Mike here. This post is from my colleague Brad Miller over the important debate on the Antonio Weiss nomination. Brad is a former U.S. Representative who recently joined the Roosevelt Institute as a Senior Fellow, so he has firsthand knowledge of the internal negotiations around financial reform. Check it out below.
The opposition to the nomination of another investment banker, Antonio Weiss, to a top position in the U.S. Treasury is not just a demagogic appeal to anti-Wall Street prejudices, as his supporters argue.
Weiss’s actual experience appears to be a poor match for the specific duties of the position in question, and may be less laudable than his supporters claim. Weiss’s principal credential appears to be that he is a product of the same culture that produced our other recent economic policymakers.
And that is the real problem for opponents, who believe that economic policies should be subject to democratic debate and require the consent of the governed.
The response to the financial crisis was the most consequential economic policy in generations. Wall Street and Washington insiders alike argue that those policies, endlessly indulgent of banks and pitiless to homeowners, were technocratic decisions that required the recondite knowledge of Wall Street professionals.
To Weiss’s supporters, disregard for public opinion is a virtue. “Making economic policy isn’t a popularity contest,” David Ignatius wrote in The Washington Post, “especially when financial markets are in a panic.” “Our job was to fix it,“ former Treasury Secretary Timothy Geithner said, “not make people like us.”
Criticism did not just come from politicians pandering to the great unwashed, however.
Most economists argued that the lesson of past financial crises was to take economic pain quickly, recognize losses on distressed debt, and take insolvent banks through an orderly receivership. The “standard playbook” for financial crises since the 1870s was to “shut down insolvent institutions so executives and shareholders in the future do not think they will escape the consequences of the moral hazard they created.” “Zombie” banks, economists argued, only delay recovery.
The Bush and Obama Administrations instead helped too-big-to-fail banks pretend to be solvent and provided subsidies and other dispensations until the banks became profitable, an effort that continues.
Unfortunately, any effective effort to reduce foreclosures required banks to recognize losses on mortgages. Insiders regarded foreclosures as a lesser concern. Geithner said that even if the government used federal funds “to wipe out every dollar of negative equity in the U.S. housing market…it would have increased annual consumption by just 0.1 to 0.2 percent.”
According to Atif Mian and Amir Sufi, two prominent economists, “that is dead wrong.” Household wealth fell by $9 trillion after the housing bubble burst in 2006, which greatly reduced consumer demand. “The evidence,” Amir and Sufi said, “is pretty clear: an aggressive bold attack on household debt would have significantly reduced the horrible impact of the Great Recession on Americans.”
Wall Street’s critics did not lose that debate. There was no debate.
Senator Obama endorsed legislation in his presidential campaign to allow the judicial modification of mortgages in bankruptcy. President Obama never publicly wavered from that position, but Treasury officials privately lobbied against the legislation in the Senate, where the legislation died. The determination by economic policymakers to protect their immaculate policies from tawdry politics may extend to attempts by the President to intrude.
Meddling by Members of Congress was certainly unwelcome. In a private meeting between Administration officials and disgruntled House Democrats, I said that foreclosure relief efforts appeared designed to help banks absorb losses gradually, not to help homeowners. Geithner was offended—indignant—at the suggestion. Neil Barofsky, then the Special Inspector General for the Troubled Asset Recovery Program, later confirmed that was exactly the purpose of the programs—in Geithner’s words, to “foam the runway” for the banks.
The success of policies that are unacknowledged or even denied is difficult to measure. Since the financial crisis, however, the financial sector, from whence our unguarded platonic guardians came and soon will return, has prospered. Others fared less well. Wealth and income inequality widened dramatically.
Weiss has not served in government, so opposition to his nomination may punish him for the sins of others, perhaps unfairly. There is nothing to indicate, however, that Weiss questions the assumption that the North Star of economic policy should be the prosperity of the financial sector, or that policies should be freely debated unless there’s money involved.
The presidential campaign in 2016 will undoubtedly largely be about economic policy. Voters may assume that the election of one candidate or another will result in implementation of that candidate’s economic policies.
If the culture of economic policymakers remains unchanged, the public positions of candidates and the votes of citizens may not matter much.
Brad Miller is a Senior Fellow at the Roosevelt Institute. Previously, he served for a decade in the U.S. House of Representatives.