Peril in This Wall Street Shuffle

By Elizabeth Warren, Politico

28 January 13

t's that time again when jobs open up across Washington and the big shuffle starts: People on Wall Street angle for key economic policymaking jobs, and people in key economic policymaking jobs angle for jobs on Wall Street.

This isn't necessarily a bad thing. People with Washington experience bring expertise to Wall Street - often a sense of public service - and people with Wall Street experience bring expertise to government.

When I worked to set up the Consumer Financial Protection Bureau, we hired a number of people with industry experience. We built a team that had diverse expertise and different worldviews because that meant smarter, more effective policies. It's pretty clear that you can't write good rules or effectively enforce the law if you don't know how the game is played.

But as past experiences have shown, there is also real peril in this Wall Street shuffle. Big business orthodoxy against rules and regulations can seep into the bones, including the bones of new policymakers who are charged with protecting consumers and strengthening markets. Industry groupthink and overconfidence can prevent clear and evenhanded analysis of problems. The result can be a group of decision makers who are self-confident in the extreme and who end up clearing the path toward the sort of recklessness and excessive greed that have already broken the economy once.

As jobs open up and the shuffle continues, policymakers in Washington ought to think seriously about some key indicators when considering people with industry experience:

1. Who do they listen to and who do they trust?

Not all the expertise and good ideas are on Wall Street. Small banks, credit unions, academics, consumer groups, regional Federal Reserve banks and foreign financial commentators often have important insights. If potential appointees coming from industry don't show a real willingness - and even eagerness - to listen to smart people outside of the industry, that's a real problem. If they aren't already having serious conversations with people who are not from Wall Street, the blinders may have grown too big to remove. It matters who they talk to and who they will rely on for advice.

2. Where do they disagree with industry and lobbyist orthodoxy?

No one is perfect; they should be able to see some areas for improvement. If a potential appointee can't give thoughtful examples of where the lobbyists and the industry have gotten it wrong over the past generation and give specific examples of where they have it wrong now, then they aren't right for the job.

3. Do they recognize the advocacy imbalance in Washington?

Industry lobbyists are highly specialized, well-funded and enormous in number. That means they can provide important information, but it also means they so outnumber advocates for the public interest that the playing field is badly tilted in their favor. If a potential appointee doesn't recognize that imbalance and have a thoughtful view about how to address it, that person shouldn't be under consideration.

4. What their real intention is for getting into government?

Many people get involved because they made money from the industry but know that greed and recklessness in some quarters have given everyone else a bad name - and they want to see real reforms and changes. Some may have ideas about how to make government work more efficiently. On the other hand, others are just looking to advance their careers and put themselves in line for promotions in the industry. Intentions matter.

5. Are they attuned to the diversity of institutions and actors?

Big banks and small banks operate very differently. Some companies engage in deceptive practices to cheat consumers, but many add enormous value to the financial system. Some create business models that create private benefits and public risks, while others are responsible for both risks and rewards. If a potential appointee isn't willing to differentiate the virtuous from the villains - and treat them differently - then they will make mistakes by over-regulating those who don't need it and by not cracking down on the real scofflaws.

Transition is afoot in Washington, and if the right people go back and forth, the country will develop smarter, stronger rules. But if the wrong people make the shuffle, then Washington will be rigged even more for Wall Street - and every middle-class family will pay the consequences.