Hillary Clinton Faces a Different Democratic Party

By Harold Meyerson, The Washington Post

13 November 13

he Hillary Clinton Express is already lumbering down the track. Her recent trip to Los Angeles yielded professions of affection, loyalty and financial support from Hollywood's elite should she run for president in 2016. Web sites tout her candidacy, though an official declaration is unlikely for at least a year. Old Hillary hands such as Harold Ickes have assured financial backers that the proto-campaign will be run well - at least, better than the campaign Clinton waged in 2008. And such is the scope of her appeal across Democratic ranks that handicappers have all but conceded the nomination to her, if she runs.

This conditional Clinton consensus is remarkable not only because of her popularity but also because it wouldn't exist absent the Democratic Party's uncharacteristic near-consensus. This party, after all, once was split on civil rights. It once tore itself asunder over the Vietnam War and maintained distinct hawkish and dovish wings straight through the 2002 congressional authorization of the invasion of Iraq.

Today, those rifts are no more. A process that began when Lyndon Johnson signed the Civil Rights Act has culminated in the white South moving almost entirely into the Republican column while the remaining Democrats almost uniformly support minority rights. On matters of military intervention, there are no more Joe Lieberman Democrats: The Iraq and Afghan wars destroyed any remaining Democratic (or, for that matter, American) eagerness to intervene in kindred conflicts. Clinton's tenure as President Obama's secretary of state has distanced her from her initial support for the Iraq war and largely dispelled the tensions that her support created.

The issue that still divides Democrats today is economics. Their differences are most readily visible at the municipal and state levels: A number of Democratic governors and mayors have arrayed themselves against public employee unions, long a key force in turning out the Democratic vote. At the national level, the clearest sign of division was the campaign several liberal senators waged to persuade Obama to nominate Janet Yellen, rather than Larry Summers, as chairman of the Federal Reserve. To the liberals, Summers's sin was his central role in deregulating derivatives when he served as Bill Clinton's Treasury secretary as well as his support for repealing the Glass-Steagall Act, a change that allowed previously safe depositor banks to use those funds for speculative investments. In a larger sense, the opposition to Summers signaled the growing Democratic opposition to Wall Street liberalism - the free-trade, deregulatory perspectives that dominated Democratic economic policy during Clinton's presidency and Robert Rubin's tenure as Treasury secretary and that had enough sway during Obama's first term, partly through the influence of such Rubin protégés as Summers and Treasury Secretary Tim Geithner, to block a serious crackdown on Wall Street.

And therein lies the challenge for Hillary Clinton: How to present herself on economic issues? The surest way she can alienate significant segments of her party - perhaps to the point of enabling a progressive populist such as Sen. Elizabeth Warren (D-Mass.) to enter the race - is to surround herself with the same economic crew that led her husband to untether Wall Street and that persuaded Obama, at least in his first term, to go easy on the banks. The economy isn't likely to be significantly better in 2016 than it is today, and Democratic voters will be looking for a more activist, less Wall Street-influenced nominee.

But betting against the Clintons' political instincts has usually been a sucker's game. During the debate over Summers and the Fed, Hillary maintained an appropriate, if strategic, silence. Bill felt compelled to defend his onetime Treasury secretary - but only after Summers withdrew from consideration. If this lack of support foreshadows a realization by the Clintons that they'll have to come up with a more populist brand of economics than recycled Rubinomics, then the Hillary consensus is likely to hold.

Both the challenges facing the Democrats and the party's constituencies have changed considerably since Bill was president. The Democratic base has many more minority voters and economically stressed young people than it did 20 years ago. America's private sector - like that throughout the advanced industrial world - no longer creates jobs in the numbers it did 20 years ago. Even more pointedly, profits have soared largely because of the suppression of wages. Combine those new constituencies with those new challenges, and the need - both political and economic - for more public investment and a stronger safety net (and more tax revenue to support them) becomes screamingly clear. That doesn't mean Hillary has to explicitly repudiate Bill's declaration that "the era of big government is over." At times, however, she will have to act as though he never said it - at least, if she's going to be the sole serious contender for the Democratic nomination.

Elizabeth Warren's Populist Insurgency Marches On

By David Dayen, Salon

12 November 13

It's about more than politics or 2016. First comes a new plan to restore the economy and blow up the finance sector

f asked, Americans of all political persuasions will say overwhelmingly that they prefer "tougher rules" for Wall Street. But what does that actually mean?

You can frame this conventionally: supporting regulators, punishing rules violators, mopping up 2008-style disasters to limit the damage and attempting to prevent such chaos from happening again. But by "tougher rules," maybe Americans are really signaling a vague but persistent dissatisfaction with an economy that has become dominated by the financial sector. And you can see within that how transforming banking back to its traditional purpose - as a conduit for putting capital in the hands of worthwhile business ventures and driving shared prosperity - would be one antidote to an unequal society full of financial titan gatekeepers, who confiscate a giant share of the money flowing through the system.

Sen. Elizabeth Warren - in many ways the avatar of a new populist insurgency within the Democratic Party that seeks to combine financial reform and economic restoration - will speak later today in Washington at the launch of a new report that marks a key new phase in this movement. Released by Americans for Financial Reform and the Roosevelt Institute - and called "An Unfinished Mission: Making Wall Street Work for Us" - the report is a revelation, because it finally invites fundamental discussions about these issues. Its 11 chapters from some of the leading thinkers on financial reform do look back at the successes and failures of the signal financial reform law of this generation, the Dodd-Frank Act. But the report also weaves in a story about how we can reorient finance as a complement to the real economy, rather than its overriding force. Mike Konczal, a fellow at the Roosevelt Institute and the co-editor of the report, tells Salon, "The financial sector is still eating up a lot of GDP [gross domestic product], and it's not clear what we're getting out of it. We want to get the conversation at that level."

This report fills in the details, creating definable action items and goals that could serve as a marker for legislative and regulatory action, as well as primaries in the next several election cycles.

The roots of this conversation go back decades, if not hundreds of years. One of the report's authors, John Parsons of MIT, notes that the debate over whether to force derivative trades - the bets on top of bets that helped accelerate and magnify the financial crisis - into central and transparent clearinghouses dates back to the Minneapolis Grain Exchange of 1896. The concept of a fiduciary standard, which states that anyone offering advice on investment strategies should act in the interests of their individual clients rather than trying to enrich themselves, was initially settled in the Investment Advisors Act of 1940. Even Ben Bernanke last week drew parallels between the 2008 crisis and the Panic of 1907, which led to the creation of the Federal Reserve.

In the past few decades, Wall Street has devised financial "innovations" with the primary purpose of outpacing regulatory reach, surmounting decades-old reforms. This frees non-bank financial firms from oversight by the watchdogs, and allows them to accumulate risk in search of greater profits. For example, Marcus Stanley of Americans for Financial Reform looks at shadow banking, the lending markets that "convert illiquid, risky, long-term assets into ‘safe,' liquid short-term securities." This creates an illusion of safety and puts massive amounts of money outside the New Deal-era regulatory apparatus, where the firms involved don't have requirements to carry capital to guard against inevitable losses, for example. In 2008, the breakdown of parts of the shadow banking system made it impossible for large financial actors to access short-term funding, turning a downturn into a crisis.

While shadow banking does not have access to the public safety net (things like bank deposit insurance, or access to Federal Reserve liquidity programs), in reality it is hooked into mega-banks inside the safety net. AIG was bailed out because its counterparties were corporations like Goldman Sachs and JPMorgan Chase, determined to be too big to fail. So you have the worst of all possible worlds; a giant alternative banking system not subject to any of the rules that limit risk, vulnerable to old-style bank runs, but able to get government relief if their gambles turn sour. You get privatized profits and socialized losses. You also create more fragility in the system, because shadow banking involves multiple links from borrower to lender, and as Stanley told Salon, "Each link in the chain is another opportunity to lie about what's inside the loan."

There are two ways to look at this problem. One is seen in the way Dodd-Frank tried, with varying success, to bring New Deal-era structures to the broader financial sector, pulling systemically important activities like insurance and hedge funds under a regulatory regime. Unfortunately, the maddening complexity of financial innovations generates uncertainty over what really falls under the rules, giving Wall Street and compliant regulators the opportunity to take advantage of loopholes. Orderly liquidation authority, the new measures for regulators to wind down large financial institutions, is so full of holes, argues Stephen Lubben of Seton Hall University, that it could quickly devolve into "a bailout in all but name." Regulators have not even begun to reckon with large elements of the system, like money market funds or the overnight "repo" markets, which made significant contributions to the financial crisis. "Many of the conditions that helped cause the 2008 crisis persist," writes Jennifer Taub of Vermont Law School in one of the report's chapters.

The other way to deal with financial innovations is to simply eliminate those activities that only serve to pool risk without productive social purpose. For example, Wallace Turbeville of the think tank Demos, in a section on derivatives purchased by state and local governments, concludes that these municipalities would be better off hedging their risks by building a cash reserve, instead of paying the financial sector exorbitant fees for a product they don't understand. "Inefficiencies that transfer earnings to the financial sector are like a tax that redistributes wealth upward," Turbeville concludes.

Similarly, we can ban mega-banks from, as Saule Omarova of the University of North Carolina School of Law puts it, becoming "financial-industrial conglomerates," pushing into commercial business like energy, transportation and physical commodities and distorting those industries for profit. We can give shareholders a greater say in executive compensation, tying it to actual performance. We can significantly boost capital requirements so financial institutions cover their own risk rather than allow taxpayer dollars to serve that purpose. We can restrict shadow banking, and reestablish the link between borrower and lender so that the lender has a stake in the borrower's success. We can empower regulators with easy-to-implement, clear rules that place limits on banking activities and bank size. We can demand that law enforcement creates deterrents to fraud by legitimately punishing wrongdoing on Wall Street. All of these recommendations and more are in the comprehensive report.

There's a real-world consequence to keeping unnecessary financial innovation in place, argues Brad Miller, former congressman now a senior fellow at the Center for American Progress. "The yawning inequality of income and wealth is not because the middle class isn't working hard enough or because the richest fraction of a percent is making an enormous contribution," he told Salon. "Much of the reason is what economists call ‘rent seeking,' or extracting money without doing anything useful, mostly in the financial sector. It's a wonder the economy has the strength to get out of bed in the morning."

This core debate - whether to build a new regulatory regime for 21st-century financial products, or to just bar "innovations" that merely allow financial interests to capture money that should cycle through the economy - has not been part of the Obama administration's approach to Wall Street reform, Mike Konczal says. "Paul Volcker said there wasn't a financial innovation with a useful purpose in the last 30 years except the ATM. But the administration didn't engage in this debate."

The administration has seemingly taken the position that any effort to build on financial reform would reflect a tacit admission that Dodd-Frank didn't solve the problem, and therefore nothing else can be done.

But in three years, President Obama will leave office, and these core issues will not. The age of "boring" banking, without these innovations, coincides directly with the creation of the broad middle class and a time of unparalleled economic expansion. Kleptocracies aren't known for their economic vitality, but that's what we have with a Wall Street-dominated economy.

The issue of Wall Street reform isn't just about which regulations are sufficient to the task. It's about what kind of economy we want for all our citizens.