There’s been a series of back-and-forths about the rumored short-list of the National Economic Council spots, and the ties between those on the list and Wall Street. Brad Delong notes that he has been a Rubinite for 18 years and that “you want to draw your White House staff from successful managers…and that there are only three groups of successful managers who are Democrats: Hollywood studio executives and their ilk, people who have made careers in government and academia, and executives who have worked for traditionally-Jewish investment banks. If you want managers in a Democratic administration, that’s where they have to come from. ” Felix Salmon responds here and here.
Brad’s point seems to restate the issue, which is: why is there such an overlap between Wall Street and the Democratic Party, and what consequences does that have? Finance is a big sector, and Democrats could be picking from any number of places within it (or elsewhere), yet they go for the large investment banks.
I’d point out a few reasons why this has consequences. The first is that as Tim Duy noted, “What I find curious is that DeLong neglects to mention what I believe was a central element of the Rubin agenda, and an element that was in fact the most disastrous in the long run – the strong Dollar policy.” More:
The strong Dollar policy takes shape in 1995. At that point, Rubin made it clear that the rest of the world was free to manipulate the value of the US Dollar to pursue their own mercantilist interests. This should have been more obvious at the time given that China was last named a currency manipulator in 1994, but the immensity of that decision was lost as the tech boom engulfed America.
Moreover, Rubin adds insult to injury in the Asian Financial Crisis, by using the IMF as a club to enact far reaching reforms on nations seeking aid. The lesson learned – never, ever run a current account deficit. Accumulating massive reserves is the absolute only way to guarantee you can always tell the nice men from the IMF and the US Treasury to get off your front porch.
It’s also very likely that the Rubinites and Wall Streeters in the administration are the ones pushing for deficit reduction coming out of the worst downtown since the Great Depression and also are the ones who are likely emphasizing a “structural” nature of unemployment, particularly generated by believed uncertainty of budget deficits – Rubin himself has pushed in these direction recently. These two claims are disastrous for the Democrats, and the worry from many on the outside, myself included, is that these are the voices most strongly heard on economic policy.
A larger problem than whether or not Rubin himself is associated with any Democratic insider is that the mentality of the new financial elite could take over policy and ideological thinking within the party that is supposed to represent the interests of working people. From Chrystia Freeland’s fantastic new Atlantic Monthly article The Rise of the New Global Elite:
The good news—and the bad news—for America is that the nation’s own super-elite is rapidly adjusting to this more global perspective. The U.S.-based CEO of one of the world’s largest hedge funds told me that his firm’s investment committee often discusses the question of who wins and who loses in today’s economy. In a recent internal debate, he said, one of his senior colleagues had argued that the hollowing-out of the American middle class didn’t really matter. “His point was that if the transformation of the world economy lifts four people in China and India out of poverty and into the middle class, and meanwhile means one American drops out of the middle class, that’s not such a bad trade,” the CEO recalled.
I heard a similar sentiment from the Taiwanese-born, 30-something CFO of a U.S. Internet company. A gentle, unpretentious man who went from public school to Harvard, he’s nonetheless not terribly sympathetic to the complaints of the American middle class. “We demand a higher paycheck than the rest of the world,” he told me. “So if you’re going to demand 10 times the paycheck, you need to deliver 10 times the value. It sounds harsh, but maybe people in the middle class need to decide to take a pay cut.”…
When I asked one of Wall Street’s most successful investment-bank CEOs if he felt guilty for his firm’s role in creating the financial crisis, he told me with evident sincerity that he did not. The real culprit, he explained, was his feckless cousin, who owned three cars and a home he could not afford. One of America’s top hedge-fund managers made a near-identical case to me—though this time the offenders were his in-laws and their subprime mortgage. And a private-equity baron who divides his time between New York and Palm Beach pinned blame for the collapse on a favorite golf caddy in Arizona, who had bought three condos as investment properties at the height of the bubble.
It is this not-our-fault mentality that accounts for the plutocrats’ profound sense of victimization in the Obama era…Yet many of America’s financial giants consider themselves under siege from the Obama administration—in some cases almost literally. Last summer, for example, Blackstone’s Schwarzman caused an uproar when he said an Obama proposal to raise taxes on private-equity-firm compensation—by treating “carried interest” as ordinary income—was “like when Hitler invaded Poland in 1939.”….
A Wall Street investor who is a passionate Democrat recounted to me his bitter exchange with a Democratic leader in Congress who is involved in the tax-reform effort. “Screw you,” he told the lawmaker. “Even if you change the legislation, the government won’t get a single penny more from me in taxes. I’ll put my money into my foundation and spend it on good causes. My money isn’t going to be wasted in your deficit sinkhole.”
He is not alone in his fury. In a much-quoted newsletter to investors last summer, the hedge-fund manager—and 2008 Obama fund-raiser—Dan Loeb fumed, “So long as our leaders tell us that we must trust them to regulate and redistribute our way back to prosperity, we will not break out of this economic quagmire.” Two other former Obama backers on Wall Street—both claim to have been on Rahm Emanuel’s speed-dial list—told me that the president is “anti-business”; one went so far as to worry that Obama is “a socialist.”
Really, just read the whole thing. Instead of a soul-searching for why the financial crisis happened, there’s an incrimination of middle-class Americans. Instead of looking at the latest research finding that securitization and Wall Street intermediation increased the supply of credit, and supply always finds its demand, they blame average Americans for demanding too much credit.
And the most worrisome thing is that the obvious solutions for where we are at – a short period of higher inflation, massive credit writedowns, and a larger government deficit paid for with higher taxes on the rich and the largest banks – are all things this new financial elite hate. And the current debates about “structural unemployment” or a lack of interest in jobs provide cover for an obvious priority with this elite – the American middle-class was an anomaly of history, an artifact of the Cold War and the post WWII era. Regular Americans are going to have to take a massive cut in wages and lifestyle in order to recover. This was the argument in the age of Keynes and the Great Depression, and it is the argument now. No wonder the Democratic party looks paralyzed from the outside.