It's been exactly one year since Lehman Brothers, once among the nation's blue-chip investment banks, failed, catalyzing the financial crisis. "You can almost circle a date on the calendar, and those who can track these things saw their businesses fall off a cliff," Lee Sachs, a counselor to Treasury Secretary Tim Geithner, said Monday, when he was asked whether the fall of Lehman had any effect on the non-financial economy. Clearly, it did.
It was also a year ago this month, at the height of the presidential campaign, that Sen. John McCain told voters "the fundamentals of the economy are strong" before rushing off to Washington to insert himself in the Bush administration's negotiations with a Democratic Congress on how to rescue the ailing financial system. In the process, McCain gave intransigent House Republicans the opportunity to kill Congress' first attempt at bank rescues.
Through both events, then-candidate Barack Obama played it cool. Much cooler than McCain. And his reassuring calm during the crisis was a key reason for his victory last November.
While that dispassionate approach worked at the time, it is hurting him today. It made sense for Obama to give cover to Democrats to pass the politically unpopular but economically necessary bank rescues, which pundits with short memories are happy to excoriate. After his inauguration, Obama's hands-off approach came with a few more drawbacks. He rose above the debate over government restructuring of insolvent banks, allowing his team to prop up the banks as they earned themselves back to solvency. But Obama also failed to intervene as those banks pursued some of the same ugly practices that led to the crisis in the first place.
The debate last winter was, at the most basic level, between those who wanted the government to simultaneously rescue and reform the financial system and those who wanted the government to rescue the system and then reform it. Progressives advocated for the former. Obama, however, took the latter approach, and to his administration's credit, this has kept the financial system functioning, even though it is still vulnerable and slow to lend. But for his cautious approach to pay off, he needs to step up and complete the job.
This isn't going to be easy. Republicans allied with the financial industry are stronger now and eager to obstruct his initiatives. The banks themselves remain a potent political force (though they were powerful in the spring, as well, cheerfully killing pro-consumer legislation). Despite this, Obama hasn't missed his chance to pass meaningful reform. His administration needed time to understand the depth and mechanics of the crisis, prepare policy proposals, and consult with the major stakeholders in Congress, the regulatory agencies, and, yes, Wall Street. Outside groups needed space to organize and educate themselves and their constituents on what a credit swap is and why changing the way we regulate it is important to everyone.
The administration's proposals are pragmatic and tempered: fixing the loopholes that led to the crisis, putting more onerous restraints on the behavior of banks, and making sure banks whose failure could put the financial system at risk take stronger safety measures. With the exception of a new agency to protect consumers, the plans do not go as far as progressives want: more consolidation of regulators and greater emphasis on hard-and-fast rules rather than regulatory discretion. In particular, progressives want to limit the size of the banks so that no failing institutions will have to be rescued by taxpayers again. It's an argument between nudging and bludgeoning.
It might not mollify his critics, but Obama's course of action reflects reality. Congressional barons aren't interested in losing their fiefdoms to regulatory consolidation (neither are the regulators), and the banks and their conservative allies in Congress will do everything they can to slow reform. Though a few members of Congress are prepared to strengthen the administration's proposals if they can, the idea that presidential willpower is the ultimate legislative arbiter is as false in regulatory reform as it is in health-care reform. Still, if Obama does all he can to ensure these reforms pass and the devil is in the details -- the financial sector will be safer; the economy more robust.
Even people who ought to know better are criticizing the administration's proposals. I recently watched former New York Gov. Eliot Spitzer, once scourge of the big banks, talk about how policy-makers had failed to confront the problem of too-big-to-fail financial institutions. Then, concurring that banks should be forced to keep more cash on hand to hedge risky investments, he used the exact same metaphor Treasury Department officials used to explain the proposal, which they offered three months ago: It is imperative to make sure that banks internalize the external -- read, taxpayer -- costs of their activities.
Similarly, economist Simon Johnson criticized the administration for ostensibly failing to propose increased capital requirements, though he couldn't specify what the requirements ought to be. "How much capital is enough?" he asked in The New Republic last week. "This is a hard question, with no definite answer." Yet this week, Johnson, conceding that these proposals had been offered, complained that the administration had yet to be more specific than he was: "The administration will not tell anyone the exact capital and liquidity requirements they are proposing."
The administration's critics are right about one thing: Obama can't afford to play it cool any longer. And he can't follow the same playbook with the banks he has used with the health-care reform, pragmatically allying himself with industry stakeholders. Insurance companies may be pernicious, but their various damages to society are nothing compared to those caused by the financial sector. Harnessing public anger at the banks isn't just one of many options. It's the only way he can pass his reforms.
That's why his speech about regulatory reform on Monday was both good and disappointing. He excoriated bankers, fought for consumer protections, and explained how strong rules make for strong capitalism. But he also urged the bankers to voluntarily take civic interests to heart and "embrace serious financial reform, not fight it." He fails to understand that the financial sector is an even more obstreperous partner than congressional Republicans, who oppose the administration from both self-interest and principle.
The banks have no principles behind their opposition, just the profit motive, and the American economy depends on reducing profits in the financial sector. There's no deal to be made. If Obama wants to make the financial sector work for the economy and not against it -- and reap the political benefits of doing so -- it's time to fight.
