The Hidden Wisdom of Merely Shaming Wall Street
posted by Frank Pasquale
President Obama has just called Wall Street’s billions of 2008 bonus dollars “the height of irresponsibility.” He has stated “It is shameful, and part of what we’re going to need is for folks on Wall Street who are asking for help to show some restraint and show some discipline and show some sense of responsibility.”
Recently both Dan Markel and co-blogger Danielle Citron have commented on the new trend of shaming these high-flying executives. I want to add one sincere argument against shaming, and one cynical one for it.
First, if Obama only wants to exhort Wall Street “to show some restraint and show some discipline”–well, that horse has left the barn. Even after the federal government has become part owner of their establishments, they reward themselves for behavior that brought their firms to near-ruin and the larger economy to the brink of depression. There is but one ethic operative here: get while the getting is good. Why should it stop now? As Robert Reich patiently explains, “You and I are paying Wall Street to lobby Congress to go easy on Wall Street:”
[W]hat’s happened to the Wall Street campaign contributions and to the lobbyists? They’re still going strong. We now know that many of the financial giants that have been bailed out by taxpayers continue to finance a platoon of Washington lobbyists, who are at this moment trying to influence TARP II and the next attempt to regulate Wall Street. In effect, your money and mine, and that of all other taxpayers, is paying these lobbyists to push Congress in a direction we have every reason to believe is not in our interests but in the continued interests of Wall Street. [emphasis added]
Citigroup, the recipient of $45 billion of taxpayer money so far, is still fielding “an army” of Washington lobbyists, according to the New York Times. Its lobbyists are working on a host of issues, including the bailout. In the fourth quarter of 2008, when it got its first infusion of bailout money, Citi spent $1.77million on lobbying fees. During the last three months of 2008, at least seven other firms receiving bailout funds (American Express, Capital One, Goldman Sachs, KeyCorp, Morgan Stanley, PNC and Bank of New York Mellon) lobbied the government about the bailout.
Which leads me to the hidden wisdom of the mere shaming sanction.
Formerly a professor at U. of Chicago Law School,* President Obama knows game theory. Even if he & Congress were to impose a retroactive tax on Wall Street bonuses, the targets of such a tax would still be extremely wealthy and powerful. There are only two viable political parties, and they’d most likely intensify their past support of Republican deregulationists in response to such a measure. But if the fatcats are convinced of an enduring Democratic majority, they may well be willing to support it financially in exchange for a influence over the bailout (even if that comes with a few symbolic slaps on the wrist). For example, pharma industry donors, long red, have been turning blue as they realize that “if you’re not at the table, you’re on the menu.”
As David Leonhardt notes, Mancur Olson long ago identified the role of elites like our Wall Street titans in coopting government:
[Olson's] seminal work, “The Rise and Decline of Nations,” published in 1982, helped explain how stable, affluent societies tend to get in trouble. The book turns out to be a surprisingly useful guide to the current crisis.
In Olson’s telling, successful countries give rise to interest groups that accumulate more and more influence over time. Eventually, the groups become powerful enough to win government favors, in the form of new laws or friendly regulators. These favors allow the groups to benefit at the expense of everyone else; not only do they end up with a larger piece of the economy’s pie, but they do so in a way that keeps the pie from growing as much as it otherwise would. . . .
Surely no interest group fits Olson’s thesis as well as Wall Street. It used an enormous amount of leverage — debt — to grow to unprecedented size. . . . At Princeton, the financial-engineering program, meant to educate future titans of finance, enrolled more undergraduates than any of the traditional engineering programs. Before the stock market crashed last year, finance companies earned 27 percent of the nation’s corporate profits, up from about 15 percent in the 1970s and ’80s. These profits bought political influence. Congress taxed the income of hedge-fund managers at a lower rate than most everyone else’s. Regulators didn’t ask too many hard questions and then often moved on to a Wall Street job of their own.
This type of power doesn’t go away overnight. A savvy Democratic administration probably has to find ways to co-opt it in order to achieve higher ends–even if the most just thing to do would be retroactive taxation of ill-gotten wealth and strict limits on executive compensation going forward. There are simply too many superclass-loving elites who’d scream at the very idea of a maximum wage, or Eisenhower-era marginal tax rates for those making tens of millions of dollars a year.
As those on the right embrace an increasingly Schmittian politics, they shouldn’t be too surprised if an innovative centrist leader tries to develop a progressive corporatism that eschews any strict ideology. Rove & Delay’s K Street Project has taught us that a party willing to opportunistically embrace a “friend/enemy” distinction can get a great deal of its agenda accomplished. In that environment, its rival should never make the mistake of bringing a knife to a gun fight.
Stimulus skeptics are sure to whine about the resulting corruption in politics. But in the current political environment, we may be facing a choice between one party willing to give big finance carte blanche in exchange for nothing, and another willing to let it continue having outsize influence in exchange for some taxation, transparency, and responsibility. As Matt Miller’s book The Tyranny of Dead Ideas shows, the history of progressive social change often runs through the latter, hard-bitten realist path.
*I originally labeled Obama a graduate of, not a former professor at, U of Chicago.