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.
January 29, 2009 at 8:30 pm
Posted in: Corporate Law, Economic Analysis of Law, Politics, Securities
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Responses (9)
Ezra Sneed - January 29, 2009 at 9:30 pm
President Obama is a Chicago Law grad?
Frank - January 29, 2009 at 9:42 pm
Thanks, Ezra–I wrote that a little too fast, misremembering his time as a prof there as his time as a student. My main point is that if you’ve spent some time at Chicago, you know game theory!
Lawrence Cunningham - January 29, 2009 at 10:33 pm
Frank,
This all seems very cynical and worrisome. Some notes/queries:
On Mr. Reich’s “patient” comments, every moderately funded interest group lobbys extensively in Washington, many with the functional equivalent of what Mr. Reich calls taxpayer funds, including non-profit organizations that do not pay taxes. What is so special about the lobbyists that this post quotes him as calling out?
Concerning David Leonhardt’s purported interpretation of Mancur Olson’s work, see my post from last night, a few down from this one, wondering what in the world Mr. Leonhardt’s strange piece is talking about.
On “the role of elites like our Wall Street titans in coopting government,” who among Washington lobbyists are not “elites” trying to “coopt government,” whether working for Wall Street, Main Street or coal miners or for housing, consumers, education, technology or what not?
Why is it okay for a “savvy Democratic administration . . . to co-opt . . . in order to achieve higher ends” if other kinds of co-opting for some other conception of “higher ends” is not okay?
On “bringing a knife to a gun fight,” why this kind of imagery in a discussion of national economic policy and philosophy?
Is this the best way to discuss these challenges?
Frank - January 29, 2009 at 11:04 pm
Lawrence,
Well, I suppose it was only a matter of time before we had some dissenting opinions on concurring opinions! Here’s some reasons why I think I have to dissent from the expert law prof consensus on how to discuss these matters (even if I end up, like Justice Stevens in the Scott v. Harris decision, the only person who has this perspective):
1) As for Reich, and your query on “what is so special about the Wall Street lobbyists:” I linked to a study that documented how “the finance, insurance and real estate (FIRE) industries that collectively are at the center of the current crisis are the single largest sector–by far–of all the major economic and interest groupings that give campaign contributions to federal politicians.” I would also note that most heads of nonprofit organizations do not sport the kind of centimillionaire fortunes that people like Fuld, O’Neal, and others are enjoying–and their subordinates are unlikely to enjoy the 7 and 8 figure incomes enjoyed by many at the Wall Street firms.
I am aware that Charles Lindblom-style “circularity” is a pervasive problem. But when an industry that has caused so much damage, and done so much self-dealing, goes on with business as usual even as it gets billions from opaque arrangements with the Fed, surely this is qualitatively different than the ordinary run of the DC influence game. The only comparable thing I can think of is the DOD’s “black budget”–not exactly a model one would wish to extend.
Moreover, it appears that Geithner thinks there may be need for special lobbying rules here:
As reported here, http://www.msnbc.msn.com/id/28870041/ ,
“The new rules come in the wake of fresh lobbying reports filed with the government showing some big banks stepped up their lobbying efforts late last year even as they received billions of dollars from the bailout program.”
The only thing I wonder about (along with Elizabeth Warren), is why weren’t these rules imposed earlier?
2. As for “they’re all elites”: I’ll agree with that assessment. My concern is just that we have elites whose main purpose is enhancing the competitiveness of the nation as a whole, improving our education system, assuring health care to all, and rebuilding our infrastructure. If you can tell me how the Wall St. lobbyists are doing that better than the “housing, consumers, education, technology” lobbyists you mention, I’d share your apparent relativism about the worthiness of their efforts.
3. As for the “co-opting:” I’ll just pick one issue that stands for many. If an administration co-opts, say, PhRMA, to help get poor kids insured, I like that co-optation. If they co-opt such a trade association to help deny coverage to kids, I don’t like it. I explain that point more in this post, also linked to above:
http://www.concurringopinions.com/archives/2007/07/what_larry_does.html
[Just to be clear on the LArry title--it's about Lessig, not you!]
4. The “gun/knife” issue is apparent even here. Consider the degree to which this issue is getting politicized presently:
http://andrewsullivan.theatlantic.com/the_daily_dish/2009/01/ugh.html
As Reinhold Neibuhr argued in “Moral Man, Immoral Society,” an assumption of the good faith of the other side is often dangerously naive. I didn’t see good faith in the Bush administration’s opposition to SCHIP, and I don’t see good faith in a quote like this on the stimulus:
“They can cram down a stimulus package without Republican support,” said Kyl, “but if that happens, then when, as we believe, in six months or so, when the American people say, ‘Wait a minute, we’re not better off. In fact, we’re worse off than we were six months ago. Who is responsible for this and what can be done to fix it?’ Republicans then are going to be in a position to say, ‘We didn’t have the input in this and that’s why it didn’t work.’”
Frank - January 29, 2009 at 11:09 pm
I should have also linked to this Bernard Harcourt post above:
http://uchicagolaw.typepad.com/faculty/2009/01/geithner-needs-to-tell-bank-of-america-to-cut-a-4-billion-check-to-the-us-treasury-now.html
“Geithner Needs to Tell Bank of America to Cut a $4 billion Check to the U.S. Treasury, Now”
Maryland Conservatarian - January 30, 2009 at 4:43 am
A few quick hits:
Do you mean retro-actively tax the ill-gotten wealth of people like Jon Corzine and Jamie Gorelick?
Do you think Niebuhr would think that I, as a conservative Republican hell bent on avoiding, the nationalization of our health care system, am naive to assume good faith on the part of all those top-tier law school educated attorneys (i.e. the Clintons, the Obamas etc…) who, even though obviously smart enough to handle the rigors of med school and thus be in a position to contribute directly to our health care system in their own preferred way, choose instead to just sit on the sidelines and harp about the injustice of it all?
…and please, Mr. Obama was at best an instructor.If you can achieve professor status at a so-called top tier school without publishing even a paragraph of legal scholarship, wouldn’t that cause at least a few of you to question your route to the top?
Fred in Arizona - January 30, 2009 at 10:18 am
I wonder how much was paid out in bonuses throughout all of the federal government at the end of 2008? Now that would be an interesting comparison to the Wall Street bonuses!
Daniel S. Goldberg - January 30, 2009 at 11:56 am
After the news I’ve heard over the last few days, I’m ready to tar and feather. Figuratively speaking, of course.
Somewhere, Marx and Engels are grinning.
JP - January 30, 2009 at 12:58 pm
Lawrence thought this post was “cynical and worrisome.” I thought Frank’s utter faith in Democratic politicians was quite the opposite.
From his time at Chicago, Obama should also be well versed in public choice theory. If the federal government is handing out trillions, those seeking rents will inevitably step up their efforts. They probably won’t even complain too much when Obama’s populist rhetoric includes unkind words about the industry (so long as it involves “merely shaming,” and not actual action).
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