I adore Elizabeth Warren and consider her one of the more courageous policy leaders in Washington today. Her simple, prescient toaster metaphors of 2007 (which I’ve previously mentioned) were brilliant.
However, in her most recent Wall Street Journal Op-Ed, “Wall Street’s Race to the Bottom,” I believe Professor Warren makes unfortunate leaps that weaken her purpose and give credence (if not, outright strength) to the destructive ongoing debate around financial regulation. This debate continues to paralyze our political system, change nothing about the underlying causes of the crisis and offend just about everyone. As American citizens we need to hold our elected officials accountable to get something done now, or history is bound to repeat itself.
So…where does this great thinker go wrong? Oddly, she doesn’t get her villains right (from a productivity standpoint, at least).
Before I explain, let me be clear – I have few doubts that weak lending standards, NINJA (“No Income, No Job, no Assets”) loans, option ARMs and other complex financial products sold to consumer were among the multiple contributors to our current economic climate. Even Ben Bernanke himself purchased an option ARM that “exploded” and had to be refinanced. (See the Chairman’s own words on page 11 from his Time Magazine 2009 Person of the Year Extended Interview.)
However, I believe that in blanket vilifying Wall Street, policymakers fall into a familiar pattern of scapegoating that occurs irrespective of party affiliation or ideology. They find the most obvious target from outside the ranks of Capitol Hill and foment public frustration in a manner that isn’t entirely productive. Blaming Wall Street for pursuing profit is like a vegetarian getting angry at tigers because they eat meat.
The simple truth is that when American corporations pursue profit — successfully or not — as long as they stay within the law they are functioning exactly as we designed them to. Wall Street firms are legally obligated to focus on their fiduciary responsibility to shareholders and employees. This reaches to the core of what it means to be American, and how capitalism has helped make the United States the extraordinary nation it is today.
Elected officials, by contrast, have a very explicit moral responsibility to taxpayers and should make 100% of their decisions for the benefit of citizens they represent. Sadly, a great number of them act like this doesn’t matter, and they end up protecting the wrong constituency. This is the graver issue deserving of Professor Warren’s considerable attention.
At the end of the day it is important to remember, Jamie Dimon doesn’t have the final say on regulation no matter how much he wishes he does. In concluding her article, Professor Warren calls on Wall Street CEOs to directly support consumer protections that will cost the largest banks billions in lost revenue. I do not believe this is the most realistic course for achieving progress on financial reform.
Co-published (with edits) on the Huffington Post.
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Where to begin?
Put the gun down. She is just the messenger.
Hi bsjones, thanks for your comment. I’m not sure exactly what you mean by the gun in this instance, I believe I’m levying a legitimate opinion with regards the execution decision being made by a policy maker.
I’d also note, Professor Warren is far more than “just the messenger,” and to call her that frankly detracts quite a lot from the work she’s already accomplished. For starters, the fact we have a CFPA proposal even on the table is in large part thanks to her, this is an issue she has been fighting towards for years.
Ben Bernanke’s mortgage did not in fact explode. He misspoke for some reason in that Time article:
http://www.calculatedriskblog.com/2009/12/bernanke-arm-ok-head-explodes.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CalculatedRisk+%28Calculated+Risk%29
Thanks for commenting Nathaniel, and bringing this article into the conversation. It is a meaningful addition — in certain respects I find myself more shocked looking at this and trying to discern the implications/motivations behind it. Chairman Bernanke’s exact words were:
“Bernanke: Yes. We had to do it because we had an adjustable rate mortgage and it exploded, so we had to.”
How can the Fed Chairman misspeak so badly on such a critical issue? As you note, there must have been “some reason” to make such a comment. I would cautiously take it as a fair assumption that he doesn’t fundamentally mis-understand what an exploding ARM is — that would have far too horrific implications for leadership at the Fed, and frankly, also be inconsistent with the Chairman’s significant accomplishments.
As a result, the best plausible explanation I’m currently left with was that he was making a joke — perhaps he was nervous doing such an important interview. However, if that is the case, it indicates at minimum very poor taste and, even worse, a belittling of the pain millions of Americans feel. Sadly, this would also be entirely consistent with an institution that has lost touch with the non-banking segment of our economy.
First, To your statement, “Oddly, she doesn’t get her villains right (from a productivity standpoint, at least”.. Oh really? I say she does, even though I have not a clue what you mean by the use of the productivity phrase. What does that mean in plain English?
Second, of course for profit Wall Street firms pursue profit. Instead of leaving that truism, why not also address Wall Street’s ability to game the system by using that profit to “buy” influence in both parties to write regulations that benefit their needs in lieu of the folks who had ARMs, etc foisted on them.
Do you really expect us to take seriously your sad lament that Congress often protects the wrong constituency as if it were an accidental oops? We know what they are, it is just a matter of establishing their price for performance. The ongoing pleasure of more corporate dollars versus the pain of living with an independent gatekeeper.
Professor Warren is very clear-eyed in her observations.
Hi jshoop, thank you for your comment. If I may ask, who would you consider to be acting more inappropriately — the businessman who makes decisions that benefit employees/shareholders, or the elected official who makes decisions benefiting the businessman to the direct loss of US taxpayers? I do not state that the businessman is a good person or that Professor Warren is wrong in her analysis. In fact, I agree with a lot of her views. However, I do disagree with any blank vilification of the financial services industry by the media or those serving in government, as I do not feel it adds to the debate. In fact, I would personally go on the record stating that ratcheting the rhetoric higher only makes meaningful reform (which we need) even harder to achieve.
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I really do not typically reply to posts but I am going to in this case.