Memo to Republicans

When you sober up from your Scott Brown parties, please listen to the President’s surprisingly clear position on banking and the financial markets. My last blog accused Obama of political cynicism for pretending to get after the Wall Street bankers who heavily supported his election. My prediction was that he would talk tough and maybe levy a token tax, but resume the Washington/New York embrace that has nearly brought this nation to its knees. It’s too early to repent of my cynicism, but, I am very impressed by the clarity of the position he has taken. This week the President announced a very direct philosophical position that too big to fail (Toobtof) must end. Meanwhile people such as Sheila Bair at the FDIC and Elizabeth Warren of the Congressional Oversight Committee are speaking clearly about systemic risk while FED officials parrot  the constructive ambiguities they were raised on. The President’s position is that his goal is not to “manage” systemic risk, but to eliminate it. He clearly hasn’t figured out how to articulate this in a manner which recaptures the hearts of Scott Brown independents, but if you reassume your historical role as Wall Street stooges and the President finds the voice of a true economic populist, your wilderness years will continue indefinitely.  

I caught part of the White House Press conference on CSPAN. While I was impressed by the clarity of the President’s position, Robert Gibbs demonstrated the problem this administration will have trying to find its populist voice. Ending Toobtof subsidy will be a blow for economic freedom and decentralization.  Systemic risk is not a naturally occurring market phenomenon; rather it is an unintended consequence of decades of increasingly centralized regulatory power. Regulation creates the systemic risk it seeks to manage. It is hard for this administration to admit that more smart guys in Washington, with even more regulatory power, are not the answer.  We do well to remember that regardless of who is President, high-level regulators tend to be loaned executives from Wall Street.

A Reporter asked Robert Gibbs, something like the following, “Today the president announced his policy and the stock market fell 200 points led by bank stocks. Are you sure that it is wise to pursue this policy at a time when we are trying to encourage badly needed job creation?” This was a high hanging fastball waiting to be pounded out of the park, but Gibbs seemed confused and clueless. You need to learn to hit questions like this out of the park.  Gibbs should have responded with something like, “the big decliners were those institutions who will be affected by this policy and this is not surprising. We intend to end the public subsidy afforded to these institutions. This subsidy has been good for management and (sometimes) the shareholders of these firms, but a very bad deal for those who create and actually work in real jobs.  Continued public subsidy of those who think manufactured financial bubbles are the economic future of this country is exactly what we intend to end. Clever financial shenanigans do not create jobs in Cleveland, Oshkosh and Des Moines.   Economic value is created by entrepreneurs and the hard working people they employ. The people of this country need sound straightforward financial intermediation which is best fostered on a decentralized basis. Wall Street bankers will continue to have the freedom to pursue the strategies they can support with private capital. Their counterparty risk will no longer be supported by an implied public guarantee.”

The nation will be well served by the position the President has expressed. To do this, the President will not only need to find a populist voice, he will need to change his thinking about business. His economic rhetoric to date reflects a disturbingly socialist perspective. It has been a kind of dreamy socialism with a smile. To many of us working amidst the rubble of the economic earthquake, he sounds like he believes the purpose of business is to fund the welfare state. To those of us facing investment and hiring decisions, he seems to be waiting to expropriate the fruits of the work we do and the risks we take. Until we hear something different, we will just hunker down, continue de-levering and spend more time on things we can’t be taxed for.  

Wall Street invested heavily in Obama’s election. If he sticks to his current course, they will turn all their charm, their money and their formidable intellectual muscle on you.   The problem you had on economic policy in 2008 is that you had exhausted your public credibility sheltering and defending economic abusers. It is your complicity that made Obama’s soft socialism seem like the least bad choice to many independents. Do not resume your customary role as Wall Street’s water boy. The natural conservative position is to reverse the public subsidy of the Toobtofs. Tea party conservatives and Scott Brown independents are waiting for you to explain what they know in their hearts. Decentralized financial intermediation is essential for economic revitalization. There is world of difference between the financial machinations of Wall Street and the hiring and investment decisions faced by the gutsy main street entrepreneurs recovery depends on. When Wall Street comes knocking remember that when they’re done with you, they’ll dump you in a New York minute.