James Kwak has his best post yet at Baseline, pointing out that Tim Geithner is the poster child for the soft power of regulatory capture:
we meant that one of the primary means by which Wall Street got its way in Washington was by creating and propagating the understanding – among sophisticated, educated, cultured people, as opposed to “populists” or the “rabble” that showed up at anti-globalization protests – that what was good for Wall Street was good for the country as a whole.
I don’t think that implicit quid pro quo bargaining is a sufficient explanation, because I believe it entirely possible that there are honest politicians and civil servants who really, truly believe that they are acting in the public interest when they come to the aid of the largest banks.
Some day political historians will recognize the elevation of Bob Rubin to Secretary of the Treasury in January 1995 as a watershed moment in American politics.
Before the 1990s, finance was as establishment as it got. There were, of course, successful firms run by all manner of scrappy ethnic types who pop up in Liars’ Poker. But the dominant ethos of upper management was joining the country club and behaving as though you ran GM; the desire to join the corporate aristocracy in the rest of the country. In short, acting Republican, whether you actually were or not. Lloyd Bensten was so damn conservative he couldn’t even be bothered to change party affiliations after the Southern Strategy.
The core of the Democratic party, for its part, hated finance as much as it hated all other captains of industry. Keeping working people down.
That antagonism held from WWII on, from LBJ through the Carter years and the years in the wilderness to Clinton’s Hillarycare era. Treasury was establishment territory, with only the occasional Wall Streeter who usually had to do something else along the way:
- George Humphrey (previously CEO of a steel company)
- Robert Anderson (previously Deputy Secretary of Defense)
- Douglas Dillon (previously chairman of Dillon Read, US Ambassador to France, Under Secretary of State)
- Henry Fowler (general counsel of the War Production Board)
- Joseph Barr (had the job for a month, because LBJ wanted one more person who would owe him a favor)
- David Kennedy (previously CEO of Continental Illinois)
- John Connally (previously Governor of Texas, LBJ’s aide de camp before that)
- George Schultz (previously Secretary of Labor)
- William Simon (previously at Salomon Brothers)
- Michael Blumenthal (previously CEO of Bendix)
- George Miller (previously Chairman of the Fed)
- Don Regan (previously CEO of Merrill Lynch)
- James Baker (previously White House Chief of Staff, before he and Don decided to swap jobs)
- Nick Brady (previously Chairman of Dillon Read and Senator from New Jersey)
- Lloyd Bensten (previously Senator from Texas)
Then came the Contract With America and the forced housecleaning, and there was a new generation.
By 1995 there was a distinction between the creative and the extractive industries. Media had long been liberal, but all of a sudden finance companies and technology companies were led by people who saw themselves as liberal; people who spent their money taking cooking classes in Provence and flying in esoteric ingredients instead of hiring more servants to pour the Scotch and sear the steak. Rubin’s appointment gave the creatives their first real taste of power, and it affected the Democratic Party, which saw in these rich guys a chance to be well-funded and to appear responsible.
Dubya went so ridiculously overboard favoring the extractive industries – basically, if your company didn’t make a mess doing its business, it was a bit fruity in the eyes of the Decider – that pretty much anyone with a top-tier college education was pushed to the Democratic column. By 2006, the correlation between SAT score and propensity to vote blue must have been off the charts.
This has been Geithner’s world for his entire professional career. It was always normal for a regulator to like the industry he regulates, to trust the guys he regulates, to see his job as fundamentally one of explaining the importance of the industry to the Great Unwashed always ready to go Seattle and blow up the hard-won responsibility.
It is the essence of regulatory capture – the industry doesn’t have to tell the regulator what to do, or bargain, threaten, or cajole; the regulator wants to do the same thing as the industry.