Wall Street's Reprieve Expires

The financial sector got its bailout with few strings attached, but now an angry public is demanding that it face the long-deferred consequences of its behavior.

Richard Drew / AP

If the United States is nearing any kind of cultural consensus on the role of finance in American life, it’s awfully hard to discern. For sheer political dissonance, consider these two recent events: Last week, Democratic presidential candidates jostled over who can be toughest on Wall Street, and earnestly discussed imposing a tax on the sort of financial speculation that benefits large financial firms like Goldman Sachs. And second, the Federal Reserve got a new senior official, Neel Kashkari, who helped design the 2008 bank bailout after having worked at—wait for it—Goldman Sachs.

Wall Street is still very much a political football. Financial-regulation legislation—or efforts to stop it—ranks among the trickiest political knots that the White House and Congress have to unravel if they want to keep with their October budget compromise and fund the government. Democrats and Republicans in Congress—though not in the country at large—still line up on opposite sides of the fence.

Yet the debate over how the U.S. should treat finance in American law, policy, and even culture reflects more than the political polarization that’s invoked often enough to constitute a sturdy cliché. It reflects the bifurcated legacy of the bank bailout, which managed to succeed economically—it stabilized the banks, and even made money for the federal government—but solved absolutely nothing in a political sense. The legacy of how the Obama Administration managed the politics of the bailout will roll on for years.

Back in 2008, there was a strong case for arresting the disintegration of the financial system without worrying too much about who benefited. The world economy would have careened into another Great Depression more quickly, and more ferociously than after the stock market crash of 1929. The United States faced economic ruin. In Europe, the prior outcome of depression had been dictatorship, war, and genocide. (Working there at the time, I thought of how I’d cover the collapse of newly democratized states in former Soviet bloc within a few years if something drastic didn’t happen.)

The conditions of the bank rescues averted that sort of general crisis, but also fed resentment. While the rest of the country tumbled into a searing recession, Wall Street got away with its businesses and bonuses intact. The Great Depression shredded the reputation of finance in American culture. Nearly 80 years later, a seething, yet inchoate public mood didn’t lead to criminal investigations or tough limits on the size of banks.

In fact, many public officials applauded themselves for resisting such pressure. Tim Geithner, as head of the New York Fed and then as treasury secretary, once invoked this era’s master politician, Bill Clinton, to explain why punishing bankers to appease the public would have made no sense. “You could take Lloyd Blankfein into a dark alley,” Clinton told Geithner, “and slit his throat, and it would satisfy them for about two days. Then the blood lust would rise again.”

Of course, nobody was talking about executions. The real question was whether Geithner and other Obama administration officials could have acted more forcefully to rein in bonuses and force bondholders to take a bigger hit. It would have required some creativity, but Geithner chose to invest his energy in assuring financial stability. When he had the political opportunity, Geithner didn’t want to penalize the bankers, and didn’t seem to strain himself to help people who were losing their homes. And Obama didn’t second-guess him.

The result was a strange split. Policymakers congratulated themselves on successfully averting a crisis, even as the public seethed over how they’d chosen to do that. There were ways to square that circle. The Obama administration could have recognized public resentment that ordinary people took a hit in a way bankers did not, by sending a clear message that Wall Street doesn’t call the shots. Criminal prosecutions might have done that. So might a financial transaction tax. But in the absence of such a message, the tension between bankers and society remains unresolved.

Mike Konczal, a fellow with the Roosevelt Institute, has opened an important debate on financialization, a broad concept covering the power of finance over the rest of the economy, the political potency of wealth, and above all, the size of the financial sector, which refuses to downsize significantly since the crisis. Before the housing bubble burst, the financial sector’s share of the Gross Domestic Product peaked at 7.6 percent of GDP. It dipped slightly after 2008 but returned to 7.3 percent in 2014, far higher than it was in 1980 and more than doubt the size in 1950. Put another way, there are a lot more financiers, with a lot more money, to make their case than ever before.

Meanwhile, the Democratic Party has cast a skeptical eye on Wall Street, and gained an articulate critic of the industry in Senator Elizabeth Warren of Massachusetts. Continuing resentment toward financiers has created the political space for Democratic candidates to discuss what kind of financial-transaction levy they would impose as president. Bernie Sanders would impose a 0.5 percent tax on stock sales and a smaller one on bond and derivative trades. And Hillary Clinton would slap an unspecified duty on high-frequency trading. Both proposals are descended from ideas advanced by Attac, the group founded in France in 1998 to advocate for taxing currency speculation.

What’s more, progressive Democrats have the public on their side. A Washington Post/ABC poll found 67 percent of Americans are in favor of a president that would be tough on Wall Street. Look beyond the Tea Party’s origins in griping about homeowner assistance and there’s a solid majority of Republicans—58 percent—who favor exactly the same thing. It’s no wonder then that the more populist Republican presidential candidates have, on occasion, directed barbs at Wall Street.

This type of public sentiment, bipartisan, deeply rooted to the point of being viscerally felt by many Americans, doesn’t make for new legislation in Congress—it takes a fluid political moment for that—but it will curb politicians’ enthusiasm to defend Wall Street. And help ensure that the debate over the role of finance in American life goes on.