On the Role of Business in a Societal or Global Catastrophe

While it is obvious that a business or industry can affect and be affected by its environment, such as by polluting a river and a hurricane, respectively, it is less well known that a business or an entire industry can cause or facilitate a societal or global crisis. Whereas polluting a river can be answered with government regulation, the very legitimacy (and thus ongoing operations) of a company or even an entire industry is arguably at risk in knowingly creating or significantly worsening a societal/global crisis. The latter role goes beyond the scope of government regulation and corporate social responsibility, although broadening or just enforcing anti-trust laws may be sufficient to deal with the lost legitimacy. That is to say, what I have in mind is another genre or type of problem.
For instance, Exxon funded its own scientific studies on the effects of the oil industry on the Earth’s climate as early as in the 1950s. Certainly by the 1970s, the company’s management knew that the ongoing release of CO2 into the atmosphere would cause severe climatic problems, and yet the company’s public-relations lied to the public that the company’s studies were not decisive. Given the industry’s clout/money with members of Congress and even presidents, the company could keep the government from legislating and regulating geared to an expected crisis. Exxon (and the entire industry) played a major role in causing global warming, which could result in the extinction of our species, not to mention reduce the production of food-stuffs and trigger mass-migrations and even wars such as over water-rights.
Business ethicists can be expected focus on the ethical principles violated lying and the related willingness to be a major contributor to a planetary crisis as regards habitability. In other words, what should Exxon have done? Scholars of business and societal culture focus on the incompatibility of corporate and societal cultural norms and values. Within that field of business and society, advocates of corporate social responsibility design company charitable programs oriented to specific societal problems, especially if the company had contributed to the ongoing (rather than crisis) problems. Operating a food bank for the poor is not like saving the planet, or our species. Political economists cover the legislative and regulatory capture by an industry and the resulting muted regulations. Systems theorists can explain how all of these parts work together—an entire system with a fatal flaw in its basic design and operation. The ability of business to cause or even greatly facilitate a societal or global crisis is perhaps so new in the twenty-first century that this sort of problem has not yet been studied.
In 2007-2008, mortgage producers and investment banks created sub-prime mortgages and made high-risk bonds based on the risky mortgages. Investment banks even sold insurance for holders of the bonds. The financial derivative and insurance markets became so large that when they collapsed, a financial crisis occurred. An industry had put the world’s financial system itself at risk of collapse. Financial regulation was not sufficient; a gigantic financial infusion from the Congress and the Federal Reserve was necessary. Unlike the banking crisis of 1907, more than a socially responsible J.P. Morgan would be needed. Society, through its government, had to step in both for the U.S. economy and the global economy. The crisis was that large. That the financial sector was culpable and yet could receive federal money without strings (so even bonuses could be paid!) suggests that the notion of a few large companies or an industry creating a major societal-level (e.g., the economy) crisis was new. Wall Street money as electoral campaign contributions doubtless played a role in the refusal of Congress and the U.S. president to break up the big banks, but the larger question of what to do when a business or industry creates a societal crisis rather than localized typical problems had not been considered in its own right.
To be sure, a government can enable a company to create a societal crisis. Take, for example, the public-health crisis during the coronavirus pandemic that began in 2020. In Phoenix, Arizona, the regional transit authority and the two subcontractor companies ignored local law requiring that masks be worn on the buses and light-rail. A significant proportion of bus drivers went maskless and/or allowed passengers to ride without wearing masks even when federal law required masks even of operators behind a plexiglass shield. A representative of TransDev, one of the subcontracting companies, said that the law didn’t matter because of the company’s policy, which permitted masks and presumably overrules federal regulations. A representative of Metro Valley, the regional authority, refused to enforce the federal regulation on the light rail as well as against the willful bus drivers (and passengers). A transit supervisor on the police force told me that the chief of police had told police employees not to enforce the federal regulation even though, according to the FBI, local law enforcement is regularly relied on to enforce federal law. “They are federal; we are state,” the police supervisor told me. He also told me that the governor had told the chief not to enforce the federal regulation. That federal money goes into the mass transit system in the Phoenix metropolitan area is apparently no reason to follow federal law on mass transit. One police employee told me that “bus drivers are state employees (which is false) so they are not bound by federal regulations. A second police patrol supervisor had told me that the only real law in Arizona is that which “goes through the state legislature.” All three men were not only sure that they could not be wrong, but were extremely rude and dismissive towards me. I concluded that Arizona is in need of federal oversight.
At the company level, TransDev has been knowingly misleading its bus drivers into thinking that they don’t have to wear a mask and that passengers need not either—in spite of the company’s own signs, “Per federal law, masks are required on the buses.” A representative from Metro Valley, the regional authority, told me to ignore the signs. This mentality within at least two organizations is itself a problem. In fact, with Arizona having the highest infection rate in the U.S. on at least November 3, 2021, the mentality and the resulting patchwork of masks on the local buses and light rail can be said to be a significant cause of the ongoing pandemic locally. At the very least, the positive correlation is troubling, though conveniently not to the governor, chief of police, regional transit authority, or TransDev company.  The brazenness alone is enough for informed minds to question the legitimacy of at least the local police department (which was being investigated by the FBI for having intimidated and stopped peaceful political protesters) and the TransDev company. The matter of the higher officials, including the governor, the mayor of Phoenix, and the city manager, is of course more political. I had spoken with the mayor’s office manager and had sent an email to the manager’s office (my request to speak with a managerial-level staffer resulted in a call from an intern). Besides the sheer willfulness, lack of respect for federal law, and ignorance all around, the culpability of a company (TransDev) in giving the ok for bus drivers and passengers to go maskless, and another company (Allied Security, backed up by Metro Valley) to allow security employees to go maskless and allow passengers to go maskless on the light rail when the state ranks highest in the pandemic-danger in the U.S. suggests that companies can create or severely worsen a crisis with impunity both within the companies themselves and in a corrupt and ignorant political culture. The question of legitimacy is in this case broader than just for a few companies.
Company managements are not always above lying to the public. The case of Boeing involves a management lying to its pilots, customers, and the public, resulting in preventable deaths, a significant decrease in the company’s reputational capital, and arguably even a societal-level crisis at an early stage regarding aviation. The company installed new software that could be influence by a sensor that could malfunction. Saving the company the cost of training the pilots, the company’s management did not inform those employees of the addition. The ethical dimension is pretty clear (consider Kant’s dicta about lying). What is less clear is the matter of a company being of such size in a market and the latter being so salient in society that the company can unilaterally cause a crisis at the societal level. Announcing a program in corporate social responsibility, such that helps children to keep up in school, wouldn’t suffice; the harm in a societal crisis is so much greater than are the societal problems to which CSR is geared. At the very least, the board and upper management could have been replaced by a law; the company’s response was to replace the CEO with the “Plan B” insider on the board. That is, playing a significant role in causing a societal crisis could justify the intervention of a government, rather than leaving it up to a company’s shareholders. Where the government is itself corrupt, such as in Arizona, the needed intervention can come from a federal government (e.g., U.S. and E.U.) or even other countries against both the government and the particular company involved. Corporate social responsibility and business ethics are geared to a lesser scale of harm. Causing a societal or global crisis does not reduce to unethical business and is not redressed by corporate social responsibility. Instead, society has more legitimacy to intervene and in a more drastic way, given the nature of a crisis.

Obama and Goldman Sachs: A Quid Pro Quo?

U.S. President Obama nominated Timothy Geithner to be Secretary of the Treasury. While president of the New York Federal Reserve Bank, he had played a key role in forcing AIG to pay Goldman Sachs’ claims dollar for dollar. Put another way, Geithner, as well as Henry Paulson, Goldman’s ex-CEO serving as Secretary of the Treasury as the financial crisis unfolded, stopped AIG from using the leverage in its bankrupt condition to pay claimants much less than full value. At Treasury, Mark Patterson was Geithner’s chief of staff. Patterson had been a lobbyist for Goldman Sachs.
To head the Commodity Futures Trading Commission—the regulatory agency that Born had headed during the previous administration—Obama picked Gary Gensler, a former Goldman Sachs executive who had helped ban the regulation of derivatives in 1999. Born had pushed for the securities to be regulated, only to be bullied by Alan Greenspan (Chairman of the Federal Revere) and Larry Summers, whom Obama would have as his chief economic advisor. To head the SEC, Obama nominated Mary Shapiro, the former CEO of FINRA, the financial industry’s self-regulatory body.
In short, Obama stacked his financial appointees during his first term with people who had played a role in or at least benefitted financially from financial bubble that came crashing down in September 2008.[1] Put another way, Obama selected people who had taken down the barriers to spreading systemic risk to fix the problem. Why would he have done so? Could it have been part of the quid pro quo the president had agreed to when he accepted the $1 million campaign contribution from Goldman Sachs (the largest contribution to Obama in 2007)? Might Goldman’s executives have wanted to hedge their bets in case the Democrat wins. Getting Goldman alums in high positions of government would essentially make the U.S. Government a Wall Street Government—that is, a plutocracy with the outward look of a democracy. It is no accident, we can conclude, that the spiraling economic inequality increased during the Democrat’s first term of office.

1. Inside Job (2010).

Members of Congress Secretly Lobbied the Fed

As of late September 2012, more than one hundred members of Congress had lobbied the Federal Reserve and other regulatory agencies on the Volcker Rule, the part of the Dodd-Frank Financial Reform Act of 2010 that prohibits banks from operating like casinos (e.g., trading with proprietary funds, rather than those of customers).[1] The rule stems from the importance of banks in our financial system. In September 2008, the world nearly witnessed the collapse of that system when banks stopped trusting each other (e.g., via commercial paper market) because of the risks that some of the big ones had been taking with mortgage-backed derivative securities and the related insurance swap securities. Awash in healthy-seeming fees, the banks purchased risky subprime mortgages and bundled them into bond-like securities that could be sold to investors.
Congress passed the Dodd-Frank Act, so it makes sense, and indeed is positive from the standpoint of accountability, that lawmakers remain involve as the relevant regulators (who are not elected) translate the broad legislative language into specific rules for banks. However, the newspaper’s report points to a less-than-salubrious practice wherein members of Congress contact regulatory agencies in private and before even the period for public comment. This raises the possibility that Wall Street was using its connections in Congress to weaken the public safeguards in the bill—essentially putting a narrow private interest in front of the public interest that the bill was designed to protect.

The access purchased comes not only from having information that the regulatory agencies need; banks (and American corporations in general) could contribute unlimited amounts of money from the corporate treasury (rather than from contributions from executives and employees) to “social welfare” non-profit organizations that can spend money on political ads in support of friendly candidates (and against their opponents) without having to divulge the identities of the donors. So Wall Street banks can furtively promote U.S. Senate candidates who support the repeal of the Dodd-Frank Act without any of us knowing it. In fact, the “social welfare” (54c) groups can in turn contribute directly to a candidate’s campaign without divulging the names of the donors. Not even the IRS, which has been concerned about whether the donors pay the required gift tax, bothers the “social welfare” organizations for donor lists after complaints from several U.S. Senators. Nor has the SEC pushed corporations to divulge to their respective stockholders how the political donations have been spent. I suspect that senatorial influence lies behind this inaction too.
It is not as though there were some uncertainty regarding the need for disclosure in a democracy. Even though eight of the nine U.S. Supreme Court justices in Citizens United stress in their opinions the necessity of disclosure, corporations, no doubt well-connected in the halls of power in Washington from the donations already given, have a way to evade the transparency. Political and corporate democracy are both undercut as banks and business corporations can spend unlimited amounts (out of their respective profits) to help “pro-business” candidates for public office. Rather than being speech itself (and thus subject to free-speech constitutional protection), money is power that can be used to skew or otherwise limit the contours of public debate. After the election, the continued influence of the money is also stealth, such as when members of Congress lobby the Federal Reserve to weaken regulation meant to safeguard our financial system from a repeat of the near-collapse in 2008. For deregulation to be urged so soon after a near-depression gives us an indication of how dangerous “money as invisible speech” is to the public good, even if such influence is in the corporate interest.
As creatures of the state, corporations should not have a share in governance, for that function subverts the causal relationship between Creator and creature. That is to say, a corporate management (or board) presuming to influence members of Congress can be likened to the self-idolatry of a creature supposing itself to be God. Interestingly, as going concerns, corporations are immortal, legally speaking. As for us mere mortals, Rousseau reminds us that we are born free but live in chains—only we are under the delusion that we are still free because the confining elements are subterranean qua the furtive influence of great concentrations of private wealth. I suppose one question is whether finite bundles of subjectivity can somehow become aware of that which has been designed to be outside of our awareness, and, if so, whether a society can so move to protect its good in a viable republic.

1. Ben Protess, “Behind the Scenes, a Lawmaker Pushes to Curb the Volcker Rule,” The New York Times, September 21, 2012.

President Obama Took Care of Wall Street below a Public Persona of Reform

In April, 2010, President Obama gave a speech in New York City to counter what he called “the furious efforts of industry lobbyists” geared to weakening or stopping the new financial regulations that Obama claimed would be needed to stave off a second Great Depression.[1]  It is telling that the banks that had contributed to the financial crisis of 2008 were trying to diminish or block any new regulation. The very legitimacy of industry calls for deregulation in the wake of a market failure caused in part by the industry flies in the face of the rationale for regulation. In short, the rationale for government regulation has to do with market failures, which includes fraud and over-zealous profit-taking at the expense of the public good. The root of the rationale is the difference between the interests of an organization and society (i.e., the public good). 

After the financial crisis of 2008, the U.S. President wanted more consumer protections, limits on the size of banks and the risks they could take, reforms on executive compensation, and greater transparency for controversial financial securities known as derivatives.  He maintained that each of these safeguards must be in any bill that he would sign. In giving the speech with some of the banking titans in the audience, the President wanted to confront the financial industry more directly through a sharp speech. After having castigated the bankers' “failure of responsibility” in recent years, he called on them to stop resisting tighter regulation through the army of lobbyists staked out then on Capitol Hill. The president’s address at Cooper Union in Lower Manhattan circled back to another speech he had given at the same location in March of 2008 warning of financial manipulation, market bubbles and the concentration of economic power.

Analysis:

At the time of his speech, the President was actually supporting the bills coming out of Congress. These bills would do nothing to forestall or minimize market bubbles and reduce the concentration of economic power.  The bills would not even limit or reduce bank size; instead, higher reserve requirements for the biggest banks was presumed a sufficient incentive for those banks to willing reduce their sizes. Although this approach, which would become law, incorporated the market mechanism (regarding financial disincentives), the assumption that empire-building Wall Street titans would reverse the "business logic" where in the opposite of growth is bankruptcy is very naive. It is remarkable that the president considered this approach as satisfying his requirement that the bill reaching his desk must include something limiting the size of financial institutions (especially when the systemic risk of one big bank failing and taking down the entire financial system had recently been lived through). Paul Volker, Chairman of the Federal Reserve under Reagan, was urging a decrease in the sizes of the five largest banks. 

I submit that Goldman Sachs' $1 million contribution to Obama's presidential campaign may have had something to do with it, as did Wall Street lobbying in Congress. On the eve of the President’s speech, Obama’s chief of staff had met behind closed doors with representatives of Wall Street firms. Fox News reported that Obama's message was the following: we’ve got to trash you in public, but know that we will take care of you in private.  While Fox News was at the time certainly no friend of the President, the account would explain why the President would eventually sign the Dodd-Frank Act of 2010, which except for staggered reserve requirements and a consumer-protection bureau is pretty kind to Wall Street.  

 

Recalling President Andrew Jackson, who successfully took on the bank of the U.S. by refusing to fund it in 1832, and Theodore Roosevelt, who supported the Sherman Anti-trust Act in 1911, we could certainly view Obama as not having been willing to take on the guys who not only had contributed to his 2008 campaign, but could be useful again in 2012 for Obama's reelection.  

1.  Peter Baker, "Obama Issues Sharp Call for Reforms on Wall Street," The New York Times, April 22, 2010.

President Obama and Goldman Sachs: A Quid Pro Quo?

Wall Street and the White House may be closer than the typical American thinks. One way this is accomplished is for a bank to contribute heavily to both presidential campaigns so as to be able to hedge political risk by getting ex-managers into strategic posts in the executive arm of the U.S. Government. This can be the case even when one of the candidates has campaigned on holding Wall Street accountable, such as after the financial crisis of 2008. There is the campaign slogan, and there is the political-economic reality underneath. 

U.S. President Obama nominated Timothy Geithner to be Secretary of the Treasury. While president of the New York Federal Reserve Bank, he had played a key role in forcing AIG to pay Goldman Sachs’ claims dollar for dollar. Geithner, as well as Henry Paulson, Goldman’s ex-CEO who was serving at the time as Secretary of the Treasury under President Bush, stopped AIG from the leverage in its bankrupt condition to pay claimants much less than full value, which would have been expected given AIG's plight. Once Geithner became Secretary of the Treasury under Obama, Geithner’s chief of staff was Mark Patterson, a former lobbyist for Goldman Sachs.

To head the Commodity Futures Trading Commission—the regulatory agency that Born had headed during the previous administration—Obama picked Gary Gensler, a former Goldman Sachs executive who had helped ban the regulation of derivatives in 1999. Born had pushed for the securities to be regulated, only to be bullied by Alan Greenspan (Chairman of the Federal Revere) and Larry Summers, whom Obama would have as his chief economic adviser. To head the SEC, Obama nominated Mary Shapiro, the former CEO of FINRA, the financial industry’s self-regulatory body.

In short, Obama stacked his financial appointees during his first term with people who had played a role in or at least benefited financially from financial bubble that came crashing down in September 2008. Put another way, Obama selected people who had taken down the barriers to spreading systemic risk to fix the problem. Why would he have done so? Could it have been part of the quid pro quo the president had agreed to when he accepted the $1 million campaign contribution from Goldman Sachs (the largest contribution to Obama in 2007)? Might Goldman’s executives have wanted to hedge their bets should the Democrat win? Unfortunately, getting Goldman alums in high positions of government would essentially make the U.S. Government a Wall Street Government—one that would be hampered in holding Wall Streeters accountable, even in terms of criminal prosecutions related to the financial crisis. It is no accident, we can conclude, that the spiraling economic inequality increased during the Democrat’s first term of office.

Source: Inside Job (2010), directed by Charles Ferguson

The U.S. Department of Justice: Big Banks May Legitimately Be above the Law

The Financial Times reported in 2013 that lawmakers in the U.S. Congress were claiming that the Department of Justice had been “too soft on big banks and their executives by failing to bring criminal cases related to the financial crisis.”[1] In the five years following the financial crisis of 2008, no Wall Street executive was criminally charged with fraud. The U.S. Justice Department chose not to go after the bankers for their lack of due diligence regarding their purchases of sub-prime mortgages from mortgage originators. This in spite of the fact that at Citibank, for example, a manager in the bank’s due diligence department estimated that 50% to 80% of the approved mortgages did not meet the bank’s credit policy, and yet Robert Rubin, the CEO at the time, did not act on the manager’s email. This suggests that a criminal complaint could have been lodged against the bank itself, but then what would be the implications for the financial system should Citibank had gone under after being found criminally guilty? Does it even hold that a guilty verdict would mean bankruptcy? Simply stated, a company can be so large that its failure due to a guilty verdict could harm innocent third parties, including stockholders, employees, suppliers, and even the general public if the bankruptcy triggers a systemic collapse of the financial system. Such concerns are called collateral consequences. 

After the collapse of Lehman Brothers in September 2008, systemic risk became a particularly salient concern for criminal prosecutors at the U.S. Department of Justice. Swayed by a desire to minimize the potential disproportionate harm to innocent parties from a verdict-triggered major bankruptcy, the prosecutors believed they were obligated to consider collateral consequences even if that meant that the really big banks would be immune from criminal prosecution. To such banks, this could be used as a competitive advantage because keeping within the constraints of law in making money would not apply. I contend, therefore, that the U.S. Government should not have taken collateral consequences into consideration. 

 Mythili Raman testifying before Congress. mainjustice.com

Mythili Raman, Acting Assistant Attorney General in the Criminal Division, argued that collateral factors as a group should be considered. Testifying before Congress on May 22, 2013, she cited “the disproportionate impact on innocent third parties, including the public at large,” as being entirely appropriate for prosecutors to consider.[2] Her reference to the general public means that systemic risk was among the legitimate factors in her view, and yet she also said, “the size of a corporation will never be a factor in and of itself and that no institution is too big to prosecute.”[3] Crucially, her position was that one particular consequence should never be the only factor. “A single collateral consequence cannot be the reason.” However, she added that “collateral consequences are issues that we must and do consider.”[4] Because banks too big to fail tend to have more than one significant collateral consequence (e.g., many stockholders and employees, as well as systemic risk), such banks may be too big to jail.

In testimony before Congress in March 2013, U.S. Attorney General Eric Holder had admitted that the lawyers in his department were wary of the “negative impact” on the economy from prosecuting a large financial institution. “(I)t is a function of the fact that some of these institutions have become too large.” Differing from Raman, he thought the size of large banks “has an inhibiting influence – impact on our ability to bring resolutions that I think would be more appropriate. . . . (a)nd I think that is something that we – you all – need to consider.”[5] I want to unpack this rather robust admission, for it is significant.

Firstly, the Attorney General was hinting at what Sen. Kaufman had observed while in office. Namely, it should not have been the F.B.I.’s concern whether the Wall Street banks continued as viable concerns. In other words, systemic risk or even collateral consequences more generally had no business being considered by prosecutors whose job it was to enforce the law. Including systemic risk among the collateral consequences thus further compromised the rule of law. As Sen. Charles Grassley put it, “It was stunning to hear the nation’s top prosecutor acknowledge that, from the justice department’s perspective, the big banks are too big to jail. This is worrisome for the fair application of justice in our country.”[6]

Secondly, the Attorney General was suggesting that Congress should reduce the size of the biggest banks—those with over $1 trillion in assets. This would have removed the specter of banks being too big to jail. Also, by implication, Holder had concluded that the Dodd-Frank Act would not be sufficient to solve the "too big to fail" problem. That law was premised in part on the theoretically beautiful but practically insufficient assumption that imposing disproportionate capital reserve requirements on the biggest banks would not only be enough to keep them sound even in a financial crisis, but would also prompt the banks' boards to reduce the size of their banks. Besides of cost-advantages in being so large, and getting even larger as the five biggest banks have since done, the psychology of empire-building, which had gripped Lehman's Dick Fuld so, can easily dismiss the disproportionate costs of retaining or enlarging size. 

Regarding the implications for the U.S. Department of Justice should the biggest banks have taken the bait and voluntarily reduced their respective sizes, it is clear that if no systemic risk (i.e., of being too big to fail without taking the whole financial system down) were to exist, then third-party collateral damage would not be disproportionate so the banks (and bankers) could be prosecuted. Accordingly, the Huffington Post observed at the time that lawmakers “may be encouraged to apply even more public pressure on efforts to crack down on big banks.” [7] Lawmakers having received campaign contributions from those banks, however, would hardly do so. In fact, those members of Congress would even defend the large sizes of the biggest banks. 

Exceptions admittedly existed. Rep. Sherman, the chair of the full committee, noted while Raman was testifying that the fact that the Department of Justice considered collateral consequences rather than simply enforced the law was enough justification to break up the big banks. Putting aside the issue of size for the conduct of banking (e.g., whether a gigantic sized bank is necessary to make huge loans or would a syndicate of banks do as good of a job and spread the risk), having powerful people and organizations de facto above the law is something that just cannot be permitted in a republic. So on this basis alone, the rationale goes, society had an overwhelming interest in braking up the largest U.S. banks. 

Unfortunately, being too big to fail has carried (and still carries) with it tremendous political power—muscle that could have been used all too easily to resist legislative proposals (or even public debate) oriented to seriously downsizing the mammoth banks. This has the real problem since economic power became so concentrated in large corporations and banks: can a republic resist the power of its most powerful for the good even of the economy, and the public societal good more generally? Were the big banks pulling the strings that led to Raman’s assertion that collateral consequences “must and should” be considered in deciding whether to prosecute? Whether Raman realized it or not at the time, the implication that the rule of law applied impartially should be compromised by the magnitude of the predicted collateral consequences from a corporate conviction is, euphemistically speaking, troubling.

See “The Untouchables,” Frontline, January 22, 2013 and Essays on the Financial Crisis: Systemic Greed and Arrogant Stupidity, available at Amazon.

1. Shahien Nasiripour and Kara Schannell, “Holder Says Some Banks Are ‘Too Large’,” The Financial Times, March 7, 2013.
2 Congressional Hearing, “Who Is Too Big to Fail: Are Large Financial Institutions Immune from Federal Prosecution?” Financial Services Committee, Oversight and Investigations Sub-Committee, U.S. House of Representatives, May 22, 2013. See also the letter to sub-committee members; Shahien Nasiripour, “Too-Big-To-Jail Dogs Obama’s Justice Department As Government Documents Raise Questions,” The Huffington Post, May 22, 2013.
3. Ibid.
4. Ibid.
5. Nasiripour and Schannell,  “Holder Says Some Banks Are ‘Too Large’,”
6. Ibid.
7. Ibid.

Big Bankers and the U.S. Government: A Coalition Circumventing Accountability on Wall Street

It is interesting that the U.S. Department of Justice did not pursue the fraudulent bankers on Wall Street not only during the Bush presidency, but also the following presidency, that of Barak Obama.  Not coincidentally, Goldman Sachs was the single biggest campaign contributor to Obama’s 2008 candidacy for president. It would seem that Wall Street had both political parties in a net by the time of the financial crisis in September, 2008. A sector of the economy being able to control both major parties is bad for not only industrial policy (i.e., favoritism), but also democracy. In short, a government should have enough strength to constrain a business sector, rather than being subject to it. The latter condition implies continued vulnerability should greed again get ahead of itself on Wall Street. By nature, greed, if allowed to go on running on its own steam, accumulates more and more momentum. 

The New York Times reported in 2011, “legal experts point to numerous questionable activities where criminal probes might have borne fruit and possibly still could. Investigators, they argue, could look more deeply at the failure of executives to fully disclose the scope of the risks on their books during the mortgage mania, or the amounts of questionable loans they bundled into securities sold to investors that soured. Prosecutors also could pursue evidence that executives knowingly awarded bonuses to themselves and colleagues based on overly optimistic valuations of mortgage assets — in effect, creating illusory profits that were wiped out by subsequent losses on the same assets. And they might also investigate whether executives cashed in shares based on inside information, or misled regulators and their own boards about looming problems. Merrill Lynch, for example, understated its risky mortgage holdings by hundreds of billions of dollars. And public comments made by Angelo R. Mozilo, the chief executive of Countrywide Financial, praising his mortgage company’s practices were at odds with derisive statements  he made privately in e-mails as he sold shares; the stock subsequently fell sharply as the company’s losses became known. Executives at Lehman Brothers assured investors in the summer of 2008 that the company’s financial position was sound, even though they appeared to have counted as assets certain holdings pledged by Lehman to other companies, according to a person briefed on that case. At Bear Sterns, the first major Wall Street player to collapse, a private litigant says evidence shows that the firm’s executives may have pocketed revenues that should have gone to investors to offset losses when complex mortgage securities soured.”[1]  David Skeel, a law instructor at the University of Pennsylvania, remarked, “It’s consistent with what many people were worried about during the crisis, that different rules would be applied to different players. It goes to the whole perception that Wall Street was taken care of, and Main Street was not.”[2]

Elliot Spitzer, the Attorney General of New York, was preparing to go after some big bankers until he stopped when a lawyer at the U.S. Department of Justice (DOJ) told him to back off because the department would be moving against the bankers. However, it did no such thing; the DOJ would not in fact "move" against the bankers. So it is suspicious; the lie may have been fabricated in Washington, D.C. to protect the bankers. If so, elected representatives including the president who had received sizable campaign contributions from the bankers themselves or their banks would be prime suspects. To suggest that an elected official would not protect a major contributor is like asking water to go up hill.  The subterfuge used by the DOJ at the time was that if the department went after the bankers, the banks themselves, which were too big to fail without taking the financial sector and even the economy with them, would become too unstable.
Incredibly, not only did the bankers not get punished; the banks got bailouts, which the bankers could use to pay themselves bonuses! This included bonuses at Goldman Sachs for selling "crap" (i.e., the subprime-mortgage-based bonds) to even good clients and of course lying about how solid the bonds actually were. 

Bank regulators, who can be "captured" by regulatees not only due to reliance on information from them, but also political pressure from the regulatees' political protectors in Congress and the White House, may have played a role too. According to The New York Times, bank regulators referred 1,837 cases to the Justice Department in 1995. In 2007-2010, an average of only 72 a year was referred for criminal prosecution.  “The Office of Thrift Supervision was in a particularly good position to help guide possible prosecutions.” From the summer of 2007 to the end of 2008, O.T.S.-overseen banks with $355 billion in assets failed. The thrift supervisor, however, did not refer a single case to the Justice Department between 2000 and 2010. The Office of the Comptroller of the Currency, a unit of the Treasury Department, referred only three in that decade.[3]

The relationship between the head of Thrift Supervision and the CEO of Countrywide is particularly revealing.  In March 2007, Countrywide was regulated exclusively by the regulatory agency. That agency was overseen at the time by John M. Reich, a former banker and Senate staff member appointed in 2005 by President George W. Bush. Reich was on all for deregulation. Robert Gnaizda, a former general counsel at the Greenlining Institute, a nonprofit consumer organization in Oakland, Calif., said he had spoken often with Reich about Countrywide’s reckless lending. Gnaizda says that when he suggested to Reich how he could build a case against Mozilo, the CEO of Countrywide, Reich “was uninterested. He told me he was a good friend of Mozilo’s.”[4] Reich subsequently refuted that the two were friends. “I met with Mr. Mozilo only a few times," Reich insisted, "always in a business environment, and any insinuation of a personal friendship is simply false.”[5] Even a few business meetings can be sufficient and the same ideology can be sufficient, however, to bend the ear of a regulator. Besides, Reich had reason after the financial crisis to deny any friendship with a man largely discredited due to the mortgage-producing antics at Countrywide. Mozilo’s flush fingers may have stretched as far as the chairman of the Financial Crisis Inquiry Commission, Phil Angelides. The New York Times reported in 2011 that he had told two deputies that Mozilo and Countrywide were off limits, though Angelides subsequently denied having made the statement. Instead, he pointed instead to the Republican opposition to hearings on Countrywide in Congress.

I suspect that whether of the deregulation crowd or Democratic, both parties, being of part and parcel of the establishment, had by the financial crisis of 2008 become too close to the vested interests on Wall Street to effectively regulate its banks and bankers, and thus to be in a position to investigate cases of regulatory failure. In other words, when the necessary relationship between financiers and regulators breaks down, accountability does as well. Without the regulators and DOJ being able to constrain excessive greed by holding the people in the financial sector accountable, continued vulnerability to the financial system collapsing as it almost did in September, 2008 can be expected even if it is ignored.  

See Essays on the Financial Crisis: Systemic Greed and Arrogant Stupidity, available at Amazon.

1. Gretchen Morgenson and Louise Story, “In Financial Crisis, No Prosecutions of Top Figures,” The New York Times, April 14, 2011.

2. Ibid.

3. Ibid.

4. Ibid.

5. Ibid.

Too Big To Fail: The U.S. Is Still at Risk

On March 20, 2013, more than two years after the Dodd-Frank financial reform legislation had become law, Federal Reserve chairman Ben Bernanke made it clear that the problem of too-big-to-fail banks had not been solved. “Too Big To Fail is not solved and gone,” he said in a press conference. “It’s still here.”[1] That is, providing an orderly liquidation process for bankrupt banks would be insufficient in keeping the U.S. economy free of vulnerability from even one of the biggest banks taking down the financial sector merely by going bankrupt. Congress should not have missed or minimized this point while working on the Dodd-Frank Act. The self-interested power of Wall Street in Washington and the need of campaign funds in Congress coalesced to dilute the law in spite of the detriment to the public good.

Suggesting that more legislation might be needed, Bernanke said, “Too Big To Fail was a major source of the crisis . . . and we will not have successfully responded to the crisis if we do not address that successfully.”[2] More would be needed to rid the U.S. economy of the threat of banks too big to fail. If holding more capital does not make the big banks safer, “we will have to take additional steps.” This, he said, “is important.” Yet somehow his voice was not adequately heard. Other voices were louder on Capitol Hill.

Meanwhile, Wall Street banks faced little downside. Because the mammoth size of big banks such as Citibank and Bank of America makes their failure a threat to the viability of the financial system and even the overall economy, such size is an advantage to the banks because the bankers can reasonably bet that the U.S. Government would have to bail them out even if they face financial ruin by having taken on too much risk as the economy sours. The sense of invincibility, plus lower borrowing costs, could lead big banks to not only stay big (or even get larger!), but also take bigger risks. Bankers at such banks may even feel free to commit fraud because U.S. Attorney General Eric Holder admitted in 2013 that large banks were nearly immune from government prosecution for crimes, given the risks to the economy from the failure of a convicted bank. What about the fraudulent bankers who sold "crap" while claiming the mortgage-based bonds were sturdy? In short, the risk taken on by a big bank could easily outstrip even the additional capital requirements in the Dodd-Frank Act.

Even apart from reckless banking at the top of the U.S. financial system, if a sizable market in the U.S., such as many of the housing markets, were to collapse all at once, as in 2007-2008, many banks would be hit. The additional reserves would not likely buttress individual banks from the domino effect that was evinced, albeit halted, in September 2008. I submit that more money in reserves would have stopped the cascading momentum. While higher reserves might safeguard a bank while others are intact, the claim seems doubtful at best when the undercurrent from the momentum of many banks being hit at once or in a row is strong. It is no accident, I contend, that the Obama campaign of 2008 accepted $1 million from Goldman Sachs. 

1. Mark Gongloff, “Ben Bernanke: ‘I Agree With ElizabethWarren100 Percent’ On Too Big To Fail,” The Huffington Post, March 20, 2013.
2. Ibid.

On the Gravitational Pull of Clearinghouses in Congress after the Financial Crisis

Lest it be assumed that the Dodd-Frank financial-reform Act, which became law in 2010, two years after the financial crisis, would render it less probable that taxpayers would again be faced with having to bail-out financial institutions even without strings attached in order to keep the financial system intact and the American economy from collapsing, Gretchen Morgenson of The New York Times wrote two years after the Act's passage that “failing to confront the too-big-to-fail question is a serious oversight.”[1] For one thing, disproportionately increasing the amount of money that the biggest banks must hold against a rainy day once again neglects the possibility that every bank is having such a day on the same day and so none of the banks will loan to other banks (i.e., the commercial paper market). When a financial system itself is sick to the extent that it cannot stand, all the heavy dominoes may topple, one after another, even though each has more support. Secondly, widening the too-big-to-fail category enables more financial institutions to engage in risky bets because the expanded net could limit any eventual downside. Sure enough, Morgenson points out that the legislation “actually widened the federal safety net for big institutions. Under the law, eight more giants were granted the right to tap the Federal Reserve for funding when the next crisis hits.”[2] Those institutions, including the Chicago Mercantile Exchange, the Intercontinental Exchange, and the Options Clearing Corporation were even able to avoid the penalties for failure specified in the Act. The clearinghouses had successfully argued that even though only banks had been allowed to borrow from the Fed’s discount window, the clearinghouses are not financial institutions; rather, they are financial utilities. So, should they fail, they should not have to be “wound down” by regulators. This is essentially having it both ways and getting away with it. To explain this comfortable arrangement, we would need to look under the hood, so to speak, where I suspect we would find an exclusive world wherein vast private wealth is itself political power even apart from any attendant lobbying activity.

In 2011, the CME Group, the parent company of the Chicago Mercantile Exchange, made almost $3.3 billion in revenue. Craig Donohue, the CEO, received $3.9 million in compensation and held an additional $10 million worth of equity outstanding. With this kind of money comes inherent influence, politically speaking. A very large concentration of wealth has a certain mass, by analogy, that bends space itself and thus has the force of gravity on other masses. This subtle force operates on legislators and regulators too, and thus complements both the influence of lobbying and campaign contributions. Even beyond the ability or wherewithal of great wealth to reward and punish, money talks; it is respected in itself. 

So great concentrations of wealth, like giant planets warping the space nearest to them, intrinsically warp a democratic system, which facilitates the natural tendency of great masses of wealth to attract even more. Hence after the financial crisis and the TARP and Fed infusions of cash, the five largest American banks were even bigger, and thus carried more systemic risk from the vantage-point of the financial system as a whole. In other words, it was even more likely that any of those banks, should it fail, could bring the system down. Additional reserve requirements seems like a paltry means of countering this natural law of great concentrations of wealth. Given their inherent and practiced influence, it should come as no surprise that they leverage the natural law by using even elected officials to bend the space appreciably more. 

It should be no surprise, according to Sheila Bair, the former head of the Federal Deposit Insurance Corporation, that just when the managers at the clearinghouses “were drooling at the prospect of having access to loans from the Fed, top officials at the Treasury and the Fed, over the objections of the F.D.I.C.,” pushed Congress to allow the non-banks access to the Fed’s discount window as part of the Dodd-Frank Act even while saving the clearinghouses from being subject to the law’s “wind-down” requirements.[3] Approving members of Congress likely either saw the huge amount of clearinghouse wealth as impressive and thus eminently worthy of being tapped for political contributions or were already tapping. It is as the density of the wealth had a warm glow even though a cold winter. 

According to Morgenson at the time, the clearinghouses had "considerable clout in Washington. From the beginning of 2010 through [November 2012], the CME Group . . . spent $6 million on lobbying.”[4] Warping space even more by redesigning artificial contours is apparently not cheap. 

As though a rationale were needed, managers at CME argued that once their institution received Dodd-Frank’s designation of “systemically important,” the Fed “should provide access to emergency lending” and without strings.[5] Without strings! It would seem that a certain presumptuousness comes from prolonged exposure to the warped space near the immense concentrations of wealth. Not included in the Act’s penalties for failure, CME hardly deserved an “offsetting” benefit. The lack of symmetry alone is indicative of the sheer influence of great wealth. Would such wealth, as almost the entire wealth on the planet concentrated, be a black hole? No one could escape its pull! 

More realistically, when, according to Morgenson, “large and systemically important financial utilities that together trade and clear trillions of dollars in transactions appear to have won the daily double—access to federal money, without the accountability" in being wound down after failing—the rest of us can legitimately wonder how much of the Dodd-Frank Act can be relied on to protect the financial system and economy, and thus us, after the warping effect of the giant planets. Shouldn't they be pared down, given their sizable risk to the system? If so, democratic government would be less warped and thus more directly oriented to the public good. For if a government is thwarted in this role, who is going to look after our macro systems, whether they be economic, political, or societal in general? 

See Essays on the Financial Crisis: Systemic Greed and Arrogant Stupidity, available at Amazon. 

1. Gretchen Morgenson, “One Safety Net That Needs to Shrink,” The New York Times, November 3, 2012.

2. Ibid.

3. Ibid.

4. Ibid.

On the Various Causes of the Financial Crisis of 2008: Have We Learned Anything?

In January, 2011, the Financial Crisis Commission announced its findings. The usual suspects were not much of a surprise; what is particularly notable is how little had changed on Wall Street since the crisis in September of 2008. According to The New York Times, "The report examined the risky mortgage loans that helped build the housing bubble; the packaging of those loans into exotic securities that were sold to investors; and the heedless placement of giant bets on those investments." In spite of the Dodd-Frank Financial Reform Act of 2010 and the panel's report, The New York Times reported that "little on Wall Street has changed." One commissioner, Byron S. Georgiou, a Nevada lawyer, said the financial system was “not really very different” in 2010 from before the crisis. “In fact," he went on, "the concentration of financial assets in the largest commercial and investment banks is really significantly higher today than it was in the run-up to the crisis, as a result of the evisceration of some of the institutions, and the consolidation and merger of others into larger institutions.” Richard Baker, the president of the Managed Funds Association, told The Financial Times, "The most recent financial crisis was caused by institutions that didn't know how to adequately manage risk and were over-leveraged. And I worry that if there is another crisis, it will be because the same institutions have failed to learn from the mistakes of the past." From the testimonies of managers of some of those institutions, one might surmise that the lack of learning in the two years after the crisis was due to a refusal to admit to even a partial role in crisis.  In other words, there appears to have been a crisis of mentality, which, as it contains intractable assumptions and ideological beliefs, as well as stubborn defensiveness, is not easy to dislodge such that legislation past Dodd-Frank could ever be passed.
It is admittedly tempting to go with the status quo than be responsible for reforms. If the reformers are also the former perpetrators, their defensiveness and ineptitude mesh well with the continuance of the status quo even if an entire economy the size of an empire is left vulnerable to a future crisis. To comprehend the inherent danger in the sheer continuance of the status quo, it is helpful to digest the panel's findings. 
The crisis commission found "a bias toward deregulation by government officials, and mismanagement by financiers who failed to perceive the risks." The commission concluded, for example, that "Fannie and Freddie had loosened underwriting standards, bought and guaranteed riskier loans and increased their purchases of mortgage-backed securities because they were fearful of losing more market share to Wall Street competitors." These two organizations were not really market participants, as they were guaranteed by the U.S. Government. That government-backed corporations would act so much like private competitive firms undercuts the assumed civic mission that premises government-underwriting. All this ought to have raised a red flag for everyone--not just the panel which stressed the need for a pro-regulation verdict. 

Lehman was a particularly inept player leading up to the crisis.     Zambio

In terms of the private sector, The New York Times reported that the panel "offered new evidence that officials at Citigroup and Merrill Lynch had portrayed mortgage-related investments to investors as being safer than they really were. It noted — Goldman’s denials to the contrary — that 'Goldman has been criticized — and sued — for selling its subprime mortgage securities to clients while simultaneously betting against those securities.'”  The bank's proprietary net-short position could not be justified by simply market-making as a counter-party to its clients, Blankfein's congressional testimony notwithstanding. 
Relatedly, the panel also pointed to problems in executive compensation at the banks. For example, Stanley O’Neal, chief executive of Merrill Lynch, a bank which failed in the crisis, told the commission about a “dawning awareness” through September 2007 that mortgage securities had been causing disastrous losses at the firm; in spite of his incompetence, he walked away weeks later with a severance package worth $161.5 million. The panel might have gone on to point to the historically relatively huge difference between CEO and lower-level manager compensation and questioned the relative merit, but such a conclusion would go beyond the commission's mission to explain the financial crisis.

With regard to the government, The New York Times reported that the panel "showed that the Fed and the Treasury Department had been plunged into uncertainty and hesitation after Bear Stearns was sold to JPMorgan Chase in March 2008, which contributed to a series of “inconsistent” bailout-related decisions later that year." The Federal Reserve was clearly the steward of lending standards in this country,” said one commissioner, John W. Thompson, a technology executive. “They chose not to act.” Furthermore, Sabeth Siddique, a top Fed regulator, described how his 2005 warnings about the surge in “irresponsible loans” had prompted an “ideological turf war” within the Fed — and resistance from bankers who had accused him of “denying the American dream” to potential home borrowers. That is to say, the Federal Reserve, a corporation wholly owned by the U.S. Government, is too beholden to bankers instead of the common good. So we are back to the issue of a government-guaranteed corporation acting like or on behalf of private companies (and badly at that).
We can conclude generally that governmental, governmental-supported, and private institutions, all acting in their self interests, contributed to a "perfect storm" that knocked down Bear Stearns, Lehman Brothers, Countrywide, AIG, and Freddy and Fannie Mae. Systemically, the commercial paper market--lending between banks--seized up and many of the housing markets in the U.S. took a severe fall such that home borrowers awoke to find their homes under water. The Federal Reserve was caught off-guard, as its chairman, Ben Bernanke, had been claiming that the housing markets could be relied on to stay afloat. Relatedly, AIG insured holders of mortgage-based bonds without bothering to hold enough cash in reserves in case of a major decline in the housing markets all at once. Neither the insurer nor the investment banks that had packaged the subprime mortgages into bonds though to investigate whether Countrywide's mortgage producers had pushed through very risky mortgages before selling them to the banks to package. In short, people who were inept believed nonetheless that they could not be wrong. Dick Fuld, Lehman's CEO, had the firm take on too much debt to buy real estate so that eventually his firm would be as big as Goldman Sachs. That such recklessness would be on the behest of a childish desire to be as big as the other banks testifies as to the need for financial regulation that goes beyond the "comfort zone" of Wall Street's bankers and their political campaign "donations."

See also Essays on the Financial Crisis: Systemic Greed and Arrogant Stupidity, available at Amazon.

Source:

Sam Jones, "Hedge Funds Rebuke Goldman," Financial Times, January 28, 2011, p. 18.

The 2012 U.S. Presidential Election: Fueled by Leadership or Money?

The 2012 U.S. presidential election was the first in which neither of the major-party candidates participated in the campaign-matching system that imposes campaign spending limits in return for federal financing. It was also the first presidential election since the Citizens United case in 2010. That U.S. Supreme Court ruling was a significant factor in the election because corporations and unions could dip into their respective treasuries directly, rather than only through employee or member contributions, spend an unlimited amount on political ads by making donations to “social welfare” organizations. Without disclosing their donor lists, these non-profit organizations could create political ads that in turn could favor or criticize a particular candidate, albeit with no formal approval from the favored candidate. Faced with formidable super PACs pumping some $800 million or more in favor of Mitt Romney, Obama’s money-machine went into high-gear in a sort of “rich man’s” arms-race. Some rich donors had spent millions of dollars to push the massive ship of state a discernible distance in their direction. Hardly anyone expected that the contending high monies would virtually cancel each other out. Hardly anyone thought the Obama campaign’s scientifically-based “ground game” oriented to getting new voters registered would trump Romney’s financial advantage. To be sure, Wall Street was also behind Obama; Goldman Sachs had donated $1 million in 2008, and Obama in turn gave the big banks federal money (TARP) without strings, including on bonuses (which the bankers abused).

Subtly missing in the 2012 presidential election season among all the financial fire-power and Obama’s grass-roots operation and even all the presidential “debates” were ideas and a sustained societal discussion of a few basic principles of political economy and governance. The result, in spite of all the money, time and effort, was a continuance of the political status-quo because few minds were changed in the process. If ideas and rational argument are not absolutely required for a basic shift in a body politic worth the name vision, at least they provide for a basis for leadership and real change.  

Unfortunately, The New York Times reported afterwards that “the overall cost of the campaign rose accordingly, with all candidates for federal office, their parties and their supportive ‘super PACs’ spending more than $6 billion combined.” The grand result for all that money was that the U.S. House remained in Republican hands, the U.S. Senate continued with a slim Democratic majority, and the Democrats held the White House. Even the deal-makers—the major players—notably John Boehner, Nancy Pelosi, Harry Reid, Mitch McConnell, and Barak Obama—remained in place. The difficulty they had had as a group in coming to agreement on major policy items before the election was essentially unchanged.

On Thursday, November 8^tth The New York Times summed up the previous year and a half as follows: “After $6 billion, two dozen presidential primary election days, a pair of national conventions, four general election debates, hundreds of Congressional contests and more television advertisements than anyone would ever want to watch, the two major political parties in America essentially fought to a standstill. When all the shouting was done, the American people on Tuesday more or less ratified the status quo that existed at the start of the day: they returned President Obama to the White House for another four years, reaffirmed Republican control of the House and kept the Senate in Democratic hands. As of Wednesday, the margins in the House and the Senate had each changed by just two or three seats.” For all the money, time and effort spent kicking up dirt and picking fights, when the dust settled it was clear that the American electorate had not moved much at all.

It is not that the American electorate intentionally voted for continued divided government or gridlock. Rather, the American body politic contained voters of diametrically-opposed political, economic and social ideologies. In spite of the length of the campaign “season,” neither camp had budged by election-day. The resulting continuance of the status quo meant the continuance of the political constellation in Washington that had led to gridlock. Besides gridlock being more generally etched into the very design of the federal lawmaking apparatus in part to check power as well as unwelcome encroachments of the General Government on to the turf of the state governments, the various stalemates on the Hill in 2011 and 2012 were a manifestation, or symptom, of where the People as an aggregate stood then politically—that is, divided and even polarized ideologically. As a result of the stark ideological differences between citizens and the multiple points of access available in the U.S. Government, both major parties had sufficient electoral support and accessibility to the federal law-making machinery to grind policy-making and legislative activity to a halt on major problems desperately in need of solutions.

A story in The New York Times on the day after the election had as a headline, “Electorate Reverts to a Familiar Divide as Obama’s Support Narrows.” He “garnered just 50 percent of the popular vote, three percentage points lower than in 2008, in a sign of just how divided” the electorate was “over his leadership.” In spite of Obama having lost some of his base, the mere two-percentage-point difference in the popular vote between the two major candidates meant that among the electorate neither “side” had budged much. To find a “verdict” on the president’s first term beyond the vested opinions of the two bases, one must look to how the independents. Even there, the “verdict” was muted.

Referring to the independents, the New York Times reported that the vote was “very close.” In some swing states, including Ohio and Virginia, Romney received a slight majority of such voters (53 and 54 percent, respectively), while Obama received similar majorities in a few others (Iowa and New Hampshire). However, Obama received 45 percent of the independents over all (Romney got 50 percent), and in 2008 Obama had received 52 percent. This means that Obama lost some of the independents he had had in 2008. As a “verdict” of the relatively neutral “jury” segment within the electorate, the loss of 8 percent suggests something less than a vindication for the president.

Moreover, that Obama received 50% of the popular vote over all while Romney got 48% suggests that the contest ended unchanged as a virtual draw. Put another way, only about 3 million Americans out of 310 million residents in the U.S. separated the two candidates in the popular vote. About 1% of the entire population hardly constitutes a mandate, as if “the American people” has swung around en mass to support the incumbent after a long and hard-fought campaign.

To be sure, some general movement can be discerned, as most counties had shifted in the Democratic direction in 2008 to vote for Obama only to shift back in a Republican direction in 2012. It could be said that the country had returned to its native center-right position. That Obama’s narrower base came out in sufficient force to counter the general shift in a Republican direction in most counties and a slight shift away by some independents accounts for his slight majority in the popular vote (and his wins in almost all of the swing states). Even so, such wan movement does not constitute the sort that is associated with an idea or mandate. Put another way, even the shift toward “Obamania” of 2008 was short-lived—the ideational shortfall rendering the “movement” as akin to a short-lived energy spirt from cotton-candy rather than new muscle from rich protein.

Accordingly, “(t)he bottom-line scorecard [from the 2012 federal election] left Washington as divided as ever,” according to the Times, “with no resolution of most of the fundamental issues at stake. The profound debate that has raged over the size and role of government, the balance between stimulus spending and austerity and the proper level of taxation has not been settled in the least.” The ideas had not changed because the hyperactive campaigns had been relatively bereft of new ones or even serious discussion of the central principles.

For all of the money, ads, and “debates,” one might say that talking points rather than novel arguments or ideas took center-stage during the long campaign “season.” In an interview on CBS’s Sixty Minutes broadcast shortly before the election, David McCullough, who had written several books on American political history (and who spoke at my doctoral graduation ceremony!), said he doubted that any words from the two major presidential candidates would stand the test of time. In fact, nothing said or written during even the “debates” was worthy of being retained past the news cycle of the day. The historian went on to contrast the contemporary talking-points with the authenticity in Truman’s “Give ‘em hell Harry!” campaign of 1942. In 2012, talking points backed up by fund-raising and the application of empirical political science to getting elected punctuated the candidates’ trajectories along paths of political-least resistance.

Considering the sheer duration of the primaries and general campaign, the opportunity-cost of shallow campaigning is in terms of foregone governance not only during the duration, but afterward as well. Moreover, the empty-form of a superficial campaign-mode exacerbates the fundamental flaw in having extended the campaign “season” further and further:  Taking a means—that of selecting office-holders to govern—as more important than its end, governance. The eclipse of governance at the federal level in the U.S. is from not only gridlock, but also the enabling ideational emptiness of the modern campaign elongated into a sustained void of sorts that the electorate allowed to take on a life of its own. 

For the body politic to shift as a body having a will from the status quo such that political leadership evincing a direction could replace gridlock and stasis, some ideational-ideological change would have to have occurred in enough voters that the contours of the body itself will have changed. Sadly, the experience of having gone through the financial crisis of 2008—rather than any new idea or exchange of ideas—led an unusually high 51% of the presidential voters in 2008 to favor more government intervention in the economy while only 43% wanted more things to be left to business. The unusually high percentage was a result of economic fear and perhaps even greater hardship due to the crisis, rather than from a national debate centered on a reconsideration of old ideas.

That even powerful people can reflect on the level of fundamental ideas and come to different conclusions genuinely rather than in a political calculation (e.g., Obama’s “change” on gay marriage during his re-election campaign) suggests that citizens too can allow themselves to be more open ideologically and thus shift. An empirical crisis, for instance, can jar loose even fundamental paradigms. For example, Alan Greenspan, a former chairman of the Federal Reserve, admitted in Congressional testimony after the financial crisis of 2008 that the freezing-up of the commercial paper market in September 2008 had shown him that his free-market, or laissez-faire economic paradigm had a fundamental flaw. He marveled before a panel of lawmakers that forty years of observing markets had done nothing to point to the flaw. Specifically, the market mechanism itself can freeze-up rather than make pricing adjustments under conditions of high volatility involving high uncertainty and risk. In September 2008 as banks lost trust in each other, they stopped lending rather than adjust their rates of interest upward to compensate for the additional risk. High risk, especially if occurring all of a sudden, can paralyze a market’s mechanism. Hence, the former central banker could suddenly discern a rationale for regulation by the government because of the “fatal flaw” in the “market-alone” paradigm.

Had the ideas behind Greenspan’s paradigmatic shift percolated through the electorate during the presidential election of 2008 or even 2010 in place of “Obama as the flavor of the month,” the percentages on the question would not have subsequently flipped back in 2012 back to “center-right” on the question of the role of government in regulating business. Rather, a fundamental shift similar to that which ushered in the New Deal in the 1930s would have been realized. That Greenspan’s “ideational moment” had not registered in the campaigns or the electorate itself at least by 2012 can be seen from the fact that Romney called for financial deregulation even though the lack of regulation of mortgage-based securities had played a significant role in the financial crisis. Absent a sustained paradigmatic reflection from a shared experience of the financial crisis, the electorate was vulnerable to the financial-political power of Wall Street as it continued as though legitimately along its familiar trajectory of profit and self-interest. It is significant that even though Obama came out slightly ahead in 2012, the electorate as a body evinced a shift back to its pre-2008 center-right position on government intervention in business.

Absent new ideas and a sustained reflection on the continued viability of extant paradigms, an electorate succumbs to the status quo. More money—much more money—and more time—much more time—does not necessarily mean that an election-cycle makes a dent in the judgment of the popular sovereign—the We the People—come election day. An election-campaign season should be a rather brief yet poignant opportunity for a genuine societal reflection that results in the body politic being in a new place—that is, changed in some way that will reflect on the ensuing governance. I contend that the way Americans elect the president of the Union was by 2012 not only flawed, but also rather ineffectual and even impotent. It is as though a runner were running in circles only to end up panting where he had begun. To use another analogy, it is as though the voters woke up the day after election day still hungry in spite of having eaten so much cotton-candy. The sacrifice of governance alone, not to mention the value in the popular sovereign (the We the People) making its judgment on general policy and candidates, suggests that elections should include new ideas and substantive arguments rather than each side hammering in more of the same through an eternally-repeated stump-speech and “debate” talking-points.

If there is one thing we can discern concerning the voters almost without exception on the morning after voting, according to the Times, “they were glad that the strident and polarizing contest between President Obama and Mitt Romney was ending.” Beyond the proliferation of negative ads, especially in the “swing states,” and the sheer length of the primary and general campaigns, the voter-frustration may reflect a still-unsatisfied hunger for ideas and authentic, substantive discussion of them and the paradigms we construct out of them and what can be termed, ideational values. I suspect that the want of ideas and genuine discourse had existed for so long that few if any Americans realized what was at the core of their discontent regarding the election cycle. The root may go far deeper than Citizens United and even the serial elongation of campaigning at the expense of governance. It may be asked whether a starving man will eat if he does not realize he is starving.

Sources:

Jackie Calmes and Megan Thee-Brenan, “Electorate Reverts to a Familiar Partisan Divide,” The New York Times, November 7, 2012.

Susan Saulny, “The Most Sought-After Voters Were No Longer Flattered by the Attention,” The New York Times, November 7, 2012.

Jeff Zeleny and Jim Rutenberg, “Focus Is On Economy As Voters Choose,” The New York Times, November 7, 2012.

Michael Shear, “As Electorate Changes, Fresh Worry for G.O.P.” The New York Times, November 8, 2012.

Peter Baker, “Obama Wins a Clear Victory, but Balance of Power Is Unchanged in Washington,” The New York Times, November 8, 2012.

Sara Murray and Patrick O’Connor, “How The Race Slipped Away From Romney,” The Wall Street Journal, November 8, 2012.