The Economics and Politics of Elizabeth Warren

By Simon Johnson

Congressional Republicans are apparently intent on a big showdown with Elizabeth Warren, who is currently building up the new Consumer Financial Protection Bureau (CFPB).

This is very good news for the White House, if they use this opportunity wisely.

Some Republicans seem to think that Ms. Warren is about “big government” or “intrusive regulation”.? But this is not the case – Elizabeth Warren’s approach is much more appealing and already popular with almost everyone on right and left: Transparency.

Look carefully at Ms. Warren’s September speech to the Financial Services Roundtable and think about how this plays as a broader political message.

Her political principle is clear and completely compelling:

““…the best way, in my view, to strengthen those middle class families is to find solutions that are deep and lasting, that strengthen the markets, and that will create a robust, competitive consumer credit industry that works for families, not against them.”

Her economic approach is also right on target – the market should work for the consumer:

“I come to Washington as a genuine believer in markets and a genuine believer that the purpose of regulating the consumer credit market is to make that market work for buyers and sellers alike: a level playing field where the best products at the best prices win. When it works, the market is an ally to consumers. And, when it works, the market rewards those lenders who offer the best value to their customers.”

…

“When I talk about functioning markets, I’m not using the word “market” as coded
language for a return to the Wild West where companies use deception to pick off every consumer they can get in their sites. A free market is one where consumers have the ability to make well‐ informed choices, where the choices are visible and the terms are clear, and where there are cops on the beat to make sure that everyone plays by the same rules.”

In other words: stop already with the cheating of people.? This is not good for our economy, not good for business as a whole, and definitely not good for American families.

“But credit agreements have gotten long and complicated. In fact, there’s a new epithet: fine print. I understand that some of you call it “mice type.”Where I come from, nobody calls fine print, hidden fees and surprise penalties “negotiated contract terms” or “innovations.” On a polite day, my brothers in Oklahoma call that kind of stuff “garbage.””

This is the specific deliverable: Get rid of the fine print.

“An AARP poll earlier this year showed that 96 percent of Americans over 50 surveyed want to put an end to the fine print in their credit agreements. Just in case you missed the point, 91 percent felt strongly about that. 96 percent? These are your customers.”

And they vote.? This is exactly the terrain onto which the White House should seek to shift the political debate.?

Don’t play the Republicans’ game by agreeing to debate “big” vs. “small” government.? This is a complete illusion – just watch the favors that businesses will seek from Republicans on the Hill; not all of these appear “on the government’s balance sheet”, to be sure,?but you can talk to the anguished people of Ireland about how exactly supposedly?”pro-business” (and definitely pro-big bank) policies end up costing the taxpayer a lot of money.? (Or just look at how the financial disaster of 2008-09 ended up costing us 40 percentage points of GDP, measured in terms of the increase in our national debt – directly because of how the financial sector ran its customers and itself into the ground.)

The political debate should begin?with documenting business practices that are misleading and duplicitous, wherever they occur.

We need transparency and accountability in the financial sector – and in all other parts of our economy.? Elizabeth Warren is exactly the right person to lead this charge, in the first instance from the CFPB.

She should be nominated by President Obama to head the agency.? The fight for her confirmation would make her ideas clear to millions.? Let’s see which senators exactly are willing to argue against greater transparency.

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The White House Needs Elizabeth Warren, Now More Than Ever

By Simon Johnson

The White House today is under pressure, with insiders asking: After the strong showing of the Republicans in the midterm elections, should the president move to the right or to the left?

This is entirely the wrong way to think about the problem – the administration needs to get beyond its mental framework of early 2009, which led it sadly astray with regard to the financial sector.? The President needs to find people and themes capable of cutting across the political spectrum; specifically he needs to promote strongly the ideas of Elizabeth Warren – what we need in financial services, above all else, is much more transparency.

The premise – and central mistake – of the Obama administration in 2009-10 can be summed up in what the president said to leading bankers on that fateful day, March 27, 2009: “My administration is the only thing between you and the pitchforks”.

The organizing notion then, provided by Larry Summers and presumably Tim Geithner, was that the “responsible” administration would protect global megabanks from “dangerous” populists, in return for cooperation and better behavior.? This kid gloves strategy turned out to be a very bad bet – not only is it far from best practice with regard to handling failed financial systems (there must be consequences for executives and shareholders, at the very least), but it also allowed banks and their close allies to bounce back to profitability and use that cash (underwritten by the taxpayer) to oppose the administration on financial reform and, according to credible public reports, to funnel large amounts of money into various “populist” anti-administration midterm campaigns.?

A lot of pitchforks ended up being paid for by the 13 Bankers, in various forms (e.g., Chamber of Commerce; American Financial Services Association).

The administration, to its credit, did see Elizabeth Warren as an important potential ally early on – hence the emphasis on the new consumer protection agency for financial products.?? But the White House also should have played this card more aggressively by stressing at every turn Professor Warren’s central idea, the need to protect families from opaque small print and deceptive practices.

The Chamber of Commerce and other lobbyists help spend bank profits framing the consumer protection debate as being about “regulation,” but that is not the issue.? We have had plenty of regulation in recent decades and still have lots of regulators.? The issue is capture.? Big banks in particular disproportionately captured the hearts and minds (and maybe more) of federal regulators.

The best idea for rolling this back is Elizabeth Warren’s – require more transparency and full disclosure.? In effect, this is applying the best idea from the 1930s reforms (when it was applied to securities and other investments) to mortgages and credit cards.? In the 1920s, there were terrible abuses of consumers around the investments that they were sold (see Michael Perrino’s new book).? In the 2000s, the abuses were concentrated on the liabilities side of the consumers’ balance sheet, i.e., on what they borrowed; again these were egregious abuses.

This is the key point that Ms. Warren communicates effectively time and again – and to very broad audiences (including CEOs, in her effective no-drama style).? The nonfinancial private sector completely gets and understands this point; if you sold boxed cereal in the same way that financial services have been sold (by some people), you would be kicked out of the boxed cereal business – by your industry colleagues.? The financial sector, unfortunately, has lost its moral compass and ability to police itself.? The right approach is to require full disclosure of all material information – just as we do for the securities industry.? It’s not perfect, to be sure, but it has served us well for going on 80 years.

President Obama is worried about his left and needs to think also where the center is heading.? He needs an issue that cuts across left and right.? The left hates the abuse of power at the center of the financial system, but the right also understands that “too big to fail” is not a market – it’s an implicit government subsidy scheme, it’s a dangerous, unfair, and nontransparent form of taxpayer abuse, and it should stop.

If the administration goes onto the defensive on these issues in response to the election, the Chamber of Commerce and its fellow travelers will have a field day.? Fresh from its successes in the midterms and backed by an increasing wave of clandestine and – by the way, foreign – money, the Chamber will attack again and again.

What the president needs is someone who can take the fight to the Chamber – force them publicly to defend business practices that are unacceptable and abhorrent to responsible entrepreneurs and executives.? (If you doubt whether Elizabeth Warren can pull this off, see her recent speech to the Financial Services Roundtable.)

The problem is absolutely not “fat cat bankers” (if you know a term that more effectively unifies potential supporters of the Chamber of Commerce, let me know).? It is that a few people (and their prominent organizations) at the center of our financial system got out of control.? We can fix this problem – there is no reason to subject ourselves to the risks inherent in these individuals having excessive power and an inclination to take advantage of ordinary people.

The nonfinancial sector gets this.? Community bankers get this.? Hedge funds get this.? Even people who work in bigger banks (but not the biggest or worst behaved) get this.? And people who, until recently, worked in the global megabanks also get this.

But we need a champion.? Deputy Treasury Secretary Neal Wolin railed against the Chamber of Commerce earlier this year for its lobbying activities against reform, but he is too low profile to get much traction.? Secretary Geithner may now understand these issues but he is not the greatest communicator to the broader public.? And the rest of the Obama economic team looks, at best, rudderless – what exactly do they stand for or against?

Elizabeth Warren has the vision, the credibility, and the communication skills needed to really bring overdue changes to our financial system – and to lay the groundwork for 2012.? If the White House downplays her role or themes, the next two years will be very difficult.

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