Monday, December 15, 2014

Transparency is for suckers.

Jonathan Gruber, the MIT economist and Obamacare guru, apologized last week for his "mean and insulting comments." Set aside the irony of having to apologize for mean and insulting comments to Congressman Darrell Issa, for whom mean and insulting comments are standard fare, Gruber beseeched Issa's committee to accept his apology for suggesting that "lack of transparency is a huge political advantage" made possible only by "the stupidity of the American voter" just days before Congress maneuvered behind closed doors to give a huge Christmas present to the nation's largest banks and political parties buried in its last minute budget bill.

The sound of jingling coins that could be heard as members of Congress skipped off to National and Dulles airports was payment for a job well done. Tucked away in the budget bill was a provision that loosens the rules on derivatives trading by commercial banks, and specifically allows trading by bank units that benefit from federal deposit insurance. The provision, originally drafted by lobbyists for Citibank, was vigorously opposed by members on the right and the left, who each object to the growing financial concentration of the banking system and the vulnerability of the economy and taxpayers to increasing systemic risk in the banking system.

A similar dynamic transpired over a campaign finance rider that was also attached to the budget bill. That rider allows for significant increases in the amounts that individuals can give to political parties, from $97,200 to $777,600 in some cases. Like the derivatives deregulation provision, that rider was opposed by both the right and the left as a power grab that would boost the influence of the political parties over the nomination process at the expense of the grass-roots of the parties.

For all the feigned outrage by Darrell Issa and his colleagues, there was nothing new in Gruber's observation that "lack of transparency is a huge political advantage." Certainly, the banking industry understands this well. The industry tried to get a straight up or down vote on the Citibank legislation, to no avail, so attaching it as a rider to the budget bill--the non-transparent route--was clearly preferable. Passing riders in the dark of night is nothing new to the banking industry. Back in the 1980s, Rhode Island Congressman and Banking Committee Chairman Fernand St. Germain famously snuck in a rider that more than doubled federal deposit insurance for the savings and loan industry. St. Germain's rider laid the groundwork for the ensuing real estate investment fandango that ended in the collapse of the savings and loan industry, foreshadowing the real estate-driven banking industry collapse twenty years later.

Four years ago, JP Morgan Chairman and CEO Jamie Dimon, who led the lobbying effort for the bank rider, sought to dismiss concern over banking crises when he observed that the nation should expect to have a financial crisis every five, seven or ten years. Perhaps a corollary to Dimon's Rule is that the seeds of banking crises are planted in federal legislation that precedes them. And as John McCain--a member of the Keating Five influence peddling scandal that was the seminal event of the S&L crisis--reminds us, political contributions that to an untrained eye might seem to be provided in exchange for legislative favors were part of the political playbook back then as they are today. As Charles Koch famously observed on the pages of the Wall Street Journal, there is no investment made by American corporations that offers a higher prospective return on investment than lobbying in Washington, DC.

Neither of the two budget bill riders that threatened to crash the budget deal last week enjoyed popular support. While the bank bonanza may have only raised the ire of members on the left and the right, distrust of the banking industry is widespread across the general population, perhaps matching only the nation's lack of faith in our political institutions. But whatever the view of the American voter, the riders did enjoy broad support within the establishment center on both sides of the aisle. If bi-partisanship is supposed to be the Holy Grail of our politics, this was a genuine moment of coming together. And for good reason: both bills were about money, and, more specifically, money in the pockets of the members themselves.

For incumbent members of Congress, the value of raising the contributions limits is self-evident, as that money will be used by the party committees first and foremost to defend incumbents that might be at risk against challenges from their respective political flanks. The value of pandering to the banks is equally evident when one considers the $6.2 billion spent by the financial services industry lobbying Congress over the past 15 years--or over $750,000 per year per member. Not to put too fine point on it, in the Senate, the two respective leaders that got the bill through, Harry Reid and Mitch McConnell, received $1.3 million and $2.2 million, respectively, in campaign contributions from the securities and investment industry over the past five years, well more than they were paid by the American voters. Given these realities, it should be no surprise that as members of Congress faced the prospect of a collapse of the budget bill and missing their plane flights home for Christmas recess, proponents of the budget deal were able to suppress dissent and get the budget bill passed.

Any time the left and the right find themselves allied against the center on legislative fights, Americans should sit up and take notice. Lack of transparency was indeed the key enabling factor, the 'huge political advantage' in Jonathan Gruber's words. But it was just the means to the end. The end was money and power. Each of the riders that were approved last week will have the effect of concentrating wealth and political power in the big banks and the political parties. Jonathan Gruber was pilloried in front of a Congressional committee for his "mean and insulting comments" because he uttered a simple truth and then wondered in passing why Americans put up with it, whether it was "stupidity of the American voter or whatever." Then the members of that committee made a mockery of their own outrage, as they joined their brethren in a bi-partisan vote that only demonstrated the truth of Gruber's words.

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