Three years later: responses to the financial crisis

Once or twice a century, there is a watershed moment in American politics in which the bankruptcy of the present arrangement is laid naked, and gives way to paradigmatic transition. During the Great Depression, 25% unemployment set the stage for the New Deal. In the late 1970s, stagflation brought the New Right and its ‘government is the problem’ ideology to power.

By all rules and reason, the 2008 financial crisis should have been such a moment. Last week I chronicled how the collapse represented the cherry on top of a laissez-faire nightmare that replaced an industrial, socially mobile society with an economy defined by a financial sector too large for its own good and income inequality unseen since the 1920s.

Yet, three years later, it is unclear that the lessons of the Great Recession have been translated into needed reform. On the three defining issues of our time –the size of the financial sector; income inequality; and the gross influence of money in politics–adequate reform is yet to be achieved.

Let’s start with the financial sector. Excessive risks absorbed by investment banks, which sent shocks throughout the entire economy, called for regulatory reform.

The reforms needed are simple: a small tax of 1/10th of 1% on financial transactions to dissuade volatile high-frequency trading; the separation of risk-prone investment banks from commercial banks on which families and individuals rely for mortgages and student loans; and leverage requirements to reduce risk in the unregulated derivatives market. Most disinterested economists agree on this.

Yet, instead, the Obama Administration was able only to achieve watered down reform that fails to regulate derivatives or increase leverage requirements. The transaction tax was never even on the table. These shortcomings speak to the immense influence of Wall St. in Washington– but more on campaign finance reform later.

Next, income inequality that undermined consumer purchasing power, exacerbating the recession, must be addressed. In the short term, this means job creation and mortgage relief. Despite the February 2009 stimulus, which created or saved 3 million jobs, the Administration’s jobs policies have been lacking.

As profitability returns to Wall St., it is troubling that the Administration has not exercised more political capital, and taken a more populist tone, in advocating a New-Deal like public jobs program. Similarly, given the speed with which the federal government responded to hopelessly indebted banks, there should be greater effort to aid troubled homeowners.

In addition to these short-term steps, long-run policies are needed to address structural inequality.  These include large-scale investment in the clean energy sector, which can create significant numbers of middle class job; job-training for communities struggling through deindustrialization; expansion of Pell Grants; and increases in both the minimum wage and progressive taxation. Here the Administration deserves mixed reviews. The President certainly gets credit for expanding health care to thirty million citizens. Yet the Administration disturbingly extended the Bush tax cuts for the wealthy while embracing the false ‘Seniors are the Problem’ rhetoric of the far right by indicating willingness to slash Social Security and Medicare.

Equally troubling, the President missed an opportunity to rekindle the historic alliance with organized labor, whose influence counterweighs that of corporate money, with his silence during this year’s state-level attacks on unions.

Underlying each of these shortcomings is the corrosive role of money in politics, which brings us to campaign finance reform. Most Americans support public campaign financing that compensates state and federal candidates in the amount they have been outspent by opponents or independent attack groups.

Yet implementation requires flouting the ‘contributor class,’ which is sure to hurt the party associated with reform. Thus, if public campaign financing is ever to be achieved, it is likely only to be in a ‘watershed’ moment, such as Obama’s inauguration.

Yet instead of moving forward, we’ve moved backwards since the financial crisis. In 2010, in a decision 80% of Americans opposed, the Supreme Court struck down the most important law on election spending. Corporations are now more empowered to influence elections than they were in the years preceding the crisis, when they bought deregulation, tax cuts for the rich, and the crippling of organized labor.

Overall, the response to the financial crisis has been underwhelming. Regulations necessary to avert another calamity have not been implemented. Efficacious short and long-term steps to reduce inequality have not been pursued. Nothing has been done to rein in the influence of money that skews our political process.

At this point a historical conjecture is useful. While FDR deserves credit for the New Deal, reform was only made possible by a mobilized public. In 1932, 20,000 veterans participated in the Bonus March on Washington. In 1934, a million and a half workers struck for higher wages. Unemployment councils spontaneously formed to advocate for public assistance.

If we emerge a more prosperous society from this winter of our discontent, it will be because a mobilized citizenry has decided that the status quo is unacceptable. The ultimate irony of the Obama Presidency is that, because the President’s immediate actions prevented a second Great Depression, he eroded the urgency necessary for systemic reform.

Now, even as the economy slowly recovers, core structural defects –an all-powerful financial sector; income inequality; the unhealthy influence of money– remain unaddressed.  These cracks, painted over for the present, are sure to bulge again. When they do, the question will be: Can public outrage and presidential leadership translate into reform?

History offers this tidbit: Without a mobilized citizenry, the answer is unlikely to be yes.

Sam is a junior. He can be reached at

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