“Rules are not the enemy of markets,” Sen. Elizabeth Warren told me yesterday, on the heels of her major address on the unfinished business of financial reform at the Levy Institute’s Hyman Minsky Conference. “Rules promote innovation and competition. Rules prevent markets from blowing up. We learned that in 1929 and we should have learned it again in 2008.”
That comment captures what distinguishes Warren from so many of her congressional and political colleagues. Any lawmaker can create a laundry list, and in her Minsky speech Warren did some of that, presenting specific steps needed to bolster financial regulation, which in its current state still puts the country at risk. But Warren has garnered attention because she actually has a worldview for how to best structure the economy, one which has become impossible for any Democrat, even the former Secretary of State winding through our nation’s Chipotles, to ignore.
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Warren’s governing philosophy can be boiled down to one simple sentiment: Actions must have consequences. The way to build functioning markets is to lay out ground rules and actually hold market participants accountable to them. That allows everyone in a market the same set of chances to succeed if they can attract enough customers. “This is about building competitive capitalism instead of crony capitalism,” Warren told me.
In terms of financial regulation, that means that institutions must be punished for breaking the rules. And it means that taxpayers shouldn’t be on the hook for the risks of those institutions, because they must not be rewarded for failure. “Everything else flows from these two principles,” Warren said, arguing for a principles-based approach to smarter, simpler regulations.
You can very easily expand that out. If a retailer sells a defective mattress that falls apart when you lay on it, the customer should be able to get their money back. If the oil industry gets special subsidies not offered to other firms in the energy space, they’re gaining an unfair advantage in the market. If an auto dealer quotes you one price for a car, and then comes back and raises it, the purchaser should have recourse to claim unfair practices. (In fact, one of Warren’s recommendations was to extend Consumer Financial Protection Bureau oversight to auto dealers, who are currently carved out under Dodd-Frank.)
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In other words, Warren’s agenda isn’t the result of some narrowly focused monomania about financial institutions. It’s about making the economy work, in a way that it hasn’t for the past 40 years. And it’s rooted in this principle that rules are necessary for healthy markets.
This is actually a pretty conservative viewpoint, in the small-c sense of the word. Lack of bailout protection should lead to conservatism, or prudence, in risk-taking. You can find plenty of conservative treatises on free market discipline, or the idea that punishment deters crime. There’s obviously room within this worldview for a safety net for individuals. But this vision takes as much cruelty out of market-based capitalism as possible.
Each item in Warren’s laundry list fits into this coherent framework about actions and consequences. Closing the auto dealer loophole would let CFPB treat their unlawful actions the same way as other consumer products. That also goes for extending the regulatory perimeter to cover non-bank financial institutions known as “shadow banks,” which issue short-term debt without scrutiny from regulators. Breaking up big banks helps prevent any unfair advantages through “too big to fail” status, instead forcing companies that get into trouble to face the consequences. Limiting emergency Federal Reserve lending, the beating heart of the bailout, forces companies to reckon with failure without a lifeline. Warren even implicates the tax code for discouraging companies from being well-capitalized so they can absorb losses when they make mistakes.
The agenda only works if officials are willing to actually enforce the rules. That’s where Warren directed her most critical comments on Wednesday. “The Department of Justice doesn’t take big financial institutions to trial — ever — even when financial institutions engage in blatantly criminal activity.” If rules are essential to markets, then allowing rules to be broken destroys them.
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Warren suggested several fixes. She would weed out deferred prosecution agreements (or their cousins, non-prosecution agreements), which give slaps on the wrist to financial miscreants. Any firm settling wrongdoing should have to pay a “mandatory minimum” equal to at least all of the profits obtained from the illegal activity (“if that’s controversial, shows there are real problems on Wall Street,” Warren noted). And judges should be granted more power to review settlements. This part of the agenda could be accomplished without Congress, Warren pointed out. “There are many things regulatory agencies can and should do, starting now.”
I asked Warren about the so-called “Arthur Andersen” defense, that there are collateral consequences to taking down big firms, and that settlements which don’t implicate innocent bystanders are more appropriate. “How come that doesn’t apply to small banks?” she asked, referring to small fry prosecutions like Freedom Bank in Oklahoma. “Why is it when a small bank violates the law, no there’s no hesitation to take them down, close the bank, fire the management team and put employees on the street?” Again, it’s this issue of clear and consistent rules for everyone that Warren wants to institute.
She also questioned the unconscious bias written into the collateral consequences argument: “You ask about the collateral consequences of enforcing the law, what about the collateral consequences of not enforcing law?” Certainly, when actions have no consequences, the result is more actions that profit from law-breaking, and a market based on how expertly you can deceive.
The simplicity of this framework, along with its universal grounding in firmly held values, has made it difficult to characterize as wild-eyed liberal screeds, no matter how hard industry mouthpieces try. That gives Warren’s views power, and you can see that in how Hillary Clinton wants to align herself with them, whether through laying on the praise in a Time magazine profile or hiring campaign staff with a track record on financial reform, like former Commodity Futures Trading Commission chief Gary Gensler.
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What is so far mimicry (which the financial industry has discounted, for what it’s worth) needs to be accompanied by a broad articulation of an actual governing philosophy. “What I did was lay out the structural approach,” Warren said. That’s what people are responding to. They don’t want to know what you’re for; they want to know who you are.
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