By Paul Krugman
New York Times
On Wall Street, 2010 was the year of "Obama rage," in which financial tycoons went ballistic over the president's suggestion that some bankers helped cause the financial crisis. They were also, of course, angry about the Dodd-Frank financial reform, which placed some limits on their wheeling and dealing.
The Masters of the Universe, it turns out, are a bunch of whiners. But they're whiners with war chests, and now they've bought themselves a Congress.
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Before I get to specifics, a word about the changing politics of high finance.
Most interest groups have stable political loyalties. For example, the coal industry always gives the vast bulk of its political contributions to Republicans, while teachers' unions do the same for Democrats. You might have expected Wall Street to favor the GOP, which is always eager to cut taxes on the rich.
In fact, however, the securities and investment industry — perhaps affected by New York's social liberalism, perhaps recognizing the tendency of stocks to do much better when Democrats hold the White House — has historically split its support more or less equally between the two parties.
But that all changed with the onset of Obama rage. Wall Street overwhelmingly backed Mitt Romney in 2012, and invested heavily in Republicans once again this year. And the first payoff to that investment has already been realized. Last week Congress passed a bill to maintain funding for the U.S. government into next year, and included in that bill was a rollback of one provision of the 2010 financial reform.
In itself, this rollback is significant but not a fatal blow to reform. But it's utterly indefensible. The incoming congressional majority has revealed its agenda — and it's all about rewarding bad actors.
So, about that provision. One of the goals of financial reform was to stop banks from taking big risks with depositors' money. Why? Well, bank deposits are insured against loss, and this creates a well-known problem of "moral hazard": If banks are free to gamble, they can play a game of heads we win, tails the taxpayers lose. That's what happened after savings-and-loan institutions were deregulated in the 1980s, and promptly ran wild.
Dodd-Frank tried to limit this kind of moral hazard in various ways, including a rule barring insured institutions from dealing in exotic securities, the kind that played such a big role in the financial crisis. And that's the rule that has just been rolled back.
Now, this isn't the death of financial reform. In fact, I'd argue that regulating insured banks is something of a sideshow, since the 2008 crisis was brought on mainly by uninsured institutions like Lehman Bros. and AIG. The really important parts of reform involve consumer protection and the enhanced ability of regulators both to police the actions of "systemically important" financial institutions (which needn't be conventional banks) and to take such institutions into receivership at times of crisis.
But what Congress did is still outrageous - and both sides of the ideological divide should agree. After all, even if you believe (in defiance of the lessons of history) that financial institutions can be trusted to police themselves, even if you believe the grotesquely false narrative that bleeding-heart liberals caused the financial crisis by pressuring banks to lend to poor people, especially minority borrowers, you should be against letting Wall Street play games with government-guaranteed funds. What just went down isn't about free-market economics; it's pure crony capitalism.
And sure enough, Citigroup literally wrote the deregulation language that was inserted into the funding bill.
Again, in itself last week's action wasn't decisive. But it was clearly the first skirmish in a war to roll back much if not all of the financial reform. And if you want to know who stands where in this coming war, follow the money: Wall Street is giving mainly to Republicans for a reason.
It's true that most of the political headlines these past few days have been about Democratic division, with Sen. Elizabeth Warren urging rejection of a funding bill the White House wanted passed. But this was mainly a divide about tactics, with few Democrats actually believing that undoing Dodd-Frank is a good idea.
Meanwhile, it's hard to find Republicans expressing major reservations about undoing reform. You sometimes hear claims that the Tea Party is as opposed to bailing out bankers as it is to aiding the poor, but there's no sign that this alleged hostility to Wall Street is having any influence at all on Republican priorities.
So the people who brought the economy to its knees are seeking the chance to do it all over again. And they have powerful allies, who are doing all they can to make Wall Street's dream come true.