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Trump’s First Task: Close the Wall Street-Washington Wormhole

Hot takes abound here in the immediate aftermath of one of the most historic presidential elections in U.S. history. Here’s one about a subtle step to shake up the Establishment.

If I’m Donald Trump, one of the first people I’m reaching out to is Stanford University professor of finance and economics Anat Admati.

Patronized and shunned despite her “elite” credentials, Admati is a force for a common-sense approach to financial regulation and oversight.

As a first matter, she recognizes the corrosive concept of “regulatory capture” at the heart of the present system.

And that’s probably why both Democrats and Republicans in high places in the Wall Street/Washington, D.C./Mainstream Media power nexus give her only the time of day.

Admati’s been tightly focused on the financial system since 2010. She’s published numerous academic papers on the subject, exposing flawed arguments and pernicious myths advanced to perpetuate the status quo, “helpfully slicing through the bankers’ self-serving nonsense.”

Guy Rolnik of the Stigler Center at the University of Chicago Booth School of Business’ ProMarket blog published a discussion with Professor Admati on October 27, 2016, focused on her May 2016 working paper “It Takes a Village to Maintain a Dangerous Financial System.”

Admati writes:

The Great Financial Crisis of 200709 exposed the ineffectiveness of the relevant regulations in place at the time. Yet even now and despite the crisis, the rules remain inadequate and flawed. Policymakers who repeatedly fail to protect the public are not accountable partly because false claims obscure reality, create confusion and muddle the debate.

There’s no small amount of irony in the title of Professor Admati’s paper given Tuesday’s events and the title of Hillary Clinton’s 1996 book expressing her vision for America’s children.

Professor Admati calls on another invocation of Clinton’s phrasing in her introduction: “If it takes a village to raise a child, it takes a village to abuse a child.”

That’s a line from a lawyer in the 2015 film Spotlight, delivered in advocacy of victims of sexual abuse at the hands of Catholic priests in Boston.

Here’s the abstract from Professor Admati’s working paper (emphasis mine):

I discuss the motivations and actions (or inaction) of individuals in the financial system, governments, central banks, academia, and the media that collectively contribute to the persistence of a dangerous and distorted financial system and inadequate, poorly designed regulations. Reassurances that regulators are doing their best to protect the public are false. The underlying problem is a powerful mix of distorted incentives, ignorance, confusion, and lack of accountability. Willful blindness seems to play a role in flawed claims by the system’s enablers that obscure reality and muddle the policy debate.

The bottom line is the financial system “is not only riddled with conflicts of interest, but also the potential and actual damage from excessive risk taking is largely hidden from view.”

It’s the kind of thing that sees Robert Rubin go from 26 years at Goldman Sachs to the chairmanship of President Bill Clinton’s National Economic Council and then from the top spot at the Department of the Treasury to the top spot at Citigroup.

President George W. Bush’s Treasury Secretary Henry Paulson was chairman and CEO of Goldman Sachs before he hopped the Acela Express and sojourned inside the Beltway in time to help engineer the massive Wall Street bailout in the aftermath of the Great Financial Crisis.

More recently, Timothy Geithner cashed in on his experience as president of the Federal Reserve Bank of New York by taking the same title at private equity firm Warburg Pincus.

Rubin, who now chairs the Council on Foreign Relations, was instrumental, along with former U.S. Sen. Phil Gramm, former Treasury Secretary Larry Summers, and former Fed Chair Alan Greenspan, in many of the regulatory changes that laid the foundation for the Great Financial Crisis.

The financial deregulation village is a bipartisan protection racket, less reflective of the Clintonian vision than the Catholic priest reality.

Hillary Clinton lost because she is the Establishment. Indeed, Summers was among names whispered for top slots in her rejiggered corporation. You know, puttin’ the band back together.

Admati’s not without her own Establishment “sheen.” In 2014, she was one of Time magazine’s 100 most influential people and Foreign Policy’s top 100 global thinkers.

But here’s the thing: She actually does “speak truth to power,” rather than sling slogans.

She’s been in rooms with muck-a-mucks, including President Obama. But as she wrote to me in an October 27 email:

I have been asked a few times whether I am in touch with any campaign and I have stories about various people who tried to do things but somehow it fizzled, let me not drop names… the depressing thing is that the intellectual capture is so subtle and then also bipartisan to a point and the politics so incredibly powerful, it is amazing.

As Binyamin Applebaum of The New York Times wrote in an August 9, 2014, article headlined “When She Talks, Banks Shudder,” “Bankers are nearly unanimous on the subject of Anat R. Admati, the Stanford finance professor and persistent industry gadfly: Her ideas are wildly impractical, bad for the American economy and not to be taken seriously.”

That’s one hell of an endorsement right there.

Admati explained her experience with Wall Street and Washington, D.C., to Rolnik:

I had expected academics and policymakers to engage and care about whether what they were saying and doing was appropriate, particularly since they often know more than the public about the issues and are entrusted to protect the public. But that’s in my ideal world, in the world I hoped we live in. It was not the world I encountered. I was surprised that it was so difficult to get through and engage on important issues that matter to the economy even after such an awful financial crisis and the clear failure of regulations.

My initial involvement included trying to talk to policymakers. I discovered it’s very difficult to get through if your message is challenging or inconvenient. I made some desperate attempts to reach various people, but many would not engage. It was very disturbing. I realized that we hit a raw nerve in banking.

When I did sit down with people, they sometimes changed the subject; they didn’t truly engage, instead often repeating certain narratives. It felt like I encountered a sort of religion, where people want to believe certain things to be true.

Another thing Admati understands, as she expressed in a November 9 follow-up email, is that “the solution can also be bipartisan to a point — but not if people believe all regulation is bad, like the Tea Party segment of the Republican Party, or that all credit is good, as is the case with some populist Democrats.”

When polls opened on Tuesday, all evidence — including nationwide horse-race polls, battleground-state polls, polls of polls, betting markets and aggregators that combine elements of available data plus other empirical and historical factors — pointed to a Clinton victory.

But as we noted that morning, public opinion polling is a function of two basic concepts: figuring out the size and the composition of the real, live electorate before it votes.

Well, all that scientific stuff failed to capture the anger at and motivation to topple the Establishment driving large segments of the rural population — the shorthand for which is “lower-educated white males.” And nobody “got” the sense of educated white women.

Both these groups share an overriding suspicion of our institutions and, more importantly, who’s now controlling them and for what purposes.

As unrefined as he is, Donald Trump spoke to this suspicion.

And that makes him not only the prevailing political genius of our time. It’s made him president of the United States.

He could go a long way toward consolidating his power by reaching out to Professor Admati, taking her seriously, and closing the Wall Street-Washington, D.C., wormhole.

Money Quote

“In its quest for prosperity, the Party of the People declared itself wholeheartedly in favor of a social theory that forthrightly exalted the rich — the all-powerful creative class. For many cities and states, this was the economic strategy; this was what our leaders came up with to revive the urban wastelands and restore the deindustrialized zones. The Democratic idea was no longer to confront privilege but to flatter privilege, to sing the praises of our tasteful new master class. True, this was all done with an eye toward rebuilding the crumbling cities where the rest of us lived and worked, but the consequences of all this ‘creative class’ bootlicking will take a long time to wear off.”

– Thomas Frank, Listen, Liberal: Or, What Ever Happened to the Party of the People

Smart Investing,

David Dittman
Editorial Director, Wall Street Daily

David Dittman

, Contributing Writer

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