Forbes: Unleash the Nerds

Make Markets Be Markets gets reviewed by Forbes' Dan Gerstein.

Unleash The Nerds
Dan Gerstein, 03.17.10, 12:01 AM ET



A few weeks ago I went to an incredibly informative--and ultimately depressing--conference on financial reform sponsored by the Roosevelt Institute. Many of the country's most knowledgeable experts on Wall Street and market regulation were there to assess just how screwed up our financial system remains 18 months after it almost collapsed and just how ineffective most of the fixes Washington is considering will be. They offered innovative solutions for restoring integrity to our markets by the score. The only question they couldn't answer, sadly, was the only one that really mattered: What will it take to make meaningful reform happen?

To be fair to these experts, no one in or out of the Axis of Acela really seems to know. Indeed, this is the most maddening political mystery of the moment--why, despite all the populist backlash and obvious evidence that another economy-breaking Wall Street bender could be just around the corner, has nothing changed? How could a government controlled by liberal Democrats not pass a single law to rein in an overweening oligarchy that brought us within decimal points of a depression? Why did it take the well-intentioned and comparatively well-informed Senate Banking Committee Chairman Chris Dodd 14-plus months just to unveil a relatively mild regulatory reform bill this week--and with no Republican support to boot?

The all-star geek squad that the Roosevelt Institute assembled--which included the likes of TARP watchdog Elizabeth Warren, former IMF chief economist Simon Johnson and financier George Soros--reiterated the obvious explanations. First, President Obama's decision to bet the bank, so to speak, on health care reform has sucked up most of the focus and energy on Capitol Hill ever since the stimulus bill passed. Second, whatever resolve was leftover has been no match for the banking lobby, which, by spending hundreds of millions of dollars on campaign contributions and a relentless closed-door pressure campaign, has miraculously managed to hold onto its ownership stake in Congress, Inc. (Nor has anyone bothered to activate the Tea Partiers on this issue.)

But as I listened to the presenters talk about what they know best--the intricacies of today's markets and the inadequacies of yesterday's regulatory approaches--it became clear that these facile political diagnoses missed the heart of the matter. The problem here, I came to realize, is not so much the singular venality of Wall Street, but the double-barreled ignorance of their supposed watchdogs. For all the complex instruments and processes that were broken down at the Roosevelt conference, most members of Congress literally don't know any better about how these things work--or too often fail. And for all their policy smarts, even the most sophisticated outside reformers don't really understand how to play politics or move votes. The result is that Wall Street's money is filling the vacuum and doing all the talking, with a predictably lopsided payoff.

Let's start with the first part of that information equation, our lawmakers. After working in the Senate for a decade, I can tell you it's not fair or realistic to expect these members or their staff to master the arcana of credit default swaps and CDOs or to grasp the distinctions between rate risk, liquidity risk and counter-party risk for GSEs. These folks are running a million miles a minute every day and pulled in just as many different directions. The House offices are stretched particularly thin--they have much smaller and younger staff than the Senate, and not nearly the same depth of policy expertise. So on issues of this complexity, members and staff have no choice but to rely on outside guidance.

The first line of defense is the relevant committee staff and the executive branch regulators. But in this case, both have their limitations and deficiencies. Few committee staffers have spent much time working in finance, and their expertise often pales in comparison to the industry lobbyists with whom they're competing in the influencing game. The regulators have a different problem: Each part of the bureaucracy has its own agenda and turf to protect, and thus can't be counted on to provide independent, unbiased advice. So members and their staffs, often as a matter of default, will regularly turn to the "expert" advocates lining up to fill the policy void. (That is, if they don't just succumb to the forces of political gravity and stay inert on the issue.)

Therein lies the rub. The dominant voice (and in some cases the only voice) members are hearing is that of the anti-reform partisans, who are carpet-bombing Hill offices with personal visits and background papers. Yes, there are a few small pro-reform and consumer groups scraping to be heard. But they don't have anywhere close to the resources or reach of the banks. They can't match the money or access of the big Wall Street firms. But even more important, they can't match the muscle of the community banks and credit unions and other constituency groups that can mobilize their members in a heartbeat to contact their home state members and press the case against a specific reform provision that threatens their interests.

In that light, it should be no surprise that the one truly bold new policy reform the Obama administration has been fighting for--the consumer financial protection agency--has been stuck in political purgatory. Put yourself in the shoes of the average, open-minded Congressman. The idea sounds appealing on paper and it polls well. But you see or hear no real public demand for it in your district and no apparent upside for fighting for it. On the other hand, you are getting pounded with letters and calls and meeting requests from people you know--who give to your campaign and may even round up votes for you in November--saying the president's proposal would put them out of business. You may not end up voting against it. But you're certainly not going to make it a priority. At best, you are going to bury it in the Federal Reserve, as Chairman Dodd did in his bill.

This power imbalance, which mirrors the one-sidedness of our economy as a whole, was implicit in the Roosevelt conference. Not in the event's panels or their presentations--they were outstanding--but it's solitariness. Here you had one of best collections imaginable of thought influencers on financial reform in one room for one day--in New York, talking mostly to their peers and the press, with not one high level policymaker in attendance. Then they--and the cumulative strength of their numbers--went their separate ways. All that was left was a smart report that, if we're lucky, a few plucky Hill staffers will plow through during the next recess.

Just imagine the impact these intellectual and financial heavyweights would have if they banded together to form an ongoing, in-your-face counterweight to the banks. If they raised money, hired staff, proactively provided independent analysis to members of the press, aggressively rebutted misinformation from Wall Street, called out the banks' water carriers for blocking reasonable changes, gave donations to pro-reform candidates and ran ads against the obstructionists. If they strategically tapped into the wing of the Tea Party movement that hates Wall Street even more than they hate the government and started organizing rallies in the districts of fence-sitters to demand action now. Which is to say, imagine if they systematically pulled the traditional levers of power Washington understands and instilled some old-fashioned fear in the hearts of Congessmen who would keep today's gamble-ocracy in place.

With all due respect to the Obama idealists, this is how change actually happens inside the Beltway. I learned this firsthand as an education policy advisor on Capitol Hill. For many years the teachers unions had a one-sided conversation going with the Democrats and many moderate Republicans, and as a result exercised an almost unfettered veto authority on federal policy changes. But as the economic consequences of the achievement gap became more and more apparent, the business community started to agitate for higher standards and greater accountability. And the tide--along with the political calculations Democrats were making--started to turn.

Once President Bush proposed No Child Left Behind and its new focus on holding educators responsible for the academic progress of all students, the battle was fully joined. The Business Roundtable, the Chamber of Commerce and other influential players mounted an intense public and private lobbying campaign. Name-brand CEOs flew in to buttonhole members. Suddenly, Democrats were hearing the other side of the story, getting hard data and hearing hard truths, and the self-serving mythology of the status quo defenders was exposed. Doing nothing and dancing on the margins were no longer options. The rout was completed when the late great Ted Kennedy, long a staunch union ally, sided with the president and cut a rare bipartisan deal.

Here you can see the seeds of a solution to the financial reform mystery. Clearing health care off the docket will no doubt help. So too will President Obama retaking the bully pulpit to highlight the cost of inaction and make a persistent case for real reform. But experience suggests that if he wants to break the current paralysis and pass a truly transformative reform bill, the president is going to need similarly smart and radicalized reinforcements. The kind that can do more than talk a good change game at the occasional conference, but actually create a sustained demand for it. Want to beat the banks? It's time to unleash the nerds.

Dan Gerstein, a political communications consultant and commentator based in New York, is the founder and president of Gotham Ghostwriters. He formerly served as communications director to Sen. Joe Lieberman, I-Conn., and as a senior adviser on his vice-presidential and presidential campaigns. He writes a weekly column for Forbes.