The Real Story Behind The Volcker Rule, this Era's Glass-Steagall Act

Reprinted from National Journal

As 2009 rolled on and the panic receded, Paul Volcker felt there was something very wrong with the Obama administration's plans for reforming Wall Street. But no one was listening to him. The gruff-voiced, cigar-chomping former Fed chairman may have been nominally a member of the Obama team—chairman of the president's new Economic Recovery Advisory Board—as well as a living legend of finance, the conquerer of runaway inflation in the '70s. But the then-82-year-old Volcker found that his rep wasn't getting him anywhere with the president's inner circle, especially Obama's bank-friendly Treasury secretary, Tim Geithner, and chief economic advisor Larry Summers, both of whom had little time for him. 

In an interview in late 2009, Volcker said he felt somewhat used early on by Obama (whom he had publicly backed for president)--merely trotted out for the cameras during the presidential campaign, but then sidelined when the real decisions were being made. "When the economy began going sour, then they decided I could be some kind of symbol of responsibility and prudence of their economic policy," he said with a wry smile.

What bothered Volcker was very simple: After hundreds of billions of dollars in taxpayer bailouts, he was appalled that the biggest banks--which Obama allowed to remain intact even though they had caused the worst financial crisis since the Great Depression--were being permitted to resume their pre-crisis habits of behaving like hedge funds, trading recklessly with taxpayer-guaranteed money. Volcker wanted a rule that would bar commercial banks from indulging in "proprietary" trading (in other words, gambling with clients' money for the firm's own gain), thus cordoning off federally guaranteed bank deposits and Federal Reserve lending from the heaviest risk-taking on the Street. It was the closest thing he could get to a return of Glass-Steagall, the 1933 law that forced big banks like J.P. Morgan to spin off their riskier investment banking sides into new firms (in that case, Morgan Stanley) after the Crash that led to the Depression. Commercial banks that lie at the heart of the economy and are able to draw cheap money from the Fed discount window "shouldn't be doing risky capital market stuff," Volcker told me. "I don't want them to be Goldman Sachs, running a zillion proprietary operations." But the president "obviously decided not to accept" his recommendations, Volcker said then.

Volcker had been skeptical of financial deregulation going back to February of 1987, shortly before the end of his tenure of Fed chairman. The big Wall Street banks were even then chipping away at Glass-Steagall. At a hearing room in Washington, in one of his last acts as chairman, Volcker listened skeptically as Thomas Theobald, the vice chairman of Citicorp, argued that “the world has changed a hell of a lot” since the ‘30s. Theobald declared that there were three new "outside checks" on corporate misconduct since then: "a very effective" Securities and Exchange Commission, knowledgeable investors, and "very sophisticated" rating agencies. Volcker stared gruffly at Theobald and the other two bankers who came to plead their case. They made it sound so "innocuous," so "sensible," that "we don't have to worry a bit," Volcker said sarcastically, according to The Wall Street Journal. "But I guess I worry a little bit." Volcker said that without Glass-Steagall, lenders might begin recklessly lowering loan standards in order to win more contracts for public offerings of their borrowers’ stock. He said that banks might start marketing bad loans to an unsuspecting public.

No one listened. In that particular episode, Volcker was outvoted 3-2 by his Board, which included two Reagan free-market appointees, on new rules that allowed Citicorp, J.P. Morgan and Bankers Trust to move into some underwriting. It was the beginning of the process by which Glass-Steagall became effectively moot by the time it was formally repealed in 1999.

A generation later, Volcker’s premonition came dramatically true in the subprime crisis and crash of 2008. But Volcker's prescience carried almost no weight with Geithner and Summers, who in the 1990s were themselves part of the broad deregulatory moves that Volcker had feared, especially the repeal of Glass-Steagall and the adoption of the Commodity Futures Modernization Act of 2000, which Summers had enthusiastically endorsed and which created, effectively, a totally laissez-faire market in over-the-counter derivatives, allowing trillions of dollars worth of trades to go unmonitored by any government. 

And now Geithner and Summers also shot down Volcker's proposal to bar proprietary trading. Channeling the argument of Wall Street, they contended it was simply not feasible: How was anybody supposed to know when a trade was "proprietary" as opposed to a legitimate hedging or "market-making" transaction for clients. Just couldn't work, they said. And so Volcker began traveling all over the country to deliver a series of speeches pushing for even more fundamental reform of the financial system--parting ways with both the Obama administration and most of the Congress.

By late 2009 and early 2010--especially after the stunning special Senate election result in Massachusetts gave the once-Democratic seat to a Republican, Scott Brown--Obama began to think that his administration looked vulnerable on the issue. According to a senior administration official involved in economic policy-making, the president came to believe that Geithner and Summers hadn't gone far enough with financial reform. They had, in fact, resisted almost every structural change to Wall Street, not only Volcker's plan but also Arkansas Sen. Blanche Lincoln's idea to bar banks from swaps trading. And Wall Street didn't seem to be changing on its own: In December 2009, the president was outraged to hear that year-end bonuses would actually be larger in 2009 than they had been in 2007, the year prior to the catastrophe. "Wait, let me get this straight," Obama said at a White House meeting. "These guys are reserving record bonuses because they're profitable, and they're profitable only because we rescued them." And so at a meeting late that year in the Roosevelt Room, Obama said: "I'm not convinced Volcker's not right about this." Vice President Joe Biden, a longtime fan of Volcker's, bluntly piped up: "I'm quite convinced Volcker is right about this!"

Obama formally proposed the rule at a White House news conference on Jan. 21, 2010 with Volcker in rare attendance, announcing: "We're calling it the Volcker Rule after the tall guy behind me." Senators Jeff Merkley, D-Ore., and Carl Levin, D-Mich, later formally introduced the rule into the Dodd-Frank law. But even then Geithner dragged his feet on implementation, and for the next two and a half years Wall Street lawyers loaded the proposal down with loopholes and exemptions.

The Volcker Rule was, in fact, in grave danger of being loopholed to death right up until its adoption this week. And in the end it was largely one regulator, more than any other, stood firm against those efforts and managed to avert the worst of the watering down: Gary Gensler, the outgoing chairman of the Commodity Futures Trading Commission. As diminutive in stature as Volcker is towering, Gensler was the Jeff to Volcker's Mutt, an essential part of a de facto team.

Like Volcker, the 56-year-old Gensler was also something of a relic from an earlier era, not necessarily the person you would expect to be taking on Wall Street in the second decade of the 21st century. Serving under Treasury Secretary Robert Rubin in the '90s, Gensler had helped to open the way to massive deregulation of the banks, ultimately leading to the subprime mortgage crisis. As a result, progressive senators such as Bernie Sanders, I-Vt., and Maria Cantwell, D-Wash., even put on a hold on his CFTC nomination at first. But in testimony and later on in interviews, Gensler became one of the very few former Clinton or Bush administration officials to admit his errors of judgment in freeing up finance in the '90s. And as CFTC chief, he sought to make right what had gone so terribly wrong.

It was Gensler, using the unmatched expertise he had developed in the previous three years cracking down on over-the-counter derivatives trading--which is the main source of the banks' proprietary profits--who mainly led the charge to toughen the Volcker Rule and extend it worldwide, especially when it became clear that banks could evade it by shifting trading to their overseas operations, by several accounts. Along with Securities and Exchange Commissioner Kara Stein, he was also the key player behind a critical provision that places the burden of proof on the banks to justify that activities they are engaged in are not proprietary trading, forcing them to provide a regular analysis correlating such trades to appropriate hedges or other approved activities. Giving additional teeth to the rule, Gensler and the other regulators also forced the banks to restrict their hedging to specific identifiable investments and ban so-called portfolio hedging--which had allowed the banks to engage in complicated trades putatively to hedge against general risks across a broad portfolio of investments. Gensler held up as a cautionary tale the notorious "London Whale" episode, when even a blue-chip bank like JPMorgan was found to be making derivative bets that cost $6.2 billion in losses and masking them as a portfolio hedge. Gensler "went to the mat on that issue," says Michael Greenberger, a University of Maryland regulatory expert and a sometime advisor to the CFTC.

By taking the baton from Volcker, and pushing almost alone to regulate trillions in derivatives trades overseas, Gensler initially earned himself enemies in the Treasury Department and White House, especially when European and Asian governments began complaining about his efforts to extend his purview to U.S. banks' overseas activities. Helped by in the end by Treasury Secretary Jacob Lew, who proved much more eager to endorse his efforts than Geithner had been, Gensler won over less enthusiastic regulators. In a recent speech that could almost have been written by Gensler, Lew praised the rule as "true to President Obama's vision" and echoed Gensler in saying that it was intended to prohibit "risky trading bets like the 'London Whale' that are masked as risk-mitigating hedges."

Now, with little fanfare, Gensler is on his way out at the CFTC--perhaps the most unsung hero of the entire post-financial crisis period--and the effectiveness of the Volcker Rule remains to be seen, especially since regulators have put off implementation until 2015. The banks will no doubt sue to change it further. But even some skeptics of Dodd-Frank think it could be the biggest breakthrough yet against the concentrated power of Wall Street banks. It "will not end all gambling activities on Wall Street, but should limit them and reduce the risk to Main Street," Dennis Kelleher, the head of the advocacy group Better Markets, said in a statement. Thanks largely to the odd couple of Paul Volcker and Gary Gensler, the rule may yet prove to be the single most effective solution to the too-big-to-fail problem.

Last of the Immortals

Reprinted from National Journal

The great ones, it often seems, hand off the mantle of greatness to each other. Nelson Mandela, in his 1994 autobiography, Long Walk to Freedom, described how Franklin Roosevelt and Winston Churchill in 1941 helped change his life and those of his fellow black students in the infant African National Congress with the Atlantic Charter, which committed the West to human dignity and universal rights, setting the stage for the entire postwar world. "Some in the West saw the charter as empty promises," Mandela wrote, "but not those of us in Africa. Inspired by the Atlantic Charter and the fight of the Allies against tyranny and oppression, the ANC created its own charter." Called "African Claims," it set out the aspirations that would make Mandela a revered world figure a half-century later.

Then a young Barack Obama sought to take the mantle from Mandela. In his own autobiography, Dreams from My Father—in a story he again repeated on his visit to Africa last June—Obama described how the anti-apartheid movement that Mandela led effectively began his own rise to charismatic leadership. As a freshman at Occidental College in Los Angeles in the early 1980s, Obama made his first attempt at public speaking at a divestment-from-South-Africa rally (where "Free Mandela!" was often a rallying cry). He wrote that few of the Frisbee-playing students were listening when he began in a low voice, saying, "There's a struggle going on." Then he raised his deep baritone, and suddenly, for the first time, the Obama Effect made itself known. "The Frisbee players stopped.... The crowd was quiet now, watching me. Somebody started to clap. 'Go on with it, Barack,' somebody shouted.... I knew I had them, that the connection had been made." Thus, inspired by Mandela's struggle, was launched a voice that would ignite a meteoric political rise and later inspire huge crowds in places like Berlin and Cairo.

With the announcement of Mandela's death Thursday at age 95, who will the mantle go to now? In his remarks, the president of South Africa, Jacob Zuma, called Mandela South Africa's "greatest son." But Mandela was far, far more than that, as Obama indicated when he flew to South Africa last June, just after Mandela fell mortally ill, and pre-eulogized his personal hero as a "hero for the world." Is there anyone else left on the planet who could be described that way? Who's the next Mandela? Is one even possible?

Certainly Obama himself doesn't qualify (yet). Indeed, it doesn't seem far-fetched to call Mandela the last of the great ones, the truly inspirational historical leaders on the scale of a Gandhi or Churchill or FDR who lived noble (if not entirely untainted, though Mandela comes close) lives and, more importantly, who genuinely changed the world for the better. Look around the world, and you see no one else of that stature. Even the once-sainted Aung San Suu Kyi, Asia's answer to Mandela who suffered as a house prisoner of the Burmese junta for 20 years while her husband died and her children grew up without her, has looked somewhat compromised since she was freed and began her tentative dance with the dictators. Recently Suu Kyi has temporized, in a most un-Mandela-like way, over the Burmese military's brutal oppression of the Kachin and Rohingya communities in Burma, and that "has tarnished her image abroad while raising concerns about the future of Burma's tentative political reform," Ellen Bork wrote in an article titled "Burma's Fallen Idol" in Foreign Policy.

As for the other major leaders on the scene, from the United Kingdom to Europe to China to Russia to most of the rest of Africa, there is precious little to admire, and plenty to lament.

Why is that? Don't we still have great causes, or has the entire globalized system grown too gray and compromised? Perhaps somehow, starting with places like South Africa, just enough justice and freedom has been achieved in the last few decades to make everyone just a little too satisfied and a little too willing to hedge and fudge. The anti-apartheid movement of the '80s was in some ways the last really coherent global social-justice campaign. We've seen two successive social movements erupt in the last two decades over the still-devastating inequalities in the global economy—the anti-globalization protests of the '90s and then Occupy Wall Street—and yet no inspirational figure has emerged from them and both movements petered out with a whimper (though old Ralph Nader's still around, making some fairly valid points about the excesses of free-trade agreements). Timemagazine's annual list of the world's "100 Most Influential People" is continually deflating, stocked with pop artists, tycoons, marginal politicians and ... Sheryl Sandberg.

It's not like we haven't seen some new mini-heroes spring up, and Aung San Suu Kyi's story is far from finished, just as Obama's isn't. Aaron Swartz, the Internet activist who tragically killed himself when faced with prosecution in January, has inspired a movement around a bill that would rein in prosecutors. Malala Yousafzai, the teenaged education activist who was shot in the head by the Taliban, would seem to have a great future—if she survives future assaults. National Security Agency leaker Edward Snowden has found a following among a few libertarians and far-leftists, but few others. If the global economy has had any heroes over the last few years, it's probably central bankers like Ben Bernanke and Mario Draghi—but, never mind about that. No cause, and no leader, has inspired anything like the devotion and reverence that Mandela did.

Is it that Mandela was truly unique? In his autobiography, Mandela wrote that he was "no more virtuous or self-sacrificing than the next man" and never wanted the mantle of movement leader, but it was the struggle for basic freedom "that transformed a frightened young man into a bold one, that drove a law-abiding attorney to become a criminal, that turned a family-loving husband in to a man without a home, that forced a life-loving man to live like a monk." As usual, Mandela is being too humble. It wasn't just the way he conducted his struggle against the racist white regime in South Africa, in and out of prison (refusing, in case we've forgotten, any conditions at all for his release, including renouncing violence). It was also the way, after he was released from 26 years of imprisonment and became president, Mandela transmuted his personal suffering into a larger understanding, as only the great ones can do, and an embrace of his former enemies that was about as close as you get to Christ-like in the modern world.

"He's a personal hero, but I don't think I'm unique in that regard," Obama said in Dakar last June. "I think he's a hero for the world. And if and when he passes from this place, one thing I think we'll all know is that his legacy is one that will linger on throughout the ages."

Especially because there is no one to replace him.

It's Home to Mama for Timmy G

Reprinted from National Journal

No one should begrudge Timothy Geithner his new job. It was inevitable that a man who had been spiritually captured by Wall Street would someday join it in the flesh. In truth the former Treasury secretary held out far longer than the band of Rubinites he sprang from. And by joining a respectable private-equity firm, Warburg Pincus—rather than one of the banks he bailed out—at least Geithner is avoiding the path to reputational ruin followed by his mentor, Robert Rubin, who while he was in Washington freed up Citigroup to become an economy-destroying monster and then went to Wall Street to join it, standing by in befuddlement while the bank nearly imploded.

Geithner has a family to feed after all; he has every right to cash in with the vast industry he saved and protected. It seems a bit overripe for Dennis Kelleher, head of the Better Markets advocacy group, to suggest that Geithner's "spin through the revolving door" will "further erode public confidence in government," when such confidence is all but undetectable today.

But neither should Geithner get a full pass, as CNBC's Ben White seems all too eager to give him in a Web piece today.

CNBC, of course, tends to cover Wall Street in somewhat the way Pravda once covered the Soviet Union, with a lot of boosterism and without asking too many fundamental questions. But White, who also writes for Politico, is a respectable financial reporter and should know better. White argues that the criticism of Geithner "neglects to mention" that the former Treasury chief  "inherited the Wall Street bailout" and "fails to ask the fundamental question of what, exactly, the administration was supposed to do with the banking sector, let it fail and turn a crushing recession into a lasting depression?"

This is an egregious misrepresentation of history. No knowledgeable observer doubts that the Obama administration inherited the crisis (though Geithner, as head of the New York Fed, did not), and that the new president was faced with a stark choice of bailing out the banking sector in the nerve-wracking months of early 2009 or sending the economy into a Depression.

But by the time Congress began debating serious reform in late 2009, the banks were much healthier. The panic had passed. Yet even then Geithner refused to tamper with their structure and balance sheets—to the point where even senior Fed officials like Governor Dan Tarullo today think that Dodd-Frank doesn't have enough restraints on the banks. Geithner's fellow Cabinet member, Attorney General Eric Holder, has publicly questioned whether the banks are not only too big to fail, but also too big to prosecute.  As Harvard University's Kenneth Rogoff, a former adviser to John McCain, said of Geithner in a 2011interview with me, echoing the views of many financial experts: "He was too generous to the financial system. He followed a set of policies aimed at preserving the status quo."

White also credits Geithner with the best of the Dodd-Frank financial-reform law, saying, "It's a big stretch to suggest Geithner stood in the way of stronger reform in order to win a place for himself on Wall Street."

A truer history of that law would record that Geithner resisted many of its toughest provisions, including the "Volcker Rule," which he avoideduntil the president insisted on it. As former Federal Deposit Insurance Corp. chief Sheila Bair wrote in her frank memoir this year about her major battles with Geithner, Bull by the Horns: "I couldn't think of one Dodd-Frank reform that Tim strongly supported. Resolution authority, derivatives reform, the Volcker and Collins amendments—he had worked to weaken or oppose them all."

Geithner, in truth, often seemed in denial of the deeper systemic dangers on Wall Street that he, as a member of Rubin's team back in the 1990s, had helped to create. Their signature policy, the 1999 repeal of Glass-Steagall, ensured there would longer be any strong firewalls and capital buffers between Wall Street institutions and their affiliates, and between banks and nonbanks and insurance companies. A year later, in 2000, then-Treasury Secretary Lawrence Summers and Geithner pushed for the Commodity Futures Modernization Act, which created a global laissez-faire market worth trillions in unmonitored trades. With the repeal of Glass-Steagall, systemic failure was largely forgotten while at the same time, with the passage of the CFMA, huge new systemic risks were being created.

Yet Geithner, throughout his tenure, did not acknowledge these mistakes and resisted more fundamental reforms like the Volcker Rule, which harked back to the spirit of Glass-Steagall by seeking to bar federally insured banks from the riskiest trading.

Personally, I don't believe that Geithner took the positions he did "in order to win a place for himself on Wall Street." He's not that kind of fellow. I think he did it because he believed in Wall Street. Welcome home, Tim

You Gotta Love Elizabeth Warren, But .... for President???

Reprinted from National Journal

Gutsy, smart, and hyper-articulate, Elizabeth Warren is quickly becoming the voice of progressivism in Washington. Along with departing regulator Gary Gensler, Warren probably did more than anyone in Washington to bulk up Dodd-Frank from its rather flimsy beginnings and turn it into a financial-reform law with some weight. She also speaks out eloquently for the beleaguered middle class and on the deeper problem of income inequality.

But the idea that somehow this growing reputation translates into a competitive bid for the 2016 presidential nomination—The New Republic recently suggested on its cover that Warren represents the "soul" of the Democratic Party more than Hillary Clinton—is pretty over the top.

Here's why. As impressive and quotable as she is as a senator—"I'm really concerned 'too big to fail' has become 'too big for trial,' " Warren memorably declared at her very first Banking Committee hearing—she is basically a one-issue political figure. And that doesn't get you into the White House in this era. (OK, fine, Barack Obama first came to national attention by declaring Iraq a "dumb" war, but more on that later.) Warren's punditocratic boosters, like Jonathan Chait of New York magazine, have tried to compensate for her one-issueness by suggesting that the issue that Warren became famous for is still, as Chait put it, "the most potent, untapped issue in American politics." 

And what might Chait be talking about? Get ready: financial reform. That's right. An issue almost no one talks about anymore and far fewer people understand. I ought to know because I've spent tens of thousands of words trying to get people to talk about it since I published a 2010 book called Capital Offense: How Washington's Wise Men Turned America's Future Over to Wall Street. I fully agree that Obama failed miserably to exploit a potential populist issue that, once upon a time, might have made him the second coming of FDR. "Surveys show that both Left and Right, liberals and conservatives, were united in wanting to see fundamental change to Wall Street and big finance," I wrote in 2011. "Yet rather than seizing the chance at the kind of leadership that might have unified a good part of the country, Obama threw himself into an issue that divided Left and Right as never before, and which was not directly related to the historic crisis at hand—health care."

But that moment has long passed. Warren has consistently been a powerful, positive voice on financial reform, and it got her the party nomination in Massachusetts. But that's Massachusetts. A Harvard Law professor who became an expert in mortgage fraud and bankruptcy and later conceived of one of Dodd-Frank's most significant reforms, the Consumer Financial Protection Bureau, she's never done much of anything else in public life, other than chair the TARP oversight committee. And her "issue" has faded in popular imagination. Remember the Occupy Wall Street movement? You're forgiven if you don't. It petered out without a trace (while the tea-party movement doesn't seem to go away, demonstrating that you can have a successful movement these days; OWS just wasn't it).

And with each passing year the causal connection between Wall Street's unprosecuted perpetrators and the terrible recession and national PTSD they set in motion has grown more distant, draining the issue of its populist potential. In 2012 when Mitt Romney promised, and then failed, to propose an alternative to Dodd-Frank, almost no one cared. Polls consistently show that while the U.S. public is still mainly concerned about the economy (although the numbers have been steadily falling), Wall Street is way down the list, behind health care, immigration, education, guns, and a host of social issues. By the time the 2016 race rolls around, nearly eight years will have passed since the financial crisis.  

But that's not even the main point. Chait finds it "odd" that financial reform hasn't become a bigger issue despite surveys showing that large numbers of people are still angry about Wall Street (when they're asked about it: big difference). Here's why: It's booorrring. And incredibly esoteric. Yes, the banks are huger than ever and over-the-counter derivatives are being traded again in the hundreds of trillions—one reason why Gensler, the outgoing head of the Commodity Futures Trading Commission, may be one of the great unsung heroes in Washington thanks to his lonely fight to regulate derivatives internationally. But only a handful of people in the entire world truly understand derivatives regulation. "Bash the Bankers" works as a slogan, but when you get down to what really must be done about them you would have to talk about capital and liquidity ratios on the stump.

"Too big to fail?" Again, it's a vital issue. But it comes down to the scintillating debate over whether "resolution authority" will really work to liquidate (rather than bail out) a bank in trouble, or whether, as progressive Federal Reserve Gov. Dan Tarullo has argued, "a set of complementary policy measures" is needed to go with Dodd-Frank that would limit banks' sources of short-term funding.

Never heard of Dan Tarullo? That's my point.

OK, though, let's say for the sake of argument that the issue does play. Recall that Hillary entirely sat out the Dodd-Frank debate, and with good reason: She was secretary of State. She can basically write her own platform, make it as progressive as she wants, without worrying much about baggage. If Warren gets the big cheers at AFL-CIO rallies, Hillary can move left in a way she could never do on Iraq, where Obama easily outflanked her on an issue that had become truly toxic by the time 2008 rolled around and her vote for the Iraq War resolution looked very unpresidential. I mean, if even Larry Summers, the Great Deregulator, can reinvent himself as a champion of the middle class, Hillary Clinton can make a better case. Remember, she was pushing Hillarycare on the national agenda back when Warren was still teaching in obscurity in Cambridge, Mass. Other potential Democratic big names, like Governors Andrew Cuomo and Martin O'Malley, are also pretty credentialed up.  

And now let's get to the heart of the question: What is the soul of the Democratic Party? Is it really that leftward and progressive, or is that simply an agenda that old warriors like John Lewis talk about with nostalgia? The last two Democratic presidents both had populist inclinations but went straight to the center in order to win two terms. For both Bill Clinton and Barack Obama, that apparently also meant going easy on Wall Street. And Bill Clinton, at least, later publicly expressed regret for permitting the Alan Greenspanization of his views on financial reform. No doubt his wife has taken that particular lesson on board.

Being on Wall Street Means Never Having to Say You're Sorry

Picture credit: http://pogoblog.typepad.com


Over the weekend JPMorgan Chase, the world's largest bank, reportedly agreed to fork over $13 billion in what will be the world's largest corporate settlement. Although the penalty, in proportion to JPMorgan's multi-trillion-dollar balance sheet, will merely dampen its annual earnings, some commentators said they felt bad for CEO Jamie Dimon. Calling the not-yet-announced agreement a "shakedown," the Wall Street Journal opined: "Federal law enforcers are confiscating roughly half of a company's annual earnings for no other reason than because they can and because they want to appease their left-wing populist allies." The Washington Post, lamenting the "persecution" of Morgan, quibbled that the Justice Department should not be so "backward-looking" as to slap the bank "for allegedly misleading investors about the quality of [subprime] securities it marketed before the crash." After all, the editors said, "roughly 70 percent of the securities at issue were concocted not by JPMorgan but by two institutions, Bear Stearns and Washington Mutual, that it acquired in 2008" under government pressure.


Poor Jamie. We do feel his pain. But all this empathy misses the point. What the historic deal demonstrates, beyond any reasonable doubt, is that the biggest banks are so big today that almost no wrongdoing can threaten their existence. They have become, in effect, something close to sovereign powers. Yes, if you're a bigger power, like the United States, you can extract "tribute" from them occasionally, as the Romans used to do to vassal states. But you don't liquidate sovereign powers or put their officials in jail.


Consider the odd spectacle of Dimon reaching out like a potentate to Eric Holder, asking for a personal meeting in which the two of them could hash out the penalty in private. The head of a bank and the attorney general of the United States held, in other words, a kind of personal "summit" meeting. Such a pact would only have been possible if the government of the United States is itself afraid of disturbing the operations of the bank—and in fact Holder admitted just that back in March when he warned that the biggest banks have grown not only too big to fail, but too big to prosecute. (In testimony before the Senate Judiciary Committee, Holder delivered an implicit rebuke to his former Cabinet colleague, Treasury Secretary Timothy Geithner, who permitted Wall Street to resurrect itself in what is largely its former image.)


As MIT financial expert Simon Johnson, the former chief economist of the International Monetary Fund, observed, "If Dimon's bank didn't have $4 trillion in assets (measured using international accounting standards), but rather a much more moderate $250 billion or $500 billion, do you think he would have the same access?"


Dimon is apparently taking this deal as a large-scale cost of doing business, and he's still fighting Justice's demand that his bank admit some culpability or wrongdoing. Which is the same pattern we saw in previous cases with Goldman Sachs and others: in one case, against Citigroup in 2011, U.S. District Judge Jed Rakoff rebuked the Securities and Exchange Commission and refused to approve a $285 million settlement with the bank because the SEC failed to gain any admission of wrongdoing or liability. To his credit, Holder is reportedly still pursuing a criminal case against JPMorgan involving allegedly fraudulent mortgages in California; in previous instances, banks have successfully bargained for the dropping of criminal charges in exchange for substantial settlements.


But for those who are tut-tutting that poor JPMorgan is giving up some half its profits, consider these figures from Andrew Haldane, head of the Bank of England's financial-stability department. He wrote that the financial crisis of 2008-09 produced an output loss equivalent to between $60 trillion and $200 trillion for the world economy. Assuming that a financial crisis occurs every 20 years, the systemic levy needed to recoup these crisis costs would be in excess of $1.5 trillion per year, Haldane says. What that means is that overall, our unrestrained financial sector does not add any net benefit to the economy -- its repeated crises cost us far more than Wall Street brings to overall economic growth.


JPMorgan, in effect, is giving up what amounts to a medium-sized penalty fee so that it can perpetuate Wall Street's pattern of occasionally blowing up and costing the rest of society its pursuit of happiness. And despite crying now that 70 percent of the bad mortgages were accumulated by Bear Stearns and Washington Mutual—which the government pressed on Dimon in the heat of the crisis—in fact he made out very well. "He got a 'Jamie-deal' on both Bear (the U.S. government guaranteed $30 billion of mortgage assets) and WAMU (the FDIC put WAMU in bankruptcy and let JPMorgan buy it for peanuts)," says Jeff Connaughton, author of the book "The Payoff: Why Wall Street Always Wins." "So in some ways the fine is a belated increase in fair purchase price."


Dimon has often behaved like the latter-day potentate he is. In the years since the crash, no one has worked harder than Dimon to resurrect the debunked idea that Wall Street can regulate itself. He has publicly disparaged Paul Volcker, the legendary inflation-fighting Fed chief and namesake of President Obama's still-unimplemented "Volcker Rule," which prevents federally insured banks from acting like risky hedge funds. Volcker has taken to telling audiences in recent years that the big, complex trades earning billions for firms like JPMorgan Chase add little growth to the real economy, just as Haldane's paper concludes. And despite the evidence that not a single Wall Street CEO really understood the trades that would doom his firm in the months leading up to September 2008, JPMorgan and the other global banks have still sought to keep derivatives and swaps trading in the dark and out of regulatory control as much as possible, so as to keep their vast profit machine (which relied on a lack of transparency) going.


The latest deal? Just the cost of doing business.

`

The Unbearable Lightness of Being Hillary

Reprinted from National Journal

In the innermost sanctum of Clintonland, it is difficult to imagine that Hillary and Bill, two of the savviest politicians in the country, are not pinching themselves to make sure that it's all real. Perhaps they're dancing a jig together, or knocking back shots and howling at the moon out of sheer, giddy joy at their good luck. (OK, Hillary's not howling, but Bill might be.) Or maybe they are just quietly kvelling over the latest turn of events.

Because the trend lines are unmistakable, and they're looking better all the time: If she wants to run in 2016, Hillary Rodham Clinton could have the easiest walk into the White House of any candidate in either party since, well, one has to go back a very long way. Maybe to Reagan in '84. LBJ in '64, or Eisenhower in '52, or even FDR in 1932, 1936 and 1940. The presidency is looking like it's hers to lose, more than ever.

The reasons are becoming more obvious with each passing crisis of Republicanism, but are even starker now in the wake of the GOP's embarrassing implosion over the shutdown and debt-ceiling fight. This is an opposition party in such a state of extreme dysfunction that talk of a third-party split in 2016 is almost irrelevant. Why would you need a third-party split to win—as Bill did, recall, cheating George H.W. Bush out of a second term in 1992 thanks to the Ross Perot candidacy—when the base and establishment of the GOP are no longer on speaking terms?

Remember when poor Mitt Romney, who even in the best of fettle was not a very smooth or relaxed guy, twisted himself into an unrecognizable pretzel to win over the base? When a man who'd been a fairly effective Massachusetts governor felt he had to disown his greatest achievement, universal health care, and virtually emasculate himself before the general election in order to triumph in the primaries, thus losing all credibility (or at least identity) by the fall? When Romney believed he had to out-Santorum Rick Santorum, the man once voted the second dumbest senator, and go even more conservative on immigration than not-ready-for-prime-time Rick "Oops" Perry?

Well, guess what, it's only gotten worse for reasonable Republicans who might have a shot at winning a general election against a popular Democratic nominee. Whatever rational, impressive candidate lays claim to the GOP nomination in 2016 -- say, the popular, newly trimmed-down but currently-all-too-moderate New Jersey governor, Chris Christie -- is now going to have to out-Cruz Ted Cruz. And that's just not possible. Finding a place to the right of Ted Cruz, as brazen a demagogue who has come along in American politics since Huey Long, is like reaching the edge of the Internet and then trying to go beyond. You can't do it. Nor would you want to try. Nor could you ever win a general election doing so.

Hillary, meanwhile, can cruise to the Democratic nomination. She is head and shoulders above any possible challenger, the polls consistently show. Yes, OK, we all said that before the 2008 campaign too, when suddenly a phenom named Barack Obama came along. But let's be real: The Obama candidacy was like a perfect storm, a hundred-year event, a freakish thing. Martin O'Malley is never going to be mistaken for a phenom. Nor is Andrew Cuomo. Joe Biden? Democrats love him, but he can't touch her either. And you can be sure the Clintons are not going to make the same mistakes they did in 2008, bypassing the smaller Democratic caucus states because they underestimated the Obama insurgency.

The demographic numbers tell a grim tale for any potential GOP candidate at the same time as they look like manna from electoral heaven for Hillary. The Republican Party, still in the grip of tea-party extremism, is more and more becoming the party of disaffected and aging white voters. Even many Republican strategists are conceding that no GOP presidential nominee can win that way. But the party is not building itself a bigger tent fast enough: Strapped down by House extremists who can't think beyond the demands of their scarlet-red districts, or beyond the next two years, the GOP is not likely to embrace immigration reform despite Marco Rubio's efforts, thus continuing to alienate the burgeoning Hispanic vote that so doomed Romney. As my colleague Ron Brownstein wrote recently: "Absent big GOP gains with minorities, [Clinton] could win, even comfortably, just by maintaining Obama's showing with whites … [But] the first 2016 polling instead has generally shown her trimming Obama's deficit among whites both nationally and in key states."

GOP strategists will say they're changing the rules, cutting the number of primary debates so the next Republican nominee is not subjected to the same "traveling circus" (as national chairman Reince Priebus called it) that Romney was. But that's not going to change the tenor of those debates, in which the candidates will have to outflank each other on the right. They also say, well, you'll see, the tea party movement is fading, or at least becoming more manageable. But it's not, as we saw when 144 Republicans in the House voted against the reopening of the government and extension of the debt ceiling Wednesday night, costing John Boehner the support of most of what used to be known as "his" caucus. More to the point, several of those who might be considered serious GOP 2016 contenders for the presidency also voted in favor of the first default in American history in order to stay in the tea party's good graces, including Paul Ryan, Cruz, Rubio and Rand Paul (supplying the first fodder for those Hillary 2016 attack ads). We'll no doubt see a resumption of GOP extremism in coming months when the two parties battle over spending cuts leading up to the next debt-ceiling deadline on Feb. 7. The tea party is still dictating terms to the GOP establishment, and those terms are just too conservative for the general electorate. And who is now the point man for the GOP in budget negotiations? Ryan.

Yes, Hillary has some vulnerabilities. There are still plenty of Clinton haters out there. John Kerry appears to be eclipsing her record as secretary of State already, and then there's Benghazi, which the Republicans will resurrect gleefully if she runs. But in truth the mistakes of Benghazi, which branded Clinton as the first secretary of State to lose an ambassador in the field since 1979, are not going to stand up to scrutiny. It's wild conspiracy theory, utterly unproven (in fact it's been disproven), to say that Clinton covered up what was known about the Benghazi attack. It won't work in 2016.

So, if she wants it, the broad center of American politics – and the White House—may well be Hillary Clinton's for the taking. We await her decision. But she and Bill must be feeling pretty good about it now. Maybe even a bit giddy.

How the Economists--and the Nobel Prize Committee--Are Still Failing Us

Who is more irrational: the tea party or the Nobel Prize committee? That's a pretty close call this week.

Tea party libertarians base much of their view of the world – and their current efforts to blow up Washington – on the simplistic idea that government is always bad and markets are always good. The more freedom, the better for all. The Nobel Prize committee effectively endorsed this concept on Monday by awarding the 2013 prize to the University of Chicago's Eugene Fama, whose "efficient markets hypothesis" was mocked even by the father of modern free-market economics, Milton Friedman, but which forms a fundamental justification of the world view that tea partiers, many of them unknowingly, live and breathe. That's the long-since debunked view that markets, especially financial markets, are always rational, so just let 'em rip. No regulation needed. No government needed.

So irrational was the Nobel decision that even the committee second-guessed itself; it simultaneously gave a piece of the 2013 award to Yale's Robert Shiller, whose life's work has sought to show that Fama's theory is "one of the most remarkable errors in the history of economic thought." (This is perhaps Stockholm's idea of what Wall Street calls a "hedge.")

Shiller has developed a field of "behavioral economics" fleshing out John Maynard Keynes's idea that irrational "animal spirits" drive markets more than policy-makers realize. If we needed any more proof of that, we got it in 2008, when we realized that virtually every Wall Street CEO and the biggest, most sophisticated banks in the world had no clue what they doing and would have destroyed themselves en masse had not the government (yes, the government) stepped in to save them at taxpayer expense.

Why does any of this matter now? Because in spite of the ample evidence before us, we in Washington still live in the free-market fantasy world that Ronald Reagan ushered in, that even President Obama has lamented he has not been able to alter, and which the work of economists such as Fama has propagated. Yes, we know that freer markets are better than "command" economies of the communist ilk. The end of the Cold War proved that as the United States essentially bankrupted the Soviet Union out of existence; even Beijing concedes this, as would the extinct dinosaurs of the Soviet era.

But it's long past time for the pendulum to swing back to the middle from the extreme conclusion that this means fully free markets always work well. They don't. The United States is, in truth, not a free-market economy but a "mixed" economy. As the great economist Paul Samuelson once wrote, the end of the Cold War meant only that "victory has been declared in favor of the market-pricing mechanism over the command mechanism of regulatory bureaucracy." The victor was plainly not pure laissez-faire capitalism but simply a more balanced economy—markets modified by government taxes and government-orchestrated transfers of wealth to limit inequality, and government monetary and fiscal policies to curb recessions and inflation.

The truth is not simple or rational, in other words, and in fact financial markets, most economists have long known, are the least rational of all,contra Fama. Even Milton Friedman didn't buy Fama's ideas, one of the late economist's students, Robert Auerbach, now a professor at the University of Texas at Austin, told me in a 2010 interview. Friedman asked his students: How could it be that all available information is instantly translated into price changes in a completely rational way, as Fama argued in his hugely influential theory, which opened the door to the kind of across-the-board deregulation that led Wall Street to almost destroy the global economy in the mid-2000s? Friedman pointed out that "traders couldn't make any money if that were true," Auerbach said.

Ironically, considering that it was tea-party antipathy to Obamacare – to "the government getting involved in health care"—that has put the United States on the precipice of default and economic disaster, some of the best economics work of recent decades has shown that the health care industry is one in which free markets don't work well. The Nobel-winning economist Joseph Stiglitz, among others, has demonstrated that this is because of the lack of good information shared between insurance companies and those they insure. The companies are habitually suspicious that their clients aren't forthright about their health and therefore always look for ways to deny coverage, like "preexisting conditions." Moreover, most health care is not a tradable "good"—everyone offers a different kind of service – and people rarely make "rational" decisions in health care. That's why many economists support universal coverage supplied or guaranteed by the government, or the idea of a public option. But you haven't heard much about that in the Obamacare debate, and of course as a sop to the free-marketers the public option was replaced by health care exchanges.

Obama himself has lamented the prevalence of a zeitgeist of free-market absolutism. Facing the debt-ceiling crisis in 2010, the president complained privately to a group of liberal economists how hard it was "to change the narrative after 30 years" of a small-government zealotry dating back to the Reagan presidency, according to one of the participants. In an interview last year, Maryland Gov. Martin O'Malley called it a "fairy tale gone wild." "Since Reagan, [the Republicans] have done a very good job of setting the frame and setting the story," O'Malley, a putative challenger for the 2016 Democratic presidential nomination, said. "The enemy is government. The enemy is taxes.… Taxes are things that must be eliminated. And the only good that comes from government is the elimination of taxes."

Economics, which flatters itself that it is a science (another myth perpetuated by the Nobel committee), should be helping us out of this confusion, but it is not. Should government be reined in? Of course. But the kinds of economic ideas that would allow a rational discussion of a mix of government and markets, spending cuts and revenue increases, no longer prevail in Washington, at least on the Republican side. And so we find ourselves in this perpetual non-debate, going from shutdown to shutdown and debt ceiling to debt ceiling, an endless state of brinksmanship fueled by misbegotten ideas. And the news from Stockholm isn't helping.

Why Yellen Will Be Tougher on Wall Street than Bernanke

Reprinted from National Journal

Most of the commentary about Janet Yellen, President Obama's historic choice to lead the Federal Reserve, is focused on her views about controlling inflation and unemployment, the Fed's twin mandate. (And here, promisingly, the "dovish" Yellen has said clearly that she is more concerned about unemployment, which is a huge problem, than she is about inflation, which presently is not.)

But another huge part of the Fed's job, especially since the 2008 financial crisis, is re-regulation of the banking system and Wall Street, where Yellen will finish the task that Ben Bernanke started. And here, too, while her track record is not quite as pronounced as it is on monetary policy, she is expected to be very aggressive in reining in risky practices. Yellen, who is almost certain to be confirmed by the Senate, may turn out to be even bolder in her prescriptions than Bernanke or the Obama administration have been, according to officials who have watched Yellen from the inside of the Fed during her three years as vice chairman.

For now, Wall Street is reacting mostly favorably to Yellen's long-anticipated appointment, thanks to her dovish views on inflation and the likelihood that she will not support "tapering" off Bernanke's quantitative easing program, so as to spike the economy's still-tepid growth and ease long-term unemployment.

But the banking community may not quite know what it is getting.

Yellen's views are considered very close to those of Daniel Tarullo, a progressive-leaning Fed governor and expert on global financial regulation whom Bernanke has deputized to oversee new banking and capital standards. In her public remarks, Yellen has echoed Tarullo's push for higher capital standards for "systemically important" or too-big-to-fail banks, and his concerns about curtailing the unstable short-term funding sources of too-big-to-fail banks. Tarullo has been more aggressive than the Obama administration in proposing "a set of complementary policy measures" that goes beyond the Dodd-Frank law. Among them: limiting the expansion of big banks by restricting the funding they get from sources other than traditional federally insured deposits.

Yellen, in an important speech in Shanghai, China in June, went beyond what Bernanke has said by explicitly endorsing some of Tarullo's efforts, saying, "I'm not convinced that the existing SIFI [systemically important financial institutions] regulatory work plan, which moves in the right direction, goes far enough." She also spoke of doing much more, as Tarullo has, to constrain the "shadow banking" sector that caused so much trouble in 2008, including broker-dealers and money market funds. Yellen said "a major source of unaddressed risk" is the hundreds of billions of dollars of short-term securities financing used by these firms, adding: "Regulatory reform mostly passed over these transactions."

Michael Greenberger, a former deputy director of the Commodity Futures Trading Commission and a leading voice for more transparent regulation of derivatives and other arcane Wall Street products, says that Yellen backed his stand for a tougher Dodd-Frank law than the Obama administration, Senate, and House were advocating back in 2010—a time when a fierce fight raged over the historic legislation to reorder the financial system. "I told her about weaknesses in the then existing Senate draft bills and the House bill. She was clearly sympathetic to my concerns, which, in turn, were a reflection of progressive legislative advocacy at that time," Greenberger said this week, recalling a talk he and Yellen had at the so-called Minsky conference in New York, where she gave the keynote address (noteworthy in itself, given that it is named for the late economist Hyman Minsky, who presciently described how financial markets are inherently unstable). Adds Greenberger: "The Obama Administration was not being particularly helpful about these substantive concerns. Compared to the powers that be at that time on the Hill and at the White house, she was a breath of fresh air."

Yellen is thus likely to continue a distinguished line of female regulators who have demonstrated a striking degree of vision, courage and integrity in taking on one of the most chauvinistic of industries, Wall Street. Among her predecessors and peers: new Massachusetts Sen. Elizabeth Warren, who has used her position on the Banking Committee to dress down Wall Street CEOs and the prosecutors who have failed to go after them; Sheila Bair, the former chairwoman of the Federal Deposit Insurance Corp. who angered then-Treasury Secretary Tim Geithner by pushing for harsher treatment of banks during Obama's first term; retired regulator Brooksley Born, who like Bair ran up against accusations that she wasn't a "team player" in the old boys' club when she sought to rein in over-the-counter derivatives trading back in the 1990s; and most recently Mary Jo White, the no-nonsense head of the SEC who has warned she's going to crack down much harder on Wall Street fraud.

Yellen, a former economist at the University of California at Berkeley, has a notable pedigree of skepticism about Wall Street's proclivities: A student of arch-market-interventionist James Tobin at Yale—who famously proposed a tax on financial transactions—she is also the wife and writing partner of George Akerlof, who shared the 2001 Nobel Prize in economics with Joseph Stiglitz for work that showed how markets can fail thanks to imperfect information. As such, she is likely to be even tougher than Bernanke, a former free-marketer and Republican nominee who changed his views somewhat after 2008 and has since turned the Fed into a major interventionist force in the economy.

The late Tobin and Akerlof fought career-long battles to make the case that financial markets work differently, and are more inherently prone to failure, than ordinary markets in goods and services. Their work has tended to back the prescription of John Maynard Keynes, as far back as the Bretton Woods conference in 1944, that "nothing is more certain than that the movement of capital funds must be regulated." In a 2010 interview, Akerlof said he "was always apoplectic" at the kind of rapid deregulation advocated by Harvard economist Larry Summers, who almost certainly would have been nominated in Yellen's place had he not backed out last month—in particular, the abrupt opening up of capital flows around the world, which has arguably led to financial bubbles in one economy after another.

While Yellen did not always act on regulation when needed—claiming that as head of the San Francisco Fed she had to wait on Washington's guidance—the record shows that she appeared to be somewhat ahead of Bernanke in appreciating the dangers of the securitization-led housing bubble. At the Fed's June 2007 she warned that the failing housing sector was the "600-pound gorilla in the room." That was only a month after Bernanke, in congressional testimony, said he saw only a "limited impact of subprime mortgages on "the broader housing market."

Yet Yellen also offered up a refreshing mea culpa after the financial collapse, telling the Financial Crisis Inquiry Commission in 2010 that she "did not see and did not appreciate what the risks were with securitization, the credit ratings agencies, the shadow banking system, the S.I.V.'s [structured investment vehicles]— I didn't see any of that coming until it happened." That remark was also a striking contrast to Summers, who has never acknowledged his far-greater responsibility for deregulatory policies that helped created the worst-ever financial crash in U.S. history.

Who Really Created the Tea Party? Guess...

Reprinted from National Journal

During his five years in office, President Obama has often blamed his problems on what George
W. Bush left him with: two wars, a historic recession, an out-of-control financial system and a
huge budget deficit. But W.’s most enduring legacy to his successor may have been the tea party
movement, and the political dysfunction that it has brought.

That may seem an odd conclusion. Today Obama is the central villain in tea-party rhetoric, and
Bush is hardly ever mentioned. Yet the rebellion against Big Government that the tea party has
come to embody really began more than a decade ago with a growing sense of betrayal among
conservatives over Bush’s runaway-spending habits. Conservatives were angered by his refusal
to veto any spending bills, especially in his first term, not to mention what happened during
the nearly six years of GOP control of the Senate and House from 2000 to ’06, when federal
spending grew to a record $2.7 trillion, more than doubling the increase during Bill Clinton’s
two terms. The final outrage that lit the brushfires of tea-party fervor was Bush’s sponsorship of
the $700 billion Troubled Asset Relief Program in the fall of 2008, just before he left office, in
order to bail out Wall Street.

It is arguably true that President Obama’s decision in 2009 to pile a giant stimulus and a new
national health-care program on top of TARP transformed those brushfires into a true national
conflagration—and a movement. But in reality Obama’s actions were more like a tipping point,
many conservatives say. “This social and political phenomenon of the tea partiers was burning
all through the Bush years,” Reid Buckley, brother of the late William F. Buckley and the self-
appointed keeper of his flame as a father of modern conservatism, said in a 2010 interview.
“It’s a long-term slow boil that has disaffected most people who call themselves conservatives.
There’s nothing I have against President Obama that in this I wouldn’t charge Bush with.”
It wasn’t just spending of course. Bush also built the intrusive post-9/11 national-security state
that Obama has embraced, and which a growing number libertarian tea partiers have come to
hate, including National Security Agency surveillance and a program of frequent but secret drone
strikes.

True, on many issues, Bush gained enthusiastic conservative support. Among them were his
hawkish response to the 9/11 terrorist attacks; his abandonment of the Kyoto Protocol and
resistance to domestic efforts to reduce the carbon emissions linked to climate change; his
conservative nominees to the Supreme Court; the two large tax cuts he passed in 2001 and 2003
(the latter was the first tax cut approved during wartime in American history); and above all,
his 2005 attempt to restructure Social Security, the pillar of the public social safety net, into a
program that relied less on government and more on markets to deliver economic security.

Yet throughout his presidency, Bush was far more comfortable with an assertive role for
Washington than many conservatives were. They recoiled from his proposals to expand the
federal role in education, create a prescription-drug benefit under Medicare and establish a
pathway to citizenship for millions of illegal immigrants.

On some of these issues—especially the post-9/11 response and the war in Iraq—a sense of
patriotism and party loyalty papered over growing conservative discontent with Bush’s fiscal
irresponsibility and national-security recklessness. But the fissures in the party were quietly
widening. Among the conservatives who cooled on Bush were some of today’s intellectual
champions of the tea party, such as Jim DeMint, the former senator from South Carolina who
now heads the Heritage Foundation and is a leading player in the Obamacare standoff; and Tom
Coburn, the zealously fiscally conservative senator from Oklahoma. For DeMint, Bush’s TARP
and stimulus in the fall of 2008 were “the last straw” in his disaffection from Bush, an aide to the
senator said. “There’s a lot of affection for Bush because of how passionately he fought the war
on terror. But as far as domestic policy goes, conservatives felt betrayed.” Coburn, in a speech
on the Senate floor in October 2005, inveighed against the remorseless earmarking of his fellow
Republicans and the spending of the Republican-controlled White House. “All change starts with
a distant rumble, a rumble at the grassroots level, and if you stop and listen today, you will hear
such a rumble,” he said.

Coburn spoke then of “committees full of outraged citizens” forming in the heartland. He
supported the Porkbusters movement led by Glenn Reynolds, a blogger (Instapundit) and law
professor from Tennessee, which resembled a dress rehearsal for the tea party movement. “It
started when Republicans were in charge,” Coburn told National Journal a few years ago. He
added that Bush’s “Medicare prescription drug plan—that was the worst thing imaginable, $13
trillion in unfunded liabilities.”

George W. Bush left behind many baleful legacies, among them a $3 trillion war in Iraq that
didn’t need to be fought, and the worst financial crisis since the Great Depression. But he also
helped to fracture his own party—and thus Washington.



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