On Thursday, the Federal Reserve became the latest institution to feel a sudden, aggressive backdraft.
A joint ambush by Republicans and Democrats of the House Financial Services Committee left America’s central bank facing a comprehensive audit of its activities for the first time, and, by extension, a direct challenge to its cherished independence.
Now, there’s lots of Washington politics here. As John Kemp at Reuters noted, the committee’s chairman, Barney Frank, effectively lost control of his own bill – one of the key pieces of financial reform legislation winding its way through the Washington process. A cabal of Democrat rebels, led by Alan Grayson, and Republicans, led by Ron Paul, managed to vote through the Fed audit amendment against his will.
Of course, Grayson et al are fearful of losing their seats. They know there is growing anger over the perception that the Washington policy machine has been “captured” by Wall Street.
For good or ill, the generalised anti-Wall Street mood on the streets in the US is being transposed into some quite lively political skirmishes. Earlier, at the same committee meeting, Frank was physically button-holed by a group of rattled Democrats, who refused to vote on the legislation in front of them. As Ryan Grim at the Huffington Post reported:
“We will not be proceeding to passage today,” Frank began. “I have been meeting with members of the committee, particularly the members of the Congressional Black Caucus, who have informed me that they are troubled by what they believe is the lack of response to the economic situation that is confronting them on the part of the administration, and therefore do not feel that they could — in deference to the various constituencies that they represent — vote for passage.”
As Kemp at Reuters pointed out, there’s a definite trend here:
The Paul-Grayson amendment is only one symptom. In another, a maverick congressman from the president’s own party, Representative Peter DeFazio (Democrat, Oregon), used a television interview to call for Timothy Geithner’s resignation as secretary of the Treasury, claiming he was too close to the banking industry he is charged with regulating.
In a follow up interview, DeFazio said “Quite frankly, all the gambling on Wall Street is doing nothing to put people back to work in America and rebuild our economy.
There is a real sense that the outrage over banking bonuses, illustrated most vividly by the fury against Goldman Sachs, is feeding through to a potential populist backlash at the ballot box in the mid-term elections scheduled for November 2010. As Kemp put it:
Some elements of the Republican Party appear to be laying the ground for an insurgent, anti-incumbency campaign that would attempt to brand Democrats as too close to special interests and favouring them at the expense of ordinary voters. At least some Democrats now appear to be taking a more populist stance to defend themselves.
All this has been building for a while. Remember this transcript of a podcast interview with Liars Poker author Michael Lewis from three months ago?
ML: We are at a point right now where we should be radically reforming the financial system, and no Wall Street person with an actual interest should have a great deal of influence on that reform. Instead, the Obama administration is sort of half-heartedly reforming things, with little radical change — and Wall Street people are instrumental in designing the new rules.
I think they think nobody’s going to say anything to them about it, but I think it’s politically risky. There’s a real chance that there’s going to be an uprising about this, and they’re going to have trouble controlling the process.
TM: Do you mean they’ll face trouble when what they pass doesn’t work?
ML: Right. It won’t work, and the mess they’ve created is going to have slow-burning economic consequences. We’re going to be living in a very soft economy for a long time, and it’s going to create disillusionment and anger. I expect there’s going to be a crashing down of Wall Street’s influence. It’s just amazing it hasn’t happened yet. And it hasn’t happened yet because for thirty years their influence has become part of the air we breathe.
Lewis was warning then of an actual up-rising. Perhaps we should be thankful that, for now, the matter is being dealt with through the democratic process.
Related links:
Philanthropy and bank bashing – Gillian Tett
Geithner defends record to Congress – FT
U.S. Financial Regulation Overhaul: Side-by-Side Comparison – Bloomberg
Markup of Financial Stability Improvement Act – Alston & Bird