Whatever Happened to Making an Honest Buck? Wall Street Attacks Elizabeth Warren Because She Believes in Capitalism More Than They Do

With the calendar about to turn to 2012, coverage of the U.S. elections is becoming ever more intense.  Most of that coverage has, quite understandably, been aimed at the presidential election, with the endless gyrations of the Republican field offering a smorgasbord of delights for even the most wizened political observers.

With all eyes on the race for the White House, the elections for the House and Senate have been pushed aside.  Even so, with over one-third of the Senate up for grabs, including an especially large number of seats that are currently held by Democrats, there is every possibility that—if Election Night is a good one for Republicans—the Democrats could not only lose further ground in the House, but also lose their current 53-47 majority in the upper chamber.

One Senate seat that could move in the opposite direction, however, is in Massachusetts.  It’s the seat once held by liberal icon Edward M. Kennedy, which switched parties two years ago, in a shocking special election held after Kennedy’s death.  The winner of that by-election, Scott Brown, is generally thought of as the first “Tea Party” candidate, which would making it especially meaningful if the Democrats could take back that seat.  And it’s likely they will: Brown’s re-election chances will be strongly diminished due to the strong position of the Democratic Party in the Commonwealth of Massachusetts.

With the stakes already high, the race became even more interesting and important when Democrat Elizabeth Warren agreed to run for the seat.  Warren is a Harvard Law Professor, former overseer of the TARP bailout funds, and advisor to President Obama on financial matters.

Warren was also the driving force behind the creation of the Consumer Financial Protection Bureau (CFPB).  However, the financial firms that will be subject to the CPFB’s regulations are so hostile to Warren that their Republican allies in the Senate mounted an unyielding opposition to her appointment to be the first head of the agency she took the lead  in creating.

Fortunately, and ironically, this left Warren available to make a run for Brown’s Senate seat.

The Political Opposition to Warren’s Candidacy: Wall Street Knows on Which Side Its Bread Is Buttered

Senate Republicans now face the possibility of having Warren join them as a colleague.  In the Senate, she would surely be placed on the Finance and Banking committees.  If her party maintains its majority status, she could even chair key subcommittees with jurisdiction over financial laws that govern Wall Street firms.

Wall Street, in turn, has gone into overdrive to try to help Senator Brown keep Ms. Warren out of the Senate.  Notably, as a recent news article in The New York Times pointed out, the big financial firms would normally have little reason to come to Brown’s aid.  He serves on no committees of relevance to Wall Street, and he has even cast some votes that were quite unpopular with banks and hedge funds.

Even so, from the standpoint of Wall Street, this election is not about keeping Scott Brown in Washington, but about keeping Elizabeth Warren at Harvard.  The article in the Times reported that huge sums of money are being poured into Brown’s campaign, with the donors quite openly telling the reporter (and their allies, in fundraising appeals) that it is all about taking Warren down.

The calculus is obvious, even for those who are not Wall Street insiders:  Warren’s preferred policies make it more difficult for Wall Street firms to do as they please, and they do not like that a bit.  In both actions and words, the political players on Wall Street are making it clear that it really is that simple.  With Warren in office, they are more likely to have to follow rules that they would rather not follow.  They will do all they can to prevent that result.

The Content-Free Attack on Warren: That “Big Government Liberal” Must Be Stopped!

While this story is interesting in its own right – and while it will certainly be an important subplot in the 2012 elections—there might seem, to some, to be something dog-bites-man about it all.  Sure, the Tea Party angle reflects recent changes in the U.S. political climate, and Wall Street’s uniquely strong interest in the race is noteworthy.  But how is this anything more than garden-variety Senate-level politics?  Republicans are pro-business, and business knows it, right?  Maybe there is no real news here, some might suspect.

On the contrary, however, there really is something different and interesting about this story—a difference that not only reflects the unique players in the Massachusetts Senate race, but also shines a light on the false narratives that guide most political discussion in the United States.

According to the Times article, a major fundraising effort for Brown talked about the importance of defeating “big government liberal Elizabeth Warren.”  Such a label is not, by itself, outside the norm for party fundraisers.  And in this case—unlike in many, many others—labeling the Democratic candidate a liberal is actually accurate.

Moreover, by the standards that currently hold sway in the Republican Party, views such as Warren’s would, indeed, lead to a much bigger government than most conservative activists could tolerate.  Thus, although the label of Big Government Liberal is anything but hardball rhetoric, it is a bit tired and obvious.

What is notable, however, is the fundraiser’s defense of Warren’s opponent:  “Senator Brown is a free-market advocate who believes that our strength as a nation comes from the ingenuity and hard work of its people.”  Apparently, therefore, Professor Warren opposes free markets and believes either that the American people have no ingenuity or work ethic, or that those qualities are not what makes America strong.  Or, maybe she believes that America is weak!

Again, we must make allowances for the source of this rhetoric.  This is not a policy paper from a conservative think-tank, and it is certainly not a careful scholarly analysis of Warren’s views.  Even so, it is remarkable that a major Wall Street political player would think it was plausible even to suggest that Elizabeth Warren is not a believer in free markets.

She plainly is.  Indeed, her words and actions have shown that she believes more strongly in the genius of free markets—indeed, in the promise of capitalism itself—than do any of her detractors.

The Difference Between Being “Pro-Business” and Being an Advocate of Free Markets, as Warren Indubitably Is

A reader might reasonably wonder how anyone could possibly call Ms. Warren an advocate of free markets, if she wants to regulate markets.  Are not “freedom” and “regulation” by definition opposites?  Absolutely not.

Even the most basic economics textbooks carefully recite what is necessary to allow “the invisible hand of the market” (in Adam Smith’s famous, but generally misunderstood, words) to work its magic.  Among the conditions necessary, to give us confidence that self-interested trades among buyers and sellers will lead to socially desirable outcomes, is the requirement that both sides are well-informed about the choices they face.

If one party to a deal has an advantage over the other—knowing, for example, something about the quality of the product that the other party does not know—then “the market” will not even produce economically efficient outcomes, much less fair trades.  Although there are nuances to the economic theories underlying this basic insight, nothing cuts against the idea that markets work better when parties must, when dealing with their counter-parties, honor, in contract law parlance, “the duty of good faith and fair dealing.”

As I described in a column posted during the early stages of the political debate about creating a consumer financial protection agency, Professor Warren’s ideas would affirmatively enhance both the fairness and the economic efficiency of financial markets.  Her ideas have focused on the necessity to prevent the misleading (and sometimes outright fraudulent) methods that financial firms have used to extract profits from uninformed customers.

It is not just that consumers are unsophisticated about financial matters (although most people certainly are), but also that financial firms have gone out of their way to prevent people from learning what they would need to know to make informed decisions.  Financiers thus make their profits, far too often, not just by fleecing naïve “marks,” but also by making sure those naïfs remain uninformed.

Warren’s argument, therefore, is not—as a primary matter—focused on the unequal distribution of incomes and wealth in the United States.  Of course, she surely worries about those problems.  But she also understands that the inequality we see in this country now is, to a very large degree, driven by Wall Street:  Its stratospheric salaries have been driven by profits that were gleaned by promoting mortgages that were bound to fail and result in foreclosure—and, more generally, by the creation of a culture in which consumers cannot compete for fair deals on clear terms.

When one watches Warren during interviews on various news programs, it is striking just how well she explains this basic message:  Consumer protection does not mean coddling consumers; it simply means full and honest disclosure.  That is what makes markets work.  It is also striking to notice her genuine befuddlement at the attacks leveled against her, which suggest that she is some kind of communist sympathizer.  One can almost hear her thinking “What is so radical about giving people the information necessary to make smart choices?”

In short, Warren’s views (and, to be clear, my views as well) are captured in the old-fashioned term “honest buck.”  There is no desire at all on Warren’s part (or mine, in this writing or elsewhere) to vilify the pursuit of self-interest, or the desire to run a profitable business.  What we should allow markets to do, however, is to facilitate honest trades that make both parties better off.  If businesses are willing to compete honestly, and if they have a good product to sell at a fair price, then they will find customers, and they will prosper.  That is capitalism.  And when it works as Warren and I know it can work, it is a force for good.

What Would Wall Street Firms Prefer in Lieu of the Reasonable Regulations Warren Proposes?  To Simply Get Their Way, Without Interference

If the logic (both legal and economic) is so strongly on Warren’s side, what is the basis of her opponents’ attacks?  The financiers who despise her surely understand that they have no argument on the merits that can defeat hers.  What they do not like is being told that they must stop engaging in practices that have been quite profitable for them—even if there was no valid justification for allowing them to engage in those practices in the first place.  They have a good thing going, and they want it to continue.  It is as simple as that.

The problem, therefore, is that Warren’s opponents confuse being “pro-business” with being in favor of whatever business leaders say they want.  The truth is that one can be pro-business, and also be very much in favor of clear and aggressive regulations on the way business is done.  Not only is such a stance possible, but it is essential in the long run, if we are to prevent precisely the type of corruption (both financial and political) that led to the recent financial crisis, the Great Recession, and its current, grindingly painful aftermath.

This distinction—between favoring business as the pursuit of an honest buck, or catering to the whims of business leaders—hardly represents a new insight.  Indeed, in a famous antitrust decision early in the Twentieth Century, the Supreme Court noted that the purpose of the laws was to promote the interests of markets, not the interests of the particular participants in any given market.  The Court was thus saying that there are times when a business says that it wants the courts to stop a competitor from engaging in “unfair competition,” but what the business really wants is a guarantee that it will stay in business.  And that guarantee, of course, should never be made.

A complementary logic applies to the types of law and regulations that Warren has promoted.  Businesses complain to their allies in Congress that laws and regulations are bad for business, when what they really mean is that those laws and regulations are bad for the way they have been running their businesses for far too long.

There is every reason to believe that a financial system with stronger protections for consumers will be economically vibrant, with firms and customers agreeing to mutually-advantageous deals in the shadow of the law.  Setting the rules, and then allowing people to trade freely while operating under those rules, is the essence of what free markets are all about.

If today’s denizens of Wall Street have become so spoiled by the favorable treatment that they receive under current laws, then that is all the more reason to follow Warren’s lead and bring real competition back to the center of global financial capitalism.  As Warren’s candidacy continues, it will be interesting to see if she can prove to the public what close observers already know well:  She, not Scott Brown, is the true capitalist in the Massachusetts race.