A brutal political battle that could profoundly affect our economic future is looming in Washington. The battle is a conflict between liberal Democrats (who like to label themselves progressives these days) and Wall Street and its allies.
The lighting rod sparking this war is an unlikely political messiah, U.S. Senator Elizabeth Warren (D-Massachusetts). Warren delivered the opening shot in this war on Dec. 11, 2014 by delivering a speech that demanded Congress remove a provision from the spending bill that would let banks make derivatives trades with federally insured money.
The Dodd Frank financial reform legislation passed in 2010 made it illegal for banks to used funds in FDIC insured accounts for derivative trades. Many observers blame such derivative trading as one of the causes of the 2008 economic meltdown. The idea behind the legislation was to keep banks from backing such trades with funds from checking and savings accounts, which could expose them to market risk.
Warren became an instant progressive folk hero by going against President Obama and the Democratic leadership in Congress, both of which had signed off on the dubious measure to avoid a politically damaging budget showdown. A consortium of the nation’s largest banks that includes Citigroup (NYSE: C) and JPMorgan Chase (NYSE: JPM) has been lobbying for the measure for several years.
One result of Warren’s action is that 300 veteran Democratic election organizers, all apparently veterans of both Obama Presidential campaigns, have organized an effort to draft Warren to run for the Democratic Presidential nomination in 2016. In other words, attacking Wall Street is paying off handsomely in American politics. Not coincidently, another potential 2016 Democratic Presidential nominee, House Democratic Leader Nancy Pelosi of California, was also very vocal with her denunciation of the derivative measure.
Is Warren the new Goldwater?
Historians of American politics noted similarities between the effort to draft Warren for President and the campaign of conservatives for another maverick U.S. Senator, Barry Goldwater of Arizona, in 1964.
Many historians believe Goldwater’s quixotic campaign in 1964 marked the start of the neoconservative takeover of the Republican Party. Like the 1964 Goldwater activists, many Warren supporters don’t think their candidate can win; instead, they want to lay the groundwork for future victories. Many of those that worked for Goldwater in 1964 helped Ronald Reagan win his election in 1980.
A Warren nomination would mark as big a change in the Democratic Party and the American Left as Goldwater’s did in the Republican Party and the American Right. Before Goldwater, the Republicans were a largely centrist party willing to make a wide variety of concessions to Democrats to win elections. Before Goldwater, the American Right was largely focused on foreign policy and national security.
After Goldwater, the Republicans became a conservative party that was unwilling to compromise with Democrats. The American Right became largely focused on cultural and economic issues after the Goldwater era.
Warren has already signaled her unwillingness to compromise. She’s firmly committed to taking the Democrats to the left at least on economic issues. Warren would also change the focus of the American Left from cultural issues and racial politics to meat and potatoes economic issues. That would lead to an all-out war with Wall Street.
Warren, a former Harvard Bankruptcy Law professor, is deeply interested in economic issues and has a very good working knowledge of them. She is also reminiscent of another fighting politician who launched a war on Wall Street, Theodore Roosevelt. Like Roosevelt, Warren seems to believe in enlightened regulation and breaking up concentrations of wealth, which, like Teddy, sees as a threat to the rights of the average person. One consequence of Theodore Roosevelt’s success in that war was that both the Democrats and Republicans became strongly committing to curbing corporate power and Wall Street for several decades.
Interestingly enough, Warren herself may not be interested in running, but somebody else will undoubtedly take up her mantle. One likely contender is Pelosi, who is starting to imitate Warren. Others will jump in as dissatisfaction with Hillary Clinton grows.
The political implications of this are obvious: Wall Street is going to be a major issue in the 2016 presidential campaigns. Economic issues, such as income inequality, financial regulation, student loans, jobs, etc. will be the defining ones in the election. Those who want to win elections, or at least Democratic primaries, will have to be the most vocal in attacking it.
American politics is undergoing a change that will shape policy for decades to come. One has to wonder how far Warren and her followers are willing to take the war on Wall Street, as well as what Wall Street and its allies will do to fight back. I imagine that the war will be a brutal and nasty one that will destroy a lot of political careers. It will also make it a lot harder for certain companies to do business as usual.