Sarah Palin is Seizing The Populist Moment -- Will Democrats?

Sarah Palin's broadside against the Obama administration's Wall Street reform proposal is an interesting study in, well, hackery. One the one hand, her latest Facebook post [1] is a disingenuous smear, loaded with outright lies. On the other, she's kind of onto something, in her own horrible way.

It's a little silly to offer a serious critique of right-wing posturing posted on Facebook, but I'm going to do it anyway. Palin only makes one substantive critique of the Wall Street bill, and it's flat-out wrong. She claims the bill will "institutionalize the 'too big to fail' mentality" by "institutionalizing" the ability of regulators to pick and choose what banks fail and what banks get saved. That's wrong. Just wrong.

Regulators are not—repeat, not—empowered to save companies on the verge of collapse. Under the new law, they are legally compelled to shut down banks when they get into trouble. Shareholders are wiped out and creditors must take losses. Obama is not institutionalizing too big to fail. Too big to fail is currently institutionalized in the U.S. political economy, and Obama is making a serious effort to eradicate it.

But then Palin's piece gets interesting. She touts Wall Street's massive lobbying machine and suggests that the big banks will be bailed out again in the future thanks to their political clout. The regulators will never "choose" to kill off a big Wall Street titan because of Wall Street's political connections, Palin says.

I actually agree with this, in a way. Palin is certainly being disingenuous (if she understands the plan at all) when she claims that Obama will formally legalize the right of regulators to bailout influential firms. The bill would explicitly codify the opposite. But I do believe that when push comes to shove in a financial crisis, regulators are not going to shut down major financial institutions, regardless of the letter or intent of this legislation. And I also believe the firms that get saved will be the banking behemoths that employ armies of lobbyists. Courts give federal agencies very broad leeway to interpret statutes, and when the next major financial crisis hits, I doubt there will be any serious challenge to the Fed or the FDIC invoking some arcane clause in a law from 1913 to justify a bailout. Even if courts could intervene, they wouldn't. In the middle of an economic meltdown, no judge wants to step in and tell regulators how to do their jobs.

In other words, I believe that economic policy becomes in a sense lawless during financial crises. The administration effectively declares an economic state of emergency and asserts whatever powers it deems necessary to curb the crash. There is no official declaration, of course, but that's how it works. The response is ad-hoc, uncoordinated and inconsistent, but megabanks tend to find themselves in good shape afterwards. Nobody knew the Federal Reserve had the authority to lend to investment banks prior to 2008. It had literally never happened in the 95-year history of the institution. Suddenly, they found the clause in an ancient statute, and voila!—it turns out the Fed can also lend to AIG, and no court is ever going to say otherwise.

So the problem with Obama's plan is not that it institutionalizes bailouts. It just doesn't address the cause of bailouts, or deal with the way they occur. Bailouts are not carried out according to laws, they are dictated by networks of power. If you want to stop bailouts, you have to attack the political power of major Wall Street firms. And to do that, you have to cut them down to size. Break them up into companies that are small enough to fail without jeopardizing the economy, and the firms lose their economic leverage over politicians.

You also have to take aim at the revolving door between Wall Street and Washington. Palin notes that the Obama administration is full of Goldman Sachs alums. Progressives were sharply critical of how closely Obama tied himself to Wall Street with his early appointments, and it remains a fundamental problem with his administration's economic thinking. But it's not as if Obama is the first president with close ties to Wall Street. President George W. Bush's Treasury Secretary was from Goldman Sachs, President Bill Clinton's Treasury Secretary was from Goldman Sachs, President George H.W. Bush's Treasury Secretary was a Wall Street icon. . . we can keep this going all the way back to Herbert Hoover and Andrew Mellon. It doesn't excuse Obama, but it does put his capitulation in context. He didn't invent bailouts and he didn't invent the revolving door.

There's also an important political lesson in Palin's post for Democrats. If they don't break up big banks, Republicans are going to seize this faux-populism to derail or defame other useful Wall Street reforms. Palin doesn't offer any alternatives to the Obama plan or the Dodd bill at all. She's not trying to solve any problems. She's just trying to say nasty things about Democrats. There are good policy reasons to break up big banks. But it's also good politics—nobody can accuse you of being in bed with Wall Street when you cut it down to size.

I have now officially spent far too much time discussing a cheap political hit from Sarah Palin.