From the September 2012 issue of Research Magazine • Subscribe!

Who Can Reform Wall Street: Romney or Obama?

The political calculus is that Romney has a good chance in November because the economy is bad, and Obama is the guy who was supposed to make it better. Not so fast.

When is the last time you heard Mitt Romney talk about Wall Street? Probably never. The former Massachusetts governor and now GOP presidential challenger is reluctant to raise the subject with voters. That’s a pity, because Wall Street and Big Finance—more so than any other industry—needs the “creative destruction” for which Romney’s former business, private equity, is famous. Moreover, by ignoring Wall Street, Romney gives President Barack Obama a break on what should be a vulnerable issue for the incumbent.

The political calculus is that Romney has a good chance in November because the economy is bad, and Obama is the guy who was supposed to make it better. Not so fast. What worked in 1992 may not work today. Twenty years ago, when “it’s the economy, stupid” was Bill Clinton’s election mantra, people could easily blame then-President George H.W. Bush for job losses. The recession seemed to come out of nowhere, and Bush didn’t seem to understand that it was a problem.

Today, though, voters don’t exactly feel that everything was terrific for a decade or two until President Obama came along and ruined it. Our now half-decade-old slump—we’ve now had a longer real-estate bust than we had post-9/11 housing boom—is different from previous recessions. In a poll conducted by NBC News and the Wall Street Journal in May, 48% of potential voters said we were in a “longer-term decline,” while only 45% said we were “experiencing a tough time” (the pollsters didn’t ask the question during the last election cycle).

In that vein, older voters are looking backward even beyond Bush with a revisionist eye, understanding that much of the supposed prosperity of recent decades was fueled by household debt (this isn’t complicated for people to grasp; they still haven’t paid the debt back). As for first-time voters: They may not remember much about what came before Obama other than a terrifying financial collapse that happened when they were in high school.

Plus, voters don’t have a vague problem with the economy. They have a specific problem with Wall Street. Nine months ago, the last time the Journal pollsters asked the question, 36% of voters, when asked “who is most to blame for current economic problems, blamed “Wall Street bankers.” Only 21% blamed Obama (34% blamed Bush). This May, 52% of potential voters said they had little or no confidence in the financial industry—not much different from the 55% in the weeks after Lehman Brothers collapsed in September 2008. (By contrast, only 17% felt that way in December 2000, as the tech bubble was deflating.)

It doesn’t take a long conversation with a normal person—read, non-financier—to realize that many Americans remain white-hot enraged about the bailouts that began in 2008. Former Pennsylvania Senator Rick Santorum, one of Romney’s primary challengers, did so well in the South this spring not only because of social issues, but also because he was quite clear—as was the ever-popular Ron Paul—on his “no bailouts” stance.

There’s no way around it: Americans think that Wall Street got a free pass on the taxpayer dime, while other industries, small businesses, and families had to go through painful restructurings. And since then, the news from the banks has only gotten worse. Americans may not know the details about JPMorgan’s whale or the Libor scandal, but they know that Wall Street bankers remain insulated from the suffering everyone else has experienced. That’s not because of capitalism; that’s because of cronyism and corruption.

It’s a great opportunity, then, for Romney. After all, Obama has been president for nearly four years. If something is still wrong with Wall Street, it’s Obama’s fault. And yet the president is out of ideas on how to fix Wall Street. He’s running not on future proposals, but on the two-year-old Dodd-Frank financial reform bill, saying that “it set ground rules for the riskiest financial speculation.” Yet the fact that JPMorgan could lose $5 billion betting with taxpayer-guaranteed deposits earlier this year makes that claim demonstrably false.

Just as saliently, Romney comes from an industry that specializes in corporate accountability. Romney could make a speech saying that he’ll allow free markets to do for Wall Street what they have done with the rest of corporate America. To wit: Romney could make a speech acknowledging that Americans aren’t angry with capitalism but at the lack of free-market capitalism: that is, one set of rules for Wall Street, another for everyone else. He could say, too, that it was wrong for the government to bail out sophisticated investors financial firms starting in 2008—and he could promise that voters could be sure it would never happen on his watch.

Romney could say he’s sure of this because he knows exactly what the country needs when a company fails: not for that company to get a bailout, but for it to go out of business. He should know—because he’s fired bad top executives. He could say, too, that Obama has utterly failed here: Dodd-Frank financial-regulation law enshrines bailouts rather than prevents them.

Instead, Romney hides his fix-Wall-Street spiel smack in the middle of his 160-page “Believe in America” proposal for jobs and economic growth. Yes, he says he’d “seek to repeal Dodd-Frank” as president and “replace it with a streamlined regulatory framework” that offers “greater transparency for inter-bank relationships, enhanced capital requirements, and provisions to address new forms of complex financial transactions.”

But Romney never says why this set of rules is important. Instead, he seems confident that people will enthuse about inter-bank transparency for the sake of inter-bank transparency. Good regulations matter, Romney should say, because they are the only thing that will prevent financial meltdowns and inevitable bailouts. In fact, rules such as clear limits on borrowing did so up until the 1980s, when a succession of presidents began to dismantle the Depression-era rules that had worked just fine for half a century.

Without a strong line on making Wall Street subject to free-market discipline, Romney risks looking irrelevant on the rest of his jobs and growth proposal (Obama hasn’t announced any such proposals yet). On “day one,” for example, Romney says he’d send Congress five bills: one to reduce the corporate tax rate, one to negotiate free trade agreements, one to “undertake a comprehensive survey of American energy reserves,” one to “consolidate the sprawl of federal [unemployed-worker] retraining programs” and one to cut federal spending, aside from defense, by 5%.

This stuff is hardly rousing. To be sure: It’s not that any of these ideas are bad. It’s that they miss the point. Voters are not going to get behind a corporate-tax cut and more free trade when they think—quite correctly—that powerful corporations, led by Wall Street banks, already enjoy plenty of advantages. As for drilling: Obama can hit right back at Romney in the fall debates that under his watch, America is doing more energy exploration than ever before. As for the final two proposals, it’s odd that Romney thinks that voters care about worker-retraining programs but have completely forgotten about Wall Street bailouts. And Americans are tired of each party promising to cut spending and then not doing it—and unless Romney soon says what, exactly, he would cut, he’s no more credible on this point than anyone else.

Romney should realize, too: A robust no-bailout policy isn’t just good policy for the country. It’s vital politics for him. Unless Romney goes on the offensive with the financial industry, he’ll remain on the defensive. Romney seems to think that people will forget his association with the now politically toxic financial industry just because he doesn’t bring it up. He leaves his nearly two-decade-long career as the founder and chief of Bain Capital until the last paragraph of his 10-paragraph official biography, for example (“salvaging” the Salt Lake City Olympics “from certain disaster” rates a fourth-paragraph plug).

But hiding may backfire. A June NBC News/Wall Street Journal poll found that while a majority (53%) had not heard of Bain Capital, those who had included 20% of respondents who saw the firm in a negative light, while only 8% held a positive view.

If Romney doesn’t present his biography to his advantage, more people will learn of Romney’s financial-world history negatively, not positively. No matter how many academics wax theoretically about the wonders of private equity, the fact is that many working-class voters—perhaps unfairly—will see Romney as the corporate suit who swept in and cut jobs, becoming immensely rich even as the nation suffered. Romney can counter—as he does—that he helped start Staples, the Bright Horizons daycare chain, and The Sports Authority. And working-class voters will think in response: He got rich as the country’s industrial jobs withered, and he wants us to work for minimum wage at an office-goods or sports outlet?

Romney’s Rust Belt trouble isn’t just a risk; it’s happened already. In 2002, running for governor of Massachusetts against a weak candidate, he lost the state’s western industrial sector—decimated by decades’ worth of factory closures—by wide margins. As Commonwealth magazine said at the time, “though the promise of new jobs would seem to play well in a region that has lagged behind the rest of the state economically, Romney’s promise to lure major employers to the state didn’t prevent the GOP percentage here from plunging eight points.” Indeed. And that’s at a time when the overall economy was much healthier than it is today.

Romney’s best bet is to embrace his past before it embraces him—and to promise that he’ll use his unique skills to ensure that markets subject Wall Street to the same medicine that the rest of America has taken in the past four decades. Otherwise, too many Americans may suspect that he’s not on their side—and stay home come November. 

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