The Acid Test for Conservative Populism

A few weeks ago, The Nation had a great editorial on breaking up the banks:

The heart of our predicament is the Too Big to Fail (TBTF) problem. Banks have grown so large that they can’t go down without threatening the whole system. Reforming the financial sector thus means breaking up TBTF conglomerates and reinstating the Glass-Steagall Act, with its firewall between investment and commercial banking.

The media have labeled the break-up-the-banks camp as the most “liberal” or “left” option, the bankers’ position as the most conservative (also the one the GOP in Congress will courageously defend) and the White House position as the sensible, Goldilocks compromise.

But while critics of reinstating Glass-Steagall dismiss it as wildly impractical, it is supported by a roster of people who hardly count as liberals: John Reed, former head of Citigroup; Mervyn King, governor of the Bank of England; and, most notably and vocally, Paul Volcker, ex-Fed chair and current chair of the President’s Economic Recovery Advisory Board.

My knowledge of financial regulation is sadly lacking, but this strikes me as an excellent idea. As the editorial points out, breaking up large financial institutions largely avoids the problem of regulatory capture. Instead of crafting sophisticated banking guidelines hand-in-glove with industry insiders, it relies on a fairly blunt instrument – the separation of commercial and investment banks – to reform the financial sector.

Moreover, this approach seems less complicated (and potentially less costly) for the banks themselves. In place of some some exotic regulatory scheme, large financial institutions are left with a simple mandate: don’t mix investment and commercial banking.

As I said, I think this is a sound approach to financial reform. But I also think the politics of a “break up the banks” platform are tailor-made for a smart conservative populist. Populism of the conservative variety is supposed to be more concerned with the concentration of political and economic power than free market purism. “Too big to fail” banks – whose very existence holds taxpayer dollars hostage to the threat of systemic failure – are the embodiment of centralized financial clout. Yet despite the persistent aftershocks of one of the biggest economic collapses in modern history, the cause of financial reform continues to languish behind debates over health care and the stimulus.

Fetishizing the electorate’s prejudices is not a blueprint for responsible governance, but at its best, populism is a useful corrective to the insularity and narrow-mindedness of the governing class. The current debate over financial reform – dominated as it is by insiders who are either content with the status quo or satisfied by a few minor regulatory changes – seems ripe for a populist counter-reaction.

So far, the conservative response to the bailout has been strikingly incoherent. Other than vague noises about limited government and lower taxes, the tea party movement is largely bereft of new ideas, and their political leaders are scarcely better. It is striking, for example, that Matthew Continetti’s long encomium to Palin’s populist persuasion is void of any platform that could be meaningfully distinguished from bog-standard Republican orthodoxy. Whatever one thinks of William Jennings Bryan and Andrew Jackson (Palin’s ideological precursors, according to Continetti), both were associated with readily identifiable policies that broke with contemporary political orthodoxies. Palin and other would-be conservative populists, on the other hand, are left with tired old nostrums and little else.

The bank bailout has stuck taxpayers with an enormous bill. The contrast between a government-subsidized Wall Street recovery and skyrocketing unemployment rates could not be more stark. An infuriating new report alleges that Obama’s  Treasury Secretary overpaid his former employer (not to mention other major firms) for worthless derivatives. Despite this obvious political opening, conservatives like Palin are more interested in book sales and stoking cultural resentment than crafting a response that taps into this populist zeitgeist. If conservative populism is to become something more than a bundle of cultural grievances and tea party slogans, it should latch onto a program that addresses serious concerns and grasps the importance of diluting concentrated political and economic power. Breaking up the banks that got us into this mess would be an ideal place to start.