Wall Street Regulation

Glass-Steagall has made somewhat of a comeback with help from the Occupy movement and rising political stars like Elizabeth Warren… The only two political insiders you won’t catch talking about reinstating Glass-Steagall both happen to be running for president.

Part 4 of the Special “Off The Reservation” Election Series in the Long Island Press.

The Banking Act of 1933, commonly known as Glass-Steagall, was established to tame the harmful speculative behavior of an industry run amok in the early part of the 20th century; behavior many observers at the time credited for the market crash that precipitated the Great Depression. For some, the repeal of Glass-Steagall, by the Gramm-Leach-Bliley Act of 1999, was the deathblow to financial prudence on Wall Street.

 In reality it was simply the formal recognition of careless financial practices that were largely in place already. Since the near-collapse of the banking industry in 2008, Glass-Steagall has made somewhat of a comeback with help from the Occupy movement and rising political stars like Elizabeth Warren, the former federal consumer protection advocate now running for Senate in Massachusetts. The only two political insiders you won’t catch talking about reinstating Glass-Steagall both happen to be running for president.

Wall Street reform is as important as it was in 2008 but both President Obama and Gov. Mitt Romney have taken great pains to avoid talking about it too much. For his part, President Obama seems content to rest on the laurels of the Dodd-Frank Act, Congress’s attempt to rein in Wall Street excess, which had enough support to pass but not enough to be properly funded or enforced. According to Romney’s platform, he would “Repeal Dodd-Frank and replace with streamlined, modern regulatory framework.” That’s the extent of his vision for the future of Wall Street according his platform. Ten words.

So while the rest of the country is suddenly talking about a law enacted almost 80 years ago, these guys aren’t going anywhere near it. The truth is, Wall Street reform and, more specifically Glass-Steagall, is more complicated, making it easy for Obama and Romney to be evasive.

So let’s answer two questions. What would actual Wall Street reform look like and what exactly was Glass-Steagall?

The purpose of the original act was to establish a barrier between traditional banks and the risk-taking investment firms, denying investment banks access to consumer deposits and secure, interest-bearing loans. The unwritten effect of Glass-Steagall, however, was to establish a culture of prudency in the consumer and business banking realm, leaving sophisticated professional investments to more savvy financiers who had the ability to calculate the inherent risk of a financial instrument. For decades to follow, the merits of Glass-Steagall would continue to be debated, but it nevertheless drew a marked distinction between the function of a consumer bank and an investment bank.

Today reinstating Glass-Steagall is a common rallying cry among those who decry the bad behavior of Wall Street. Its repeal has become the fulcrum of nearly every debate surrounding deregulation. Actually accomplishing this, of course, is easier said than done.

The best way to reconcile the debate over whether to reinstate Glass-Steagall is to appreciate that the culture of Glass-Steagall was more important than the act itself. Over time the restrictions placed on bankers under the act were chipped away, but the culture that governed the banking industry endured beyond its measures. Eventually, savvy bankers and politicians found ways to loosen its screws and interpret the act to their own benefit.

Don’t Just Blame Republicans

In 1978, President Jimmy Carter oversaw the passage of the International Banking Act, a bill that should probably receive as much, if not more attention than Gramm-Leach-Bliley. Essentially, the act allowed foreign banks or entities that engaged in “banking-like activities” to participate in domestic financial markets. For the first time, foreign investment firms were able to make competitive loans so long as they didn’t compete for consumer deposits; initially individual states could determine whether their regulatory structure could support this new activity. The government would go on to loosen restrictions governing the competition for consumer deposits and allowing bank holding companies to treat money markets like checking accounts.

In his book “End This Depression Now,” economist Paul Krugman argues that perhaps the most influential step with respect to the banking sector came with Carter’s passage of the “Monetary Control Act of 1980, which ended regulations that had prevented banks from paying interest on many kinds of deposits. Unfortunately, banking is not like trucking, and the effect of deregulation was not so much to encourage efficiency as to encourage risk taking.”

 By 1987 the bank holding companies, including foreign companies allowed to operate within the U.S. banking system, were granted access to mortgages to create a package of investments called mortgage-backed securities; the threshold for the amount of investing activity in instruments such as these was also increased, paving the way for the growth of investments backed by the strength (or weakness) of the consumer market.

During that same year, members of the Federal Reserve began calling for the repeal of Glass-Steagall as then-chairman Paul Volcker was providing the tie-breaking resistance. But this was a mere formality because by this time, Glass-Steagall was effectively over.

Yet even though most of the threads of regulation had been pulled from the overcoat that protected consumers from risky banking practices, the culture of prudent banking still existed to an extent; maintaining the Glass-Steagall Act on the books was an indication of this sentiment. Throughout the decades when regulations were steadily eroding, powerful national figures such as Paul Volcker under Carter and Reagan, and Treasury Secretary Nicholas Brady under George H.W. Bush managed to temper the enthusiasm of the movement.

That George Bush Senior heeded their admonitions was an admission that the public’s appetite for deregulation was actually beginning to wane in the post-Reagan hangover. Richard Berke’s New York Times article of Dec. 11, 1988, on the eve of the Bush presidency, encapsulated this feeling. Berke wrote, “Lawmakers and analysts say the pressure is fed by a heightened public uneasiness about deregulatory shortcomings that touch the daily lives of millions of Americans: from delays at airports and strains on the air traffic control system to the presence of hazardous chemicals in the workplace to worries about the safety of money deposited in savings institutions.” Alas, these four years would prove to be a momentary hiccup in the deregulation movement.

During the Clinton years, the nation’s leadership was largely comprised of proponents of deregulation. In fact, by his second term, Clinton was almost entirely surrounded by rabid free market enthusiasts. A former chairman at Goldman Sachs, Robert Rubin, was Secretary of the Treasury, Alan Greenspan was still at the helm of the Federal Reserve and Phil Gramm was the head of the powerful Senate Banking Committee. All of these men had close ties to Wall Street and made no secret of their intention to release bankers from the burdensome shackles of regulation and oversight.

Reforming Reform

In 2008, economist Joseph Stiglitz warned of the enduring negative consequences of deregulation. At a hearing held in front of the House Committee on Financial Services, Stiglitz invoked Adam Smith saying, “Even he recognized that unregulated markets will try to restrict competition, and without strong competition markets will not be efficient.” One of Stiglitz’s solutions was to restore transparency to investments and the markets themselves by restricting “banks’ dealing with criminals, unregulated and non-transparent hedge funds, and off-shore banks that do not conform to regulatory and accounting standards of our highly regulated financial entities.”

For emphasis he noted, “We have shown that we can do this when we want, when terrorism is the issue.”

Still, the nagging question remains as to what reform might look like. After all, not all deregulation is irresponsible. Most of the discussion in the media surrounding deregulation revolves around the concept that our banking institutions are “too big to fail.” Thus the rallying cry for reinstating Glass-Steagall and separating banks from investment banks. I’m in tepid agreement with the underlying principle, but the reality of the situation is far more complicated. The fact is banking has gone global and the deregulation genie is out of the bottle.

As I said earlier, Glass-Steagall was as much about instilling a culture of prudency to the banking world as it was about erecting a barrier between commercial banks and investment banks. Advocates like Elizabeth Warren like to say that prior to 1999 and the repeal of Glass-Steagall, the economy functioned through periods of both prosperity and recession since 1934 without the banking sector once collapsing. It’s a fair, but oversimplified assertion that overlooks the fact that Glass-Steagall was on a ventilator in 1978 and dead by 1980. A 30-year run of prosperity from 1978 to 2008, with a few brief recessions in between, is nothing to sneeze at.

Restoring balance to the banking sector does not necessarily require separating the banks. Not yet at least. It begins with transparency and reestablishing the culture of prudency that has been conspicuously absent over the past decade. After all, you cannot value what you cannot see; nor can you mitigate risk unless you first manage reward.

What this really boils down to is accountability, which is ultimately a behavioral issue. Allowing investors to actually see how a bank behaves by viewing the size and scope of their transactions would theoretically assuage their appetite for risk. Given these conclusions, it’s easier to make the case that our current president would provide more accountability and inspire behavioral changes on Wall Street, particularly given Romney’s intransigence when it comes to considering financial reform. But tough talk against Wall Street has all but disappeared from Obama’s rhetoric leaving little hope that a second term will elicit any further positive change. So this week, while neither man seems serious about financial reform, the status quo is better than further deregulation and letting bankers rule the roost.

Tie goes to the incumbent.

To Spend or Not To Spend

To examine the effect the stimulus had on the economy, it’s necessary to understand the economic philosophy behind it while parsing the figures. The conflict between Democrats and Republicans on this issue is largely a debate over the economic theories of two men: Milton Friedman and John Maynard Keynes.

Mitt Romney called it “the biggest, most careless one-time expenditure by the federal government in history.” Paul Ryan characterized it as “a case of political patronage, corporate welfare, and cronyism at their worst.”

“It” was the American Recovery and Reinvestment Act of 2009, colloquially known as the “Obama Stimulus.” The Republican narrative is that Americans would have been better off not taking on more debt and allowing the omniscient markets to work themselves out. (This argument was noticeably absent in 2008 when President George W. Bush signed a stimulus bill for more than $150 billion.) Before  Obama signed his stimulus bill into law, House Republicans had voted against it. Every single one of them. In the Senate, only three Republicans approved the bill.

So we know where the parties stood in 2009—pretty much where they stand today. Democrats largely believe that the stimulus prevented the complete, Depression-like collapse of the economy. Republicans believe it had no effect on the economy and, furthermore, the additional debt will be our ultimate undoing. Republicans are correct to say that the stimulus had few offsetting revenues and blew yet another enormous hole in the budget deficit. They did not make this argument, however, when our country decided to wage two decade-long wars abroad while simultaneously reducing taxes. But the reality of the unfunded stimulus expense exists. So the question remains: Did the stimulus work?

Both Democrats and Republicans point to FDR’s New Deal to answer this question historically. Republicans take the short view that FDR’s programs had little effect on the nation’s economy as the economy double-dipped in 1937. Democrats take the long view that this date coincided with the Roosevelt administration’s decision to back off federal spending and that a resurgence of federal funding ultimately mitigated the decline. There is general consensus that the tipping point that put the nation back on a path toward prosperity was World War II and the wartime economy. Despite this philosophical harmony, Republicans are still loath to admit that the top marginal income tax rate in 1941 was 81 percent, and by 1945 it was 94 percent. That’s how you pay for war.

So while it can be instructive to look back and apply historical lessons to the present, the picture is incomplete because the circumstances are vastly different. To examine the effect the stimulus had on the economy, it’s necessary to understand the economic philosophy behind it while parsing the figures. The conflict between Democrats and Republicans on this issue is largely a debate over the economic theories of two men: Milton Friedman and John Maynard Keynes.

Born in 1912, Friedman would come to be recognized as one of the great economic minds of the modern era. A Nobel Prize-winning economist who taught at the University of Chicago, Friedman held a wide range of core libertarian views and is often credited as one of the principals of the ideology. Throughout his career he argued the benefits of monetary policy and the folly of fiscal policy. Think TARP versus stimulus. In other words, maneuvering liquidity through the system in a centralized fashion was an appropriate measure of government intervention whereas providing government funding for programs via the Treasury was not.

This is not to say that Friedman would have approved of President George W. Bush’s TARP “bailout” of the banks (Friedman died in 2006 before the financial world came unraveled) or even of the Federal Reserve itself. In a perfect world, Friedman would have abolished the Federal Reserve altogether, which is a common rallying cry among Libertarians who also promote a return to the gold standard no matter how economically or politically impossible this would be. Again, the theory being that private markets would be more efficient, accurate and apolitical with respect to pegging the value of currency in real time.

But if Friedman’s economic policies have dominated the years since Gerald Ford was in the White House, it was English economist John Maynard Keynes who dominated the years prior, beginning in 1933 with his paper, “The Means to Prosperity.” Keynes’ recommendations for dealing with recessions and depressions would fundamentally alter Europe and America’s approach to the Great Depression. Keynes’ first assumption, considered revolutionary at the time, was called the “paradox of thrift.” Simply put, if businesses and consumers collectively tighten their belts during difficult times, the effect would be a downward spiral in the demand for goods and services.

Under Keynes’ theory, this self-perpetuating loop of plunging demand would necessarily result in a decline of both profitability and confidence. Keynes believed the antidote was government spending. Specifically, the further the funding went down the economic chain the better. Businesses and consumers, those with the greatest need for liquidity, were likely to circulate government funds through the economy faster than institutions such as banks that might be more prone to hold onto liquidity. The net result, due to what Keynes coined the “multiplier effect,” would be spending that works its way through the normal economic channels via the purchase of goods and services at the consumer level, labor and equipment at the business level.

A great deal of attention is paid to the short-term effects of spending on infrastructure as large public works projects during the Depression became the most visible and lasting testaments to Keynesian economy theory during the Roosevelt era. But many Keynesian theorists argue that these types of projects also contribute to the long-term health of the economy, with the best possible result being partnership with, and ultimately transition to, private industry. A great example of this is the Tennessee Valley Authority (TVA) established under FDR, which ultimately became a private utility. But long-term infrastructure projects don’t have the immediate effect of direct government spending at the bottom levels of the economy.

Larry Summers, the notoriously prickly economist, has had a remarkable career serving in both the Clinton and Obama administrations (Summers was Treasury Secretary briefly under Clinton) and as one-time president of Harvard University. Tapped to join Obama’s transition team, he is credited with determining the strategy for bailing out the faltering American economy. In his book, The New New Deal, Time magazine senior staffer Michael Grunwald writes, “At Brookings, [Summers] proposed a technocratic approach to Keynesian stimulus that has dominated the debate ever since. A stimulus package, he argued, should be timely, targeted, and temporary.”

This guiding philosophy would result in a three-tiered approach to Obama’s stimulus. The first would be accomplished through tax breaks for the vast majority of Americans. The second would be through entitlement spending such as extending unemployment benefits and prolonging health insurance coverage for laid-off workers. It also provided direct aid to states to help plug budget gaps to prevent the layoffs of teachers and reductions to Medicaid. The third was investment in programs deemed “shovel-ready.”

This last point is somewhat controversial because few, if any, infrastructure projects can begin work at a moment’s notice. But on this, Obama was clear that funds would be found to target America’s aging infrastructure and invest in new projects on the drawing board, even if their timetables weren’t immediate.

Keynesian economists such as Joseph Stiglitz quickly lauded Obama’s plan, though most of them  believed the $787 billion package was only about half of what was required to properly address the crisis. Another Keynes disciple, Nobel Prize-winning economist and columnist for The New York Times, Paul Krugman, has been extremely vocal that the stimulus, while swift and necessary, was “woefully inadequate.” Nearly everyone on Obama’s transition team would concur, but the thought of a stimulus package topping $1 trillion was politically radioactive. Besides, almost everyone involved at the time hoped for a second crack at stimulus funding in Obama’s first term. And while most of Obama’s political advisors understood how difficult this would be, no one could have predicted how hard the Republican Party was preparing to fight against any new proposal from the Democrats.

Perhaps the most astounding revelation in Grunwald’s book is how Obama’s inner circle — especially the most cynical among them like the explosive Rahm Emanuel or acerbic Larry Summers — understood that the package was political suicide. In fact, they were prescient in this regard as the stimulus provided the freshly-routed GOP with a rallying cry and a strategy to take back control of the House of Representatives during the 2010 mid-term elections.

In reality, the Recovery Act did more than just pump taxpayer dollars temporarily into the economy and drive up the national debt. It put federal funds into the hands of agencies and consumers who had the ability to spend them in a timely fashion. This came in the form of tax cuts for the middle class, an extension of unemployment benefits and medical coverage, state aid to support endangered Medicaid programs, healthcare and student loans. It was the ultimate return to Keynesian philosophy.

Opposition to blanket stimulus funding isn’t fundamentally misguided. After all, no government can sustain unlimited subsidies without someday having to recoup these costs. This brings us to the second half of Keynes’ theory. If the government is supposed to aid a recovery during a recession by pouring funds through the economy, then it must likewise increase revenue during the boom times that follow. There are only two ways to do this: raise taxes or cut spending. Or both. The problem is that we haven’t meaningfully done either in decades.

While cutting spending is very much a part of the Republican narrative, increasing taxes is anything but. In a perfect world of no government intervention or regulation, the markets would simply figure it out and restore balance because recessions and depressions are, after all, bad for business in the long run. Having said that, this type of “boom and bust” behavior creates great potential short-term benefits, as volatility is a savvy investor’s best friend. But Keynes never meant to eliminate the boom and bust nature of the economy. His policies were intended to mitigate the depths and the peaks.

Shedding all government spending and letting the markets work it out was precisely the advice President Hoover received from Treasury Secretary Andrew Mellon after the market crashed in 1929. Hoover didn’t actually follow his advice. Instead, he set in motion many of the public works projects and federal spending plans continued by Franklin Roosevelt. The Depression was hung around Hoover’s neck in part because he chose to portray an aura of calm and confidence even though Rome was indeed burning.

Hoover fought vigorously behind the scenes for some of the programs that would make Roosevelt one of the most popular presidents of all time. Hoover’s biggest problem was actually Roosevelt. Because Hoover rarely took the opportunity to point out that the economy collapsed as a result of his predecessor’s policies and then failed to defend himself against Roosevelt’s subsequent attacks, he became unfairly synonymous with the Great Depression. This little bit of history was not lost on Obama.

Today, comparisons abound between the circumstances surrounding both the Great Depression and the (dare I say) current depression. Politicians and historians will forever debate their similarities and how they both arrived. But there are also current comparisons we can draw relating to Keynes’ paradox. In Europe today, where austerity is the mainstay of the economic recovery attempt, unemployment remains untenably high. In both Spain and Greece it hovers around a bruising 24 percent. Before the stimulus, the US economy shed 800,000 jobs in January of 2009 and GDP growth was negative. Since the beginning of 2010 America has added an average of 143,000 jobs every month and experienced positive GDP growth, although everyone acknowledges it’s a slog. But this kind of forward momentum amply defends the stimulus.

Beyond facts and figures, be sure to listen closely for what you cannot hear. Perhaps the most incredible aspect of the stimulus is the lack of fraud associated with the spending. The oversight has been so rigorous and the process so astoundingly transparent that almost no one is crying foul at the veracity of the disbursements. Instead, opponents gnash their teeth and shout at the rain about Solyndra, the failed California solar plant manufacturer, at every turn. And that’s about it. Forget the fact that the mechanism for funding Solyndra was established in 2005 and Solyndra was selected to participate in the program in 2007; if opponents of the stimulus want to make this their Alamo, so be it. Out of nearly $800 billion invested, one failed solar manufacturer is all you’ve got? Even Bain Capital would have relished this level of success.

So, did it work? I side with Krugman. The answer is that the stimulus package was a good start, but it should have been bigger. Nearly all of those involved in creating the stimulus recognized at the time that it would prevent catastrophe but fall short of prosperity. Unfortunately, our politics are so poisoned today that uttering the phrase, “should’ve been bigger,” is truly the third rail. There is no more room for a reasoned debate in America. But the fact remains that without the stimulus several state budgets would have collapsed, all but bankrupting Medicaid, far more roads and bridges would have fallen further into disrepair, middle-class Americans would have had less in each paycheck and millions more people would have fallen off of the unemployment rolls and into poverty.

All told, Ryan’s claims of  “patronage” and “cronyism” fell apart the moment he lobbied to divert federal funds to his district; Romney’s claim that the stimulus was “careless” underscores either a deep misunderstanding of the shrewd, tactical and successful nature of the program or a further illustration of his belief that no person, corporation or municipality deserves financial support, even under the most severe economic circumstances. Romney’s recent disdainful comments about “47 percent of Americans” may give weight to the latter sentiment, which should give us all pause.

Obama’s Iago – The ‘Indispensable’ Man

True to his Harvard Law School roots, the current occupant of the White House opted for an elitist approach to the worst economy since the Great Depression. He signed up central banker types, including a former Treasury Secretary and a former Fed Chairman.

“In following him, I follow but myself.”

“Your legacy,” the newly installed Treasury Secretary counseled the recently elected President, “is going to be preventing the second Great Depression.”  Quite a legacy if one ignores on-going recession, permanent high unemployment, rampant health care and higher education costs, legislative gridlock, China ascendant, all played out to the distant fiddling of the inflamed Euro-economy.

“Your Money, Your Vote” debate kicked off by asking Republican presidential wannabes what they would do to buffer America’s anemic economy against the bunga, bunga of Italy’s economy, the world’s seventh largest.  One-time frontrunner Herman Cain announced he would “assure that our currency is sound. Just like — a dollar must be a dollar when we wake up in the morning. Just like 60 minutes is in an hour, a dollar must be a dollar.”  Dollars to donuts, most folks wouldn’t be hiring a financial advisor based on fortune cookie advice.  Clearly, though, there is an element out there that has no problem subjecting the world’s biggest economy to master plans scribbled on the back of bev-naps.

True to his Harvard Law School roots, the current occupant of the White House opted for an elitist approach to the worst economy since the Great Depression.  He signed up central banker types, including a former Treasury Secretary and a former Fed Chairman.  Timothy Geithner, whose five years heading the NY Fed placed him at the helm for the economic meltdown of ’07-‘08, was named T-Sec.  Given his renowned intimacy with New York financiers, Geithner knew how to serve his masters by covering them with a $700 billion TARP at crunch time.  No man is a hero to his valet and Geithner says he could’ve “cared less about Wall Street.” But he had to get credit flowing again, even it went to core perpetrators of the meltdown.

The docudrama “Too Big to Fail” portrayed current Fed chair Bernanke, dropping the D bomb on congressional and banking leaders: go along with the Bush economic team or detonate the next Depression.  Exiting from the actual meet, John Boehner looked drawn and quartered as if he had just faced the Grim Reaper.  But Depression prevention was “not enough” for the incoming President, so he set about to reform a bloated, inefficient health care system by extending it to the 45M uninsured.  The jury is literally still out on that aspect of Obama’s legacy and, like almost everything else in America today, subject to slow death by deadlock.

Meanwhile, Treasury actually realized a profit on the widely despised TARP bailout, even as the banks have opted to sit on trillions while taking record bonuses for themselves.  Mad Money’s Jim Cramer gushed recently that “Tim Geithner did a lot to make our institutions stronger…. He’s one of the greatest Treasury Secretaries we’ve ever had!”  He has become this Administration’s Indispensible Man, the President beseeching him to stay on through the end of his first term.

Geithner’s bank-centric approach has not come without collateral damage.  Bloomberg reported that Geithner-led NY Fed instructed crippled mega-insurer AIG to cross out references to $62B in swap payments to banks like Goldman Sachs, which were made at 100 cents on the dollar, no haircut.  Geithner reportedly assured the banks that the dreaded doyenne of consumer financial protection, Elizabeth Warren, would never head the newly formed bureau.  Though he denied “slow-walking the President,” the T-Sec reportedly ignored Obama’s early directive to dissolve troubled Citigroup (which had previously offered Geithner CEO).

Nothing has suffered more in T-Sec priorities than jobs.  Geithner has intermittently lip-serviced the problem, lately with a Jobs Bill he knows is not getting past Republican blockades.  In fact, the most arbitrary job barrier was thrown up on Geithner’s own turf by federal agencies closely interconnected with Treasury.  On July 6, 2010, OCC, FDIC, NCUA and FHFA, the conservator for mortgage giants Fannie Mae and Freddie Mac, unloosed a coordinated strike against Property-Assessed Clean Energy (PACE) programs.  PACE obligations, they contended, would pose a threat to “the safety and soundness” of mortgage products.

Launched in 2008, Long Island Green Homes was the first operational residential energy efficiency retrofit program in the nation.  A typical retrofit is $9,400, averaging yearly savings of $1,114 that generally covers the homeowner’s monthly obligation, secured by the property.  Energy use and emissions are cut over 25%, saving homeowners money, enhancing property value all while putting hard-hit tradesmen to work.

None of this matters much to the holders of a couple of trillion dollars of toxic subprime mortgages.  In PACE, legislatively affirmed in 27 states and promoted by a Vice-Presidential White Paper, they imagined the second coming of toxic instruments and the chance to demonstrate what tight-fisted regulators they’d finally become.  Fact is that if 5% of the nation’s 80M houses were retrofitted it would amount to a 0.6% rounding error of Fannie & Freddie’s total exposure.  At the same time, this shovel-ready work would create 435,000 job years nationwide never to be outsourced.

The Town of Babylon, along with the State of California and several counties, filed suit against FHFA who fundamentally argued that they were accountable to none, even the courts.  A Federal judge in California’s Northern District ruled otherwise and appeals are heading to the next level.  In its suit, Babylon argued that FHFA had unilaterally abrogated state and local sovereign rights in determining what infrastructure could be remediated for a public purpose.  In an aberrant departure from Washington gridlock, a bipartisan group of congressmen (23 Reps/29Dems, with Peter King the sole Long Islander to date) has embraced this principle by sponsoring the PACE Protection Act.  Message to Feds: ‘Hands off our incandescents and back off of our local energy efficiency programs!’  Go figure.

Watching this mountain be made out of a mole hill, Geithner has held himself back behind the wizard’s curtain, as if PACE could conceivably be the straw that breaks the economy’s back.  The Indispensable Man, who corralled the world’s most powerful bankers, could put the leg in legacy by delivering a swift kick to his in-house regulatory bureaucrats.  As Othello’s Iago knew, so should Obama’s Iago, that, “Reputation is an idle and most false imposition; oft got without merit and lost without deserving.” 

The Fundamentals of Fundamentalism

The circumstances that promoted the rise of the evangelical Christian doctrine in the 1920s and ’30s bear a striking resemblance to our current situation.

The sight of so many conservative Christian presidential candidates attempting to out-holy one another during the GOP debate this past weekend was curious but not without precedent. The role of Christianity in the American political system predates the formation of the nation itself, with the more fundamentalist aspects playing a larger part during difficult economic periods. While it can be said that religion informed the political ideologies of the men who established the framework of our nation, fundamentalism was largely relegated to the fringes of American politics until the first part of the 20th Century.

The circumstances that promoted the rise of the evangelical Christian doctrine in the 1920s and ’30s bear a striking resemblance to our current situation and help to explain—as history often does—why right-wing religious views are influencing the social, political and economic platforms of the GOP candidates.

Prior to the Great Depression, the evangelical set were more like babbling mystics than an influential political force. Think Jimmy Swaggart or Jim Bakker. The mainstream transformation came when successful, white Christian men who accumulated and maintained great wealth during this time were looking for absolution of the guilt they felt while their fellow countrymen fell upon hard times. Enter Abraham “Abram” Vereide, the man perhaps most responsible for the modern fundamentalist Christian movement in America.

Vereide was able to coalesce the successful strategies and teachings of other soul-surgeons and evangelists of his era. By rationalizing the financial success of his followers as the earthly manifestation of Christ’s will, he was able to mold a new Christian doctrine that recognized wealth, power and influence as deliberate and divine endowments. As it turned out, mass absolution and wider acceptance came in the form of Jesus Christ as seen through the lens of Bruce Barton’s bestselling book, The Man Nobody Knows.

Barton, who is more enduringly known as the second “B” in the ad agency BBD&O, which exists even today, published The Man Nobody Knows in 1925. It was an instant phenomenon. Barton’s Jesus was the ultimate winner, the consummate salesman. The book was a pocket guide to winning with Christ that helped extricate Christianity from purely religious constraints and bring it to a wider audience as only a professional adman could.

By 1933, when the nation was in the throes of the Depression, Vereide’s organization began to take shape. The political outgrowth of his movement was formalized in Seattle with the creation of the New Order of Cincinnatus. The parallels between the New Order and the Tea Party today are undeniable. Like the Tea Party, the New Order cherished free market ideals and conservative morality, and organized against taxes and big government.

Vereide’s followers heartily rebuked then-President Herbert Hoover for bailing out Wall Street bankers whom many Americans believed to be responsible for the stock market crash of 1929 just as the Tea Party chastised the Bush administration for doing the same with the Troubled Asset Relief Program (TARP). Both groups found their footing, however, railing against the subsequent administrations for battling economic downturns with public works projects, specifically FDR’s New Deal and Obama’s Stimulus Package. Likewise they share similar views regarding social welfare programs, and were able to elect candidates to battle these reforms. Even the great adman Bruce Barton went on to secure a seat in Congress under the slogan “Repeal a Law a Day.”

Vereide’s organization lives on today through the efforts of a rather enigmatic figure named Douglas Coe, who took over the group upon Vereide’s death in 1969 and transformed it into one of the most influential and highly secretive organizations in the modern era. The only public recognition of the group known today simply as “The Family” is the National Prayer Breakfast held every year in Washington, where political and business leaders assemble to pay tribute to Douglas Coe’s cabal. Most of what transpired beyond the breakfast remained a complete mystery until Jeff Sharlet, a reporter and expert on religion, stumbled upon Coe’s secret world, which he unraveled in his 2008 book titled The Family: The Secret Fundamentalism at the Heart of American Power and his 2010 follow-up C Street: The Fundamentalist Threat to American Democracy.

Sharlet painstakingly details the roots of fundamentalism in America and illustrates the many ways in which The Family’s perversion of Christianity as a doctrine of power has transformed modern political life in America. The ultimate testament to the work of The Family is fully on display in the platforms of candidates such as Michele Bachmann, Rick Perry and Rick Santorum—not to mention the political juggernaut waiting in the wings that is Sarah Palin. But before Bachmann there was Frank Buchman, founder of “Moral Re-Armament,” whose closeted reputation was more Marcus Bachmann than Michele, if you catch my drift. Before Palin there was Arthur Langlie, figurehead of the New Order of Cincinnatus, and before Perry there was Bruce Barton.

When placed in historical context, the great revelation of the Tea Party is that there’s nothing particularly innovative about it. As young as our nation is, we’re now old enough that everything old is new again. In Vereide’s time Vladimir Lenin was the Osama bin Laden of the day and Communism was today’s Islam. The rise of the German economy and the grand display of Nazism in the 1936 Olympics openly mocked America’s failing economy in the midst of the Depression just as China’s present-day ascension and the grand pageantry of the 2008 Olympics in Beijing taunted Americans during the Great Recession. And just as FDR became the bête noire of the New Order of Cincinnatus, so too is Barack Obama to the conservative, evangelical wing of the Tea Party.

What I find interesting about the parallels between our past and present circumstances is that there is room for both sides of the debate to find comfort. Christian fundamentalists can take heart in the notion that their wing of the Tea Party is an idea whose time has finally come while opponents of radical evangelicals may take solace in the fact that fundamentalism ebbs and flows with the vagaries of the economy. It’s simply a matter of perspective, or perhaps it’s a lack thereof.