The inaugural Democratic debate Tuesday night was a strange show. It felt like two different programs.
One was a screwball comedy starring red-faced ex-Marine Jim Webb and retired Keebler elf Lincoln Chafee, whose Rhode Island roots highlighted the Farrelly brothers feel of his performance. The latter's "I voted to repeal the Glass-Steagall Act because it was my first day at school" moment was the closest thing I've seen to a politician dissolving into his component elements on live television.
The other drama was serious and highly charged argument between two extremes on the political campaigning spectrum, pitting the unapologetic idealist Bernie Sanders against the master strategist Hillary Clinton. (Martin O'Malley seemed like an irrelevant spectator to both narratives.)
One of the most revealing exchanges in the Clinton-Sanders tilt involved the question of Wall Street corruption. Sanders has always been a passionate crusader against Wall Street perfidy, but Hillary's take on the subject was fascinating.
Asked about it Tuesday night, she gave an answer that to me sums up her candidacy and the conundrum of the modern Democratic Party in general. She seemed to hit a lot of correct notes, while at the same time over-thinking and over-nuancing a question where a few simple unequivocal answers would probably have won everyone over.
The key exchange began with a question from CNN's Anderson Cooper:
"Just for viewers at home who may not be reading up on this, Glass-Steagall is the Depression-era banking law repealed in 1999 that prevented commercial banks from engaging in investment banking and insurance activities. Secretary Clinton, he raises a fundamental difference on this stage. Sen. Sanders wants to break up the big Wall Street banks. You don't. You say charge the banks more, continue to monitor them. Why is your plan better?"
Backing up: When Bill Clinton took office, it was still illegal in the United States for commercial banks to merge with investment banks and insurance companies. But toward the end of Clinton's second term, he signed a bill called the Gramm-Leach-Bliley Act that essentially created Too Big to Fail "supermarket" banks like Citigroup.
This isn't the only reason the financial system is so dangerous now. There's also the matter of the extreme interconnectedness of the financial services industry. This problem came violently into play in 2008, when the failure of a single idiot investment bank, Lehman Brothers, caused a chain reaction that nearly blew up the whole financial system.
This latter problem was partially a consequence of another Clinton-era law, the Commodity Futures Modernization Act, which deregulated derivatives like swaps that were the agent of many of those chain-reaction losses.
So Cooper's question to Hillary Clinton was really about a financial system that became dangerously over-concentrated thanks to multiple laws passed during her husband's administration. Her answer:
"Well, my plan is more comprehensive. And, frankly, it's tougher because of course we have to deal with the problem that the banks are still too big to fail. We can never let the American taxpayer and middle-class families ever have to bail out the kind of speculative behavior that we saw. But we also have to worry about some of the other players: AIG, a big insurance company; Lehman Brothers, an investment bank. There's this whole area called 'shadow banking.' That's where the experts tell me the next potential problem could come from."
A few observations:
First, it's definitive now that Hillary has no intention of reinstating Glass-Steagall. Cooper gave her a prime opportunity Tuesday night to announce otherwise, stories have filtered out of her campaign that she has no plans along those lines, and she's explicitly stated that she wants to find a "different way" to reduce risk.
The second and probably more important observation is about Hillary's rhetorical choices.
Hillary, like her close advisor Barney Frank, has been pushing an idea that banks aren't at the root of any financial instability problem. Last night, she pointed a finger instead at "shadow banking," non-bank actors like AIG, and a dead investment bank in Lehman Brothers. (Interesting she didn't mention a still-viable investment bank like Goldman, Sachs, which has hosted her expensive speaking engagements.)
This squeamishness about criticizing banks is laughable to people in the industry. But of course, that's probably the point – that the average voter won't know how absurd and desperate it is to point to faceless "shadow" financiers as villains when the real bad guys are famed mega-firms that are right out in the open, with their names plastered all over every second city block.
Companies like AIG and Lehman Brothers did, of course, shoulder blame for what took place in 2008. But there is no way to untangle what those non-bank actors did without also talking about the banks. This stuff is all connected, and it's not really that hard.
The root of the 2008 crisis lay in a broad criminal fraud scheme, in which huge masses of home loans were given to people who couldn't afford them. Those loans in turn were bought back up by giant banks and resold to investors who weren't told how crappy the merchandise was.
AIG blew up because it insured this fraudulent market. Lehman blew up because it overinvested in it. But it was banks that financed the problem and that were possibly the most depraved actors in the narrative (apart, perhaps, from the Countrywide-style mortgage lenders who were handing loans out to anyone with a pulse).
We know this, among other things, because it was big banks like JPMorgan Chase and Citigroup that paid the biggest chunks of the $100 billion in fines Hillary later referenced in the debate. There is a vast record of documentary and witness evidence now attesting to the mass fraud, which was of a type that can and probably will happen again. The policy issue is how to curb the impact of that inevitable next crooked scheme.
And the question there is how to make sure companies are small enough that the really corrupt ones can be allowed to implode organically, rather than requiring mass bailouts.
How do you make Too Big to Fail companies smaller and safer? Probably, you just do it.
The two main attempts so far have been the Brown-Kaufman amendment, proposed (and routed) during the Dodd-Frank negotiations, and the more recent Terminating Bailouts for Taxpayer Fairness Act, also sponsored by Ohio Sen. Sherrod Brown, along with Louisiana Republican David Vitter.
Both efforts relied on automatic, hard-number concepts. In Brown-Kaufman, banks were hard-capped at 10 percent of America's deposits. In Brown-Vitter, banks would be required to hold a hard 15 percent capital buffer. The key idea here in both cases is that there is no wiggle room. If banks get too big, they get whacked.
Hillary Clinton last week released a plan that sounds very similar to these proposals. This is the "comprehensive" plan she mentioned in the debate.
Her plan would create a "risk fee" for banks over a certain size. If banks get too big, they would be asked to get smaller. But my reading of her proposal is that it doesn't contain an automatic mechanism. Hillary's plan would merely give regulators the authority to do something about risky companies.
"Clinton did say large firms should be required to 'downsize or break apart,'" says Dennis Kelleher of the Wall Street watchdog group Better Markets. "But only if they can't prove to regulators that they can be managed effectively."
It's a subtle difference. But such subtle differences between real action and ambiguous verbiage are what turned the Dodd-Frank bill into a mountain of legislative leprechaun tricks, as opposed to the sweeping, simple, FDR-style reform of a plainly corrupt marketplace that it should have been.
Whether or not you think Hillary Clinton plans on doing anything to fix Wall Street corruption really comes down to your read on her intentions. Both regulators and criminal prosecutors already have enormous theoretical power over the market. They're not particularly handicapped by a lack of regulatory tools. The issue is how much political will a future executive plans on exerting.
By going out of her way to downplay the influence of bank corruption, Hillary is probably signaling that she doesn't plan on leaning into the reform effort all that much. This is consistent with her history as a politician who has accepted an enormous amount of money from Wall Street (both in donations and speaking fees) and has surrounded herself with policy advisors who in many cases bear primary responsibility for the very messes we're talking about.
It's smart politics, well thought-out. Or is it? The modern Democratic Party seems forever to be looking for nuance, when taking a stand would do just as well. Let gay people be soldiers, don't invade the wrong country, break up dangerous banks. An idea isn't automatically bad just because it's simple.