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Since leaving the New York Governor’s Mansion, Eliot Spitzer has been busy. He cohosts CNN’s In the Arena and has a new Boston Review book coming out entitled Government’s Place In the Market. Web editor David Johnson asked him about his proposals for restoring fairness to Wall Street.
David Johnson: Your book reads like a Thomas Paine, Common Sense-style pamphlet—it sets out simple, clear rules about government’s role in the market that everyone should agree upon but that, if accepted, would revolutionize the way many have thought about markets over the past three decades. Was that your intention?
Eliot Spitzer: The problem we have faced is a simplistic pseudo-analysis of markets by an ideology of neo-libertarians that so diminished the role of government and rule-makers and enforcers that we lost sight of first principles. How do markets really function? People who listened to Alan Greenspan over the years would have totally misunderstood what is needed to insure integrity in the marketplace. So I wanted to set out a simple rationale for genuine enforcement—one that drew on the cases and lessons I learned in my period in government service.
DJ: In the book you claim that only government can ensure the integrity, transparency, and fair dealing of markets. But you also offer many examples of how government has failed to ensure these things in recent years. A libertarian might conclude from your examples that government can’t ensure these things. How would you respond to this reading of the evidence?
ES: I explain that government has an obligation to ensure integrity, transparency, and fair dealing. That does not mean it will do so at all times. Indeed, the record of the past several years indicates that when enforcement agencies lose their spine or purpose, or are taken captive by the industry they regulate, bad things happen. We have seen all of this with great frequency in the past cycle of abuses. But surely, nobody in the private sector has stepped in to fill the void left by the need for integrity in the market, and my effort is designed to explain how important it is that we not lose sight of the critical role that government can play in this space.
DJ: How do you galvanize public support for your proposals when the recent results have been so demoralizing?
ES: Probably the movie Inside Job will do more to galvanize public support for a more vigorous effort than anything I can do. Maybe if a few people look at the historical record and realize that prosecutions followed by a coherent regime of rules brought us 50 years of relative banking tranquility—after the Great Depression—the public will support some form of redefinition of the banking structure.
DJ: It seems that whether Democrats or Republicans are in charge, whether the president is Reagan, Clinton, or Bush, the pro-business weakening of market regulations continues apace. How do you protect a regulatory system from regulators put in place by a party that is anti-regulation? Is putting the right people in the right places all we need?
ES: The political environment has been a disaster. Neither party has the backbone to stand up to the financial sector. The current treasury secretary [Timothy Geithner] was a key architect of the system that failed, and as a consequence he has opposed real structural reform.
Putting a few aggressive prosecutors in place will surely help—not prosecutors who will bend the moment they are called by CEOs or a treasury secretary interested in preventing a real investigation.
DJ: Your book also criticizes Timothy Geithner for being too accepting of “too big to fail” banks. But given the current state of our financial system and our economy, is it possible for any treasury secretary to take a harsher line on “too big to fail”?
ES: Sure it is. Geithner is a proponent of the status quo. He created it and opposed more fundamental reform. The first meager proposals out of the Obama administration were a reflection of his views. A treasury secretary more willing to seek fundamental reform could do a great deal. Look what FDR accomplished.
DJ: You call recent executive compensation practices an “outrageous betrayal of fiduciary duty.” Do you think it was worth it for the Obama administration to hire a pay czar? Or are there better ways for government to control excessive compensation?
ES: The issue of pay is one for shareholders to deal with. There are perverse incentives in the capital structure of banks that regulators can also deal with, but at the end of the day it is up to shareholders to get active. There are institutional shareholders who should play a much more vigorous role than they have so far.
DJ: If government is going to play its proper role in regulating markets, don’t we also need campaign-finance reform to ensure that government officials aren’t overly influenced by donations from corporate interests?
ES: Yes, campaign-finance reform is important, but a few prosecutors with backbone could succeed even without that. I don’t want people to hide behind the excuse that it is impossible to do anything now. It is possible—if people are willing to stand up to some powerful interests.
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