How Hillary Outmaneuvered Bernie on Wall Street Excess

One of the things I was looking most forward to in last night’s Democratic presidential debate was seeing how Bernie Sanders would challenge Hillary Clinton on curbing Wall Street. Sanders, a socialist, has made some serious noise about the need to push back against unfettered capitalism and the growth in the power of the financial lobby, rightly citing the rise of finance (and the 1% it enriches) as one of the causes of income inequality in the US. Hillary Clinton, on the other hand, had been fairly timid until quite recently about speaking out against Wall Street—where some of her biggest supporters come from. To the extent she had, she’d seemed to have been pushed into that position by both Sanders, and Massachusetts Senator Elizabeth Warren.

Until last night. Despite Sanders’ tougher positions—he wants to break up big banks and go way beyond the Dodd-Frank banking regulation—Hillary was able to put forth a more sophisticated message about the financial system during the course of the first Democratic debate. She clearly understands what’s happening on the Street. Whether or not she really wants to stop it is another question.

Both Sanders and O’Malley pushed hard on the need to separate commercial and investment banking via a 21st century version of Glass Steagall, the Depression-era banking regulation that kept the financial system relatively safe, that is, until Clinton’s husband repealed it. (BTW, CNN debate host Anderson Cooper did a nice job explaining to everyone what Glass Steagall actually entails.)

That line of debate could have gone badly for Hillary, but she smartly pivoted and pointed out that the risk in the financial system today is less about Too Big To Fail banks, and more about “shadow banking,” the less regulated and more opaque part of the market that includes money market funds, hedge funds, private equity, etc. She’s right about that. Shadow banking has grown like topsy since the financial crisis, in large part because big banks have deleveraged their balance sheets and risk has migrated to the shadow areas of finance.

By pointing out that her opponents might “lose the forest for the trees” by focusing too much on breaking up big banks, she was able to both avoid alienating the financial lobby and also seem well-versed in the nature of financial risk today. Sanders, by contrast, wasn’t able to connect the dots between the growth of inequality and the percentage of wealth that’s being taken by finance in a way that resonated with the general public. (The key stat, which is that Wall Street creates only 4% of jobs but takes almost 30% of corporate profits, went unmentioned by any candidate.)

Meanwhile, there were topics like corporate pay and how it got so high (in part because of legislative shifts made under Bill Clinton which allowed for more pay in stock options) that went unmentioned. All of these things—the growth of finance, the rise of executive pay in stock options, the short-term type of capitalism it encourages, and the inequality that engenders—are connected. That’s a message Sanders should have drawn out much more clearly.

As it was, he just seemed angry at bankers and at the system, while Hillary seemed to be saying, pragmatically, “We’ve made a start at re-regulating the financial system; now let’s figure out how to finish the job.” I’m not yet convinced she’s serious about doing that. If she is, it would mean facing up to the legacy of Clintonomics and how it weakened the very middle class that Hillary now claims to support. That’s bound to be a tricky topic for her.