How the Gods of Finance Could Help Solve the Fiscal CliffBy
People who worked in Congress and for the George W. Bush administration back in 2001 have told me Alan Greenspan’s support of the proposed Bush tax cuts was a turning point. Greenspan was chairman of the Federal Reserve at the time, but also a kind of magus, a conjurer of that decade’s economic expansion, and after he said tax cuts would, indeed, be good for the economy, it was that much harder for members of Congress to oppose them.
That came to mind recently after the Financial Services Forum, a lobbying group for banks and insurers, released a letter they wrote Congress and President Obama, asking Washington to avoid the fiscal cliff. “We urge you to negotiate a bipartisan agreement as quickly as possible,” the letter reads. “We further urge you and your colleagues to enact legislation that truly restores the nation’s long-term fiscal soundness.” Lloyd Blankfein of Goldman Sachs signed it, as did Jamie Dimon of JPMorgan Chase, Brian Moynihan of Bank of America, and 12 other CEOs of large financial institutions.
The letter is right: Congress and President Obama must avoid the short-term pain of the fiscal cliff and produce a long-term solution to the deficit. And almost no one in Washington could contest how right the group is—which is exactly why the letter is worthless. Here 15 magi have the power to bestow a gift, maybe even a Greenspan moment. But instead of these wise men giving members of Congress permission to buck their own parties, the CEOs fail to explain what such a bipartisan agreement should look like.
The argument about the deficit doesn’t swing on whether, but on how. The president believes we should invest in education and infrastructure and raise the top tax brackets. It doesn’t seem that this will reduce the deficit much, but in his budget he agrees that a long-term plan is important. Mitt Romney wants to lower tax rates and get rid of some tax deductions. This doesn’t seem plausible, but it’s hard to say, since he won’t name which tax deductions will get jettisoned. It’s not clear at all what Senate Minority Leader Mitch McConnell and Majority Leader Harry Reid want. Each agrees with the Financial Services Forum on the need to avoid the fiscal cliff and come up with a long-term solution. But it’s the solution and the avoiding that keep eluding a consensus.
Rob Nichols, the Financial Services Forum’s president, explains that the point of the group’s letter is simply to contest the idea—which the forum’s members believe is spreading—that a leap off the fiscal cliff is in any way an acceptable option. “That becomes a pretty ugly Q1 for the United States of America,” he says. “I would suggest that would cause a great degree of market harm and turmoil.” Nichols worries that if Washington doesn’t legislate itself back from the cliff, it will send a signal to ratings agencies that it’s unable to solve problems. This might cause another credit downgrade and raise borrowing costs. Bad for the United States of America, yes. In particular, bad for Nichols’s member companies.
All the more reason, then, to give Washington a hand—to put the weight of the collective wisdom of 15 heads of finance behind, say, higher taxes, or a simpler tax code, or lower taxes, or somebody’s plan for entitlements, or … something. Anything. (In an interview on CNBC earlier this month, Blankfein suggested he’d pay higher taxes as part of a comprehensive solution.) Nichols disagrees that he’s missing a Greenspan moment. To suggest a policy “makes sense in a month, not today. Once the election’s behind us, we’ll know who all the players are,” he says. The Financial Services Forum is in the business of not just furthering its members’ policy goals, but protecting their reputations. It’d be tough to get caught on the wrong side of an election.
In the meantime, though, there can be no bipartisan agreement, as the lobbying group urges, because there is no agreement. It’s encouraging that Blankfein, Dimon, and Moynihan want to avoid the fiscal cliff. So do the rest of us. But they can do what few of the rest of us can—nudge Washington to turn in one direction or another and actually avoid it.