Washington's relationship with Wall Street is growing more schizophrenic by the day. On the one hand, Congress is trying to show how tough it can be on the financial sector by enacting a law ostensibly designed to prevent another near-meltdown and taxpayer-supported bail-out. As the mid-term election looms, a staggering number of Americans remain unemployed or underemployed, and most Americans blame Wall Street (whose top bankers are raking in almost as much money as they did before the crisis). The lawsuit launched by the Securities and Exchange Commission against Goldman Sachs for alleged fraud only confirms the view held by many that the economic game is rigged.
On the other hand, both parties are going to Wall Street seeking campaign donations to fund critically important television advertising in the months ahead. After all, the Street is where the money is, and TV ads demand huge amounts of it. In recent years, the financial industry has become the second-biggest source of campaign contributions in America - just behind the healthcare industry.
Even as Congress debates legislation to tame it, Wall Street is conducting a bidding war between the parties for its continued beneficence. More than 60 per cent of the $34m given by the financial industry to fund the 2010 elections has so far gone to Democrats, but since January the Street has switched its allegiance to the Republican camp. In the first quarter of this year, Citigroup, Goldman, JPMorgan Chase and Morgan Stanley donated twice as much to Republicans as to Democrats.
It is hard to bite the hands that feed you, especially when you are competing for food. The finance reform bill emerging from Senate Democrats takes a hard line in many respects - requiring that most derivatives be traded on open exchanges where buyers can see what they are getting and sellers have adequate capital, establishing an agency to protect unwary consumers from predatory lending, and giving the government authority to wind down the activities of banks that get themselves into trouble. Democrats point to these and other features as evidence of their willingness to be strict with the Street, despite their dependence on its generosity.
But the American public has no independent means of judging how tough the bill really is. Most people do not understand the intricacies of finance, and still do not know exactly what Wall Street did to bring the economy to the brink. The dependence of both parties on the financial industry for political support inevitably feeds suspicions that the bill is not nearly tough enough. Why, for example, are so-called "customised" derivatives exempted from the exchanges? Does this not create a big loophole? Why does the bill not limit the size of banks so none can again become "too big to fail"? Why is the Glass-Steagall Act - which once separated commercial from investment banking - not being fully restored? Why does the bill not separate investment banking from the private banking and wealth management activities that got Goldman into trouble?
It does not help that in recent months both parties have held at least three-dozen fundraising events with Wall Street bankers and their lobbyists. Harry Reid, the Democratic Senate majority leader, has trekked to Wall Street cup in hand, while in February and March the National Republican Senatorial Campaign Committee invited financial industry executives to pony up $10,000 each for the chance to confer with Republican senators.
Tight connections between Washington and Wall Street are nothing new, of course, especially when it comes to Goldman. Hank Paulson ran the bank before becoming George W. Bush's Treasury secretary. Robert Rubin followed the same trajectory under Bill Clinton, then returned to Wall Street to head Citigroup's executive committee. Dick Gephardt, the former Democratic House leader, lobbies for Goldman. Some 250 former members of Congress are now lobbying on behalf of the financial industry. President Barack Obama himself received nearly $15m from Wall Street during his 2008 campaign, of which almost $1m came from Goldman employees and their families.
But politicians cannot continue to have it both ways. Given the Street's excesses, Washington's continued financial dependence on it is eroding trust in government. The distrust has already helped spawn the so-called "Tea Party movement" of disaffected Republicans. Many Democrats and Independents are no less cynical.
If Washington knew what was good for it and the nation, it would sever its financial connections with the Street. Better yet, it would enact legislation seeking to limit the impact of private and corporate money in politics. That goal is made more difficult to achieve by the grotesque recent Supreme Court decision (Citizens United vs. Federal Election Commission) holding that corporations, including financial firms, have the right to spend unlimited amounts on political campaigns. But there are ways around this, such as more generous public funding for candidates that choose not to take private contributions. Hopefully as well, the president will nominate Supreme Court justices who understand the importance of public trust in democratic institutions, and the difference between companies and people.