Spitzer for Governor

But, even as Republicans invoke pleasant-sounding slogans at every turn, they pursue policies that undermine the values they claim to represent. Take the following three recent scandals: conflicts of interest among Wall Street analysts, who duped small investors with tainted research; predatory lending, which imposed illegal and unconscionable mortgages on homeowners; and illegal practices of mutual-fund traders, who skimmed billions from people saving for their kids' college tuitions and their own retirements. In each of these situations, the Bush administration and congressional Republicans not only impeded the investigations but actually proposed legislation that would preempt the ability of state regulators to combat the problems.

Through these and other actions, the Ownership Society is revealed as an empty slogan that should have been turned against the Republicans. Some might say that this is an unduly negative approach, certain to turn off voters. I disagree. Highlighting the disconnect between the Republicans' sound bites and the alarming reality of their policies is fair game. And it would have been an even more effective strategy if coupled with a passionate articulation of our commitment to fairness and equal access to the American dream.

Democrats have to explain why the government must act when the markets are manipulated and working people are harmed. Teddy Roosevelt understood this nearly a century ago. His trust-busting and environmental activism were meant both to protect citizens and to restore the integrity of the markets. He said, "We demand that big business give people a square deal; in return, we must insist that, when anyone engaged in big business honestly endeavors to do right, he shall himself be given a square deal."

Instead of fighting for a square deal for all, Republicans today place corporate interests ahead of consumer interests. When regulators, such as those in my office, try to call them on their cronyism, they portray our efforts as bureaucratic meddling in free markets. But we did not investigate Wall Street because we were troubled by large institutions making a lot of money; we took action to stop a blatant fraud that was ripping off small investors. We sought to right the wrong, reestablishing the level playing field that is a prerequisite to market competition and ensuring that every investor enjoys the same opportunity to profit that the insiders have.

The most common criticism you hear from Wall Street is that Spitzer, who's now wrapping up a similar investigation of Salomon Smith Barney (a division of the financial conglomerate Citigroup), doesn't know what he's doing. "Spitzer is a wild man," one Wall Street veteran recently complained to me. "He can do enormous damage." But the more you know about Spitzer, the more you realize that what such critics mean isn't so much "damage" as "change." In fact, Spitzer knows exactly what he's doing. A former law review editor, he has a voracious appetite for detail--he frequently tries his own cases, something unusual for a state attorney general--and a hyperrational approach to reform. As Spitzer explained the analyst/investment-banker issue to me, "It's difficult because it poses theoretical issues about who needs research, how it's used, how you pay for it, how the marketplace will get access to it. Good people sharing common objectives could still disagree about what the best formulation on that one is."

In the next couple of weeks, Spitzer and SEC enforcement chief Stephen Cutler are expected to announce a "global settlement" that will apply to all the major Wall Street firms and will, once and for all, resolve those theoretical issues. Though the details are still subject to negotiation, early reports suggest it will require companies to subsidize independent research for their retail customers--something that could cost as much as $1 billion over five years--and to hire an internal "ombudsman" to see to it that the research is distributed properly. The agreement will also use the Merrill settlement as a benchmark for levying fines, which could run into the hundreds of millions of dollars for firms like Citigroup and Credit Suisse First Boston.

Increasingly, even people on Wall Street are grudgingly conceding that Spitzer's efforts have been largely on target. There is ready acknowledgement, for example, that analysts at Merrill and Salomon breached the so-called "Chinese Wall" that's supposed to separate research and investment banking. "The impression I have is that, in their eagerness to increase market share, Blodget and, to a larger extent, Grubman threw the rule book out," says one longtime Wall Street lawyer.

We are told we live in the New Economy, an economy of computers and fiber-optic cables, capital without borders, and competition on a global scale. This is mature market capitalism, and its promise for human advancement--when combined with democracy and individual freedom--is rightly touted at every turn. But, if our economy is a creature of the twenty-first century, our thinking about government's role in the economy is mired in the nineteenth.

Two essentially opposite viewpoints dominate today's debate. On one side are those who see market capitalism, loosely regulated and unencumbered by the artificial interventions of government, as perfection itself. They argue: Leave the markets alone, let them work, and efficiency, choice, and progress will follow. On the other side are those who argue that, as miraculous as the capitalist experiment has proved to be, free markets cannot be left unchecked. To maintain a just and equitable society, they say, markets must be protected from their natural tendency toward excesses that lead to monopolies and unfairness. In this scheme, government's role is to put the brakes on capitalism and to protect the public from market forces through its power to tax and regulate.

This conflict has often been reduced to caricature--heartless laissez-faire capitalists versus meddling government bureaucrats. But this characterization presents a false choice. If there is one lesson that can be gleaned from the New Economy, Illustration by Alex Nabaumit is that the government's proper role is neither that of passive spectator nor lion tamer. The proper role of government is as market facilitator. Government should act to ensure that markets run cleanly as well as smoothly. It should prevent market failures and right them when they occur. And it should ensure that markets uphold the broad values of our culture rather than debase them. In this vision, government action is necessary for free markets to work as they are intended--in an open, competitive, and fair manner. In this vision, government helps to create, maintain, and expand competition, so the system as a whole can do what it does best: generate and broadly distribute wealth.

Where government has retreated from these core responsibilities, economic dislocation and decay have followed.