The Lost Generation

The Obama team is keeping its cards close to the vest. That’s probably a good way to manage expectations, good politics and it may even be good policy. Until the new team can get in place, there doesn’t seem much point in sending signals or taking responsibility for actions they cannot control. More to the point, the new administration is going to have to reconstruct the way Washington works from the ground up.

How so? Well, think about this comment from Steve Pearlstein in the Washington Post :

Now that even Alan Greenspan has finally discovered that markets are not always self-correcting, there is a temptation to declare deregulation a failure and expanded regulation inevitable. But any careful review of what went wrong in financial markets would quickly reveal that the problem wasn’t primarily that regulators had too little authority but rather that they had neither the resources nor the political backing to use it. The goal needs to be better regulation, not more. This is also the moment to transform the regulatory process from one based on rigid rules that invite gamesmanship on the part of business to one based on broad principles that will give government officials flexibility and discretion to respond to changing market conditions. And when the first industry steps forward to challenge his regulators, Obama needs to bring the full weight of his legal, political and moral authority to bear in beating it back . . . .

Better regulation requires better regulators. To accomplish what Pearlstein outlines, there needs to be a group of talented and confident people manning the regulatory agencies. But Washington hasn’t had a culture of regulatory power for a very long time.

Think about it. In the last eight years, can you name a prominent regulator who used his time in Washington as a stepping stone to better things? Michael Powell comes to mind. After that, it’s a long wait.

The imperatives of the current situation–where a large number of very large enterprises are coming under direct government control–demands that Washington be the destination of choice for the kind of the bright folks who used to go to Wall Street or even Silicon Valley. Look around at the commentary over the last few weeks–or look at the muddling through with AIG announced today–and you’ll see many doubting Washington’s capacity to oversee the auto industry, say, or manage a massive public works project that might masquerade as a stimulus package.

During the New Deal, Felix Frankfurter was a conduit for talent from Harvard Law School to Washington agencies that were being formed. Today, we have the agencies but the bodies just aren’t there. For more than a generation, the absence of regulatory muscle has made those jobs career quicksand. Now Washington needs bodies and Wall Street is shedding them. But do we really want all these out of work bankers getting on the Acela with their resumes? And if you think that’s a joke, read this little bit of scene setting from Vanessa Grigoriadis in New York Magazine a few weeks ago:

This is nuts—working for the government? The enemy of free markets everywhere? Could anyone have imagined a worse outcome for a Jerseyite Master of the Universe? The natural order of things has been upended. The meek have indeed inherited the Earth. For Wall Street predators, the top of the food chain, this has been the hardest thing to swallow. Before Bear and Lehman went down, and UBS announced major cutbacks, and Citi looked like it was going to nail a lot of people—before every single bank, except for highly focused boutiques concentrating on M&A, had started to fail—it seemed that to work at one was to be at a pinnacle, looking down. These are people who thought that they were the smartest guys in the city, and the world, smarter than government drones, naturally, and smarter than the guys they went to college with, because they used their impressive IQs for the only wised-up purpose: making money. Everyone else seemed to be missing the point.

But Grigoriadis’s anonymous banker did decide to work for the government. They needed his expertise; after all, he’d put together all of these collateralized depth charges, now it was his job to disarm them. But like all jobs in government, it’s a temporary thing:

He’s starting to hire low-to-mid-level managers, to help the Treasury Department with the bailout. “I get a ton of calls asking about what it’s like to work for the government,” he says. “I got a call from a guy in Florida earlier today, whom I worked with at Citi. He’s done, and he wants to know if the government wants a consultant.” He raises his palms. “Hey, it’s a stable paycheck and a guarantee of benefits.” There are some things he can’t get used to about D.C., like having to move around to different hotels, according to whichever one has subsidized rooms at the government limit of $150 a day, or not having an expense account. “I just pay for whatever I want and eat the bill,” he says. [ . . . ] He drained a can of Coke, then his mind began to wander. He was stressed about being out of the flow, getting stale. His friends are raising hundreds of millions of dollars at new funds, to buy distressed loans and other vulnerable assets. They’ve told him to hang in D.C. as long as he can, that the next generation of whatever is going to generate fast cash hasn’t been put together yet. But he was eager to figure out a way to reinvent himself.

So who does that leave us with? There’s a bit of lost generation here, isn’t there. Sure, some of the big New York law firms will loan out there best associates and a few young partners. Better that than lay them off–and the boys and girls will come back armed to the teeth with experience. Still, will that be enough?