Billionaires for U.S. Financial Reform

What can President Obama learn from FDR’s success in reforming Wall Street 75 years ago?

February 4, 2010

What can President Obama learn from FDR's success in reforming Wall Street 75 years ago?

President Barack Obama should take heart. The attacks on him — whether from Wall Street, the U.S. Chamber of Commerce, Fox News or other self-appointed champions of the free market system — suggest they fear he might, in fact, save capitalism.

For that is exactly what happened to President Franklin D. Roosevelt, who managed to save it from its own excesses 75 years ago.

What is most remarkable about FDR's exceptionally successful drive to regulate the U.S. financial sector and cleanse it of its then-prevailing pathologies was the stature of the business titans who supported him.

The founding chairman of the Securities and Exchange Commission, after all, was none other than Joseph P. Kennedy. Mainly known today as the founder of a great liberal political dynasty, he was one of the most successful and notorious Wall Street operators of the Great Bull Market of the Roaring Twenties.

Quite contrary to the halo of his sons, old Joe Kennedy was no soft and sweet liberal idealist. Worse, he was a convinced isolationist and friend of Charles Lindbergh. Joe Kennedy was also openly anti-Semitic, as was his oldest son, Joe, Jr.

After his triumphs at the SEC, old Joe proved to a be a disastrous U.S. ambassador to Britain from 1938 to 1940, wrongly predicting that Britain was doomed to lose the war and that its Royal Air Force didn't have a chance of holding off the Nazi Luftwaffe.

But as SEC chairman, Kennedy proved to be an outstanding success. Although he was hated by the old-line Manhattan moneymen, he succeeded in his mission. It was a case of putting an experienced crook in charge of cleaning out the crooks.

The old East Coast wealthy underestimated Joe Kennedy, and failed to realize the real reason he supported the New Deal — and why he proved such a passionate, hard-working and successful SEC chairman.

Kennedy recognized that American capitalism and democracy were worth preserving — and had to be preserved, if the wealth and power he had accumulated were to be passed on to his own children. That was what guided him in his actions.

To be sure, Kennedy had his differences with Franklin Roosevelt, whom he ultimately grew to hate after his own son's death as a volunteer pilot in a high-risk U.S. Army Air Force bombing mission over the English Channel in 1944.

Still, Joe Kennedy was a Wall Street plutocrat and titan of American business who recognized that the financial regulation program of the New Deal was essential to restore national and international confidence in the U.S. financial system for generations to come. Joseph P. Kennedy was far from alone in that understanding.

These days, the late Averell Harriman is mostly remembered for an almost 40-year public life of exceptional achievement in the public sector. He was national security adviser, governor of New York State, U.S. ambassador to the Soviet Union and Britain, Secretary of Commerce, a crucial envoy from President Roosevelt to British war premier Winston Churchill — and even a major player in reassessing the U.S. role in the Vietnam War in the late 1960s.

What is not much remembered is that he entered public life as the son of E.H. Harriman, the monopolistic railroad baron of the Pacific Northwest. He inherited $100,000,000 of his father's wealth — and that was back at the start of the 1930s, when $100 million was still real money.

What propelled Harriman into public life was the same conviction that drove the fierce and uncompromising Joseph P. Kennedy — a passionately held belief that the Augean stables of Wall Street had to be cleansed before they could once again fulfill their function of attracting the investment and the trust necessary to restore and maintain prosperity.

And there were others. Before he took the oath of office in 1933, Roosevelt, staying in Washington's famous Mayflower Hotel on Connecticut Avenue, met his old friend, the extremely wealthy financier Bernard Baruch.

Baruch told Roosevelt that, if he defeated the Great Depression, he would go down as the greatest president in U.S. history. Roosevelt soberly replied that if he failed, he would be the last president. Baruch did not dispute the notion: He recognized what was at stake.

Roosevelt also appointed a freewheeling Texas businessman and self-made millionaire, Jesse Jones, as the founding head of the Reconstruction Finance Corporation. Jones proved to be another big success.

He, too, recognized the need to reform Wall Street and to regulate it carefully. Jones, like Joe Kennedy, saw clearly that the financial institutions of Wall Street had to be reined in. He also went on to serve as a notably successful U.S. Secretary of Commerce from 1940 to 1945.

It should also be noted that back in the 1930s, Winston Churchill, the adored poster-boy now for several generations of American conservatives, was loud and public in his admiration of the New Deal and Franklin Roosevelt's leadership of it.

This position did not involve any volte-face on Churchill's part. Like FDR, he was a son of privilege who had incurred the hatred of most of his class equals and contemporaries by supporting far-reaching liberal reform programs designed to alleviate the suffering of the poor.

Indeed, Churchill had played a leading role in UK prison reform and the creation of unemployment benefits, and also took the first steps towards establishing government subsidized health care in Britain with his close friend and political ally, then Chancellor of the Exchequer (British finance minister) David Lloyd George. They both served in the reforming governments of Herbert H. Asquith before World War I.

Past vs. present

Obama so far has not appointed any energetic reformers from the U.S. business community comparable to Joe Kennedy, Averell Harriman or Jesse Jones. On the contrary, he has reappointed Ben Bernanke to another term as chairman of the Federal Reserve and chose as his first Secretary of the Treasury a consummate Wall Street insider, Timothy Geithner.

Joe Kennedy's hands-on, aggressive and highly interventionist record as SEC chairman is particularly striking when compared with that of former Republican Representative Christopher Cox of California, who, as SEC chairman under President Bush, failed to anticipate any of the growing problems that led to the collapse of Lehman Brothers, the problems of Citibank and Bank of America and the entire financial tsunami of September 2008.

Nor did Cox take the slightest action to prod his SEC regulators into taking any notice of the serious warnings that Bernard Madoff's hedge fund was in fact a gigantic $60 billion Ponzi scheme, the biggest in modern financial history.

But then, Cox had had no experience in big business before being chosen by President George W. Bush to head the SEC. Like Bush, he simply believed in a highly bowdlerized version of Adam Smith for children: That the market was always wise and infallible.

Joseph Kennedy, Averell Harriman, Jesse Jones and Bernard Baruch, who had actually worked at the highest levels of U.S. finance, all knew far better than that.

Where are the Kennedys, Harrimans, Joneses and Baruchs of today? They actually aren't hard to find: Warren Buffett, who coined the term “weapons of financial destruction," is one obvious figure. Another one is George Soros, relentlessly reviled by demagogues on the right, not because he wants to destroy capitalism but precisely because he wants to save it.

The difference is that Franklin Roosevelt was ready to act boldly, and to appoint as his top financial officials and advisers men and women with a strong sense of justice, as well as financial expertise.

Barack Obama has only appointed and listened to plodding old spear-carriers of the conventional wisdom that brought the U.S. financial system to the brink of ruin. It isn't enough.

Takeaways

The old East Coast wealthy underestimated Joe Kennedy, and failed to realize the real reason he supported the New Deal.

Quite contrary to the halo of his sons, old Joe Kennedy was no soft and sweet liberal idealist. Worse, he was a convinced isolationist and friend of Charles Lindbergh.

Where are the Kennedys, Harrimans, Joneses and Baruchs of today? Think Warren Buffett and George Soros.

Baruch told Roosevelt that, if he defeated the Great Depression, he would go down as the greatest president in U.S. history.

Joe Kennedy was a Wall Street plutocrat who recognized that financial regulation was essential to restore national and international confidence in the U.S. financial system.