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Why is Wall Street worried about Gary Cohn's exit?

Gary Cohn's decision to leave the White House has Wall Street worried. As President Trump's top economic adviser, Cohn was a proponent of free trade. Now investors are worried that Trump will carry out his protectionist policies. 

Posted: Mar 9, 2018 12:14 PM
Updated: Mar 9, 2018 12:28 PM

Most observers today, including myself, bemoan the reason that Gary Cohn is leaving the Trump White House. The President's top economic adviser lost the trade policy battle with Trump and the protectionists around him, as the President insists he will impose tariffs on steel and aluminum -- and stock markets are falling as a result.

Still, I will shed no tears to see the former president and chief operating officer of Goldman-Sachs head for the exit. The White House-Goldman Sachs revolving door has been costly for the nation.

The central role of Goldman Sachs in national policy-making has been evident for a quarter century. Bill Clinton married the Democratic Party with Wall Street by bringing on Goldman-Sachs' co-chairman Robert Rubin, first as his economic adviser and then as Treasury Secretary (1995-1999). George W. Bush had Goldman chairman and CEO Henry Paulson as his Treasury Secretary (2006-2009).

Barack Obama's White House was staffed to the gills with Rubin acolytes. And Trump brought in Gary Cohn, along with Treasury Secretary Steve Mnuchin and former political adviser Steve Bannon -- all Goldman-Sachs alumni.

So what has been the result of Goldman's extraordinary run of power? There are a few glimmers of light and public service, and huge dollops of hubris and self-interest followed by disaster. The company owes the United States a huge apology and a generation of penance -- far away from power, I hope.

Rubin gets reasonably high marks for his early years as Clinton's adviser and Treasury secretary. He persuaded Clinton to manage a responsible fiscal policy, raising taxes early on, despite cries of doom from the Republicans. This led to budget surpluses, falling debt-GDP ratios, and a boom economy in Clinton's second term.

Yet this positive record was tarnished by three blunders. Rubin mismanaged the 1997 Asian financial crisis, helping to turn a financial hiccup in Thailand into a deep macroeconomic downturn in Asia. Two years later, Clinton, Rubin, Treasury Secretary Larry Summers (1999-2001), and former Federal Reserve Chairman Alan Greenspan presided over the dotcom bubble, which they had negligently allowed to build to excess.

By far the worst step was the Clinton-Rubin play in 1999 to dismantle the Glass-Steagall barriers between investment and commercial banking, which led willy-nilly to the too-big-too-fail syndrome that culminated in the 2008 financial disaster.

After repealing Glass-Steagall, Rubin almost immediately took up a cushy job at Citigroup, a newly created financial firm he brought about while Treasury secretary, collecting more than $150 million in compensation between 1999 and 2008. Citibank was poorly governed, and ended up in disaster after the 2008 financial crisis, requiring a massive government bailout to stay in business.

Nonetheless, Rubin's policy errors pale in comparison with the disaster that his Goldman successor Paulson committed in 2008. Paulson's tenure as Treasury secretary may indeed go down in history as among the worst in the nation's history, with one especially horrible decision: to push Lehman Brothers into an explosive Chapter 11 bankruptcy on September 14, 2008.

Paulson had no idea what he was about to trigger: the worst global financial panic in decades, with catastrophic declines of tens of trillions of dollars in worldwide financial wealth in the aftermath of the Lehman failure. The financial panic was followed by vast sums given to Wall Street in federal bailouts and cheap loans -- of course, not least to Goldman-Sachs itself, which eventually had to pay out billions of dollars in fines in response to charges of financial wrongdoing.

Ironically, though not coincidentally, presidential candidate Barack Obama immediately turned to Robert Rubin in September 2008 for advice on how to handle the exploding financial crisis. As President, Obama staffed the White House and Treasury with Rubin's protégés -- Timothy Geithner, Lawrence Summers, and Peter Orszag. They helped to stabilize the economy but also coddled the banks.

The Obama economic team, among others in the administration, gave Wall Street's malefactors a free pass, bailed them out, turned a blind eye to a return of megasalaries, and quickly welcomed them back to White House state dinners.

Gary Cohn's brief tenure in the Trump administration will not be kindly remembered by others than the financial elite. Cohn did not create a financial crisis like his Goldman predecessors. Instead, he spent his time in power to help implement a tax cut for the rich that will be remembered in history as grossly unfair, ineffective, and unaffordable.

The tax cut is being hawked by Trump and the Republican Party as a great success that has boosted employment, wages, profits, and the stock market. It won't look that way in longer-term retrospect. It will be remembered as a budget-buster that grossly exacerbated inequality, drove up public debt, and failed to do much, if anything, to spark overall growth and jobs.

Today we note -- and applaud -- Cohn's defense of free trade in the midst of Trump's mindless, ignorant, and dangerous assault on the international trading system. Bravo. Yet in the larger context, Cohn will be remembered more for the tax cuts and for serving a President who is a lout, a liar, and a danger to international peace and cooperation.

Goldman-Sachs' hold on power, and indeed the ongoing tsunami of corporate lobbyists and revolving-door business leaders holding the top ranks of Washington power, will represent the classic tale of how a democracy can be strangled by corporate largesse and influence.

Corporate leaders today are steeped in a culture of self-interest and wealth maximization, not the public-mindedness needed to be virtuous stewards of the common good.

There have been exceptions, even from Goldman Sachs (John Whitehead, deputy secretary of state in the Reagan administration, and Robert Hormats, whose government service includes serving as under secretary of state for economic growth, energy, and the environment under Obama, both distinguished diplomats), but they are exceptions in an age of corporate greed.

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