As New York Attorney General, Eliot Spitzer prosecuted Wall Street executives for a range of financial crimes. He increased the profile of his office and pushed for political reform, drawing controversy for his unconventionally aggressive tactics. In 2006, Spitzer easily won the New York gubernatorial election. He came into office promising major reforms, but ran into opposition from entrenched interests in Albany. Since resigning as governor in 2007, Spitzer has appeared in various media outlets.
The Politic: What do you think is the most important issue facing the nation today other than the economy?
ES: I think the deepest issue is the decline of the middle class. I’m not sure this is an economic issue; I think it is a social issue. The creation of the middle class was perhaps the greatest accomplishment, or one of the greatest accomplishments, of the past 80 to 100 years in American society: we permitted wealth to accrete to not just those in the top of the social spectrum. What we’ve seen over the last 20 or 30 years, unfortunately, is a reversal of that trend. Middle class incomes are dipping, income distribution is getting less equal, and the more egregious elements of the problem, which is the wealth creation at the very top, are staggering and akin to what we would have seen in the Gilded Age or earlier times in history which we would look back on as an appropriate social contract. So I think figuring out how to maintain the dynamism of capitalism while somehow buttressing the role of the middle class is the greatest challenge.
The Politic: What are some concrete steps you could take to help the middle class?
ES: Much of it has to do with intellectual capital, I think—somebody at Yale, you understand. Looking at the world around us, the twin realities of globalization and technology mean we are competing in a different world and on a very different playing field than we were 50 years ago. We cannot take it as a given that American manufacturing, or American creativity, or American innovative skills will necessarily be better, faster or more astute than those that dominate in the rest of the world. The only way to stay ahead is to change, and to study, and to get smarter. The intellectual capital that will differentiate us is where we need to invest, and that is what our great universities hopefully are doing. The more deeply into our society that we can extend those skills the better off we’ll be.
The Politic: What are the most important skills for Americans to learn?
ES: I think innovation. Anything that can be repeated can be done elsewhere. Anything that is repetitious, that is rote process, will have a pressure for it to migrate to some other part of the world. Therefore, where we need to be most nimble is in our capacity to continuously see what is changing and adapt to it.
The Politic: What do you see as the priorities for New York?
ES: I think New York is fortunate that we have New York City. New York City is unlike any other city in the nation, it is a center of dynamism, intellectual ferment, and the destination of virtually all young, talented, progressive, and ambitious people. So if we agree that intellectual capital is what drives economic growth and will make any urban area succeed, New York will continue to get that inflow of great human talent, both domestic and international. So we are in a pretty good state. Even if you believe that New York City has the inflow of human talent, we still have a housing shortage; we still have infrastructure problems; our K-12 educational system is not what it can be and must be, our public higher educational system must be improved. Those are things we need to look at. The rest of the state needs to refocus on a business model. While in office, I was trying to use higher education and the web of public higher educational institutions and private higher educations institutions as an economic driver, which I think can work, but it will take some doing. New York City, extended up the Hudson and Long Island, the suburban ring, is still and will continue to do well economically because of what we talked about, but the non-downstate part of New York State has a deeper problem.
The Politic: What do you think is missing in our current financial regulation?
ES: What is missing is still an element of balance between the risk that can be undertaken by major institutions and their actual exposure to that risk. And by that I mean that when you have too big to fail institutions that are overtly guaranteed by the federal government, the tendency and incentive is for them to undertake risks and lending practices that will be excessively risky for those whose guarantee is at stake — the taxpayer — and not sufficiently balanced by those who are making the decisions. And the reason for that is that we have a system where we guarantee their risk and they manage to maintain the upside profit. That is why Paul Volker wanted to eliminate proprietary trading from entities that have a federal guarantee and why some effort to do that is underway to do that but we have not gone far enough in that process.
The Politic: A lot of the rules mandated by the Dodd-Frank financial reform have yet to be written. If you were a regulator, what would be your priorities in writing them?
ES: I think that it’s simplicity. I am a believer that rules should be easily enforced and fairly understood by both those who have to play by them and those who enforce them. Simple principles are better than a multitude of very arcane, hard to understand guidelines. Now, that isn’t always possible in a context where you are making tough judgment calls. In the context of proprietary trading, for instance, the Volker rule is a very complicated rule. So simplicity is one. Next, I would have preferred to see some greater effort to restore a more stable retail banking system, where we separated commercial and investment banks. I think they are very different entities. One deserves and often requires a federal guarantee—certainly the depositary functions played by institutions. We want savers to feel comfortable, so there you want a guarantee. You don’t want that guarantee in the investment banking side of the business. Finally, I would have preferred to see some greater limits on scale, because I think size alone begins to become hazardous to the health of the financial system. And those are all potentially throwbacks to the environment we had when we had relative banking stability between the New Deal—or the Depression, which led to the creation of the New Deal rules—and the bubbles of the past decade. Obviously those principles become more complicated when they are drafted into particular rules. Nonetheless I would say those would be good principles to use.
The Politic: Where do you see the financial industry in 10 years?
ES: I don’t pretend to be able to predict where things will end up. I think the natural ebb and flow in finance is such that the return to most of the major institutions has come down significantly from the period during which we have seen so many bubbles — credit bubble, housing bubble, internet bubble — which created a false return to capital in the finance sector. We have yet to understand exactly where the equilibrium point will be and have yet to restore finance to its proper and necessary role, which is aggregating capital and distributing it to sectors that will then deploy that capital productively. That is what finance needs to do. The underlying driver in the past decade has been more of a casino mentality, where risk was detached from the possible upside reward that it produces capital.
The Politic: How would you evaluate President Obama’s first term?
ES: I think he was handed, and I think history will acknowledge this, about as bad a set of cards one can imagine: we were dipping into what was almost a depression, and there was no easy answer to restore our economic stability. So as of now, I think people can look at several significant accomplishments. One, he stabilized the economy, and there is some marginal trend to job growth even though I said the issue of wages and middle class income is still a very deeply troubling backdrop. Still, he stabilized the economy and stopped what was a dramatic free fall. He passed a healthcare bill that was obviously fraught with tension, conflict, and controversy, but it will extend healthcare to millions of Americans. That is definitely an accomplishment. He has done well on the international scene in terms of confronting terrorism and the challenges that we face from nontraditional state players. The success when it comes to the Middle East or the relationship with Russia or the relationship with other countries — such as Pakistan and India—is more ambiguous clearly, but certainly the success when it comes to al Qaeda, bin Laden, and nontraditional threats to the nation has been quite good. I think those three accomplishments are quite a meaningful argument for him to say, ‘ok guys’ given where I began this isn’t so bad; I think I’ve earned a second term. I think he has a winning mark.
The Politic: Looking at the Republican primaries, do you see a new direction for the Party?
ES: Well, I still think that it’s likely that Mitt Romney is the nominee. It’s been a messier process for him than he wanted, obviously. There have been a number of Republican alternatives, each one of whom have had a moment, from Rick Perry to Michelle Bachmann to Herman Cain to Newt Gingrich, now it’s Rick Santorum. I don’t know if at the end of the day, any one of them can capture as large a piece of the Republican Party as Mitt Romney. The problem Romney has is that I see at least three different pieces of the Party that are vying for leadership. One is the libertarian piece of the Party, which is the Ron Paul faction. Another is the social conservative faction, which is Rick Santorum. Then you have the more traditional corporate conservative piece of the Republican Party, which is somewhat more moderate on some of the social issues and somewhat more pragmatic on some of the economic issues, and it’s basically the party of corporate leadership and business. Those three do not fit easily together. Mitt Romney is very much a product of the left, which is why the libertarian piece of the Party is uncomfortable with him, and why the social conservative part of the Party is uncomfortable with him. But there is nobody out there who has withstood scrutiny who could appeal to all three of them, as of now at least.
The Politic: Do you see the potential for a third party candidate in 2012?
ES: Well, I don’t think we know yet if there will be a third party candidate of any great significance. The Libertarian Party occasionally makes noise about having a candidate. Whether that amounts to much if it’s not Ron Paul is open to question. I think the remaining candidates in the Republican primary field have been pretty clear that they will endorse whoever comes out of the Republican convention as the nominee.
The Politic: Do you see anyone as the future of the Democratic Party—maybe a presidential candidate in 2016?
ES: No—I hate to make predictions like that. I mean it could go seriously amiss. I think that the beautiful thing about politics is that there is always regenerative, ferment, lack of predictability. Nobody in 2003 could ever have predicted that Barack Obama would be the next president. The one thing I know is that there is absolutely no predictability to economics or politics, and that is what is both mysterious and exciting.
The Politic: Given the massive stalemate in Washington and the personal attacks, how can we move back to a more effective government?
ES: I think that much of the anguish right now reflects a deep ideological divide, and I don’t think people are mean or nasty or somehow angrier than they were either on Capital Hill or elsewhere. I think you have developments that really converge. One is a disagreement with Rawls and Keynes on one side of the aisle, and Nozick and Hayek on the other side—really quite a deep ideological divide. When you superimpose that on top of an economy that is no longer growing, politics gets angrier. That is what, I think, explains the tension right now. There’s always been an ideological debate about the size, role, and scope of government, and that is good and healthy—that is what we should have. But when that debate is superimposed upon a shrinking middle class with foreclosures that are off the charts, with high unemployment, and people get angrier and shorter of temper, that tension is reflected both in every local election and in Washington as well. So I think we have the same ideological battles we used to fight now being exacerbated by an economic reality that is more difficult. There are many things that could be done outside of the economy, in terms of campaign finance, in terms of gerrymandering, or in terms of people of goodwill sitting down and working together. All of that is certainly what we want and hope for. Having said that, as long as the economy is floundering, things are going to be dicey.
The Politic: Is the stagnant economy also the root of movements like Tea Party and Occupy Wall Street?
ES: I think that is where their appeal seems to be deeper today than it was ten years ago. When the economy is growing, when there was a sense of confidence, when unemployment was low, when housing prices were going up, the Occupy Wall Street argument about income distribution would have had less traction. The anger at government articulated by the Tea Party would have been less appealing. So certainly, those two pieces of our political spectrum have a more fertile territory to work with when the economy is situated where it is today.
