The True Reach of the Vampire Squid

February 16, 2020

The role of modern financial firms was originally thought of as separate from the political and geo-political sphere. Recently, modern finance has grown to play an increasingly pivotal role within political decision making, which has often been underestimated by onlookers.

This political capital banks hold is most visible in the Government of the United States of America as essential advisory positions to the Presidency are often held by those who’ve previously worked in the most senior positions within investment banking. This can be seen from the personnel within the Reagan administration up until the current personnel in the Trump administration. The most astute financial firm at exerting political power is that of Goldman Sachs whose intelligent strategy and skilled executives has ensured their influence within the majority of modern American political administrations. Goldman Sachs has had influential figures within Federal Government departments close to the President and has held positions  in every administration in the last 40 years. The tremendous power Goldman Sachs holds means that the firm’s indelible mark upon American public policy can be quite easily seen.

 

The archetype for Goldman in its enaction of political influence was John Whitehead. Whitehead was the first to move from CEO of Goldman to become an integral member of the Reagan administration. He was appointed Deputy Secretary of State in 1984 to serve under George Schultz. Whitehead fundamentally challenged many of the assertions of Ronald Reagan’s foreign policy advisers. He famously fought for the United States to contribute its fair share to the UN, fighting Alan Keyes over this position. Whitehead was unwilling to relent on his Liberal Foreign Policy stances even when he faced attack from the Heritage Foundation, a prominent Think Tank that had lobbied the State Department to more openly support anti-communist forces internationally. The power that Whitehead had in determining American foreign policy gave Goldman Sachs a place at the heart of the creation of international diplomacy. Goldman now had a say within US foreign policy. His previous experience within the banking industry gave Whitehead a unique insight into contemporary economic issues. Whitehead was at the forefront of the movement towards free trade and the globalisation of the world economy. The former Goldman Sachs CEO continued to advocate the GATT ideals of 1947 of bringing down trade barriers. The international deregulation of finance and the modern international flows of capital can be partly attributed to Goldman Sachs innovative political strategy, which enabled Whitehead to achieve a position of significant influence to refashion the global economy within Goldman’s internationally Liberal ideological framework.

The influence of Goldman is often falsely aligned upon American partisan grounds, but the political strategy of Goldman Sachs has been successful on a genuinely bipartisan basis. The Clinton administration of 1993 to 2001 was deeply influenced by the political expectations of Goldman Sachs. Within the Clinton administration, Robert Rubin the co-chairman of Goldman from 1990 to 1992 was given significant power to influence American economic policy. Rubin was given a place on the National Economic Council and later became the Treasury Secretary under President Clinton. Rubin was integral in the deregulation of finance that occurred throughout the 1990s. The most prominent piece of legislation that Rubin enacted in the domestic economic policy was his contribution to the repeal of Glass Stegall in 1999. This legislation allowed for the merging of commercial and investment banking, completely reshaping the sector in the United States. This policy has sometimes been identified as a contributing factor to the 2008 financial crisis through its allowance of potentially anti-competitive bank mergers, risking the stability of the American macro economy. Rubin was supportive of Alan Greenspan in his attempts to maintain an unregulated market in collateralised debt obligations and derivatives. The Treasury Secretary was integral to the formation of a new low regulation corporate environment that furthered the ideas of Whitehead under a Democratic President. Rubin shared Whitehead’s international economic vision and embedded it under President Clinton. As a Member of the National Economic Council, Rubin was part of the administration that formed NAFTA. This new free trading zone was something that Whitehead couldn’t manage to create, but Rubin’s influence in the NEC allowed for the United States to have a far more economically open relationship with Canada and Mexico in terms of capital, raw materials and labour flows. Goldman Sachs political strategy gained some of its highest returns during the Clinton administration as it not only continued the deregulation of the American market and international free trade but also ensured that Goldman had a positive relationship with both the Republican and Democratic party.

 

Within the Bush administration, Goldman Sachs played an instrumental role within the reconfiguration of the financial system. In George W. Bush’s second term, the sub prime mortgage crisis occurred. When the financial crisis began to take hold, former Goldman Sachs Chief Executive Hank Paulson was Treasury Secretary. This allowed Goldman Sachs to have a front seat in the formation of a new financial system once the crash had subsided. Paulson had advised Goldman Sachs to change its status from an investment bank to a commercial bank. Commercial banks were given government assistance after the crisis in a way that investment banks were not, using this information Paulson maintained the financial security of the Goldman from the heart of Federal Government. More importantly than the bank change was that Goldman Sachs had influence over TARP (Troubled Asset Relief Program), which provided $700 billion to stabilise the American economy and prevent a potential depression. The TARP program was created by Paulson and UK Prime Minister Gordon Brown. The first phase of the program centred on securing the solvency of banks and infusing capital into banks. The second phase consisted of reconstructing the securities market. Goldman Sachs’ political strategy had been so successful that the bank’s former Chief Executive was now brokering international economic strategies and reconstructing whole financial markets to be aligned to the interests of the bank. The close proximity of Paulson to President Bush meant that he could prevent the potential rejection of TARP by the House or the Senate. The House originally rejected the plan by 228 to 205, but Paulson’s relationship with the White House ensured President Bush would push the plan through the House of Representative, which was achieved on a second reading. Goldman Sachs was not only influential in reshaping the global economy after the subprime mortgage crisis but was also essential in pushing President Bush and later the House to support the deal.

 

Donald Trump had originally spoken of Goldman Sachs in incredibly negative terms. In the 2016 campaign, he spoke of the need to properly tax the investment bank whom he believed to be hard-wired into the rigged system of American governance. Despite this, the influence of Goldman Sachs has been as strong as ever under the Trump administration. Even critics of Goldman Sachs can’t deny the effectiveness of their political strategy. Under Trump, this influence has been exercised through the Secretary of the Treasury Steve Mnuchin and Gary Cohn, the former Director of the National Economic Council. Mnuchin and Cohn have had a dramatic impact on the changing relations the Trump administration has had with the finance sector and corporate America. Mnuchin has changed the tax regime of the United States markedly, reducing corporation tax to 21% and continuing reductions in capital gains tax. Mnuchin has arguably tamed Trump’s rhetoric on the financial sector by removing many articles of the Dodd-Frank legislation of the Obama presidency. Gary Cohn reportedly prevented Trump from exiting NAFTA before the renegotiation and ratification of USMCA, although Cohn later resigned his position due to Trump’s more protectionist economic policies. Goldman Sachs has been instrumental in altering the economic framework of the Trump administration through Steve Mnuchin’s Tax Cuts and Jobs Act of 2017 altering America’s domestic economic agenda and Gary Cohn’s persuasion of Trump to remain in a free trade area altering international economics indefinitely.

 

The political strategy of Goldman Sachs has been the among most powerful relationships between industry and Government ever seen. The influence that Goldman has managed to create and wield has dramatically altered the paradigm of international finance indelibly.

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