Reining In, and Reigning Over, Wall Street

Conservative Joe Scarborough thinks she should be treasury secretary. Lefty Matt Taibbi thinks she should run for president. Wherever you sit on the political spectrum, it's clear that Elizabeth Warren, the Harvard Law professor charged with overseeing the government rescue of the financial system, has struck a nerve with her plain-spoken populism. She took time from preparing her students for their final exams to critique the Obama administration's efforts to stop foreclosures and to tell NEWSWEEK what she thinks is the real solution to our financial mess. Hint: it's not breaking up big banks. Excerpts:

People are talking about an economic recovery, but we haven't fixed the banks yet. Where is the urgency?The rise in the stock market has lulled some people into believing the crisis has abated. I read the data differently. Families are in more trouble than they were in a year ago, and a large part of the Wall Street boom is the consequence of government guarantees. That's not real recovery.

You've popularized the idea of creating an agency to protect borrowers from abuses like subprime lending. What do you think of Congress's efforts to make it law?The consumer-agency proposal that's been voted out of committee in the House is strong. It's got a couple of dings that I hope get corrected later, but the proposed agency has the power to reform a broken market. Sen. [Christopher] Dodd's first discussion draft is even stronger than the House version, which is a very good sign. But to get a prediction on what happens next, you need someone who understands Washington politics better than I do. It seems obvious to me what Congress should do, but I'm not the one in charge.

Congress is trying to reform financial regulation, and it can get a little abstract. Where should people focus?To restore some basic sanity to the financial system, we need two central changes: fix broken consumer-credit markets and end guarantees for the big players that threaten our entire economic system. If we get those two key parts right, we can still dial the rest of the regulation up and down as needed. But if we don't get those two right, I think the game is over. I hate to sound alarmist, but that's how I feel about this.

Should the government step in and break up the biggest banks?There are a lot of ways to regulate "too big to fail" financial institutions: break them up, regulate them more closely, tax them more aggressively, insure them, and so on. And I'm totally in favor of increased regulatory scrutiny of these banks. But those are all regulatory tools. Regulations, over time, fail. I want to see Congress focus more on a credible system for liquidating the banks that are considered too big to fail. The little guys aren't immortal; they pay for their mistakes. The big guys can't be immortal either. A free market cannot operate in a too-big-to-fail world.

Why are people so angry about the government's efforts to save the economy?Many Americans want to know if the people in Washington are on their side or on the side of the powerful banks. There should never be a doubt about the point of any government action: it should always be to help families directly, or help markets in ways that help families. If that isn't clear, I think the action is wrong, or the description of the action is wrong.