Mike & Co. –
For better or worse, there have been few repercussions thus far among electeds or the media regarding the recent exchanges on financial regulation policy from the campaign trail this week (see photo below). The differences in the nature of the candidates’ proposals doesn’t appear to be clear and sufficient to generate much momentum one way or the other.
But as relevant legislative activity on the Hill hasn’t geared up quickly yet, we have time for a closer look below at the financial regulation discussion. Tomorrow, the road ahead on tax policy on the Hill.
The proxy pas de deux this week featuring New York City Mayor De Blasio and Sen. Elizabeth Warren on financial reform has passed for now but drew some notice. Tie goes to the front runner, for the moment.
The Mayor had not endorsed, governs in the heart of the nation’s economic capital, and has street cred when it comes to progressive community and Wall Street. So his clear preference for the HRC financial regulatory reforms plan over that of Sen. Sanders was dispositive and the comments of Gary Gensler at the outset had blunted Sanders’ salvo and provided enough coverage for now.
Sen. Warren hasn’t endorsed a Democratic candidate for president yet either. She may have had a preference for the Sander’s package of reforms but did not endorse and named HRC in a tweet praising all the Democratic presidential candidates alike on “fighting for Wall St reform.”
The discussion may well move back to the wayside in short order but it is thematically significant enough to the premise of the Sanders campaign that it is likely to be revisited. So though this round — a muted draw — is done, another engagement on the front can be expected before the finish line.
Where will it likely come from? A quick look here at two leading possible policy trigger areas that have been central to the discussion, Glass-Steagall and Too Big to Fail” (aka Break up the Banks).
- Reinstating Glass-Steagall–
Asked to identify the biggest policy problems and industry practices that resulted in the financial crisis of 2008 and the deep recession that followed, few laymen would put the evisceration of Glass-Steagall at the top of the list. Nothing akin to restoring Glass-Steagall came up for a vote in the immediate post-crisis years. The Obama administration has come under occasional criticism for opposing its reinstatement in some form.
On Tuesday, Sanders embraced “a 21st Century Glass-Steagall Act, introduced by my colleague Senator Elizabeth Warren, [which] aims at the heart of the shadow banking system… In my view, Senator Warren, is right. Dodd-Frank should have broken up Citigroup and other ‘too- big-to-fail’ banks into pieces. And that’s exactly what we need to do. And that’s what I commit to do as president.”
At the end of the day, Glass-Steagall is probably MEGO material to all but the most activist voters. What does it matter if it doesn’t make as a consumer better or get rid of TBTF — which has spread much further into the lexicon than G/S while “break up the banks” is a rallying cry for some in the base.
The more proximate causes include some other problems identified by Sanders in his speech, such as getting a grip on systemic risk, which gets attention.
- TBTF/Break up the Banks–
A less-defined but more resonant concern is the faith of most Americans that Dodd-Frank will prevent post-2008 bailouts at their expense. It is small solace that TARP returned a profit for taxpayers who will never see the return and whose paychecks haven’t grown similarly. No one wants to make another reverse transfer of wealth on that scale in the teeth of a recession again.
So it matters whether Dodd-Frank’s Titles I and II governing systemic risk work or not. Thankfully, they remain untested. Opinion on their efficacy in the face of a crisis is diverse but it is admittedly a minority that believes the procedures in place should be given a chance to work in the absence of some better design.
The most popular view in almost all quarters is that maybe Dodd-Frank’s operations would handle a one-off, single-firm liquidity crisis but would be overwhelmed by a full-blown simultaneous sectoral contraction. So there is probably a policy that can address this ambient but legitimate concern without undermining the essential structure of DFA Titles I and II.
Quick postscript on the discussion that got some notice. In his speech, Sanders said: “Shadow banks did gamble recklessly, but where did that money come from? It came from the federally insured bank deposits of big commercial banks—something that would have been banned under the Glass-Steagall Act.”
It is false that Glass-Steagall banned commercial banks from lending to investment banks. Many academics and analysts agree with HRC that Glass-Steagall wouldn’t have prevented the crisis, because it wouldn’t have directly addressed the activities of problem firms such as insurer AIG and the investment banks Lehman Brothers and Bear Stearns.
Two additional perspectives…
Independent Community Bankers of America: Glass-Steagall did not ban commercial banks from lending to investment banks, but I don’t think that was Sander’s point. The repeal of Glass-Steagall made lending to investment banks moot. The repeal of Glass-Steagall made commercial banks and investment banks one and the same. So all those relatively cheap insured deposits were there for the taking and for use in high risk and speculative trades. Lending became unnecessary.
Americans for Financial Reform: Big commercial banks like Citibank and JP Morgan provided all kinds of support to shadow banking after the repeal of Glass-Steagall. They had massive exposures to ‘toxic assets’ and to failing investment banks through the securitization, repo, and derivatives markets, not through conventional lending. Preserving the original Glass-Steagall would have prevented some of those exposures, and the modernized 21st Century Glass-Steagall Act that Sanders has endorsed would ban almost of them.