Banking, Bernie, Hillary
“Today I am pleased to sign into law S. 900, the Gramm-Leach-Biley Act. This historic legislation will modernize our financial services laws stimulating greater innovation and competition in the financial services industry… the most important legislative changes to the structure of the U.S. financial system since the 1930’s. Financial services firms will be authorized to conduct a wide range of financial activities… The act repeals provisions of the Glass-Steagall Act… It grants banks significant new authority to conduct most newly authorized activities…”
William Clinton, November 12, 1999
I am attaching a copy of an op-ed piece published in “the guardian”, most notably edited by them. Gordon Gekko may be my handle these days but not one I use to present serious issues. Alas, the press. Anyway read on:
Banking is the least understood, and possibly most lethal, of all the myriad issues at stake in this election. No candidate other than Bernie Sanders is capable of taking the steps necessary to protect the American people from a repeat of the recent debacle that plunged the nation into a recession from which we have not recovered.
The potential for a depression looms heavily on the horizon. As a trained economist who has spent more than 20 years on Wall Street – … – I know the financial system is in urgent need of regulation and responsibility. Yet Hillary Clinton is beholden to the banks for their largesse in funding her campaign and lining her pockets. The likelihood of any Republican candidate taking on this key issue is not even worthy of discussion.
The recession of 2007-2016, and the persistent transfer of wealth from the 80% to the 1% is, mostly the result of banking irresponsibility precipitated by the repeal of the Glass-Steagall Act in 1999. The law separated commercial banking (responsible for gathering and conservatively lending out funds) from investment banking (more speculative activities).
A new culture emerged that rewarded bankers for return on equity rather than sound lending practices. The wild west of risk-taking, staked on depositors’ money, became the best sport in town. Why not? If management won, they got rich. When they lost, the taxpayer took on the responsibility. If that sounds like a good wager, it was (and is).
The only problem is what happens when the music ends. Debt-to-capital ratios for investment banking functions rose from 12:1 to 30:1. Options on derivatives on other derivatives increased that leverage many fold. Self-regulation became the rule and, lo and behold, in 2008: crash. America and the world were nailed by a fastball from which the bottom 80% of the American population has yet to recover.
Remarkably, today the derivatives positions held by the large banks approach 10 times those of 2007-2008. In four banks alone, they exceed the GDP of the entire world. This is the interesting consequence when unchecked risk management rests in bankers’ hands.
When Clinton repealed Glass-Steagall, it was the culmination of the largest ever lobbying effort by the banking community to that date, $300m spent to convince Congress that Clinton, aided by Robert Rubin (US treasurer, previously with Goldman Sachs) and Alan Greenspan, a Milton Friedman-style supply-side economist, that the restraints on speculation should be removed. The banking community’s gratitude was and is unending. Who can blame them?
Wait, there’s more. After the collapse of 2008, the Federal Reserve invested more than $15tn to save the banks under the guise of monetary stimulation. At the same time, little or no funds were channeled to the needs of the American people. Yet today we face another crisis of liquidity. This time Europe will break first, followed by their highly leveraged US colleagues. Meanwhile, the bottom 80% of Americans remain mired in a recession, having seen no increase in their incomes during the last 20 years.
Poverty is at its highest level since the 1930s (in some areas of the country, higher). More than 30% of all children live with families subsisting below the poverty level. Employment is at a new all-time low (the percentage of employed persons is at about 49%, having been at more than 52% prior to 2008).
The average American is entitled to more. Only Bernie Sanders is committed to honest solutions to these problems. The way to avert the next banking crisis is the most clear. Assuming a Republican Congress, which would prevent the reinstatement of Glass-Steagall, Bernie has only to turn to regulation and responsibility.
Dodd-Frank provides the necessary structure with which to begin. Enforce it. Put teeth into bank regulation. Determine the acceptable level of risk at which banks can operate. Make management, not underlings or stockholders, responsible for violating the law. Encourage the Justice Department to be clear in seeking appropriate penalties for financial crimes in large institutions, not by fines alone but by the prosecution of those executives responsible.
Split up the banks that are speculating with depositor and government funds. Investment banks are supposed to risk investors’ money but commercial banks should return to lending fairly and carefully to help create a foundation for future growth. Bernie Sanders is the only independent candidate who escapes the malaise of being bought. He is paid for by the people and represents their interests. And you can take that to the bank.