By Simon Johnson, co-author of 13 Bankers: The Wall Street Takeover and The Next Financial Meltdown. This post also appears on pbs.org/needtoknow – as part of that new TV program’s coverage of the week’s issues.
There is widespread agreement that the financial crisis which broke out in September 2008 was our most severe in over 50 years. There is also a consensus that, whatever other factors may have been involved, the excessive risk-taking and general mismanagement of huge banks at the center of our economy played a significant role in what happened. (Yes, of course the largest banks themselves deny any responsibility – including most recently using insulting language.)
The financial reform package now on the Senate floor puts surprisingly little constraint on the activities of our largest banks going forward – preferring instead to defer to regulators to tweak the rules down the road (despite the fact that this approach has gone badly over the past 20-30 years).
A growing number of senators insist we should do more to reduce the size and limit the leverage of megabanks (i.e., the amount that banks can borrow), arguing that this would constitute an important additional failsafe – on top of all other efforts to establish “more effective regulation”.
Senator Ted Kaufman (D, DE) has led the charge on this issue, pounding away for months – and giving another powerful speech on the floor of the Senate yesterday.
Yet, astonishingly, it seems increasingly likely there will be no real Senate debate on this issue.
A real debate, in the modern American system, needs a vote on something specific – in this case, an amendment to the main legislation. And Senator Kaufman, with Senator Sherrod Brown (D, OH), to that end has proposed the SAFE Banking Act – with meaningful size and leverage caps – which is ideally suited as a way for senators to show whether or not they support the continued existence of our largest banks in their current (very dangerous) form.
Kaufman has directly taken on and rebutted all the arguments put forward by proponents of big banks – such as Larry Summers of the White House and Hal Scott of Harvard Law School. Kaufman has the facts and most sensible opinion on his side, including the literature summarized in our book (13 Bankers, which he cited yesterday), and other voices (also quoted in his speech yesterday):
- Mervyn King, governor of the Bank of England: “Banks who think they can do everything for everyone all over the world are a recipe for concentrating risk.”
- Alan Greenspan, formerly chair of the Federal Reserve Board: “For years the Federal Reserve had been concerned about the ever larger size of our financial institutions. Federal Reserve research had been unable to find economies of scale in banking beyond a modest-sized institution. A decade ago, citing such evidence, I noted that ‘megabanks being formed by growth and consolidation are increasingly complex entities that create the potential for unusually large systemic risks in the national and international economy should they fail.’ Regrettably, we did little to address the problem.”
With such strong arguments and powerful evidence on its side, you might think that the completely reasonable and responsible proposals in the SAFE Banking Act would get a vote. But you would be wrong.
The Senate leadership – on both sides of the aisle – has apparently decided that they do not want to give senators (and the public) the opportunity to focus their attention on this key issue. Instead, they would prefer to keep the “debate”, in terms of votes, on issues less likely to infuriate powerful banks.
Our democracy allows great freedom of discussion – and it is encouraging that someone as prominent as Senator Kaufman can take on (and trounce) the biggest banks on the merits of the case.
But how much is this freedom worth if the political power of the megabanks – based on campaign contributions, lobbying efforts, and more general ideological control - can effectively prevent an up-or-down vote in the US Senate on the most pressing issue of financial reform?
This is, of course, partly about the political power of corporations. But corporations are, in this sense, merely a veil – this is really all about which people have what kind of power in our society. To what extent are we really still a democracy – and how far have we already slipped down the road to oligarchy?