By Simon Johnson
For nearly two years now we have waited for a speech. We need a simple speech and a direct speech – most of all a political speech – about what exactly happened to our financial system, and therefore to our economy, and what we must do to make sure it can never happen again.
President George W. Bush apparently did not consider giving such a speech, and Secretary Paulson could never talk in this way. President Obama seemed, at some moments, close to making things clear – when he talked on Wall Street in September and, most notably, when he launched the Volcker Rules in January. But President Obama has always come up short on the prescriptive part – i.e., what we need to do – and his implementation people still move as if there were lead weights in their shoes.
Without a definitive speech, there is no political reference point, there is no convergence in the debate, and there is not even any clarity regarding what we should be arguing about. Without the right kind of speech, there are just many lobbyists working the corridors and a lot of backroom deals that most people do not understand – by design.
Tomorrow, hopefully, we should finally get the speech. Not – sadly – from the White House, not from anyone in the executive branch, and not even from within the Senate Banking Committee (although Senators Merkley and Levin took a big step today), but rather on the floor of the Senate.
On Thursday, Senator Ted Kaufman (D., DE) is due to deliver a strong blow to the overly powerful and unproductively mighty within our financial sector. He will say, according to what is now on his website,
- Excessive deregulation allowed big finance to get out of control from the 1980s – but particularly during and after the 1990s. This led directly to the economic catastrophe in 2007-08.
- We need to modernize and apply the same general principles that were behind the Glass-Steagall, i.e., separating “boring” but essential commercial banking (running payments, offering deposits-with-insurance, etc) from “risky” other forms of financial activity
- We need size caps on the biggest banks in our financial system, preferably as a percent of GDP.
- We should tighten capital requirements substantially.
- And we must regulate derivatives more tightly – on this issue, he likes at least some of the steps being pushed by Gary Gensler at the CFTC.
To be sure, a speech is not legislation. And, as yet, this is just one senator’s point of view. But because the administration so completely lost the narrative regarding what happened and why, there is now a free, open, and fair competition to explain what we need to do.
The lobbyists will still prevail on this round. But a big debate around the nature of our financial system is exactly what we need.
People who want to defend finance as-is now need come out of the woodwork. Senator Kaufman has set a very high standard. If you wish to oppose this agenda, speak clearly and in public about why we should not pursue exactly what the senator proposes.
If opponents of reform do not come out and argue the merits of their case, people will reasonably and increasingly infer that Senator Kaufman and his allies are right on all the substance.
Reform is blocked by a perverse combination of bankrupt ideology and deep-pocketed corporate interests. The only way to break through is to bring a lot of sunshine into the true affairs of finance – including by speeches like the one we will hear tomorrow.