The big banks never lost all their power in D.C. Now they're really running the place, and risks will rise.
We’re told that everything moves faster today, including attention spans.
I guess that’s so.
After laissez-faire policies brought on the Great Depression, the federal government enacted numerous laws and agencies to keep such a cataclysm from happening again. Among them were the Glass-Steagall Act regulating banks, and the Securities and Exchange Commission to ensure fair play in the stock market.
The Pecora Commission, established to investigate the causes of the crash, laid out the corrupt practices behind the disaster, encouraging the reforms.
Most Read Business Stories
- 5 investment tips from Vanguard founder John Bogle
- King County property tax bills are coming, and the housing market slowdown won't lower your bill
- After Paul Allen's death, Stratolaunch cuts sharply back — but giant plane will still fly WATCH
- Facing populist assault, global elites regroup in Davos
- Alaska Airlines flight diversion leads to a 30-hour nightmare for passengers WATCH
It took until 1954 for the Dow Jones Industrial Average to recover its 1929 high, and generations of Americans never regained their trust in the market. Republicans, in power when the crash happened, didn’t regain a house of Congress until 1948 and the presidency until 1952, under the popular and nominally Republican Dwight Eisenhower.
That was then.
Republicans in charge when the financial collapse happened a decade ago quickly regained traction. Efforts to reinstate Glass-Steagall and other tight regulation failed, leaving us with the relatively weak and complex Dodd-Frank bill. Other financial reforms aimed at helping wounded consumers faltered. A frustrated Sen. Dick Durban, D-Ill., confessed that banks “frankly own the place,” meaning Congress.
A Pecora redux, led by former California state Treasurer Phil Angelides, produced a damning report on the causes of the 2008 crash, an event that nearly took down the world financial system. It was left on the shelf. None of the banksters went to jail or were forced to give back their risk-based compensation.
Now the table is being set for a new financial meltdown.
Earlier this month, President Donald Trump signed legislation that will roll back Dodd-Frank.
Several Democrats seeking reelection in red states voted with Republicans to make it happen.
Taken in isolation, this is cause for only mild concern. Much of the law would stay on the books. The co-sponsor of the original bill, Barney Frank, said easing rules on small banks is “mostly” reasonable.
But the trajectory back to laissez-faire is clear. More attacks on Dodd-Frank will come. Banks want to further weaken the Volcker Rule, which seeks to limit banks’ risky trading in derivatives. The Consumer Financial Protection Bureau is being gutted. Every major regulatory head is now a Trump appointee. The president has also appointed bank-friendly governors to the Federal Reserve, the industry’s most important regulator.
So much for populism to help the (white) working class.
I’m not sure the biggest cause of this course change is collective amnesia. The more likely culprit is the enormous amount of money the banking industry and Wall Street funnel to Washington, D.C.
For example, Rep. Kyrsten Sinema, D-Ariz., who is running for a Senate seat in that deep red state, received more than $1 million in contributions from the financial industry in the 2016 cycle. She voted for a weaker Dodd-Frank.
The disgraced banksters and ruined stock fraudsters of the Great Depression didn’t have this kind of cash to influence policymakers.
Another reason is a collective, bipartisan mindset that tilts toward risky — but very lucrative for the players — business in finance.
Remember, Bill Clinton’s lionized Treasury Secretary Robert Rubin was a product of Goldman Sachs and a leading proponent of “deregulation,” including the repeal of Glass-Steagall. I use quotations because the policies don’t really deregulate finance but allow the industry to capture the regulators and tame the watchdogs.
His intellectual partner on the right was Fed Chairman Alan Greenspan, an acolyte of Ayn Rand. Both championed “financial innovation.”
One innovation was exotic derivatives.
The plain vanilla variety, proliferating since the 1980s, is a contract that allows a company or bank to spread risk. The product’s name comes from its value being “derived” from an underlying asset, from real estate to jet fuel.
Wall Street took this further, selling so-called bespoke derivatives. Highly complex and usually individually tailored, these became the biggest causes of the 2008 crisis in the form of credit default swaps. These were enormously profitable bets when the housing market was rising.
When the subprime market faltered, these derivatives began a chain-reaction explosion. The bankers themselves realized they didn’t really understand these dangerous instruments. The regulators certainly didn’t. Who was betting what, against whom? No wonder the system seized up.
Trump supporters firmly believe the crisis was caused by poor people getting loans and the federal Community Reinvestment Act (CRA). Never mind that CRA has been around since 1977, and this conspiracy theory has been debunked by reputable economists.
Thanks to remaining safeguards from the New Deal, a Federal Reserve led by a leading scholar of the Great Depression, and expert moves by the George W. Bush and Obama administrations, we avoided the worse.
But millions of people were ruined financially, Seattle lost venerable Washington Mutual, which became a huge peddler of subprime loans because they could be bundled, sold and dangerously “derived” by Wall Street. Not one went to prison. The big banks got bigger.
When Timothy Geithner, Obama’s Treasury Secretary, came to Town Hall Seattle for the release of his memoir Stress Test, I asked him about this. He said “Old Testament” justice risked sinking financial markets that had barely begun to recover.
Maybe. But the Obama administration’s failure to bring the rule of law to Wall Street was one of its biggest shortcomings. Even if the banks repaid the taxpayer money used to bail them out, they learned an unintended lesson: If they get in trouble again with excessive risk-taking, we would bail them out again. And they would keep the profits.
The economy continues its slow-but-steady expansion and memories fade, facts become irrelevant. So, what’s happening in D.C. now won’t trigger another financial explosion tomorrow. But the device, so to speak, has been armed. It’s ticking.