The usual disclaimer: PBI doesn’t endorse or lobby political candidates. But we can and will assess and compare their policy proposals.
Spoiler: Although any road ahead on bank reform is a long, frustrating slog, and while no good reform will stay good in the watering down and game-the-bill stages of the policymaking process, voters this year actually have some interesting competing proposals in the Democratic primary race. But those proposals will ultimately be meaningless without grassroots efforts to continue the push for public banks (with other economic sustainability measures), and against neoliberal trade agreements—that goes for Sanders’s proposals, which both assume an ease of change we haven’t seen evidence of in the beltway, and ignore the candidate’s own history of supporting public banks, or at least the Bank of North Dakota. This ultimately means something most readers of this blog already know: It’s our job, not a presidential candidate’s job, to create public banks in our cities and states. We need to keep doing that no matter who is elected.
When a Daily News interview with Bernie Sanders was published last week, a lot of silly messaging occurred about Sanders's unclear or seemingly light answers on breaking up the banks. But it’s rather absurd to suggest from that awkward interview that Sanders doesn't know how to break up big banks--his competence is recognized by any halfway educated commentator across a variety of publications.
Mike Konczal of the Next New Deal project, writing for Salon, offers perhaps the best refutation. Sanders accurately (if simplistically, because he’s talking to the staff of the Daily News), describes possible ways to break up big banks. As I indicated last week, even Hillary Clinton has a proposal to partially and incrementally achieve such a breakup—through “risk fees,” the one really interesting, substantive, and unique piece of Clinton’s bank policy package. Sanders can do what he describes in three possible ways, as Konczal points out:
- cap the balance sheet of banks;
- have the FSOC (Financial Stability Oversight Council) declare the largets banks to be too risky; or
- have the Federal Reserve and FDIC declare the "living wills" of banks not credible
“The second two work through Dodd-Frank,” he writes, “the first would work through Congress.”
But this post is not a defense of Sanders. Where Clinton is short on commitment to a genuinely equitable and just form of banking, Sanders is short on a plan to overcome the tremendous elite resistance to some of his banking visions. Konczal indicates one of the first “political reality" problems of Sanders’s plans: Any process that involves agency-level decisionmaking will take time because regulators will have to be replaced. Sanders promised, I think off the cuff, that he could do it in a year. That seems problematic—perhaps ultimately irrelevant, but problematic. Even a unilateral executive order might backfire in other ways, and not everyone will be that comfortable with a “unitary executive” theory of banking. Some might say it smells a little Trumpian.
Nevertheless, most entities asking critical questions about Sanders’s plan are asking them from a position of vision-distorting bourgeois privilege. The center-right Brookings Institute published Aaron Klein’s “Four Questions” piece last week, a kind of Clintonian hand-wringing over Sanders’s big plans. “In reality,” Klein writes, “consumers have been choosing large financial institutions at a greater rate than smaller institutions” -- a curious argument to make, and not intrinsic to the reasons community banks are important or big banks are harmful to the economy. Consumers also frequently choose fast food that makes them die earlier, and music by Justin Bieber. “Global businesses want global banks,” Klein says – a position that assumes that global businesses, as presently construed, should be placated. And, probably not essentially true: Global businesses like the services global banks can provide, but there may be models of global banking activity that are sustainable and not big bank-dependent.
Klein makes a few other arguments that people in the banking reform movement are already familiar with, like liquidity:
The United States has the deepest, most liquid capital markets in the world. These capital markets provide tremendous benefits to American governments through lower borrowing costs and the ability to transfer risks, including interest rate risk, to investors who can more easily absorb ups and downs.
--A silly argument. As my friend James Henry of Columbia University’s Center for Sustainable International Investment has argued, we frequently have liquidity coming out our ears. So what? Lower borrowing costs for the banks hasn't translated into low borrowing costs for anyone else--at least nobody I slum with down in these parts.
Would forcing Goldman Sachs or Morgan Stanley to sell their commercial banking subsidiaries really make them less systemically risky? How and by whom would they be regulated? Would they be designated as SIFIs (systemically important financial institutions) to be regulated by the Federal Reserve? Would size limitations be imposed upon stand-alone investment banks that are not part of any bank holding company?
. . . demonstrates the futility of bank reform that doesn't involve turning the Fed into a utility and creating additional public banks. Sanders has given public banks a nod, and wants to fundamentally change the fed, but hasn’t talked about those things in this primary race.
Klein also gushes about Dodd Frank. Why are people so enamored by such a crappy law? He’s just as wrong about it as others are—people like President Obama, whom he quotes at length. Part of the problem with these kind of policy evaluations is that these critics don’t just fail to think outside the box: they also seem to be subsisting on a diet of the cardboard from that very box. At least Klein admits that, as someone who helped create the legislation, he's “less objective on the shortcomings of the legislation.”
There’s tremendous support, sometimes from unlikely sources, for breaking up the big banks. Of course, there remains the question of how to re-invent banking and sustain and support community banks, neither of which emerge naturally from breaking up the big guys. Again, more about public banks below.
Sanders also supports reinstating Glass-Steagall, while Clinton opposes it. Jason Easley writes:
Allowing commercial banks to merge with investment banks and insurance companies in 1999 was a huge mistake. It precipitated the largest taxpayer bailout in the history of the world. It caused millions of Americans to lose their jobs, homes, life savings and ability to send their kids to college. It substantially increased wealth and income inequality and it led to the enormous concentration of economic power in this country.
But Easley also raises that important “political feasibility” issue again:
It is at this point that the obvious must be stated. Despite the support of McCain, Senate Republicans are going to squash this bill. However, the point of this legislation isn’t passage. Congressional liberals have quickly become experts as using their minority status to introduce publicly popular legislation that raises the profile of important issues while putting Republicans on the hot seat by forcing them to defend positions that place them in opposition to a majority of the public.
On the specific question of reforming the Federal Reserve (short of nationalizing it or turning it into a public utility), nobody can accuse Sanders of being vague. His editorial in the New York Times last year outlines specific and substantial policy changes:
1. “prohibit commercial banks from gambling with the bank deposits of the American people.”
2. “the fed must stop providing incentives for banks to keep money out of the economy.”
3. the fed should charge a fee on the reserves that would be used to finance direct loans to small business.
4. transparency at the Fed--transcripts of its Open Markets Committee meetings within six months (Sanders says this would have alerted Americans to the 2004 housing bubble).
5. ban banking industry executives from serving on the board, and fill the board with labor reps, homeowners, urban residents, small business owners, farmers
6. break up the big banks (which we’ve already discussed).
But what about public banking? Here’s what Sanders said in a 2013 interview:
Obviously you have this very Conservative State [North Dakota] that is very proud of their State-owned bank, and by the way, it is something that citizens in Vermont are looking at, and is something that I strongly support. The issue here is the degree to which we take out savings, and we invest it in a public bank which then makes investments -- invests in our communities and earns a decent rate of return, rather than giving this money to some Wall Street bank that engages in whatever fraudulent activities they engage in - makes a lot more sense to me to invest in local financial institutions who are going to invest locally - in housing, in small business, in agriculture. To me, that makes a whole lot of sense.
Sanders’s endorsement of the Bank of North Dakota was enthusiastic, displayed basic understanding of public banking . . . and was frustratingly short on detail. Sanders’s subsequent sponsored legislation on public funding of worker-owned cooperatives was much more promising as far as embrace of new economy was concerned. As I expressed late last year, though, Sanders has had public banking amnesia during this campaign--scarcely talking about his own new economy-oriented proposals, let alone mentioning the BND or public banks at all.
So, no surprises here, since I already told you what I would conclude: Bernie Sanders’s banking proposals are more comprehensive and less incremental than Clinton’s, are likely to encounter steep and vicious resistance, and he currently lacks an explicit public banking platform that is, in my view, essential to establish the kind of institutional and material base for his proposals to really have teeth—to really be effective, to really build a world where big finance doesn’t hijack the democratic process. Sanders’s movement, however, includes many people who would and do push for public banks, a re-conceptualized notion of money-creation, and real (not merely redistributive) economic justice.
I'll assess the plan of whoever wins the GOP nomination after that party’s undoubtedly interesting convention. In all honesty, trying to assess what open bigots and theocrats have to say about banking reform is a tough job best left to others. I’m too weak-stomached for it.
[Illustration by Thomas James for intelligencesquared.org]