Financial RomanticismOne line I’ve been seeing in various places, including comments here, is the claim that the real way to deal with Wall Street is laissez-faire economics: no more bailouts! On this view, policy makers should raise their right hand in the air, place their left hand on a copy of
Atlas Shrugged, and swear in the name of A is A that they will never again step in to rescue failing banks. And all will be well with the world.
Sorry, but that’s a fantasy.
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Second, there are in fact very good reasons to intervene to support banks during a financial crisis. Bagehot knew it;
Diamond and Dybvig showed it theoretically; and it remains true. Letting a financial crisis spread is very dangerous.
Finally, even if you persuade yourself that the moral hazard created by financial firefighting outweighs the benefits of avoiding a 1931-style cascading crisis, the fact is that policy makers
will intervene. Hank Paulson set out to make Lehman an example; two days later he was staring into the abyss.
So the only feasible strategy is guarantees and a financial safety net plus regulation to limit the abuse of those guarantees. It’s imperfect; it faces the constant threat of regulatory capture; but it has worked in the past, and it’s the only game in town.
The current economic crisis was made possible by repealing Glass-Steagall.
The reason Dodd-Frank was necessary is because Glass-Steagall, which made a lot of the actions leading to the crisis illegal, was repealed.
Even Matt Taibbi
knows this:
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But the reality is, the brains of investment bankers by nature are not wired for "client-based" thinking. This is the reason why the Glass-Steagall Act, which kept investment banks and commercial banks separate, was originally passed back in 1933: it just defies common sense to have professional gamblers in charge of stewarding commercial bank accounts.
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In other words, "rogue traders" are treated like bad accidents and condemned everywhere from the front pages to Ewan McGregor films. But rogue companies are protected at every level of the regulatory structure and continually empowered by dergulatory legislation giving them access to our bank accounts.
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The banks also know this and that's why they're fighting to repeal or weaken the reforms.
Here's
Bernie Sanders:
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More than three years ago, Congress rewarded Wall Street with the biggest taxpayer bailout in the history of the world. Simultaneously but unknown to the American people at the time, the Federal Reserve provided an even larger bailout. The details of what the Fed did were kept secret until a provision in the Dodd-Frank Act that I sponsored required the Government Accountability Office to audit the Fed’s lending programs during the financial crisis.
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Making these reforms will not be easy. After all, Wall Street is clearly the most powerful lobbying force on Capitol Hill. From 1998 through 2008, the financial sector spent over $5 billion in lobbying and campaign contributions to deregulate Wall Street. More recently, they spent hundreds of millions more to make the Dodd-Frank bill as weak as possible, and after its passage, hundreds of millions more to roll back or diluter the stronger provisions in that legislation.
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Wall Street reform does reverse many of the policies initiated in the past to weaken financial regulations. The
, which is being finalized this month, is basically Glass-Steagall. There was a complaint about an exception, but the rule also addresses issues that were not covered by Glass-Steagall.
The law can be improved upon, but it is a huge step in the right direction. It should be strengthened.
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