Sen. Bernie Sanders of Vermont doesn’t have to worry that when he rails against Wall Street, he’ll be called a socialist, since that’s what he calls himself (a “Democratic Socialist,” to be sure, who appears on the ballot as an “independent,” then caucuses with the Dems in the Senate. Still, he’s the only self-styled socialist to make it to the Senate in this generation, and I think maybe ever. What are those Vermonters smoking?)
Perhaps that frees him up to make certain statements like these, in a Boston Globe op-ed this week in solidarity with the Wall Street occupiers:
“The demonstrators and millions of sympathetic Americans understand that odds are stacked in Wall Street’s favor because of the extraordinary economic and political clout of the big banks. Believe it or not, the country’s six largest financial institutions (Bank of America, CitiGroup, JP Morgan Chase, Wells Fargo, Morgan Stanley and Goldman Sachs) now have amassed assets equal to more than 60 percent of our gross domestic product. The four largest banks issue two-thirds of all credit cards, half of all mortgages, and hold nearly 40 percent of all bank deposits. Incredibly, after we bailed out the behemoth banks that were ‘too big to fail,’ three out of the four are now even bigger than before the financial crisis.
Later in the same piece, Sanders (who won his last reelection with slightly more than 65 percent of the vote), calls for the breakup of the giant financial institutions because:
“Left to their own selfish devices, Wall Street bankers will continue to gamble with other people’s money. Sooner or later, when their bets go wrong, they will come back to Congress asking to be bailed out again. Why not nip that in the bud? There also is a sound economic argument against too few owning far too much.
The idea that six giant financial institutions can exert such enormous control over the economy should frighten anyone who believes in a competitive free-market system. Good Republican presidents like William Howard Taft and Teddy Roosevelt broke up Standard Oil, the railroad trusts and other huge monopolies a century ago. Now is the time for us to end the financial oligarchy that has been so destructive to our economy. If a bank is too big to fail, it is too big to exist.”
Sen. Sanders, by the way, will be the guest speaker at the DFL’s Annual Founders Day Dinner on October 29, if he isn’t in prison yet. (That’s a joke, about the prison, not the dinner.)
Bernie’s point would be well taken, if not for the fact the the government *forced every bank* to accept TARP cash.
Never let it be said that government can’t add financial catastrophy to any bad situation….even financial catastrophy.
So how many banks should hold ‘half of all mortgages’ and ’40 percent of all bank deposits’? Would we really be better off if it was eight or ten? Would that satisfy the trust busting urge? Because it wouldn’t have changed much during the financial meltdown.
And seriously, Sen Sanders, the way to defeat the ‘too big to fail’ meme is to stop giving bailouts. Let the banks know that they must be secure enough in their investments to weather a storm. Make them face the consequences of their own bad decisions. That can’t be too hard to understand, can it?
Bernie’s rhetoric has a certain populist appeal but breaking up these banks wouldn’t address the fundamental problems which have more to do with deregulation than the size of these banks. Better to repeal the part of the National Banking Act that allows national banks to charge interest rates of the states they’re located in and adopt a national usury law fixing the maximum rate of interest at 6 percent. Then repeal the awful Garn-S. Germain Financial Deregulation Law of 1982 as well as the Alternative Mortgage Act that both prevent states from imposing usury limits on bank loans and mortgages. Then repeal the 2005 Bankruptcy Act. Then the Commodity Exchange “reform” laws that allows financial instrument futures to be traded like commodities. Then reinstate Glass-Steagall requiring investment banking to be divested from banking and insurance. Most of the problems and excesses we’ve seen in the last few years are traceable directly to laws passed by Congress that allowed the financial sector to self-regulate and dominate everything else. To paraphrase the National Power Policy Committee in 1935 when it recommended adoption of the Public utility Holding Company Act: the problem of financial is the regulation of investment banking.
Jon–
Some good points but–
How would this apply to financial institutions that are not legally banks, and which are responsible for much of the recent risky speculation?
And a 6% interest cap applied to ALL loans would dry up the credit supply; it would be impossible to get a home loan at that rate.
Remember, we live in a global economy. We can’t cap the interest rates offered in other countries (even but supposedly American banks), so banks (and other lenders) would simply invest where the market provided the best return/risk ratio.
Paul, usury laws, which are still on the books in Minnesota and many other states apply to all loans except the financial institutions which were segregated and got special exemptions because of the other federal laws. Usury laws apply to all money loans.
The reason we have to pay usurious credit card rates is because of the National Bank Act passed by Congress in the 1860’s which gave a bank the right to charge the interest rate allowed by the state in which it was located. In the 1970’s the Supreme Court held that Minnesota’s usury law was preempted so it could not prevent a Nebraska national bank from selling credit cards that offered usurious rates. But the usurious rates were authorized by Nebraska.
I don’t know where you get the idea that credit would dry up. Maybe the usury limit should be higher but there needs to be a cap and probably somewhere well below 18% which is what retail credit card gougers get. Mortgage rates right were recently and I think continue to be below 6%. Keynes held usury laws to be consistent with economic theory and in fact laid the problem of speculation as opposed to investment at the foot of unregulated high interest rates.
As far as banks lending elsewhere, let the “buy American” policy start with lending. If there is anywhere that needs export and import regulation, it is with the flow of money.
Jon–
Right now mortgage rates are at a record low because housing demand is low — a result of the housing bubble (fueled by high risk mortgages from non bank mortgage companies). This will (hopefully) not be permanent.
I still want to know how you will regulate foreign banks.
And there’s a big difference between 6% and 18%.
I agree that a cap would be a good idea (better one indexed to the prime rate); just that 6% is not realistic. Note that the current outburst of debit card fees is a result of rate caps.
Paul Krugman (see his NYT columns and blogs) has given detailed explanations of the interactions between rate levels and credit availability and their effects on the economy.
Short form: financial institutions have choices about what they do with their money.
And also note that mortgage loans have usually been the cheapest of consumer loans.
After all, they are backed up by the house which (again historically) has a stable value greater than the loan. So, banks (and other lending businesses, which make the bulk of mortgage loans) have viewed it as a no risk situation.
You’d usually pay more to get a loan to start up (or build up) a small business.
My recollection is that mortgage rates were low while there still was a housing bubble. But no matter. Interest rates have long been subject to regulation, except since about 1980 in this country. This is not a novel idea.
Interest rates stand as an obstacle to true investment. Why invest your money in a start up if you can get 18% or higher interest on an enforceable loan. Yes there is default risk but so is there on any investment.
Until the financial markets were deregulated, there were savings and loans which were savings and loan cooperatives. We still have credit unions and other forms of cooperative financial institutions. Time to bring them back.
It’s not a matter of regulating foreign banks. It’s a question of regulating the contracts made by them in this country. The US is going to be a huge market for many years to come if people have money to spend on goods and services.
I think you underestimate the power of a nation to regulate its currency and the price of money.
No question that the United States (unlike the Euro countries such as Greece) has the power to regulate its currency. Unfortunately, the consequences of doing so are not always foreseen.
And I agree on the value of small, consumer oriented financial institutions. You can still find small local banks who invest most of their resources in consumer loans; I prefer to do business with them top the extent that they can provide the services that I need.
What I’ve found with my local credit union is that it prefers to outsource its services (can you say Kasasa) rather than providing them itself. Too bad.