This has already been diaried by MeMeMeMeMe and discussed by McJoan on the Front Page, but I believe that it's of such importance that it deserves even more attention.
Sherrod Brown and Ted Kaufman, two Democratic Senators who are definitely not in the bankers' pockets, have introduced the Safe Banking Act (Whitehouse and Casey are co-sponsors as well).
The goal is to break up the six largest banks, whose deposits now comprise more than 60% of annual GDP. These banks, whose financial condition remains questionable, continue their wild, speculative ways, and if they are not broken up and reformed, the next, even worse, financial crisis is inevitable.
Simon Johnson, the MIT business professor and former IMF economist, is fully behind Brown and Kaufman.
The proposal places hard leverage and size caps on financial institutions. It is well crafted, based on a great deal of hard thinking, and — as reported on the front page of The New York Times this week — the issue has the potential to draw a considerable amount of support.
The idea is simple, in the sense that the largest six banks in the American economy are currently "too big to fail" in the eyes of the credit market (and presumably in the leading minds the Obama administration — which saved all the big banks, without conditions, in March-April 2009). The bill put forward by Senator Christopher J. Dodd, the chairman of the Banking Committee, has some sensible proposals — and is definitely not an approach that supports "bailouts" — but it does not really confront the problem of the half-dozen megabanks.
Paul Krugman wrote the other day that breaking up the big banks may be necessary for the integrity of our democracy.
My view is that I’d love to see those financial giants broken up, if only for political reasons: it’s bad to have banks so big they can often write laws.
Johnson, who has dealt with a lot of banana republics in his IMF work, amplifies Krugman's points:
In the American political system — where the power of major banks is now so manifest — there is no way to significantly reduce the risks posed by these banks unless they are broken up.
These banks are so powerful that they can confront and defy the government, as seen in the twists and turns of the S.E.C. versus Goldman Sachs case. They are also powerful enough to threaten a form of extortion: If reform is tough, according to JPMorgan Chase’s chief, Jamie Dimon, credit will contract, the recovery will slow and unemployment will stay high. Given the size of his bank, that’s a credible threat.
Our democracy is threatened by these extortionists. Is it realistic to hope that Brown and Kaufman can succeed with this bold legislation? Here's what the optimist Johnson thinks:
The big banks give a lot of money to politicians on both sides of the aisle and they are now digging in hard to defeat reform. Indeed, there are credible reports of various "front" organizations being used for this purpose.
Under such circumstances, the Brown-Kaufman approach might be thought unlikely to succeed.
But consider how the Republicans are already starting to counterattack the Dodd proposals, the ways in which the broader Dodd-White House approach remains vulnerable, and how exactly the Brown-Kaufman approach can help the Democratic leadership as it becomes increasingly hard pressed.
The Republicans are saying: the Dodd bill does not end "too big to fail." Most of their reasons are misleading ("it’s all about Fannie and Freddie really," "there will be a permanent bailout fund," "the Federal Reserve needs to lose some of its powers," etc.). But there is no question that this message will seriously confuse people who are only just starting to pay attention.
As the Republicans have astutely spotted, the Dodd-White House proposals will not actually reduce the size or seriously limit the activities of the megabanks — and a broad cross-section of society completely understands that these institutions brought us into the trauma of September 2008, have become even bigger since then, and still have the incentive to take on an excessive amount of risk.
The S.E.C. case against Goldman has created a great opportunity for the Democrats because it exposes details regarding exactly how big banks are mismanaged and why they treat many of their customers in an unreasonable manner. The electorate now completely understands — even more clearly than a week ago — that the attitudes and compensation structure of the largest banks lie at the heart of our current macroeconomic difficulties.
The Brown-Kaufman bill therefore addresses not just the substantive financial issues of our day but also the tough political situation now facing Democrats. If their SAFE banking bill can come to the floor of the Senate (for example, as an amendment to the Dodd bill) and be voted on — up or down — then we will really get to see which of our elected representatives support overly big banks and which want to bring them down.
I'm very skeptical about our political system, especially at the federal level, but if there were ever a bill that was worth calling your Senators about, this is it. Johnson thinks there is a window of opportunity here. Kossacks need to let their Senators know that they are behind this kind of bold, meaningful reform.
According to The American Prospect, Brown and Kaufman plan to introduce the legislation both as an amendment to the Dodd bill and as an independent bill. Here's some contact ideas to get things rolling faster:
Possible contacts:
1. your own Senators to get them to sign on as co-sponsors
2. the Senate Banking Committee
3. the Majority Leader's office
4. the offices of the current co-sponsors to indicate your support and ask for ways to help:
Sherrod Brown
Ted Kaufman
Sheldon Whitehouse
Bob Casey