Senator Ted Kauffman will give a speech today that many will ignore. HuffPo is highlighting it, but it's a long speech and not very sexy. Yet in a few years from now as we look at a Great Depression and wonder why, people will see a lost opportunity, the future that could have been, if only we could stand up to organized financial power. But, as Sen Durbin admitted last sping, the the banks "own the place", that is, own the Senate. And as the administration seeks a few reforms that mostly fail to address the real problems, even those reforms will be destroyed in the Senate.
Financial regulatory reform is perhaps the most important legislation that the Congress will address for many years to come. Because if we don't get it right, the consequences of another financial meltdown could truly be devastating.
Sen. Kauffman: Wall Street Reform That Will Prevent The Next Financial Crisis
In the Senate, as we continue to move closer to consideration of a landmark bill, however, we are still far short of addressing some of the fundamental problems – particularly that of "too big to fail" – that caused the last crisis and already have planted the seeds for the next one.
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I start by asking a simple question: Given that deregulation caused the crisis, why don’t we go back to the statutory and regulatory frameworks of the past that were proven successes in ensuring financial stability?
And what response do I hear when I raise this rather obvious question? That we have moved beyond the old frameworks, that the eggs are too scrambled, that the financial industry has become too sophisticated and modernized and that it was not this or that piece of deregulation that caused the crisis in the first place.
Sen. Kauffman: Wall Street Reform That Will Prevent The Next Financial Crisis
Senator Kauffman provides an excellent history, going back to the regulations created in the wake of the Great Depression, and leading through the deregulation in the 1980s and 90s that culminated with the repeal of Glass-Steagall which was supported by President Clinton and then Treasury Secretary Lawrence Summers.
If the changes in the financial marketplace that led to the repeal of Glass-Steagall took place over many years, the market’s transformation after 1999 was swift and profound.
Sen. Kauffman: Wall Street Reform That Will Prevent The Next Financial Crisis
He takes us through the orgy of deregulation and regulatory ostrichism in the 2000s. The history is essential to understanding, and I ask readers to follow the link and read it when they have time.
Sen. Kauffman then takes us through the Great Recession and the responses by government. He shares with us a brutal truth:
Large and complex institutions like Citigroup dominate our financial industry and our economy. MIT professor Simon Johnson and James Kwak, a researcher at Yale Law School, estimate that the six largest U.S. banks now have total assets in excess of 63 percent of our overall GDP. Only 15 years ago, the six largest U.S. banks had assets equal to 17 percent of GDP. We haven’t seen such concentration of financial power since the days of Morgan, Rockefeller and Carnegie.
One solution he proposes is this:
Rather than pass the buck to a reshuffled regulatory deck, which will still be forced to oversee banks that former FDIC Chairman Bill Isaac describes as "too big to manage, and too big to regulate," we must draw hard statutory lines between banks and investment houses.
We must eliminate the problem of "too big to fail" by reinstituting the spirit of Glass-Steagall, a modern version that separates commercial from investment banking activities and imposes strict size and leverage limits on financial institutions
The banks and their wholly owned politicians will never let this happen. I think our modern Morgans, Rockefellers and Carnegies are too powerful and our officerholders too weak and/or too corrupt. Remember Sen. Durbin. The banks own the place.
Sen. Kauffman offers additional solutions, but this diary is already getting too long. Please follow the link and read the whole speech. There is much substance, much content.
I'll end with his point about how putting faith in regulators alone is not enough.
That is why I believe that reorganizing the regulators and giving them additional powers and responsibilities isn’t the answer. We cannot simply hope that chastened regulators or newly appointed ones will do a better job in the future, even if they try their hardest. Putting our hopes in a resolution authority is an illusion. It is like the harbor master in Southampton adding more lifeboats to the Titanic, rather than urging the ship to steer clear of the icebergs. We need to break up these institutions before they fail, not stand by with a plan waiting to catch them when they do fail.
Without drawing hard lines that reduce size and complexity, large financial institutions will continue to speculate confidently, knowing that they will eventually be funded by the taxpayer if necessary. As long as we have "too big to fail" institutions, we will continue to go through what Professor Johnson and Peter Boone of the London School of Economics have termed "doomsday" cycles of booms, busts and bailouts, a so-called "doom loop" as Andrew Haldane, who is responsible for financial stability at the Bank of England, describes it.
The notion that the most recent crisis was a "once in a century" event is a fiction. Former Treasury Secretary Paulson, National Economic Council Chairman Larry Summers, and J.P. Morgan CEO Jamie Dimon all concede that financial crises occur every five years or so.
Without clear and enforceable rules that address the unintended consequences of unchecked financial innovation and which adequately protect investors, our markets will remain subverted.
These solutions are among the cornerstones of fundamental and structural financial reform. With them we can build a regulatory system that will endure for generations instead of one that will be laid bare by an even bigger crisis in perhaps just a few years or a decade’s time. We built a lasting regulatory edifice in the midst of the Great Depression, and it lasted for nearly half a century. I only hope we have both the fortitude and the foresight to do so again.
Sen. Kauffman: Wall Street Reform That Will Prevent The Next Financial Crisis
He's right on most things here. We ignore this at our own peril. The next Great Recession may well eclipse the Great Depression.