There are lots of ways to break up the big banks
I’ve been going to Alt Banking every week for almost 5 years. Here’s what I’ve learned:
There are lots of ways to break up the big banks.
First, there are ways to create incentives for banks to get smaller by themeselves. For example, we could impose more capital requirements on bigger banks than smaller ones, or more regulations, or we could say that banks beyond a specific size couldn’t engage in certain kinds of behavior, or trade certain kinds of derivatives, or we could impose taxes on those trades that are heavier for larger banks. Progressive taxes that max out at 100% profit when the bank is as big as Bank of America.
Next, we could outlaw huge banks. We could do this by simply defining a legal limit to the size of a bank, or its geographic scope, or the amount of risk it carries. We could even say that its connections to the other financial institutions has to be adequately uncomplicated that, in an event of bankruptcy, we could let it fail and it wouldn’t be a biggie. We could give banks 4 years to get compliant.
Or we could go nuts and say that banks are no longer able to “create money” at all, which is to say we could put an end to fractional reserve lending. Or, we could just do that for big banks, where reserve requirements would get larger as banks get larger. We could change accounting laws around banking to make it a lot harder for them to hide risk. We could make it illegal for them to trade derivatives, or impose a new version of Glass-Steagall to make certain things illegal. We could impose all sorts of laws that would blow them out of the water permanently.
Or we could go the other way entirely, and nationalize one of the big banks, or all of them, and let them remain big but treat them like utilities, and make them super duper boring, and pay no bonuses and have the CEO get paid something like $200K.
And I’m not saying what specific we should do – my heart’s probably closest to imposing high capital requirements and limited trading for big banks so they’ll make themselves smaller – but in any case, there are plenty of things we could do that there is no political appetite for. Once again, there’s no shortage of possible plans.
What we do have a shortage of, though, is political will. That’s why we don’t talk about this very much, and we might not have talked about it at all had Sanders not entered the race.
Which is why, when I hear people complaining about Sanders not have a specific enough plan for breaking up the big banks, I think it’s hogwash. What Sanders has, which is sorely needed, in fact is the crucial missing ingredient to any discussion around big banks, is the political will to do something. Once the political will is there, the details can be sorted out by people who think about this stuff all the time.
mathbabe 
When the GOP took control of Congress, they did not move on to the rhetoric of the in-party. They stayed the out-party, the out of Congress, out of control, out of responsibility party. They stayed the party of stasis, or the party of repeal taking us back into a past that wasn’t glorious, back into a past that was broken. The GOP did not have the political will even when they had the control. The GOP can say that they are the party of smaller government and doing anything would be contrary to that, but the GOP has done this over and over. They get control, but lack agenda.
Doing nothing is not free. It costs to do tomorrow what we could do today. We always need political will.
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Oh boy do I wish Bernie would have had the chance to read this post/talk with you before his recent interview with the daily news.
Political will is certainly the crucial catalyst here. I think Bernie knows/gets that but doesn’t communicate it enough.
Great post Cathy!
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Another way would be for Treasury & the Fed to say that those Institutions who do not want “high capital requirements and limited trading” may operate but will not be bailed out. Let the “market” ie other insitutions including the Fed lending windows decide about counterparty risk, and the shareholders about risk premiums as well. AKA “put your money where your mouth is”
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Problem with that is empty threats aren’t taken seriously.
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I completely agree. When I read the financial proposals of Bernie and Hillary, I actually agree with a lot of what Hillary says.
“Our banking system is still too complex and too risky … While institutions have paid large fines and in some cases admitted guilt, too often it has seemed that the human beings responsible get off with limited consequences – or none at all, even when they’ve already pocketed the gains. This is wrong, and on my watch, it will change.”
The catch is that I don’t believe she has any intention to go through with it. Obama sounded good, too.
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Obama _did_ go through with as much as he could get through Congress — Dodd-Frank passed. The banks (through the GOP, and a handful of Dems) fought it tooth and nail, and are still fighting to prevent it from getting usefully implemented (e.g. they fought to prevent anyone from becoming head of the CFPB, they’ve fought over the details of administrative rules, etc). Hillary has offered plans for dealing with those administrative rule details that seem a lot more realistic than anything Sanders has offered.
Don’t get me wrong, I’m probably ideologically more aligned with Bernie than with Hillary, and if he’s the nominee I’ll donate and phone-bank and canvass for him as much as I can. But I’m with Krugman in having serious worries about him. Latest: http://www.nytimes.com/2016/04/08/opinion/sanders-over-the-edge.html
His takes on many issues seem simplistic to me, and he and his surrogates don’t seem to offer a realistic explanation of how he’d get anything done if (as seems very likely) the Dems don’t win control of the House plus sixty votes in the Senate.
Of course, if Trump is the nominee, and there’s a wave of revulsion against him, it could happen. Dem majority in the House + supermajority in Senate + Bernie would be AWESOME. But OTOH I don’t think the same thing plus Hillary would be all that much worse, b/c most of the good stuff that would happen would be stuff that could be initiated from Congress, e.g. by Liz Warren introducing bills, that Hillary would likely not push back against.
On “breaking up the big banks”, it seems to me that focusing on that misses the point. Canada’s banks were bigger, relative to their economy, than America’s biggest banks, but because they were well-regulated — because their banking system was still “boring” — they didn’t blow up the economy.
It’s possibly-true that Sanders would consult some outside experts and come up with a proposal that would regulate Wall Street even more aggressively than what Clinton proposes. It’s less clear that he knows how to whip Dems into line and peel off a GOP vote or two to get anything passed through Congress, or is interested in hiring people who can manage bureaucratic infighting to make the regulatory process work. I don’t necessarily agree with Hillary on everything, but I trust her to work the machinery of government effectively and to read the political environment well. (One of my main complaints about Obama was that early in his term, he kept acting like Charile Brown against a bunch of Lucy Van Pelts in the GOP — he offered up a pre-compromised stimulus to attempt to appease them and get a few votes, and got nothing at all; he would’ve been much better off starting with a larger, better package, and then maybe trading a bit of it away for moderate Dem votes, and just ignoring the GOP entirely.)
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Obama let a lot of people down when he entered and did nothing for people losing their homes. He is a huge disappointment financial regulation-wise.
Also, I cannot read Krugman, he’s such a Democratic establishment shill.
Also, I don’t think we disagree too much about what can be accomplished if the only thing that happens is that Sander gets elected, and Congress continues to suck. I’m thinking of Sanders as a first step in a larger revolution. I also think you’re right when you say Clinton can be relied on to know how to work the machine. She is, in fact, eminently qualified, nonsense ignored from the Sanders campaign and elsewhere. But that’s just it, she’s proven herself to be overly qualified in a way, in that she knows how to play the game so well she’s part of the problem.
I don’t think Sanders and Clinton supporters, generally speaking, disagree about what can be expected, even the probabilities. It’s just that Sanders supporters are, generally speaking, unwilling to settle for the change Clinton is promising.
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Sanders wrote and introduced a bill to break up the banks including a couple of the measures Cathy mentions. “Any entity on the too-big-to-fail list would no longer be eligible for a taxpayer bailout from the Federal Reserve and could not use their customers’ bank deposits to speculate on derivatives or other risky financial activities” (Sanders press release). Here’s the bill which has three parts: listing the too-big-to-fail banks, directing the treasury to break them up with their consultation (so I guess it’s up to the bank how it should break itself up), denying Fed financing and restricting types of too-big bank activity (hedging beyond its own commercial activity, speculating or dealing in derivatives or any other activity specified by regulators).
http://www.sanders.senate.gov/download/tbtfleg?inline=file
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Hi Mathbabe, you provided several good ways of breaking up big banks, but have not at all addressed the motivation to do it (as if it was obvious). Could you point me to a good post (yours would be great) that talks about why it would be good (/necessary?) to break up the big banks. Also, is there an alternative solution to the underlying problem than breaking up the banks?
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How many of these can be done without congress? That is the real question.
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The one thing in your article I would quarrel with is that you seem to believe in “fractional reserve banking” but in fact this does not exist. Banks create money out of nothing when they loan it and those who need reserves (many countries, such as Canada, have no reserve requirements) can borrow it at extremely low interest rates from the Central bank overnight. See the report of the Bank of England at http://www.bankofengland.co.uk/publications/documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf for example.
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My pet suggestion is to limit the limits on liability for shareholders. If you own stock in a bank that fails, be prepared to be sued for a percentage of the remaining debt based on how much stock you owe. The stockholder can go personally bankrupt, but that’s not pleasant. In practice, it won’t be worth it to go after small shareholders.
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But is it enough for Sanders to have the political will? Won’t there be nothing other than one long gridlock with total blockage and nothing happening for four years if he gets to Washington and has to make real live people pass real live legislation? Much more than half the country will deeply hate and fear his anticapitalist stance and vote in Republican congresspeople explicitly to counter it. Actually one of the things that have turned me off Sanders is that he never addresses this exact, and flagrant, problem face-on.
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Bernie and the political revolution he spawned have been effective at moving 20% of the US population toward a $15/hr minimum wage that few thought possible even a year ago. I’m not seeing hate and fear of him showing up in polls – certainly at the levels other candidates are getting. He has a positive vision and is inspiring many like-minded folks to actively participate in the political process – as candidates, staff and volunteers. Remember how quickly the country turned to FDR’s socialism in the 30s and 40s – and the lasting legacy the New Deal left. Rebuilding that legacy is a popular position only feared by elites.
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Crediting Bernie with the Fight for Fifteen is a stretch. There are plenty of Hillary supporters who are active in that movement, both in the outside protest force (especially union folks), and folks involved in getting bills passed (like in NY).
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Be honest, the union folks you’re referring to – centrally the SEIU – are supporting Clinton as a strategy for their union members, not because Clinton was particularly excited about the Fight for 15. She was advocating for $12 per hour. I can even see the argument for SEIU behaving like this, but it’s just not fair to credit Clinton with it as a win.
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Assuming an obstructive Congress, there will be marked differences between a Sanders and Clinton admin that will not affect policy, but will affect public engagement. I expect Hillary will continue the Obama model of trying to placate Republicans, finding the middle road to compromise and mostly failing. Bernie will be obstreperous, so his fans will not so much be disappointed as frustrated. Disappointment inclines to apathy; frustration to resistance, which is good for participation in a democracy. Hillary fans will not be disappointed either — their expectations are more “realistic.” But lowered expectations are not good for participation, and if Hillary wins, the party will lose the enthusiasm of the Sanders movement as well. That’s why I’m still hoping that Bernie wins — enthusiasm among this nation’s good people (as distinct from the Trumpsters & Trusteds) is more valuable to them and its process than anything a party machine can provide when it doesn’t run the Congress.
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I agree. Or, as I say it, at least we can trust that Bernie will call out all the liars when they obstruct his pie-in-the-sky goals. Names will be named, and I think that’s progress given where we are.
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I am sorry I am late to this thread. In one sense, you are right. As a presidential candidate, it is not Sanders’ responsibility to work out the details of his plans. On the other hand, it is completely insufficient to wave your hands and say “smart people will work out the details.” Once someone is elected, that person is engaged in the process of governing; to be a success it is necessary to hit the ground running, and it’s better to do it with detailed policy proposals than with grandiose but half-baked ideas. This was Obama’s failing in 2009 (to an extent forgivable faced with the crisis he was faced with), but it tainted his first entire first term. If Sanders thinks he will appoint a policy team to solve these problems during transition, he’s delusional.
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