Check out this sad story in the New York Times: apparently Morgan Stanley has been doing the right thing by taking fewer risks in their trading than their competitors at Goldman Sachs and Citibank. But in the perverse Wall Street system we have allowed to remain in place in this country, where the big financial traders make money for their firms by big gambles, the bankers who are actually being more responsible are being punished for it. Meanwhile there are record bonuses for the traders at Citibank and Goldman.
This is the problem I have with the resuscitation model rather than the restructuring model when it comes to Wall Street. I give the Obama team credit for wanting to regulate these big financial traders more, but they need to go further than that and change the fundamental financial trading system. What is being recreated in front of our very eyes is the exact same system with the exact same problems that led to our financial collapse in the first place. These big financial conglomerates will still have all the same incentives to take huge risks, and because they are so huge, the risk is to not just to their own company, but to our entire economy. And their financial clout will be compounded by the political power of being that big, which will inevitably lead to weaker regulations and captured regulatory agencies.
Oh, and by the way, that whole "we have no choice but to revive the banks, because that will start the credit flowing and create jobs" thing: it's not working either. Unemployment is going up, we're still losing hundreds of thousands of jobs every single month. I know that it takes a while for jobs to start being produced, but this jobs report is much worse than the forecasts predicted, and the Geithner/Summers team has consistently been too optimistic in their guesses.
We need a big, bold change of direction in this economy. The old models aren't working. Let's get some economists in the White House who actually made accurate predictions on the economy, and let's take on the big banks that brought us this mess. These Wall Street guys are back to their old tricks - risky trades, huge bonuses - and the rest of us are getting hosed.
With the possible exception of the health care fight, there is no more important battle for the future of our economy and democracy than breaking up these too-big-to-fail financial institutions. Limiting their size, their economic power, and their political power is urgent and absolutely essential. The problem is that these Wall Street behemoths have such incredible power that very few politicians want to take them on.
The Obama administration, while they proposed some reasonably good regulatory changes in terms of consumer protections and dealing with the so-called "dark markets" (the derivatives and credit default swaps that were kept away from regulators over the past dozen years), appears to have for now decided they want to take a pass on the fight. Larry Summers, according to a recent story in the NYTimes, says that there is no going back to the days of small banks: "I don't think you can completely turn back the clock." The President himself, in a NYTimes magazine interview, seemed focused for more on regulation than on breaking up the big banks:
Q: There was this great debate among F.D.R.'s advisers about whether you had to split up companies - not just banks - you had to split up companies in order to regulate them effectively, or whether it was possible to have big, huge, sprawling, powerful companies - even not just possible, but better - and then have strong regulators. And it seems to me there's an analogy of that debate now. Which is, do you think it is O.K. to have these "supermarkets" regulated by strong regulators actually trying to regulate, or do we need some very different modern version of Glass-Steagall, in which we basically slim them down?
THE PRESIDENT: You know, I've looked at the evidence so far that indicates that other countries that have not seen some of the problems in their financial markets that we have nevertheless don't separate between investment banks and commercial banks, for example. They have a "supermarket" model that they've got strong regulation of.
The modest sized regulatory package the White House just proposed reflects that this theory that regulation as opposed to Teddy Roosevelt style trust-busting is the way the administration wants to go.
So far, there doesn't seem to much more excitement for such a fight on Capitol Hill. Even progressive organizations have been slow to take up the fight, although I'm told the new coalition Americans for Financial Reform will be coming out with a policy paper soon on the issue.
The problem is that the too-big-to-fail is the central issue of our economic collapse. I became more convinced with each passing day, as I watch these should-be-discredited-pariahs dominate the Congress, that our economy will not start to seriously recover until we deal with this problem.
Our only hope is to build an outside of DC movement that rattles the walls. Politicians will not have the courage to take this on until we make it impossible for them to stop avoiding the issue.
I have been thinking a lot about the difference between failed and successful Presidencies lately, mostly because I so desperately want President Obama to be on the successful side.
First, some definitional terms. For me, a successful Presidency means the following:
1. That they are re-elected. I know some of my high-minded readers may think this is crass, but it certainly matters whether American voters think well enough if you to give you a second term, and it's hard to really get a lot that's lasting done in only four years. I can't think of a modern President that I would call a successful President who only served one term.
2. That they actually get something significant and lasting done in terms of policy agenda.
3. That their policies work reasonably well in terms of overall economic prosperity and foreign policy.
4. That they end their term in reasonably good standing with the American public.
More on who do and do not fit this definition, and some caveats, in the extended entry.
I am very glad that President Obama continues to talk in terms of strong new regulatory system for the financial industry. It is good to have a President, unlike the last one, who actually thinks government playing an oversight role in an industry that could destroy the entire world economy is a useful thing.
The coming legislative battle over the future of banking regulations will be an intense one, with lots of different ideas in the mix. Personally, I am not in favor of one big idea that the White House is floating, which is giving the Federal Reserve- one of our nation's most secretive and least democratic institutions- more power in the regulatory structure, especially given their complete failures to use the regulatory power they already have in constructive ways over the past decade. But, hey, this is going to be a long and involved debate, with lots of ideas floating, and big pros and cons to each of them. It's good we are having the debate right now, with the memory of the abject failures of our past regulatory structure fresh in our memories. What will be urgently important is keeping progressive minded folks engaged in this battle.
There is one hugely important thing that is not being talked about nearly enough, though.
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