Bernie and the Big Banks (1/3)

Is Sanders proposal to break up the big banks a solution to the power and concentrated wealth of Wall St.? Bill Black and Leo Panitch discuss and debate the plan

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Story Transcript

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to the Real News Network. I’m Paul Jay in Baltimore.

This is the beginning of a series we will be doing over the next few months looking at the various candidates for president and their policy, and what they’re proposing, how to solve burning issues facing all of us. We’re going to start today with Bernie Sanders and what Mr. Sanders would do with the big banks and Wall Street. Here’s a little clip from the recent debate.

BERNIE SANDERS: That the greed and recklessness and illegal behavior of Wall Street, where fraud is a business model, helped to destroy this economy and the lives of millions of people. Check the record. In the 1990s, and all due respect, in the 1990s when I had the Republican leadership, and Wall Street spending billions of dollars in lobbying, when the Clinton administration, when Alan Greenspan said, what a great idea it would be to allow these huge banks to merge, Bernie Sanders fought them. And helped lead the opposition to deregulation. Today it is my view that when you have, the three largest banks in America are much bigger than they were when we bailed them out for being too big to fail, we have got to break them up.

JAY: Now joining us to talk about Bernie Sanders’ proposals on what to do with Wall Street, what he calls the fraud model of doing business, first of all in Toronto is Leo Panitch. He’s a Distinguished Research Professor of Political Science at York University in Toronto. He’s also the winner of the UK Deutscher Prize for his book with Sam Gindin, The Making Of Global Capitalism: The Political Economy of American Empire. And also joining us from Kansas City, Missouri, is Bill Black. Bill is an associate professor of economics and law at the University of Missouri Kansas City. He is a white collar criminologist and a former financial regulator, and author of the book that has one of the best titles of any books on economics: The Best Way To Rob a Bank is to Own One. Thank you both for joining us.

Now, let’s talk about Bernie Sanders. First of all, Bill, is breaking up the big banks an effective proposal? An effective solution? I have heard a critique of that position, and I must say, a position that in fact is not so radical, is supported by apparently several former heads of the Federal Reserve, including Ben Bernanke, as mentioned. We’ve heard apparently from Alan Greenspan, and some others. Volcker. But is this an effective proposal?

BILL BLACK: Yes. It’s not sufficient in itself to protect us, but it’s essential to be part of the protection. As long as you allow systemically dangerous institutions to exist, the definition of how you become such an institution is that when you fail, and it’s a question of when, not if, it is very likely to cause a global financial crisis. So why would we sit around with worldwide roughly 50 of these ticking time bombs, wondering when, which particular act of fraud or insanity is going to kick them over the edge and bring down the global economy? This should be one of our absolute top priorities, ending the existence of systemically dangerous institutions. And it’s one of the few win-wins because they’re also inefficient. They are far too large to be efficient economic entities. And of course they make real democracy impossible. So it’s a win-win-win to get rid of them.

JAY: Okay. Leo, is this effective policy?

LEO PANITCH: It’s great to have a presidential candidate critiquing the banks this way and identifying the enormous power of the big banks. But you know, I think one shouldn’t get too hot about this in terms of how much it’ll accomplish. America has always had a great number of banks, and it’s had loads of financial crisis with those great number of banks. One may remember even recently the savings and loan. Moreover the financialization of the world economy centered in the American capitalist economy is very, very deep. And it’s a democratized financialization. A democratization of debt [faring] credit, where ordinary people are stuck into the banking system.

And this isn’t, you know, your old day of JP Morgan or high finance. You have a financial system which lends to the masses, and which the masses depend on for consumerism. And they don’t have to be loaning from Goldman Sachs. In fact, as occurred with the mortgage crisis, although Goldman Sachs and its ilk were reducing many of the instruments, the derivative instruments, that were crucial to it, the actual link was through small banks and mortgage dealers, et cetera.

Moreover, I have to say this, I think Sanders’ representation which a lot of the left presents, that everything was hunky dory until Glass-Steagall was removed, really needs to be looked at again.

JAY: Well, we’re going to talk–Leo, we’re going to talk about Glass-Steagall next. I just want to focus on this one issue, about whether breaking up the big banks is really going to be effective, assuming one could actually pass such a thing.

PANITCH: What they’re doing, I’d like to point out, will be taken up outside of what has been regulated and where Fed regulators are. As we see now with the hedge funds operations. A lot of what the banks used to do, the investment banks, are now being done by hedge funds, and they’re even less regulated.

JAY: Bill, what do you make of what Leo’s saying? But also, I’ve also heard the critique that if you break up big banks–I know you said that’s only one piece of several things that need to be done. But on its own, breaking up the big banks, given how banks seem to invest or follow activities essentially in a herd–like, if there’s a ton of money to be made in subprime mortgages, they all go into subprime mortgages. So if you break them up, don’t you just have more of them doing the same thing? In other words, it’s more a sectorial systemic risk than just a few big institutions.

BLACK: Okay. This is why I did emphasize, of course it is not the single solution to all problems of banking. It doesn’t fundamentally transform capitalism, for example, or financialization of the world. But let’s take, for example, the savings and loan case. So there were many more failures in the savings and loan crisis. Actually, roughly about three times as many failures just in savings and loans than in the current crisis with banks and savings and loans combined. And if you added bank failures in, that would go to more like five times the current crisis. But there was not even a mild recession as a result of that crisis.

Now, a large part of that was due to the more vigorous regulatory response. But it was critical that not a single one of the institutions that failed was a systemically dangerous institution. And so no, they don’t all just do it. And if you want to talk about the unregulated sector, yes, it’s quite true that we have [inaud.] first the number of banks. Yes, the United States has many banks, still, but it has fewer than half as many banks as it did roughly 20 years ago. So the number of banks is falling at a very fast clip. And in terms of the dominance of the big four banks, that is just extraordinary in key sectors such as financial derivatives, where indeed the big five banks are estimated to have, depending on the year, 95-97 percent of all the derivatives training in the United States, which is the largest such trading area in the world.

While there were small mortgage banks involved, in virtually all cases their funding came from too big to fail institutions. So yes, of course you have to watch out. Do the systemically dangerous institutions, do they have avenues that they can escape regulation by using in essence cutouts of things like mortgage banks to escape jurisdiction? And you should bring that within jurisdiction. Again, getting rid of the systemically dangerous institutions, however, means that they can’t take advantage of those gaps in the same way.

JAY: Leo?

PANITCH: Well, yeah. I think, though, that one needs to see that this isn’t just speculation and predatory finance. The function that these very large, concentrated banks play–and remember, one of the reasons they get so concentrated is that they eat up the smaller banks, or the more successful middle-sized banks eat up the smaller banks and get big.

But in, you know, in the case of the really big ones the Bill’s talking about they perform an important function for the integrated network of global trade through the derivative market. You know, Caterpillar was opposed, as opposed as the banks, when it came to lobbying the American Congress to the types of regulation, very mild as they were, that were introduced a couple of years ago. And the reason they’re opposed to it is that derivative trading [let us say] in the foreign exchange market, is necessary for them. It’s functional for them. They need it, and they want very large institutions capable of creating the type of financial product, and having very deep financial pockets, that can make that market go. That is, you know, when they sell or buy a part on the other side of the world, whoever they’re doing it with–and you have to ensure that you’ll have a profit at the end if exchange rates change.

That’s not simply something–it is based on speculation, of course. A lot of people are speculating on what the renminbi will be in relation to the dollar two, three, four months from now. Indeed, one day from now. A lot of people are speculating on that. And the banks fund that speculation. But it’s also functional to global production, given the way that globalization has developed. So it isn’t just a matter of bad speculators. And you know, Bill may say, well you know, you’re simply saying one should nationalize the world. I’m simply pointing out the nature of the world. And one shouldn’t, I think, create illusions that this is all a matter of evil speculators.

BLACK: It’s actually not speculation, it’s rigged. You’re describing the FX, foreign exchange market, which is the second-largest cartel in the history of the world. And it’s a cartel because there are so few banks that dominate it that it’s easy to form and maintain cartel discipline. Whereas if you had many institutions that were rivals providing these kinds of derivatives it’s just standard economics even that it would be much harder to form and much, much harder to maintain a cartel. So yeah, Caterpillar may have thought it was being [advantage], but in fact Caterpillar was being ripped off.

JAY: Leo, you’re shaking your head.

PANITCH: Well, you know, that’s the typical American, you know, hidden hand of the market kind of view. Although it’s often presented, of course, I think in a genuine way from the left that is critical of the enormous power of capital in its various guises in the states. But there isn’t a hidden hand of the market. And shysterism in these markets is as rampant, if not more, amongst small and medium-size financiers and businesses generally, than it is in big. In fact, the regulators that the Fed now has in every systemically important institution, you’d have to ask whether that could be maintained in a way that would stabilize the system. At least contain failures, which as the Treasury says, it’s now its main function, were you to actually decentralize too much, without turning finance into a public utility, which would be an entirely different matter.

The Treasury has said since the late ’90s, we’re no longer in the business of failure prevention because of the functional role that finance plays in global production. We’re in the business of failure containment because we know there will be inevitable crises. And essentially what the regulators do is try to contain either the likelihood of failure or actual failure. And they do it by being located in–and yes, I think embedded in in a way that makes them complicit with the power of–these systemically important institutions.

BLACK: So let’s take that from someone–this is my life. White-collar criminology and financial regulation. First, the FX cartel is real. It’s not delusional. It’s admitted to by the participants. So it isn’t some standard, you know, canon of the left. It’s like this thing called reality. Second, when you try to regulate through embedded regulators, you put examiners on-site, they always marry the natives. In fact, we have had that phrase in banking regulation for at least 30 years that I’ve been involved. So we all know that always fails. Third, it’s quite true that finance, the Treasury, through the Office of the Comptroller of the Currency, expressly decided about 25 years ago that they would change the banking regulatory approach and no longer seek to change the amount of risk being taken, and instead supposedly manage it. That led to the crisis, and has been a catastrophic failure.

So real regulators don’t want to follow the approach, you’re quite right, that the Obama appointees are still following the Bush playbook. And when you combine that with systemically dangerous institutions, it means that as soon as they’re able to get the economy humming again, and we can really gear up first-class bubbles, we’re likely to have another crisis. So yeah, we really do want to change that stuff. But not because we’re lefties, but because we’re actually studied criminology, and actually we’re effective financial regulators, and know what works and what fails.

JAY: Okay. So if I understand this correctly, Bill is saying we–this corruption is endemic, and one way amongst others is to break up big banks. Leo is saying there needs to be banks of a certain scale in order to carry on global commerce. On the other hand, there’s another alternative to this, and that’s what Leo mentioned, is the idea of treating banks as a public utility.

So in the next part of our discussion we’re going to take up that idea of Leo’s, and he’ll explain it, and Bill will tell us what he thinks of it. So please join us as we continue this discussion. We started with Sanders, Bernie Sanders’ proposal on breaking up big banks, and we’re going forward with what would be effective policy in addition to or instead of breaking up big banks. Please join us for that on the Real News Network.

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