Bernie and the Big Banks (2/3)

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Is Sanders proposal to reinstate the Glass-Steagall Act a serious way to counter the power and concentrated wealth of Wall St., or just window dressing? Bill Black and Leo Panitch discuss and debate the plan

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to the Real News Network. I’m Paul Jay. We’re continuing our discussion which started with an assessment of Bernie Sanders and his proposal to break up the big banks. He called Wall Street a fraud industry, or a model based on fraud. And we’re discussing whether or not breaking up the big banks is one of the effective solutions.

Now joining us again first of all, from Toronto, is Leo Panitch. Leo is the Distinguished Research Professor of political science at York University, and author with Sam Gindin of the book The Making of Global Capitalism: The Political Economy of American Empire. And joining us from Kansas City is Bill Black. He’s the author of the book The Best Way to Rob a Bank is to Own One. He teaches at the University of Kansas City Missouri. Thanks for joining us, both of you.

So we’re going to–if you haven’t watched part one you really should, because we’re kind of picking up this discussion or debate from there. Leo, you mentioned towards the end of the first segment that breaking up the big banks is, well, first of all you need big banks. Commerce needs big banks. But they don’t necessarily need big banks the way they are. And you talked about banking as a public utility. So what does that look like?

LEO PANITCH: Well you know, the alternative is, you know, do you go back to the American dream, the liberal dream, the neoclassical economist dream, Adam Smith’s dream, that you can have a hidden hand of the market that will produce equilibrium if you have a lot of small actors in it? And you know, you aren’t allowing two or three to collude together to set price. That’s the traditional American model advanced by sometimes radicals in the United States and often on the right by the most rabid inegalitarians. The other way to look at this is in terms of this is indeed very, very concentrated power. But you’re not going to get any stabilization or you’re not going to get a return to the small being eaten up by those who are, you know, either better at engaging in fraud or more efficient, or have more links to the state or what have you. That that will all happen again.

So you need to look at something more fundamental. And especially given the financialization of capitalism I think what needs to be raised, although it’s very, very difficult to imagine how this could come about given the political forces we have around today, to think in terms of turning these giant institutions into public utilities. They play an essential role in the economy. Not–of course there’s fraud, and I’m very happy that people like Bill, as I understand it, are engaged in trying to prosecute that fraud and expose it. But their role is much, much deeper than can be expressed through the problem of fraud, or indeed just their systemic danger. The problem has to do with the power of finance and with the role of finance. The essential role of finance in relation to what ought to be a basic set of democratic decisions. What gets invested, where it gets invested, how it gets invested, et cetera. How do people get access to credit, insofar as their wages have stagnated they’ve become more and more dependent on credit. And insofar as they themselves are investors through pension funds in great numbers, they themselves therefore have an interest in the financial system.

So you know, that’s not to say that I’m in any sense suggesting that there are the political horses to bring this about. And for that matter I think that socialist economists and theoreticians have done very, very little in terms of trying to map out what a public utility banking system would be. Some of the kind of work’s been done in Germany, but not much. So I’d like to hear Bill’s response to this, actually.

JAY: Go ahead, Bill.

BILL BLACK: Okay. So again, we’ve been–people should listen to part one. This is the context that I’m talking about, is this is one of the reforms necessary. It doesn’t solve all problems, and it doesn’t largely address Leo’s concerns about the world and financialization. But let’s break down some of the things you were saying, where I do disagree.

First, banks of this size, that they create a global financial risk, are not necessary to our financial system and are not useful. In other words, most economists think that you get all of your economies of scale by the time you’re at $50 billion in assets. Something like JP Morgan, that is more than 40 times that size at over $2 trillion in assets, when JP Morgan fails it will bring down the global economy. So you know, why would we roll the dice every day when the next one of these, again roughly 50 worldwide systemically dangerous institutions, is going to fail and take us into another great recession or worse?

Second, they are an enormous risk to democracy. They inherently will have immensely disproportionate political power. And they will, that power will be in the hands of a very small subset of people who are not answerable to anyone other than themselves and their desires, which are, you know, typically pretty venal.

Third in all of this, it isn’t a binary choice. You can have perfect competition with thousands and thousands of effective competitors, or you have cartels. No. The closer you are to having smaller numbers of really powerful institutions and more smaller competitors, the range of things that improve, and that range includes, first, it’s really hard to form effective cartels when you have very substantial numbers of major competitors in things like foreign exchange, and so that, you know, life there improves greatly. Let’s take the United Kingdom. In the United Kingdom while they have [liars] loans as well, and that whole area of the crisis that is familiar to Americans, their biggest single thing was the sale of this product, the supposed insurance product, to anybody, normal people like us, who came into the bank to get any kind of loan. They would try to sell us this insurance product.

And that insurance product, [that’s] going to be quoting from a case or the facts of a case that was decided last year in the United Kingdom. The insurance company paid the bank a commission equal to 72 percent of the gross amount of the deal. Right, do you understand the economics? The profit margin is so massive, estimated to be typically 80 percent, that the insurance company up-front would pay the bank a 72 percent kickback of all the money it received because it knew that payments were going to be so trivial under the supposed insurance product.

And the Tories–okay, the Tories, in their parliamentary inquiry that they controlled said that virtually all profits in the UK banks came from this deliberate policy of ripping off the consumer. And the Tories said–and nothing changed. No bank came in and ever tried to outcompete and say, you know, customers, you’re getting ripped off by Lloyds. Come to our bank, we won’t sell you this crap, or if we sell it to you, you know, we’ll sell it at one-twelfth the price, which would be the real price.

JAY: Leo, just to sort of finish this one part of this discussion about big banks, you say there aren’t the political horses now really to pass legislation that would enable public interest banking, or banking as a public utility. I must say, it’s not clear there’s enough political forces even to break up big banks, for that matter. But that being said, there was a moment during the crisis when there were a lot of commentators, I’m talking in ’07-’08, who were talking about what a Swedish model of actually nationalizing at least some of the institutions that were really on the, on the edge of bankruptcy. And would have, obviously, gone bankrupt without massive public bailout funds. And there are moments or windows where one could imagine such a thing is possible.

But that being said, is–short of banking as a public utility, is breaking up the big banks a step towards a better banking system?

PANITCH: Well, I’d want to know a lot more about it. I’d want to know who they are being broken up among. Whether it’s going to be the same families that will own these various banks, or the same concentrated institutional investors. You know, I’d want evidence that the kind of shysterism that is indeed embedded in the system, and that Bill was describing a particularly egregious example of, wouldn’t be replicated. There’s all kinds of examples of that kind of rip-off occurring. And in banking especially. Bill says if you have entrants into the system they would challenge this. It’s very difficult to enter into the system. And I’m not sure that that doesn’t get generalized even amongst smaller institutions.

I just want to say something about Sweden. Yes, they nationalized them and then gave them back to the 15 families that own Sweden. And the great crash in Sweden was a result of Sweden being the first to deregulate its financial market in 1985. So you know, this–one should be careful about looking to Europe, which isn’t actually a very good example. Deutsche Bank for decades has been–.

JAY: Yeah, I think with the Swedish model, the idea of the Swedish model is you could nationalize. But you don’t have to do the second half of the Swedish model in your scenario, which is you don’t have to give them back again.

PANITCH: Well, that would be something very different. And then social democracy in Sweden would finally have had to do something about the deal it made with those 15 families in the late 1930s in exchange for union recognition. You know, we’ll let you control and own the economy in exchange for a strong labor movement and a more egalitarian welfare state.

JAY: Right. Okay, let me just jump in here. As far as I know in terms of detail of how that breakup would look, we have not yet found Bernie Sanders articulating that. He did propose legislation in 2013 which was the too big to fail, too big to exist act. But the legislation, as far as we could see, is about one paragraph long. It calls for breaking up the big banks but doesn’t yet deal with the kind of detail you’re asking for, Leo.

But in terms of the regulatory environment, and Bill’s been making this point, it’s not just about breaking up big banks. The other thing that Bernie Sanders has been calling for is to return to Glass-Steagall. And so why is that important, Bill, and how significant is it?

BLACK: Let me just do 20 seconds on the last topic. What you certainly could do is have a consumer bank through the postal system. And that would allow customers to have a broad range of banking services, and that would be a public utility-like thing, and you wouldn’t let them invest in anything exotic, so you’d prevent a lot of the abuses where you have state-owned banks, and as Leo was talking about in Germany, are after all part of the problem. But you can do that through a postal system, and that can work quite well.

JAY: Okay, now that you’ve introduced that let’s stay on that for a second. Because Bernie Sanders recently has advocated just what you’re saying. And so let’s talk a bit about that, then. What do we make of using the postal system as a banking utility? Leo, does that start to get at what you’re talking about?

PANITCH: I think [if one’s] talking about a reform that is possible, you know, given the balance of political forces in the United States, that’s a damn good one. Given the appalling treatment of the American postal system by the American Congress, which is essentially trying to do away with it, moreover it would be a way to save the postal system in the age of the internet.

But beyond that, what has developed in the United States, especially–but as usual, Americanization is a model for the rest of the world–is what one of my political economy colleagues here in Canada, Suzanne Soederberg of Queens University calls in a recent book debt-fare states and the poverty industry. And you get this, these credit institutions, often small, which are making the kind of rip-off on payday loans to poor people that are very, very similar to what Bill was describing in the British case. And if you had a postal system of credit provision to poor people especially, to ordinary people, this could be a way of getting those shysters out of poor people’s pockets.

JAY: Bill, anything you want to add to that before we talk about Glass-Steagall?

BLACK: No, I think this is an area we have substantial agreement. You do have to worry about corruption. People don’t know that the Japanese postal service was the largest depository institution in the world. But the Japanese opened up its investments to allow it to be used to manipulate things like the Nikkei average. Nothing works without eternal vigilance, and transparency to a great extent. But people have to stay involved, and keep them trying to do the right thing.

I would mention that payday lenders can look small. They are actually very large enterprises and they’re frequently, a bunch of small things are actually owned by the same group of, small group of people.

JAY: I mean, as long as the political class is so beholding to Wall Street most of these reforms are questionable, because what winds, what winds up getting passed through Congress and through the president, is usually pretty much in the end what Wall Street wants anyway. We’re talking about what policy we think would work, and we’re trying to make sense of what Bernie Sanders is proposing.

So let’s move on with the issue of Glass-Steagall. That is one of Bernie Sanders’ main other pillars of his policy about how to deal with Wall Street. Glass-Steagall–if I state this correctly. Gentlemen, please correct me if I don’t–essentially separates consumer banking, normal commercial banking, from more derivative, speculative banking. Institutionally they were supposedly supposed to be separated. If I understand it correctly over the course of the 1960s that kind of separation was kind of being whittled away anyway and was completely gone when they got rid of Glass-Steagall, which was passed, what 1933 I think it was, during the midst of that crisis.

So Bill, why would reenacting Glass-Steagall make such a difference?

BLACK: So first, the Glass-Steagall was enacted as a result of the Pecora investigations of the great depression in terms of real abuses, and it responded to a real abuse, and it worked brilliantly for decades. So we violated one of the central rules of life, which is if it ain’t broke don’t purport to fix it. Second, you are correct that starting in the ’60s, but pretty mildly for the next 20 years, but then kicking heavily into gear in the mid-1980s and on, the Fed in particular led an unholy war to administer the death of 1,000 cuts to Glass-Steagall by creating regulatory exceptions. And therefore by the time Glass-Steagall was repealed it was considerably less effective.

The fundamental idea is that hey, deposit insurance is different, right? It’s for smaller people to protect them, and if we’re going to have deposit insurance then you need regulation, and so banking, what’s called commercial and you said consumer banking, that’s where that sphere is. We’re going to have a federal subsidy, deposit insurance, but we’re going to limit it to this activity. And we do it as a compromise to prevent the most destructive runs. But there was never any rationale–and by the way, it’s particularly weird when conservatives and libertarians support the repeal of Glass-Steagall, because that means we would extend it to investment banking. And investment banking means taking an ownership position. In other words, Merrill Lynch owns a company, or owns a chunk of a company. Well, why would we want to have a federal subsidy that would help some people outcompete other folks who didn’t have that same federal subsidy in an ownership position? I’ve never understood why libertarians in particular aren’t appalled by the repeal of Glass-Steagall.

Also, it’s just plain a whole lot riskier. Every single one, all five of the big five investment banks in the United States, would have failed but for the bailout. And three of them despite the bailout went out of business as independent entities. In other words, the whole investment banking model is as risky as commercial banking was shown to be. Investment banking was closer to taking cyanide. So why in God’s name would we provide insurance to that activity, especially because there’s no need to provide insurance to that activity? If you do either explicitly or, as we had done, implicitly through too big to fail, provide a federal guarantee you incentivize them, goes the standard economic argument, to do wilder and crazier and of course more fraudulent things.

JAY: All right, Leo?

PANITCH: Well, I think Bill is right to identify when it started coming apart. One needs to remember that what Glass-Steagall was doing, I mean, apart from when you took your $5 into the bank and the bank manager said no, don’t put that in a deposit account, I’ve got a great mine in Peru that you can invest in, protecting that person who brought it in, it was also stabilizing the banking system. And the role that the Treasury and the Fed played through the post-war era was bringing American finance back to not only health but a very dynamic role in the world. Glass-Steagall already began to break down when commercial banks, the very, very large commercial banks, Citibank, was able to say, look, this isn’t–we’re able to do investment banking in London. What sense does it make that we can’t do it in New York? And increasingly because of the globalization of multinational corporations and development of [euro]-dollar market in London and much more, it was very difficult given the internationalization of finance for the New Deal regulations not to be eroded. You’re right, Bill is absolutely right [the data] that really exploded in the 1980s, this dissolution of the watertight compartments between investment and commercial banking. It wasn’t just a matter of the Fed doing it by 1,000 cuts. It was doing it in relation to the dynamics of the financial system, and under a lot of pressure of course from commercial banks who wanted to get into the business. But there was pressure to do this as well from institutional investors. And even from industrial investors.

And the world has changed. When you go into–a bank gets your money now, not by you opening a deposit account–and this has been the case since the late ’50s, but often by selling you a security. The banking has been securitized. And in that sense that line is very, very difficult to draw. I think by the time Glass-Steagall was repealed–and sure, it was all kinds of enormous pressures that were dastardly pressures that finally took it away, but by the time it was repealed, and I think Bill was largely saying this, the horse had already bolted. And it had bolted because the barn door was, you know, so worn away by the way capitalism had evolved over the post-war era.

JAY: Okay. We’re going to pick this up in the next segment of this series of interviews. We’re going to talk a little more about Glass-Steagall. Please join us, with Leo Panitch and Bill Black, on the Real News Network.

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