Much has been made of the twin takedowns of Sanders last week. First there was the Daily News story which was spun by many in the media and the Hillary camp as a disaster, but if you read and understood the actual content it wasn’t a disaster at all. And then there was the Krugman spin on the financial crisis where he once again echoed the Hillary party line that the bad actors were “shadow” banks and not the actual too big to fail banks, and that Sanders was just on a reckless bank-hating crusade. Krugman said:
Yet going on about big banks is pretty much all Mr. Sanders has done. On the rare occasions on which he was asked for more detail, he didn’t seem to have anything more to offer. And this absence of substance beyond the slogans seems to be true of his positions across the board.
This isn’t true mind you. Sanders gave all the relevant detail he needed in the Daily News interview. Sanders’ answers regarding the breakup of the big banks was correct in that, according to Dodd/Frank, it’s up to the banks to break themselves up. Sanders would initiate it but it would fall on the Treasury Department to decide how much smaller a bank should be and what would be acceptable. It’s not up to Sanders or any president to make those decisions or to get into the weeds on details.
What about the core idea of Krugman’s that the big banks weren’t at fault? In a not so veiled swipe at Krugman, Elizabeth Warren vehemently disagreed.
There’s been a lot of revisionist history floating around lately that the Too Big to Fail banks weren’t really responsible for the financial crisis, That talk isn’t new. Wall Street lobbyists have tried to deflect blame for years. But the claim is absolutely untrue.
There would have been no crisis without these giant banks, They encouraged reckless mortgage lending both by gobbling up an endless stream of mortgages to securitize and by funding the slimy subprime lenders who peddled their miserable products to millions of American families. The giant banks spread that risk throughout the financial system by misleading investors about the quality of the mortgages in the securities they were offering.
Why was Elizabeth Warren commenting on this issue? As part of Dodd/Frank, systemically important banks need to supply plans on how to wind themselves down in case they’re going to fail. There’s a new report by the FDIC and the Federal Reserve that five of the six largest banks don’t have credible plans. This means that if any of them were to collapse they would require another taxpayer bailout. I have heard for some time from party loyalists that Dodd/Frank fixed everything, however that’s not the case. Dodd/Frank gave the lawmakers and regulators some tools but there were many areas of concern that the law failed to address, and many others where there needs to be a willingness on the part of the regulators to take on the banks. So far that willingness isn’t there. It should give everyone pause that seven plus years after the crash the banks still don’t have their act together and the regulators are dithering about enforcing regulations.
The bottom line is that Hillfans need to give up on this talking point regarding the shadow banks. Warren (and Sanders) are correct that the big banks crashed the economy and are still an existential threat. If you’re still talking about focusing on shadow banks in the coming weeks, it’s a sure sign you’re not serious about bank reform.
and you got head berniebro Konczal’s post? That rich. Thanks for the laughs.
but thanks for playing along. If you want others I can provide them, including Dean Baker and Patrick Eaves.
pay attention.
He got hammered for questioning our Savior’s health care plan.
..is in addition to, rather than instead of. She has talked quite a bit about breaking up the big banks – necessary, but not sufficient.
What Hillary has said was that she would make it more expensive to be “too big to fail” but she has been very vague about what that would mean. She has not called for breaking up the big banks directly.
Yes she would add a fee or a tax to be imposed by regulators. Fees can be raised or lowered and ultimately be rendered moot. Given how timid our regulators have been I wonder what, if any, effect this would have. And as we have seen during the Obama administration, fining big banks billions of dollars doesn’t deter them from committing more crimes. So why would a fee/tax on banks make them want to make be smaller? So far they’ve just built the fines/fees into their business plans.
Is that “breaking up” big banks is enormously complex, slow, and expensive, and also requires significant legislation that has zero probability of getting through Congress in any foreseeable time. Clinton is more of a wonk, and has ways to address the problem– not just size, but risk+size, by focusing on the risk– increasing capital reserves, among other things, which doesn’t require the Congress to do anything.
The reason Sanders did poorly in that interview was because he couldn’t answer very well how he might use executive power to reach his goal. He thinks like a legislator, rather than the chief executive.
Outside the Sanders bubble, “break up the big banks” is little more than a bumper sticker designed to appeal to people who haven’t got the vaguest clue of what happened in 2007-08, or why. If the financial sector, upon which most of the rest of the economy relies for liquidity, carries too much risk, then economic reverses are vastly magnified, regardless of whether the institutions are big or small.
That’s why he seemed like a lightweight. That’s why he was criticised. That Salon writer might think Warren took a jab at Krugman in support of Sanders, but if true, then Warren didn’t understand Krugman’s point, and responded to a criticism of Sanders that was not made.
That isn’t the Senator’s style, at all. So it might just be more reasonable to conclude that both you and some people at Salon are engaged in some wishful thinking.
it doesn’t take legislation to break up the banks. There are three potential ways to break up the banks.
1) Legislation is passed to do so, as you describe.
2) The FSOC headed by the Treasury Secretary can declare the big banks too risky to exist in their current form.
3) The fact that living wills are not up to snuff, as the FDIC and the Fed have already agreed, can cause the banks to be broken up. If you ever think they will ever be up to snuff you live on another planet than I do.
I would add a fourth way, use of the Sherman Anti-Trust Act or Clayton to break them up. It’s OK to say you need legislation but that’s not the only way, and to keep insisting that’s the only way is factually incorrect.
The fact that breaking up the banks is hard or complex isn’t a reason not to do it.
Actually this is false. It’s the Daily News editors who were confused in their interpretations of his answers. It was the Daily News editors who failed to understand the basics of what tools were available to Sanders. Their confusion isn’t Sanders’ problem. Sanders laid out the three options above. What else was he supposed to say?
I agree that Hillary is wonky and is using complex answers to hide the fact that her remedies wouldn’t fix much. That’s seems to be her tactic on virtually any issue. Sometimes the simplest fixes to problems are the best. And sometimes the complexity of solutions obscures the huge amounts of wiggle room that’s embedded to provide loopholes and dodges for big donors who wouldn’t approve of a comprehensive solution. Her fracking answer is a good example of that. Lots of verbiage that allowed her avoid taking a stand and really meant nothing. If anyone thinks Hillary takes environmental issues surrounding fracking seriously, they got their answer in her extraordinarily convoluted non-answer.
Actually that’s not true at all. There are many groups of people from many quarters who want to break up the big banks. Many members of local Federal Reserve boards and several economists also seem to think it’s a good idea. Simon Johnson, the chief economist for the IMF is one of many. It’s not just about systemic risk or monopolistic market control, there’s also a risk to democracy itself when institutions are allowed to grow so big. I would argue that the general public is way more in agreement on this issue than you’d like to think.
I think Warren understood Krugman’s point entirely. He has said over and over that it wasn’t the big banks that are the problem but rather the shadow banks as Hillary said. I wouldn’t expect Krugman to get it right since he has been slow to evolve on a number of issues including free trade, another neoliberal disaster foisted on us by the Democratic establishment.
The sad fact for Hillfans is that this bank issue isn’t going away and it’s a huge weakness of her campaign. To think Republicans won’t hit her far harder than Sanders on this issue is wishful thinking.
Suppose, for the sake of discussion, that we stipulate that everything you write here is correct (I have no serious issues with any of it, including your criticisms of Ms. Clinton).
So what?
Let me present three scenarios:
1. President Sanders
2. President Clinton
3. President Trump/Cruz/Kasich/other
Under which of those three scenarios do we think the needed breakup will happen?
I suggest that of those three, scenario 2 — especially with Senator Sanders and Senator Warren speaking out from the Senate floor — is far and away the scenario most likely to solve the problem.
I really cannot imagine any scenario in which Republicans make Hillary’s position on breaking up the banks a campaign issue.
What occurred was systemic corruption, based upon the assumption of risk-free operations by brokerage houses and investment banks. (Note that “risk-free” did not apply to individual investors.) This trend started in investment banking and spread throughout the financial instruments community, including the big commercial banks.
This cultural corruption can be illustrated by the fact that union-busting, the destruction of pensions, and mass layoffs were often subsidized by union pension funds.
The result was a parasitic mindset including, but not limited to, the management of the big banks; it was much more systemic than that.
Good analyses of the macronomics of all this, readable by the lay public, are by Krugman, Gary Gorton, and Raghuram Rajan.
Senator Warren is by training a financial instruments attorney, not an economist. One can stipulate the validity of her criticisms of the large banks, while giving Paul Krugman the props for macroeconomic analysis.
Glenn Wiech’s post comments are largely an appeal to authority: Elizabeth Warren says so.
As Paul Simmons says, economists look at things different, and they have been looking at the idea of TBTF for several years. Here’s Mark Thoma documenting of perspectives on the idea. As far back as 2009, Bernanke was saying the TBTF was not necessarily the answer. And again it’s good to look at Krugman–darling of the Occupy Movement, target or the Manichean Bernistas:
Big banks were definitely a problem in 2008, but their largeness wasn’t necessarily the economic problem. AIG wasn’t a big bank. Lehman wasn’t. Country Wide wasn’t.
It will surprise Sanderistas in their simplistic view of the world that people can actually disagree honestly with their Candidate and Savior. As Krugman has pointed out, what’s troubling is not the goals of Sanderistas–with which most of us agree–it’s the fact that in their efforts to reinvigorate Democratic commit so many of the sins of the GOP, misinforming others in service to a greater truth.
So are the stream of anti-Bernie pieces people have linked to from Frank and Krugman. I have an aversion to all of it, since it’s all a form of avoiding being reality based and thinking for oneself. It’s why I generally am not swayed by endorsements from celebrities or elected officials. I would much rather read thoughtful analysis from BMG’s own contributors on most of these questions, and I would much rather we discuss policy in the real world and in our local community than this tiresome presidential primary.