By Wade Lee Hudson
The financial industry…is a machine to enrich itself, fleecing customers and widening income inequality.
Jesse Eisinger, Pulitzer Price winning reporter
Driven by reckless greed, Wall Street undermines the economy, corrupts the government, creates repeated crises, and is leading the country toward even greater disaster. A financial system that does not serve the public interest needs restructuring. Building an effective movement to fundamentally reform Wall Street is an urgent necessity.
A sustainable economy requires banks to honor their rightful purpose. Banks are supposed to secure deposits, make loans, and earn a profit by charging interest on those loans. In these ways, banks support businesses and consumers. Trustworthy banks are key to a vibrant economy.
In 1933, President Roosevelt signed the Glass-Steagall Act to stop banks from gambling on the future value of stocks, bonds, currencies and other financial instruments that are known collectively as “paper.” Thereafter only investment banks could bet in the nonproductive “paper economy” and commercial banks were limited to loans to businesses and consumers in the “real economy.”
Those reforms benefited both banks and the general public and worked well for decades. There were no more panics. The banking industry was stable. The U.S. economy grew steadily and the dollar became the global currency.
But in the early 1960s, our largest banks began tearing down the wall between commercial and investment banking. In 1999 they finally persuaded Congress to repeal the Glass-Steagall Act. Now all banks can gamble in the paper economy. This has enabled these “universal banks” to shrink in number while increasing in size. Since 1984, the number of banks has fallen by 50% and the five largest banks now hold about 50% of total banking assets.
Big banks argue that their size provides them with advantages that come from “economies of scale,” as is true with many businesses. But MIT professor Simon Johnson has concluded, “It is well established that there are no such economies…when you adjust for the undeniable implicit subsidies received by megabanks [from the federal government].”
More importantly, in a debate at the Milken Institute in October 2012, Johnson stated:
What does that do for the American economy? What is the benefit that we derive socially, for the non-financial sector, in terms of increased productivity or anything else, from that growth in bank size? The answer is nothing. I’ve talked to [top executives] of international non-financial sector companies, and I’ve asked them, “Do you need Chase to be at this level, $4 trillion in total assets, in order to run your business globally?” The answer is no. They don’t want to buy all of their products from one supplier.
With the benefit of various government subsidies, the big banks reap gigantic profits in the paper economy, but the rest of society fails to benefit. We need ethical banks that serve Main Street.
The Growing Paper Economy
In high finance, large investors have a huge advantage over everyone else. With casinos, the government limits the house advantage. But on Wall Street, the sky’s the limit.
The big banks can buy the best computers and software. Large investors obtain privileged information from private exchanges with megabank managers. Megabank executives often illegally use inside information to guide their own bets. (The Securities and Exchange Commission brought 58 insider trading actions in 2012 against 131 individuals and entities.) And with “classic arbitrage ,” they gain virtually guaranteed profits by buying paper at one price in one market and immediately selling it at a slightly higher price in another market.
From 1984 to 2011, the contribution of the U.S. financial industry to total corporate profits increased from 12% to 32%. The financial sector’s share of the nation’s gross domestic product increased from 2% in 1945 to 8.4% in 2009 . In 2010, Wall Street processed almost $3 trillion a day in currency transactions.
In early 2008, Bloomberg News reported that 68% of Goldman Sachs revenue came from trading, but pinning down the size of the Wall Street casino is impossible because the banks obscure what they are doing, as Frank Partnoy and Jesse Eisinger documented in the January/February 2013 issue of The Atlantic. They reported:
JPMorgan had to admit that its reported numbers were false. A major source of its supposedly reliable profits had in fact come from high-risk, poorly disclosed speculation…. Current disclosure requirements don’t illuminate banks’ financial statements; instead, they let the banks turn out the lights.
In “How Wall Street Hollowed Out Industrial America, ” a 2012 Mother Jones article, Steve Fraser observed that one result has been economic stagnation:
[The] traders and financial wizards of Wall Street gobbled up ever more of the nation’s resources. It was another Great Migration — instead of people, though, trillions of dollars were being sucked out of industrial America and turned into “financial instruments” and new, exotic forms of wealth. If blue-collar Americans were the particular victims here, then high finance is what consumed them. Now, it promises to consume the rest of us.
This paper economy is highly unstable: the greater the risk, the greater the potential profit. And traders feel free to take big risks because they know that if they get into trouble, as they did in 2008, taxpayers will have to bail them out.
Taxpayers are on the hook because the big banks loan each other so much money. They routinely make long-term loans using money borrowed for very short periods, making a profit from the difference between what they charge for the loans and what they pay to borrow. They also use certain accounting tricks and “off-balance-sheet” transactions to obtain more money for gambling in the paper economy.
Since they rely on each other to pay their debts, these loans make the banks extremely interconnected, like a house of cards. The failure of one big bank could bring down all of them, which would devastate the entire economy.
The financial industry knows the government will bail out a “too big to fail” bank that is threatened with bankruptcy. This assumption enables big banks to borrow money more cheaply than can community banks, the traditional source of loans for businesses and consumers. As a result, many of these smaller banks are going out of business.
Wall Street facilitated this banking transformation by exercising its political muscle. According to OpenSecretsorg, the financial sector employs more lobbyists than any other for-profit sector of our society. And 60% of those lobbyists are “revolvers” who go through “a revolving door that shuffles former federal employees into jobs as lobbyists, consultants and strategists just as the door pulls former hired guns into government careers.”
Legislators, regulators, and administrators know that if they don’t challenge the big banks, they may be offered lucrative jobs when they retire from public service. This unspoken promise often weakens their desire to protect the public. And banks and their lobbyists influence officials with campaign donations and gifts.
With their near-monopoly, Wall Street blocks reform legislation and dominates the agencies that are supposed to regulate them. As Harvey Rosenblum, chief economist for the Dallas Federal Reserve bank, wrote, “[The big banks] remain difficult to control because they have the lawyers and the money to resist the pressures of federal regulation.”
The power of the megabanks has permitted them to avoid prosecution for crimes that contributed to the 2008 debacle. As Charles Ferguson, director of the Academy Award-winning documentary Inside Job, wrote in the New York Times:
The world’s largest financial institutions earned several hundred billion dollars in fake profits…. Yet despite substantial evidence of large-scale fraud, nobody has gone to jail, nobody’s compensation has been clawed back, and only a few firms have paid even trivial fines.
In late 2012, the federal government shocked the world when it decided not to prosecute the global HSBC bank for laundering billions of dollars in blood-soaked Mexican drug cartel money. A major reason is that the U.S. government was concerned that criminal prosecution might cause the bank to go bankrupt and threaten the entire economy. Apparently the big banks are also “too big to jail.”
The shift toward a paper economy has led to increasingly frequent financial crises. From 1933 to 1966 there wasn’t a single global financial crisis. Since 1966 there have been eighteen and almost one a year since 2000. Harvey Rosenblum has estimated that the continuing 2008 crisis has already cost U.S. economy about $15 trillion, which equals one year’s gross domestic product.
In 2002, commenting on the danger posed by derivatives, a kind of speculation involving bets on bets, Warren Buffet predicted, “These instruments will almost certainly multiply in variety and number until some event makes their toxicity clear… These are financial weapons of mass destruction.” The 2008 crisis proved his prediction correct.
Wall Street titans are remarkably indifferent about these crises. In 2010, Jamie Dimon, head of JP Morgan Chase, casually testified to Congress that a financial crisis is merely “something that happens every five to seven years .” The big banks don’t care because they almost always come out on top after buying up losers at bargain-basement prices. Speculators love volatility.
The big banks are not only too big to fail and too big to jail; they’re also too big to regulate and too big to manage. No executive office can supervise thousands of employees spread throughout the world conducting countless incredibly complex high-speed trades.
Economist Rosenblum stated in a debate at the Milken Institute on October 15, 2012:
If Lehman [Brothers] and four others declared bankruptcy simultaneously that week in September of 2008, there’s no way our system could have dealt with it. And we were on the brink. Read the opening page of [Andrew Ross] Sorkin’s book, Too Big To Fail, and we were on the brink. Jamie Dimon was literally worried about all five firms that he was dealing with declaring bankruptcy and preparing for it. Nobody could have dealt with that edge of the cliff. And we are going to be facing a bigger edge of the cliff if we leave the status quo unchanged.
Some observers believe that the forthcoming regulations authorized in the Dodd-Frank bill will enable the federal government to smoothly lead a failing bank through bankruptcy. But most experts are unconvinced. The big banks are just too interconnected and too global. Even William C. Dudley, President of the Federal Reserve Bank of New York, said in a November 2012 speech :
We are a long way from the desired situation in which large complex firms could be allowed to go bankrupt without major disruptions to the financial system and large costs to society. Significant changes in structure and organization will ultimately be required for this to happen.
This prompted Congressperson Brad Miller to comment that “ultimately” is insufficient and “a trial and error approach to regulation really should not be an option.”
The Dodd-Frank bankruptcy procedure is unreliable partly because it would require banking officials in other countries to cooperate to a previously unknown degree. Each country would have to refrain from quickly seizing threatened assets for itself, while risking major losses later. It is extremely unlikely that politicians in any country would allow that to happen.
So why take the chance of a global economic catastrophe by perpetuating the status quo? Only a few benefit and the rest of us are put in jeopardy. Why not prevent commercial banks from gambling and leave the gamblers to their own devices? The potential benefits from that approach are obvious and the risks minimal.
A Broad Coalition
Fortunately, a growing number of pro-reform voices are speaking out loudly and clearly. A wide array of forces could come together quickly to fundamentally restructure Wall Street.
Community banks and their advocates are vehemently protesting the advantages that the big banks gain from federal subsidies. Some regional Federal Reserve Banks, many Congresspersons and Senators, and a number of libertarian and conservative pundits support these protests. Even those who are generally anti-government agree that only the federal government can change the rules of the game. Wall Street reform therefore offers a rare opportunity for an effective alliance between free-market proponents and progressive advocates who accept a mixed economy.
The financial reform movement is already global, as it must be. Reforming Wall Street must be coordinated with similar efforts in other countries. Fortunately, reformers elsewhere are already strong. The United States should use its influence constructively by setting a positive example.
We have a good foundation to build on. Sixty percent of Americans support stronger reform. As Partnoy and Eisenger reported, “A parade of former high-ranking executives has called for bank breakups, tighter regulation, or a return to the Depression-era Glass-Steagall law.” Even Sandy Weill, the former Citigroup chief executive who created the first modern-era megabank, said in a CNBC interview:
What we should probably do is go and split up investment banking from [commercial] banking, have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that’s not going to risk the taxpayer dollars, that’s not too big to fail.
Local actions are currently being taken to deal with specific problems like threatened foreclosures. And some national activist organizations have affirmed the need for fundamental Wall Street reform. Projects that address Wall Street-related issues include:
- Americans for Financial Reform
- End “Too Big to Fail” Petition
- Home Defenders League
- Independent Community Bankers of America
- Move Our Money
- National People’s Action
- New Bottom Line
- Occupy Our Homes
- Public Banking Institute
- Rebuild the Dream
- Reinstate the Glass-Steagall Act Petition
- Robin Hood Tax USA
- Stop Big Bank Greed / SEIU
- Strike Debt
- Switch Your Bank
But so far, to my knowledge, no group is organizing activists locally, face-to-face, to pursue specific, winnable reforms concerning national financial policy.
Reform Wall Street
Occupy Wall Street focused on Wall Street for good reason. Now is the time to translate the Occupy Wall Street spirit into effective action.
The growing Wall Street reform movement needs a member-controlled component. Bottom-up pressure focused on achievable reforms is essential if this movement is to succeed.
These groups could consider, among other options, the goals adopted by Reform-Wall-Street.org, a project dedicated to growing a network of concerned individuals who want to educate each other on these issues. Our mission is to help assure that banks serve the real economy. Our primary goals are:
- Discourage risky, nonproductive financial transactions in the paper economy by imposing a sales tax on those transactions.
- Break up banks that are too-big-to-fail.
- Reestablish the wall between commercial and investment banking.
- Eliminate governmental subsidies for big banks that make it harder for community banks to compete.
Our primary methods are:
- Develop an informal network of individuals concerned about this issue.
- Share information, analysis, and action alerts.
- Support the development of inclusive, member-controlled grassroots activist organizations dedicated to this cause.
- Promote the growth of a more just, compassionate, and sustainable society.
- Encourage the development of small, supportive communities rooted in nonviolence whose members support one another in their personal development, community building, and civic engagement.
We don’t expect any group to fully adopt these particular policies. Nor do we plan to build an activist organization ourselves. Rather, we will encourage others to do so and will help as best we can if and when they do.
Our recommendation is that this movement base itself on the Gandhi-King Three-Fold Path, which is rooted in what Gandhi called “evolutionary revolution.” In order to advance the steady transformation of our society into a compassionate community dedicated to the common good of all humanity, the Gandhi-King Three-Fold Path integrates personal development, growing community, and civic action in a holistic synergy.
There are other key elements in the Gandhi-King approach. We need to tap deep feelings of love rather than rely primarily on anger to motivate one another. We need to affirm positive goals rather than merely struggle against injustice. We need to focus on concrete, achievable short-term reforms that move toward longer-term transformation, rather than merely undertake symbolic acts of moral witness to educate others. And, while engaging in nonviolent direct action when necessary, we need to constantly seek mutual respect and reconciliation with our opponents through negotiation rather than seek to defeat them as “enemies.”
In these ways, we can attract others with contagious positive energy and collaborative problem solving. If enough progressive-mined activists embraced the Gandhi-King Three-Fold Path, we could move closer to our goal, a just and more humane society.
Please let us know what you think by commenting on our website. We’ll consolidate and share what we learn, including information about meaningful opportunities for action. You can also follow our Facebook page, interact on Twitter, and subscribe to our newsletter.
Since our government is paralyzed, change must come from the bottom up. To transform our society, we must restructure our financial industry, revive our economy, and strengthen our democracy. It won’t be easy, but together we can do it.