In a presentation Elizabeth Warren gave at the Levy Institute’s 24th annual Hyman P. Minsky Conference, she asked: what are we to make of Dodd-Frank five years later? She asked us to go back to the Wall Street crash of 1929 and how the government responded to it.
In response to the crash, our policy makers examined what went wrong and changed our laws to ensure that excessive speculation and risk taking on Wall Street would not, again, push our economy over a cliff.
They established the SEC – an agency charged with enforcing basic marketplace rules.
They put in place FDIC insurance so depositors felt comfortable that their money was safe in case of disaster.
And the Glass–Steagall act made a clear division between deposit-taking financial institutions and investment banks. This move assured that banks could not use government guaranteed deposits for high risk speculation.
Warren tells us that for the next 50 years these precautions worked. However, in the 80’s “deregulation” became the new buzzword. The Fed and other bank regulators learned to look the other way as the big banks took advantage of their customers and gambled for high stakes. The banks issued easy-to-get home equity loans, excess credit cards, and mortgages to those who could not afford to pay. The list goes on. Glass-Steagall was eventually repealed and the fox was allowed into the hen house.
Our legislators ignored high-risk mortgages which were packaged, re-packaged, and sold to unsuspecting pension funds, municipal governments and others who trusted the market. And in 2008, the worst crash since the 30’s brought us to our knees. The crash, according to the Dallas Federal Reserve Bank, cost us $14 trillion.
Warren says that without some basic government regulations, our financial markets just don’t work. According to Warren, this has further polarized the division between Democrats and Republicans- I won’t argue that. She says, rules are necessary to markets that create competition and innovation.
She asks, that financial institutions should not be allowed to cheat people. Markets only work if people understand and agree to what they are getting. She asks that banks should not be allowed to get the taxpayer to pick up their risks.
Warren did her homework and please understand I’m not necessarily agreeing with her political frame of mind. I’m saying she has some merit- we are once again allowing the banks to run amok, shirk responsibility and put the burden of paying up on our average citizen- who can ill afford it.
She challenges the Too Big To Fail banks. Warren claims that eleven of the big banks are still so risky that if any of them started to fail, they would need a government bailout or they would take the U.S. economy down again.
So what do we do?
Break up the big banks by capping the size of the biggest financial institutions and establish another Glass – Steagall Act that rebuilds the wall between commercial and investment banking? Maybe.
For too long we have allowed the Fed to bail out the too big to fail banks. The Fed has given trillions of low- cost loans to these banks, which undermines the usual market discipline. So big banks continue to take risks, knowing the Fed will bail them out once again. We’ve essentially allowed the Fed to be the piggy bank for the big banks. She asks we visit our tax codes that are in alignment with excessive risk- taking.
Warren says we need smarter and simpler regulations. And, we need to break up the biggest banks so that NO bank is too big to fail. She says this is an economic as well as a financial fight. The biggest of the too big to fail banks wield huge political power; witness Citigroup’s amendment gutting part of Dodd-Frank in which they persuaded their DC friends to attach to a bill that had to pass or we would have had another government shutdown.
Warren quotes Teddy Roosevelt, who said, “Big corporations should not have the power, “to interfere in politics in order to secure privileges to which they are not entitled.””
We’ve lost something since then.
Is it apathy? Laziness? Lack of thinking that we as citizens can make a difference. Are we ill–informed? Odd isn’t it, considering how many houses are tuned in to news 24 hours a day?
I’m not sure what the answer is, but we sure are heading down an ever careening slope if we don’t ask, question, act, otherwise speak out and stop letting the big banks, or anyone run roughshod over our basic principles.
You can see the text of her presentation by clicking here: The Unfinished Business of Financial Reform.
You can see a video of her presentation by clicking here: Elizabeth Warren: The Unfinished Business of Financial Reform.