An Unfinished Mission:
On Tuesday, November 12, 2013, a group of financial experts gathered in the Russell Senate Office Building in Washington, DC to discuss the current state of financial industry regulatory reform, with a keynote speech by Senator Elizabeth Warren (D-MA). Speakers exhibited a sense of self-awareness that has been largely missing from the conversation on financial rulemaking; panelists humbly acknowledged that there are still significant challenges to achieving regulations that actually protect consumers while earning support from the financial industry.
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which authorized several federal agencies to write financial regulations addressing a vast array of issues. Agencies are still in the process of implementing those regulations, and they face opposition from the industry daily. Testimonies from professors, economists, financial regulators, and even former members of Congress discussed the problems the financial sector faces today, the challenges to implementing the most significant financial reform act since the 30’s, and the issues that remain unresolved.
Panelists sipped coffee and nibbled at pastries as they waited their turn to discuss the forces that drove our national economy to the brink of collapse in the fall of 2008. After a brief discussion of derivatives, a device that allows speculators to hedge risks against other assets, panelist Marcus Stanley of Americans for Financial Reform, of which Green America is a member, raised the issue of “Shadow Banking.” The term refers to transactions that are not based upon the acceptance of traditional bank deposits, and therefore not subject to traditional banking rules and regulations. Jennifer Taub, a professor at Vermont Law School, made the case that since the 1980’s, the United States’ securities rules were gutted based on the premise that “sophisticated investors,” who completed complex transactions, better understood the incentives and risks involved than regulators, and thus were actually inhibited by laws requiring disclosure on the transactions.
The problem of shadow banking was further illuminated when Mike Calhoun of the Center for Responsible Lending discussed how subprime mortgages originated. The proliferation of mortgages sold to subprime borrowers, Calhoun and others on the panel asserted, was a result of ludicrous monetary incentives offered to lenders, paired with an acute inability to enforce regulation upon those responsible for the reckless lending.
The failure to craft and implement regulations in the financial sector directly led to the events that shocked the economy in 2008. As money passed between institutions with little to no accountability for fraud and deceit, banks swelled to the point where they were famously “too big to fail.” As they became too big to fail, they became too big to manage. It became difficult to determine the level of capital banks held at any given time, and thus difficult to impose a minimum capital requirement so that banks could sustain their operating losses. To make many long stories into a short one, banks pushed their limits as far as they possibly could before things began to fall apart. Of course, when things fell apart, tax payers were forced to come to the rescue to bail out the banks. Americans paid a steep price as trillions of dollars in wealth evaporated and the unemployment rate shot up.
So five years after the massive bailout given to failing banks, the fate of financial regulation reform remains up in the air. At the same time, megabanks — such as Citi, Bank of America, Wells Fargo, and Chase — are even bigger. If they fail again, the bailout will dwarf the last one. Lawmakers and policy specialists alike are grappling with defining banking’s role in America’s future. Should we continue to allow banks to participate in markets other than banking? Or should we, despite the defiant cries of financial executives, decide as a country to make financial institutions work more for the people, and less for themselves?
Senator Warren is a leader on the Hill of financial regulatory reform, and she believes the costs imposed to society as a result of lax banking rules are unacceptable and reprehensible. Warren cited bailouts and other taxpayer subsidies as the screws holding the “too-big-to-fail” institutions together. “We don’t grow this country from the financial sector,” she asserted, “but from the middle class.”
As citizens, we can urge lawmakers to support the successful implementation of the Dodd-Frank Act regulations (and urge Congress to go further). At the same time, Green America urges you to Take Charge of your Credit Card and shift your support from the megabanks back into your own community. Your money belongs to you, and you should think twice before wasting it on credit card fees and propping up the investments of megabanks that don’t benefit anyone but those at the top of the food chain. Let us know what you think by taking our pledge to stop supporting banks that are too big to do anyone any good!