Tuesday, December 22, 2015

Greider on Clinton and Wall Street

Probably nothing demonstrates so vividly the dramatic shift to the right in USA politics as the story of Hillary Clinton and her role in the Democratic Party.  I sort of understand her bellicose hawkishness because I got to know some amazingly militaristic "liberals" during my experience with the anti-war movement in the 1960s and 1970s.  I was living in Minnesota which had an anti-war candidate in Eugene McCarthy and a serious Cold Warrior in Hubert Humphrey.  The Humphrey people could not believe we could part company with him over Vietnam.  I was once asked, "Are you really going to turn your back on the man who almost single-handedly gave us Medicare?  Over Vietnam?"  So while I do not like it, I understand the Democratic Party selecting as its standard-bearer someone who at least half of the world's population considers a war criminal for her actions as Obama's Secretary of State.

But when it comes to economics, I am still shocked at how reactionary a Democrat can be.  Not long ago, I heard Ms. Clinton defend the 1999 repeal of Glass-Steagall, the 1933 banking reform act that drew a sharp legal divide between commercial and investment banking.  This repeal happened on Bill Clinton's watch and many of us blame that misbegotten legislation for the banking meltdown of 2007-8.  Here's something to keep in mind.  Carter Glass (VA) and Henry Steagall (AL) were very conservative southern Democrats who were vitally important in creating the Federal Reserve System.  These were not a couple of radical bomb-throwers.  In fact, such conservatives from the South are usually Republicans these days.  By defending the repeal of Glass-Steagall, Hillary Clinton was placing herself to the reactionary right of those two.  In fact, it's hard to believe there is any space to the right of those two but our Hillary has found it.

Personally, I believe that the election of Ms. Clinton would be an unmitigated disaster.  Climate change is on track to destroy the biosphere for human habitation.  The ONLY way we can get off that track is to invest a lot of money in a new greener society.  And the only way we can ever get the necessary money is to radically reform the global financial system.  We don't need someone who can be convinced that something like Glass-Steagall needs to be repealed—we need visionaries to pass a couple dozen pieces of Glass-Steagall-like legislation that will take the financial system out of the hands of criminal greedheads and put it into the control of people who want to nurture the real economy.

Hillary Clinton Is Whitewashing the Financial Catastrophe

She has a plan that she claims will reform Wall Street — but she’s deflecting responsibility from old friends and donors in the industry.


This post originally appeared at The Nation.

Hillary Clinton’s recent op-ed in The New York Times, “How I’d Rein In Wall Street,” was intended to reassure nervous Democrats who fear she is still in thrall to those mega-bankers of New York who crashed the American economy. Clinton’s brisk recital of plausible reform ideas might convince wishful thinkers who are not familiar with the complexities of banking. But informed skeptics, myself included, see a disturbing message in her argument that ought to alarm innocent supporters.

Candidate Clinton is essentially whitewashing the financial catastrophe. She has produced a clumsy rewrite of what caused the 2008 collapse, one that conveniently leaves her husband out of the story. He was the president who legislated the predicate for Wall Street’s meltdown. Hillary Clinton’s redefinition of the reform problem deflects the blame from Wall Street’s most powerful institutions, like JPMorgan Chase and Goldman Sachs and instead fingers less celebrated players that failed. In roundabout fashion, Hillary Clinton sounds like she is assuring old friends and donors in the financial sector that, if she becomes president, she will not come after them.

The seminal event that sowed financial disaster was the repeal of the New Deal’s Glass-Steagall Act of 1933, which had separated banking into different realms: investment banks, which organize capital investors for risk-taking ventures; and deposit-holding banks, which serve people as borrowers and lenders. That law’s repeal, a great victory for Wall Street, was delivered by Bill Clinton in 1999, assisted by the Federal Reserve and the financial sector’s armies of lobbyists. The “universal banking model” was saluted as a modernizing reform that liberated traditional banks to participate directly and indirectly in long-prohibited and vastly more profitable risk-taking.

Exotic financial instruments like derivatives and credit-default swaps flourished, enabling old-line bankers to share in the fun and profit on an awesome scale. The banks invented “guarantees” against loss and sold them to both companies and market players. The fast-expanding financial sector claimed a larger and larger share of the economy (and still does) at the expense of the real economy of producers and consumers. The interconnectedness across market sectors created the illusion of safety. When illusions failed, these connected guarantees became the dragnet that drove panic in every direction. Ultimately, the federal government had to rescue everyone, foreign and domestic, to stop the bleeding.

Yet Hillary Clinton asserts in her Times op-ed that repeal of Glass-Steagall had nothing to do with it. She claims that Glass-Steagall would not have limited the reckless behavior of institutions like Lehman Brothers or insurance giant AIG, which were not traditional banks. Her argument amounts to facile evasion that ignores the interconnected exposures. The Federal Reserve spent $180 billion bailing out AIG so AIG could pay back Goldman Sachs and other banks. If the Fed hadn’t acted and had allowed AIG to fail, the banks would have gone down too.

These sound like esoteric questions of bank regulation (and they are), but the consequences of pretending they do not matter are enormous. The federal government and Federal Reserve would remain on the hook for rescuing losers in a future crisis. The largest and most adventurous banks would remain free to experiment, inventing fictitious guarantees and selling them to eager suckers. If things go wrong, Uncle Sam cleans up the mess.

That’s a hard sell in politics, given the banking sector’s bear hug of Congress and the White House, its callous manipulation of both political parties. Of course, it is more complicated than that. But recreating a safe, stable banking system — a place where ordinary people can keep their money — ought to be the first benchmark for Democrats who claim to be reformers.
“As I have reflected about the years since 1999, I think the lessons of Glass-Steagall and its repeal suggest that the universal banking model is inherently unstable and unworkable. No amount of restructuring, management change or regulation is ever likely to change that.”
Actually, the most compelling witnesses for Senator Warren’s argument are the two bankers who introduced this adventure in “universal banking” back in the 1990s. They used their political savvy and relentless muscle to seduce Bill Clinton and his so-called New Democrats. John Reed was CEO of Citicorp and led the charge. He has since apologized to the nation. Sandy Weill was chairman of the board and a brilliant financier who envisioned the possibilities of a single, all-purpose financial house, freed of government’s narrow-minded regulations. They won politically, but at staggering cost to the country.

Weill confessed error back in 2012: “What we should probably do is go and split up investment banking from banking. Have banks do something that’s not going to risk the taxpayer dollars, that’s not going to be too big to fail.”

John Reed’s confession explained explicitly why their modernizing crusade failed for two fundamental business reasons. “One was the belief that combining all types of finance into one institution would drive costs down — and the larger the institution the more efficient it would be,” Reed wrote in the Financial Times in November. Reed said, “We now know that there are very few cost efficiencies that come from the merger of functions — indeed, there may be none at all. It is possible that combining so much in a single bank makes services more expensive than if they were instead offered by smaller, specialised players.”

The second grave error, Reed said, was trying to mix the two conflicting cultures in banking — bankers who are pulling in opposite directions. That tension helps explain the competitive greed displayed by the modernized banking system. This disorder speaks to the current political crisis in ways that neither Dems nor Republicans wish to confront. It would require the politicians to critique the bankers (often their funders) in terms of human failure.

“Mixing incompatible cultures is a problem all by itself,” Reed wrote. “It makes the entire finance industry more fragile…. As is now clear, traditional banking attracts one kind of talent, which is entirely different from the kinds drawn towards investment banking and trading. Traditional bankers tend to be extroverts, sociable people who are focused on longer term relationships. They are, in many important respects, risk averse. Investment bankers and their traders are more short termist. They are comfortable with, and many even seek out, risk and are more focused on immediate reward.”

Reed concludes, “As I have reflected about the years since 1999, I think the lessons of Glass-Steagall and its repeal suggest that the universal banking model is inherently unstable and unworkable. No amount of restructuring, management change or regulation is ever likely to change that.”

This might sound hopelessly naive, but the Democratic Party might do better in politics if it told more of the truth more often: what they tried do and why it failed, and what they think they may have gotten wrong. People already know they haven’t gotten a straight story from politicians. They might be favorably impressed by a little more candor in the plain-spoken manner of John Reed.

Of course it’s unfair to pick on the Dems. Republicans have been lying about their big stuff for so long and so relentlessly that their voters are now staging a wrathful rebellion. Who knows, maybe a little honest talk might lead to honest debate. Think about it. Do the people want to hear the truth about our national condition? Could they stand it? more


  1. I totally agree with you about Hillary Clinton. I believe she and her husband are both unmitigated disasters that will only get worse the longer they hang around.

    I’ve given up on our political options. I stopped voting for the first time in fifty years when I couldn’t vote for Obama again in 2012. (He let me down.) But if Joe Biden came out for Bernie and agreed to stay on as Vice President, I think I could vote for that? It might stir things up a little!

    Meanwhile, I still don’t understand how you think reform and regulation of the banking systems will be enough to keep us going? (Does Tony know the chronology of banking and business reforms since Teddy Roosevelt and Sherman Anti-Trust in the 1890’s, to Glass-Steagall in the 1930’s, to its repeal under Bill Clinton and where we are now? I think it all translates to, "Reform and regulation doesn’t last long when it comes to money." WE NEED A WHOLE NEW SYSTEM!

    Ref: the question at the end of Greider, “Do the people want to hear the truth about our national condition?” Yes, I think they do. “Could they stand it?” Yes, I’m sure they could. But I also still feel that reform and regulation of our current systems is not enough compared to the whole new system I think we really need.

    1. You are probably right about the need to completely rebuild the financial system. I wonder though, how different a rebuilt system would be from a remodeled one. Bankers tend to think like bankers, after all, and banking has practices that have existed for centuries.

      And there have been practices in the past that have actually worked pretty well. Before it was blown up in the 1980s, the Savings and Loans did a pretty good job of putting people into homes they could afford. Postal banking has worked in many countries. The Sparkassen system has been very helpful in Germany. The Bank of North Dakota is amazingly effective considering the handicaps it operates under. Etc.

      Of course, if you are saying we need to build a new system that works so well, it will probably replace the old practices, then we are probably on the same page. Then it is mostly a matter of deciding what we want the new system to accomplish.

  2. Who is Prince Sovon? Don't think I want to click on either of those links.

    The new system I’m thinking of would indeed work so well it will not only replace all “good” old practices, it will create new ones with new incentives for getting most of us up in the morning and going to work (or not) that will make most of us glad to be here and unafraid of what the new day might bring. (But not just for the sake of a new financial system that, in and of itself, will cease to exist.)

    What we really need is to completely rebuild everything on earth, top to bottom, the entire socio-economic-political system of the entire world! All of it. And if we do that we will be saved (as much as humanly possible) and Peace on earth will break out everywhere (because it’s always been more popular then war). Things will get easier once we get going, as we learn how to make the transition, there will be less fighting and more cooperation as it becomes obvious that life isn’t about money anymore.

    Indeed. The key, the most important thing in the new system, is that we stop thinking about money all the time and start working together toward a better “New Deal.” Money for small stuff yes, small scale private enterprise and personal stuff. But money for big stuff no, because anything big is social and only society at large can decide what could potentially affect the whole planet.

    No large private or personal fortunes allowed in this new system. No more capitalism to beguile us, no more corporations and financial institutions to get us all mixed up, and no more unemployment or mandatory work gangs either! Everyone who wants a job in the new system will get one (by mutual agreement) and the rest will be provided with subsistence food, healthcare, and shelter to think about it. That’s how the new system will begin. Neighborhood by neighborhood, each rebuilding itself within a new minimum (and maximum) standard of neighborhoods, residences, and businesses that will be allowed (or required for the sake of the common good for all) on earth from now on. (And no despots allowed either, everything strictly democratic with citizenship and the right to vote earned not granted by birth or waiver of any kind.)

    Those who know how to run a good financial institution, like the Savings and Loans, Postal banking systems, Sparkassen system in Germany, Bank of North Dakota, etc, as true believers in liberty and justice for all, they will know how to help and be the seed bed of inspiration for many in the many changes we need to make.

    When food, healthcare, and shelter are provided, warring factions will no longer be popular. There will be little left for them to fight about or fight over except all the typical bully stuff there’s always been (and will always be that we will always need a good cop for to help control them, the bullies, but no more military armed forces).

    Mortality and learning will continue to be abiding issues (the new system won’t be able to cure everything) but it will solve all of our money problems, so the sooner we get started the sooner we will get closer to living in a world where the rest of our fondest dreams might be possible too. (Things that money never could buy.)

    Deciding what we want the new system to accomplish is already established: “We the People, in order to form a more perfect union and better neighborhoods on earth for all to live in, in peace and harmony, to establish justice, insure domestic and neighborhood tranquility, provide for the common good, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity, do ordain and establish this new system of everything on earth that shall be the order of the day from now on!” Sound familiar? The rest are details that will be worked out, as long as we are able to keep the demons’ rum and money at bay.