"Big Is Bad" Catches On In Congress
The populist angst aimed at Wall Street banks is already spilling into Senate deliberations on regulatory reform, and a powerful new sentiment — big is bad — is being echoed by liberals and conservatives alike.
The anger at the nation’s financial behemoths is taking shape in a variety of ways, most notably in a bill from Sens. Maria Cantwell (D-Wash.) and John McCain (R-Ariz.), who are targeting big financial institutions such as JPMorgan Chase and Citigroup.
The bi-partisan duo’s bill would reinstate the Depression-era law that built a wall between commercial banking and the riskier activities of investment banking. The separation — originally set up in the Glass-Steagall Act — was repealed in 1999.
But reinstating Glass-Steagall has become something of a rallying cry among progressives, as well as some conservatives. They believe that allowing banks to provide all services to all people creates the very sort of “too big to fail” institutions that threatened the stability of the global financial order in 2008.
In other words, Big is Bad.
The idea has some powerful backers, including former Federal Reserve Chairman Paul Volcker — a giant in the financial world and also an outside economic adviser to President Obama — who literally has been traveling the world arguing in favor of returning to Glass-Steagall-type restrictions on what trading activities banks can engage in, though not a full return to the Depression-era restrictions.
But, as with anything in Congress, there’s also a clear political opportunity to be had with such a move.
“It doesn’t take a rocket scientist to know that Americans are really angry at the banks, and they feel like the administration and Congress are too cozy and have been too soft on them in terms of not really demanding that they change fundamentally,” said Heather McGhee, Washington director of Demos, a progressive think tank that supports the return to Glass-Steagall.
“Glass-Steagall rightly has sort of become this flag for something that would fundamentally change the way banks do business, something that would reassert the government’s role, a strong sort of government hand in between the Wild West market forces that caused our economy to tank last year,” she said.
For all its talk about “fat cats” in the banking industry, the Obama administration has not embraced reviving Glass-Steagall. Nor have leading lawmakers writing the main bills in Congress. Most experts scoff at the idea that the 1999 repeal — known as Graham-Leach-Bliley — had anything to do with the financial crisis, and the big banks wasted no time in warning Senate Banking Committee members that the Cantwell-McCain bill was misguided and bad for the economy.
“Reinstating Glass-Steagall is a misdiagnosis of the cause of the crisis,” with those who argue for it making a classic logical fallacy in contending that simply because Gramm-Leach-Bliley preceded the meltdown it must have caused it, said Rob Nichols, president of the Financial Services Forum.
What’s more, Nichols argued, the crisis also illustrated the benefits of diversification. “Many of the institutions that experienced the most turmoil during the crisis — namely, Bear Stearns, Lehman Bros., Merrill Lynch, Countrywide, WaMu, Indy Mac, AIG — were not financial holding companies, [the hybrid entities] permitted under Gramm-Leach-Bliley,” he said.
But the financial industry isn’t dismissing the Cantwell-McCain bill, or any other populist push, however remote their chances of becoming law may seem. As soon as Cantwell and McCain dropped their bill, lobbyists were knocking on doors of Banking Committee members to argue against the measure.
The Cantwell-McCain bill is not an isolated development, either. In the weeks ahead of the Dec. 11 floor vote on the House financial reform bill, Demos started getting calls from members looking for ways to toughen the bill by limiting what the banks could do, McGhee said. None of the resulting amendments made it through the House Rules Committee, however, including one from Rep. Maurice Hinchey (D-N.Y.) that would re-enact Glass-Steagall.
Hinchey introduced the amendment as a stand-alone bill the same day Cantwell and McCain introduced theirs. “The repeal of the Glass-Steagall Act was done to help large banks become enormous and to line the pockets of banking executives with more money than most Americans could ever dream of earning in their lifetime,” Hinchey said in a statement. “It was not done to help average working men and women in this country get ahead, and that was wrong.”
In the days after the House vote, House Majority Leader Steny Hoyer (D-Md.) said at a press conference that the House was discussing reimposing the banking limits. “As someone who voted to repeal Glass-Steagall, maybe that was a mistake,” Hoyer told reporters.
The effort is just the latest expansion of a populist push in Congress to beat back the largest, most powerful financial firms.
Rep. Paul Kanjorksi (D-Pa.), who is generally seen as a rather pro-business moderate on the House Financial Services Committee, pushed language that would empower federal regulators to pre-emptively break up large financial institutions that posed a risk to the economy, even if they were currently healthy. Progressive activists say the final language included in the House bill is actually not as tough as it sounds, but the financial industry nonetheless hates it.
In the Senate, Bernie Sanders (I-Vt.) introduced the “Too Big to Fail, Too Big to Exist Act,” which would require the Treasury secretary to break apart any financial institution deemed too big to fail. The Vermont independent has become a populist hero on the left and the right of the political spectrum for his crusade against Fed Chairman Ben Bernanke, a mission also rooted in his belief that the American people want a change in the way Wall Street functions, and Bernanke and the Fed he runs represent the status quo, Sanders says.
Both Cantwell and McCain describe their legislation in the language of Main Street’s ongoing economic angst coupled with anger at Wall Street’s return to outsize profits and bonuses.
“The American people want us to do something about the fact that capital is [not] flowing down to them. It is flowing in a direction that is making Wall Street huge profits. Nothing wrong with making profit, but this consolidation has squeezed the American public out of needed capital. And I think that capital could be going to investment in technology, to new business start-ups, to things that are about the ingenuity of America, not the ingenuity of toxic assets,” Cantwell said on MSNBC.
They also describe the legislation as a way to ensure that giant firms aren’t so big that they can gamble themselves again into the kind of trouble that requires taxpayer bailouts.
It remains unclear if any of these populist measures will make it into law, but some of the advocates following the financial reform process believe interest from members in such measures will only increase as jobs and the economy take center stage in the Senate and the 2010 election draws closer.
“This will be one of the hottest issues in the election,” predicted Heather Booth, director of Americans for Financial Reform, a coalition of consumer, labor and other pro-reform activists. “And the dividing line will be, Are you for Wall Street and the biggest banks, or are you for Main Street and real reform?”
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