As election season rolls on, anger continues to bubble up on both sides of the partisan divide about Wall Street. Last night, Hillary Clinton and Bernie Sander’s Brooklyn brawl was no different, as the idea of banks being “too big to fail” was a major issue. This comes after the nation’s top regulators announced that five banks are still too massive and pose a systemic risk.
Populism is sweeping America, politicians are voicing the perception of many angry, everyday Americans: one set of rules for Main Street and another set of rules for Wall Street. While much the rhetoric is based on uninformed anger–since the bank bailout didn’t actually cost U.S. taxpayers a dime (T.A.R.P actually yielded a $15 billion profit)–let’s explore why so many people, including Sanders, are so adamant about breaking up the banks.
The anti-Wall Street mindset is framed by the following: the government had few lifelines for them in the face of economic calamity but rolled out the red carpet for banks. In many people’s eyes, it was unfair that banks got bailed out to the tune of hundreds of billions of dollars. Furthermore, many people blame bankers’ reckless behavior for the financial crisis, so they believe the government rewarded risky behavior with bailouts. It’s only a matter of time before there’s another crisis, and the government has to rescue an institution that’s “too big to fail.” Sanders takes this a step further and uses strong language to lambaste our banking class:
“We have got to break up these banks, A, because they’re based on fraudulent principles, and B, because when you have six financial institutions that have assets equivalent to 58 percent of the GDP of this country, they are just too big, too much concentration of wealth and power.”
-Bernie Sanders, Democratic Debate 4-15-2016
Sanders is right about the mammoth size of our banks–they are larger than ever— and they are probably too big to fail, precisely what we learned during the last crisis. The question is, can they be broken up in an orderly fashion to lower systemic risk? Better yet, is that a good policy for our economy? No one really knows the answer to those questions, but you might be surprised to learn that many people, conservative and liberal, are very adamant about shrinking the size of our banks.
Mind you, there are powerful voices arguing that breaking up the banks is a bunch of hogwash that won’t actually solve any of our problems. Forcibly breaking up an industry and artificially limiting the size of private companies on its face sounds extremely un-American. Furthermore, more regulations on one of America’s biggest industries would make our financial services sector much less competitive globally. (For more information, Michael Grunwald of Politico did an excellent write up on how breaking up the banks is a terrible idea).
On the other hand, a motley crew of conservatives deeply entrenched in the financial world, including Republicans Neel Kashkari, president of the Minneapolis Federal Reserve, and Former Dallas Federal Reserve President Richard Fisher sign off on the idea of breaking up the banks. Kashkari made a speech titled “Ending Too Big To Fail,” that reviewed specific policy proposals on how the government could unwind the banks. Fisher believes big banks rose from massive implicit government subsidies and that breaking up the banks would make for a better, more free-market financial system.
The debate will likely continue, and there’s a lot at stake for major financial interests and the general public. Many are promoting the idea that the reforms under the Dodd-Frank set of regulations don’t go far enough. Breaking up banks is extremely risky, but others warn the consequences of another financial crisis may be even worse without taking that risk. Look for “too big to fail” and breaking up the banks to remain a permanent fixture in American political discourse for the foreseeable future.
