Five years later, and things seem marginally better in some areas (the CFPB exists), significantly worse in others (LIBOR, money laundering, London Whale, etc.). There has been some debate recently about whether we have a safer financial system today than before Lehman collapsed. But the fundamental issue, as Simon and I discussed in 13 Bankers, is whether our political system will put the interests of society at large ahead of the interests of large financial institutions. On that score, there is little to be encouraged about.
In 2002, Art Wilmarth wrote a mammoth (262 pages) article titled “The Transformation of the U.S. Financial Services Industry, 1975–2000.” In that article, he identified many of the key trends in the financial sector—consolidation, deregulation, breakdown of Glass-Steagall, complex products, increased risk-taking—that would not only produce a financial crisis but make it so destabilizing for the economy later in the decade. Now he has written a shorter (164 pages) article, “Turning a Blind Eye: Why Washington Keeps Giving into Wall Street,” on the key question: why our government doesn’t do anything about it, even after the financial crisis.
Much of the material will be familiar to readers of this blog and others who follow the misdeeds of the megabanks closely. But Wilmarth provides a nearly comprehensive catalog of all the things we should be outraged about. Reading it, I remembered so many instances where Wall Street blocked or delayed sensible regulatory policies, or regulators pushed for Wall Street’s interests—the watering down of mark-to-market accounting, the artificial inflation of the mortgage settlement by giving dubious credits to banks for doing things that were in their own interests, and so on—that I had forgotten about or not thought about recently because they had been crowded out of my mind by successive waves of revelations.
According to Wilmarth, the fundamental problem, and the reason things don’t get significantly better, is the political power of major financial institutions. This power takes on many forms: campaign contributions, lobbying, regulatory capture in various flavors, and simply being “too big to jail.” Wilmarth tries to end his article on an optimistic note: even though Wall Street appears to be just as influential as it was before the financial crisis, perhaps the magnitude of its victory will trigger a popular backlash. I find it hard to be so hopeful: if we couldn’t get the job done in 2009–2010, when the financial crisis was on everyone’s minds, how will we be able to do it now? This is especially true with a Democratic president who is completely uninterested in dealing with the problem—and a Democratic nominee on deck who has never shown any inclination to take on Wall Street. (We can safely assume that the Republican nominee will be against any substantive regulation of the financial sector.) In any case, Wilmarth’s article does a great job of pointing exactly where we should be looking.
This piece is cross-posted from Baseline Scenario with permission.