Now that the Obama stimulus package has been approved by Congress in a decidedly partisan vote, step two in the economic-recovery plan, repairing the financial structure, is up for consideration. If history is any guide, it, too, will produce a fierce partisan battle, the presidents expressed preference for bipartisanship notwithstanding.
When it comes to the banking system, partisan struggle is nothing new; it should be expected and, in fact, welcomed as the normal political expression of contending economic interests. As far back as the republics founding, lines were drawn between those (like Hamilton and the Federalists) who championed the primacy of organized finance and those (like Jefferson and the Democratic-Republicans) who distrusted and endeavored to control it. A generation later, the fight was between the Whigs, representing the power of centralized private banking, and the Democrats, whose leader, Andrew Jackson, dissolved the hydra-headed monster known as the Second Bank of the US, which, he charged, had allowed financiers to feed off the public purse.
In the 20th century, the partisan divide was between Franklin Roosevelts Democratic New Dealers, who sought to regulate a chaotic banking system that had helped precipitate the Great Depression, and their business-oriented Republican opponents, who resisted any interference with the natural workings of the credit market. The New Dealers, bent on ameliorating the worst effects of laissez-faire banking, created the edifice of protective financial regulation that survived more or less intact into the 1990s. Now, in the face of its unraveling, the age-old political conflict is about to be re-engaged.
Commenting in 1816 on the fever of financial speculation that accompanied reauthorization of the Bank of the US, Thomas Jefferson wrote the following: We are under the bank bubble, as England was under the South Sea bubble .... We are now taught to believe that legerdemain tricks upon paper can produce as solid wealth as hard labor in the earth. It is in vain for common sense to urge that nothing can produce but nothing. Sound familiar? Everything that goes around comes around, and two centuries later, were back under the bankers bubble; the systematic dismantling of the New Deals structure of bank regulationits barriers to greed, if you likelaid the country open to everything that has transpired over the past two years.
A brief review is in order. In 1980, bank mergers were legalized, and in 1994, the Riegle-Neal Act lifted the ban on interstate banking, paving the way for nationwide megabanks. In 1999, the Gramm-Leach-Bliley Act repealed part of the Banking Act of 1933 (Glass-Steagall), as well as the Bank Holding Company Act of 1956, removing the walls separating commercial banks, insurance companies, and securities firms, and spurring on the formation of mammoth, diversified financial groups. Meanwhile, under US influence, the WTO enacted a global agreement opening world financial markets as of 1999, thereby weaving a tangled web of unstable international banking free of oversight.
What the ensuing decade of deregulation has wrought is this: banks that either cant or wont lend money, corrupt credit practices resulting in an ongoing housing crisis, and the dispersal of toxic financial investments leading to a worldwide economic collapse. Other than that, deregulation worked just fine. So where to go from here? In the waning days of Bush, the all-purpose solution was to throw free money at the banks, hoping they would solve the problem themselves, an exercise formulated by Henry Paulson, Ben Bernanke, and (representing the Federal Reserve Bank of New York) Timothy Geithner. Geithner, in his new incarnation as Treasury secretary, can be expected to continue that approach, with modificationsa bit more regulation, a bit less money without strings.
It wont be enough. The system cant be saved as currently constituted; there needs to be less hope and more change. President Obama and his economic advisors would be well advised to emulate Jefferson, Jackson, and Roosevelt, and directly take on the bankers and their supporters. If, despite the TARP, banks wont extend the credit necessary to revive the economy or agree to renegotiate threatened mortgages, they should be nationalized, with the government assuming majority ownership control, replacing management and doing the required lending itself. This goes doubly for the oversized, post-1990s megabanks heretofore judged to be too big to fail, which in the long run need to be broken up, their constituent functions separated once more. They are an overbearing and inefficient offshoot of the era of deregulation, a product of the wave of consolidation that accompanied the withdrawal of serious antitrust enforcement.
Although merger mania dates back to the Reagan years, the worst of it financially began in the late 1990s. Between 1996 and 2006, seven of the top ten bank mergers worldwide were consummated in this country, including (in anticipation of Glass-Steagalls repeal) Citicorp-Travelers (value: $74 billion), which produced now troubled Citigroup. Over the same decade, the share of American bank assets controlled by the ten biggest institutions swelled from one-quarter to one-half. And last year, an investigation by Washington Monthly concluded that just three banks (Citigroup, Bank of America and JP Morgan Chase) held over 30% of the nations deposits and 40% of all loans to corporations. Thats tbtf on steroids.
Its too much economic power in too few hands, especially when those wielding it turn to wild securities speculation and then demand rescues from their indiscretions. Yet, even as bankers accepted public bailout funds (while steadfastly refusing to expand lending), the merger beat went on. In the last few weeks of 2008, three TARP recipients ($25 billion each) unblushingly spent their windfalls on new acquisitions; B of A acquired Merrill Lynch, Wells Fargo absorbed Wachovia, and JP Morgan consumed what was left of Washington Mutual.
No one in authority blinked. Finally, in February, the Obama Treasury Department released its much-anticipated overhaul of the TARP, which at last banned acquisitions by those feeding at the public trough. Secretary Geithner still balks at setting lending targets for the banks or nationalizing them, the latter a course populist FDIC Chair Sheila Bair has been following in the case of failing commercial institutions under her purview (e.g. lndyMac). Prior to Treasurys latest plan to save Citigroup, Bair had also signaled intentions to break up that lumbering behemoth if it requested more federal money. No wonder bankers boy Geithner regards her as not a team player.
Wayne OLeary is a writer in Orono, Maine.
From The Progressive Populist, April 1, 2009
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