Too Big to Fail Banks: We Have Bill Clinton to Thank for That
Pundits delighted in chasing the crazy at CPAC earlier this March, and there was plenty of it to go around. But if you lifted your gaze above the drama in the foreground, you might just have glimpsed something in the distance worth noticing: the speech made by Dallas Federal Reserve President Richard Fisher, who came to deliver one simple message: break up the big banks.
"These institutions operate under a privileged status that exacts an unfair tax upon the American people," said Fisher.
We've heard this song before. Large Wall Street banks enjoy advantages over small banks because the big boys have an implicit guarantee from Washington that they will not be allowed to go under. This unacknowledged safety net lowers their cost of capital while encouraging excessive risk-taking. Several of the remedies prescribed by Washington since the crisis began have actually increased the already enormous power of Goldman Sachs, JP Morgan, and their kin, whose destructive gambling has cost an estimated $12.8 trillion in lost GDP.
As tempting as it might be for Democrats to pawn the global financial crisis onto George W. Bush, the uncomfortable fact is that it is more directly the result of policies laid down by the DNC's rock-star-in-residence, Bill Clinton.
"Over the [past] seven years we have tried to modernize the economy … And today what we are doing is modernizing the financial services industry, tearing down those antiquated laws and granting banks significant new authority."
So enthused President Clinton in 1999 as he signed the Financial Services Modernization Act into law, thus eliminating the barriers that had protected the economy from investment bank high-rolling since the New Deal.
Barack Obama, despite initially winning the White House by campaigning on a theme of economic justice, wasted no time in protecting the big banks according to journalist Ron Suskind. "I'm not out there to go after you," Obama explained to a private meeting of Wall Street CEOs in March 2009. "I'm protecting you. But if I'm going to shield you from public and congressional anger, you have to give me something to work with …"
Optical corrections, gentlemen — nothing to worry about.
Financial reformers like Elizabeth Warren and Paul Volker were put into cold storage during the new administration's first term. Dodd-Frank, which the president hailed three years ago as finally ending "too big to fail," was derided by his own TARP inspector general as evidence of just how far the federal government had been captured by Wall Street interests. Attorney General Eric Holder ruefully admitted this month the difficulty of bringing criminal charges against big banks owing to the negative impact it would have on the economy.
All this should translate into an opportunity for the GOP to beat Democrats on their own terrain:
Break up the banks.
But can this elephant change its, er, spots? After all, this is the same party whose most recent presidential candidate derided half the country as takers a few months ago. The same party whose patron saint, Ronald Reagan, redistributed an unprecedented amount of wealth from the middle to the upper class during his two terms behind the wheel. Could the GOP really just walk away from its primary food source and start standing up for the little guy?
While it would require the mother of all realignments, stranger things have happened in the free jazz of history. Few observers at the end of the Civil War could have foreseen that in less than one hundred years the political party of slaveholders would lead the charge for racial equality. But that's what happened when Democrats outflanked the party of Lincoln by spearheading the civil rights movement in the 1960s.
While such tectonics are rare in politics, they happen when unpredictable factors enter the mix. The new populism of the Tea Party injects an unstable element into the traditional strata of left-right allegiances which could make such a shift possible. Those derided as "wacko birds" by Republican stalwarts could prove their Main Street bona fides by leading the charge to break up the banks.
Doing so would put Democrats in a serious bind: aren't we supposed to be the party of the common man? It would also hit them where they are vulnerable, revealing that for all their rhetoric, they have failed to bring about real financial reform despite having occupied the White House for the past four years. The fact that Republicans have opposed them at every turn is undeniable, but the public may be in a forgiving mood if it saw the populism of the right train its sights on a real target for once.
Not the missing birth certificate.