Dodd-Frank has indeed made the financial markets safer than they were in 2008, but in the words of Nobel Prize-winning economist Joseph Stiglitz, it was still just a “cup half full.”
Today, three of the largest financial institutions– JPMorgan, Bank of America and Wells Fargo – are 80 percent larger than they were a year before taxpayers bailed them out. In fact, Dodd-Frank encouraged or forced certain banks to merge, thus greatly increasing their market power.
Lehman Brothers, at the time of its bankruptcy which triggered the 2008 financial crisis, had $639 billion in assets. Today, JPMorgan – with $2.6 trillion in assets and 15 times more subsidiaries than Lehman – would be much harder to liquidate.
Further, banks have adeptly dodged existing regulation. Without establishment of clear, workable definitions and hard-nosed enforcement, Wall Street will exploit ambiguities in Dodd-Frank, such as those surrounding the law’s Volcker Rule.
And unsurprisingly, the large banks still wield enormous political power in Washington, strong-arming not only Republicans, but also many Democrats, too (Google “Hillary Clinton top campaign donors”).
This is not rhetorical fear-mongering, either: In December 2014, Congress employed language written by Citibank itself to repeal a Dodd-Frank provision that restricted federally insured banks from writing derivatives – those risky financial products that led to AIG’s collapse and the largest taxpayer bailout in history.
Worse yet, the provision was repealed without a single congressional hearing.
The answer?
First, Congress must pass the “21st Century Glass-Steagall Act.” Glass-Steagall – the 1933 centerpiece of Roosevelt-era banking reforms, which prevented a subsequent financial crash for the next half-century – separated “ordinary” commercial banks, which loan to citizens and businesses, from “gambling” investment banks, which purchase large amounts of securities and resell them to investors.
By restoring Glass-Steagall, traditional banking, free from the influence of risk-taking speculators which dominate many firms, will thrive and raise the middle class up with it. Proprietary trading will be eliminated, as banks will either loan or speculate, but not both.
Further, Glass-Steagall would de facto break up firms that both loan and speculate, such as JPMorgan, Citibank and Wells Fargo, all of which have assets over $1 trillion.
