Economists Say that Socialist Presidential Candidate Bernie Sanders “Can Save Free Market Capitalism”
One might assume that economists would be against a socialist presidential candidate.
But 170 top economists have endorsed Bernie Sanders’ platform regarding Wall Street, signing a letter stating:
In our view, Sen. Bernie Sanders’ plan for comprehensive financial reform is critical for avoiding another “too-big-to-fail” financial crisis. The Senator is correct that the biggest banks must be broken up and that a new 21st Century Glass-Steagall Act, separating investment from commercial banking, must be enacted.
Wall Street’s largest banks are now far bigger than they were before the crisis, and they still have every incentive to take excessive risks. No major Wall Street executive has been indicted for the fraudulent behavior that led up to the 2008 crash, and fines imposed on the banks have been only a fraction of the banks’ potential gains. In addition, the banks and their lobbyists have succeeded in watering down the Dodd-Frank reform legislation, and the financial institutions that pose the greatest risk to our economy have still not devised sufficient “living wills” for winding down their operations in the event of another crisis.
Secretary Hillary Clinton’s more modest proposals do not go far enough. They call fora bit more oversight and a few new charges on shadow banking activity, but they leave intact the titanic financial conglomerates that practice most shadow banking. As a result, her plan does not adequately reduce the serious risks our financial system poses to the American economy and to individual Americans. Given the size and political power of Wall Street, her proposals would only invite more dilution and finagle.
The only way to contain Wall Streets excesses is with reforms sufficiently bold and public they can’t be watered down. That’s why we support Senator Sanders’s plans for busting up the biggest banks and resurrecting a modernized version of Glass-Steagall.
Indeed, everyone knows that the big banks have to be broken up to stabilize the economy. And even the market thinks they should be broken up.
One of the signatories to the letter –
Bill Black, Professor of Economics and Law at the University of
Missouri, America’s top expert on white collar fraud, and the senior
S&L prosecutor who put more than 1,000 top executives in jail for
fraud – has long advocated reining in the giant banks.
Black provided the following summary of Glass-Steagall to Washington’s Blog:
It worked brilliantly for over a half-century, and banks and the economy grew strong with minimal failures – killing it violated the rule: “if it ain’t broke; don’t fix it”Secretary [Hillary] Clinton’s claims about the role of Glass-Steagall’s repeal in the most recent crisis are incorrect in five major ways.
It was attacked by bank CEOs because it worked so well and prevented their schemes
***
a. [T]he repeal of Glass-Steagall allowed
Citigroup to make investments that brought one of the largest financial
firms in the world “to the brink of failure” – where they were saved
only by a public bailout. Even if Lehman had not failed, Citigroup’s
derivatives trading losses would have triggered the global financial
crisis. Remember, Citigroup was the only huge bank that FCIC
investigated in depth – and that investigation documented fatal losses.
The largest banks were frequently
affiliates of the “shadow” banks that Secretary Clinton tries to blame
for the crisis and the largest banks typically provided the funding that
allowed even the unaffiliated “shadow banks” to cause large losses.
These massive loans from the largest banks to the “shadow banks” would
not have been permitted under real regulatory leaders that Senator
Sanders would appoint.
b. The repeal of Glass-Steagall began
producing significant losses as soon as it occurred, not just in the
most recent crisis. For example, Bankers Trust, one of the largest banks
in America, went heavily into investment banking activities and
promptly produced severe scandals that caused severe losses to its
customers, particularly P&G and Gibson. Frontline
reported that P&G’s RICO lawsuit led to the discovery of tapes on
which bank officers described the derivatives they sold as “a massive,
huge future gravy train” and a “wet dream.” In addition, there was talk
about a “rip-off factor” and that Bankers Trust “set ’em [various
clients] up.” The lawsuits against Bankers Trust were so successful that
its reputation was ruined and it was forced into a sale to Deutsche
Bank. Other large U.S. banks that responded to the repeal of
Glass-Steagall by engaging in securities activities also suffered
serious losses and were pushed into mergers.
FleetBoston, the 7th
largest bank holding company and the largest bank in the Northeast,
also went immediately into securities trading upon the repeal of
Glass-Steagall and immediately fell into a series of scandals due to
fraud. The problems proved so crippling that FleetBoston had to be sold
to Bank of America.
c. Investment banking is much riskier
than commercial banking. Investment banks often take equity (ownership)
risks while commercial banking means making loans. Glass-Steagall
forbade federally insured banks to be investment banks. Three of the
five major U.S. investment banks failed during the most recent crisis – a
60% failure rate – due to fraud. But other major U.S. investment banks
such as Salomon Brothers and Michael Milken’s Drexel Burnham Lambert had
failed earlier due to their managers’ frauds, so the true failure rate
among investment banks is even higher than a staggering 60 percent.
The huge European banks that went heavily into investment banking also
suffered catastrophic losses during the most recent crisis, again
largely due to fraud. Indeed, at the time this is written (February 9,
2016), the global financial markets are in turmoil because of fears
about Deutsche Bank’sinvestment banking losses
and recurrent scandals. Its share price is less than one-third its book
value, which tells you that investors believe its assets are worth far
less than its officers’ claims. It makes no sense to provide federal
deposit insurance protection – which puts the public on the hook for
bank losses – to the far riskier activity of investment banking as
Secretary Clinton wants us to continue to do. It also makes no sense to
provide a federal subsidy (deposit insurance) to investment banking –
where the bank owns businesses – and let them compete against firms that
receive no such subsidy.
d. Secretary Clinton
said during the most recent debate, in her effort to defend her
opposition to Glass-Steagall, that: “You know, we can’t just fight the
last war.” She’s right, which is why it is critical to reinstate a
modern Glass-Steagall. I note, and support, what the Bank Whistleblowers
United explained. They say it is essential to protect against future
losses and that Glass-Steagall is essential to that protection. They
also explain how, without any new legislation or rules, the banking
regulatory agencies can implement a modern Glass-Steagall by setting
Individual Minimum Capital Requirements (IMCR) on each bank that engages
in investment banking. Because investment banking is so much riskier,
those capital requirements would cause, if they were properly set in
accordance with that far greater risk, federally insured banks to get
out of investment banking.
e. Investment banking creates another major risk for commercial banks. It brings a “trader mentality” to the fore and that means scandals. Banking experts here and in the UK have identified this mentality as one of the important changes that has created the corrupt culture of banking described and decried by UK and U.S. regulators.
It is only the big banks – and their servants in Washington, such as Clinton, Rubio, Bush, etc. – who want to maintain the status quo.
Postscript: While you might assume that socialists such as Sanders will destroy free market capitalism, the truth is that we don’t have free market capitalism anymore in the U.S. (and the big banks are largely responsible).
Instead, we have socialism for the rich, crony capitalism, fascism, kleptocracy, oligarchy or banana republic style corruption.
So labels don’t carry much weight. The question is which presidential candidate will take the actions necessary to restore the economy and give Main Street and the average American a fighting chance.
The original source of this article is Washington's Blog
Copyright © Washington's Blog, Washington's Blog, 2016
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