FacebookTwitterGoogle+RedditEmail

The Hubris of the Wall Street Gang

by DEAN BAKER

Many highly respected Washington types have been running around for the last three years yelling that because of its large budget deficits, the United States is Greece. We learned last week that the immediate danger is the United States being Cyprus.

As we now know, Cyprus is a small island country with a financial sector that has run amok, following in the footsteps of Ireland and Iceland. The assets of its banks were eight times the size of the country’s economy.

This meant that when the banks’ big bets went bad, there was no way Cyprus’ government could afford the price of the bailout. As a result, Cyprus was forced to go hat in hand to the European Central Bank and accept whatever offer was put on the table. However the Cyprus crisis is finally resolved, it is not likely to be a pretty picture for the citizens of Cyprus.

As the Cyprus crisis was unfolding last week we also got to see the report of the Senate Permanent Subcommittee on Investigations on JP Morgan’s losses at its “London Whale” trading division. The report chronicles a series of bad bets on derivatives that were compounded by traders doubling down their stakes. They concealed the size of their losses both to bank officers and regulators. The end result was a $6 billion loss.

JP Morgan is a huge bank and can swallow $6 billion in losses, but the incident showed as clearly as possible that the Dodd-Frank reforms are not working. The London Whale’s losing trades were all done in the Dodd-Frank era. The bill’s provisions did not prevent JP Morgan from making massive bets and misleading regulators about their nature and the risks involved.

If the regulators were not able to catch the London Whale’s huge gambles before they went bad, why would we think that they will catch the next crap shoot from the Wall Street gang? It’s time that we looked at this seriously; the regulators lack either the will or competence to rein in the big banks. The big banks are going to get away with everything they want, regardless of the provisions of Dodd-Frank.

If the big banks are too big to regulate and, according to Attorney General Holder, too big to prosecute, then the only sensible course is to break them up. There have been some promising developments in this area.

At the top of the list is Elizabeth Warren’s election to the Senate. Senator Warren has already made it clear that she will use her seat on the Banking Committee to try to hold the banks and bank regulators accountable. The other important development is that Warren seems to have an ally in Louisiana Senator David Vitter.

At first glance this might seem an unlikely alliance. Warren is clearly on the left side of the Democratic Party, and Vitter is to the right of center of a very conservative Republican Party. But Vitter apparently takes his belief in the market seriously enough to realize that there is no place for too-big-to-fail banks in a free market. The point is straightforward, if a bank’s creditors know that the government will cover its losses, the bank is gambling with the taxpayers’ money, not its own.

If there is ever going to be enough political force to break up the big banks it will have to come from this sort of left-right coalition that moves in toward the center. As it stands, the leadership of both parties is too closely tied to the financial sector to take any steps that fundamentally threaten their interests. This has nothing to do with political philosophy; the leadership of both parties is owned by the financial industry. However if the outsiders in both parties can build up enough popular outrage over Wall Street’s shenanigans, the party leadership will follow.

There is precedent for this sort of left-right coalition. In 2009 Representative Alan Grayson, one of the most progressive members of the House, joined with Ron Paul, one of the most conservative Republicans, to co-sponsor a bill calling for an audit of the Federal Reserve Board by the Government Accountability Office.

Over the next year, the bill gradually got more co-sponsors until eventually an overwhelming majority of members had signed on. It was difficult to see why the operations of such an important government agency should be exempted from normal oversight. As a result of this pressure an amendment was slipped onto the Dodd-Frank bill that required the Fed to release the details of the $16 trillion in loans that were made through its special lending facilities.

It will take the same sort of dynamic to create the political space where the big banks can be broken up. Of course this effort will be much harder. It means pulling the big banks away from the public trough, not just releasing some embarrassing information.

We can also expect the elite media to provide the same sort of condescension and misinformation in the battle to break up the banks as they did in the battle over the Fed audit. Proponents of downsizing the banks will be ridiculed, regardless of their expertise in finance. The big banks will be given every opportunity to push their line, in spite of its absurdity and the lack of supporting evidence.

It will be a tough fight. On its face it seems that the Wall Street crew is invincible. But the London Whale episode and the silly efforts at cover-up should provide some grounds for confidence. These people can be pretty brazen in their contempt for the law and the general public. This arrogance on the part of the Wall Street gang is exactly what we need to give democracy a chance.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This article originally appeared on The Guardian.

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

More articles by:

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

Weekend Edition
December 09, 2016
Friday - Sunday
Jeffrey St. Clair
Roaming Charges: Nasty As They Wanna Be
Henry Giroux
Trump’s Second Gilded Age: Overcoming the Rule of Billionaires and Militarists
Andrew Levine
Trump’s Chumps: Victims of the Old Bait and Switch
Chris Welzenbach
The Forgotten Sneak Attack
Lewis Lapham
Hostile Takeover
Joshua Frank
This Week at CounterPunch: More Hollow Smears and Baseless Accusations
Paul Street
The Democrats Do Their Job, Again
Vijay Prashad
The Cuban Revolution: Defying Imperialism From Its Backyard
Michael Hudson - Sharmini Peries
Orwellian Economics
Mark Ames
The Anonymous Blacklist Promoted by the Washington Post Has Apparent Ties to Ukrainian Fascism and CIA Spying
Erin McCarley
American Nazis and the Fight for US History
Yoav Litvin
Resist or Conform: Lessons in Fortitude and Weakness From the Israeli Left
Conn Hallinan
India & Pakistan: the Unthinkable
Andrew Smolski
Third Coast Pillory: Nativism on the Left – A Realer Smith
Joshua Sperber
Trump in the Age of Identity Politics
Brandy Baker
Jill Stein Sees Russia From Her House
Katheryne Schulz
Report from Santiago de Cuba: Celebrating Fidel’s Rebellious Life
Nelson Valdes
Fidel and the Good People
Norman Solomon
McCarthy’s Smiling Ghost: Democrats Point the Finger at Russia
Renee Parsons
The Snowflake Nation and Trump on Immigration
Margaret Kimberley
Black Fear of Trump
Michael J. Sainato
A Pruitt Running Through It: Trump Kills Nearly Useless EPA With Nomination of Oil Industry Hack
Ron Jacobs
Surviving Hate and Death—The AIDS Crisis in 1980s USA
David Swanson
Virginia’s Constitution Needs Improving
Louis Proyect
Narcos and the Story of Colombia’s Unhappiness
Paul Atwood
War Has Been, is, and Will be the American Way of Life…Unless?
John Wight
Syria and the Bodyguard of Lies
Richard Hardigan
Anti-Semitism Awareness Act: Senate Bill Criminalizes Criticism of Israel
Kathy Kelly
See How We Live
David Macaray
Trump Picks his Secretary of Labor. Ho-Hum.
Howard Lisnoff
Interview with a Political Organizer
Yves Engler
BDS and Anti-Semitism
Adam Parsons
Home Truths About the Climate Emergency
Brian Cloughley
The Decline and Fall of Britain
Eamonn Fingleton
U.S. China Policy: Is Obama Schizoid?
Graham Peebles
Worldwide Air Pollution is Making us Ill
Joseph Natoli
Fake News is Subjective?
Andre Vltchek
Tough-Talking Philippine President Duterte
Binoy Kampmark
Total Surveillance: Snooping in the United Kingdom
Guillermo R. Gil
Vivirse la película: Willful Opposition to the Fiscal Control Board in Puerto Rico
Patrick Bond
South Africa’s Junk Credit Rating was Avoided, But at the Cost of Junk Analysis
Clancy Sigal
Investigate the Protesters! A Trial Balloon Filled With Poison Gas
Pierre Labossiere – Margaret Prescod
Human Rights and Alternative Media Delegation Report on Haiti’s Elections
Charles R. Larson
Review:  Helon Habila’s The Chibok Girls: the Boko Haram Kidnappings and Islamist Militancy in Nigeria
David Yearsley
Brahms and the Tears of Britain’s Oppressed
FacebookTwitterGoogle+RedditEmail