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.

May 03, 2016
Gary Leupp
Hillary Clinton’s Foreign Policy Resumé: What the Record Shows
Michèle Brand – Arun Gupta
What is the “Nuit Debout”?
Chuck Churchill
The Failures of Capitalism, Donald Trump and Right Wing Terror
Dave Marsh
Bernie and the Greens
John Wight
Zionism Should be on Trial, Not Ken Livingstone
Rev. John Dear
A Dweller in Peace: the Life and Times of Daniel Berrigan
Patrick Cockburn
Saudi Arabia’s Great Leap Forward: What Would Mao Think?
Doug Johnson Hatlem
Electoral Votes Matter: Hillary Clinton or Bernie Sanders vs Donald Trump
Chris Gilbert
Venezuela Today: This Must Be Progress
Pepe Escobar
The Calm Before the Coming Global Storm
Ruth Fowler
Intersecting with the Identity Police (Or Why I Stopped Writing Op-Eds)
Victor Lasa
The Battle Rages on in Spain: the Country Prepares for Repeat Elections in June
Jack Rasmus
Is the US Economy Heading for Recession?
Dean Baker
Time for an Accountable Federal Reserve
Ted Rall
Working for US Gov Means Never Saying Sorry
Dave Welsh
Hunger Strikers at Mission Police Station: “Stop the execution of our people”
John Eskow
The Death of Prince and the Death of Lonnie Mack
May 02, 2016
Michael Hudson – Gordon Long
Wall Street Has Taken Over the Economy and is Draining It
Paul Street
The Bernie Fade Begins
Ron Jacobs
On the Frontlines of Peace: the Life of Daniel Berrigan
Louis Yako
Dubai Transit
Bill Quigley
Teacher, Union Leader, Labor Lawyer: Profile of Chris Williams Social Justice Advocate
Patrick Cockburn
Into the Green Zone: Iraq’s Disintegrating Political System
Lawrence Ware
Trump is the Presidential Candidate the Republicans Deserve
Ron Forthofer
Just Say No to Corporate Rule
Ralph Nader
The Long-Distance Rebound of Bernie Sanders
Ken Butigan
Remembering Daniel Berrigan, with Gratitude
Nicolas J S Davies
Escalating U.S. Air Strikes Kill Hundreds of Civilians in Mosul, Iraq
Binoy Kampmark
Class, Football, and Blame: the Hillsborough Disaster Inquest
George Wuerthner
The Economic Value of Yellowstone National Park
Rivera Sun
Celebrating Mother Jones
Nyla Ali Khan
Kashmir and Postcolonialism
Mairead Maguire
Drop the Just War Theory
Weekend Edition
April 29, 2016
Friday - Sunday
Andrew Levine
What is the Democratic Party Good For? Absolutely Nothing
Roberto J. González – David Price
Anthropologists Marshalling History: the American Anthropological Association’s Vote on the Academic Boycott of Israeli Institutions
Robert Jacobs
Hanford, Not Fukushima, is the Big Radiological Threat to the West Coast
Ismael Hossein-Zadeh
US Presidential Election: Beyond Lesser Evilism
Dave Lindorff
The Push to Make Sanders the Green Party’s Candidate
Peter Linebaugh
Marymount, Haymarket, Marikana: a Brief Note Towards ‘Completing’ May Day
Ian Fairlie
Chernobyl’s Ongoing Toll: 40,000 More Cancer Deaths?
Pete Dolack
Verizon Sticks it to its Workers Because $45 Billion isn’t Enough
Moshe Adler
May Day: a Trade Agreement to Unite Third World and American Workers
Margaret Kimberley
Dishonoring Harriet Tubman
Deepak Tripathi
The United States, Britain and the European Union
Eva Golinger
My Country, My Love: a Conversation with Gerardo and Adriana of the Cuban Five
FacebookTwitterGoogle+RedditEmail