If asked, Americans of all political persuasions will say overwhelmingly that they prefer “tougher rules” for Wall Street. But what does that actually mean?
You can frame this conventionally: supporting regulators, punishing rules violators, mopping up 2008-style disasters to limit the damage and attempting to prevent such chaos from happening again. But by “tougher rules,” maybe Americans are really signaling a vague but persistent dissatisfaction with an economy that has become dominated by the financial sector. And you can see within that how transforming banking back to its traditional purpose — as a conduit for putting capital in the hands of worthwhile business ventures and driving shared prosperity — would be one antidote to an unequal society full of financial titan gatekeepers, who confiscate a giant share of the money flowing through the system.
Sen. Elizabeth Warren — in many ways the avatar of a new populist insurgency within the Democratic Party that seeks to combine financial reform and economic restoration — will speak later today in Washington at the launch of a new report that marks a key new phase in this movement. Released by Americans for Financial Reform and the Roosevelt Institute – and called “An Unfinished Mission: Making Wall Street Work for Us” — the report is a revelation, because it finally invites fundamental discussions about these issues. Its 11 chapters from some of the leading thinkers on financial reform do look back at the successes and failures of the signal financial reform law of this generation, the Dodd-Frank Act. But the report also weaves in a story about how we can reorient finance as a complement to the real economy, rather than its overriding force. Mike Konczal, a fellow at the Roosevelt Institute and the co-editor of the report, tells Salon, “The financial sector is still eating up a lot of GDP [gross domestic product], and it’s not clear what we’re getting out of it. We want to get the conversation at that level.” [...]
There are two ways to look at this problem. One is seen in the way Dodd-Frank tried, with varying success, to bring New Deal-era structures to the broader financial sector, pulling systemically important activities like insurance and hedge funds under a regulatory regime. Unfortunately, the maddening complexity of financial innovations generates uncertainty over what really falls under the rules, giving Wall Street and compliant regulators the opportunity to take advantage of loopholes. Orderly liquidation authority, the new measures for regulators to wind down large financial institutions, is so full of holes, argues Stephen Lubben of Seton Hall University, that it could quickly devolve into “a bailout in all but name.” Regulators have not even begun to reckon with large elements of the system, like money market funds or the overnight “repo” markets, which made significant contributions to the financial crisis. “Many of the conditions that helped cause the 2008 crisis persist,” writes Jennifer Taub of Vermont Law School in one of the report’s chapters.
The other way to deal with financial innovations is to simply eliminate those activities that only serve to pool risk without productive social purpose. For example, Wallace Turbeville of the think tank Demos, in a section on derivatives purchased by state and local governments, concludes that these municipalities would be better off hedging their risks by building a cash reserve, instead of paying the financial sector exorbitant fees for a product they don’t understand. “Inefficiencies that transfer earnings to the financial sector are like a tax that redistributes wealth upward,” Turbeville concludes.