Three schools of thought on financial reform

In my view, the three prevailing schools of thought on financial reform are as follows, with many economists sharing one or more features of the three:

1. Make the banks that engage in higher risks -- mainly investment banks -- smaller. A smaller investment banking sector is the most reliable path to smaller risk, this school says. Do this by restoring some or all of the 1933 Glass Steagall Act, which put firmer separation between investment banking use of commercial and community bank depositors' money. It also restricted selling of public shares (in other words, speculation or bets with other people's savings) by investment banks which were predominantly partnerships and whose own incomes rose or fell with the fortunes of their clients. An additional argument in favor of the "make them smaller" school: maybe this will lessen their bargaining power over national industrial and infrastructure policy through their extremely powerful lobbies.

2. Don't focus on making banking smaller. There may be big political consequences if financing of national debt moves more and more offshore due to scaling down U.S. finance, this school warns. Plus some argue that there is no sure path to risk reduction through breaking up Goldman, JPMorgan, Bank of America, or AIG. This group favors national tax, insurance and regulatory policy to control the amount of leverage in the system. This group seems to me to underestimate the essential "fox guarding the chicken coop" behavior and bias (resulting from the flow of professionals in finance between public and private sectors) of the bureaucratic institutions designed to supervise giant, private financial institutions.

3. The unintended side effects of any government intervention are just too awful to contemplate. Do nothing and in the "long run" (when, as John Maynard Keynes says, "we are all dead!"), markets will reach a "new equilibrium." Only the alleged "invisible hand" of the marketplace knows what wages or living or social conditions such "new equilibrium" may bring - perhaps the Pinochet solution! So what! So says the third group, mainly Republicans and those heavily tainted with policies that encouraged the Wall Street bubble mania in mortgage-backed securities.

While I tend to favor #1, and certainly oppose #3 as completely useless, there is going to be a real problem moving big numbers of ordinary people into action on any financial reform that does not a) restore their lost 401k pensions, or b) give them back their foreclosed home.

The closest thing to that was the cram-down bill by Sen. Richard Durbin, D-Ill. - that would have saved millions of homes at mostly financial sector expense - which got killed early on. That alone speaks volumes about what AFL-CIO President Richard Trumka characterized as our servitude to Wall Street in so many aspects of economic life. No reform under contemplation by Congress at this time, whether from the "make them smaller" or "let them be big but legislate some way to de-leverage them" factions, will bring back lost retirement funds and homes.

But if we think about financial reform in a more fundamental sense as a struggle to implement a collective, social reallocation of investment capital from less productive to the most productive, most strategic applications, then the fight for jobs - which is of such overriding immediate AND long-range urgency, and affects the overwhelming majority of working families (one of every two families has a member without work) - must inevitably exert the biggest pressure for a stronger national industrial (investment) policy, and thus a large public share of investment dollars, and thus a relatively smaller private financial sector.

In a way, perhaps the jobs fight is our best path to impacting financial reform. The jobs fight DEMANDS that government compel the employment of the unemployed AND a net RISING standard of living for all workers.

The level and degree of innovation coming out of the private and corporate sector is constrained in many cases by the stalled demands for more powerful, more broad-based and more efficient infrastructures in many sectors (transportation, housing, Internet connectivity, etc). The excessive diversion into "financial infrastructure innovation" for its own sake was a truly parasitic development, and appears to have done some serious damage to the private sector's current capacity to innovate, according to innovation expert Michael Mandel. Rapid job creation from that sector may not be able to contend with the still very high levels of risk (and shortage of credit) still plaguing the system.

Perhaps the most important decision of all is where, exactly, to place our collective "bets" on the mix of investments that will promise the best and soundest basis for the future? One must consider many little-knowns and not a few complete unknowns:

* How much should be invested in primarily scientific and technical research?

* How much in overall education? Broad-based education reform is, and must be, simultaneously a) rising standards, values, knowledge and skills; and b) a direct battle against poverty and political or economic inequities by race, nationality and gender.

* How much of GDP for health care?

* How will the variables of globalization, and all its economic and security entanglements, including war and peace, impact available resources?

* How to mobilize the people as they adapt to the social changes all the big "bets" will entail. What is the broadest, sustainable, level of democracy possible in making decisions of such magnitude and consequence? The people, collectively, I believe, make wiser decisions than merely the most powerful faction at a given time. Accurate economic information is important in assessing risks, but life experience is what determines the range of uncertainty that can be tolerated.

As long as jobs and the public investment demands of a renewed national industrial and employment strategy are satisfied - perhaps, exactly HOW private financial capital is reorganized and re-regulated are best decided through Darwin's "natural selection" algorithm.


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  • The masses of people want financial reform that will place the burden of paying for this crisis on the shoulders of those who caused it. Not only was there gambling with other peoples savings there was out and out theft or robbery. And the big banks were principal culprits and perpetrators during this reign of gangster capitalism when our government in fact did nothing.
    So I agree, the third school of "economic reform" is out to snacks. But that doesn't make the first and second the lesser of two evils. In fact, looked at from a historical point of view, all of these so-called schools of "economic reform" are tried and proven failures in terms of alleviating the economic plight of the masses.
    As far as job creation, which is the burning question of the moment, we need massive government intervention at least on the same scale as the New Deal of the thirities. And to make this happen we don't just need mass discontent (hell we already have that) we need organized expressions of this mass discontent through the unions, the consumer organizations, the farm workers unions, organizations for the rights of foreign born workers, small business groups, the economic rights groups and organizations for the racially oppressed, women, gay people, youth and indeed all the main street people who are caught in the grip of the Great Recession.
    We must fight for financial reform from the standpoint of the working class as it assumes the leadership of the movement of the economically disenfranchised.
    People are already organizing in pockets of resistance and protest. The 20,000 people who are presently marching in Arizona for the rights of foreign born workers and against racist repression, the fight for the Senate seat in Boston (a fight for financial reform in the delivery of health care), the multitude of workers in motion in every part of our land demanding job creation NOW on the part of our government is proof positive that the people are on the move. This movement of the masses is presently an uphill movement, and we will often find the odds against us, but it is the greatest window of opportunity we've seen in a while. In the words of Marx and Engles hic Rhodus hic salta (here is Rhodes jump here)!

    Posted by Frank Chapman, 01/19/2010 7:16pm (6 years ago)

  • Another big minus for you, John.

    Posted by Suzy, 01/17/2010 2:59pm (6 years ago)

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