Since December, Congress has twice passed measures to weaken regulations in the Dodd-Frank financial law that are intended to reduce the risk of another financial meltdown.
In the last election cycle, Wall Street banks and financial interests spent over $1.2 billion on lobbying and campaign contributions, according to Americans for Financial Reform. Their spending strategy appears to be working. Just this week, the House passed further legislation that would delay by two years some key provisions of Dodd-Frank. "[Banks] want to be able to do things their way, and that’s very dangerous.” MIT economist Simon Johnson tells Bill.
"'Here we go again' -- I think that’s exactly the motto, or the bumper sticker for this Congress. It's crazy, it's unconscionable, but that is the reality."
Lawmakers are pinning these provisions to Dodd-Frank onto bigger must-past bills like spending measures that the president doesn’t dare veto.
Bill Moyers: The safeguards that Congress is tearing down, even as we speak, were put in place after the financial disaster of 2008 to prevent another one like it from happening. Why do you think the Republicans are trying to sabotage them?
Simon Johnson: It’s mostly the lobby, specifically a few very large banks that don’t like those restrictions on their activities. They want to be able to take more risk. They’re not worried of course about how that could negatively impact the rest of us, and they’ve persuaded the Republicans to help them in that quest.
Moyers: Are they putting depositors and taxpayers at risk?
Johnson: Yes, absolutely. That’s the core of the reforms: Try and make sure -- and it's hard -- that part of the financial system is safe; that depositors are safe; that the taxpayers, as the ultimate backstop for deposits, are safe; and of course, try and make sure that you don’t have a huge crisis that affects the broader economy with millions of people being thrown out of work. That’s the goal. And JPMorgan, Chase, Citigroup, Bank of America and Wells Fargo don’t like that. They want to be able to do things their way, and that’s very dangerous.
Moyers: Aren’t these the same banks that nearly broke the economy in 2008 and helped to destroy millions of jobs and households?
Johnson: They were at the center of what happened. Citigroup, for example, went spectacularly wrong. Parts of Bank of America were in big trouble. In 2008 and 2009, JPMorgan Chase was relatively okay, but they’ve gotten themselves into lots of trouble subsequently, with big trading losses, the so-called London Whale problem, and by fixing interest rates, and accusations of fixing exchange rates and other kinds of market manipulation. So all of these very big financial institutions are potential trouble.
Moyers: But we put these rules in place to reduce the risk of their reckless gambling with our money and here we go again, it seems.
Johnson: Here we go again -- I think that’s exactly the motto, or the bumper sticker for this Congress. It's crazy, it's unconscionable, but that is the reality.
Moyers: What do you make of the fact that the tea party opposed those bank bailouts back in 2008 when George W. Bush was pushing for them, and the tea party helped Republicans win control of Congress last fall, and here the tea party is silent as their party turns into Wall Street’s puppet?
Johnson: I’ve always been puzzled and frustrated by this. When I talk to people on the right, more libertarian people, people who don’t like government, intellectuals, they get this. They would be able to participate in this conversation with you and me and we’d be getting on just fine. The problem is when you get to the political right, they don’t want to get involved. They don’t want to touch this. They don’t even want to talk about it. It has exactly the irony that you just put your finger on, which is that people on the right who rose up against government bailouts --and with some justification -- are now supporting the repeal of some of the safeguards that were put in place to prevent any such bailouts in the future. It doesn’t make sense, but that’s the political reality.
Moyers: In my research, I couldn't find any evidence that Republican candidates, or Democrats for that matter, asked voters last November if they wanted to let the wolves of Wall Street loose again. Do you remember any indication that there was a mandate in the election to turn the country over to the big banks again?
Johnson: I’m assuming that certainly no one made that proposal. What’s interesting is how few candidates, including on the left, mention the threat of Wall Street or mention these dangers. Sen. Elizabeth Warren, who wasn’t up for election in November, but did a lot of campaigning for other people, is one of the very few leading national-level politicians who talks about this. She says, "It’s the Wall Street problems that gave us the massive crisis, the deep recession, the budget problems and the austerity. So first and foremost, make sure that Wall Street can’t do it again." But it’s really interesting how few politicians are willing to explain that the deregulation of Wall Street led to the 2008 financial crisis, which caused the budget to worsen and austerity to take center stage.
Johnson: I don’t know. I think it’s the lobby and the political contributions. A lot of money flows from the big banks into the House Financial Services Committee, for example, and more broadly. But when I talk to community bankers -- and I want to emphasize this -- they are absolutely on the same side.
Moyers: And by community bankers, you mean?
Johnson: The Independent Community Bankers of America (ICBA).
Moyers: But these are not the big banks, right?
Johnson: No, they’re small town banks. They lend to the real economy. The ICBA represents 6,500 community banks. They don’t do derivatives trading and other kinds of crazy stuff. But they got hammered in the financial crisis and they’ve struggled in the recession and in the low-interest rate environment. They really fear and are very articulate against the “too big to fail” crowd.
Moyers: The first target right now in Congress is the Volcker rule and the Republicans, and some Democrats who are joining in, or at least are compliant, they say they’re only making technical corrections to the Volcker rule. Do you believe them?
Johnson: Absolutely not, that’s just a smokescreen. We should remind everyone that the first thing they wanted they already got, the repeal of Section 716, which pushed derivatives away from the insured bank part of their financial empires. They got that in December.
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Moyers: They tacked it onto the omnibus spending bill and Obama and Jamie Dimon lobbied for Congress to vote for it.
Johnson: Yes, but only one of those gentlemen, President Obama, had to sign the legislation that made it go through. Previously, the White House had pushed back and said, “No, we’re not doing Dodd-Frank repeal through this sneaky spending bill business.” But in December, they dropped that. So now the lobbyists are exploring all possible ways they can take this forward, including “technical fixes” to Dodd-Frank that are not technical fixes. They are undermining the substance, reducing the effectiveness and putting more pressure on the regulators not to do their jobs. It’s back to business as usual, pre-2008.
Moyers: As you indicate, their strategy is to pin these provisions on bigger bills that the president doesn’t dare veto. So they get an unpopular result in an undemocratic way. What does that tell you?
Johnson: I think it tells you that democracy is basically broken. But on a slightly more optimistic note, I would say that when and if the White House fights it can win. For example, the White House has steadfastly refused to allow amendments to the Affordable Care Act to be snuck through on spending bills, and they will hold the line on that, and the Republicans know that the White House will fight them publicly every inch of the way. Ultimately they’ll win that debate because they’ll say, “Look, you want to shut down the government to make these crazy changes to a program that’s working, the Affordable Care Act?” Republicans are not going to win that. But Dodd-Frank is different because on Dodd-Frank, the administration signaled in December that the store is open and they’re willing to give things away, or sell them relatively cheaply. They've created a very target-rich environment for the Republicans and for the lobby.
Moyers: I know you’re not an insider in the White House, but you’re read widely in Washington. What’s your understanding of why the president in effect said the shop is open?
Johnson: I think that he’s been poorly advised on this for a long time. I think that the people around him have a very generous view of these big Wall Street players and think somehow that the country -- and the economy -- needs the “too big to fail” crowd, with their fundamentally anti-social behavior. I think they’re wrong. There’s a Wall Street view of the world -- and I’m paraphrasing Elizabeth Warren here -- which has taken over and dominated the Treasury for a long time. That remains a problem and that remains a real weakness of this administration.
Moyers: What’s the Main Street view of the world that collides with this?
Johnson: The Main Street view is exactly the community banking view of the world, which is we have families and businesses. They need credit, they need financing, and we serve as an intermediate between savings and responsible borrowers. It has some risks, but they’re manageable, and we’ve had a system for a long time that generated growth and created opportunities for most Americans without blowing up in our faces. But we gave that up in the 1990s and we’re still living with the consequences. Why anyone would want to go back to the crazy casino dominating the real economy is beyond me and it’s beyond my community banker friends.
Moyers: We should remind our younger readers that in the 1990s, Democrats were wholly complicit in what you just described as changing the rules, regulations and the laws to benefit Wall Street. So you’ve got both parties against Main Street in effect, don’t you?
Johnson: Since the 1990s there's been a bipartisan consensus. The Clinton Treasury, Alan Greenspan, a Republican at the Federal Reserve, and both Republicans and Democrats in the Congress agreed that deregulation of finance as fine and allowing big finance to become even bigger was a good idea. So the question now is: Who has backed away from that and who is willing to acknowledge that was a mistake? The answer is some Democrats -- not enough -- and very, very few Republicans. But still, some Republicans do and I think they should get credit for that.
Moyers: I've read that depositors and taxpayers could be liable for trillions of dollars in oil derivative losses as a result of falling oil prices and the repeal of 716 of the Dodd-Frank provision that passed in December. Could we be liable?
Johnson: I don’t want to sound like a doom-monger, but I think the basic answer is we have no clue. These very large banks -- they’re big trading houses really, taking speculative positions on a daily and hourly basis and betting the whole shop sometimes -- we don’t know what their exposure is to movements in oil prices. They’re very opaque; they do not have good disclosure. I think even the regulators don’t fully understand the exposure of these banks to complex derivatives. That’s something we saw with what happened with housing prices and the derivatives based on that in 2008. I suspect something like that could happen with oil and with other commodity prices. There is a big exposure and any financial disaster can have a massive effect on the real economy. That’s where you get the trillion-dollar losses in GDP and incomes and millions of jobs lost. I’m worried about that. I’m worried about lots of things around finance...
Moyers: What else worries you?
Johnson: Europe. I don’t think it’s good to sound panic-stricken at every turn of events, but we have not done a good job of insulating ourselves from the risks that are going to be generated by the European banking system as we move forward, and we have to see the world much more in those defensive terms than we did in previous decades.
Moyers: Who’s standing up for the public?
Johnson: A few people and I think they're the heroes. Sen. Elizabeth Warren from Massachusetts, is the most prominent, but there's also Sharrod Brown from Ohio, Jeff Merkley from Oregon and David Vitter, a Republican from Louisiana. The Independent Community Bankers of America, they deserve a lot more by way of kudos from the public. Perhaps they’re not as high-profile as some lobby groups but they’re absolutely speaking truth to authority on these issues. There’s a list and it’s a list of sensible people. It’s a longer list than it was in the 1990s when very few people stood against the consensus for deregulation. But it’s a group that’s not yet powerful enough and we’ll see -- I think the big issue, really, is the presidential election -- which way do the Democrats decide to go on this issue and which way do the Republicans go, although I think that’s a bit more predictable. And then who wins in the big competition for narratives and ideas in 2016.
Moyers: But if that’s the case, it leaves the public vulnerable because Bill Clinton was president in the 1990s when Glass-Steagall was repealed and George W. Bush was president in aughts of this century when the economy collapsed. Democrats passed Dodd-Frank, but it’s now being weakened. The election doesn’t seem to decide how Wall Street is treated in Washington. Wall Street always seems to have the upper hand.
Johnson: That is true and has been true in the past. President Obama campaigned on the promise of changing things and not so much has changed on this dimension. I think though that it depends on who’s running, what that person believes and what they are really going to do when they get in. So whether Elizabeth Warren runs is one question. If Hillary Clinton is the lead candidate and wins the nomination, who are her advisers? Who does she listen to? Does she go back with Robert Rubin, who was treasury secretary in the 1990s, who is still, as far as we know, largely persuaded that big is beautiful in finance? Or does she go with some different advisers and perhaps a perspective that’s closer to that of Elizabeth Warren? I think the Democratic primary is right now, the real primary.
Moyers: How so?
Johnson: I think this is when the battle for ideas is being fought. I think the arguments about the substance on the Democratic side are absolutely now and by the time you reach the formal nominating process, it’s going to be a bit late. So ask me again in three months or in six months and I think we’ll have a clearer answer for whether 2016 could be decisive or whether it will be, as you just suggested, potentially business as usual irrespective of who wins.
Moyers: Does Elizabeth Warren have an obligation to run in order to get her argument into the warp and woof of the Democratic race, just as the tea party folks ran and got their arguments embraced by the Republican Party? Doesn’t she have an obligation to get into the debate, into the campaign and try to champion, give people an option to the establishment candidates?
Johnson: I think she is in that conversation, she does have an ability to mobilize people and an ability to bring pressure and I think -- although it’s not for me to say whether or not she has an obligation -- but I think she believes and is passionate about wanting to really move the needle and change the world on these important dimensions. It’s up to her to decide how best to do that and I for one am not going to second guess her on that. I’m going to be supportive every inch of the way, because honestly, we have nobody else. We have a few other people who are great, but Elizabeth Warren is by far our best hope for meaningful change on any of these dimensions.
Moyers: In the meantime, what can people who are concerned -- Main Street people, people who do see what you see, what we see -- what can people do to be more effective against the big bankers who are controlling our Congress today?
Johnson: Express your views. Write your congressman, email them and make phone calls. There’s a Progressive Change Coalition project called The Big Ideas Project. You can find ways through that organization to tell them and others what your views are in terms of the priorities for the country. You’ve got to speak out and you’ve got to find ways to be polite, be articulate, be forceful and be persuasive.