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How did Big Finance grow so powerful that its hijinks nearly brought down the global economy and what hope is there for real reform with Washington politicians on Wall Street's payroll? Bill Moyers talks with authors Simon Johnson and James Kwak, two of the nation's most respected economic experts and authors of the new best seller, 13 Bankers: The Wall Street Takeover And The Next Financial Meltdown.
The White House and Democrats in Congress have begun pushing in earnest for a package of financial reforms. But will it be enough to stop Wall Street from causing another meltdown?
Problem is, the financial reform legislation currently doesn't really address the central problem of the crisis, namely that America's banks have grown 'too big to fail.' In fact, the problem has gotten worse since our recent crisis, with just six banks now holding assets in excess of 63% of the U.S. Gross Domestic Product! In fact, the crisis actually made the surviving banks more powerful than they were before the crisis. What's remarkable is that it used to be maybe eight or nine banks that dominated out economy. But what's happened over the last two years is that these banks have gotten bigger, because the biggest have bought the others. So they've become that much more powerful. And so they have an even stronger market position in some key markets like credit cards, mortgages, equity underwriting, and derivatives.
For reform to work, policy makers and regulators must reject the obsolete belief that Wall Street knows what's its doing and that its interests are always aligned with the nation as a whole. The idea that we need Wall Street to have this disproportionate economic power in order to somehow make this economy work and drive entrepreneurship, is nonsense. There's plenty of evidence on this issue, and this new book provides it in abundance.
Senator Sherrod Brown and the 'Volcker Rule'
The first order of business must be that Congress passes a law capping the size of the banks, to keep them from becoming so large that their failure threatens the world economy. This approach has been dubbed the 'Volcker Rule,' after Paul Volcker, the well-respected former Federal Reserve chairman who has pushed hard for its inclusion in the financial reform legislation now taking shape. Senator Sherrod Brown from Ohio has introduced an amendment to the finance reform bill that would do just that, reading in part that, "No bank holding company may possess non-deposit liabilities exceeding 3% of the annual gross domestic product of the United States."
The tea party activists are up in arms against big government, especially the Obama administration. But if they thought this through, they'd be joining forces with other grassroots Americans who will soon be taking on Wall Street and the country's biggest banks.
As we all know by now, the Securities and Exchange Commission (SEC) recently charged the godfather of Wall Street, Goldman Sachs, with fraud in earning a fifteen million dollar fee involving those complex CDOs, a hedge fund, and the housing market. But, if we know all this, why is it so hard to hold Wall Street accountable? Even as we speak, the banking industry and corporate America are fighting against financial reform with all the money and influence at their disposal. They aim to preserve a system that would enable them to ransack the country once again.
So what can we do? That's the question that Bill Moyers recently put to his guests, co-authors Simon Johnson and James Kwak. Simon Johnson is a former chief economist at the International Monetary Fund. He now teaches at MIT's Sloan School of Management and is a Senior Fellow at the Peterson Institute for International Economics.
James Kwak, a law student at Yale, worked as a management consultant at McKinsey & Company and co-founded the successful software company, Guidewire. Together these two men run the indispensable economic website, http://baselinescenario.com/
