Reading Joe Nocera's marvelous NYT piece on the legacy of the FDR-era Glass-Steagall Act - more than six decades of U.S. banking stability until Glass-Steagall was revoked in 1999, followed by the biggest, most disastrous housing bubble in U.S. history - inspires popular U.S. economics blogger Barry Ritholtz to scorn the
enormous series of errors from newly elected President Obama, from appointing the status quo duo (Geithner and Summers) to letting the guilty parties off the hook. He should have been hammering away at the miscreants who caused the crisis, instead of continuing George W. Bush’s socialist bailouts of the banks.
Just a few results of his team’s inability to confront the causal forces?
1. A generational opportunity to restore accountability and prudence to banking
2. The trashing of zombie bad ideas that refuse to die
3. The misdirected fury of the Tea Party.
The missed opportunity to restore Glass-Steagall, repeal the CFMA [the Commodities Futures Modernization Act of 2000, which deregulated over-the-counter derivatives], and create a more honest framework for Wall Street and Banking will always be for me, the greatest tragedy of the Obama administration.
This view of Obama falling short of FDR is widely held by economists I highly respect, including Ritholtz, Joe Stiglitz, Robert Reich and Paul Krugman. But it misses the point. The point being that a deeply embedded sense of entitlement among America's monied class caused the crash, not the absence of Glass-Steagall or anything Bush and Obama did or didn't do. There's never been a law to prevent those willing to risk crashing the system from doing so while in pursuit of stupendous short-term gain. I don't imagine there ever will be one.
* Glass-Steagall divorced investment from traditional banking. Canada's Big Six banks, which came through the Great Recession with flying colors, absorbed the country's investment banking sector more than two decades ago without incident, save that raising capital in Canada became more efficient and the combined institutions were more soundly capitalized. Lesson: There's nothing inherently dangerous about the co-existence of investment and traditional banking under the same roof.
* America's top six banks now control about 53% of the nation's total banking assets, a worrisome outcome of the forced mergers of weak institutions into bigger ones during the credit meltdown of 2008-09. (Among the former giants merged out of existence: Merrill Lynch Inc., Bear Stearns Cos., Wachovia Corp., Countrywide Financial Inc. and Washington Mutual Inc..) Those U.S. banks deemed "too big to fail" are even bigger post-crisis, worsening the threat of moral hazard. Canada's Big Five banks, all too big to fail, and accounting for more like 80%-plus of Canadian banking and investment banking assets, have been that way since the last of the mergers that created them, in 1961. In the five decades since, none of these banks have required anything remotely like a government bailout, or come close to invsolvency. Instead, the banks and trust companies (a sector also since absorbed by the Big Five banks) that failed during that time were small, or wholesale banks, or regional startups which had to be forcibly merged by government into the Big Five. Many had controlling shareholders, who also happened to be real estate developers. By contrast, by law no one can own more than 10% of a "Schedule A" Canadian bank, which covers the Big Five and Quebec-based National Bank of Canada. Lesson: Banks that are too big to fail are not necessarily an invitation to moral hazard. Actually, an oligopoly is easier to regulate than, say, the fragmented residential construction business. Canadian bank regulators have about half a dozen phone calls to make in order to get every major bank to rein in lending when there's a bubble on the horizon. The U.S. still has more than 7,000 federally insured banks alone. To be sure, big, diversified, bureaucratic banks can be be a lousy investment. The average annual decline in stock-market value of America's five biggest megabanks over the past decade is 2.3%. The average annual gain in the value of stock in Canada's Big Five banks during that time is 11.6%.
* As Roger Lowenstein argues persuasively in a Bloomberg BusinessWeek cover story, the avarice, undue haste, shoddy assessment of risk (when it was assessed at all), willful ignorance and rank incompetence of the bankers who caused the crash was not and is not illegal. In 1929, Senator Carter Glass said of Charles (Sunshine Charlie) Mitchell, head of Citigroup Inc. predecessor National City Bank, that "Mitchell more than any 50 men is responsible for this stock crash." But just as Mitchell was acquitted in 1933 on criminal charges, so were the two Bear Stearns miscreants in one of the earliest high-profile cases brought by the Justice Department after the latest meltdown. Greed is anti-social, profoundly so. But it is not illegal.
* I wouldn't want Tim Geithner and Larry Summers on my economic team either. But for the record, Summers agonized about nationalizing one or two of the "miscreants" (most likely Citigroup and Bank of America) in order to set an example. Summers was 60/40 in favor of the drastic step of seizing private property, following the example of Britain, which partially nationalized the insolvent Royal Bank of Scotland, biggest British bank and second-largest in Europe. It was Geithner alone who ruled that out, with an argument Obama found persuasive: that such a move would roil world financial markets all over again, that government doesn't belong in the banking business, that the young Obama administration would never live down that act of "socialism", and the bankers who caused the mess knew best where the remaining land mines were on the troubled banks' books. I would just have preferred to hear that argument from someone other than Geithner, who as head of the New York Fed had overseen the rampant, reckless greed on Wall Street that caused the meltdown and did practiclly nothing about it. As it is, the feds did place Fannie Mae and Freddie Mac into government "conservatorship," and took effective control of AIG, world's biggest insurer, whose role in this sick drama was to guarantee everyone else's potential sour loans and thus was the ultimate "too big to fail" player.
* Summers may exaggerate in his insistence that failing to continue "George W. Bush's socialist bailout of the banks" would have escalated the Great Recession into a full-blown Great Depression, with unemployment of 25% to 30% rather than the zenith of 10.1% reached in 2010. But that's not a chance I'd want to take. When Penn Square Bank, located in a suburban Oklahoma City strip mall, went down in the 1980s, it took Chicago's mighty Continental Illinois down with it, along with Michigan National and Seattle's SeaFirst. I'm guessing the elapsed time between Citi or B of A being allowed to fail and the power being cut from America's tens of thousands of ATMs would have been about 48 hours. The Main Street and farm economies would have ground to a halt in tandem with the total and utter collapse of Wall Street, which in turn would have had a tsunami impact on global banking. I wouldn't want to be living on this planet for that outcome.
What ails U.S. financial services and Corporate America generally is lack of a sense of personal responsibility, prudence and patriotism on the part of top management and the directors charged with supervising CEOs. Period. I would argue that lax regulation played a huge role, but there would be no need of regulatory second-guessing if the personal responsibility, prudence and patriotism were in place among captains of industry.
And yes, I did say patriotism. To jeopardize your own "too big to fail" institution and thereby put at risk the entire American financial system, knowing that fellow Americans stood to lose their jobs, homes, businesses and farms if the dice came up snake eyes on a bet designed to fatten your bonus, is surely more unpatriotic than setting Old Glory ablaze on your driveway.
If we look hard at what most reformers from Paul Volcker to Barry Ritholtz have called for, what the reforms amount to is still more laws and rules that businesspeople bent on a quick buck always have found a way to stay clear of while trousering money that isn't or shouldn't be theirs. It amounts to yet more laws and rules for regulators to fail to enforce. And we know all regulators eventually succumb to "regulatory capture" by the regulated. Perforce, the Upper Big Branch mine and Deepwater Horizon tragedies of 2010, each heavily abetted by regulators feeling themselves more accountable to the regulated than the People.
A hard look at the crisis, its causes, and the proposed reforms suggests to me only one solution - a culture change. And that's just too big an ask of Obama or of any terrestial being.