The following is an excellent excerpt from the book “OUR REVOLUTION: A Future You Can Believe In” by Bernie Sanders from Part Two: “An Agenda for a New America: How We Transform Our Country” from Chapter Three: “Ending a Rigged Economy” on page 310 and I quote: “Enacting a Twenty-First-Century Glass-Steagall Act – In 1933, President Franklin Roosevelt signed the Glass-Steagall Act as an emergency response to the failure of nearly five thousand banks during the Great Depression. The law protected the deposits of ordinary people by creating a firewall between taxpayer-insured commercial banks on one side and investment banks and insurance services on the other. It effectively kept Wall Street speculators from gambling with other people’s money, and prevented another banking meltdown for more than five decades. This is, until Wall Street got Congress to dilute it under President Reagan and kill it under President Bill Clinton.
In 1999, I was proud to lead the fight in the House of Representatives against repealing Glass-Steagall. During the floor debate, I warned that repealing the law” will lead to fewer banks and financial service providers; diminished credit for rural America; and taxpayer exposure to potential losses should a financial conglomerate fail. It will lead to more mega-mergers; a small number of corporations dominating the financial service industry; and further concentration of economic power in our country.”
I wish that I had been wrong but, unfortunately, what actually happened in 2008 was even worse than I predicted. Allowing commercial banks to merge with investment banks and insurance companies in 1999 was a huge mistake. It precipitated the alarmist taxpayer bailout in the history of the world. It substantially increased wealth and income inequality and further concentrated economic power in this country.
It is time again to separate everyday banking functions from the far riskier activities of investment banking and insurance services. Wall Street should not be able to gamble with your bank deposits. It is time to pass a twenty-first-century Glass-Steagall Act–legislation that Senator Elizabeth Warren, I, and others have worked on.
Regulating Risky Derivatives – We must also provide greater stability and transparency to the financial system by prohibiting taxpayer-insured banks from holding derivatives contracts on their balance sheets. Derivatives, like credit default swaps and synthetic collateralized debt obligations, are the risky financial products that nearly destroyed the economy. They are basically insurance policies on future events that may or may not happen, like a corporate bankruptcy or a drop in oil prices or the collapse of the housing market.
Their value is based on the performance of an underlying asset, but as we saw during the financial crisis, the underlying assets are sometimes worthless. Yet that doesn’t keep Wall Street from speculating on these complex financial instruments. In fact, today, commercial banks still have over $190 trillion of derivatives contracts on their books. That is insane. And I’m not alone in thinking that.
As far back as 1992, Felix Rohatyn, the investment banker who helped New York out of its financial crisis in the 1970s, described derivatives as the equivalent of ‘”financial hydrogen bombs.” The billionaire financier George Soros has said that he doesn’t dabble in derivatives “because we don’t really understand how they work.” And five years before the Wall Street crash, Warren Buffett, the Oracle of Omaha, warned his investors that derivatives were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
Rohatyn, Soros, and Buffett were all correct in their assessments of derivatives. That is why we must make sure derivatives that are held in investment banks, hedge funds, and private equity funds are strongly regulated. Right now, state insurance commissioners and gambling authorities are banned from regulating them. We must lift that ban. They should be treated and regulated like the high-stakes wagers they are.
In addition, all derivatives trading should be done in an open, transparent exchange, similar to the stock market, without exceptions. As it stands now, these already complex and mysterious instruments are mostly traded in the shadows. It’s time to bring into the sunlight and see if they can withstand the scrutiny.
Finally, financial regulators must ensure that all of the participants in the derivatives market have enough capital to pay up if they lose their bets. Remember, derivatives are essentially insurance policies. Can you imagine paying for fire insurance on your house for twenty years, but when the house burns down the insurer says it doesn’t actually have any money to pay your claim? Without sufficient capital levels, derivatives are the equivalent of selling an arsonist a fire insurance policy on your house. It makes no sense, and the incentives are all backward.
A Tax on Wall Street Speculation – As was brilliantly documented in Michael Lewis’s book, Flash Boys, Wall Street makes billions by buying huge quantities of stocks and bonds and then selling them shortly thereafter. The big investment houses and hedge funds have invested hundreds of millions of dollars in super-high-speed computers that detect the slightest price movements then execute trades in mere fractions of a second. Once the price goes up–sometimes by just a fraction of a penny per share, and after just a few seconds or even less–the traders dump securities. When repeated tens of millions of times, the practice reaps an unbelievably enormous profit for Wall Street.
Needless to say, this game of high-speed speculation adds absolutely nothing to a productive economy. What it does is make buying and selling securities more expensive for the vast majority of investors, including your pension fund or 401(k) administrator. And, because it is largely computer-driven, it adds yet another destabilizing force to the financial markets.
If we are serious about reforming our financial system, we have got to establish a tax on Wall Street speculators. We have got to discourage reckless gambling on Wall Street and encourage productive investment in a job-creating economy.
By imposing a small financial transaction tax of just 0.5 percent on stock trades (that’s just 50 cents for every $100 worth of stock), a 0.1 percent fee on bonds, and a 0.005 percent fee on derivatives, we would help tap the brakes on high-frequency speculative trading. And we would raise up to $300 billion a year, which I have proposed using to make public colleges and universities tuition-free. During the financial crisis, the middle class bailed out Wall Street. Now it’s Wall Street’s turn to help the middle class.
Reforming Credit-Rating Agencies – We cannot have a safe and sound financial system if we are unable to trust the credit-rating agencies to accurately rate the creditworthiness of financial products. And the only way we can have that trust is to make sure that credit-rating agencies cannot make a profit from Wall Street.
Leading up to the Great Recession, the three major credit agencies–Moody’s, Standard & Poor’s, and Fitch–would routinely give inflated AAA ratings to risky and sometimes worthless mortgage-backed securities and derivatives, even though the agencies knew the ratings were bogus. Without those AAA ratings, it is highly doubtful many investors–again, including pensions funds and 401(k) administrators–would have ever bought them.
The reason these risky financial schemes were given such favorable ratings is simple: Wall Street paid for them. Rather than providing useful risk information to investors (which is the reason they exist in the first place). The credit-rating agencies were colluding with Wall Street, because that’s where the money was.
The rating agencies’ role in the Wall Street meltdown was extremely significant. By 2010, hundreds of billions of dollars of supposedly AAA mortgage-backed securities had been downgraded to “junk” status–where they should have been all along. But because they were purchased with inflated credit ratings that commanded a premium price, more than half a trillion dollars in value simple disappeared, almost overnight. And that was before a single house was foreclosed on.
Unfortunately, the ethical underpinnings and financial incentives within these agencies are fundamentally askew. When employees of Moody’s were asked in an internal survey what their four highest job goals were, the top three were (1) generating more revenue, (2) increasing market share, and (3) fostering good relationships with customers. Fourth on the list was performing high-quality analytical work. At least they were being honest.
In my view, we need to turn for-profit credit-rating agencies into transparent nonprofit institutions, independent from Wall Street and accountable to a board of directors that represents the public interest. Wall Street must no longer be able to pick and choose which credit agency will rate their products.
Ending Usury – Having a financial system that works for all Americans means stopping financial institutions from ripping us off by charging sky-high interest rates and outrageous fees. To my mind, it is unacceptable that people all over this country pay a $3, $4, or $5 fee each time they go to the ATM. It is unconscionable that millions of Americans are paying credit card interest rates of 20 or 30 percent.
The Bible, and virtually every major religion on earth, has a term for this practice. It’s called usury. In The Divine Comedy, Dante reserved a special place in the Seventh circle of Hell for people who charged usurious interest rates. Today we don’t need the hellfire, the pitchforks, or the rivers of boiling blood, but we do need a national usury law that caps interest rates on credit cards and consumer loans at 15 percent.
In 1980, Congress passed legislation requiring credit unions to cap interest rates on their loans, with some exceptions, at no more than 15 percent. And that law has worked very well. But unfortunately, it included only credit unions, and not banks. That makes no sense to me.
Unlike big banks, credit unions are member-owned and democratically controlled cooperatives that exist solely to provide affordable banking services to their members. Unlike big banks, credit unions didn’t engage in risky behavior that caused the financial collapse. And, unlike big banks, credit unions did not receive a huge bailout from the taxpayers of this country.
Credit unions hate the good guys. While I support capping interest rates charged on the loans they make, we must extend this cap to every lender in America.
Moreover, we must cap all ATM fees at $2. People should not have to pay a 10 percent fee for withdrawing $40 of their own money. Big banks need to stop acting like loan sharks and start acting like responsible lenders.
Allow Post Offices to Offer Banking Services – Today, rather unbelievably, there are millions of Americans who live in communities that are not served by regular banking services, places in which the giant banks don’t think it’s worth their time to invest. Well, what do you do if you live in such a neighborhood and need to cash a check? Where do you go?
You go to a payday lender, who will likely charge an interest rate of over 300 percent and trap you into a vicious cycle of debt. That should not be allowed within the American financial system. We need to stop payday lenders from exploiting millions of Americans and making the poor even poorer.
Post offices exist in almost every community in our country. One important way to provide decent banking opportunities for low-income communities is to allow the U.S. Postal Service to engage in basic banking services, which could include offering savings accounts, cashing checks, and wiring money. The vast majority of postal services around the world allow their customers to do some banking, and so should we.
Reforming the Federal Reserve – Lastly, we must fundamentally reform the Federal Reserve to make it responsive to the needs of ordinary Americans and not most billionaires on Wall Street. When the financial system was on the verge of collapse, the Federal Reserve acted with a fierce sense of urgency, offering $16 trillion in virtually zero-interest loans to banks and corporations throughout the world. The Fed helped save Wall Street. However, it did little to save Main Street. And as a result, millions of families saw a decline in their standard of living and a dimming of their hope for the future.
The decisions that the Federal Reserve made during the crisis sent a very clear message: while the rich and powerful are “to big to fail” and are worthy of an endless supply of cheap credit, ordinary Americans must fend for themselves. This was a clear case of socialism for the rich and rugged individualism for everyone else. But it doesn’t need to be this way. The Fed was never supposed to be concerned just about Wall Street.
Americans deserve a central bank that works for them and not just for the big banks. We must reform the Fed to make sure it acts with the same sense of urgency to fulfill its full-employment mandate, increase wages, and rebuild the middle class as it did when it saved Wall Street. Let me outline how I believe we can do just that.
First, we must strengthen, not weaken, the Volcker rule, which prohibits commercial banks from gambling with bank deposits of the American people. The Fed has got to make it crystal clear to large financial institutions that the era of excessive speculation is over.
Second, the Feds must stop providing incentives for banks to keep money out of the economy. Since 2008, the Fed has been paying financial institutions interest rates on excess reserves parked at the central banks–reserves that have grown to an unprecedented $2.2 trillion. Instead of paying banks interest on these reserves, the Fed should charge a fee that the Small Business Administration could use to provide direct loans and loan guarantees to small Businesses.
Third, as a condition of receiving financial assistance from the Fed, banks must commit to increased lending to creditworthy small businesses and manufactures in a job-creating productive economy, reducing credit card interest rates and fees, and helping underwater and struggling homeowners. Just think of all of the productive sort-and long-term investments that could be made in our country right now if Wall Street used the money it received from the Federal Reserve wisely. Instead of casino-style speculation, Wall Street could and should invest in helping to restore our infrastructure, build affordable housing, and transform our energy system. Those are the types of investments that the Fed must encourage.
Fourth, we must eliminate the blatant conflicts of interest at the Fed. The reality is that the Federal Reserve has been hijacked by the very bankers it is in charge of regulating. I think most people would be shocked to learn that Jamie Dimon, CEO of JPMorgan Chase, served on the board of the New York Fed at the same time that his bank received a $391 billion Fed bailout. And he is not the only example. At least eighteen current and former Fed board members were affiliated with banks and companies that received emergency loans from the Fed during the financial crisis. We can no longer allow the foxes to guard the henhouse at the Federal Reserve.
Fifth, we must make the Federal Reserve more transparent. Too much of the Fed’s business is conducted in secret, known only to the bankers on its various boards and committees. The only reason we even take advantage Fed’s jaw-dropping $16 trillion in secret emergency lending during the financial crisis is because I inserted an amendment in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act to audit the Fed. We must require the Government Accountability Office to conduct a full and independent audit of the Fed, each and every year.
Currently, the Federal Open Market Committee does not release full and unredacted transcripts of its meetings to the public for five years. We must require the committee to release those transcripts within six months or less. If we had made this reform in 2004, the American people would have learned about the housing bubble well in advance of the financial crisis.
The bottom line is that we need a Federal Reserve that works for all Americans, not just the CEOs of large financial institutions.”
(AREN’T THESE GREAT IDEAS IF YOU WANT TO HAVE A BANKING SYSTEM THAT YOU CAN HAVE CONFIDENCE IN OR CAN TRUST? NUMBER 1. RESTORING GLASS-STEAGALL ACT, 2. REGULATING DERIVATIVES, 3. FINANCIAL TRANSACTION TAX – ONE WAY TO RAISE REVENUE TO PAY THE BILLS, 4. REFORM THE CREDIT RATINGS AGENCIES–THEY DEFINITELY DIDN’T DO THEIR JOB, LEADING TO THE 2008 CRASH, AND I BELIEVE, LIKE REPUBLICAN REP RON PAUL SAID YEARS AGO AND THAT’S EXACTLY WHAT BERNIE SANDERS WANTS TO DO AND THAT IS REFORM THE FEDERAL RESERVE, WHICH THE DEMOCRATS SHOULD BE JUST AS MUCH IN FAVOR OF AS REPUBLICANS. I CANNOT UNDERSTAND WHY HILLARY CLINTON DIDN’T TAKE BERNIE SANDERS FOR VICE PRESIDENT OR AT LEAST A CABINET POSITION AND ANNOUNCE IT BEFORE THE ELECTION,
LaVern Isely, Progressive, Overtaxed, Independent Middle Class Taxpayer and Public Citizen Member and USAF Veteran