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Simon JohnsonBack to OpinionSimon Johnson

Fake debate: The Senate will not vote on big banks

There is widespread agreement that the financial crisis which broke out in September 2008 was our most severe in over 50 years.  There is also a consensus that, whatever other factors may have been involved, the excessive risktaking and general mismanagement of huge banks at the center of our economy played a significant role in what happened. (Yes, of course the largest banks themselves deny any responsibility, including most recently using insulting language.)

The financial reform package now on the Senate floor puts surprisingly little constraint on the activities of our largest banks going forward – preferring instead to defer to regulators to tweak the rules down the road (despite the fact that this approach has gone badly over the past 20 to 30 years).

A growing number of senators insist we should do more to reduce the size and limit the leverage of megabanks (i.e., the amount that banks can borrow), arguing that this would constitute an important additional failsafe – on top of all other efforts to establish “more effective regulation.”

Sen. Ted Kaufman (D-Del.) has led the charge on this issue, pounding away for months, and giving another powerful speech on the floor of the Senate yesterday.

Yet, astonishingly, it seems increasingly likely there will be no real Senate debate on this issue.

A real debate, in the modern American system, needs a vote on something specific – in this case, an amendment to the main legislation. And Sen. Kaufman, with Sen. Sherrod Brown (D-Ohio), to that end has proposed the SAFE Banking Act – with meaningful size and leverage caps – which is ideally suited as a way for senators to show whether or not they support the continued existence of our largest banks in their current (very dangerous) form.

Kaufman has directly taken on and rebutted all the arguments put forward by proponents of big banks, such as Larry Summers of the White House and Hal Scott of Harvard Law School. Kaufman has the facts and most sensible opinion on his side, including the literature summarized in our book (13 Bankers, which he cited yesterday), and other voices (also quoted in his speech yesterday):

  1. Mervyn King, governor of the Bank of England: “Banks who think they can do everything for everyone all over the world are a recipe for concentrating risk.”
  2. Alan Greenspan, formerly chair of the Federal Reserve Board: “For years the Federal Reserve had been concerned about the ever larger size of our financial institutions. Federal Reserve research had been unable to find economies of scale in banking beyond a modest-sized institution. A decade ago, citing such evidence, I noted that ‘megabanks being formed by growth and consolidation are increasingly complex entities that create the potential for unusually large systemic risks in the national and international economy should they fail.’ Regrettably, we did little to address the problem.”

With such strong arguments and powerful evidence on its side, you might think that the completely reasonable and responsible proposals in the SAFE Banking Act would get a vote. But you would be wrong.

The Senate leadership on both sides of the aisle has apparently decided that they do not want to give senators (and the public) the opportunity to focus their attention on this key issue. Instead, they would prefer to keep the “debate,” in terms of votes, on issues less likely to infuriate powerful banks.

Our democracy allows great freedom of discussion and it is encouraging that someone as prominent as Senator Kaufman can take on (and trounce) the biggest banks on the merits of the case.

But how much is this freedom worth if the political power of the megabanks–based on campaign contributions, lobbying efforts and more general ideological control–can effectively prevent an up-or-down vote in the U.S. Senate on the most pressing issue of financial reform?

This is, of course, partly about the political power of corporations. But corporations are, in this sense, merely a veil. This is really all about which people have what kind of power in our society. To what extent are we really still a democracy – and how far have we already slipped down the road to oligarchy?

Simon Johnson is co-author of 13 Bankers: The Wall Street Takeover and The Next Financial Meltdown.  This post also appears on his blog, The Baseline Scenario.


  • noelle

    Or as Bill Moyers pointed out in his show, plutonomy, a term coined by Citigroup. Corporations have free speech rights now so I guess we can let them do what they want.
    Or pass a constitutional amendment taking away corporate personhood.

  • Cathy

    Simon, Thank you for your continued in-depth reporting on financial reform – or lack of – I really can’t believe that it is possible little to nothing will be done to put safeguards in place to prevent, what feels like criminal activity, in the future.

  • J. Robb Wilson

    Ever since your excellent article in the Atlantic Monthly I put you on my short list of people to listen to carefully about the economy (others include Krugman and Talbot). Please keep up doing shat you are doing; I will get your latest book.

  • William Keyser

    Dear Mr. Johnson,
    Noelle (May 4) raises the possibility of a constitutional amendment to take away corporate personhood. What do you think of this possibility?
    Bill Keyser

  • William White

    Where is the power concentrated that keeps the status quo as it is? The US government is beginning to resemble the US Catholic hierarchy, controlled from afar! We know the controlling factor in the Catholic Church, but who is the power in the US, or is it also from afar?

  • Noanie Rofoli

    Friday, we witnessed Senators Brown and Kaufman’s,
    Safe Banking Act of 2010 amendment, equivalent to
    The Glass Steagall Act of 1933, not even make it out of
    committee, in order to be debated on the floor, due to lack
    of votes. Then, in as stunning reversal, we saw the usually
    stealth and passionate about REAL Wall Street reform,
    Senator, Bernie Sanders, announce, in a somewhat shaky
    tone, he was watering down his Audit The Fed amendment, to only a shadow of his amendment’s former self. Later he admitted to Dylan Ratigan, that Senator Dodd, Geithner and others had explained his amendment had gone too far. Now we will watch what kind of pressure/threats are made to Blanche Lincoln to have her also water down her regulate derivatives and make them transparent amendment.

    I called my Senator. Diane Feinstein and asked Zack, a staffer in Feinstein’s D.C. office, how my Senator was voting on these amendments. Zack’s immediate reply, “Senator Feinstein does not reveal how she plans to vote on anything prior to actually voting.” I reiterated that I am a constituent and it is my Senator’s
    duty to inform the people how she is going to vote on any piece of pending legislation. votes. To my utter dismay, Zack repeated what he had previously told me, “Senator Feinstein does not reveal how she plans to vote until after voting.” I told Zack to tell my Senator that I would like for her to please vote for these amendments. Zack , replied, “We’ve had a high volume of calls on these amendments but I will pas your message onto Senator Feinstein” and then hung up on me. So it’s all out in the open for the most part, that most of our United States Senators are voting with and for Wall Street and against us, we, the American people.
    What a sad day for what’s left of democracy in the United States of America. We, the people have just begun to fight the good fight and that does NOT include any kind of violence and or hate. We, the people built this once great country and we, the people won’t let our own Wall Street bought and sold politicians, destroy it. United we Stand. Divided we fall.

  • Justine Dohl

    God help us if the banks aren’t put in check. Cantwell and McCain have added a Glass Steagall Bill to protect Americans against the oligarchical banks We are down the drain as a nation if we don’t bring back commercial banking separated from investment banks. Gaitner, Paulson, Summers, Greenspan are worse than Madoff

  • Grady Lee Howard

    Si J: How’s tricks over at Petersen’s? Oligarchy- now why wasn’t that at the top of your article. You tell us what you see in the news and that Europe is slightly ahead on bank reform, but you give no clue as to what we should do. You do predict simulated financial reform to match our simulated medical reform. Writing like that is for sheep: are you a goat?

    You’re INTELLIGENT Simon,but who’s interests do you support?

    Noanie: In the 80s I had Zack’s job in Specter’s office. That guy buried the Kennedy assassination and many other government crimes. Feinstein saw Moscone and Milk terminated and so is plenty meek.

    Justine: Glass/Stegall wouldn’t have much effect now. We might have to overthrow capitalism. We do it with financial nonparticipation.

    noelle and WW: There is no doubt of putonomoc ologarchy. They even had the power to flush Moyers and serve us this sewerage.