The financial reform legislation just passed by Congress was proclaimed by Obama as “the toughest financial reform since the ones we created in the aftermath of the Great Depression.” This, however, is a kind of doublespeak since the entire thrust of financial reform in the decades since the 1930s has been toward financial deregulation, so being the toughest financial reform measure by that standard merely means that it didn’t give the house away.
The most important financial reform measure to be adopted in the 1930s was the Glass-Steagall Act, which was passed in 1933 and repealed in 1999 at the instigation of the Clinton administration. Glass Steagall separated commercial and investment banking. Nothing like that is involved here. Financial interests claim that it is impossible to go back to that earlier time. This means that financial reform in the deal just passed by Congress will not even create a regulatory situation as tough as it was when Bill Clinton’s second term of office began.
Moreover, there is little in the new financial reform legislation that is actually set in stone, and this is crucial. The most important measure has to do with watered down application of the Volcker Rule requiring the big banks to cut their stakes in their in-house hedge funds and private equity units. These new rules are designed to curb but not stop banks from engaging in such risky investments in their own funds. Yet, since financial institutions are allowed to keep a foot in the door in this respect, the percentage of such trading that they are allowed to engage in — currently 3 percent — could easily be increased at any point through future legislative action, which would then be treated as as a minor adjustment.
Even more important is the fact that major banks like Goldman Sachs and Citigroup may have up to 12 years, i.e., until 2022, to comply with these new rules of curbing their in-house trading in these areas, according to Bloomberg Businessweek. This is of course an infinity from the standpoint of financial trading. The whole world could change by then. There is plenty of time for lobbying to have its effect. Changes in Washington in 12 years (equivalent to three presidential terms) could substantially alter the name of the game. Compare this to Glass Steagall, where the big banks were given less than two years to separate their commercial and investment banking operations!
There is no ban in this new legislation on proprietary trading (banks engaging in speculative trading with their own money). Banks are allowed to keep their derivatives units. There are innumerable loopholes. In fact, that is undoubtedly why the legislation ends up being 2,000-pages long! Much is left simply to the regulatory discretion of the Federal Reserve and the SEC. It is true that the Fed is given more power to intervene in the case of a failing bank. But what this means is not clear. There is nothing in the present legislation that ranks as a serious consideration of the “too big to fail” problem. In 2008, the top 10 financial institutions in the United States controlled 60 percent of total financial institution assets, compared to 10 percent in 1990. If one of these institutions were to fail the federal government would be forced to bail it out, regardless of what administration officials and the Federal Reserve currently say to the contrary.
In short, nothing has really changed. Why is this legislation so weak? The answer is that given the public outrage about the financial crisis it was necessary to make a show of doing something. But this had much more to do with face-saving in a political crisis than about limiting financial speculation itself. Indeed, no real change in the rules governing the financial superstructure of the economy was ever contemplated in this process. The reasons for this are to be found in the reality of today’s monopoly-finance capital.
The economies of the United States and the other rich nations have been slowing down for decades, with the real rate of growth dropping substantially. Paul Krugman has recently referred to the current economic condition as “The Third Depression,” comparing it to the earlier long periods of stagnation in the late nineteenth century and in the 1930s. What has served to lift the economy in this latest period of slow growth, given the stagnation of productive investment, is mainly the expansion of speculative finance, generating a long-run financialization (shift from production to finance) in the economy as a whole.
Under these circumstances of a finance-driven economy, what those at the top most fear is a stoppage in bank lending and a curbing of financial speculation. As a result their hands are effectively tied in terms of clamping down on finance. (Not to mention the fact that the richest Americans, as can be seen in the Forbes 400, are more and more dependent on the financial sector for their wealth, representing a shift in the locus of economic power that also has had effects on the state, as Hannah Holleman and I argued in “The Financial Power Elite” in the May 2010 issue of Monthly Review.)
Ironically, a new bubble is not so much to be feared as desired at this point from the standpoint of those in charge. Essentially, the same situation faces financial regulators generally when confronted with a bubble. To prick the bubble is to end economic growth. The usual response therefore is to try to expand the bubble as long as possible, even to deny its existence, until it eventually bursts.
The conclusion that all this leads to is that in our current situation financial reform is basically a dead letter, as is financial regulation itself. There is nothing in the new legislation that will prevent or even ameliorate future financial bubbles and their inevitable consequences. Nor is that the intention. What this legislation does point to is the irrationalities of our present system, and the fact that it is impossible to address such problems of the economy in a meaningful way without taking on the entire system.