Think of Wall Street as a chronic and indiscriminate addict, swallowing home mortgages as if they were OxyContin, experimenting with synthetic financial instruments and, above all, hopelessly in the thrall of risk, gambling away not only its own coin but any assets it can get its trembling hands on. There are two things we can to do to help this fiend—harm reduction and rehab.
The financial reform bills that passed the Senate in May and the House in December do little to bring about the latter—true reform and reconstruction of the financial sector so it becomes a clean player and a good citizen. That would require downsizing the obscenely large role finance capitalism plays in our economy (40 percent of corporate profits), breaking up the six too-big-to-fail banks that collectively control assets equivalent to 63 percent of GDP and reconstructing the wall between commercial and investment banking brought down by the repeal of Glass-Steagall. This tough but necessary regimen has been recommended by leading economists and proposed in part by Senators Cantwell and McCain. But few in Washington, least of all the Obama administration, had the guts to champion it—so big, bold legislation aimed at rehabbing the banks never even came up for a vote.
What we have instead is the harm reduction method; the financial reform bills merely attempt to get Wall Street into a safer space where it can wreak less havoc on itself and others while continuing to be a user and an abuser. Some safeguards, however, are better than others, and as the Senate and House bills get reconciled in conference committee, there’s still a lot up in the air. One crucial element is the regulation of derivatives, the complex financial instruments on which banks wildly speculate and which blew up the mortgage crisis so badly it became a global Great Recession. Both bills would require derivative trades to go through a central clearinghouse and a regulated exchange, making public the risks involved. But the House bill has far too many loopholes. The Senate bill is tighter, although it lacks an enforcement mechanism; and it would require banks to spin off their derivative operations into separate companies—a provision inserted by Senator Blanche Lincoln, who took an uncharacteristically populist stance in the face of a challenge from a primary opponent.
Another important unresolved issue is the status of a consumer financial protection agency. Here the House version is substantially better, creating an independent agency with broader regulatory powers. Then there’s the Merkley-Levin amendment, which would install the Volcker rule, limiting the ability of banks to engage in certain kinds of speculative trading. This widely popular measure was also never voted on, because of Republican obstructionism; but through procedural hocus-pocus, it could find its way into the final bill, where, we hope, it will meet the best elements of the Senate and House legislation.
Throughout this long process, public pressure and anger at Wall Street—spurred on by SEC investigations, street protests, direct action and electoral challenges—have pushed Congress to take a get-tough approach. That’s why it is vital that the conference committee meet in the open, as Congressman Barney Frank rightly proposes, instead of behind closed doors, where the financial lobby—which, according to the Center for Responsive Politics, has spent $122 million over the past year fighting every decent proposal—can do its dirty deeds in secret.
The intervention must be televised.