During the last Democratic debate, Bernie Sanders jabbed Hillary on the issue of campaign contributions from big banks. She responded by wrapping herself in the 9/11 flag in a fundamentally ridiculous way that rightly prompted scorn from commentators on both sides of the aisle.
The issue of bank size is important and is worthy of a more sophisticated analysis than that. The principal questions, and my responses, follow:
1. Why did the big banks grow during the financial crisis? The government, in the interests of stability during a very unstable time, encouraged (some would say compelled) acquisitions of troubled institutions by stronger banks. The alternatives (using even more taxpayer money on bailouts, or letting the banks fail and living with the unpredictable consequences) were even less palatable.
2. What exactly is the problem with having big banks? Normally, the concern with size would revolve around the concentration of economic power, but no one is suggesting that, say, Goldman Sachs has anything like a monopoly on financial services. The real issue is the amount damage the banks can do when they fail.
3. Are there any advantages to having big banks? Absolutely. Big banks can diversify their holdings, thereby reducing the likelihood of failure. Big banks have more ability to operate and make money on a global basis, as well. Financial services are a major source of wealth in our economy.
4. Can the banks be broken up without new legislation? To my knowledge, no, and the prospects for any such legislation in a Congress with a Republican House majority are abysmal.
5. Are the protections against big bank failures in Dodd-Frank adequate? No one will know until they are tested. The only thing you can say at this point is that they address the issue in a logical way, and could conceivably work, if properly implemented.
6. What, if anything, would Hillary’s Wall Street contributions mean in a Clinton Administration? The more honest answer to the issue raised by Sanders would have been that any senator from New York would be obligated to protect the interests of her Wall Street constituents. In any event, recent history strongly suggests that the vast majority of the Wall Street contributions in 2016 will go to Republicans, not to Hillary.
7. If it is legally and practically impossible to break up the banks, what is the point of being concerned about this? There could be some legitimate concern about influence being applied relative to the writing and enforcement of rules. That’s about it.
In my opinion, the best course of action is to continue to implement Dodd-Frank and see what happens. In other words, I don’t agree with Sanders on this point.