Have any plans for this Saturday? The nearly 100,000 people who have pledged to take part in Bank Transfer Day certainly do: closing their bank accounts. The idea is to punish “Too Big to Fail” banks by instigating a mass exodus to smaller credit unions and community banks. Though not technically affiliated with Occupy Wall Street, it’s a practical expression of the anti-bank anger the movement has wrought. But if the executives at the country’s biggest banks have circled Bank Transfer Day on their calendars, it's probably not out of anxiety.
David Lazarus argues today in the Los Angeles Times that Bank of America has found a way to make money off Dodd-Frank. The financial reform bill directed the Fed to limit the "swipe fees" banks were charging merchants for the use of debit cards in retail transactions. Reform was needed because these swipe fees were about the same for debit and credit cards, which made no sense. With a credit card you're borrowing money, but with a debit card you're supposed to be spending only money that you have.
As the U.S. economy fails to recover, there is a growing fear that the United States has entered a phase of long-term decline. Conservatives blame “big government” for throttling entrepreneurship; liberals tend to take aim at Wall Street. Rolling Stone writer Matt Taibbi memorably described Goldman Sachs as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” Among less inventive critics, the term in vogue is “financialization.” According to author Kevin Phillips, who popularized this notion, financialization is “a process whereby financial services, broadly construed, take over the dominant economic, cultural and political role in a national economy.”Elements of this thesis can be found in scores of books, articles, and blog posts on the state of the U.S. economy. Phillips blames financialization not just for the “Great Recession,” but for “excessive debt, great disparity between rich and poor, and unfolding economic decline.” In their book, 13 Bankers, former International Monetary Fund (IMF) chief economist Simon Johnson and James Kwak blame financial factors for the “anemic growth” in the overall economy prior to the crash. And, in an influential essay—titled “WHAT GOOD IS WALL STREET?”—The New Yorker economics writer John Cassidy pointedly contrasts the period when regulators restrained the growth of the finance sector (when wages, investment, and productivity grew, lifting “tens of millions of working Americans into the middle class”) with the period of growth experienced by the finance sector since the early ’80s (when “financial blowups have proliferated and living standards have stagnated”). One thing is clear: Financialization, in some form, has taken place. In 1947, manufacturing accounted for 25.6 percent of GDP, while finance (including insurance and real estate) made up only 10.4 percent. By 2009, manufacturing accounted for 11.2 percent and finance had risen to 21.5 percent—an almost exact reversal, which was reflected in a rise in financial-sector employment and a drop in manufacturing jobs. It is also clear that high-risk speculation and fraud in the financial sector contributed to the depth of the Great Recession. But Phillips, Johnson, and the others go one step further: They claim that financialization is the overriding cause of the recent slump and a deeper economic decline. This notion is as oversimplified, and almost as misleading, as the conservative attack on the evils of big government.
The Wall Street Journal has an excellent report detailing the financial industry's sharp turn away from the Democrats and toward the Republicans, in response to the Obama administration's plans to regulate them and tax them at higher rates: Managers of hedge funds—private investment partnerships that cater to institutions and wealthy people—are reacting to what some criticize as Mr. Obama's populist attacks on Wall Street, as well as to Democrat-led efforts to raise their tax bills.
All of those headlines about record corporate profits turn out to be a little misleading. As Justin Fox notes at the Harvard Business Review, corporate profits are hitting all-time highs only if you look at nominal dollars.
There were many factors that led us to the financial crisis of 2008—dangerous derivatives, irresponsible ratings agencies, negligent regulators—but one was more important than the rest. We now know it as the “too big to fail” problem. What brought the economy to the edge of disaster wasn’t only that financial institutions had made rash bets on lousy investments, but that those institutions were so massive that when their bets went bad, they threatened to take the rest of the economy down with them.
The financial crisis in America isn't over. It's ongoing, it remains unresolved, and it stands in the way of full economic recovery. The cause, at the deepest level, was a breakdown in the rule of law. And it follows that the first step toward prosperity is to restore the rule of law in the financial sector. First, there was a stand-down of the financial police. The legal framework for this was laid with the repeal of Glass-Steagall in 1999 and the Commodities Futures Modernization Act of 2000.
Have we finally fixed the 'too big to fail' problem?
Modern quantitative finance presents unique opportunities for smart people to run amok. But we have not fixed our financial system, or reined in the h