On January 20, 2017, after the most exhausting, tumultuous, and divisive presidential election in U.S. history, Donald Trump will take the oath of office. An inaugural ball of the mostly elite establishment co-victors will pay big money to celebrate history. That’s how these things go.
But like any raucous party, there’s the inevitable hangover that follows—and the clean-up that’s needed. Democrats have a lot of work to do in that regard, especially now that they are shut out of the White House as well as Congress. They need to raise their voices and reach across the aisle to address the criminally flawed financial system that fosters inequality and benefits wealthy CEOs at the expense of everyone else. If they can do that, they might be able to channel the very anger and sense of powerlessness that propelled voters toward Trump, someone they believed was not “bought and paid for” by Wall Street.
Despite impassioned pleas from the likes of Senators Elizabeth Warren and Bernie Sanders, the men who crashed the economy from atop their Wall Street thrones are richer than ever. The Democratic Party, which controlled the White House for the past eight years, needs to collectively reach an honest assessment of the hazard created by bailing out, not jailing, these people and enabling their firms to get bigger. They also must figure out why they thought running a candidate with such conflicted allegiances was a good idea, and then never do it again.
Ironically, it was the Republican Party that, at its convention in July, inserted clearer and more decisive language regarding breaking up the big banks. To quote their words:
“We support reinstating the Glass-Steagall Act of 1933 which prohibits commercial banks from engaging in high-risk investment.” They also called for more “sensible regulations” that “can prevent the strong from exploiting the weak.”
This clause meant that comparatively reducing regulations for smaller banks trying to compete with larger ones was a good way to go, especially for rural America. There’s nothing wrong with that, yet Democrats considered the notion 100 percent deregulatory rather than possibly progressive regarding the inequality that exists between the smaller versus the mega banks.
Meanwhile, there are massively important issues that must be addressed for the financial stability and economic security of all the American people. Here are some areas in which change is needed:
Banks Too Big to Fail
Too big to fail is not just about size; it’s about power, influence, and control. Make no mistake: Too big to fail is a policy prescription. And policies are subject to change.
Back in 1933, when the Glass-Steagall Act was passed during the height of the Great Depression after the bank-caused crash of 1929, it was supported by Democrats and Republicans alike. The act barred commercial banks from dealing in securities.
Splitting up people’s deposits and loans from the speculative activities of banks created a financial calm that lasted for decades. This balance was shattered by the Financial Services Modernization Act of 1999, passed under President Bill Clinton, which effectively repealed Glass-Steagall. Since then, the big banks have gotten steadily bigger and more complex. The assets held by the five largest banks in 2007—$4.6 trillion—have increased by more than 150 percent since then. Those firms went from holding 35 percent of industry assets to 44 percent.
Banks now own insurance companies, asset management companies, and brokerage or trading arms. They not only have access to an increasingly higher proportion of deposits, but also to pension and other funds, and insurance policies. When the Dodd-Frank Act passed in 2010, Obama pegged it as a sweeping reform.
But, in fact, the 2,300-page act contains minimal restrictions on big banks and does not alter the size or concentration of the nation’s biggest banks. It does require them to do things like establish emergency plans in the event of another crisis. But that’s something five of the largest eight banks failed to do in a manner approved jointly by the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) as recently as this April. And hundreds of lobbyists have worked to weaken the act since its passage.
Throughout the election and in discourse revealed by the WikiLeaks dump of emails from her campaign chairman, John Podesta, Hillary Clinton remained cagey about actually breaking up the banks, which would entail reducing the power base of their CEOs. Trump, a billionaire who never held a public office, tapped into the disdain his supporters felt over the sheer unfairness of the Wall Street bailout. And Trump talked about the need to help smaller banks. As recently as October, while presenting his “New Deal for Black America,” he noted,
“Dodd-Frank has been a disaster, making it harder for small businesses to get the credit they need . . . . It’s time for a 21st century Glass-Steagall.”
If Trump is serious about breaking up the big banks and reducing the burden on smaller and community banks, which tend to do less risky things than the mega-banks, Democrats should jump on board. They should be championing Main Street over Wall Street.
The Rise of Shadow Banks
While campaigning, Clinton promised to focus her reform efforts on the shadow banks, which she claimed caused the financial crisis, rather than the big “commercial” banks (run by her friends). Shadow banks are basically financial firms like hedge funds and private equity funds that are less regulated than the major banks, and don’t hold FDIC-insured deposits.
Yet the Obama Administration and most Congressional Democrats did more to help that industry than curtail its influence. Take asset management companies, which invest on behalf of individuals, companies, and pension funds for large fees. One such company, BlackRock, holds more assets than any big bank in the country. And while its holdings are not insured, it can invest in derivatives like “true” shadow banks, albeit with less regulation.
BlackRock gave more than $100,000 to Obama’s campaigns. In return, Obama’s appointees to the Thrift Saving Plan board awarded BlackRock contracts to manage $251 billion of federal employee funds between 2012 and 2015. It is not clear whether the firm will angle to have that contract extended under Trump. Federal and nonfederal retirement funds should not be handed on a platter to campaign contributors.
Curbs on Credit Fees, Relief from Student Debt
During his campaign, Bernie Sanders proposed a tax on Wall Street speculation, saying he would use those funds to make public colleges and universities tuition-free. So far Trump hasn’t mentioned a tax on Wall Street, but it’s a worthy cause to push. It would level the playing field from the risk-taking firms to the ones that could be corralled to finance development and infrastructure building alongside the government, as Trump has said he’ll do.
Then, there’s student loan debt and the unfair bankruptcy laws that favor private banks over struggling graduates. If someone is drowning in credit card bills or an underwater mortgage, current bankruptcy law allows them to file for bankruptcy protection from that debt. Yet none of the estimated $1.4 trillion in student loan debt can be discharged in a personal bankruptcy filing.
Though the government funds about 90 percent of those loans, it’s Wall Street that has a vested interest in keeping them from appearing in bankruptcy court. Why? Because more and more graduates are refinancing those loans with private lenders, and those new loans can be bundled up and repackaged just as subprime loans were before the financial crisis, and similarly sold for big fees to investors.
The possibility of students defaulting on loan payments would hurt that growing post-crisis business. The Obama Administration sided with the banks on this, and did not push to allow student loans to be discharged in bankruptcy. A bill to this effect introduced in 2015 by Representative John Delaney, Democrat of Maryland, hasn’t gained much traction.
On the campaign trail, Trump criticized the cost of college and acknowledged the burden of student loans, saying he would cap federal student loan payments at 12.5 percent of the borrowers’ income for fifteen years. He didn’t offer anything concrete to mitigate their effect through bankruptcy. That’s something Trump knows a thing or two about, so any bankruptcy proposals would at least be speaking his language.
Campaign Contributions and Citizens United
Once upon a time, the political influence of the “securities and investment” sector (i.e., Wall Street) covered only the big banks and brokerage houses (firms that hold deposits, give loans, and buy and sell stocks and bonds for their customers and themselves). But more recently, it has grown to include hedge funds and private equity firms that fall under the “shadow banks” category.
Either way, the sector is the single largest source of political contributions to both parties. During the 2012 cycle, it forked over $305 million in contributions, mostly from individuals working in the sector, dominating the post-Citizens United game.
In the 2016 election cycle, the securities and investment sector contributed over $90 million to the GOP, its largest contributing sector, but less than $1 million to Trump. On the campaign trail, Trump criticized Citizens United, at least insofar as it allowed super PACs to shovel money to his opponents, calling those PACs a “total phony deal.” We need to launch a major initiative to attack this Supreme Court ruling, beginning with a state by state constitutional amendment campaign.
What Should Be Done
The leaders of the major U.S. banks oversaw multitrillion dollar enterprises that committed fraud, lost other people’s money, harassed public service members, and fired thousands of low-level employees. None went to jail, and many went on to amass greater wealth. They did not face higher taxes or fees for the riskiest business practices. They received cheap money from the Federal Reserve and bailouts from the federal government.
While most Americans are living paycheck to paycheck, the big bankers were dining at the White House. And now they are putting the entire financial system on the edge of ruin again. That was a core message Bernie Sanders used to galvanize the progressive left, and it’s also, oddly, one message of billionaire Republican President-elect Trump.
That status quo must stop. For the sake of the country. How? It’s simple.
Break up the banks via a resurrected Glass-Steagall Act. Jail CEOs who have broken the law. Tax riskier bank practices. Cap fees and credit card rates. Reduce the concentration of shadow bank control over our retirement funds by virtue of their connections. Overturn Citizens United so that Wall Street funds don’t have backdoor access to policymaking.
These changes are bold and necessary. As progressives, we need to keep fighting to pass initiatives that were overlooked during the Obama years, not just assume that with full GOP control there’s no way to push forward our agenda. We have nothing to lose by pursuing it. We only lose when we stop fighting. Let’s not do that.
Nomi Prins is a frequent commentator on the political-financial nexus. She’s the author of six books. Her most recent book is All the Presidents’ Bankers: The Hidden Alliances That Drive American Power.