Comparing Wall Street reform plans: Hillary vs. Bernie

Which is the better Wall Street reform plan? So far most of the debate involves endorsements, rather than details, and Hillary wins the endorsement battle hands down.
Hillary's plan has been endorsed by Paul Krugman, Elizabeth Warrren, and Joseph Stiglitz. That's sort of the trifecta there. So if endorsements are what matters to you, then there is no need to keep reading this because Hillary won.

However, if substance matters to you then there is plenty more to talk about.

Before I go any further I should point out that both proposals have good points. Paul Krugman put it this way:

In other words, while there are some differences in financial policy between Mrs. Clinton and Mr. Sanders, as a practical matter they’re trivial compared with the yawning gulf with Republicans.

For instance, both Hillary and Bernie want a financial transaction tax aimed at eliminating high-frequency trading, which is really nothing more than front-running the market and should already be outlawed.

You can see Hillary's Wall Street reform plan here, and Bernie's Wall Street reform plan here.
When you look at these two proposals the first thing that stands out is that Hillary's web page is 4,800 words, while Bernie's is maybe 300. Normally that would imply Hillary's plan has more substance, but in fact that isn't the case here. What it actually means that Bernie and Hillary have different visions of what Wall Street reform should be, and this difference increasingly revolves around the terms Glass-Steagall and Shadow Banking..

"It's fine for you to say what you're going to say," she told Sanders. "But I looked very carefully at your proposal. Reinstating Glass-Steagall is a part of what very well could help. But it is nowhere near enough. My proposal is tougher, more effective, and more comprehensive because I go after all of Wall Street, not just the big banks."

There are several problems here, and many of those problems are the fault of the news media for not demanding that Hillary Clinton define the term Shadow Banking and why Glass-Steagall isn't sufficient. She has told the Des Moines Register, “A lot of what caused the risk that led to the collapse came from institutions that were not big banks.”
The most obvious problem with Hillary's statements can be summed up with one simple question..

“If you don’t think Citibank was center to this crisis, it’s hard to imagine why we spent billions bailing them out,” said Robert Borosage, co-director of the liberal Campaign For America’s Future, who referred to Clinton as “Wall Street’s favorite Democrat.”
“Her comments on their face are wrong,” said Christopher Whalen, senior managing director at Kroll Bond Rating Agency and author of Inflated: How Money and Debt Built the American Dream. “It is incorrect to blame the crisis on shadow banks. You can’t really differentiate between what they were doing and what Citi was doing.”

It seems amazing that only seven years after the financial crisis, in which all of the Wall Street banks went broke, a leading Democrat is now saying that they were victims in this crisis rather than the perpetrators.
Plus, while AIG was certainly was a key part of the financial crisis and was a Shadow Bank as Hillary pointed out, the counterparty that most benefited from the AIG bailout was Goldman Sachs, another big Wall Street Bank. In fact, all the major beneficiaries of the AIG bailout were Big Banks.
The logic of Hillary's point breaks down even further while Krugman defines Shadow Banks.

“shadow banks” like Lehman Brothers

If Lehman Brothers didn't qualify as a Big Wall Street Bank than no one, such as Goldman Sachs does.

Hillary has seven bullet points under the segment of her plan which would fix Shadow Banking. They include:

Enhance public disclosure requirements for repurchase agreements
Enhance regulatory reporting requirements for hedge funds and private equity firms
Enhance transparency requirements and disclosure for exchange-traded product
Review recent regulatory changes to the money market fund industry

These are all great for more transparency, but don't actually change anything. She also includes:

Impose, in coordination with other major international financial centers, margin and collateral requirements on repurchase agreements and other securities financing transactions

This is also good, but could easily be outside of her ability because London (which has even less financial regulations than America) might very well think otherwise. And there is this:

Strengthen the tools and authorities of the Financial Stability Oversight Council (FSOC) to tackle risks in the shadow banking system—wherever those activities may migrate or emerge

Anytime you include the word "wherever", it's a mission statement, not an actual concrete proposal. Finally, there is this:

Strengthen leverage restrictions and liquidity requirements for broker-dealers

This is an actual concrete proposal, but it's also just an addition to what was already done with Dodd-Frank.
So while Hillary may have been very proud of having addressed Shadow Banking, while Bernie hasn't, the list of proposals leaves much to be desired.
Speaking of Dodd-Frank, that is exactly the feeling you get when you read Hillary's long list of proposals. If you prefer Dodd-Frank over Glass-Steagall, then Hillary's plan is right for you..

It’s Dodd-Frank 2.0: a list of regulatory tweaks requiring various agencies to write complicated new rules governing obscure corners of the financial markets.
....
This is technocratic incrementalism, the idea that the best way to approach a very big problem—a complex, interconnected financial system anchored by large banks that are so poorly managed they are not even aware of the risks they are taking on—is with better disclosure here and stronger incentives there. That was the philosophy of Dodd-Frank, which, with the exception of the Consumer Financial Protection Bureau, largely amounted to giving existing regulators a handful of complicated new tools (living wills, hedge fund registration, the Office of Financial Research, derivatives clearinghouse regulation, and so on). Now Clinton is offering more of the same.

Since Barney Frank is on Hillary's team, it shouldn't be a surprise anyone that Dodd-Frank would be the blueprint for Hillary's reforms.
Another point of Hillary's plan is how "it ends TBTF".

Unfortunately, there’s less here than meets the eye. The Federal Reserve and the Financial Stability Oversight Council can already force a large financial institution to scale back its operations if it poses a grave risk to the financial system. (That’s the Kanjorski Amendment, or Section 121 of the Dodd-Frank Act). And per Dodd-Frank, regulators also have the power to make life difficult for systemically important financial institutions in all sorts of ways—they can impose capital requirements, leverage limits, liquidity requirements, disclosures, or short-term debt limits. (For the most part, though, these tools haven’t been widely used.) In short, when it comes to too-big-to-fail banks, Clinton is proposing very little beyond what currently exists—nor does she explain how she will get regulators to use the powers they already have.

Dodd-Frank already gave the Federal Reserve System the power to regulate all institutions of systemic importance, including Shadow Banking, but the Fed shows no inclination for using that power. I would also point out that financial regulators failed spectacularly leading up to the 2008 crash, so giving them more responsibilities is a very questionable method of reform.
Other provisions include registration requirements for advisers of hedge funds which have assets totaling more than $150 million.

There will be some debate about the success or failure of Dodd-Frank, but three things are beyond question - it's still not fully implemented after five years, the Too-Big-To-Fail banks are bigger, and there are fewer small banks. Around one community bank or credit union is closing every day.
Critical parts of Dodd-Frank were gutted by Wall Street.

For instance, the Volcker Rule was initially conceived by former Fed Chairman Paul Volcker as a three-page approximation of Glass-Steagall. But by the time the regulators adopted the final version of the rule, it was hundreds of pages long and riddled with loopholes, exceptions, exemptions and other legal gobbledygook. Similarly, bank-friendly legislators effectively repealed Dodd-Frank's swaps pushout rule — which would have greatly reduced banks' exposures to the most risky derivatives — by hijacking the congressional budget approval process at the eleventh hour in December 2014.

In comparison, reimposing Glass-Steagall, something Elizabeth Warrren supports, would actually cut compliance costs for banks.

Let's get back to the term Shadow Banking.
It's a relatively new term coined by economist and money manager Paul McCulley in 2007. According to McCulley, Shadow Banking includes entities such as hedge funds, money market funds, structured investment vehicles (SIV), "credit investment funds, exchange-traded funds, credit hedge funds, private equity funds, securities broker dealers, credit insurance providers, securitization and finance companies".
What is missing from this list is Investment Banks, such as Lehman Brothers and Goldman Sachs, but since there is no agreed upon definition for Shadow Banking that shouldn't be important. However, Hillary and Krugman make it important by including investment banks in the list while at the same time discounting the importance of Glass-Steagall.

The 1933 Banking Act, known as Glass-Steagall, was all of 37 pages. Dodd-Frank, in comparison was 848 pages, and mandated 400 new rules which would create thousands of pages of regulations.
The reason for the vast difference in size and complexity wasn't because of the difference in ages in which they were created. The reason is because of a vastly different approach to reform. This difference in approach can be seen in Clinton's and Sanders' web pages today.

Basically, Dodd-Frank's approach was to take Wall Street business practices at face value and without judgement, and bring it all under the regulatory arm of the government. It didn't change how business is done on Wall Street, except to say that you must take safety precautions now and disclose what you are doing.
Glass-Steagall, OTOH, did make value judgements. It said any banking that deals with regular people will be boring, and if you don't like it then you are on your own. Notably, it separated commercial and investment banking, forcing many large banks to break into two.
I point this out because it shows that Glass-Steagall does indeed reform Shadow Banking, as defined by Clinton and Krugman, by definition. Lehman Brothers and Goldman Sachs were investment banks, and critical parts of the 2008 crisis, and Wall Street banks such as TBTF JP Morgan Chase would be broken up if Glass-Steagall were reinstated.

Those are two very different ways of reform. Dodd-Frank was reform by regulation. Glass-Steagall was reform by changing the way things are done.

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I'm going to sleep on this, edit it and post it to the GOS in the morning.
I generally stay out of the Hillary v. Bernie battle there, but this goes beyond just endorsing a candidate.

If you can think of any improvements please let me know.

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LapsedLawyer's picture

for this season's rox/sux debate, no matter what the subject matter. That said, this is an important diary and needs to posted over there, and not just to see how quick the discussion devolves into rox/sux namecalling nyah-nyahs. They need these sorts of posts that honestly discuss the issues.

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"Our society is run by insane people for insane objectives. I think we're being run by maniacs for maniacal ends and I think I'm liable to be put away as insane for expressing that. That's what's insane about it."
-- John Lennon

mimi's picture

you making your arguments. I can't read the whole pdf report Billionaire Bonanza: The Forbes 400 and the Rest of Us, just this article Billionaire Bonanza: The Forbes 400 and the Rest of Us

Just wanted to point out to it, not that I can comment, would understand or something. The author of above report also wrote this article at truthdig: Have We Hit Peak Inequality?

Sigh. Have to try to read all of it at a later time.

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Pluto's Republic's picture

These proposed reforms, both Hillary's and Bernie's — as well as Dodd Frank -— do not address the root of corruption. No one wants to talk about the real issue, because the asset-stripping of the American people is in full swing.

The real issue is antitrust. Until you deal with the grotesque monopolization of the nation's banking system, all these reforms are deliberate kabuki. The more rules and regulations, the more opportunity for institutional corruption.

Here is what has led to the current corruption of the finance sector, which has compromised the Federal government and undermined democracy:

These massive Franken-banks that are dealing directly with the public and with commercial banking — should be nationalized immediately, and thus, converted to non-profits. (Any profits beyond expenses and salaries belong to the people.) All the current banks, post-nationalization, will continue to work without interruption.

Meanwhile, the brokerages and investment houses will be owned by their shareholders, along with the assets and obligations specific to each brokerage. All ties to banking will be permanently severed. FDIC will be effective only in banks. The US will then have banking monopolies that are nationalized, smaller independent state banks, and credit unions.

A regulatory solution is completely unnecessary. Indeed, these proposed regulations are merely a continuation of systemic corruption pushed by cynical career politicians who act as handmaidens for their Wall Street Overlords to bamboozle the American people. To benefit the people, simply capture the massive profits from the banking monopolies, and the corruption will cease to exist.

Brokerages can continue to operate as casinos and mechanisms of investment in private enterprise. But they will operate as businesses, not banks. They do not have a window to a flood of Federal Reserve funds. Bailouts do not apply to brokerages or their shareholders. It's Vegas, baby. Loans from nationalized banks to brokerages are senior to all other obligations, in the event of bankruptcy.

Unless your candidate has a "reform" plan that looks like this, you're being played again.

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____________________

The political system is what it is because the People are who they are. — Plato

The Dow and DuPont merger is a whooper. Big pharma is no different.

The only thing about this diary that I think has been left out is that Hillary is owned by the banks and isn't to be trusted. So, does it even matter what she says. Remember EFCA and renegotiating NAFTA.

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"Religion is what keeps the poor from murdering the rich."--Napoleon

Pluto's Republic's picture

But it's really just a slogan, not a serious plan.

Sander's Senate Bill has is no legal foundation (ie. antitrust monopolies). It asks regulators to pick out a few "too Big to Fail" banks, then asks the Secretary of Treasury to "break them up" in a year or so. There is no sense of the authority to structure a break-up or enforce it. The regulators have long been the foxes guarding Wall Street's chicken ranch. Above all, there is no stated recognition of the principle that "banking profits corrupt". The big banks banks require years of non-profit rehabilitation. That cannot happen without the executive imposing nationalization as a process of "reform."

Some argue that breaking up the banks is too simplistic for the 21st century, and instead support Hillary's proposal of reform via a minutia of rules slathered across all aspects of the finance sector. But we all know that requires self-enforcement, and always results in intricate loopholes and greater theft. Again, this reform is not based on legal or moral principle. It is the height of cynicism and intellectual dishonesty.

Can we talk?

Anyone paying attention knows full well that both plans are kabuki. Wall Street owns and staffs the Federal government. Predatory capitalism is both culprit and doctrine in the US. The privatization of banks (or prisons, or natural resources, or military and defense) is the Feudal nirvana of the Robber Barons. They, long ago and constitutionally, designed an economy compatible with a working plantation of indentured colonists, who are denied the benefits of government investment in human capital (ie. health care, full education toward any goal, and personal security for all, which would eliminate the desperate-frightened-hungry class that makes civil society impossible).

As long as the US is allowed to continue its international murder spree in quest of Empire supremacy, the potemkin president of either compromised party will continue to turn the austerity screw (and let you eat gay wedding cake as a consolation).

"The only way to win is not to play." — Joshua, War Games

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The political system is what it is because the People are who they are. — Plato
LapsedLawyer's picture

accomplished thus far is make TBTF banks even bigger TBTF banks, concentrating ever greater financial power into fewer and fewer institutional hands. Supposedly, the Volcker Rule was to curb this. Doesn't seem to have even been implemented from what I see.

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"Our society is run by insane people for insane objectives. I think we're being run by maniacs for maniacal ends and I think I'm liable to be put away as insane for expressing that. That's what's insane about it."
-- John Lennon

Pluto's Republic's picture

.

It's like the faux war on ISIS. After 14 months of daily bombing kabuki, ISIS increased the size of their territory and army by one third, again, and built the size of their oil smuggling fleet to over 3000 tanker trucks.

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The political system is what it is because the People are who they are. — Plato
mimi's picture

cartoon summarizes it very well. I had the feeling I understood something. Smile

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he'll invest the effort to build a legal basis to break up the six monopolies in each industry that rule this country and government.

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"Religion is what keeps the poor from murdering the rich."--Napoleon

Anyone paying attention knows full well that both plans are kabuki.

Glass-Steagall isn't kabuki.
The question I would ask is, "Which Glass-Steagall?" The Glass-Steagall of 1934 or the one of 1999.
The one of 1999 was OK, but the one of 1934 (before several rounds of deregulation) was what we need.

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Pluto's Republic's picture

…and build upon the civilization that forms, the laws must change and evolve, as well. It's our duty as the current generation to codify the changes into settled law, so that the generation that follows has a modern platform to work toward its own sovereignty and fulfillment as conscious humans in a ever evolving world. If we shirk this duty, it becomes more and more impossible to create modern laws and amend old ones.

That is what happened to the US constitution, which is now entrenched in the 18th century, in a language we no longer understand. The people have come to believe it is a sacred document, like the Torah. They worship it like superstitious ur-humans. It can no longer be amended. The Supreme Court was not designed to legislate, but since the US is stuck with a vague and compromised constitution that is lodged in the reality of a world long gone, we are forced to rely on politically appointed judges to act as oracles, who tell us what it means. That's how catastrophes like Citizens United happen.

I bring this up to answer your question:

I am referring to the Glass-Steagall of 1934, when I say that this regulation endured long enough to bring extraordinary social mobility and an array of possibility to the American people. It kept predatory capitalism in check for fifty years. But when it was not coded in a modern constitution, by the generations that benefitted from it, the new generation forgot it was important and threw it away like a piece of garbage.

And the world changed again. And the constitution has become even more obsolete. It no longer protects or benefits the people in a significant way; the very few protections and rights mentioned in the rudimentary US constitution are not directly conferred upon the people, and the government can revoke them at any time, just as the right to privacy has been.

Glass Steagall can be reinstated, but the financial environment has become too hybridized and electronically integrated for it to repair the damage and unwind the corruption that has been absorbed as "normal." The only way to put Glass Steagall in place in a meaningful way is to nationalize the banks for a time and remove the profits until they are corruption-free and exist solely to benefit the people and society, rather than the Oligarchs.

Unless the TBTF banks are put in national receivership and reorganized, our destiny remains on the trajectory that was set in 1981, when Reagan kicked off the deregulation frenzy and the doctrine of "tax cuts for the super-rich," at all costs. It is this that paved the way for the revocation of Glass Steagall. This is the path that tightens the austerity screw until the people break. This is the path to the Third World with a third class infrastructure. This is the path to economic collapse, which is triggered when the world loses confidence in the US and the greatly diminished lives of its people.

This chart ranges from 1950 to 2008. Both lines are still moving in the direction they were going in 2008.


The Blue Line represents the collapsing income tax rate on the very highest earners, which concentrates coney in the hands of the One Percent. The Red Line represents the growth of debt in the US.

Deregulation is the cause of severe income inequality. Deregulation always pushes most of the national income into the financial sector, where the One Percent makes its income gains.

Debt grows because government revenues are derived from a tax on ALL income, as a whole. But when taxes were slashed on the income of those who were earning 90 percent of the national income, the government and the other 99 Percent were both left with declining or stagnating income. Both must constantly borrow money to survive in an atmosphere of austerity.

Meanwhile, the extremely wealthy of the United States pay the lowest taxes of any nation in the world, while whining piteously.

The problem isn't spending. The problem is wage and income theft.

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____________________

The political system is what it is because the People are who they are. — Plato
mimi's picture

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About the scope of the problem and the remedy.

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"Religion is what keeps the poor from murdering the rich."--Napoleon

has been left out is that Hillary is owned by the banks and isn't to be trusted. So, does it even matter what she says

I'm sure it will be brought up by other people, who will also be countered by accusations of "does it matter what Bernie promises when Congress is Republican?"

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Dkos is freaking nuts. Besides saving America lol, I hope Bernie wins just to wipe the smug off the faces of the Hillarybots, LL, and Hillary herself. If I hear one more white male elitist at daily Kos put down (young) white males, I am done tolerating it. OPOL, gee bee bee or vice versa, and the Rino dude are putting out some awesome Bernie diaries. 7 weeks to Iowa. I so want Bernie to kick Hill's high and mighty ass. The GOP has to die. The only way to do it is to go through the Third Way and make their candidate lose. This so reminds me of how far we got with taking out Lieberman until Bill Clinton shut up Kos, Stoller and others.

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"Religion is what keeps the poor from murdering the rich."--Napoleon