Liberals all over America are celebrating the way newly elected Massachusetts Senator Elizabeth Warren grilled bank regulators in a Senate hearing this week. The Huffington Post reported on her performance with the headline, “Elizabeth Warren Embarrasses Bank Regulators at First Hearing.” A YouTube video was also posted with the same title. The 4 minute video shows Senator Warren confronting top bank regulators from the FDIC, SEC, OCC, CFTC, Fed, and Treasury. The video is shown below.
Another site, Gawker.com, reported the same story with the headline, “Elizabeth Warren Puts Bank Regulators to Shame in First Senate Hearing.”
Senator Warren raised concerns about the lawless behavior of big banks. She stumped the panel when she asked them, “Tell me about the last few times you’ve taken the biggest financial institutions on Wall Street all the way to a trial.”
Her question was fielded first by Tom Curry, Comptroller of the Currency. His job is administrator of national banks and chief officer of the Office of the Comptroller of the Currency (OCC). He fumbled for a minute until Senator Warren brought him back to her question again. He then admitted, “We have not had to do it to achieve our supervisory goals.”
Senator Warren then concluded her question by saying, “I just want to note on this there are district attorneys and U.S. attorneys who are out there every day squeezing ordinary U.S. citizens on sometimes very thin grounds and taking them to trial in order to make an example, as they put it. I am really concerned that “too big to fail” has become “too big for trial.” That just seems wrong to me.”
At that point, some attendees were unable to restrain themselves and broke into applause. Wow, what a champion for the little guys! Not quite.
Senator Warren is correct to be concerned about the banks being too big to fail and too big for trial. The mega-banks are putting our entire economy at risk. A failure by any of them, like Bank of America, could trigger an economic crisis of epic proportions. And by the way, Bank of America has still not totally recovered from the 2008 collapse of the housing market. They reported dismal earnings for the fourth quarter of 2012 and laid off 16,000 employees by the end of the year.
But just because the problem is serious does not mean Senator Warren’s performance at the Senate hearing was anything to celebrate. In fact, her performance was misguided and even absurd because no matter what the bank regulators do these mega-banks are still going to be too big to fail and too big for trial. That’s because bank regulators can only enforce the laws, they cannot change them. Even if they took the banks to trial, little would be accomplished because so much of the current law favors larger banks. Even if regulators have overlooked some of the wrongdoings by the banks, that should not come as a surprise to anyone. That is exactly what you get when we allow the banks to become so big. They are now so big they are too big for trial.
Senator Warren blaming the regulators isn’t going to help fix the problem because they are not the ones who created these monsters. Asking them to now put these beasts back into their cages makes for good show but it will never happen. It is like asking an ant to stop a stampede of elephants.
The only way to address this problem is to change the banking laws. And who would be responsible for that? Oh yeah, that would be the Congress, which now includes Elizabeth Warren. Oops!
During the Clinton administration in the 1990′s, Congress passed laws that created the mega-banks we have today. Although these laws were ultimately signed by President Clinton, they received bi-partisan support. Both parties are to blame for this mess. Here are two examples:
- Interstate banking restrictions were repealed in 1994 during the Clinton administration by the passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act. Following this act, there was a surge in bank merger and acquisition activities, which caused the big banks to get bigger and smaller banks to be swallowed up or driven out of business.
- Following the stock market collapse of 1929, a safety mechanism was put in place to limit the enormous financial power of banks. It was the 1933 Glass-Steagall Act, which prevented banks from combining commercial and investment banking under one roof. But that safety was removed when a Democrat, President Bill Clinton, signed into law the 1999 Gramm-Leach-Bliley Act, which repealed the Glass-Steagall Act. Proponents of the Gramm-Leach-Bliley Act made the same argument that Senator Warren made at the Senate hearing, which is that we can fix the banking industry with tougher enforcement from bank regulators. They were just as wrong then as she is now.
So Congress made it possible for banks to conduct interstate banking and to offer both commercial and investment services. As a result, the big banks keep getting bigger and pose an ever greater threat to our economy should one of them ever fail. Regulators cannot do anything to stop that, but Congress can and should.
Senator Warren’s tough questions at the Senate hearing appear to have scored her some political points with her base but ultimately did nothing to address the fundamental problems with the banking industry.
Author: James Bailey
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