San­ders’ rhetoric is thin on the de­tails

The Pak Banker - - OPINION - Noah Smith

IF there is one US pres­i­den­tial can­di­date who em­bod­ies the na­tion's lin­ger­ing post-2008 rage at Wall Street, that surely has to be Sen­a­tor Bernie San­ders. No other can­di­date has ar­gued as stren­u­ously for fi­nan­cial re­form, or used rhetoric that so force­fully paints a strug­gle be­tween the fi­nan­cial in­dus­try and the rest of the econ­omy.

Whether that nar­ra­tive is ac­cu­rate, San­ders' con­crete pro­pos­als give the im­pres­sion that he hasn't care­fully eval­u­ated the pol­icy land­scape. Some of the things San­ders is sug­gest­ing have largely been done. For ex­am­ple, he re­cently de­clared that in its first 100 days, his ad­min­is­tra­tion would "cre­ate a list of too-big-to-fail banks and in­sur­ance com­pa­nies". Such a list al­ready ex­ists.

Un­der the Dodd-Frank Act of 2010, the Fi­nan­cial Sta­bil­ity Over­sight Coun­cil -a branch of the Trea­sury Depart­ment - must main­tain a list of sys­tem­i­cally im­por­tant fi­nan­cial in­sti­tu­tions (SI­FIs) - that is, banks, bro­ker­age firms and in­sur­ance com­pa­nies that are con­sid­ered too big to fail be­cause their col­lapse would en­dan­ger the fi­nan­cial sys­tem.

So San­ders' pro­posal is al­ready re­al­ity. Other pro­pos­als don't seem like they would ad­dress the prob­lems San­ders thinks they will ad­dress. For ex­am­ple, he re­cently tweeted: "Real Wall Street re­form means re-es­tab­lish­ing fire­walls that sep­a­rates risk tak­ing from tra­di­tional bank­ing." Here San­ders is talk­ing about re-im­ple­ment­ing the Glass-Stea­gall Act - a De­pres­sion-era rule that sep­a­rated in­vest­ment bank­ing from com­mer­cial bank­ing - which was re­pealed in 1999. San­ders has at­tacked ri­val Hil­lary Clin­ton for not strongly sup­port­ing its re­turn.

The prob­lem is, there is no in­di­ca­tion that San­ders re­ally un­der­stands what Glass- Stea­gall does. All aspects of bank­ing in­volve risk-tak­ing. In­vest­ment banks un­der­write and sell se­cu­ri­ties for cor­po­ra­tions, which en­tails the risk that th­ese com­pa­nies will not be able to re­pay their obli­ga­tions. Com­mer­cial banks take de­posits and make loans, thereby in­cur­ring the risk that the loans will not pay off. Sep­a­rat­ing th­ese two ac­tiv­i­ties will do very lit­tle, if any­thing, to make banks less risky.

In par­tic­u­lar, Glass-Stea­gall would have done al­most noth­ing to pre­vent the 2008 fi­nan­cial cri­sis. The costly mis­takes made by the big banks that led to their in­sol­vency weren't in the area of in­vest­ment bank­ing. Banks got into trou­ble by buy­ing toxic mort­gage-backed se­cu­ri­ties and us­ing too much lev­er­age, not by un­der­writ­ing fail­ing com­pa­nies. There are bet­ter ways of sep­a­rat­ing risk-tak­ing ac­tiv­i­ties from the banks that hold Amer­i­cans' de­posits. One ma­jor such re­form has al­ready been ac­com­plished - the Vol­cker rule, which bars banks from mak­ing many kinds of spec­u­la­tive in­vest­ments with tax­payer-guar­an­teed de­posits.

San­ders, how­ever, doesn't ac­knowl­edge this suc­cess. Other fi­nan­cial re­form pro­pos­als of Bernie's seem ei­ther bizarre or in­ad­vis­able. For ex­am­ple, San­ders has de­clared that he wants to fund free col­lege tu­ition with a tax on fi­nan­cial trans­ac­tions. How­ever, Italy's ex­pe­ri­ence shows that while this sort of tax - called a Tobin tax, af­ter the econ­o­mist James Tobin - is ef­fec­tive at re­duc­ing trad­ing vol­umes, it isn't very good at rais­ing money.

In that coun­try, tax­ing fi­nan­cial trans­ac­tions yielded only a fifth of the ex­pected rev- enue, and this num­ber will prob­a­bly drop even more in the long term. Es­ti­mates con­fi­dently pre­dict­ing hun­dreds of bil­lions of dol­lars in rev­enue from this sort of tax are al­most cer­tainly overblown. A fi­nan­cial trans­ac­tion tax would help curb high-fre­quency trad­ing - an­other ac­tiv­ity that had no real role in the 2008 cri­sis - but it won't pro­vide a sta­ble source of education fund­ing for US col­leges.

An­other ex­am­ple is San­ders' ob­ses­sion with fees charged for us­ing au­to­mated-teller ma­chines. He has re­peat­edly vowed to cap ATM fees at $2 per trans­ac­tion. How he ar­rived at the $2 num­ber is any­one's guess. But re­gard­less of whether a $5 ATM fee is un­fair, it's hardly much of a bur­den. If the ATM fee is higher, just go to the ATM less of­ten, and take out more cash each time.

So it isn't clear why San­ders has cho­sen to fo­cus on this fee, es­pe­cially when ATMs are ob­vi­ously a prod­uct that pro­vides great value to mil­lions of peo­ple. A fi­nal ex­am­ple is San­ders' pro­posal to au­dit the Fed­eral Re­serve. San­ders has been work­ing with Sen. Rand Paul on this ini­tia­tive. But as for­mer Fed Chair­man Ben Ber­nanke has ex­plained, the Fed is al­ready au­dited. What San­ders and Paul and his father be­fore him, for­mer Texas Rep. Ron Paul, want to do is to give Congress close over­sight of the daily op­er­a­tion of mon­e­tary pol­icy, com­pro­mis­ing the Fed's in­de­pen­dence. That would dra­mat­i­cally de­crease the cen­tral bank's abil­ity to re­spond to crises and re­ces­sions like the one the US re­cently ex­pe­ri­enced.

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