This is the final installment of a three part interview with regular Triple Crisis contributor Gerald Epstein, of the Political Economic Research Institute (PERI) at the University of Massachusetts-Amherst. This part focuses on why there have not been more significant reforms since the financial crash and Great Recession, and on a reform agenda for today. Parts 1 and 2 are available here and here.
Dollars & Sense: Of course, bubbles burst and exacerbate the severity of downturns. One of the amazing things about the aftermath of the recent crisis has been the apparent imperviousness of the financial sector to serious reform—especially in contrast to the Great Crash of 1929 and the Great Depression. How do you make sense of that?
Gerald Epstein: You have to use a political economy approach to understand the sources of political support for finance. I call these multilayered sources of support the “bankers’ club.”
The lead group in the bankers’ club is the bankers themselves, and the politicians that they’re able to buy off with financial contributions and so forth. Their ability to do that, of course, has become much greater with changes in the campaign finance reform laws and Citizens United and so forth, so it makes it much easier for the banks to throw enormous amounts of money at politicians and prevent significant reform. This is true for both parties, for the Republicans and for the Democrats. We know how important finance was to Bill Clinton’s political coalition in raising money. That’s been true for Democrats for many years, not just Republicans.
The bankers have a lot of other support as well. Historically, the Federal Reserve has been one of the main orchestrators of the bankers’ club. You can clearly see that in the role that Timothy Geithner played—when he was at the New York Fed, and then after he became Treasury Secretary under Obama—in fighting tooth-and-nail against any significant reform. He was one of the main figures in the opposition to tough reform through the Dodd-Frank Act. The Federal Reserve, through many mechanisms—the “revolving door” mechanism, the fact that they regulate banks, and so on—is a very strong member of the bankers’ club.
A perhaps surprising group in the bankers’ club has been many economists, especially academic economists who work on finance. Some of them take quite a bit of money from financial firms as consulting fees or are on the boards of directors of financial firms. Jessica Carrick-Hagenbarth and I studied this, looking at a group of 19 well-known academic economists who were working with two groups, the Pew Charitable Trusts Financial Reform Project and the Squam Lake Working Group on Financial Regulation, on financial reform issues. And they were coming up with financial reforms that, while some of them were OK, a lot really lacked teeth. We found that many of them, if not most of them, had some kind of association with financial firms, but were not disclosing this when they would write their academic papers speak on the radio or on TV or give testimony.
An important source of power of the bankers’ club is that bankers can threaten to fail if we don’t bail them out. They can threaten to leave—to move to London, Frankfurt, Hong Kong, or Shanghai—if we don’t give them what they want. So this threat is the ultimate “club” that the bankers hold over our heads, and they use that all the time in the fight over financial reform.
On top of that, there’s an important member of the bankers’ club that in the 1930s wasn’t a member—nonfinancial corporations. This time around, if you look at the fight over Dodd-Frank, you find very little opposition to banks from other members of the capitalist class. They were either silent or supported the banks. This is a big contrast to the 1930s when a lot of industrial firms did not support the banks, and in fact joined with FDR on financial regulation. Why is this? Why didn’t we see more opposition from other capitalists to what the banks had done? After all, what the banks did led to this massive recession and hurt profits, at least initially, created all sorts of problems for nonfinancial corporations—and yet they supported the banks. Part of the answer may be that nonfinancial corporations have now become financialized themselves. The CEOs of these corporations get a lot of their incomes and wealth through stock options and other kinds of financial activities. Some nonfinancial firms have large financial components themselves. GE, for example, is now spinning off its financial subsidiary, GE Capital. But for many years it was getting quite a lot of income from GE Capital. And it’s not just GE but also many other large nonfinancial corporations.
So there was a united front among the capitalists to oppose strong financial reform. Finance had plenty of money to buy off politicians. And while there was strong and valiant effort on the part of Americans for Financial Reform, Better Markets, some academic economists who were opposing what the banks did, and important roles played by Elizabeth Warren and some other senators—it just wasn’t enough, given this united front of capitalists, the money machine, and the academic economists who were giving legitimacy to what the banks were doing.
D&S: That brings us to the question of a reform agenda for now. We’ve heard a lot about the need for re-regulation of finance, with an eye toward the restoration of the boring banking of the 1950s-1970s. The other question is whether the functions of finance require capitalist banks at all, even within a capitalist economy. Could all the functions of finance be done better by public and cooperative financial institutions, rather than private capitalist banks?
GE: The way I’ve been thinking about it is that we need both—that they’re complements to each other. Short of complete overthrow of capitalism, and having a totally socialist economy, which is unlikely to happen in the immediate future, what I think we should argue for is both re-regulation of private finance and a much stronger push for what I call “banks without bankers.” We need to have re-regulation of private finance as long as it continues to exist, for two reasons.
First, as we’ve seen—and as John Maynard Keynes and Hyman Minsky and others argued—private finance can create a lot of problems if it’s not regulated. As Keynes put it, when “enterprise is a bubble on a whirlpool of speculation,” we’re in big trouble. You have to bring private finance under control so that it can’t continue to generate these massive bubbles and then crashes, which create enormous problems for workers and for households all over the world.
Second, as long as there’s private finance out there and the bankers are making enormous profits and incomes, not only does that generate a worsening of the income distribution—it’s an engine for inequality—it also makes it hard to have a stable and productive public financial sector. If you have public or cooperative banks, and you have people running those institutions and they think of themselves as financiers or bankers, and they realize that they could jump ship and work for the private financial sector and make five, ten, fifteen, twenty times what they’re making in the public interest, this can be extremely tempting. Or it can get them to reorient the activities that they engage in to make them more profitable and look more like private banks. This is what happened to a number of public financial institutions around the world in the run-in up to the financial crisis. The first financial institution that really got into trouble, or one of the first, was a Landesbank, a regional provincial public bank in Germany that was supposed to be making boring banking investments, but instead was making roaring banking investments, because they wanted to keep up with the private financial institutions.
You can’t let there be too big a gap between the activities and the incomes and pay between the public sector and the private sector if the public sector is going to do the job it needs to do. Of course, you can have a gap, and it can be somewhat large, but it can’t get as big as it got in the 2000s. So for both of those reasons I do think that we do need to control private finance.
But in order to break up the bankers’ club and to provide the real kind of finance that society needs, we do need to promote more cooperative finance and public finance. How do you do that? Well, there are a bunch of different ways. For example, there’s the State Bank of North Dakota, and there are a number of organizations that are trying to promote state banks in other states. I know there’s been an organization in Massachusetts, for example, that’s been trying to do this. There are credit unions all over the country, so building the credit unions by having a national credit union bank to support them. These are all things that should be done.
The government should stop subsidizing the “too big to fail” banks by bailing them out. This lowers the cost of funds for these banks, allows them to grow larger and squeeze out cooperative and other kinds of community banks. So the government should end too big to fail as a way to make more room for these other kinds of public and cooperative banks. The Federal Reserve could serve as a backstop for these types of banks, by agreeing to act as a lender of last resort, to let them use their securities as collateral for borrowing. So there are all different kinds of ways that the government could support the creation or expansion of these sorts of institutions.
I think that’s necessary for us to get out of the trap that we’re in.
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