A review by Nancy Spannaus
Market Rules: Bankers, Presidents, and the Origins of the Great Recession
Mark H. Rose
University of Pennsylvania Press, Philadelphia, PA., 2019, 258 pp.
April 17, 2019—Call me a populist if you will, but I cannot discuss the financial blowout of 2008 without holding responsible those financiers who pursued their own profits and power at the expense of untold millions of Americans, many of whom still suffer grievously from that collapse today. Unfortunately, author Mark H. Rose in his book Market Rules: Bankers, Presidents, and the Origins of the Great Recession chose to discuss the subject without passing judgment. That is the great weakness in his book.
That is not to say that Rose’s book is not valuable. He provides colorful, detailed portraits of many key characters who shaped bank policy-making from the period of President Kennedy to President Obama. Here you can learn about the pioneering role of Kennedy Comptroller of the Currency James Saxon and the hard-cussing Hugh McColl, who turned Charlotte, North Carolina into a major banking center. Rose describes their (and others’) machinations and deals with sections of the political class, bringing to light some of the mostly hidden policy decisions which permitted the take-down of the FDR regulatory system.
Rose clearly understands the flim-flam nature of some of the practices of the supermarket banks which were eventually created. His description of the securitization process (Chapter 6) is devastating in showing how low-income home owners were taken for a ride. He forthrightly states that it was not the home-owners who were responsible for the ultimate collapse. But he refuses to condemn the bankers who carried out these frauds.
Again and again Rose pauses to tell the reader that what was occurring was based on agreement between the politicians (especially the Presidents) and the bankers, both of whom were aiming at achieving “economic growth.” He states numerous times that the system wasn’t actually being deregulated; it was simply that the rules were changing. What was playing out was a power struggle between various financial players—the commercial bankers, the insurance brokers, the investment bankers, the thrifts and small-town bankers—not a battle over which banking system would best serve the general welfare of the nation.
It is also disappointing that Rose does not devote much attention to the political opposition to this process other than the Independent Community Bankers and the Tea Party. For example, several Senators waged a vigorous fight to reinstitute Glass-Steagall at the time the Obama Administration was preparing Dodd-Frank. This fight was reinforced by intense lobbying by union leaders and state legislators. Although that fight was not successful, it laid the groundwork for efforts that continue today.
A Counterpoint: The Financial Inquiry Commission
Professor Rose’s discussion brought to my mind a very different review of the buildup to the 2008 crisis. I refer to the 2011 report of the Federal Financial Crisis Inquiry Commission (FCIC), otherwise known as the Angelides Report, after its chairman Philip Angelides. Like Rose’s book, the FCIC report begins in the 1960s, where it identifies the rapid growth of the commercial paper and repo markets, which deal in unsecured corporate debt. This market grew into a major shadow banking system in the 1970s, the FCIC report said, which could be considered “hot money.”
The FCIC narrative then goes into the 1980s, where it discusses the weakening of “firewalls between traditional banking subsidiaries and the new securities subsidiaries of bank holding companies;” and the adoption of the “too big to fail” policy with the 1988 bailout of Continental Illinois. (Rose discusses both of these.)
Most consequential in the 1990s, according to the Angelides Report, was the explosion of securitization (which Rose very usefully describes as a way of taking debt off your books), and the growth of derivatives (gambling). The report calls the growth of derivatives, illegal until legitimized by Phil Gramm’s wife Wendy from her position as head of the Commodity Futures Trading Commission (CFTC), “by far the most significant event in finance during the … decade.”
I searched in vain for a reference to derivatives in Professor Rose’s book. There’s a discussion of CFTC chair Brooksley Born’s 1998 call for “a central clearinghouse for over-the-counter trading in volatile financial instruments,” (p. 171), but Rose calls it a “shopworn proposal.” By that time, there had already been a series of highly visible financial crises based on bad derivatives debts (Orange County, Barings Bank), so there should have been no question but that these were dangerous gambling instruments.
While noting, as Rose does, that Glass-Steagall had been considerably weakened by the time Gramm-Leach-Bliley gutted it in 1999 (Greenspan had headed a group at JPMorgan which called for Glass-Steagall’s elimination back in 1984), the FCIC report emphasized the growth of financial bubbles after that. Even more important, they say, was the Commodity Futures Modernization Act, which banned the regulation of over-the-counter derivatives.
The summation of the FCIC report is worth quoting at length:
More than 30 years of deregulation and reliance on self-regulation by financial institutions, championed by former Federal Reserve chairman Alan Greenspan and others, supported by successive administrations and Congresses and actively pushed by the powerful financial industry at every turn, had stripped away key safeguards, which could have helped avoid catastrophe. This approach had opened up gaps in oversight of critical areas with trillions of dollars at risk, such as the shadow banking system and over-the-counter derivatives markets. In addition, the government permitted financial firms to pick their preferred regulators in what became a race to the weakest supervisor.”
Our financial system is, in many respects, still unchanged from what existed on the eve of the crisis. Indeed, in the wake of the crisis, the US financial sector is now more concentrated than ever in the hands of a few large systemically significant institutions.
The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done. If we accept this notion it will happen again.
By contrast, Rose’s concluding remarks are circumspect, to say the least. He ends by describing the misgivings about the several-decade process of “financial innovation” by former Federal Reserve Chairman Paul Volcker. Does he agree with Volcker? It’s really hard to tell.
The Issue of Glass-Steagall
This review would not be complete without directly addressing the issue of Glass-Steagall, and the role its abandonment played in creating the conditions for the 2008 crisis. Rose adheres to the popular line that the repeal codified by the Gramm-Leach-Bliley Act (GLBA) of 1999 was not a major factor. But there is significant scholarship, and political savvy, that disagrees. Indeed, one of the eight U.S. Senators who voted against Gramm-Leach-Bliley, North Dakota’s Byron Dorgan, warned at the time that the legislation would create “too big to fail” institutions, and that “in a decade” the Senate would regret having passed it. The day of reckoning came ahead of schedule, in 2008.
One of the preeminent professors to have studied the role the abandonment of Glass-Steagall played in creating the crisis is Arthur E. Wilmarth, based at George Washington University. Wilmarth wrote a detailed paper on the subject in 2017, and is working on a book. In his article’s abstract, he writes:
This article contends that Riegle-Neal [legalizing interstate banking-ed.], GLBA, and CFMA [Commodity Futures Modernization Act-ed.] were highly consequential laws because they (i) allowed large banks to become much bigger and more complex, and to undertake a much wider array of high-risk activities, and (ii) permitted securities firms and insurance companies to offer bank-like products (including deposit substitutes), all of which helped to fuel the catastrophic credit boom of the early 2000s. I therefore disagree with commentators who argue that those laws did not have any significant connection to the financial crisis.
In fact, the lack of Glass-Steagall regulation represents a major vulnerability for our financial system today. As the Angelides Report said, it can happen again.
Banks are Not the Economy
In my initial report on Rose’s book, as discussed at a seminar at the American Enterprise Institute last month, I raised the crucial question of the relationship between the banking system and the physical economy. It is on this note that I want to conclude.
Bank policy-makers, as Rose repeatedly points out, have consistently justified their proposals by asserting that they will increase “economic growth.” But what does that phrase mean? Does it mean an increase in profits for the banking sector, or rises in the stock or other markets? Or does it mean investment in the productive base of the economy?
In this age of financialization, all too often the answer is given in market terms. Thus, the fact that housing prices are rising (beyond the reach of a huge portion of the population) is considered progress. So is the increase in jobs in financial services, in casinos, and now even in selling legalized psychotropic drugs!
Banks create economic growth when they invest in improving the physical conditions of life for the population as a whole. Examples of such activity include creating infrastructure like high-speed rail; funding research into scientific advances in medicine and power production; improving water systems and protecting vulnerable areas from the threat of hurricanes and floods; and expanding new productive plant and equipment for industry and agriculture. These kinds of investments cohere with the concept that Alexander Hamilton had when he devised the First National Bank: it was to be a nursery of national wealth by promoting industry, agriculture, and commerce.
The United States has had a banking system with that orientation for several periods in its history, but the last fifty years have seen it abandoned for a system dedicated to gambling, speculation, and outright theft. That is the process which Rose describes in detail, but on which he declines to make a moral (or even scientific) judgment.
Fortunately, he does provide the material from which we can do so.
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