By Nancy Spannaus

March 30, 2019—The American Enterprise Institute (AEI) in Washington, D.C. hosted a discussion of the rise of today’s “supermarket banks” on March 27. Kicking off the event was Professor Mark H. Rose, who has recently published the book Market Rules: Bankers, Presidents, and the Origins of the Great Recession. After Dr. Rose’s presentation on aspects of his book, AEI scholar-in-residence Paul Kupiec moderated a discussion which included economic commentator Alex J. Pollock and distinguished professor of economics (emeritus) Richard Sylla, as well as Rose.

The guts of the discussion focused on the political process by which the giant Wall Street banks of today came to dominate American finance. Oddly missing, until raised by the moderator, was whether this was a good thing for the economy, and, tangentially, whether it contributed to the blowout of 2008. To the surprise of this attendee, all the speakers seemed to consider the process to have been “successful”, and probably inevitable.

Why should I be surprised? Because all the speakers clearly know that the deregulatory changes in the regulatory regime installed under the Franklin Roosevelt Administration have been accompanied from the 1970s forward, by a decline in productivity, a stagnation of wages, and disinvestment in vital economic infrastructure. The process of bank consolidation which created the mega-banks was advertised as the way to create dynamism and prosperity through the country, for “Main Street.” If that were the case, why would we have the physical economic results which I mentioned above?

Unfortunately, the issue was never posed in those terms.

The Political Campaign for Supermarket Banks

Dr. Rose, whose book I have not yet read, focused his remarks on the case of one the key actors in consolidating the supermarket-bank regime, former Texas Congressman Jeb Hensarling. Hensarling was a protégé of economics professor and Texas politician Phil Gramm, a man who gave his name to the 1999 bill that ended FDR’s Glass-Steagall regulation. Hensarling and Gramm were passionate anti-government ideologues, Rose said, with a well-honed ability to translate their program of dismantling bank regulations into folksy, populist propaganda.

Hensarling, of course, believed he was acting in the interests of the “people.” Rose described, blow by blow, his crusade against government controls of the market, especially Hensarling’s campaign to dismantle Obama’s 2010 Dodd-Frank bill. Hensarling called Dodd-Frank “regulatory waterboarding,” and he vowed to destroy it. In the spring of 2018, he finally won a substantial victory in that direction, with the passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act, which significantly gutted Dodd-Frank’s regulations.

Hensarling’s story exemplifies how politics has brought about our current domination of the financial markets by the supermarket banks, Rose concluded.

Critical Issues Raise in Discussion

There were two crucial omissions in Rose’s book, commented Dr. Sylla in opening the discussion period.  The first was the lack of data showing the evolution of the U.S. banking structure over the last century. The second was Rose’s inattention to the role of international banking and financial globalization in this process. Dr. Sylla then showed an enlightening set of charts which documented both the decline in the number of banks, and the increasing concentration of national banking assets in a small number of megabanks. (A video of the event can be found here.)

Alex Pollock’s remarks elaborated on aspects of the banking/politics relationship which he considered significant: the interplay between banks and politics is a game that is constantly resulting in new arrangements, and constant new legislation (he showed charts of the many laws over the decades). Before the creation of the supermarket banks, Pollock asserted, the system (read FDR’s regulations) was set to suppress competition, and to keep banking safe and sluggish. He likened the regulatory system to “cartelization” of banking, due to restrictions on interest rates, kinds of lending, etc. The fight, from Kennedy’s Controller of the Currency James Saxon on, has been to break that cartelization.

It was then moderator Kupiec who summarized and raised the question: All these protagonists believed that unleashing finance from regulations would bring prosperity—did it work? Rose said it didn’t end badly, and Sylla gave financial figures supporting that idea, adding that since 2000, there have been some difficulties.

Total Factor Productivity by Decade. The collapse has not been reversed.

By this point, I was virtually bursting to be able to speak. Thanks to Dr. Sylla, I was finally able to do so. I asked the panelists to address the fact that the period of “boring,” regulated banking between the 1930s and 1950s represented the “golden age” of U.S. economic productivity, whereas that measurement has gone into a nosedive since. In fact, Congressional campaigners for restoring Glass-Steagall, rather than enacting Dodd-Frank, had pointed that out, but had been suppressed.

Dr. Rose, who indicated he was aware of the fight, simply noted that since the Presidency was against such a change, it was defeated.  The meeting ended on that note.

A New Crash?

Given the reference to the “origins of the Great Recession” in the title to Dr. Rose’s book, it is noteworthy that there was no direct discussion of a potential for a new crash. The panelists were asked in the discussion period whether they would have “done anything differently” in 2002 to prevent the 2008 crash. It was of interest to me that the AEI veterans, Pollock and Kupiec, both identified the creation of off-balance-sheet Special Purpose entities, and the overrating of asset values, as elements of the problem which led to the crash. Pollock also cited the lowering of interest rates under the George W. Bush Administration as a problem.

But could these problems of the 00’s not be found to characterize the markets today?  Off-balance sheet liabilities abound, while asset values (from the stock market to the mortgage-backed securities still on the books of the Fed) remain high inflated. Interest rates may be slightly higher, but they are still so low for the major banks as to allow them to get ultra-cheap money for gigantic speculative ventures, which, according to many commentators today, have created new bubbles (as in corporate debt) about ready to pop.

In this context, Dr. Rose’s book on “Market Rules” is quite timely. It implicitly poses the question of what action is needed today.

Note: As a follow-up, I will be reviewing Dr. Rose’s book in the near future.

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