Bernie Sanders gave some fairly normal answers about financial reform when he met with the New York Daily News editorial board last week.
But you wouldn’t know it from the media coverage. Caitlin Cruz at TPM argues that Sanders “struggle[d] to explain how he would break up the banks,” a charge echoed by Tina Nguyen at Vanity Fair (Sanders “admits he isn’t sure how to break up the big banks”). David Graham writes that Sanders’s responses on high finance were “tentative, unprepared, or unaware.” And Chris Cillizza says the senator’s performance was “pretty close to a disaster.”
This is not correct. Sanders has a clear approach to breaking up the banks, and he noted it. Busting up the banks doesn’t require, or even benefit from, a specific account of how affected financial institutions would end up.
Generally, I believe Sanders would benefit from taking a more expansive look at tackling the financial sector — like even Hillary Clinton has. But bad arguments are bad arguments, and the arguments against Sanders here are bad.
There are three ways we can break up the banks.
- Pass a law putting some sort of cap on the size of the balance sheet of financial companies, usually non-deposit liabilities. Caps, such as Senator Brown’s SAFE Banking Act, are generally proposed around 2 or 3 percent of GDP.
- Have the council of regulators known as the Financial Stability Oversight Council (FSOC), on which the Treasury secretary serves as chair, declare that the largest firms are too risky and must be broken up (Section 121).
- Have the Federal Reserve, along with the FDIC, determine that the “living wills” of the biggest banks (plans on how they can fail without bringing down the economy) are not credible, and thus must be broken up (Section 165d).
The second two work through Dodd-Frank. The first would work through Congress.
Here’s the first exchange that people are citing:
Sanders: How you go about doing it is having legislation passed, or giving the authority to the secretary of treasury to determine, under Dodd-Frank, that these banks are a danger to the economy over the problem of too-big-to-fail.
Daily News: But do you think that the Fed, now, has that authority?
Sanders: Well, I don’t know if the Fed has it. But I think the administration can have it.
Sanders is clearly saying that he wants to pursue the first (“legislation passed”) and second (“secretary of treasury to determine”), two projects you can carry out simultaneously. He’s emphasized Section 121 in the past. I wish he’d emphasize the third approach more, as that’s where the current fight is, but his answer is fine.
If anything, Sanders is too wonky. It appears the Daily News and other commentators mean regulators as a whole (rather than the Federal Reserve itself) when they ask if the Fed has that authority already.
So does it? The Federal Reserve does have an extensive set of powers under the second and third approach, but it isn’t unilateral. At the same time, it isn’t clear how much the Fed could push if it truly wanted to. Sanders is right in saying it’s unclear how far the Federal Reserve can go, but it is clear that the Treasury secretary can lead FSOC to it.
The real problem with Sanders’s language on this topic is his one-year promise. You’d need to replace a lot of regulators to try this approach, and that takes time. Even then it’s a hard slog. But it also seems like an area where the campaign rhetoric is meant to diverge from the policy analysis.
Commentators have singled out the following as another offending exchange:
Daily News: So, what I’m asking is, how can we understand? If you look at JPMorgan just as an example, or you can do Citibank, or Bank of America. What would it be? What would that institution be? Would there be a consumer bank? Where would the investing go?
Sanders: I’m not running JPMorgan Chase or Citibank.
Daily News: No. But you’d be breaking it up.
Sanders: That’s right. And that is their decision as to what they want to do and how they want to reconfigure themselves.
This is a good and correct answer. It may not be intuitive to people who haven’t thought it through, but it’s not necessary, or even desirable, for regulators to dictate how to break up the banks. It’s better to tell the banks where they have to end up in terms of size — say, no larger than $500 billion dollars — and let them figure out the best way to get there.
Other well-respected figures in the financial reform community have made the same point. Here’s Daniel Tarullo of the Federal Reserve, speaking in 2012 about some of the positives of a size limit on banks:
Another attraction of this form of proposal is that, even as it places constraints on the potential size and composition of a firm’s balance sheet, it allows relative flexibility to the firm in meeting that constraint, particularly when compared with proposals for prohibitions on commercial bank affiliations with other financial firms.
In the speech he’s ultimately critical, raising many objections to a hard size cap. Yet he still agrees with Sanders on the benefits.
Again, the exact outcome doesn’t particularly matter: you tell the banks they can’t be a certain size, and let them choose how to make it happen. Perhaps they split up according to region, business lines, market segmentation — who knows? But there’s an underlying economic logic taken on behalf of maximizing the value of the resulting firms given the (regulatory) constraint, which is a selling feature of markets.
This is how Dodd-Frank is working too. Firms such as JP Morgan slimmed down slightly in response to tougher prudential regulations like capital requirements. They themselves figured out what to sell off. Activist investors are now calling for busting up AIG in response to Dodd-Frank, and they’ll know the right way to do it if it happens. Leaving it to the market to determine the most efficient way of handling requirements is a plus, not a minus, of the approach.
Critics have also pointed to Sanders’s statement that the recent MetLife court decision is “something I have not studied, honestly, the legal implications of.” The ruling, as I type this, is sealed and unreleased, so we have no clue what the opinion is yet. It will likely have serious, negative consequences, but it’s too early to understand what it means for financial reform going forward.
A final criticism being lodged against Sanders is that he couldn’t name the specific indictments that should have been brought against Wall Street after the financial crisis.
An easy way to make sense of this, however, is to assume that a Sanders presidency would be less risk-averse in seeking criminal charges. A common refrain from defenders of the Obama administration’s approach to criminal prosecutions is that they didn’t want to bring a case unless it was a slam dunk, so they ended up taking easier settlements instead. In general, they didn’t push as hard as they could have. Sanders, in contrast, would have gone forward with cases that weren’t slam dunks. The issue, then, isn’t the specific statute, but the aggressiveness of the investigation and prosecution.
When it comes to candidates’ proposals to rein in Wall Street, there’s much to scrutinize. It’s important to understand what requires genuine questions and criticism. But I don’t see Sanders’s responses to the Daily News editorial board as rising to that level.