Last month, the nonpartisan financial reform organization Better Markets put out a report claiming that the total cost for the 2008 financial crisis and resulting recession reached $20 trillion [PDF]. The number comes from an estimate of how much of a toll the crash put on the gross domestic product with high unemployment/underemployment and the hollowing out of the middle class through foreclosures, deferred education, and bankruptcies.
The report draws parallels between the 2008 crash and the the crash of 1929 and Great Depression, noting that both were the result of an out of control Wall Street. After the 1929 crash, Congress put in place reforms such as Glass-Steagall Act to keep the banking sector from melting down again. Those reforms appear to have largely succeeded until their repeal in the 1990s by the Clinton Administration after lobbying by, among others on Wall Street, Citibank and Travelers Group (which would become Citigroup).
In an odd turn of events, one of the men most responsible for the repeal of Glass-Steagall, former Citigroup CEO Sandy Weil, reversed himself and said banks like Citigroup should be broken up to achieve a safer financial system. Better late than never?
Wall Street’s theoretical purpose is facilitating production by recycling savings into investment and capital formation for new businesses, but Better Markets’ report suggests that it more closely resembles vampiric rent-seeking on the real economy.
Essentially, Wall Street used its money-power to buy influence in DC, lobbying to remove its post-1929 restraints in order to return to reckless gambling with other people’s money which, not surprisingly, led to a replay of the 1929 crash. According to the report,
By the late 1990s and early 2000s, Wall Street—assisted by a wave of deregulation obtained by Wall Street lobbyists and allies—started to once again ramp up its risk-taking and, worst of all, grow bigger and bigger, which meant they posed bigger and bigger threats to the country if anything went wrong.
Wall Street banks turned their attention from feeding the economy to feeding on the economy.
Instead of focusing on socially useful activities such as funding mortgages and new businesses, Wall
Street increasingly turned to socially useless but immensely profitably activities such as placing huge
proprietary bets in the derivatives markets.
The lesson could not be clearer — let Wall Street run wild and watch your economy crater. The banking sector can not “self-regulate” or even operate under conditions of light regulation. They cannot control themselves; someone else has to take the crack-pipe from their hands. To paraphrase Thomas Jefferson, the price of financial stability is eternal regulatory vigilance.
Sadly, there is another seemingly eternal problem; Wall Street’s ability to buy influence in government. There are already calls to repeal the meager Dodd-Frank reforms in favor of a return to “self-regulation.” Do we really want to run the experiment again?