By Eric Quintanar
President of the Federal Reserve Bank of Minnesota and former California GOP candidate for governor Neel Kashkari gave a speech at the Brookings Institute on Tuesday announcing research proposals to ensure that Wall Street Banks do not fail again, like they did in the 2008 housing market crash. Among these proposals includes increased regulations, beyond what was passed in the Dodd Frank Act (the most complicated regulation on the financial industry since the Great Depression) and breaking up the big banks all together.
Recent history has shown that anti Wall-Street positions have not been popular with conservative politicians in the past. Current Speaker of the House Paul Ryan (R-WI) has voted in favor of every government bailout that has been presented before Congress; Senator John McCain (R-AZ) stated in 2008 that the “[financial crisis] requires us to act”, thus endorsing a Wall-Street bailout. And of course, we must not forget that President Bush signed the Troubled Asset Relief Program bailout into law that same year, stating “I’m a market oriented guy, but not when faced with the prospect of a global meltdown.”
However, Kashkari’s anti-Wall Street sentiment has been brooding in the conservative Tea Party movement for a while now. At the South Carolina Tea Party Coalition convention, there was much anger over the double standard with which the government treats big banks and how they treat the common citizen. Cooper Wellons, a local land developer at the convention, stated “I think a lot of people should have gone to jail…if I’d have done some of the things they did on Wall Street, I’d have gone to jail.”
Similar sentiment can be seen in Republican presidential front-runner Ted Cruz (R-TX). When Cruz was asked by one of the moderators at the Fox News Business debate if he would bail out a major bank, such as Bank of America, if it were about to go under, he said he would not. Cruz’s stance is resonating with many conservatives who are now starting to realize that what he says is true; “Washington is picking winners and losers”, and at the expense of the American people.
Although he is advocating for different remedies, Bernie Sanders (I-VT) is also delivering an anti-Wall Street message to his liberal base; one similar to that which Cruz stands for. During the Democratic primary debate on CBS in November, Bernie Sander said to Hillary Clinton “With all due respect to the secretary, Wall Street play by the rules? Who are we kidding? The business model of Wall Street is fraud. That’s what it is.”
Conservatives and liberals are beginning to realize that when the government decides to pick winners and losers, they aren’t one of the winners. This explains the surge of anti-establishment candidates such as Ted Cruz, Bernie Sanders, and Donald Trump. However, there are disagreements in how to end the Wall Street cronyism.
Although Bernie Sanders is well intentioned, he and Neel Kashkari are advocating for policies that will result in worse, future economic calamities. The problem isn’t that banks are “too big to fail”, it’s that they are “too big and unstable”, and the federal government has facilitated this process. By developing complex regulations, larger banks are able to engage in practices that are favorable to their firm, because they have the resources to navigate through the government process. This cronyism is further exasperated by the government unwillingness to let banks suffer the consequences of risky lending decisions.
In 1984, Ronald Reagan bailed out Illinois Continental in the first major bank bailout since the Great Depression, using the rationale that Illinois Continental was too important to the economy to let it fail. This practice of bailing out companies vital to the economy continued through the 20th century. Following this, Congressman Barney Frank (D-MA) advocated for expanding lending to increase homeownership to people otherwise unqualified to get home mortgages. Banks did this with the implicit assumption that since politicians had advocated for it, the politicians would prevent the banks from going under should their risky lending result in disaster.
In response to the economic recession, Congress passed the Dodd Frank Act, the largest banking regulatory act since the Great Depression. The complicated act created new regulatory agencies, which only serve to punish smaller banks and favor big banks with the resources to navigate through them.
In order to minimize the risk of future economic downturns, and end the risky practices of “too big to fail” banks, politicians must stop passing well-intentioned regulation that results in bad consequences. Politicians must stop using our tax dollars to subsidize the mistakes of their friends in the financial sector. Politicians must realize that big banks are not above us. This will not end big banks, but it will end the unstable practices that make them too big to fail by ensuring that banks are unable to “get in bed” with the government for favorable legislation and government action.