Steve Huntley: Sanders the socialist sure gets it right on big banks

Even socialists can have good ideas — well, at least one. Vermont Sen. Bernie Sanders, the newly declared Democrat presidential candidate and a self-described “democratic socialist,” is pushing something that should resonate with believers in free market capitalism: breaking up megabanks deemed too big to fail.

One of the many shocks of the 2007-09 economic crisis was the sorry sight of the federal government bailing out huge Wall Street banks with hundreds of billions of dollars. Congress later passed the complex Dodd-Frank financial regulation act aimed at ending too big to fail, but the banks only grew bigger. For example, before the financial crisis, JPMorgan Chase had $1.8 trillion in assets. In 2013 those had soared to $2.4 trillion, according to the Los Angeles Times.

Big government is good for big business.

Sanders asserts the nation’s six largest banks have more than $9.8 trillion in assets, the equivalent to 60 percent of the nation’s gross national product, and issue more than half of the country’s mortgages. “No single financial institution should have holdings so extensive that its failure could send the world economy into another financial crisis,” Sanders said in a speech in March. “If an institution is too big to fail, it is too big to exist.”

Sanders is not proposing a socialist solution for the megabanks, such as nationalizing them. He wants to break them up.

That’s not such a radical idea — it has the support of, among others, Richard W. Fisher, the recently retired president and CEO of the Federal Reserve Bank of Dallas.

In a 2013 analysis, Fisher said that during the Great Recession, “Sick — seriously undercapitalized — megabanks stopped their lending and capital market activities during the crisis and economic recovery. They brought economic growth to a standstill and spread their sickness to the rest of the banking system.”

A dozen banks, only 0.2 percent of all banks, hold 69 per cent of all industry assets, Fisher said. Megabanks reap the benefits of capitalism but don’t have to pay the price of bankruptcy when they fail. A study last year by the Federal Reserve of New York found that the biggest banks, which enjoy lower funding and operating costs, take more risks because they believe the government will again rescue them in another crisis.

Fisher’s analysis found Dodd-Frank made things worse, saying that “parts of Dodd–Frank have exacerbated weak economic growth by increasing regulatory uncertainty in key sectors of the U.S. economy. It has clearly benefited many lawyers and created new layers of bureaucracy.” Furthermore, he said community banks, subject to the market discipline of bankruptcy and sale for bad behavior, are “being victimized by excessive regulation that stems from responses to the sins of their behemoth counterparts.”

Again, big government is good for big business.

Like Sanders, Fisher called for reshaping “banking institutions into smaller, less-complex institutions that are economically viable, profitable, competitively able to attract financial capital and talent, and of a size, complexity and scope that allows both regulatory and market discipline to restrain excessive risk taking.”

Sanders has next to no chance of winning the Democrat presidential nomination, and much of his agenda is the usual left-wing folderol. Still, he could use his campaign to try to galvanize public attention on this issue, one appealing to the American left and right. But will he?

In formally declaring his candidacy, Sanders focused on “obscene” income inequality, campaign finance “reform” and “a rigged economy which works for the rich and powerful.”

Such generalities are so easy to swallow that they quickly won the endorsement of Democrat presidential front-runner Hillary Clinton, certainly one of the rich and powerful.

The question is, could Sanders put Clinton on the spot, and by extension Republican presidential contenders, by zeroing in on this big issue? I don’t know. But I do know vague grievance talk of income inequality won’t make him stand out even in what will be a tiny Democrat presidential field.

Email: shuntley.cst@gmail.com