Must-read: Jeffrey Frankel: “Who is right on US financial reform? Sanders, Clinton, or the Republicans?”

Must-Read: Jeffrey Frankel: Who is right on US financial reform? Sanders, Clinton, or the Republicans?: “If an American citizen is ‘mad as hell’ at banks…

…should he or she respond by voting for the far left?  By voting for the far right? (Or by refusing to vote at all?)… There is a place in political campaigns for short slogans that fit on cars’ bumper stickers.  (‘Wall Street regulates Congress.’) And there is a place for ambitious goals.  (‘Shrink the financial sector.’) But the danger is that those who are attracted to inspirational rallying cries and sweeping proposals will lack the patience required to identify which is the right side to support in the numerous smaller battles over financial regulation that take place every year and that ultimately determine whether our financial system is becoming structurally safer or weaker….

Having thousands of small banks did not prevent runs on depositary institutions in the United States 1930s. Continental Illinois was the original case of a bank that was deemed ‘too big to fail’ in 1984…. Merely turning the deregulatory clock back 30 years would not be enough to do it…. Having a financial system dominated by just five large banks did not prevent Canada from sailing through the Global Financial Crisis of 2008-09 in better shape than almost any other country. Attacking banks is emotionally satisfying, for understandable reasons.  But it won’t prevent financial crises.

Hillary Clinton is correct in pointing out that the most worrisome problems lie elsewhere…. Secretary Clinton has done her homework… puts priority on closing the ‘carried interest’ loophole… a small tax targeting certain high-frequency trading… higher capital requirements on financial institutions, including non-banks… a ‘risk fee’ on big financial institutions…. It goes without saying that Dodd-Frank did not do everything we need to do.  But the law  would have moved us a lot further in the right direction if many in Congress  had not spent the last six years chipping away at it….

Sanders has indicated that if he were president, nobody with past experience on Wall Street would be allowed to serve in his administration. A blanket rule like this would be a mistake. Judging people by such superficial criteria as whether they have ever worked for Goldman Sachs, for example, would have deprived us of the services of Gary Gensler…. Financial issues are complicated. Getting the details of regulation right is hard…. We need leaders and officials who have the wisdom, experience, patience, and perseverance…. If such people are not the ones who receive political support for their efforts, we should not be surprised if the financial sector again escapes effective regulation and crises recur in the future…

February 28, 2016


Brad DeLong
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