“Bored of Banks” Is Not an Option

This week, we have a guest author: Graham Steele is former assistant secretary for financial institutions at the US Department of the Treasury and a fellow at the Roosevelt Institute. You can read more from Graham on finreg on X at @steelewheelz.

I first learned the acronym B.O.B., for “bored of banks,” in 2016 when I was working on Capitol Hill. A colleague of mine arranged a meeting for a group of Hill staff with a prominent financial journalist to discuss the release of their new economic policy book. Sitting around a large conference table in a spacious, wood-paneled congressional hearing room, I asked them what Wall Street issues most interested newsrooms. To my surprise and dismay, they responded that their editors had invented B.O.B. because they (and their financial industry readers) were tired of hearing about Wall Street’s misdeeds. Apparently, it was time to move on.

This was a shocking thing to hear less than a decade after the 2007–2009 global financial crisis. It has been even more confounding to encounter a similar attitude in recent years. Even after Trump-era deregulation led to the collapse of Silicon Valley Bank last year, financial reform remains a stubbornly under-prioritized piece of the economic policy agenda. This has been the case despite an effort on the progressive left to rethink many of the tenets of so-called neoliberal economic policy, from labor law to industrial policy to competition policy.

Strong and effective financial regulation is indispensable to a stable and fair financial system—and an economy—that people can trust. Without good regulation, even the most well-designed economic policies, from industrial policy to the clean energy transition to antitrust law, may fail to meet their full potential. In a new Roosevelt issue brief out today, I lay out an agenda for reinvigorating the spirit of Wall Street reform to make the banking system more resilient as we deal with the fallout from Trump-era deregulation and prepare for the new, digital era.

Progressive reformers like Louis Brandeis were once skeptical of the “financial oligarchy” and understood that the interests of concentrated capital were at odds with the goal of a more democratic economy. The banking laws and regulations crafted during the New Deal, in the wake of the Great Depression, were intended to both prevent the undue concentration of political and economic power and protect the public from risky financial practices. Over time, however, this skepticism gave way to Wall Street’s increasing influence, accompanied by elegant academic arguments about the efficiency and power of financial markets.

The neoliberal era that rose to dominance in the 1980s ushered in a break from the progressive tradition. The prevailing view among policymakers in Washington was that banks were sophisticated risk managers that could be trusted to self-regulate, so long as some of their incentives were properly aligned. This ideology laid the groundwork for deregulation. This included passage of the Gramm-Leach-Bliley Act repealing the New Deal-era Glass-Steagall Act, and the Commodity Futures Modernization Act preventing regulation of over-the-counter derivatives and blocking restrictions on predatory mortgage lending. Banks’ focus went from serving local communities to national, or even international, ambitions. Their business models expanded from taking deposits and lending to trading exotic financial instruments, and even some commercial activities. Predictably, deregulation was accompanied by concentration and consolidation: Assets held by the 10 largest banks more than doubled, from a little less than 30 percent in 1991 to more than 60 percent in 2011.

In the new financial consensus, the causes of and solutions to financial crises had been solved through technocratic deregulation and publicly arranged rescues. The global financial crisis, caused by Wall Street’s recklessness, should have discredited these aspects of the neoliberal consensus. Banks had badly mismanaged their risks, from underwriting predatory mortgages to investing in complex structured securities to relying on volatile short-term lending markets. More than 8 million people lost their jobs in the ensuing recession, and almost 4 million families lost their homes to foreclosure. At the same time, the US government provided banks with $2.4 trillion in loans, guarantees, and capital to avoid an economic depression. Despite this disastrous record, while there are some important exceptions, financialization lives on even after the decline of the neoliberal consensus.

In financial regulation today, to quote the poet William Butler Yeats, “the best lack all conviction, while the worst are full of passionate intensity.”  When President Biden took office in 2021, there was a long to-do list to reverse the banker-friendly deregulatory policies instituted by his predecessor—including fixing weakened capital, liquidity, and stress testing requirements for large banks. While much of that list remains unfinished, the financial booms and busts have continued. In 2023, the US experienced three of the four largest bank failures in its history after the run on Silicon Valley Bank (SVB), accompanied by emergency measures to protect depositors and provide cheap liquidity to the banking system. But as soon as the window for considering bold financial reforms opened in the wake of these historic failures, it quickly closed again. Despite the scandalous bankruptcy and criminal fraud conviction of the cryptocurrency exchange FTX and its CEO Sam Bankman-Fried, Congress is competing to deregulate the crypto industry. And the recent failure of the financial technology company Synapse has left thousands of people without access to their money.

On some level, it’s understandable that most elected officials might not want to expend precious political capital taking on Wall Street. Financial markets seem esoteric and technical, and removed from people’s day-to-day lives. Talking about financial hardship can require people to relive their traumas and the devastation wrought by the financial crisis, with its mass foreclosures, lost jobs, and liquidated retirement savings.

But people intuitively understand when they’re being treated fairly by their financial institutions and when they’re not. That’s why financial reform is broadly popular, with a clear majority of all voters supporting stronger bank regulation—including 67 percent of Democrats and 42 percent of Republicans. Meanwhile, Wall Street banks are an unpopular foil, with a negative 25 percent net favorability rating across the political spectrum.  This presents a political opportunity for leaders willing to engage with people at a personal level. Both President Joe Biden and Donald Trump understood this dynamic and campaigned against Wall Street. Of course, only one of them has actually governed as a reformer. In contrast to the Trump-era deregulation, Biden administration agencies have proposed reforms to strengthen banks like SVB, offered up new limits on outsized banker pay packages, increased scrutiny of bank megamergers, and taken steps to limit consumer junk fees. And Vice President Kamala Harris, now the presumptive Democratic nominee for president, has often touted her own efforts as attorney general of California to hold banks accountable for the financial crisis.

Safeguarding against Wall Street’s excesses is not just good politics; it’s essential to the success of the broader economic policy agenda. Money and credit are often described as the “lifeblood of the economy,” and financial markets and institutions play a vital role in determining whether resources are channeled to all communities or only the wealthiest ones; to giant multinational corporations or emerging small businesses; to productive research and development or to lavish executive pay and stock buybacks; to clean energy innovation or fossil fuels that pollute the planet.

Building a just economy begins with a stable financial foundation, which means preventing financial crises that derail economic progress and lead to devastating recessions. The success of our climate policy depends on our capacity to channel capital to invest in the climate transition. Addressing economic inequality requires ensuring that financial institutions don’t extract unfair fees from working people whose paychecks are already stretched too thin and protecting ordinary investors from losing their life savings to a crypto industry that is rife with fraud and scams.

A healthy financial sector is also a vital part of a healthy democracy. In his 1936 message to Congress, President Franklin Roosevelt warned of the risks from “domination of government by financial and industrial groups” that were “numerically small but politically dominant.” He recognized the financial threats posed to working people by Wall Street’s political and lobbying power. FDR’s insights are still relevant today. The failures leading up to the financial crisis, and the inequity of the government’s response, sowed the seeds of growing institutional distrust, polarization, and radicalization. Ceding Wall Street reform as an issue would only empower an emerging movement of right-wing populists who are challenging big finance—albeit for the purposes of opposing diversity initiatives and climate action.

Taming the excesses of financial capital is more than just a part of reclaiming a more equitable economy and society. It is foundational to it. With a clear vision and an ambitious policy agenda, progressives can make the financial system more stable and fair for working people. That begins with addressing the long-standing risks from big banks like SVB and the emerging risks of digital finance companies like FTX and Synapse. After that, all that’s missing is political will.

If You Ask Eleanor

“. . . the American people are rather prone to gambling. We want things and we are willing to take a risk to get them. Sometimes the gamble is not legitimate, and it is well for some controls to exist to help us to regulate our own desires.”

– Eleanor Roosevelt, My Day (November 20, 1947)