It is irritating but not especially surprising when Goldman Sachs CEO Lloyd Blankfein says things like "they are doing God's work", or claims that attacking Goldman is "hurting America." I'm sure people like him really believe they are good people just doing their best to help the world economy, in the same way Ayn Rand really believed that selfishness is a virtue and the Gordon Gecko character in Wall Street really believed that greed was good.
What is disturbing is when Obama administration officials like Larry Summers appear to believe it too -- or at least believe that these massive mega-banks (the top six controlling assets equal to 63% of our nation's GDP) are needed to keep our economy going. I have been thinking about the Summers quote (given to PBS' Jeffrey Brown) all weekend long:
Brown: The too big to fail issue, why not go further? Why not just limit the size of banks?
Summers: Jeff, that was the approach America took to banking before the depression. That was the approach America took to lending in the thrift sector, before we had the S&L crisis. Most observers who study this believe that to try to break banks up into a lot of little pieces would hurt our ability to serve large companies, and hurt the competitiveness of the United States. But that's not the important issue, they believe that it would actually make us less stable. Because the individual banks would be less diversified, and therefore at greater risk of failing because they wouldn't have profits in one area to turn to when a different area got in trouble. And most observers believe that dealing with the simultaneous failure of many small institutions would actually generate more need for bailouts and reliance on taxpayers than the current economic environment.
It is ironic that this quote is so appalling given that the Obama administration has been showing more steel on taking on Wall Street in some ways, and has been effectively fighting back against Republican efforts to completely neuter the bill in terms of at least some issues. I have also been pleased at Obama's political positioning on the issue, finally showing some populist message talking points on the issue. The Summers quote is awful, though - quite possibly the worst quote I have ever seen from this administration on the banking issue, and that's saying something because there have been lots of disappointing ones. Summers historical references are inaccurate and completely misleading: to imply the reason for the Great Depression and the 1980s S&L fraud crisis were due to the companies being too small is laughable and absurd. In fact, the Great Depression and the S&L crisis, as well as the 2008 financial meltdown, were all caused by the same thing: too little oversight over financial institutions that were too economically and politically powerful.
Summers' further argument is that smaller, less diversified banks would be at greater risk of failure ignores 60 years of successful banking regulation under Glass-Steagall and the other New Deal economic reforms. Even worse, he is essentially arguing that our economy needs massive concentrations of wealth and size in a few big banks in order to prosper, which takes the argument for oligarchy to a logical end point that is as right wing as anything I have ever heard Mitch McConnell argue.
What Summers, Dodd, and apparently the President continue to not get is that massive concentrations of wealth and power - both economic and political - do equally massive amounts of damage over time to both a democracy and to the markets that make our economy function. We can only make markets be markets, as the Roosevelt Institute put it in their outstanding report on financial policy, if the big six banks don't have the ability inherent in their size to distort and dominate the economic system. Simon Johnson's experience as Chief Economist at the IMF taught him this very well: when countries are dominated by a financial oligarchy, their markets become corrupted and their economies can't recover until you break up the oligarchy.
As I wrote the other day, there are some solid policy proposals in both the House and Senate bills. Combining the best of these bills (and getting rid of the crap inserted by industry lobbyists) will give you a decent step forward at rebuilding the regulatory framework shredded over the last two decades. But until you pass legislation similar to the Brown-Kaufman bill to actually break up the banks, we aren't going to solve the problems we face in the financial sector due to too much political and economic power by these mega-banks.
Cross-posted at OpenLeft.com
You can read all of my work on financial reform, health care and other topics at my home blog, OpenLeft.com.