By Pam Martens: August 5, 2014
For years now, Paul Krugman, the esteemed Professor of Economics and International Affairs at Princeton University, has been using his columns at the New York Times to defend President Obama on multiple fronts. Until yesterday’s column, Krugman, who is typically spot on in the arena of monetary and economic issues, could be forgiven for his self-imposed myopia of a President who ran not once, but twice, on a populist message and then enabled the greatest wealth inequality in our nation’s history through his obsequious servility to Wall Street.
Krugman cannot be forgiven for his latest missive, however. There is simply too much at stake for our nation to allow Krugman’s misguided musings to stand. Krugman starts off with the subtitle “Dodd-Frank Financial Reform Is Working” and ends with this stunning pronouncement: “For all its limitations, financial reform is a success story.”
Judging by the comments section to Krugman’s column, that last leap of fantasy brought a gasp from readers of the Times business section who are greeted daily with one or another Wall Street crime cartel looting the country through some new derivative scheme or appropriately named “dark pool,” or “fixing.”
One commenter, Gary Henscheid wrote “…investment bankers will run amok until Congress restores Glass-Steagall.” (Glass-Steagall is the depression era legislation put in place after the 1929 stock market crash which bans firms speculating in stocks from merging with banks holding insured deposits. It was repealed under another ill-advised President, Bill Clinton, in 1999. The market proceeded to do a 1929-style crash just nine years after its repeal.)
Another reader, Mark Thomason, wrote in the comments section: “Financial reform …did not go anywhere near far enough. It is not just the Republicans. The Democrats too, Obama insiders too, they all want to feed on the money they need in politics. None of them have a taste for real reform…They did nothing that displeased the bankers. They just papered it over and pretended.”
A commenter using just his first name, Jason, wrote: “The Dodd-Frank act of 2011 is 879-pages. The Glass-Stegall [Steagall] act of 1933 was 37-pages, and worked for 60 years. Despite its length, D-F was not complete with 243 rules left to be defined by regulators, who in turn asked the financial industry to fill in those blanks. Essentially the foxes were asked to not only guard the henhouse but to build it too.”
What does it say about Paul Krugman’s research on this topic when the comments section reads like an honest breath of informed fresh air while his position feels forced and dishonest.
Obviously, Krugman has not bothered to carefully study major Wall Street books of the last two years like Flash Boys, or Dark Pools, or Broken Markets to get a first hand perspective on how Wall Street crime has moved deeper into the shadows since the passage of Dodd-Frank.
Nor could Krugman have watched any of the recent Senate hearings where the newest, egregious, non-prosecuted Wall Street crimes have been aired. Krugman obviously didn’t hear Senator Carl Levin, Democrat from Michigan, tell the U.S. Senate Subcommittee on Investigations on July 15, 2013 that JPMorgan Chase, Wall Street’s largest bank, “piled on risk, hid losses, disregarded risk limits, manipulated risk models, dodged oversight, and misinformed the public.” And that’s not even the worst of what JPMorgan did in its infamous London Whale scandal of 2012 – two years after the passage of Dodd-Frank.
JPMorgan Chase was found to have used hundreds of billions of dollars of its bank depositors’ funds, not its own capital, to gamble in exotic derivates in London. It lost at least $6.2 billion on those wild bets. Only because of Dodd-Frank’s squishy provisions was this Wall Street behemoth allowed to use insured depositor funds to gamble for the house. Had the depression era Glass-Steagall Act been restored, as large swaths of the public demanded then as well as now, JPMorgan could not have put hundreds of billions of dollars of depositor funds at risk – four years after the 2008 crash on Wall Street.
Krugman also obviously missed Senator Jack Reed, Democrat from Rhode Island, telling a Senate panel last month on July 8 how Wall Street has devolved into little more than a “casino.” Reed stated:
“The market has changed. The old fashioned nostalgic view of the stock market is capital formation. That’s where you form capital which ultimately created jobs. Now it’s about trading. I’m struck. John Bogle, who will know more about this stuff than I will ever, made a speech a few months ago in April and he said, you know, the numbers tell a story: $56 trillion per year in trading volume as investors buy from and sell to one another, minute after minute, day after day, year after year. That $56 trillion of trading volume dwarfs the capital formation total of $270 billion. Result: short term trading on Wall Street’s casino represents 99.5 percent of the market’s activity and long term capital formation – which is the small investor putting money in hoping that some day it will pay for college for the kids – is just a side show really…The market itself, as he says, it’s a casino.”
America was not built on, nor can it survive on, casino capitalism. We need genuine financial reform, like Glass-Steagall, to restore the sound underpinnings of capital formation.
Levin and Reed are not some wild-eyed Ayn Randians who hate Dodd-Frank because it’s an affront to the John Galt wing of the Republican party’s vision of laissez faire capitalism. Levin and Reed hail from Krugman’s own progressive politics.
Other informed voices have spoken out as well. On May 7 of this year, Thomas Hoenig, the Vice Chairman of the FDIC and former President of the Federal Reserve Bank of Kansas City, gave a presentation to the Boston Economic Club. Hoenig, who supports the restoration of the Glass-Steagall Act, told attendees that mega banks are now “larger and more complex than they were pre-crisis”; “the eight largest banking firms have assets that are the equivalent to 65 percent of GDP”; “the average notional value of derivatives for the three largest U.S. banking firms at year-end 2013 exceeded $60 trillion, a 30 percent increase over their level at the start of the crisis.” Hoenig added that the largest Wall Street banks are “excessively leveraged with ratios, on average, of nearly 22 to 1.”
Hoenig was a member of the Federal Reserve System’s Federal Open Market Committee from 1991 to 2011 – he saw the crisis first hand. He has access to confidential data on current risks building up in the system, like the $1.14 trillion in leveraged loans to heavily indebted corporations that were issued in 2013. His views should be given deference.
Krugman has also apparently missed the news that President Obama has staffed key Wall Street regulatory posts with Wall Street cronies. Jack Lew, the current Treasury Secretary who under Dodd-Frank provisions also heads the Financial Stability Oversight Council, was paid millions as Chief Operating Officer for the very division of Citigroup that collapsed the bank in 2008. Upon leaving Citigroup, Lew was paid, and accepted, $940,000 as a bonus out of taxpayer bailout funds – the only thing keeping the bank alive.
Mary Jo White, former partner at corporate law firm Debevoise and Plimpton, whose clients included Wall Street’s biggest firms like JPMorgan, UBS, Morgan Stanley and Bank of America, was selected by Obama to head the Securities and Exchange Commission. Eric Holder, U.S. Attorney General, who has failed to prosecute one top executive on Wall Street for crimes related to the 2008 financial collapse, hails from the Wall Street powerhouse law firm, Covington & Burling – the firm that, literally, fronted for Big Tobacco for four decades. And despite his dubious ties to Citigroup during its most scandalous years, President Obama appointed Stanley Fischer to the position of Vice Chairman of the Federal Reserve Board, a regulator of Wall Street, just this year.
Krugman’s unsound prognostications also do a terrible disservice to the non-partisan group of Senators, including Elizabeth Warren and John McCain, who thumbed their nose at powerful Wall Street lobbyists and introduced a bill to restore the Glass-Steagall Act in July of last year. In making the announcement of the introduction of the bill, Senator Elizabeth Warren told a Senate Banking panel:
“…the four largest banks are now 30 percent larger than they were just five years ago and they have continued to engage in dangerous, high-risk practices. So, later today Mr. Chairman, Senators McCain, Cantwell, King and I will introduce a 21st Century Glass-Steagall Act. For half a century after the Great Depression, Glass-Steagall kept this country safe by separating the risky activities of investment banks from the basic checking and savings accounts that consumers rely on every day.
“The banks lobbied for weaker regulations and eventually the regulators started unraveling Glass-Steagall and finally in 1999 Congress repealed what was left of it. So now we propose a 21st Century Glass-Steagall so that we can return to the basics and try to keep the gamblers out of our banks.”
So many dedicated Americans from both sides of the aisle have labored so long and so hard and so sincerely to force Congress to admit that Dodd-Frank is an abysmal failure and to restore the sane measures of the Glass-Steagall Act, that Paul Krugman does a serious disservice to both them and his country with this poorly researched, unsound and fanciful ode to the success of Dodd-Frank.