In 1913 the great American lawyer Louis Brandeis railed against “The Curse of Bigness” in Harper’s Weekly, documenting the troubling concentration of economic power among the new tycoons and trusts of the industrial age, from railroads to steel to oil. By establishing monopolies, he argued, these private actors could dictate prices and shape the terms of access to essential goods, thus allowing them to exploit, extract, and otherwise dominate society.
But behind the monopolies lay an even more dangerous force: the financiers who jointly invested in these companies through a variety of legal and corporate vehicles. For Brandeis, this “money trust” of “banker-barons” was the ultimate villain in the industrial economy since it existed beyond the ordinary scope of traditional checks and balances. In his famous pamphlet, Other People’s Money, he warned that financiers had “acquired control so extensive as to menace the public welfare.”
A century later, finance persists as a problem. As the Trump administration moves on from the healthcare battles of the last month, a critical next frontline is emerging in financial regulation. Trump has repeatedly called for a “major elimination” of the Wall Street regulations created by the Obama administration and the 2010 Dodd-Frank financial reform bill. And Republicans in Congress are set to introduce the Financial CHOICE Act, which would dismantle many of the key innovations of Dodd-Frank. The proposed bill would weaken the regulatory authority of the Consumer Financial Protection Bureau, which has been critical to addressing problems of fraud, misinformation, and abuse in everything from mortgages to lending to student debt. Crucially, it would also undermine oversight of “systemically risky” firms, potentially recreating the regulatory loopholes that gave rise to “too-big-to-fail” firms operating beyond regulatory supervision.
Financial regulation is an emerging and critical frontline for the Trump administration.
Even if no new legislation passes, however, the Trump administration is poised to weaken the regulations already in place. Trump’s own Treasury Secretary, Steven Mnuchin, a former Goldman Sachs partner, in many ways embodies some of the very excesses that Dodd-Frank was meant to curb. (As the founder of OneWest, Mnuchin became both notorious and tremendously wealthy by taking advantage of the lending and securitization practices at the heart of the 2008 financial crisis.) And to make matters worse, Daniel Tarullo, a Federal Reserve governor known for implementing many of the Dodd-Frank regulations, is retiring, creating a third vacancy on the Federal Reserve Board for Trump to fill and leaving open the crucial post of vice chairman for bank oversight.
Given the political landscape, Democrats are likely to focus on playing defense, trying to protect as many of the regulations granted under Dodd-Frank as they can. But the challenge of financial regulation today is not just about preventing a rollback of Obama-era regulations. Dodd-Frank itself has its limitations, after all, and liberals have to grapple with their own shortcomings on this score. As Bernie Sanders’s impressive primary challenge to Hillary Clinton showed, there is an appetite for more aggressive attacks on finance, big business, and corporate economic power. Two weeks after the general election, Senator Elizabeth Warren argued that the outcome showed the failure of progressive half-measures—from Dodd-Frank and the Wall Street bailouts to healthcare. Democrats had compromised too much, achieved too little, and contributed to enduring economic malaise.
This hesitancy to commit to meaningful reforms is indicative of a broader problem. For much of the last twenty-five years, finance has occupied a central position in both liberal and conservative visions of economic growth. In this view, finance is key to an innovative, dynamic economy, and for several decades mainstream liberal approaches to economic policy have operated with a broad détente with big business (and big finance in particular), focusing most on optimizing growth. As a result, contemporary liberalism has relied too heavily on technocratic oversight as the most effective approach to problems of economic policy.
But if progressive politics is to challenge the fusion of racially-charged conservative populism and the GOP’s favoring of big business, it must rediscover the alternative tradition of financial and economic regulation found in progressive political thought that takes seriously the problem of power and the aspirations to a thicker form of economic freedom.
In our conventional understandings of finance, financial firms channel savings into investments. By seeking higher return uses, firms end up playing a large role in sparking economic growth.
The problem is that this conventional story of finance and investment is not automatically the case. Instead of spreading investment and growth widely, modern finance operates in ways that can undermine opportunity and dynamism, thus exacerbating economic exclusion.
First, the financial industry exerts a disproportionate gravitational pull on the rest of the economy, decreasing investment and gainful employment. The dominance of financial products as a source of return has led many companies to skew their decision making, funneling profits toward shareholders rather than investing in (potentially risky) new innovations, jobs, and products. This has influenced the decline in new business formation as well as the decline in manufacturing, R&D investments, and apprenticeships within the industrial ecosystem.
If the CHOICE Act passes, we will see a return to the practices that brought about the 2008 financial crisis.
The same incentives that pay off shareholders—facilitated by the increased sophistication of financial tools like securitization and the growing influence of large institutional investors such as hedge funds—incentivize employers to cut costs by shedding salaried jobs in favor of outsourcing, contracting out, and franchising, which accelerates the decline of worker protections and labor standards. The result is that, even in non-financial companies, wealth is increasingly channeled to and concentrated among the wealthier investor and shareholder class, while wages for workers do not increase in parity. Financial firms account for only 4 percent of jobs, but a whopping 25 percent of corporate profits.
Moreover finance remains a critical need for most individuals and communities, but too often financial firms engage in extractive and unfair pricing, fees, and terms. For many Americans, especially those in communities of color, access to basic financial services is fraught with peril, from payday loans with usurious rates to high fees for simple financial transactions to outright fraud as was the case for too many mortgage borrowers in the subprime crisis.
Even municipalities, already struggling with low budgets and high public needs, pay inordinate amounts in fees and problematic terms to borrow money and seek basic financial services on the open market. The result is that modern financial products can make it harder for cities to invest in ailing (often minority) neighborhoods.
In many ways, the broader challenge is the problem of “financialization.” As a number of scholars have suggested, rather than serving society, modern finance has grown in a way that has increasingly subordinated society to its demands, driving inequalities of opportunity and well-being in today’s economy. As the Roosevelt Institute estimates, between overcharging and misallocation costs, financial services actually cost Americans over $6 trillion more than the benefits they provided between 1990 and 2005.
The problem of finance today thus extends well beyond playing defense on Dodd-Frank and hedging the risk of another financial crisis. The economic dominance of finance as a sector presents a central barrier to economic vitality—and to aspirations for a more economically and racially-inclusive progressive future.
At the heart of Brandeis’s critique of “the curse of bigness” in general and “the money trust” in particular was a broader worry about freedom and opportunity. He was not alone. During the late nineteenth and early twentieth century, antitrusters argued that monopoly power was a threat to economic liberty. Labor republicans developed a similar critique of private power in the workplace, subjugating workers to the power of bosses and owners. Legal and economic scholars of the period such as John Commons, Richard Ely, Robert Hale, and Horace Kallen warned that economic power escaped the kinds of checks and balances we expect of political institutions.
This critique formed the intellectual foundations for what would later become the constitutional and policy revolution of FDR’s New Deal. Many of the early New Deal policies built on these Progressive Era ideas, from the separation of investment and commercial banking (the Glass-Steagall Act) and the imposition of caps on interest rates by the Federal Reserve to the creation of federal deposit insurance and accompanying restrictions on the powers and activities permitted to banks.
Progressive politics needs to take seriously the problem of power and the aspirations to a thicker form of economic freedom.
The result was what sociologist Greta Krippner calls “boring banking”—a regulatory regime that made banking a kind of public utility. Finance was to serve several important social functions, after all, including channeling savings into productive investments in the real economy; pooling risk and enabling saving; facilitating the flow of payments, and the like. And since private financiers provided an essential service, they had to charge reasonable rates and answer to public regulation. The New Deal regulations resulted in a simpler, restrained, and “compartmentalized” financial sector. It was treated as the basic plumbing of the economy, rather than its fast-paced pinnacle; it was also a fragmented industry and not the consolidated politically and culturally influential sector and default way of doing business that it is today. The result was a long run of financial stability and stable growth.
So where did we go wrong? Three developments undermined the “boring banking” arrangement established by the New Deal.
First, we lost faith in the regulatory state itself. The rise of totalitarianism in Europe in the late twentieth century generated increasing anxiety among the policy elite in the United States over the regulatory state. At the same time, the rise of public choice theory led by political economists like James Buchanan and Gordon Tullock created a seemingly empirical and objective social scientific account of how government regulation was likely to be susceptible to interest group influence and capture. As a result, where regulation was, for the New Deal generation, synonymous with public-spirited expertise, now it increasingly raised the specter of authoritarian government and corrupt interest-group influence.
Second, the emerging consensus among financial economists posited that markets, particularly financial markets, were the most efficient mechanisms for aggregating information about social and economic conditions into prices—as a result, financial markets would most likely be self-regulating and socially-optimal mechanisms for allocating resources. As Rana Foroohar has argued, changing cultures in business schools and the spread of financial sector veterans throughout the corporate world meant that business leaders were increasingly trained to privilege this financialized form of capitalism. The new priority of delivering short-term returns to shareholders, often through adopting securitization and financial investment practices from Wall Street, replaced the longer-haul work of creating new products, jobs, and innovations.
Third, these conceptual shifts were absorbed by a bipartisan policy consensus that increasingly saw access to finance as a silver bullet for social equity concerns. In the 1980s, the social safety net came under attack by politicians just as the inflation crisis and a global slowdown of economic growth created very real distributive challenges for economic policy. Finance emerged as a bipartisan point of agreement, a way to bypass the messy, controversial politics of redistribution, offsetting the erosion of the safety net and economic slowdown, through a turn to politically-neutral and uncontroversial expansions of “access” to financial products.
These three developments undermined the legitimizing presumption of New Deal regulation: that public-minded, neutral regulators could optimize the functioning of the market economy efficiently and virtuously. Nor were these developments a result of “natural” pendulum swings; they arose in large part thanks to a concerted effort by a coalition of conservative and libertarian economists and philosophers—Friedrich Hayek, Milton Friedman, and their successors—and conservative foundations that invested in these thinkers and popularized their ideas inside and outside the academy.
As policymakers on both the left and right moved to deregulate the financial sector, regulatory agencies themselves became less focused on enforcement and dismantled New Deal era restraints on financial firms. An increasingly conservative judiciary advanced these changes. By the time Congress got into the action with statutory deregulation in the 1990s—signed by President Bill Clinton—much of the New Deal financial regulatory architecture had already been undone.
Obama-era financial regulation did little to reverse the underpinnings of modern finance, either in theory or practice. While Dodd-Frank tried to undo some of the deregulatory zeal of the 1980s and 1990s, it relied too heavily on faith in top-down regulatory experts, rather than trying to structurally limit the size and powers of risky financial firms. The Brown-Kaufmann “SAFE Act” proposal to “break up the banks,” for example, would have limited the size of financial firms’ holdings to a given percentage of GDP, while other progressives in Congress wanted a tougher “Volcker Rule” ban on proprietary trading. Some even called for the purveyors of the financial crisis to be prosecuted.
By tackling the deep problem of financial power, a twenty-first century progressive politics can fuse the projects of both economic and racial inclusion.
Obama’s financial regulation vision thus represented in some ways a continuation of the New Deal faith in technocratic oversight—but without the kinds of New Deal structural restraints that emerged from Progressive Era notions of economic fairness and opportunity. But as the Clinton-Sanders primary debate highlighted, there is a hunger and a need for precisely that kind of robust progressive response to the problem of financial power.
There is little doubt that if the CHOICE Act passes, or if Trump is able to undercut financial oversight through his appointments to the Fed and other agencies, we are likely to see a return to the kind of super-charged and under-regulated practices that helped bring about the 2008 financial crisis. In the short run, liberals must protect as much as they can of financial regulation, from the Consumer Financial Protection Bureau whose independence and authority has been critical in saving thousands of families and individuals from fraud, crippling debt, and exploitation, to the continued oversight of systemically risky firms by the Fed and other regulators. But other than simply playing defense, what should progressives do about financial reform in the longer-run?
In particular, we need an approach to financial regulation that depends on more than just a faith in regulators at the Fed to do the right thing, and instead responds more directly to the deeper threats modern finance poses to economic opportunity and inclusion. In the face of a Wall Street–friendly administration, progressives should highlight how a moral commitment to opportunity and inclusion requires a very different approach to finance. It requires regulations that help make finance more socially productive, reversing the concentration of wealth and instead directing those flows of resources to wages, under-invested rural and urban geographies, and new industries, jobs, and innovations. Scholars of financial regulation have suggested several approaches to restore the utility-like nature of basic finance by restricting the kinds of funding structures and activities these firms can engage in (thus preventing future panics) and expanding access to financial resources particularly among minority communities. Policies like these would “make banking boring” once again.
It also means continuing to deepen the link between aspirations for economic and racial inclusion as they intersect in the context of financial reform. For all their critique of economic power, progressives of Brandeis’s era had a fraught relationship with the reality of racial exclusion and Jim Crow. But today it is communities of color who are most vulnerable to the costs of extractive financial services and thus bear the brunt of financialization and financial power. The gutting of low-wage work, the under-investment in certain geographies, and the extractive practices of lenders are all mechanisms for codifying systemic racial exclusion.
Indeed racial justice advocates are increasingly at the forefront of identifying and tackling these structural drivers of economic inequality more broadly. From the Fed Up campaign, which seeks to diversify the leadership of the Federal Reserve and highlight more directly the problems of low wages and under-employment, to the ReFund America Project, which has highlighted the problems of finance and municipal debt, the battles for racial and economic equity are increasingly intertwined. The Movement for Black Lives’s policy agenda notably includes planks calling for restrictions on financial firms (such as the reinstatement of the Glass-Steagall Act), an attack on monopoly power and market concentration, and greater investments in the countervailing power of workers through labor organizing. This structural lens unites the project of racial justice with a broader agenda of economic justice, and highlights how financialization has hijacked the larger economy at the expense of workers and middle-class communities.
This focus on systemic and structural financial reform provides a way forward in addressing dynamics that exacerbate inequality and concentrate wealth and opportunity—dynamics that affect us all. Financialization is at the heart of the hollowing out of the working and middle class since it transfers wealth to investors and shareholders. And it is linked to the increasing concentration in other industries as well—from airlines to pharma—with similar repercussions for cutting off resources and investments into declining towns, cities, and rural geographies.
The task for an economically- and racially-inclusive progressivism thus requires a sensitivity to both the unique ways in which communities of color are structurally disadvantaged and exploited in today’s economy and how these structural dynamics pose larger problems for fundamental—and universal—values of equality, opportunity, and freedom. By tackling the deep problem of financial power, a twenty-first century progressive politics can fuse the projects of both economic and racial inclusion. This was an opportunity missed in the immediate aftermath of the 2008 financial crisis. Now the challenge looms again. The longer-term fate of an inclusive American economy may well rest in the balance.