Clinton Lets Her Wonk Flag Fly With Wall Street Reform

I have often thought that one of Hillary Clinton's greatest strengths is the fact that she relishes digging in to complex problems and crafting policy solutions. This week she demonstrated that skill with the release of her proposals on Wall Street Reform. To organize the breadth of what she's talking about, Mike Konczal compared it to the five reforms that Sen. Elizabeth Warren proposed.

1. Defend Dodd-Frank against attempts to weaken or compromise it.

2. Scale up enforcement, investigations and convictions: "When big financial institutions are not deterred from breaking the law… then that’s what they will do."

3. "Tackle the shadow-banking sector," which created "runs and panics in the short-term debt markets that spread the contagion across the financial system."

4. Create a "targeted financial transactions tax."

5. Break up the biggest banks. First "cap the size of the biggest financial institutions," then create a new Glass-Steagall Act "that rebuilds the wall between commercial banking and investment banking."

Comparing both Clinton and Sanders to this list, Konczal summarizes as follows:

Using the Warren criteria, Clinton gets points on the first four, but approaches the fifth by working through Dodd-Frank rather than against it. Bernie Sanders gets major points on the last two, but hasn’t gotten specific on tackling shadow banking and the broader financial sector. Rather than stronger or weaker, we’re left with two different ways of prioritizing financial reform, with Sanders focusing on eliminating the threat of the largest banks and Clinton looking to the financial markets as a whole.

His dismissal of the idea that Clinton's proposals are either stronger or weaker than Sanders' undermines the point Sargent made the other day about Clinton merely "nibbling around the edges" of reform.

On the issue that strikes me as the most important to prevent the kind of crisis we experienced in 2008 - tackling the shadow-banking sector - Konczal points out that even Sen. Warren failed to provide the specifics that Clinton has included. The focus on this is likely the result of Clinton's decision to hire Gary Gensler as her Chief Financial Officer - a move that reformers applauded.

But on the two issues that Sanders is highlighting - breaking up the big banks and creating a new Glass-Steagall Act - Clinton took a pass. I suspect that is for the same reasons that Mike Grunwald noted. If the purpose of Wall Street reform is to prevent the kind of financial crisis we experienced in 2008, the financial institutions that were at the center of the problem were not the biggest banks. For example:

Bear Stearns wasn’t even one of the fifteen largest U.S. financial institutions in March 2008, when the Fed had to engineer a massive rescue to prevent it from collapsing and dragging down the global economy with it. Lehman Brothers wasn’t even in America’s top ten when its failure did trigger a global meltdown that September.

As Austan Goolsbee put it:

The most dangerous failures—Bear Stearns, Lehman—were not even close to the biggest. You could have broken the largest financial institutions into, literally, five pieces and each of them would still have been bigger than Bear Stearns. The main danger to the economy was interconnection, not raw size.

When it comes to Glass-Steagall, Konczal points out that Clinton would instead strengthen the Volcker Rule.

Dodd-Frank’s Volcker Rule — which separates hedge funds from commercial banking — has been described as the Obama administration’s replacement of Glass-Steagall...Strengthening the Volcker Rule is a different approach to separating financial business lines, one that sees hedge funds as more of a threat than the mingling of commercial and investment banking.

Again, if we go back to 2008, none of the institutions at the heart of the crisis would have been affected by Glass-Steagall (Bear, Lehman, Merrill, Fannie Mae, Freddie Mac, AIG, etc.), as Michael Hiltzik recently pointed out.

For those who want to shake their fists at the "too big to fail" banks, these reforms are a deep dive into the issues that might not be emotionally satisfying. We'll have to see if that sells in these days of populist anger.