President Obama was referring to the years since the financial crisis when he pointed out in his State of the Union speech that “average wages have barely budged” while “those at the top have never done better.”
But that would be a fair summary of the past three and a half decades, as well. And with his candor on this sensitive subject, the president seems to have touched a chord. In the pre- and post-SOTU commentary, a remarkably wide range of elected officials and pundits (including some who were briskly dismissive of the policy measures advanced in the speech) readily agreed that, in the president’s words, “inequality has deepened” and “upward mobility has stalled,” and something ought to be done about it.
That recognition is a breakthrough. It could – certainly it should – lead to increased support for steps to raise the federal minimum wage, reduce the burden of student loan debt and invest in early education and infrastructure, as Obama urged. But a meaningful debate over inequality will also have to address the economic structures that reinforce America’s extreme and growing concentration of income, wealth and economic and political power. And that means, for one thing, taking a fresh hard look at the rules of the game for Wall Street and the financial world.
Since the late 1970s, those rules have changed profoundly from what they were in the middle decades of the last century. Through court rulings and legislative as well as regulatory acts, this country lifted many of the restraints against what had been considered usury or loan-sharking; opened the door to a boom in deceptive and often unmanageable loans by disconnecting the issuance of debt from the responsibility to collect it; allowed banks to hide much of their activity from regulators; whittled away at the rules against conflicts of interest and insider dealings; and, by one means and another, encouraged what had been a comparatively stable and boring industry of mostly local and regional banks to transform itself into a world of high-flying, multi-purpose “financial services” giants prone to gambling with taxpayer-backed funds, and leaving others to pay for the bets that go wrong.
The financial crisis of 2008 threw some of these problems into sharp relief. And it provided the impetus for some much-needed regulatory reforms, including the creation of a Consumer Financial Protection Bureau to help end the persistent fleecing of middle-class consumers as well as the devastating debt traps so often set for low-income households. But much remains to be done.
Thanks in part to a wave of consolidations linked to the bailout, the big banks are bigger than ever, and still helped along by too many explicit and implicit public subsidies. Their business model remains ridden with insider advantages, self-dealing and conflicts, permitting practices that make heaps of money for financial high-flyers while draining resources from the real economy and leaving most Americans more vulnerable and insecure. Small wonder that Wall Street, unlike the country at large, has bounced back so decisively from the crisis it created.
In his State of the Union speech, the president emphasized measures that would not require fresh action by Congress. In the same spirit, there is much that financial regulators and the administration have the authority to do – or, under the Dodd-Frank Act and other existing laws, the duty to do – to prod Wall Street away from its destructive habits toward a simpler, safer, less leveraged and more economically useful financial system.
Regulators could, for example, forcefully implement the so-called Volcker Rule against proprietary trading, while making the most of their Dodd-Frank mandate to set higher capital and leverage rules for companies so big that their failure would likely bring on another crisis and pressure for another bailout. They could order financial firms to get out of the business of directly controlling real-world goods, and of swamping commodities markets with excessive speculation. They could say a very firm no to Wall Street’s high-pressure campaign for loopholes to let the big banks escape new derivatives regulations by routing trades through overseas subsidiaries. And they could take serious action to end the corrupt system that encouraged credit rating agencies to validate deception.
With a serious new legal assault on big-bank wrongdoing, federal watchdogs and prosecutors could do a lot more to hold financial institutions and their executives accountable for persistent patterns of misconduct that impoverish families and communities as well as local governments and other public entities.
Congress, of course, could do more still. It could, for example, strike a blow against the overconcentration and built-in corruption of our banking system by enacting the 21st Century Glass-Steagall Act – co-introduced by the bipartisan team of Sens. Elizabeth Warren, D-Mass., John McCain, R-Ariz., Maria Cantwell, D-Wash., and Angus King, I-Maine – to restore the division between traditional commercial banking and the casino world of trading and speculating. This would help limit the scope of the "too big to fail" banks, and help return banking to a focus on lending to homebuyers and "real economy" businesses.
As Washington embarks on a fresh discussion of tax reform, it could confront some of the tax-code features that help financial companies get away with paying only about 18 percent of corporate taxes despite the fact that they currently generate about 30 percent of the nation’s total corporate profits. Closing the “carried-interest” loophole, which allows managers of hedge funds and private equity funds to enjoy lower tax rates than teachers and firefighters, should be a no-brainer. The U.S. could also follow the lead of 11 European countries by embracing a Wall Street speculation tax. Unlike ordinary Americans, who pay sales taxes on all manner of goods and services, Wall Streeters go untaxed on its securities transactions. Even a very small levy of that kind would raise hundreds of billions of dollars over 10 years, while helping nudge the financial world away from excessive speculation and back towards its rightful role as an instrument of private and public investment.
One of the conspicuous drivers of inequality over the past three decades has been the spectacular income gains of the top 1 percent. Financial executives, traders, fund managers and others account for about one-fourth of those gains, and their paychecks, after taking a hit in the immediate wake of the crisis, are once again soaring to levels wildly disconnected from the state of the overall economy. Consider the stunning news that JPMorgan Chase CEO Jamie Dimon will be receiving upwards of $20 million – a 75 percent pay hike – for a year in which his company had to pay billions of dollars in legal settlements for pre-crisis mortgage abuses, energy market manipulation and institutional complicity in Bernard Madoff's Ponzi scheme, on top of its “London Whale” round of wild betting in the derivatives markets.
The Dodd-Frank Act sought to address the role of pay practices in financial misbehavior by directing the Federal Reserve, along with the Securities and Exchange Commission and other financial regulators, to issue rules against compensation arrangements that reward excessive risk taking. But the deadline for those rules passed more than two and a half years ago, and so far all we have seen is a seriously inadequate draft rule calling for a too-short delay between the awarding and the payout of bonuses for a narrow group of senior executives. That rule could and must be strengthened, finalized and seriously enforced.
Another way for Congress to contribute would be by passing the The Stop Subsidizing Multimillion Dollar Corporate Bonuses Act, introduced by Senators Jack Reed, D-R.I., and Richard Blumenthal, D-Conn., and in the House by Rep. Lloyd Doggett, D-Texas. That bill puts teeth into a law that supposedly capped the tax deductibility of executive pay at $1 million a year – 20 years ago. By closing what has turned out to be a monstrous exemption for “performance-based” pay, the Reed-Blumenthal-Doggett proposal would raise significant revenue even as it stopped subsidizing extravagant pay on Wall Street and elsewhere.
This is a far from comprehensive list of ways to address
inequality by advancing the cause of financial reform. The point is, if we are
going to set our country on a path toward broadly shared opportunity and
prosperity, steps to reshape the financial system and rein in Wall Street recklessness
and excess must be high on the to-do list.