by Andrew Klutey
Since Elizabeth Warren won Ted Kennedy’s old Senate seat in November, commentators have tried to figure out what her victory and subsequent membership on the senate banking committee would mean. Two weeks ago, they got their answer. After laying low for the first month of her term, Warren exploded (video) during her first Banking Committee hearing, aggressively pressing the Comptroller of the Currency, Chair of the SEC, and a member of the Fed’s Board of Governors on their failure to litigate Wall Street.
To those who didn’t watch the video, Warren’s argument can be summed up by this short monologue on the government prosecutors’ failure to litigate big banks:
Okay, we’ve got multiple people here. Anyone else want to tell me about the last time they took a Wall Street bank to trial? I just want a note on this: There are district attorneys and U.S. attorneys out there every day squeezing ordinary citizens — sometimes on very thin grounds — and taking them to trial in order to make an example, as they put it. I’m really concerned that ‘too big to fail’ has become ‘too big for trial.’ It just seems wrong to me.
The appeal to “ordinary citizens” getting squeezed seems a little populist, and the aggressive line of questioning may be a little much for a freshmen senator. Warren’s performance was probably exactly what all of her critics dreaded: that she would be an overzealous, far-left anti-Wall Street crusader that threatened the livelihood of the entire financial sector.
So the hearing is unlikely to win over any critics. But she shouldn’t care. The banks deserve far more pressure than what Warren offered two weeks ago. Washington needs to be asking serious questions about the structural risks that massive financial firms pose to the economy, but it hasn’t seemed willing to do so (probably because the banks are putting money in their campaign coffers). Since Warren seems to be one of the few members of Congress that has enough popularity to overcome Wall Street’s hatred (also, see above linked Forbes article that calls Warren “Wall Street’s worst nightmare), she should wield it to her advantage.
What does she specifically want with the calls for more litigation? Warren feels that banks aren’t punished enough for making bad investment decisions. In the case of the 2007-2008 financial crisis, regulators failed to prosecute the parties that initiated the recession, thus failing to appropriately disincentivize the offending behavior.
Warren expanded her criticism of government regulators’ response to the financial crisis last week during Ben Bernanke’s semi-annual congressional testimony, mentioning a recent IMF report that suggests taxpayers subsidize the borrowing costs of big banks by around $83 billion a year. The video.
I don’t agree with Warren all the time, but this issue–the size and complexity of banks–really matters. It was a huge problem in 2007, and it’s still a huge problem almost six years later. The trend of credit consolidation, one that has been evident since the mid-1990s, continued after the economic crisis, and has shown no sign of stopping.
Warren and a growing number are speaking out. Even Republicans are jumping on board! So understanding the “too big to fail” problem is essential to understanding the challenges financial regulators will face in President Obama’s second term. The next post starts by detailing the risk such large firms pose to macroeconomic stability and the reform strategies currently in place to address that risk.
