Regulating Banks vs. Displacing Them: Where Clinton and Sanders Disagree on Wall Street

Part of the Series

Beyond the Sound Bites: Election 2016

Neither Bernie Sanders nor Hillary Clinton does a good job explaining how, substantively in terms of policy, they are different from one another on Wall Street reform. After heated exchanges in early February’s pre-New Hampshire primary debate, we were left with the impression that both would break up big banks – commercial, investment or any other type of financial entity – and that Hillary Clinton is somehow vaguely dishonest because financial firms have enriched her both personally and politically.

For more original Truthout election coverage, check out our election section, “Beyond the Sound Bites: Election 2016.”

Yet their disagreement is fundamental. They believe in different roles for the financial sector in the economy. And, yes, campaign finance factors in heavily, as Sanders wants to radically change the financial institutions at the core of our financial sector, while Clinton, still surrounded by the same status quo corporate and investment banking advisers, wants to largely leave them be and regulate them more stringently.

Here’s an attempt to set the record straight.

Bernie Sanders’ Argument

Sanders claims that the financial sector, which has grown from about 3 percent of GDP in the 1950s to above 8 percent these days, has too much market power. Its market power, Sanders argues, translates into the political power that maintains the status quo of a giant financial sector dominated by a relatively few highly centralized and powerful players. Sanders often describes how the “six largest banks in this country issue more than two-thirds of all credit cards and over 35 percent of all mortgages,” and that they “control more than 95 percent of all financial derivatives and hold more than 40 percent of all bank deposits.”

At its core, Sanders’ argument is that the financial sector, the heart of any economy, is not getting the job done. It generates immense profits for itself, but is a leech on the productive economy and, even worse, it does not invest in US economic development. We have 10 percent real unemployment and median wages have been stagnant for more than four decades. Yet, instead of investing in employment of Americans to produce the goods and services that the United States needs, the financial sector effectively takes our savings and invests them anywhere in the world, in any type of asset, with the primary aim of achieving the highest possible rate of return – the “invisible hand” theory of social welfare maximization run amok.

The international component of the financial sector is also key to Sanders’ worldview and the direction in which he says he would focus his financial policies. International “free trade” sounds great in theory: Investment flows to economic activity offering the greatest financial return, regardless of place or industry, and maximum wealth is created as industries within different countries find their comparative advantage. But the theory completely misses how “free trade” works in our world, primarily because it focuses on aggregate outcome – wealth maximization – without thinking about how that outcome is distributed.

“Free trade” in the real world operates as economic imperialism by codifying the current market advantages held by US and other Western corporations. US corporations compete, absent any restraint, with industry in poor countries to extract the natural resources of those countries and then sell these resources back to them as manufactured goods, a “competition,” it goes without saying, that US corporations will dominate. Adding insult to injury, this “competitive” arrangement is due in no small part to the historic inequity created by Western colonization of virtually all of what we now euphemistically call the “developing world.”

This economic imperialism also works internally within the United States, as corporations outcompete small and medium-sized businesses – again, an obvious outcome – because small and medium-sized businesses lack the resources to compete in an economy defined by sprawling global supply and production chains, and purchasing and low-cost production advantages that come with scale. It is no accident that the Fortune 500 – the 500 largest US corporations – now account for 70 percent of US GDP. Investment regimes, domestic and foreign, that treat all economic actors the same – thereby implicitly hurting the weaker ones – are a key driver of the historic income inequality in our country and the world.

The shape of the international economy is not the natural “evolution and structure of the world economy,” as The Washington Post editorial board would have us believe. It is the result of deliberate policies. This is why Sanders’ enthusiastic opposition to the Trans-Pacific Partnership (TPP) is so important. Sanders has opposed every one of the new age “free trade” deals – including the North American Free Trade Agreement (NAFTA), Central American Free Trade Agreement (CAFTA) and permanent normal trade relations with China – whereas Clinton has a mixed record. Clinton did not oppose NAFTA when President Bill Clinton signed it into law. She then voted against CAFTA as a senator, but touted the TPP as the “gold standard” on trade while she was US secretary of state, before coming around to oppose the deal in October 2015. Prominent corporate lobbyists, like US Chamber of Commerce president and CEO Thomas Donohue, do not believe Clinton would actually oppose the TPP if elected. The fact that much of the Democratic establishment is lined up behind President Obama in support of the TPP makes the Democratic nominee’s commitment to opposing the deal that much more important.

Lastly, Sanders wants to tax the rich to produce the kind of economic development here in the United States that the financial sector has failed to finance. His infrastructure spending plan calls for the use of US capital to achieve US economic development, with development defined not as high profits for the investors of capital, but as high wages for workers and the production of goods we need at fair prices. Fair prices should be understood as the cost of production plus a reasonable profit, not the highest possible price that oligopolistic industries, such as the health insurance and pharmaceutical industries, can extract from us all.

Sanders also wants to empower the financial institutions that can normalize private sector investment in US economic development. These are the credit unions and community banks he has called the future of US banking. Ideally, Sanders would like to completely displace the giant financial firms that control investment in our society. This position is far different from Clinton’s.

Hillary Clinton’s Argument

Clinton’s argument sidesteps all of this. She does not discuss any institutional alternatives to the finance giants, like credit unions and community banks. And her plan for reform is built around regulation, suggesting she thinks that the financial sector, in its chief capacity as director of national economic investment, is doing just fine.

Clinton offers systemic risk as the only justification for breaking up any of the big financial institutions. The problem with the financial sector, for Clinton, is the chance that its risk-taking in the name of profit will produce another 2008-type run on credit markets. While a huge problem, obviously, it has nothing to do with the way the financial sector drives the production of national and global income inequality.

The key reforms of the Obama years – Dodd-Frank, including the Volcker Rule; (some) regulation of derivatives; and the Consumer Financial Protection Bureau – all leave the financial sector status quo intact while attempting to regulate some of the industry’s most socially harmful practices. More importantly, the reforms do nothing to reverse the financial sector’s disinvestment in the productive US economy.

Clinton’s plans similarly seek to regulate without attempting to change the way the financial sector allocates capital for investment. The main initiatives in her plan for Wall Street involve giving prosecutors more time to go after banks, taxing some high-frequency traders, keeping the Dodd-Frank financial reform in place, strengthening rules against risky hedge fund investments and regulating hedge funds.

If you leave the banks intact and don’t try to bypass them in any way to invest in US economic development, then words about “income inequality” and “higher wages” are likely to remain just words – not so pragmatic after all. Clinton’s financial sector reform plan does nothing to increase investment in the productive US economy, the key to increasing employment and raising wages.

Now, all of that corporate money Clinton takes is likely a huge part of why she does not speak about all of this. Clinton is not paid off and bought in a straight-up quid pro quo manner. But that kind of corruption is an awfully narrow understanding of the term. Clinton surrounds herself with corporate advisers. They are her economic teachers. Clinton seems unable to imagine how the corporation, as a highly centralized – and powerful – market actor, is the very thing that produces our highly centralized distribution of wealth.

Our political economy, the way we collect and mobilize our savings and economic surplus for investment, is both economically inefficient and immoral – and the financial sector is the driving force behind it. This is how the United States can be the richest nation in the world while whole cities and regions are crushed by the economic disinvestment of deindustrialization – and the accompanying poverty, stagnated wages and ever-rising prices of basic goods and services like health care and education.

Clinton is not bought by this political economy status quo. Almost as bad though, she is ideologically captured by it, a byproduct of surrounding herself with advisers educated only in the failed conventional wisdom.