Bernie Sanders on Financial Regulation

Bernie Sanders has spent decades fighting for a financial system that works for ordinary people, and not just for the top 1 percent of income earners. In his view, if banks are “too big to fail,” they have an incentive to make risky investments and are therefore too big to exist. Together with Senator Elizabeth Warren, Bernie supports reinstating the Glass-Steagall Act, which instituted regulations in the aftermath of the Great Depression in an attempt to avoid another economic disaster.

Reinstate Glass-Steagall

Bernie supports tougher bank regulation, including bringing back the Glass-Steagall Act. Glass-Steagall was passed in 1933, in the wake of the Great Depression, in order to prevent banks from making risky investments with the savings deposits of average Americans and then falling back on federal deposit insurance when their bets go bad. Glass-Steagall was mostly repealed in 1999 when President Clinton signed the Financial Services Modernization Act. Many economists argue that its repeal contributed to the severity of the 2008 financial crisis. In July 2015, Elizabeth Warren was joined by Senators Maria Cantwell, Angus King, and John McCain in introducing the 21st Century Glass-Steagall Act. Bernie has co-sponsored similar legislation in the past, and has stated that he supports this new bipartisan bill.

Go back. Tell me more about Glass-Steagall.

Glass-Steagall refers to the provisions of the 1933 Act that separated commercial banks and investment banks. This ensured that banks could not engage in speculative, risky trading with the savings accounts of average Americans and then fall back on taxpayer bailouts if they lost those bets. It also established the Federal Deposit Insurance Corporation (FDIC) as a guard against bank runs.

What’s the difference between commercial and investment banks?

Commercial banks take deposits and make loans. Chances are you know someone who is a member of one (think Bank of America or Wells Fargo). These banks can only invest money in government securities (like Treasury bonds) or by lending to small consumers, such as home buyers. Deposits in commercial banks are secured by the FDIC, guaranteeing them a federal bailout in the case of crisis.
Investment banks manage the fortunes of the wealthy, including hedge funds. They usually offer financial advice and trade and own complex financial assets like stocks, bonds, and derivatives. These banks are not covered by the FDIC, meaning their bets are not insured by taxpayers.

This graphic provides a handy breakdown

So, why do we need to reinstate the Glass-Steagall Act?

After Glass-Steagall was repealed in 1999, banks were free to invest their customers’ money in a variety of risky loans, including the housing market. Remember that bubble of speculation that put Americans’ savings at risk? Many experts, including Nobel Prize-winning economists Joseph Stiglitz and Paul Krugman, agree that the repeal of Glass-Steagall contributed to the global financial crisis.

I’m not a policy wonk. What does this mean?

The federal government, courtesy of your tax dollars, insures most bank deposits — so you don’t lose your savings account if your bank goes bankrupt. Glass-Steagall prevented banks from making risky bets with these insured deposits.

Why should we care?

Without Glass-Steagall, American taxpayers end up insuring risky bets made by big banks using their savings accounts. In other words, your tax dollars and your savings. For example, here’s how Sen. John McCain (R-Ariz.) frames bipartisan support for reintroducing the Glass-Steagall protections: “I want to ensure that we never stick the American taxpayer with another $700 billion — or even larger — tab to bail out the financial industry. If big Wall Street institutions want to take part in risky transactions, fine. But we should not allow them to do so with federally insured deposits. It is time to put a stop to the taxpayer financed excesses of Wall Street.”

Would Glass-Steagall have stopped the crisis or the bailout? Will it prevent future crises?

No, no, and no. Reintroducing Glass-Steagall will help prevent abuses in the banking sector, but it will not guarantee safety against future crises. We’ll have to introduce more regulations and legislation to limit the risks banks can take — and reduce the risk posed by bank failures to the rest of the economy. It will be important to break up investment banks that are “too big to fail,” so they can be allowed to go bankrupt if they take similar risks in the future.

So, what is Bernie’s position on Glass-Steagall?

Bernie has been a strong supporter of Glass-Steagall for his entire political career. In 1999, he led the fight against the law’s repeal in the House, warning that it would lead to “taxpayer exposure to potential losses should a financial conglomerate fail.” Bernie is also aware that Glass-Steagall, while important, is not entirely sufficient to protect against future crises.

What specific policies does Bernie support?

He has introduced legislation to break up banks that are “too big to fail” and has been a vocal supporter of the Wall Street Trading and Speculators Tax Act. Bernie has also co-sponsored bipartisan legislation in the Senate, including the 21st Century Glass-Steagall Act, which reintroduces rules preventing banks from taking reckless risks with the savings of American families.

Break Up the Big Banks

During the 2008 financial crisis, our federal government lent a staggering amount of support and resources — at least 9 trillion dollars — to financial institutions in order to prevent their collapse. If these financial giants were allowed to go bankrupt, they would have dragged the entire economy down with them. Bernie believes banks that are “too big to fail” participate in risky behavior that threatens our economy — and are therefore too big to exist.

Explain the problem to me in language I can understand.

When banks are so large that their bankruptcy would devastate the economy, the government is forced to bail them out. If banks know that they’ll be bailed out, they’ll chase profit by gambling and making risky investments knowing that they can’t really lose. The 2010 Dodd-Frank financial reform law defines these “big banks” as having at least $50 billion in assets.

So why break them up?

Breaking up the biggest financial institutions would reduce the level of financial monopolization in America and the corresponding political influence of the largest banks. Too few banks control too much of our money. Not only is it risky for the reasons stated above, but it gives them even more influence in Congress. At the end of 2014, the largest four banks held 35% of all bank deposits. These same four banks spent at least $21 million lobbying the federal government in 2014.

What is Bernie’s position on “too big to fail”?

Bernie is a strong opponent of allowing “too big to fail” banks to exist. He criticized the 2008 bailout as “the most extreme example … of socialism for the rich and free enterprise for the poor.”

Listen to one of his impassioned speeches to the U.S. Senate about companies that are “too big to fail.”

What has he tried to do about it?

Bernie has repeatedly called for the breakup of the country’s largest banks — and has introduced legislation to do it. The Too Big to Fail, Too Big to Exist Act would require the Secretary of the Treasury to break up the nation’s largest institutions (eight are named, but others would be identified by regulators).

Does Bernie support any other regulations for the big banks?

Bernie is a consistent proponent of strengthened bank regulations, including reintroducing Glass-Steagall, reversing tax loopholes that only help big banks, and fighting against rollbacks of banking regulations.

Tax on Wall Street Speculation

Bernie sides with several leading economists in calling for a tax on the dangerous speculation on Wall Street.

Wait. But stock markets are important for the economy, right?

Stock markets are intended to be an exchange where a company can sell ownership in return for working capital. In other words, it’s meant for companies to sell shares for cash that they then invest back in the business. But increasingly, the markets are used as an instrument to gain short-term profits by quickly trading stocks with tiny price differences and using other high-risk trading methods to make a quick return.

What is a Financial Transaction Tax (FTT)?

An FTT, also known as a Tobin Tax or Robin Hood Tax, is a small tax applied each time a financial security (e.g., a stock, bond, or similar financial instrument) is traded.

Why do we need an FTT?

The 2008 financial crisis has been both a lesson in the dangers of excessively risky financial behavior and a tremendous expense for the American taxpayers. Many studies show (as cited in this report) that implementing an FTT would both dissuade high-risk and high-frequency trading and generate revenue — to rebuild our infrastructure, improve our social safety net, and make higher education more affordable. Here is an illustration of how FFTs could be applied on a global scale:

But wouldn’t this discourage investment?

Taxing a financial transfer does disincentivize selling a stock or bond. However, the small percentage of the tax means that only trading on the smallest of margins is no longer profitable. This tax would target the high-frequency trading that uses these tiny margins for profit without having meaningfully invested in a company.

I’m not sure I follow.

Simply, a well-crafted FTT would only affect sophisticated stock brokers trying to make a quick buck. If done correctly, it would not discourage meaningful investments. See here and here for in-depth discussions on different ways of implementing an FTT.

So what does Bernie think about FTTs?

Bernie is strongly in favor of implementing an FTT in the U.S., saying that doing so “would reduce gambling on Wall Street, encourage the financial sector to invest in the productive economy, and significantly reduce the deficit without harming average Americans.”

Has he tried to do anything about it?

Bernie has praised Sen. Tom Harkin and Rep. Peter DeFazio for introducing the 2013 Wall Street Trading and Speculators Tax Act and introduced the Inclusive Prosperity Act of 2015 during the current Congress.

How can I find out more about how an FTT would work in the U.S.?

The Tax Policy Center, a nonpartisan joint venture between the Urban Institute and the Brookings Institution, produced a report on the topic. We recommend it: Financial Transaction Taxes in Theory and Practice