From Project Syndicate
There is now near-unanimity that the United States’ Dodd-Frank financial reform legislation, enacted in 2010, did not end the problems associated with some banks being “too big to fail.” When it comes to proposed solutions, however, no such consensus exists. On the contrary, financial regulation has become a key issue in November’s presidential and congressional elections.
So who has the more plausible and workable plan for reducing the risks associated with very large financial firms? The Democrats have an agreed and implementable strategy that would represent a definite improvement over the status quo. The Republican proposal, unfortunately, is a recipe for greater disaster than the US (and the world) experienced in 2008.
On the Democratic side, Hillary Clinton’s campaign materials and the party platform point to a detailed plan to defend Dodd-Frank and to go further in terms of pressing the largest firms to become less complex and, if necessary, smaller. Banks must also fund themselves in a more stable fashion. If Clinton wins, she will draw strong support from Congressional Democrats – including her rival for the Democratic nomination, Bernie Sanders, and his fellow senator, Elizabeth Warren – when she pushes in this direction.
Some commentators claim that Clinton has been “pulled to the left” on financial regulation during the campaign. But if you look carefully at her statements during this election cycle, they have been, from the very beginning, almost identical to what Warren has been seeking for the past half-dozen years. And these goals are perfectly aligned with what all responsible officials want. Everyone in their right mind wants to prevent the largest banks from getting out of control, shifting risk into shadowy, unregulated activities (on or off their balance sheet), and fleecing consumers.
This is an entirely responsible and sensible agenda. It is opposed, of course, by people who are paid – one way or another – to represent the largest banks.
On the Republican side, Donald Trump’s precise intentions are less clear, though he proudly calls himself the “king of debt,” which is not particularly encouraging. Huge mountains of debt may help enrich individual property developers or financiers, but they typically add up to trouble for the macroeconomy. It was precisely those mountains that collapsed on the US and global economy in 2008. Many were buried in the Great Recession that followed; many more are still digging out.
Unlike Trump, House Republicans have formulated and published detailed plans that can fairly be compared to what the Democrats have presented. And, in the event of a Trump presidency, financial policy would likely be crafted in large part by the House Financial Services Committee, whose chairman’s clearly stated priorities are to reduce consumer protection and remove any effective constraints on big banks’ activities.
Read the full post at Project Syndicate.
Simon Johnson is the Ronald A. Kurtz (1954) Professor of Entrepreneurship at the MIT Sloan School of Management, where he is also head of the Global Economics and Management group and chair of the Sloan Fellows MBA Program Committee.