In his competition with Hillary Clinton for the loyalty of Democratic voters angry with Wall Street and mad about bank bailouts, Bernie Sanders criticized the former secretary of state’s nuanced financial reform plan Tuesday, arguing that only his break-up-the-banks approach was sufficient.
In a speech delivered in New York City, the Vermont senator responded to Clinton’s attempt to portray him as weak on financial regulation because he lacks a specific plan for new rules on so-called “shadow banking,” which is a term for financial intermediation that occurs outside banks with deposits ensured by the federal government.
Sanders responded that his approach, which is to break up the biggest banks and re-impose the Glass-Steagall separation between commercial banks and investment banks and insurers, would eliminate the threat of crises and bailouts in the shadow banking system.
“Secretary Clinton is wrong,” Sanders said. “Shadow banks did gamble recklessly, but where did that money come from? It came from the federally insured bank deposits of big commercial banks — something that would have been banned under the Glass-Steagall Act.”
With his response, Sanders took the Democratic sparring over Wall Street into the policy weeds.
Clinton, who many on the Left perceive as being too close to big business and the financial industry, has attempted to limit Sanders’ advantage on matters pertaining to finance with a reform proposal that mostly involves stepped-up enforcement of President Obama’s 2010 Dodd-Frank financial reform law. Clinton also has called for new rules on shadow banking, noting that companies such as insurer AIG and investment bank Bear Stearns, as opposed to commercial banks, were at the heart of the financial crisis.
Clinton’s plan has the advantage of giving her space to criticize Sanders, who is clearly to her left. “Any plan to further reform our financial system must include strong provisions to tackle risks in the ‘shadow banking’ sector, which remains a critical source of instability in our economy,” her chief financial officer, former chairman of the Commodity Futures Trading Commission Gary Gensler, said about Sanders’ planned speech.
But Clinton also can argue her plan on the merits. In recent years, top regulators have listed shadow banking, not megabanks, as the top threats to the financial system needing further regulation. Top Obama appointees such as Treasury Secretary Jack Lew, Federal Reserve Chairwoman Janet Yellen and Fed governor and regulatory point man Daniel Tarullo have called for greater attention to non-banks in the mutual fund, hedge fund, insurance and other industries. The shadow banking sector today is larger than the traditional banking sector, in terms of liabilities held.
Sanders’ response Tuesday was to argue that the shadow banking sector is one step in the financial chain between the borrower and the investor who ultimate assumes the risk for the credit extended, and that banks are still involved in that chain. Without too-big-to-fail banks, he argued, the risky practices that shadow banks engaged in during the subprime mortgage crisis wouldn’t have been possible.
In making that assertion, Sanders was echoing an argument from one of the few existing liberal proposals for improving regulation of shadow banking. In a 2013 analysis from the left-of-center Roosevelt Institute, financial regulatory expert Marcus Stanley wrote that “the markets that are vital to shadow banking are heavily dependent on banks as market makers, dealers and guarantors.” Stanley cited research that three-quarters of securitizations involve bank guarantees and that banks are essential in the financial plumbing in markets for short-term lending and derivatives essential for shadow banks.
Those details, and the merits of the two candidates’ specific plans, may be above the head of the typical Democratic voter.
For at least one liberal group, however, Sanders’ response was persuasive.
In a letter sent out following Sanders speech, Neil Sroka, a representative for the grassroots organization Democracy for America, gave Sanders the upper hand.
“While Secretary Clinton is right to back greater regulation of the shadow banking system, as Bernie pointed out in today’s speech, that additional regulation means little if we aren’t also busting up banks that are too big to fail or installing a 21st-century Glass-Steagall act,” he wrote.
