When it comes to money, Americans live in two different countries.
Most people live in a country where they have jobs or seek work to pay their cost of living and put something away for retirement. They put their money in banks.
Their country is slowly emerging from the worst economic slowdown in their lifetimes.
While people in this country are regaining their optimism about the future, they are frustrated and unhappy because progress is so slow and the outlook uncertain.
In past slowdowns, these people have been helped by stepped-up government spending.
Now, however, the government is shrinking, not only failing to help but in fact contributing to joblessness.
The other country is inhabited by major financial institutions. While they are the banks where average people keep their money, they are also investors, sometimes taking big risks.
These financial institutions also suffered from the recession. They bear much of the responsibility for it, because they endangered the deposits entrusted to them when they made unwise and risky investments.
In other words, their investment side endangered their banking side.
But the big banks are back, big time. Not only have they fully recovered, but they are making record profits and have even begun once again to make massive investment mistakes.
Almost everybody knows the major financial institutions were bailed out by taxpayers. That’s because they were “too big to fail,” meaning that allowing their collapse could have endangered the savings of millions of people.
And they repaid the bailout money. But there was supposed to be something else in the deal. To protect their depositors, they were supposed to be regulated more tightly so they could not again play dangerous financial games.
In 1999, President Bill Clinton and Congress had repealed a law dating from the Great Depression of the 1930s. That law, called the Glass-Steagall Act, prevented banks taking deposits from getting into the investment business.
After that law was gone, it was easy for the major banks and investment companies to refashion themselves as hybrids, part banks and part investors.
Chase was a bank. J.P. Morgan handled investments. A year after the repeal, they became JP Morgan Chase, the nation’s biggest bank.
After the near collapse of the financial sector, Congress sought to impose some new controls on the major financial institutions. But it faced the strong lobbying effort of those institutions, which somehow had the money to use to block controls.
Paul Volcker, formerly the head of the Federal Reserve, the nation’s central bank, proposed a rule that would revive Glass-Steagall. A watered-down version made it into the law in 2010, but the big banks have so far prevented the adoption of the rules needed to put it into effect.
Then, Elizabeth Warren, the new U.S. senator from Massachusetts and the former Harvard Law School finance professor, arrived on the scene.
She seems to have the knowledge to identify what’s wrong with the financial system and the nerve to try to fix it. She has put together a bipartisan group of senators to try to restore Glass-Steagall.
She sees the same problems as helped bring on the recession: JPMorgan Chase made an unwise investment that almost nobody understands and lost $6.2 billion. The only penalty was that the president’s $23 million pay was cut in half and a couple of people were forced out of the company.
But, in the face of industry lobbying, Warren’s chances of success are slim. Still, unlike many in Washington who don’t try to set sound policy because of likely defeat, she deserves credit for the effort.
Volcker also wisely got the law to require that big players in the economy change their outside auditors every few years. The auditor’s job is to take an independent look at a company’s finances to inform investors and regulators.
When an auditor wants to hold onto a client, it may find a way to issue favorable reports. That happened in some companies pre-recession. That’s one reason the crisis snuck up on us.
A couple of weeks ago, the U.S. House of Representatives voted to repeal that requirement. Apparently members of both parties were convinced either that the problem did not exist or that the law unduly restricted companies and auditors.
Do the big financial institutions need regulatory relief from government while average people get little help from Washington?
Between 2007 and the middle of last year, U.S. household income fell by more than seven percent.
JP Morgan Chase just set a new record for profits in the first three months of this year.