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Elizabeth Warren’s Populist Insurgency Enters Next Phase: Blow up the Finance Sector, Restore the Economy

It's about more than 2016.
 
 
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If asked, Americans of all political persuasions will say overwhelmingly that they prefer “ tougher rules” for Wall Street. But what does that actually mean?

You can frame this conventionally: supporting regulators, punishing rules violators, mopping up 2008-style disasters to limit the damage and attempting to prevent such chaos from happening again. But by “tougher rules,” maybe Americans are really signaling a vague but persistent dissatisfaction with an economy that has become dominated by the financial sector. And you can see within that how transforming banking back to its traditional purpose — as a conduit for putting capital in the hands of worthwhile business ventures and driving shared prosperity — would be one antidote to an unequal society full of financial titan gatekeepers, who confiscate a giant share of the money flowing through the system.

Sen. Elizabeth Warren — in many ways the avatar of a  new populist insurgency within the Democratic Party that seeks to combine  financial reform and economic restoration — will speak later today in Washington at the  launch of a  new report that marks a key new phase in this movement. Released by Americans for Financial Reform and the Roosevelt Institute – and called “An Unfinished Mission: Making Wall Street Work for Us” — the report is a revelation, because it finally invites fundamental discussions about these issues. Its 11 chapters from some of the leading thinkers on financial reform do look back at the successes and failures of the signal financial reform law of this generation, the Dodd-Frank Act. But the report also weaves in a story about how we can reorient finance as a complement to the real economy, rather than its overriding force. Mike Konczal, a fellow at the Roosevelt Institute and the co-editor of the report, tells Salon, “The financial sector is still eating up a lot of GDP [gross domestic product], and it’s not clear what we’re getting out of it. We want to get the conversation at that level.”

This report fills in the details, creating definable action items and goals that could serve as a marker for legislative and regulatory action, as well as primaries in the next several election cycles.

The roots of this conversation go back decades, if not hundreds of years. One of the report’s authors, John Parsons of MIT, notes that the debate over whether to force derivative trades — the bets on top of bets that helped accelerate and magnify the financial crisis — into central and transparent clearinghouses dates back to the Minneapolis Grain Exchange of 1896. The concept of a fiduciary standard, which states that anyone offering advice on investment strategies should act in the interests of their individual clients rather than trying to enrich themselves, was initially settled in the Investment Advisors Act of 1940.  Even Ben Bernanke last week drew parallels between the 2008 crisis and  the Panic of 1907, which led to the creation of the Federal Reserve.

In the past few decades, Wall Street has devised financial “innovations” with the primary purpose of outpacing regulatory reach, surmounting decades-old reforms. This frees non-bank financial firms from oversight by the watchdogs, and allows them to accumulate risk in search of greater profits. For example, Marcus Stanley of Americans for Financial Reform looks at shadow banking, the lending markets that “convert illiquid, risky, long-term assets into ‘safe,’ liquid short-term securities.” This creates an illusion of safety and puts massive amounts of money outside the New Deal-era regulatory apparatus, where the firms involved don’t have requirements to carry capital to guard against inevitable losses, for example. In 2008, the breakdown of parts of the shadow banking system made it impossible for large financial actors to access short-term funding, turning a downturn into a crisis.

 
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