Popular in Economics

Banks and Policy Organisations

Macroeconomic modelling of CBDC: a critical review

European Central Bank Ulrich Bindseil

Banks and Policy Organisations

Financing Private Credit

Federal Reserve Bank of New York Nina Boyarchenko

Economics

Failing Banks

Massachusetts Institute of Technology Emil Verner

Economic History

Golden Fetters

UC Berkeley Barry Eichengreen

Economic Inequalities

Visions of Inequality

City University of New York Branko Milanovic

Economics

School Finance Equalization Increases Intergenerational Mobility

Yale University Barbara Biasi

Economics

Olivier Blanchard on U.S. Pandemic-Era Inflation

Peterson Institute for International Economics Olivier Blanchard

Busting the Bankers Club

View more insights in Books - Social Sciences - Economics - Economic History

View more figures from University of Massachusetts at Amherst

View the page of Gerald Epstein

Read the Book

Next in Books

Queer Lasting: Ecologies of Care for a Dying World

Sarah Ensor | University of Wisconsin Madison

The First Black Archaeologist: A Life of John Wesley Gilbert

John W.I. Lee | University of California Santa Barbara

Bankers brought the global economic system to its knees in 2007 and nearly did the same in 2020. Both times, the US government bailed out the banks and left them in control. How can we end this cycle of trillion-dollar bailouts and make finance work for the rest of us? Gerald Epstein confronts the powerful people and institutions that benefit from our broken financial system—and the struggle to create an alternative.

Image courtesy of interviewee. April 19, 2024

Log-in or Sign-up to Faculti
Currently viewing this subject insight as a guest. You have insight(s) remaining for this month. Login to view 8000+ figures on the platform.

Generating Workspace...

Export as PDF

This video video discusses the relationship between financial systems and society, using the metaphor of Dr. Jekyll and Mr. Hyde to illustrate the dual nature of finance—its ability to support economic stability and growth while also creating significant risks and crises. The speaker critiques the current U.S. financial system, dominated by large banks and financial institutions, which he refers to as "Roaring Banking," contrasting it with the more regulated "boring banking" of the mid-20th century, which had fewer financial crises and supported stronger economic growth.

The discussion highlights the emergence of a "Banker's Club" of powerful allies, including major banks, the Federal Reserve, and other influential entities, that perpetuate the dominance of the current financial system despite its unpopularity and propensity for crises. This video video argues for reforms to strengthen regulatory measures and to build a financial system that prioritizes public interest over profit maximization.

It outlines various avenues for reform, including increasing capital requirements for banks, addressing the issues related to private equity's influence on essential services like healthcare, and promoting public banking that focuses on community development and green investments. The concluding message emphasizes the need for collective action—encouraging individuals to engage with reform initiatives and activism to create positive change within the financial system.

Language:

Export as PDF

X-TIMESTAMP-MAP:LOCAL=00:00:00.000,MPEGTS=900000

00:00.105 --> 00:02.795
Well, I'm drawing on the famous Robert Lewis Stevenson,

00:03.175 --> 00:05.595
short story book about, Dr.

00:05.835 --> 00:07.955
Jekyll and upstanding member of the community.

00:08.695 --> 00:13.315
And, this, this murderous sundal named Mr. Hyde.

00:13.895 --> 00:15.835
And, there was a friend of Dr.

00:16.035 --> 00:18.715
Jekyll's who was trying to figure out, you know, who,

00:18.815 --> 00:20.235
who is this Mr. Hyde?

00:20.235 --> 00:23.555
And he investigates. And finally, he figures out that Dr.

00:23.835 --> 00:26.475
Jekyll and Mr. Hyde are the same person.

00:26.745 --> 00:30.435
They're these two opposites, good

00:30.495 --> 00:32.995
and evil, in, in the same body.

00:33.055 --> 00:37.075
And in a certain sense, our financial system, has a,

00:37.135 --> 00:39.355
jekyll and high, high quality to it.

00:39.695 --> 00:42.635
On the one hand, all capitalist economies, in fact,

00:42.895 --> 00:46.115
all economies need a, a well-functioning financial system.

00:46.815 --> 00:49.275
Why will people need a place to store their savings?

00:49.825 --> 00:52.675
They need to be, have, have a, some kind of institutions

00:52.675 --> 00:54.915
that will make, payments for them.

00:55.055 --> 00:57.795
So if you, you know, take your, credit card to the,

00:58.255 --> 01:00.035
to the, store and wanna buy something

01:00.035 --> 01:01.475
that it'll, it'll work.

01:01.935 --> 01:03.515
Uh, they, they all need someplace

01:03.515 --> 01:06.275
where they can borrow money if they need to buy a house,

01:06.295 --> 01:07.995
or businesses wanna build a factory.

01:08.535 --> 01:11.115
Uh, there are many ways in which we need a financial system

01:11.115 --> 01:15.555
that works, but, financial systems can get out of whack.

01:15.855 --> 01:18.715
And, the United States financial system in the,

01:18.775 --> 01:20.995
in its current form, and my book is almost entirely

01:21.525 --> 01:24.435
about the United States, though I think there are other,

01:25.275 --> 01:27.035
countries that have similar problems,

01:27.035 --> 01:28.555
perhaps the United Kingdom as well.

01:29.095 --> 01:33.075
Um, we have a financial system now that's, that's,

01:33.345 --> 01:37.155
dominated by huge, mega banks like Bank of America,

01:37.435 --> 01:38.635
Citicorp, and,

01:38.855 --> 01:43.035
and big asset management companies like Blackstone,

01:43.215 --> 01:45.315
and hedge funds and private equity firms.

01:46.015 --> 01:49.235
And we know that these institutions have created

01:49.745 --> 01:52.955
some big problems for our economy, including, for example,

01:53.335 --> 01:57.315
the great financial crisis of 2007 and 2008.

01:57.615 --> 02:00.035
And that's the hide face of finance.

02:00.655 --> 02:04.235
And so what we need to do is figure out ways to protect

02:04.415 --> 02:06.875
and build up the, the, the Dr.

02:07.075 --> 02:08.715
Jekyll side, the good, the good side of finance,

02:09.135 --> 02:12.035
and keep under some control, the more,

02:12.135 --> 02:13.715
the more destructive aspects of finance.

02:14.025 --> 02:16.355
Well, so I talk about these, these mega banks.

02:16.355 --> 02:19.635
This, this, this financial system that we've had,

02:19.635 --> 02:23.115
in the last 30 years in the us, which I, I actually refer to

02:23.215 --> 02:24.475
as Roaring Banking.

02:25.175 --> 02:27.355
Um, to contrast it with the kind

02:27.355 --> 02:28.435
of banking system we had

02:28.765 --> 02:31.795
after the Second World War, which was more tame,

02:31.795 --> 02:33.675
more regulated, which I,

02:33.985 --> 02:36.275
call other people have called boring banking.

02:36.375 --> 02:40.155
So we had this transition from boring banking in the 1950s

02:40.215 --> 02:42.235
and sixties and seventies to this kind

02:42.235 --> 02:45.435
of Wild West Site type of, banking and finance.

02:45.775 --> 02:46.995
Uh, I called roaring banking.

02:47.655 --> 02:50.475
Um, and the thing about banks in the United States at least,

02:51.015 --> 02:52.275
is that they're not very popular.

02:52.865 --> 02:54.035
Most people,

02:54.225 --> 02:57.195
here do not like these big financial institutions.

02:57.195 --> 02:59.525
And this goes way back to the founding

02:59.525 --> 03:02.365
of our country when there was a lot of skepticism about,

03:02.415 --> 03:04.005
about big banks and so forth.

03:04.505 --> 03:08.265
Um, so, my que the question

03:08.265 --> 03:12.145
that my book poses is how does, how has this banking system,

03:12.295 --> 03:14.145
this financial system, gotten so powerful

03:14.165 --> 03:17.225
and so wealthy, despite being, you know,

03:17.805 --> 03:18.865
pretty unpopular

03:19.125 --> 03:22.745
and despite causing crises, you know, every 10 or 15 years

03:22.745 --> 03:23.825
or so, how does this happen?

03:24.615 --> 03:26.755
And my answer is, well, it's the Bankers Club.

03:27.145 --> 03:30.155
It's the group of allies that they have cultivated and,

03:30.535 --> 03:31.715
and developed to,

03:31.775 --> 03:34.075
to help support them politically and economically.

03:34.895 --> 03:37.675
Um, and, who's in this Banker's Club?

03:37.695 --> 03:39.195
Who are the members of the Banker's Club?

03:39.195 --> 03:40.595
Well, it includes, of course, the banks,

03:40.895 --> 03:42.155
the major banks themselves.

03:42.825 --> 03:46.525
Uh, it includes, the Federal Reserve System,

03:46.625 --> 03:49.405
our central bank, the counterpart to your Bank

03:49.405 --> 03:51.725
of England, which, I call the Federal Reserve

03:51.725 --> 03:53.605
that the chairman of, of the club.

03:54.065 --> 03:56.845
It includes, many lawyers

03:57.025 --> 04:00.765
and regulatory agencies that are captured, by the, the,

04:00.765 --> 04:02.525
the, the financial system.

04:03.105 --> 04:08.085
And it includes even non-financial, CEOs, like,

04:08.105 --> 04:09.365
the head of GE Capital.

04:09.905 --> 04:12.765
And finally, it includes members of my own profession.

04:13.005 --> 04:15.845
A lot of economists, it turns out, are members

04:15.865 --> 04:17.445
of the Bankers Club as well.

04:17.675 --> 04:21.645
This idea of pouring banking, more regulated banks,

04:21.775 --> 04:25.245
banks that didn't get, get, us into so much trouble.

04:25.625 --> 04:27.445
If you look at a graph, and I have that in my book,

04:27.545 --> 04:28.805
and you look at, ups

04:28.805 --> 04:31.805
and downs of financial crises around, around the world,

04:31.965 --> 04:35.405
including the United States from the 19,

04:35.405 --> 04:40.285
early 19 hundreds to, 2010, what you'll see is that,

04:40.465 --> 04:43.605
before the Great Depression and after the Great de and

04:43.735 --> 04:48.025
after the 1980s, we had had lots of financial crises,

04:48.125 --> 04:53.035
but there was a period between 19, 45

04:54.055 --> 04:55.475
and 1980

04:55.695 --> 04:59.035
or so when there were almost no financial crises in the

04:59.035 --> 05:00.995
United States or in other parts of the world.

05:01.255 --> 05:04.715
And the reason I argue, one of the reasons I argue is

05:04.715 --> 05:07.835
because we had a very highly regulated financial system

05:08.145 --> 05:11.875
that made it very difficult for these banks to engage in,

05:12.295 --> 05:17.075
in, high, high risk, speculative activities, that w

05:17.075 --> 05:19.755
that were then allow them to get bailed out by the,

05:19.935 --> 05:21.395
the Central Bank or the Treasury.

05:22.095 --> 05:24.995
Um, they, they were very limited in what they could do.

05:25.495 --> 05:26.635
And this c comes about

05:26.635 --> 05:28.755
because of regulations, for example,

05:29.065 --> 05:31.315
like the Glass Stegel Act in the United States

05:31.545 --> 05:34.595
that separated the more speculative investment banks from,

05:34.935 --> 05:36.555
the commercial banks, the one that,

05:36.705 --> 05:38.555
that do the everyday work of banking.

05:39.095 --> 05:43.155
Um, it limited the amount of, high risk kinds of bets

05:43.155 --> 05:45.835
that banks could take, for example, in terms

05:45.835 --> 05:46.915
of derivatives and,

05:46.915 --> 05:50.395
and other kinds of, of, of, instruments like that.

05:51.015 --> 05:52.515
And it created a lot

05:52.515 --> 05:54.555
of regulations in the securities markets

05:54.985 --> 05:57.565
that created the Securities and Exchange Commission and,

05:57.745 --> 06:01.245
and, and made it difficult for companies,

06:01.265 --> 06:05.445
to borrow money and for, for banks to, float securities,

06:05.585 --> 06:07.925
unless there was a lot of information, a lot

06:07.925 --> 06:10.005
of information about what these things were gonna do.

06:10.545 --> 06:13.085
And, that in fact did create a,

06:13.245 --> 06:16.325
a much more stable financial system, that,

06:16.355 --> 06:19.045
that financed real activities in our economy.

06:19.745 --> 06:21.005
And you can see it in the data,

06:21.195 --> 06:22.765
this lack of financial crises.

06:23.065 --> 06:25.405
And the, so-called Golden Age

06:25.405 --> 06:28.245
of Economic Growth when economic growth in the United States

06:28.265 --> 06:31.325
and Western Europe was much higher than it had been either,

06:32.225 --> 06:35.565
before, during the, during the, 1920s and thirties

06:36.025 --> 06:39.285
and after, you know, since 1980, except

06:39.285 --> 06:41.205
for perhaps the most recent period.

06:41.665 --> 06:45.405
So it was a period of regulated banking,

06:46.135 --> 06:47.405
rapid economic growth,

06:48.065 --> 06:52.455
and a relatively, relatively few crises.

06:52.805 --> 06:55.495
Yeah, I discussed the fight in over the,

06:55.595 --> 06:58.015
the New Deal financial reforms that were put forward

06:58.035 --> 06:59.255
by, Roosevelt.

06:59.995 --> 07:02.535
And, the banks tried to fight it.

07:02.535 --> 07:04.575
There was kind of an early bankers club where they tried

07:04.575 --> 07:06.695
to fight some of these laws like Glass Eagle

07:06.955 --> 07:08.935
or the security laws and so forth.

07:09.635 --> 07:13.135
Um, but, there were mostly unsuccessful. Why?

07:13.135 --> 07:16.785
Well, number one, many of the banks had gone bankrupt.

07:16.895 --> 07:19.425
They weren't bailed out by the Central Bank.

07:19.805 --> 07:23.425
So if, if you're gone, you can't fight, number one.

07:23.645 --> 07:25.785
Number two, a lot

07:25.785 --> 07:28.625
of the indu industrial firms at the time decided, you know,

07:28.725 --> 07:30.425
you bankers kind of screwed us.

07:30.445 --> 07:32.665
You created this, this great depression,

07:32.975 --> 07:33.985
this, this time around.

07:34.285 --> 07:37.545
Uh, we're, we're not gonna fight the regulation.

07:37.545 --> 07:40.305
We're gonna support some of these regulations that the re,

07:40.455 --> 07:43.025
that the, Roosevelt in administration put forward.

07:43.485 --> 07:45.465
So they didn't have strong allies.

07:45.725 --> 07:47.585
And finally, you know,

07:48.075 --> 07:50.945
there was over 20% unemployment people,

07:51.565 --> 07:52.785
had lost their savings.

07:52.785 --> 07:54.905
Their local banks had gone bankrupt and,

07:54.965 --> 07:56.305
and taken their savings with them.

07:56.365 --> 07:59.385
So the banks had almost no popular sympathy as well.

07:59.525 --> 08:00.945
So, and finally,

08:01.005 --> 08:03.185
the banks were somewhat divided among themselves.

08:03.445 --> 08:05.905
So you had a situation which the Bankers Club

08:05.905 --> 08:07.225
couldn't really succeed.

08:07.805 --> 08:11.745
Uh, the bank's ranks had been decimated. They were divided.

08:12.055 --> 08:15.025
They didn't have allies either among the population

08:15.085 --> 08:16.505
or among other kinds of firms.

08:16.965 --> 08:20.505
And so, faced with a committed administration

08:20.535 --> 08:23.425
that really wanted to, to restructure banking,

08:24.055 --> 08:25.705
they weren't able to succeed.

08:25.815 --> 08:26.785
Yeah. So,

08:26.785 --> 08:28.145
that's a, that's a really interesting question.

08:28.175 --> 08:30.505
Well, in the early 19, fifties

08:30.605 --> 08:34.745
and sixties, the big banks were just re regrouping.

08:35.405 --> 08:38.645
Um, and they were starting to get upset

08:38.645 --> 08:41.005
with the restrictions that they had, in terms

08:41.005 --> 08:43.885
of their ability to, underwrite securities

08:44.145 --> 08:46.805
and en engage in more speculative behavior.

08:47.385 --> 08:49.085
So the first thing that they did, the,

08:49.085 --> 08:50.685
the big banks like Citibank and,

08:50.745 --> 08:52.965
and so forth, they started going overseas.

08:52.995 --> 08:57.165
They started setting up, activities in, in Europe,

08:57.345 --> 08:59.125
and, that was one way that they could get

08:59.125 --> 09:00.765
around some of these restrictions.

09:01.445 --> 09:04.585
But then they started to really mobilize

09:05.325 --> 09:07.065
and start to fight against,

09:07.735 --> 09:11.025
against regulations against the, the Glass Eagle Act.

09:11.245 --> 09:14.865
Uh, they, they worked through the judiciary to get,

09:14.915 --> 09:16.065
legal changes so

09:16.065 --> 09:18.545
that they could get loopholes on some of these restrictions.

09:18.695 --> 09:21.065
They hired lawyers, to do that.

09:21.645 --> 09:24.665
Um, and they started finding allies, giving lots

09:24.665 --> 09:27.945
of campaign contributions to legislators

09:28.325 --> 09:29.705
and to their staffs.

09:30.365 --> 09:33.945
Uh, and they started working, on the Federal Reserve

09:34.005 --> 09:35.465
and trying to get the Federal Reserve

09:35.925 --> 09:38.185
to support more financial deregulation.

09:38.295 --> 09:40.745
Through all of these mechanisms, they were able

09:40.745 --> 09:42.585
to build the Bank Bankers Club.

09:43.245 --> 09:46.025
And finally, with the,

09:46.025 --> 09:49.385
bill Clinton administration in the 1990s, they succeeded

09:49.385 --> 09:52.625
with the, with, with the, the key point was getting rid

09:52.625 --> 09:53.865
of, glass Eagle and,

09:53.865 --> 09:56.745
and a number of other related factors, which allowed them

09:56.745 --> 09:58.865
to create these huge,

10:00.275 --> 10:01.855
universal banks.

10:03.205 --> 10:05.905
And, to allow them to get engaged in all

10:05.905 --> 10:08.865
of this activity under one roof, which ultimately led

10:08.865 --> 10:10.265
to the great financial crisis.

10:10.885 --> 10:12.945
We could come back to this issue of universal banks.

10:13.365 --> 10:14.625
Are they necessarily bad?

10:14.705 --> 10:16.105
I know that in Europe and in Canada

10:16.205 --> 10:18.905
and so forth, ger Germany, there are these universal banks.

10:19.445 --> 10:21.865
Um, and so a question is, well, why were they

10:21.865 --> 10:24.065
so dangerous in the US that they'd be not quite

10:24.065 --> 10:25.385
so dangerous in other countries?

10:25.805 --> 10:29.225
And I think the answer is, that in other countries,

10:29.225 --> 10:32.345
they had decades of dealing with these universal banks

10:32.365 --> 10:34.985
of regulating them, of putting,

10:35.645 --> 10:36.665
bumpers on them.

10:36.665 --> 10:40.105
Whereas in the United States, they, they just had,

10:40.325 --> 10:41.545
no experience in doing that.

10:41.845 --> 10:44.825
The key to one, the key to one of the major things

10:44.825 --> 10:47.345
that these universal banks, like, like City Citicorp,

10:47.345 --> 10:50.705
Goldman Sachs, and all of these, big banks did,

10:51.325 --> 10:56.265
was decide to turn normal old style financial products,

10:56.735 --> 10:58.225
into tradable securities.

10:58.445 --> 11:01.745
So, for example, in the United States, mortgages,

11:01.895 --> 11:05.225
when I, when I got bought my house a long time ago, I went

11:05.225 --> 11:06.225
to the local bank.

11:06.345 --> 11:09.385
I took out a mortgage, they serviced my mortgage,

11:09.775 --> 11:10.905
they held my mortgage.

11:10.985 --> 11:13.065
I knew who, who to turn to if I had a problem

11:13.065 --> 11:14.465
with my mortgage, it was my local bank.

11:15.005 --> 11:18.585
But what, what these financial engineers figured out how

11:18.585 --> 11:20.145
to do, JP Morgan

11:20.205 --> 11:24.065
and elsewhere, is how to take these, mortgages,

11:24.775 --> 11:29.625
package them with many, many other mortgages into a security

11:29.695 --> 11:32.905
that could be bought and sold, like a share of stock or,

11:32.925 --> 11:34.945
or a corporate bond or something like that.

11:35.645 --> 11:40.585
Um, and then, what they then discovered how

11:40.585 --> 11:44.825
to do is to package these packages of mortgages,

11:45.015 --> 11:47.785
into other insti, into other securities

11:47.785 --> 11:48.905
that had derivatives on them

11:48.905 --> 11:50.985
and other kinds of bets associated with them.

11:51.605 --> 11:52.745
And, they could sell

11:52.745 --> 11:53.765
These on the open market.

11:53.875 --> 11:55.885
They sold a lot of them to banks in, in Europe

11:55.945 --> 11:58.085
and to US pension funds and elsewhere.

11:58.705 --> 12:01.565
And the problem is, nobody really knew what was

12:01.565 --> 12:03.645
inside these, these securities.

12:03.825 --> 12:07.405
Nobody really understood that a lot of these, mortgages,

12:07.745 --> 12:10.405
were to subprime land, borrowers

12:10.425 --> 12:12.205
who couldn't really, who couldn't really

12:12.205 --> 12:13.325
afford these mortgages.

12:13.785 --> 12:17.445
And so when these, mortgages started,

12:18.215 --> 12:21.085
defaulting the value of the securities went down,

12:21.705 --> 12:24.005
and nobody knew exactly what was in them.

12:24.425 --> 12:26.245
And so there was a panic people,

12:26.245 --> 12:27.365
the institutions sold them,

12:28.145 --> 12:30.925
and, they, the values dropped.

12:31.305 --> 12:33.525
And many of these banks, which had held onto a number

12:33.525 --> 12:35.365
of these mortgages, found

12:35.365 --> 12:37.325
that their balance sheets were evaporating and,

12:37.385 --> 12:40.045
and were threatening to, to go go bankrupt.

12:40.105 --> 12:43.205
So the Roaring Banking System, I did a study

12:43.205 --> 12:44.925
with a former graduate student, Juan Monte,

12:45.545 --> 12:48.045
and we looked at the impact of this kind

12:48.165 --> 12:50.645
of financial system on the core functions, you know,

12:50.645 --> 12:54.085
providing save savings accounts, lending for businesses,

12:54.395 --> 12:57.605
payment mechanisms, liquidity provision

12:57.605 --> 12:58.725
for households, et cetera.

12:59.265 --> 13:03.565
And what we found is that on balance, relative to a,

13:03.605 --> 13:07.205
a well-functioning financial system like boring banking,

13:07.475 --> 13:10.085
that, that this system wa was a net negative

13:10.085 --> 13:12.085
for the US economy, that it,

13:12.085 --> 13:14.365
it extracted more resources that it put in.

13:14.715 --> 13:16.245
Part of the reason,

13:16.265 --> 13:18.445
is the financial crises that it creates.

13:19.235 --> 13:23.445
Part of the reason is the huge rents, the huge,

13:24.335 --> 13:25.605
level of, of wages

13:25.985 --> 13:28.565
and incomes for the top bankers that it generates,

13:28.695 --> 13:32.045
which extracts income from, from the rest of us.

13:32.745 --> 13:34.845
Um, and finally, a big reason is

13:34.845 --> 13:37.445
that it mis allocates resources.

13:37.865 --> 13:40.925
It, it, it draws in too many resources from the rest

13:40.925 --> 13:43.125
of our economy into an industry

13:43.675 --> 13:47.085
that contributes too little in terms of real productivity,

13:47.715 --> 13:52.005
real services, and one that that's, utilizes too many

13:52.005 --> 13:53.805
of these resources for speculative

13:54.025 --> 13:56.045
and other unproductive purposes.

13:56.765 --> 13:59.025
And, there's a whole literature on this called,

13:59.085 --> 14:00.465
too, too much finance.

14:01.245 --> 14:03.545
Uh, and this is put out by economists at the Bank

14:03.545 --> 14:05.145
for International Settlements and IMF

14:05.145 --> 14:07.585
and elsewhere that have shown that,

14:07.925 --> 14:10.585
if you correlate the size of the banking system

14:11.455 --> 14:14.265
with the rate of economic growth, what you find is

14:14.725 --> 14:17.785
for a while is, is the banking system grows relative

14:17.785 --> 14:21.625
to the size of the economy, economic growth goes up, but

14:22.035 --> 14:25.205
after a certain point, if you get grow,

14:25.225 --> 14:28.165
the banking system, economic growth actually declines.

14:28.345 --> 14:32.245
And the major reason, economists think is

14:32.245 --> 14:35.405
because it draws too many skilled workers,

14:35.905 --> 14:38.365
and other capital into this system and away from others.

14:38.785 --> 14:41.685
Uh, when I teach money in banking at the University

14:41.685 --> 14:44.845
of Massachusetts, certainly in the 1990s

14:44.845 --> 14:46.965
and two thousands, most of my students wanted

14:46.965 --> 14:49.885
to go in into banking rather than into, you know,

14:50.045 --> 14:51.405
becoming teachers or scientists

14:51.465 --> 14:52.885
or engineers or something like this.

14:53.265 --> 14:57.955
So, that's part of the problem tech, I think.

14:58.235 --> 15:00.795
I think tech has, really substituted for banking,

15:00.895 --> 15:04.155
but now there's kind of a marriage between finance and tech.

15:04.255 --> 15:06.115
So, and it's, it's another way

15:06.115 --> 15:07.595
of getting into the same thing, right?

15:07.595 --> 15:12.445
So, this, this notion of Federal Reserve independence,

15:12.445 --> 15:14.845
central Bank Independence is a really interesting one.

15:15.425 --> 15:18.885
Um, Milton Freeman, the, the, the laissez-Faire economists

15:18.885 --> 15:22.045
that everybody's heard of once said, well, he,

15:22.305 --> 15:24.765
he doesn't bel support independent central banks,

15:25.115 --> 15:27.765
because when central banks are independent,

15:28.075 --> 15:30.845
they're too much under the control of the commercial banks.

15:32.095 --> 15:35.275
Um, and he has had quite an insight there, I think,

15:35.275 --> 15:39.155
because, there's no such thing as pure independence

15:39.175 --> 15:41.955
of a big, institution like a central bank.

15:42.455 --> 15:45.955
Uh, a central bank, like every other big institution in,

15:46.015 --> 15:49.515
in a, in a capitalist economy is a political institution.

15:50.245 --> 15:54.705
Uh, and, but central banks like to be autonomous.

15:54.705 --> 15:56.865
They don't like the government telling them what to do.

15:57.765 --> 16:01.145
And, so as a result, they have to cultivate

16:01.785 --> 16:06.105
constituencies to protect their autonomy from the

16:06.745 --> 16:08.745
Congress or from the, the executive branch.

16:09.285 --> 16:12.305
And it's a natural constituency for them, are the banks.

16:12.735 --> 16:14.065
They operate through the banks.

16:14.615 --> 16:16.825
They, they speak with the same language.

16:17.095 --> 16:21.345
They regulate the banks so they can easily offer favors

16:21.345 --> 16:24.865
to the banks in exchange for the banks, defending them.

16:25.185 --> 16:26.345
Whenever Congress comes knocking

16:26.405 --> 16:28.425
and say, fed, you're doing the wrong thing.

16:28.425 --> 16:30.825
We want you to do this. All of a sudden, the bankers

16:30.825 --> 16:32.705
and other peoples scre,

16:32.725 --> 16:35.025
but that violates Central Bank independence.

16:35.605 --> 16:39.195
Um, the Nobel Prize, which I talk about in my book,

16:39.255 --> 16:41.035
and economics is an interesting case of this.

16:41.695 --> 16:44.035
Uh, there's, it's really not a formal Nobel Prize.

16:44.055 --> 16:46.035
It wasn't the original, part

16:46.035 --> 16:47.435
of the original Nobel Prizes.

16:47.435 --> 16:51.305
What it was, was the,

16:52.735 --> 16:55.155
the, the Swedish, central Bank

16:55.985 --> 16:58.965
was worried about wa wanting to have more independence.

16:59.465 --> 17:02.445
And so they decided that they were gonna create this prize

17:03.025 --> 17:07.485
in, in economics to try to build up, economists

17:07.485 --> 17:09.325
who would support Central Bank Independence.

17:09.325 --> 17:10.565
There's a great book about this.

17:11.105 --> 17:15.155
So, this has been, a continuing thing now,

17:16.055 --> 17:17.715
but the bankers don't always win.

17:17.975 --> 17:20.155
The Central Bank is a political institution.

17:20.155 --> 17:22.395
It's a, it's a public institution.

17:22.975 --> 17:25.675
And so there's a contest over who's actually gonna control

17:25.675 --> 17:27.195
it and what kind

17:27.195 --> 17:29.955
of policy the central bank is, is going to undertake.

17:30.535 --> 17:33.915
And, so labor unions, workers,

17:34.685 --> 17:38.395
small business people, liberal politicians,

17:38.825 --> 17:41.115
they all have a shot at, at, at trying

17:41.115 --> 17:42.995
to influence the central bank policy.

17:43.615 --> 17:46.355
And under some conditions, central banks end up being,

17:46.735 --> 17:47.755
pretty progressive.

17:47.855 --> 17:49.805
It depends on the, the context and the,

17:49.985 --> 17:53.325
and the power, of these different forces, which again,

17:53.385 --> 17:57.325
is why central bankers who don't want to be influenced

17:57.325 --> 17:58.765
by labor unions and by others,

17:59.235 --> 18:01.805
they build up the constituency of the bankers.

18:01.995 --> 18:05.085
Well, I talk in my book about all these mechanisms,

18:05.705 --> 18:07.685
in the economics profession,

18:08.305 --> 18:12.965
the academic economics profession, which, tends

18:13.025 --> 18:17.205
to support the, the, powers that be, that is the,

18:17.865 --> 18:20.565
the, the powers, the economists that were at the top,

18:20.565 --> 18:24.085
institutions that they all publish in the, the top journals,

18:24.545 --> 18:27.845
the top, institutions create the top editors

18:27.845 --> 18:28.885
for the top journals.

18:29.505 --> 18:32.965
And there's kind of this in, in, in insidious,

18:33.395 --> 18:36.525
loop within academic economics, that tends

18:36.525 --> 18:40.725
to close off new ideas, counter ideas that are critical

18:40.725 --> 18:42.445
of the, of the standard economics.

18:42.865 --> 18:45.405
And this has been particularly true, I think,

18:45.405 --> 18:46.525
of macroeconomics

18:46.525 --> 18:49.885
and financial economics, where, it's very difficult

18:49.945 --> 18:52.765
for critics of the standard model of macro

18:52.945 --> 18:55.285
and finance, which says,

18:55.985 --> 18:58.085
the financial system is basically stable.

18:58.665 --> 19:01.125
Uh, the financial system is basically efficient.

19:01.125 --> 19:03.885
Some of these Nobel Prize winners, like Eugene Fama

19:04.025 --> 19:05.525
and so forth, won the Nobel Prize

19:05.545 --> 19:06.685
for making those arguments.

19:07.265 --> 19:10.445
Um, those kinds of arguments go into the top journals,

19:11.025 --> 19:13.965
and it's very difficult for those of us on the outside of

19:13.965 --> 19:17.165
that, who practice a different kind of macroeconomics

19:17.265 --> 19:18.765
to really get our voices heard.

19:18.985 --> 19:23.085
Now, when there's a financial crisis, as we had in 2007

19:23.185 --> 19:27.005
and 2008, that opens up the window for a while,

19:27.145 --> 19:30.245
and some of these voices, are paid more attention to.

19:30.945 --> 19:34.245
But, when is those crises are kind of forgotten,

19:34.505 --> 19:35.805
the window closes down

19:35.955 --> 19:39.645
because what the standard system does is kind

19:39.885 --> 19:42.885
of integrate one idea, you know, a financial friction

19:42.905 --> 19:45.925
or a little financial problem into the standard model,

19:46.255 --> 19:49.725
which basically still portrays a, a stable system.

19:50.105 --> 19:51.765
So it's really hard to break into it.

19:52.105 --> 19:54.965
Uh, but luckily there are a lot of institutions out there,

19:55.105 --> 19:56.805
in the United States and the United Kingdom

19:56.865 --> 19:59.565
and elsewhere that are, that have economists

19:59.745 --> 20:01.765
who are doing excellent work,

20:01.945 --> 20:04.205
and are trying to break into this system, right?

20:04.205 --> 20:06.765
So my book is partly about how powerful the banks are

20:06.765 --> 20:07.805
and who their allies are,

20:07.825 --> 20:10.885
but a lot of my book is also about people who are trying

20:10.885 --> 20:12.245
to reform their financial system.

20:12.255 --> 20:13.965
Again, this is focused on the United States,

20:14.265 --> 20:16.285
but you have them in UK and Europe

20:16.345 --> 20:18.885
and elsewhere, I might call them the club busters.

20:18.905 --> 20:23.085
And so there are institutions, of, of activists and,

20:23.085 --> 20:25.645
and specialists who work on finance, for example,

20:26.025 --> 20:27.805
in the United States, we have better markets

20:28.425 --> 20:30.165
and the Americans for Financial Reform

20:30.265 --> 20:32.005
and other institutions,

20:32.225 --> 20:35.245
and they, they are not only watchdogs, they don't only,

20:35.245 --> 20:37.685
they don't only pay attention to what the bankers

20:37.685 --> 20:38.965
and the politicians are doing,

20:39.305 --> 20:42.845
but they promote, alternatives and, and new laws

20:42.905 --> 20:44.045
and, and new regulations.

20:44.425 --> 20:46.365
And then we have, academics

20:46.425 --> 20:48.045
and in, in,

20:48.045 --> 20:50.405
institutions like my own at the University of Massachusetts.

20:50.545 --> 20:52.405
So you have, in the United Kingdom,

20:52.545 --> 20:54.925
you have Greenwich at the University of Greenwich,

20:54.925 --> 20:56.405
and you have Leeds University

20:56.405 --> 20:58.365
and many others where there are people

20:58.365 --> 21:00.605
who are doing this alternative economics.

21:00.605 --> 21:03.885
So we, in, in the academy, we have club busters as well.

21:04.465 --> 21:06.285
Um, there are legal scholars and,

21:06.905 --> 21:09.325
and who really try to show what's wrong

21:09.325 --> 21:11.365
with the legal framework of, of finance

21:11.505 --> 21:14.005
and try to talk about how we can change the laws

21:14.425 --> 21:17.245
to make the finance work better for the rest of us.

21:18.025 --> 21:20.765
And, so we have these club busters,

21:20.905 --> 21:23.325
and they operate in, in many different ways in terms

21:23.565 --> 21:27.565
of regulations, changes in laws, education, policy

21:28.165 --> 21:30.605
proposals, that are trying to make a difference.

21:30.745 --> 21:32.325
Before I do that, if you don't mind, I'd like

21:32.325 --> 21:34.125
to talk about one that's really on the table right now,

21:34.125 --> 21:35.605
which is the, the question of,

21:36.185 --> 21:38.005
of capital requirements for banks.

21:38.885 --> 21:42.985
Um, yes, in Basil in Switzerland, there's, there's this,

21:43.425 --> 21:44.425
a group that, that's trying

21:44.425 --> 21:46.585
to coordinate capital requirements for banks.

21:46.855 --> 21:50.425
That is, how much of the banker's,

21:50.425 --> 21:53.945
investors' own funds are at risk when the banks

21:54.135 --> 21:55.625
undertake these activities.

21:56.125 --> 21:58.985
And the banks wanna keep this, the capital funds

21:58.985 --> 22:01.505
that they have to raise on the, on the market as to

22:01.785 --> 22:03.265
as low a level as possible.

22:04.005 --> 22:07.345
Why? Because instead of using their own funds,

22:07.655 --> 22:09.385
when when the bank gets into trouble,

22:09.805 --> 22:12.865
they'd rather use the taxpayer's funds and get bailed out.

22:13.445 --> 22:14.825
So our banks in the United States,

22:14.825 --> 22:16.665
and I don't know if this is true in the United Kingdom, is

22:16.765 --> 22:18.865
so much, they're, they're used to the Federal Reserve

22:18.865 --> 22:21.225
and the Treasury, treasury Department come in

22:21.245 --> 22:25.025
and bail them out, for free, instead of having

22:25.025 --> 22:26.185
to raise their own capital.

22:26.645 --> 22:29.105
Uh, that would be, the first to go if,

22:29.105 --> 22:30.105
if they got into trouble.

22:30.365 --> 22:33.465
And so the Bankers Club is really organizing

22:33.525 --> 22:36.145
around these capital requirements, trying to, to,

22:36.405 --> 22:39.465
to lower them, to a, a dangerous level.

22:39.765 --> 22:42.865
And so that's an example of something where the ba,

22:43.125 --> 22:45.745
the Club Busters really fighting to get these ba,

22:45.745 --> 22:47.945
these capital departments up to a reasonable level.

22:48.445 --> 22:49.545
So it's, it's the banks

22:49.545 --> 22:51.465
that are on the hook rather than the taxpayer.

22:51.775 --> 22:56.745
Private equity in the United States is, is, a, a,

22:56.825 --> 22:59.385
a kind of financial institution that buys out firms

23:00.325 --> 23:02.065
and typically loads the,

23:02.365 --> 23:05.545
not just firms in the United States is often now in the

23:05.545 --> 23:07.665
healthcare industry, nursing homes,

23:08.305 --> 23:09.705
hospitals, doctor's offices.

23:10.215 --> 23:11.425
They buy these things out.

23:11.855 --> 23:15.425
They load them up with high levels of debt in order

23:15.425 --> 23:17.745
to finance their, their own incomes.

23:18.245 --> 23:21.025
Um, and then that puts them under enormous stress

23:21.445 --> 23:26.265
to cut services, to, speed up, their work,

23:26.265 --> 23:27.385
which, you know, nurses

23:27.445 --> 23:29.625
and doctors can't really do without harming patients.

23:30.005 --> 23:32.145
Uh, so this needs to be brought under control.

23:32.215 --> 23:35.425
This, this, this kind of private equity pillage of,

23:35.525 --> 23:39.465
of our economy has to be limited, and, and restricted.

23:39.685 --> 23:42.625
So that's an example. And finally, with Green Investments,

23:43.125 --> 23:46.245
our, our, our financial system has

23:46.245 --> 23:49.045
to start really giving more incentive to finance so

23:49.045 --> 23:53.245
that financial institutions pony up more, to help,

23:53.245 --> 23:55.725
us make the green transition that we need to make to save,

23:56.225 --> 23:58.485
to save, our, our planet, our futures.

23:58.545 --> 24:03.365
So by public banking, what I mean is, banks who,

24:03.545 --> 24:07.685
for whose major goal is not profit maximization, it's,

24:07.685 --> 24:09.805
they have some social missions, so for example,

24:10.035 --> 24:13.245
community development, affordable housing,

24:13.415 --> 24:15.405
green investments and, and so forth.

24:16.145 --> 24:20.805
And, they, are able to raise capital,

24:21.075 --> 24:24.085
some from the government and some from philanthropy

24:24.665 --> 24:28.325
and, from private investors who ha who agree

24:28.325 --> 24:29.325
with their special mission.

24:29.985 --> 24:33.645
And they can on lend these to directly to clients who are,

24:33.745 --> 24:35.165
who are investing in green energy

24:35.165 --> 24:36.245
or building affordable housing,

24:36.585 --> 24:40.005
or they can on lend these, to institutions,

24:40.685 --> 24:43.085
small community banks and other kinds of,

24:43.085 --> 24:44.605
specialized institutions that,

24:44.605 --> 24:46.325
that specialize in this kind of lending.

24:46.745 --> 24:48.485
But they can do it at a lower cost

24:48.675 --> 24:50.565
because they don't have to pay high returns

24:50.625 --> 24:52.125
to, to their stockholders.

24:52.745 --> 24:56.445
Um, they often get patient capital from people who,

24:56.445 --> 24:58.565
either the government or others who believe in the mission.

24:58.625 --> 25:02.285
So they get patient capital, they earn a, a reasonable rate

25:02.285 --> 25:04.205
of return, but not an excessive rate of return.

25:04.865 --> 25:07.845
Um, Thomas MOIs, who is an economist in,

25:08.065 --> 25:10.085
in the UK someplace, I'm not sure where he is,

25:10.265 --> 25:13.365
has written a book talking about public banking all over the

25:13.365 --> 25:16.405
world and how, effective this is for certain kinds

25:16.405 --> 25:18.445
of purposes, like community development,

25:18.445 --> 25:20.205
green investment, et cetera.

25:20.545 --> 25:23.005
So, we need more of that in the United States.

25:23.345 --> 25:26.645
And there's a very active movement around the country trying

25:26.645 --> 25:29.405
to promote public bankings in many different states.

25:29.755 --> 25:31.765
It's been most successful in California,

25:31.905 --> 25:34.845
but there are are movements in many other states as well.

25:35.275 --> 25:38.085
Well, my book ends with the, the following conundrum.

25:38.205 --> 25:40.395
I say, look, I spend a half

25:40.395 --> 25:42.115
or two thirds of the book talking about how

25:42.715 --> 25:44.315
powerful the banks are,

25:44.315 --> 25:46.955
and then I spend a third of the book talking about reforms

25:46.975 --> 25:48.075
and banks with,

25:48.565 --> 25:50.515
banks without bankers and this kind of thing.

25:51.175 --> 25:53.515
And, the contradiction of course is

25:53.515 --> 25:55.915
that if the banks are as powerful as I say they are,

25:56.215 --> 25:58.795
how are we ever gonna get these kinds of reforms through?

25:59.335 --> 26:02.995
And the, the point I try to make in my last chapter is,

26:03.505 --> 26:04.795
that yes, we need

26:04.795 --> 26:07.875
to reform our general political system in the United States,

26:07.875 --> 26:10.515
especially where money plays such a huge role

26:10.775 --> 26:11.835
in, in our politics.

26:11.835 --> 26:13.395
I dunno if it's, that's the same thing in the

26:13.395 --> 26:14.835
United Kingdom, but it, it's,

26:14.985 --> 26:17.355
it's really excessive in the us So we do

26:17.355 --> 26:18.395
need these big reforms.

26:18.695 --> 26:22.875
But, with all these club club busters around, you know,

26:22.875 --> 26:24.555
the, the, the institutions

26:24.735 --> 26:27.035
and the individuals who are trying to create public banking,

26:27.535 --> 26:28.595
better markets

26:28.695 --> 26:30.955
and Americans for financial reform trying to regulate,

26:31.445 --> 26:34.355
there are many places where people can get involved.

26:34.915 --> 26:36.955
I use the example of, you know, Archimedes.

26:37.195 --> 26:40.755
Archimedes said, you know, if you give me a a place to stand

26:40.755 --> 26:42.235
and you give me a fulcrum

26:42.235 --> 26:43.925
and a lever, I, I can move the world.

26:44.265 --> 26:47.005
And what I say is, we need many levers, many places

26:47.185 --> 26:50.365
to stand, just do something, get involved,

26:50.435 --> 26:51.605
join the club busters.

26:51.825 --> 26:54.085
And some of them are bound to work, some

26:54.085 --> 26:55.685
of them are bound to move us forward.

26:56.385 --> 26:59.245
And that is the way that we can accumulate, change

26:59.865 --> 27:03.125
and get momentum and perhaps really change the sys the

27:03.125 --> 27:03.365
system.

Jekyll and Hyde: A Financial Analogy

00:00:00 - Well, I'm drawing on the famous Robert Lewis Stevenson, short story book about, Dr. Jekyll and upstanding member of the community. And, this, this murderous sundal named Mr. Hyde. And, there was a friend of Dr. Jekyll's who was trying to figure out, you know, who, who is this Mr. Hyde? And he investigates. And finally, he figures out that Dr. Jekyll and Mr. Hyde are the same person. They're these two opposites, good
00:00:33 - And in a certain sense, our financial system, has a, jekyll and high, high quality to it. On the one hand, all capitalist economies, in fact, all economies need a, a well-functioning financial system. Why will people need a place to store their savings? They need to be, have, have a, some kind of institutions that will make, payments for them. So if you, you know, take your, credit card to the, to the, store and wanna buy something that it'll, it'll work.
00:01:03 - where they can borrow money if they need to buy a house, or businesses wanna build a factory. there are many ways in which we need a financial system that works, but, financial systems can get out of whack. And, the United States financial system in the, in its current form, and my book is almost entirely about the United States, though I think there are other, countries that have similar problems, perhaps the United Kingdom as well. we have a financial system now that's, that's,
00:01:37 - Citicorp, and, and big asset management companies like Blackstone, and hedge funds and private equity firms. And we know that these institutions have created some big problems for our economy, including, for example, the great financial crisis of 2007 and 2008. And that's the hide face of finance. And so what we need to do is figure out ways to protect
00:02:07 - Jekyll side, the good, the good side of finance, and keep under some control, the more, the more destructive aspects of finance. Well, so I talk about these, these mega banks. This, this, this financial system that we've had, in the last 30 years in the us, which I, I actually refer to as Roaring Banking. to contrast it with the kind of banking system we had after the Second World War, which was more tame, more regulated, which I, call other people have called boring banking.
00:02:40 - and sixties and seventies to this kind of Wild West Site type of, banking and finance. I called roaring banking. and the thing about banks in the United States at least, is that they're not very popular. Most people, here do not like these big financial institutions. And this goes way back to the founding of our country when there was a lot of skepticism about, about big banks and so forth. so, my que the question

The Power Dynamics of the Bankers Club

00:03:12 - this financial system, gotten so powerful and so wealthy, despite being, you know, pretty unpopular and despite causing crises, you know, every 10 or 15 years or so, how does this happen? And my answer is, well, it's the Bankers Club. It's the group of allies that they have cultivated and, and developed to, to help support them politically and economically. and, who's in this Banker's Club? Who are the members of the Banker's Club?
00:03:40 - the major banks themselves. it includes, the Federal Reserve System, our central bank, the counterpart to your Bank of England, which, I call the Federal Reserve that the chairman of, of the club. It includes, many lawyers and regulatory agencies that are captured, by the, the, the, the financial system. And it includes even non-financial, CEOs, like, the head of GE Capital.
00:04:13 - A lot of economists, it turns out, are members of the Bankers Club as well. This idea of pouring banking, more regulated banks, banks that didn't get, get, us into so much trouble. If you look at a graph, and I have that in my book, and you look at, ups and downs of financial crises around, around the world, including the United States from the 19, early 19 hundreds to, 2010, what you'll see is that,
00:04:43 - after the 1980s, we had had lots of financial crises, but there was a period between 19, 45 and 1980 or so when there were almost no financial crises in the United States or in other parts of the world. And the reason I argue, one of the reasons I argue is because we had a very highly regulated financial system that made it very difficult for these banks to engage in,
00:05:17 - that were then allow them to get bailed out by the, the Central Bank or the Treasury. they, they were very limited in what they could do. And this c comes about because of regulations, for example, like the Glass Stegel Act in the United States that separated the more speculative investment banks from, the commercial banks, the one that, that do the everyday work of banking. it limited the amount of, high risk kinds of bets
00:05:45 - of derivatives and, and other kinds of, of, of, instruments like that. And it created a lot of regulations in the securities markets that created the Securities and Exchange Commission and, and, and made it difficult for companies, to borrow money and for, for banks to, float securities, unless there was a lot of information, a lot of information about what these things were gonna do. And, that in fact did create a,

Regulated Banking and Economic Growth Insights

00:06:16 - that financed real activities in our economy. And you can see it in the data, this lack of financial crises. And the, so-called Golden Age of Economic Growth when economic growth in the United States and Western Europe was much higher than it had been either, before, during the, during the, 1920s and thirties and after, you know, since 1980, except for perhaps the most recent period. So it was a period of regulated banking,
00:06:48 - and a relatively, relatively few crises. Yeah, I discussed the fight in over the, the New Deal financial reforms that were put forward by, Roosevelt. And, the banks tried to fight it. There was kind of an early bankers club where they tried to fight some of these laws like Glass Eagle or the security laws and so forth. but, there were mostly unsuccessful. Why? Well, number one, many of the banks had gone bankrupt.
00:07:19 - So if, if you're gone, you can't fight, number one. Number two, a lot of the indu industrial firms at the time decided, you know, you bankers kind of screwed us. You created this, this great depression, this, this time around. we're, we're not gonna fight the regulation. We're gonna support some of these regulations that the re, that the, Roosevelt in administration put forward. So they didn't have strong allies. And finally, you know,
00:07:51 - had lost their savings. Their local banks had gone bankrupt and, and taken their savings with them. So the banks had almost no popular sympathy as well. So, and finally, the banks were somewhat divided among themselves. So you had a situation which the Bankers Club couldn't really succeed. the bank's ranks had been decimated. They were divided. They didn't have allies either among the population or among other kinds of firms. And so, faced with a committed administration
00:08:24 - they weren't able to succeed. Yeah. So, that's a, that's a really interesting question. Well, in the early 19, fifties and sixties, the big banks were just re regrouping. and they were starting to get upset with the restrictions that they had, in terms of their ability to, underwrite securities and en engage in more speculative behavior. So the first thing that they did, the, the big banks like Citibank and,
00:08:52 - They started setting up, activities in, in Europe, and, that was one way that they could get around some of these restrictions. But then they started to really mobilize and start to fight against, against regulations against the, the Glass Eagle Act. they, they worked through the judiciary to get, legal changes so that they could get loopholes on some of these restrictions. They hired lawyers, to do that.

The Rise of Universal Banks and Financial Crises

00:09:24 - of campaign contributions to legislators and to their staffs. and they started working, on the Federal Reserve and trying to get the Federal Reserve to support more financial deregulation. Through all of these mechanisms, they were able to build the Bank Bankers Club. And finally, with the, bill Clinton administration in the 1990s, they succeeded with the, with, with the, the key point was getting rid
00:09:53 - and a number of other related factors, which allowed them to create these huge, universal banks. And, to allow them to get engaged in all of this activity under one roof, which ultimately led to the great financial crisis. We could come back to this issue of universal banks. Are they necessarily bad? I know that in Europe and in Canada and so forth, ger Germany, there are these universal banks. and so a question is, well, why were they so dangerous in the US that they'd be not quite
00:10:25 - And I think the answer is, that in other countries, they had decades of dealing with these universal banks of regulating them, of putting, bumpers on them. Whereas in the United States, they, they just had, no experience in doing that. The key to one, the key to one of the major things that these universal banks, like, like City Citicorp, Goldman Sachs, and all of these, big banks did, was decide to turn normal old style financial products,
00:10:58 - So, for example, in the United States, mortgages, when I, when I got bought my house a long time ago, I went to the local bank. I took out a mortgage, they serviced my mortgage, they held my mortgage. I knew who, who to turn to if I had a problem with my mortgage, it was my local bank. But what, what these financial engineers figured out how to do, JP Morgan and elsewhere, is how to take these, mortgages, package them with many, many other mortgages into a security
00:11:32 - or a corporate bond or something like that. and then, what they then discovered how to do is to package these packages of mortgages, into other insti, into other securities that had derivatives on them and other kinds of bets associated with them. And, they could sell These on the open market. They sold a lot of them to banks in, in Europe and to US pension funds and elsewhere. And the problem is, nobody really knew what was
00:12:03 - Nobody really understood that a lot of these, mortgages, were to subprime land, borrowers who couldn't really, who couldn't really afford these mortgages. And so when these, mortgages started, defaulting the value of the securities went down, and nobody knew exactly what was in them. And so there was a panic people, the institutions sold them, and, they, the values dropped. And many of these banks, which had held onto a number

Critique of the Roaring Banking System

00:12:35 - that their balance sheets were evaporating and, and were threatening to, to go go bankrupt. So the Roaring Banking System, I did a study with a former graduate student, Juan Monte, and we looked at the impact of this kind of financial system on the core functions, you know, providing save savings accounts, lending for businesses, payment mechanisms, liquidity provision for households, et cetera. And what we found is that on balance, relative to a,
00:13:07 - that, that this system wa was a net negative for the US economy, that it, it extracted more resources that it put in. Part of the reason, is the financial crises that it creates. Part of the reason is the huge rents, the huge, level of, of wages and incomes for the top bankers that it generates, which extracts income from, from the rest of us. and finally, a big reason is
00:13:37 - It, it, it draws in too many resources from the rest of our economy into an industry that contributes too little in terms of real productivity, real services, and one that that's, utilizes too many of these resources for speculative and other unproductive purposes. And, there's a whole literature on this called, too, too much finance. and this is put out by economists at the Bank for International Settlements and IMF
00:14:07 - if you correlate the size of the banking system with the rate of economic growth, what you find is for a while is, is the banking system grows relative to the size of the economy, economic growth goes up, but after a certain point, if you get grow, the banking system, economic growth actually declines. And the major reason, economists think is because it draws too many skilled workers,
00:14:38 - when I teach money in banking at the University of Massachusetts, certainly in the 1990s and two thousands, most of my students wanted to go in into banking rather than into, you know, becoming teachers or scientists or engineers or something like this. So, that's part of the problem tech, I think. I think tech has, really substituted for banking, but now there's kind of a marriage between finance and tech. So, and it's, it's another way
00:15:07 - So, this, this notion of Federal Reserve independence, central Bank Independence is a really interesting one. Milton Freeman, the, the, the laissez-Faire economists that everybody's heard of once said, well, he, he doesn't bel support independent central banks, because when central banks are independent, they're too much under the control of the commercial banks. and he has had quite an insight there, I think, because, there's no such thing as pure independence

Central Banks: Power, Politics, and Independence

00:15:42 - a central bank, like every other big institution in, in a, in a capitalist economy is a political institution. and, but central banks like to be autonomous. They don't like the government telling them what to do. And, so as a result, they have to cultivate constituencies to protect their autonomy from the Congress or from the, the executive branch.
00:16:12 - They operate through the banks. They, they speak with the same language. They regulate the banks so they can easily offer favors to the banks in exchange for the banks, defending them. Whenever Congress comes knocking and say, fed, you're doing the wrong thing. We want you to do this. All of a sudden, the bankers and other peoples scre, but that violates Central Bank independence. the Nobel Prize, which I talk about in my book, and economics is an interesting case of this.
00:16:44 - It wasn't the original, part of the original Nobel Prizes. What it was, was the, the, the Swedish, central Bank was worried about wa wanting to have more independence. And so they decided that they were gonna create this prize in, in economics to try to build up, economists who would support Central Bank Independence. There's a great book about this. So, this has been, a continuing thing now,
00:17:17 - The Central Bank is a political institution. It's a, it's a public institution. And so there's a contest over who's actually gonna control it and what kind of policy the central bank is, is going to undertake. And, so labor unions, workers, small business people, liberal politicians, they all have a shot at, at, at trying to influence the central bank policy. And under some conditions, central banks end up being,
00:17:47 - It depends on the, the context and the, and the power, of these different forces, which again, is why central bankers who don't want to be influenced by labor unions and by others, they build up the constituency of the bankers. Well, I talk in my book about all these mechanisms, in the economics profession, the academic economics profession, which, tends to support the, the, powers that be, that is the,
00:18:20 - institutions that they all publish in the, the top journals, the top, institutions create the top editors for the top journals. And there's kind of this in, in, in insidious, loop within academic economics, that tends to close off new ideas, counter ideas that are critical of the, of the standard economics. And this has been particularly true, I think, of macroeconomics and financial economics, where, it's very difficult

Reforming Financial Systems: The Club Busters

00:18:52 - and finance, which says, the financial system is basically stable. the financial system is basically efficient. Some of these Nobel Prize winners, like Eugene Fama and so forth, won the Nobel Prize for making those arguments. those kinds of arguments go into the top journals, and it's very difficult for those of us on the outside of that, who practice a different kind of macroeconomics to really get our voices heard. Now, when there's a financial crisis, as we had in 2007
00:19:27 - and some of these voices, are paid more attention to. But, when is those crises are kind of forgotten, the window closes down because what the standard system does is kind of integrate one idea, you know, a financial friction or a little financial problem into the standard model, which basically still portrays a, a stable system. So it's really hard to break into it. but luckily there are a lot of institutions out there,
00:19:56 - and elsewhere that are, that have economists who are doing excellent work, and are trying to break into this system, right? So my book is partly about how powerful the banks are and who their allies are, but a lot of my book is also about people who are trying to reform their financial system. Again, this is focused on the United States, but you have them in UK and Europe and elsewhere, I might call them the club busters. And so there are institutions, of, of activists and, and specialists who work on finance, for example,
00:20:28 - and the Americans for Financial Reform and other institutions, and they, they are not only watchdogs, they don't only, they don't only pay attention to what the bankers and the politicians are doing, but they promote, alternatives and, and new laws and, and new regulations. And then we have, academics and in, in, institutions like my own at the University of Massachusetts. So you have, in the United Kingdom, you have Greenwich at the University of Greenwich, and you have Leeds University
00:20:58 - who are doing this alternative economics. So we, in, in the academy, we have club busters as well. there are legal scholars and, and who really try to show what's wrong with the legal framework of, of finance and try to talk about how we can change the laws to make the finance work better for the rest of us. And, so we have these club busters, and they operate in, in many different ways in terms of regulations, changes in laws, education, policy
00:21:30 - Before I do that, if you don't mind, I'd like to talk about one that's really on the table right now, which is the, the question of, of capital requirements for banks. yes, in Basil in Switzerland, there's, there's this, a group that, that's trying to coordinate capital requirements for banks. That is, how much of the banker's, investors' own funds are at risk when the banks undertake these activities. And the banks wanna keep this, the capital funds

Bailing Out Banks: A Costly Reality

00:22:01 - as low a level as possible. Why? Because instead of using their own funds, when when the bank gets into trouble, they'd rather use the taxpayer's funds and get bailed out. So our banks in the United States, and I don't know if this is true in the United Kingdom, is so much, they're, they're used to the Federal Reserve and the Treasury, treasury Department come in and bail them out, for free, instead of having to raise their own capital. that would be, the first to go if,
00:22:30 - And so the Bankers Club is really organizing around these capital requirements, trying to, to, to lower them, to a, a dangerous level. And so that's an example of something where the ba, the Club Busters really fighting to get these ba, these capital departments up to a reasonable level. So it's, it's the banks that are on the hook rather than the taxpayer. Private equity in the United States is, is, a, a, a kind of financial institution that buys out firms
00:23:02 - not just firms in the United States is often now in the healthcare industry, nursing homes, hospitals, doctor's offices. They buy these things out. They load them up with high levels of debt in order to finance their, their own incomes. and then that puts them under enormous stress to cut services, to, speed up, their work, which, you know, nurses and doctors can't really do without harming patients. so this needs to be brought under control.
00:23:35 - of our economy has to be limited, and, and restricted. So that's an example. And finally, with Green Investments, our, our, our financial system has to start really giving more incentive to finance so that financial institutions pony up more, to help, us make the green transition that we need to make to save, to save, our, our planet, our futures. So by public banking, what I mean is, banks who,
00:24:07 - they have some social missions, so for example, community development, affordable housing, green investments and, and so forth. And, they, are able to raise capital, some from the government and some from philanthropy and, from private investors who ha who agree with their special mission. And they can on lend these to directly to clients who are,
00:24:35 - or building affordable housing, or they can on lend these, to institutions, small community banks and other kinds of, specialized institutions that, that specialize in this kind of lending. But they can do it at a lower cost because they don't have to pay high returns to, to their stockholders. they often get patient capital from people who, either the government or others who believe in the mission. So they get patient capital, they earn a, a reasonable rate of return, but not an excessive rate of return.

Revitalizing Banking Through Public Initiatives

00:25:08 - in the UK someplace, I'm not sure where he is, has written a book talking about public banking all over the world and how, effective this is for certain kinds of purposes, like community development, green investment, et cetera. So, we need more of that in the United States. And there's a very active movement around the country trying to promote public bankings in many different states. It's been most successful in California, but there are are movements in many other states as well.
00:25:38 - I say, look, I spend a half or two thirds of the book talking about how powerful the banks are, and then I spend a third of the book talking about reforms and banks with, banks without bankers and this kind of thing. And, the contradiction of course is that if the banks are as powerful as I say they are, how are we ever gonna get these kinds of reforms through? And the, the point I try to make in my last chapter is, that yes, we need to reform our general political system in the United States,
00:26:10 - in, in our politics. I dunno if it's, that's the same thing in the United Kingdom, but it, it's, it's really excessive in the us So we do need these big reforms. But, with all these club club busters around, you know, the, the, the institutions and the individuals who are trying to create public banking, better markets and Americans for financial reform trying to regulate, there are many places where people can get involved. I use the example of, you know, Archimedes. Archimedes said, you know, if you give me a a place to stand
00:27:03 - and a lever, I, I can move the world. And what I say is, we need many levers, many places to stand, just do something, get involved, join the club busters. And some of them are bound to work, some of them are bound to move us forward. And that is the way that we can accumulate, change and get momentum and perhaps really change the sys the system.

Faculti AI can make mistakes

Faculti

Popular in Economics

Macroeconomic modelling of CBDC: a critical review

Financing Private Credit

Failing Banks

Golden Fetters

Visions of Inequality

School Finance Equalization Increases Intergenerational Mobility

Olivier Blanchard on U.S. Pandemic-Era Inflation

Busting the Bankers Club

Next in Books

Guide

Platform and Category Pages

Contact Us

FAQs

What is Faculti?

How do you select interviews?

Interview Process

Page Structure

Popular in Economics

Guide

Platform and Category Pages

Contact Us

FAQs

What is Faculti?

How do you select interviews?

Interview Process

Accessibility Options

Contrast Adjustment

Text Size Adjustment

Text Spacing Adjustment

Line Height Adjustment

Cursor Size Adjustment

Page Structure Options

Page Structure