Please note that the YouTube videos I embedded in previous installments have been removed, so you’ll have to watch the episodes at the PBS website.
Okay, this final episode continues with the theme that more government is the answer. We need even more bloated regulatory agencies to protect the economy from the banks. This is the basic theme throughout this episode, even though much of what the show focuses on here illustrates the problem with this kind of thinking, which is basically that this kind of talk of “reform” is really just nibbling at the edges when what is really needed is a complete overhaul of our entire monetary and economic system.
This episode really gets lost in the minutiae, focusing a lot on the role of young traders who became seduced by the corporate culture of greed on Wall Street. The incentive of promotions and bonuses led people to search out loopholes in existing regulations.
It talks about how the repeal of part of Glass-Steagal was part of the problem, because now commercial banks could merge with investment banks. The show doesn’t really explain exactly how so, but presumably the argument is that now banks “insured” by the FDIC — which was created with the Glass-Steagal Act (you always read about the “repeal of Glass-Steagal” as though the entire piece of legislation was repealed, which isn’t so) — were getting into trouble with securities. The show returns to this again towards the end.
The program next talks about how the banks sought out clients who didn’t understand derivatives and shouldn’t have been investing in them. Here, it offers an example of why the argument that we need more government to solve the problem is a fallacy, though the program’s makers don’t seem to be cognizant of this. The example is how Bear Stearns (later bought up by JPMorgan) offered lower borrowing costs to a county government if it entered into derivatives. But then it went sour and the county’s borrowing costs soared. Other local governments also engaged in swaps and were in over their heads when the crisis hit. The show gives an example of how JPMorgan bribed Bill Blunt to influence the local government to go into an interest rate swap agreement with the bank. According to the program, swaps like this, in which governments literally gambled with taxpayers’ money, have cost taxpayers $20 billion.
The show continues with more and bigger examples, like how swaps and derivatives were used by European countries to cook their books, such as Greece, which bought giant swaps from Goldman Sachs and went on a spending spree borrowing with easy credit, until the debt ballooned and spending was cut and the people went out into the streets to protest the spending cuts. Ireland, Portugal, Italy, Spain followed down similar paths.
The show notes how this instability in Europe in turn threatens the U.S. economy, and how since 2007, the five biggest banks in the U.S. have become even larger (an example being, again, JPMorgan buying up Bear Stearns after the latter went belly up). The show then turns its attention to the Occupy Wall Street movement. What were people protesting, exactly? The protesters didn’t understand the system (nobody did, we are told, not even the banks), but they knew it wasn’t working for them.
The above examples of government involvement in swaps beg the question of how more government is supposed solve the problem, of how the government is supposed to “regulate” these kinds of activities when government is participating in them. But that is a question that doesn’t seem to have even crossed the minds of the show’s producers, who once again return to the theme that more “regulation” is what is needed, even while acknowledging that regulation is pretty much useless because banks hire expensive lawyers who will always be able to “outwit” regulators.
The show takes you a bit inside an FDIC meeting to discuss “too big to fail” banks, and how former Fed chairman Paul Volker proposed the “Volker rule” which would basically reinstitute the repealed section of Glass-Steagal that separated commercial from investment banking, which was in practice not enforced anyways, since the regulatory agency that enforced the legislation was the Federal Reserve itself, and the Fed interpreted it however it pleased.
The show places a lot of blame on this ability to merge commercial with investment banking, suggesting that this is what caused the crisis, or at least that this contributed greatly to it, but doesn’t get into the details of how exactly so. Banks like Lehman Brothers that were investment banks only were hit hardest during the crisis, while banks like JPMorgan that had both investment and commercial (Chase) banking sides fared much better, but the show doesn’t address this inconsistency in the argument. It focuses on the Frank-Dodd legislation and the “Volker rule” and how it ended up being full of loopholes after armies of lobbyists descended on Capital Hill.
Going back to the suggestion that the solution is to reinstate those prohibitions of Glass-Steagal, again, it was this same piece of legislation that created the FDIC, thus “punishing” the banks that caused the crash of ’29 (the show interviews a guy who offers a narrative for the cause of the Great Depression pinning the blame on unregulated banking) by promising to bail them out if they got into trouble again with excessively risky behaviors.
The idea that all of Glass-Steagal should be repealed and the FDIC abolished, that government should just not incentivize excessive risktaking by promising to bail out any “too big to fail” banks that engage in excessive risk with taxpayer money in the first place.
I comment more on the bigger picture in this regard in my recent post “Paul Krugman, a Wolf in Sheep’s Clothing, a Shill for the Banks“, so won’t repeat myself here.