Elizabeth Warren wants a banking system that works for everyone

This is an opinion piece by Sheila Bair, former Chair of the FDIC.

Elizabeth Warren has announced an exploratory committee to seek the Democratic nomination for the presidency with a finely honed platform based on economic opportunity for the middle class.

She has a unifying message, extolling working families of all colors and origins to work together in their common economic interest. Her “big tent” rhetoric could pose a threat to President Donald Trump, who has built a political base by tapping into that same economic disaffection, but with a message that resonates primarily with voters who share his gender and race. With that misguided strategy, he has alienated working mothers, families of color, immigrant workers, and others who have been just as disadvantaged by the current system as high-school educated white males. Warren aims to bring them together in a potentially potent political coalition.

Warren’s critics on the right sniff that working class males will never support a socialist. But she is not a socialist. She is a Teddy Roosevelt-quoting, Oklahoman who believes in capitalism and markets. What she does want to change are government policies that have perverted our market-based system to benefit the wealthy and powerful. She is determined to make capitalism work again for everyone, as it did through the post-WWII era. Far from wanting to nationalize the system, she recognizes that government has been part of the problem by handing out benefits and favors to the privileged few.

A simpler, smaller, and more accountable financial system

The 2008/2009 big bank bailouts remain a symbol of the rigged system many believe our government has become. Perhaps one of Warren’s biggest advantages as a candidate is her financial expertise. A longstanding critic of the current financial system, she is one of the few people in elective politics who understands that system and has a workable plan to reform it. So what does Elizabeth Warren want that system to look like?

I have worked with Elizabeth Warren and her team for many years on financial issues, and this is how I believe she would reshape the banking system.

First, it would be smaller and simpler. Warren is supportive of community banks and credit unions, but she wants to break up the big guys. High on her list is a modern day version of Glass-Steagall, the landmark law enacted during the Great Depression that forced a separation of investment banking from commercial banking. While Warren supported the 2010 Dodd-Frank reform law for making incremental improvements, she believes its technocratic approach is less effective — and imposes more costs — than fundamental structural reform. Under Warren, expect big banks enjoying the benefits of deposit insurance and Federal Reserve lending to be broken up and banned from their high-risk derivatives and securities activities. If they want access to government safety net support, they will need to be boring again.

Warren’s banking system would be less leveraged. Excessive borrowing by large banks was widely recognized as a key driver of the 2008 financial crisis. Warren would beef up capital requirements and curb tax subsidies for highly leveraged banks. She would also end tax incentives for banks to pay their executives with huge, performance-based bonuses that too often reward short-term risk taking while compromising the bank’s long-term financial health.

New Bureau of Consumer Financial Protection director Kathy Kraninger speaks to media at the Bureau of Consumer Financial Protection offices in Washington, Tuesday, Dec. 11, 2018. (AP Photo/Carolyn Kaster)
New Bureau of Consumer Financial Protection director Kathy Kraninger speaks to media at the Bureau of Consumer Financial Protection offices in Washington, Tuesday, Dec. 11, 2018. (AP Photo/Carolyn Kaster)

Warren’s banking system would be more consumer friendly. Warren would no doubt appoint a strong head of the Consumer Financial Protection Bureau. Created by Dodd-Frank, the bureau was her brainchild but has been seriously weakened under the current administration. She would also enable banks and credit unions to partner with the U.S. Post Office in offering basic financial financial services such as checking and savings accounts in postal facilities. Roughly six in 10 are located in areas that have either no bank facility or only one branch. Postal banking would broaden the provision of low-cost financial services to under-banked communities and give them alternatives to check-cashers for basic cash needs.

Finally, her banking system would be more accountable. Warren’s proposed “Too Big to Jail Act” would set up a special unit within the Treasury Department to investigate and prosecute financial crimes. It would also require major bank CEOs to conduct due diligence each year of their organizations and certify they have found no criminal conduct. False certifications would be grounds for prosecution. In this way, Warren hopes to discipline behavior by imposing personal accountability on decision-makers. Contrast this to the approach taken after the 2008 financial crisis when the government meted out billions in fines on banks and their shareholders, but did little to prosecute culpable executives.

A vision that could resonate broadly with Americans

Though there will be debate over the specifics, her vision of a financial system that is simpler, smaller, and more accountable should resonate broadly with the populace. Indeed, many of my conservative friends also criticize the technocratic labyrinth of government bank oversight that concerns her. Its costs and complexity stifle competition and impede effective scrutiny by market analysts, academics, and others, thus protecting the status quo. But while conservatives may put too much faith in capitalism’s invisible hand to discipline the big banks, Warren wants to add a dose of structural limits on their size and power, combined with personal accountability for their leaders. And even Adam Smith thought government regulation of banking was essential.

But will she follow through? We’ve heard presidential candidates campaign against Wall Street before, only to succumb to its siren song with industry-friendly regulators and tepid oversight once elected. But anyone who knows Warren knows her administration would not (at last) travel down the well-trod path of Wall Street campaign money and revolving door jobs.

At her core, she sees the too-big-to-fail banks as not only threatening our market-based system, but our democracy, as well. She frequently quotes Teddy Roosevelt who viewed the corporate trusts of a century ago in the same way. She has announced that she will not accept corporate PAC or lobbyist money and plans to finance her campaign primarily through individual contributions. This aspect of her candidacy is unique and defining among the leading Democratic presidential contenders and may be even more important than the specifics of her proposals. Eschewing big institutional money in favor of grass roots support can give the American people confidence she will not only have the know-how, but the independence and integrity, to achieve a financial system that works for them.

Sheila Bair is the former Chair of the FDIC and has held senior appointments in both Republican and Democrat Administrations. She currently serves as a board member or advisor to a several companies and is a founding board member of the Volcker Alliance, a nonprofit established to rebuild trust in government.

Read more:

Former FDIC Chair: The Fed needs to hit pause on rate hikes

America has left the door wide open for bailouts

Vulnerability in America’s lower income brackets poses a risk to the economy

China thinks long-term on financial stability — so should we

Former FDIC chair: Why we shouldn’t ban bitcoin

Sheila Bair: Trump is going after the Bill of Rights

Former FDIC chair: The Fed needs to get serious about its own digital currency