How Washington Caved to Wall Street

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In TIME’s recent cover story “How Wall Street Won,” Rana Foroohar gave an excellent appraisal of the last five years since Lehman collapsed. While her analysis hit at five of the major shortfalls in our “reformed” financial sector, there was even more she could have pointed to: Five years after the crisis, why have we not even begun putting the mortgage market on a sound footing? Why has so little been done about banks’ market manipulation? The LIBOR scandal is a major example. Nothing has been done to replace this manipulable (and manipulated) figure, a fictional number that remains the basis of a more than $300 trillion market.  And every day we are exposed to new stories of banks manipulating one market or another—most recently, energy and ethanol credits. The list of issues goes on. While we recognize that predatory lending was part and parcel of the failure of the subprime mortgage failure, we continue to allow payday loans. The only successful actions against the credit rating agencies since the crisis have been private suits (both in the US and Australia).

The causes of much of this neglect are all too obvious: congressional lobbying combined with a revolving door, with too many people in the administration too closely tied to the financial sector. The Treasury Department’s strong reaction to TIME’s article only convinced me more of how important and accurate your report is.  You pointed out that only 40 percent of the regulations required by Dodd-Frank have been written. Treasury seemingly prides itself that, three years after Dodd-Frank, they have completed, or are in the process of completing three fourths of the deadlines set by Congress.  In other words, they are tardy on more than a quarter.  And many of the obligations are far softer than they should have been—partly because the administration failed to support those who wanted deeper reforms, for example in transparency of the derivatives market.  Nothing was done in curbing the anti-competitive practices of the credit card industry (only debit cards were affected by the Durbin amendment, and even the courts noted that the interchange fee set for debit cards was unconscionably high, well above costs).

Treasury argues that we have a banking system that is “safer, stronger and more resilient than it was five years ago.”  While that is probably true—putting aside the increased danger from too-big-to-fail, too-connected-to-fail financial institutions—that’s hardly an achievement, given how bad things were then. The issue is that the crisis’s one silver lining was an enormous opportunity to make reforms, and yet there are major, multiple problems we left completely unresolved. The sad fact is that we largely let this crisis’s sole upside go to waste.

(MORETIME’s Foroohar Responds to Treasury: Our Financial System is NOT Stronger)

We can’t put aside the problems of too-big-to fail—our mega banks are not only too big to fail, but also too big to manage, and too big to be held accountable. Banks were engaged in massive violations of the law—the foreclosure abuses, the LIBOR manipulations,  money laundering—but there have been few prosecutions.

Treasury rightly points out that there are improvements—for instance increased capital requirements, reduced leverage. But have we done enough?  Most serious economists who have studied the matter who are not in the employ of the banking sector would say no, absolutely not.  We also have not ensured that the banks return to their core mission—lending, especially to small and medium sized enterprises. Too much of banks’ attention is focused on making profits from trading and speculation.

The banking industry has a well-oiled propaganda machine, trying to convince everyone that all is well, if only we could dial the clock back.  The administration too has a well-oiled propaganda machine, trying to convince everyone that, having pulled the economy back from the brink, they are well on the road to creating a financial sector that will support sustainable and shared prosperity.  But Americans know otherwise.

Joseph Stiglitz is an economist and professor at Columbia University. He is the author of many books, including The Price of Inequality. The views expressed are solely his own.