With the possible exception of the health care fight, there is no more important battle for the future of our economy and democracy than breaking up these too-big-to-fail financial institutions. Limiting their size, their economic power, and their political power is urgent and absolutely essential. The problem is that these Wall Street behemoths have such incredible power that very few politicians want to take them on.
The Obama administration, while they proposed some reasonably good regulatory changes in terms of consumer protections and dealing with the so-called "dark markets" (the derivatives and credit default swaps that were kept away from regulators over the past dozen years), appears to have for now decided they want to take a pass on the fight. Larry Summers, according to a recent story in the NYTimes, says that there is no going back to the days of small banks: "I don't think you can completely turn back the clock." The President himself, in a New York Times magazine interview, seemed focused more on regulation than on breaking up the big banks:
Q: There was this great debate among F.D.R.'s advisers about whether you had to split up companies - not just banks - you had to split up companies in order to regulate them effectively, or whether it was possible to have big, huge, sprawling, powerful companies - even not just possible, but better - and then have strong regulators. And it seems to me there's an analogy of that debate now. Which is, do you think it is O.K. to have these "supermarkets" regulated by strong regulators actually trying to regulate, or do we need some very different modern version of Glass-Steagall, in which we basically slim them down?
THE PRESIDENT: You know, I've looked at the evidence so far that indicates that other countries that have not seen some of the problems in their financial markets that we have nevertheless don't separate between investment banks and commercial banks, for example. They have a "supermarket" model that they've got strong regulation of.
The modest-sized regulatory package the White House just proposed reflects that this theory that regulation as opposed to Teddy Roosevelt style trust-busting is the way the administration wants to go.
So far, there doesn't seem to much more excitement for such a fight on Capitol Hill. Even progressive organizations have been slow to take up the fight, although I'm told the new coalition Americans for Financial Reform will be coming out with a policy paper soon on the issue.
The problem is that the too-big-to-fail is the central issue of our economic collapse. I become more convinced with each passing day, as I watch these should-be-discredited-pariahs dominate the Congress, that our economy will not start to seriously recover until we deal with this problem.
Our only hope is to build an outside of DC movement that rattles the walls. Politicians will not have the courage to take this on until we make it impossible for them to stop avoiding the issue.