Financial Regulation
Will the Democrats Take on the Banks and Reverse Financialization?
The 2020 mentions “Curbing Wall Street Abuses” but the Democrats’ relationship with finance is complicated.
Over the last several decades the American economy has become much more reliant on finance to generate economic growth and profits, which is often referred to a “financialization.” In the late 1940s finance, insurance and real estate accounted for about 10% of the value added in the U.S. economy, but in recent years this figure has been around 20%.
A number of academic studies have pointed to the negative consequences of this increasing financialization for the U.S. and other Western economies. Financialization may contribute to income inequality, higher unemployment and slow growth. But these academic studies are probably not needed to alert people to the dangers of an over-sized financial sector for anyone who remembers the 2008–09 financial crisis.
While a vital financial sector is critical for a strong economy, excessive speculation and reliance on a few large banks has its obvious downsides. Dodd-Frank enacted after the financial crisis placed some limits on what banks can do and also took steps to ensure that banks have adequate capital to (partly) avoid the need for future bailouts. But the banking system fundamentally remains the same as it was prior to the financial crisis. So far finance has remained relatively healthy even as the economy has tanked due to the Covid-19 recession (depression?). But it is not clear that this can last and it is interesting to consider what the political repercussions might be if finance does run into problems in the coming months.
In their 2020 Platform the Democratic Party has a section on “Curbing Wall Street Abuses,” which reads in part “Democrats will work to reverse the over-financialization of the American economy and curb Wall Street speculation.” But will they? Can they?
The relationship between the Democratic Party and the banks is complicated. During the New Deal, and for some decades after, the Democratic Party typically favored stricter regulation of banking activities, including the Glass-Steagall act passed in the 1930s, which prevented the mixture of investment and consumer banking in a single firm.
By the 1980s and 1990s many Democrats, fueled by “New Democrat” deregulatory ideologies and campaign contributions from finance, had begun to embrace financial deregulation. According to research by Nathan Kelly the Democratic and Republican parties essentially converged with respect to financial regulation around the 1980s. My own research shows that while finance used to grow more slowly under Democrats, over time there was little difference between the two parties, which both presided over a growing financial sector. And a number of Democrats played a key role in deregulation in the 1990s, most prominently President Clinton and members of his economic team, but also numerous Democratic members of Congress.
Of course, times change. The Democratic Party has moved to the left since the 1990s. After the 2008 -09 financial crisis the Democrats did enact Dodd-Frank, which was perhaps not enough but was something. Since then, Democrats like Elizabeth Warren and socialist Bernie Sanders have been very open about their desire to take on the banks. There is also considerable public support for regulating finance more closely.
Would a Biden-Harris administration take on the banks? Similar language about taking on Wall Street was in the 2016 Platform, but this has not been a major focus of the Democrats in the House since regaining control of the institution after the 2018 election.
Furthermore, at the moment there are certainly larger fish to fry in the form of a pandemic that is completely out of control across the country. Once the pandemic is under control, stabilizing incomes of workers, creating job opportunities, reopening businesses and schools, and shoring up the finances of state and local governments will all be pressing matters that will almost certainly take precedence over taking on the banks.
On top of this, Biden and Harris hardly have unfriendly relationships with the financial industry. Biden long-represented Delaware in the Senate, which is home to many banks and insurance companies. And he has frequently been criticized by those to his left for his friendly relationships with large financial institutions. Unsurprisingly, one of Biden’s large sources of support is companies and individuals working in finance. Harris also receives considerable support from finance. Thus, there are reasons to be skeptical that even if they control all institutions after the 2020 election Democrats will make a priority of taking on the big banks in the next few years.
On the other hand, it is clear that there is a more vocal group of Democrats in Congress that supports reigning in the banks, and this would likely be popular with the public. And Biden has worked with Warren and Sanders to craft his banking policies, which has caused some concern for the banks. If Biden wins and the Democrats regain the Senate, and especially if the large banks do begin to have trouble again, we just might see the Democrats act on their campaign pledge.
