Bernie Sanders View Of Wall Street And Banking

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Richard X. Bove, Vice President Equity Research at Rafferty Capital Markets, highlights Bernie Sanders’ view of Wall Street and the changes he wants to make to the U.S. banking industry.

Key Theme

Senator Bernie Sanders (VT; I) spoke two days ago outlining his view of Wall Street and banking. His basic theme is:

  • The disparity in incomes in America is extreme.
  • That Wall Street is the source of this disparity because
  • Wall Street has gained control of the government and
  • This is not good because Wall Street is driven by greed and fraud (“the business of Wall Street is fraud”).

The Senator believes that Wall Street created the financial crisis and then was bailed out when the rest of America was left to suffer. He believes that the banking system has let America down and he wants it changed.

I would agree that the disparity in incomes in America is a real problem and that it may be holding back economic growth. The argument that the disparity emanates from the financial sector may be a stretch, however. It is more likely due to the fact that the country does not generate enough income due to weak output – i.e., we do not make enough products that are saleable globally.

Point/Counterpoint – Bernie Sanders’s take on the banking industry’s problems

Senator Bernie Sanders prescriptions for solving the banking industry’s problems are mentioned below with some counterpoints:

  • The Senator wants to break-up the structure of the financial industry returning it to smaller units. As part of this adjustment, he wants investment and traditional banking to split apart. This is clearly an anti-consumer proposal since banking has proven to be a scale business and by eliminating scale the Senator’s proposal would force prices higher. Additionally, it would make American industry less competitive globally because small financial companies generally have higher funding costs than big companies.
  • Senator Bernie Sanders wants to re-allocate incomes away from the banking companies to individuals. To do this he wants a national usury rate such as exists in the credit union industry. The cap rate would be 15%. He also wants ATM fees set at a maximum of $2 per transaction. Further, he wants transactions in the financial markets taxed and the proceeds of this tax to be used to provide free public college educations.
    • The price fixing that Senator Durbin demanded and got in the debit card industry ultimately resulted in retailing giants getting a big cost break and prices of a variety of other banking products rising so that the consumer paid for the retailing industry’s windfall. The same would happen here if more price fixing is introduced.
    • The United States had usury rate ceilings on a state basis for decades. It also set rates through Federal Reserve Regulation Q. Basically all of these ceilings were ultimately eliminated because they caused a misallocation of funds whereby places where no ceiling existed received funds and other areas were starved. A national usury rate ceiling, which was below market rates, would incent funds to go overseas; weaken the dollar’s value; increase inflation; and harm U.S. industry’s ability to compete.
    • Taxing transactions would simply drive them to countries where trading was less expensive. This would result in American companies having to go off shore to raise funds for their businesses.
  • Another recommendation is to put the Post Office system in the banking business. In effect, the United States government would run a banking company making loans and covering loan losses. This is pure socialism.
  • The Senator is also very unhappy with the Federal Reserve. He wants a new structure under which the Fed is more responsive to the American people. This sounds like putting the Fed under the control of Congress. Further, Senator Bernie Sanders wants to force banks to pay the Fed a fee on the deposits that are placed in that organization. He does not understand the new banking rules which require banks to put money into highly liquid assets. His proposals are likely to create turmoil in the markets as money is pulled from the Fed and placed in bank vaults, which is allowable. This would lower money supply forcing the Fed to sell off its assets destabilizing the markets. The alternative would be for the Fed to print money rapidly to offset the loss in bank deposits. This is dangerous thinking on his part because he clearly has no understanding of how the financial system is structured.

While there are a number of extreme concepts in the Senators proposals what strikes me most is lack of comprehension as to how the system works but his commitment to fixing what he does not understand. While he is the most extreme in his concepts my reading of the statements of other candidates show the same lack of understanding of the U.S. financial system as the Vermont Senator displays. This is not good. Someone should at least know what they are talking about before suggesting mammoth change.

There are other ideas in the speech which follows on the next page. The probability of any of these ideas being passed by this government is remote. Congress is not likely to open another major debate on banking without some crisis suggesting that the system needs more regulation.

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