Larry Summers Is Lying About Big Banks

Last week, Larry Summers, the top economic adviser to President Barack Obama, gave a startlingly dishonest interview with PBS Newshour’s Jeffrey Brown. When asked directly why the White House was not pushing to break up the nation’s largest banking behemoths, Summers responded with a lie that rivals the recent whoppers told by Mitch McConnell. Breaking up the too-big-to-fail financial conglomerates that drove the economy off a cliff in 2008, Summers said, would actually put the economy in jeopardy today:

“It would actually make us less stable, because the individual banks would be less diversified and, therefore, at greater risk of failing, because they wouldn’t have profits in one area to turn to when a different area got in trouble. And most observers believe that dealing with the simultaneous failure of many — many small institutions would actually generate more need for bailouts and reliance on taxpayers than the current economic environment.”

This is wrong in several respects, and Summers is too smart for the error to be an act of incompetence. The economic threat from the simultaneous failure of many small banks was curtailed with the invention of deposit insurance in the 1930s. That’s why the economy didn’t fall apart during the savings and loan crisis, in which thousands of banks failed simultaneously. The S&L crisis was not fun, but it was not anywhere near the scale of what occurred in 2008. The global economy was never in jeopardy of collapse during the S&L crisis—nobody ever thought the entire banking system could completely shut down. By contrast, that was precisely what Henry Paulson and Ben Bernanke were afraid of in the fall of 2008.

Moreover, it’s much easier to hold the executives of small banks accountable for their actions. Thousands of bankers were jailed for fraud in the wake of the S&L crisis. We are yet to see a criminal prosecution against executives from large banks over their actions during the most recent crisis, and we know that criminal activity took place. Dozens of local public officials in Jefferson County, Ala. have been jailed for taking bribes from J.P. Morgan Chase bankers. Nobody from J.P. Morgan Chase has faced charges. The economic might of Big Finance insulates its top players from both politicians and prosecutors.

The truth is, today’s megabanks aren’t just too-big-to-fail, they’re too-big-to-regulate. In the years leading up to 2008, big banks went on a predatory lending binge, but regulators didn’t lift a finger to stop them. Between 1995 and 2007, the Office of the Comptroller of the Currency (OCC), which regulates the largest banks in the country, took zero public enforcement actions against the eight largest national banks over consumer protection violations. The OCC’s record on consumer protection is not good, but it did at least crack down on 13 small banks over the same period. Similarly, the OCC has taken actions against two small banks for offering predatory “refund anticipation loans” (RALs) – a deceptive scam that lets banks skim from tax refunds. The biggest player in the market is J.P. Morgan Chase. The bank has not only been exempted from the OCC crackdown, it didn’t even know the OCC was regulating these loans until this year. If we want other regulatory reforms to work, we have to break up the big banks.

But back to Summers. The top White House economic advisor knows full well that diversification isn’t always a good thing. Nobody wants to see banks to expand into the roulette, blackjack or craps businesses to help cushion themselves against loan losses. There is no denying that by allowing banks to make reckless bets in the securities and derivatives markets, the core of our financial system has become remarkably unstable, as evidenced by its near collapse less than two years ago.

The Summers interview marks a new and problematic strategy for Democrats as Wall Street reform moves to the Senate floor. Thus far, the Democrats’ gravest misstep has been timidity: Key Democrats like Sen. Chris Dodd (D-CT) have backed policies that don’t crack down hard enough on bank abuses and do not do enough to protect our economy. But Summers is now lying to protect Wall Street. That puts Democrats in the same moral swamp as Senate Minority Leader Mitch McConnell (R-KY) with his dishonest repetition of the claim that the current reform bill institutionalizes bailouts.

If Democrats want to salvage their political credibility, they now have no choice now but to push to break up the banks. Anything short of that will simply validate Republican attacks that the Democrats are in bed with Big Finance.

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