A century ago, Louis Brandeis, a distinguished Boston lawyer who would later go on to the Supreme Court, wrote a series of articles in Harper’s Weekly denouncing what he called the “financial oligarchy” on Wall Street that had effectively seized control of the burgeoning industrial economy.
The investment banks at the center of this oligarchy, he argued, were not content simply trading securities, in which they took the “inconsistent” position of being buyer and seller. They also had cornered the market on “manufacturing” and “distributing” securities, earning huge fees in the process. The partners in these firms earned incomes derived not by “the rule of reason” but from the maxim “all that the traffic will bear.”
Steven Pearlstein is a Pulitzer Prize-winning business and economics columnist at The Washington Post.
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In fairness, the world of finance today is more transparent, diverse and competitive, in large part because it is better regulated. Since the financial crisis of 2008, the government has been moving once again to rein the excessive power, risk-taking and compensation on Wall Street, as mandated by the Dodd-Frank financial reform act.
But while most of us have been distracted by elections and fiscal brinksmanship, the financial services industry has been waging a furious, well-funded counter-attack that has been alarmingly successful in wearing down the financial regulators. There has been hand-to-hand combat about every word in every regulation. And win or lose, every one of those regulations will be the subject of a scorched-earth legal strategy that will go all the way to the Supreme Court. Working through the Republican caucuses on Capitol Hill, the industry also has moved to trim regulators’ budgets, block nominations to regulatory posts and deny industry critics such as Elizabeth Warren seats on relevant oversight committees.
The depth and breadth of the industry campaign to gut Dodd-Frank is unlike any I have seen in Washington. I have no doubt it was a factor in Mary Schapiro’s decision last week to retire as chairman of the Securities and Exchange Commission.
These developments — in the face of an election in which the “repeal Dodd-Frank” candidates were resoundingly defeated — serve as a reminder that there is only so much that regulation can do to change the behavior and the culture of a determined and powerful industry. Wall Street will always have the ingenuity and muscle to get around whatever roadblocks well-meaning regulators put in its way.
Brandeis, however, understood that there is something else we can do to ensure that the financial system serves the economy, rather than the other way around. After all, it’s not their money they are playing with, he wrote, it’s ours. If we don’t like how Wall Street is investing it and lending it and what they are charging to do so, then all we have to do is put it elsewhere.
What Brandeis had in mind was a new set of institutions that are owned and controlled by their customers. Mutual banks and insurance companies. Cooperatives of various kinds. Credit unions. Employee-run pension funds.