There has been a little something for everyone in the latest news from the ongoing battle between the financial sector and federal regulators. The Federal Reserve rejected five of the eight largest banks’ plans for orderly liquidation in a crisis — their “living wills” — a move that signaled to Wall Street’s critics that the institutions are still “too big to fail.” Goldman Sachs agreed to a $5 billion civil settlement with the Justice Department, admitting that it had misled certain buyers of its mortgage-backed securities during the housing bubble a decade ago. Meanwhile, regulators took a hit, as a U.S. district judge in Washington ruled that insurance giant MetLife had been improperly designated a “systemically important” institution subject to tighter federal control.
Mixed as it is, the big picture here is fundamentally a positive one. The long, grinding and conflictual process of stabilizing the U.S. financial sector, without neutering it altogether, goes on. Set in motion by the Dodd-Frank law of 2010, it’s the kind of struggle no one really likes, in part because it is, necessarily, costly — and in part because it’s much less satisfying, ideologically, than simplistic cries to get Washington’s boot off the private sector’s neck or, alternatively, to break up the fraudulent banks. Yet it is the kind of effort a moderate, democratic capitalist society undertakes in pursuit of a middle path to financial stability, consistent with the rule of law.
Wall Street’s sins of omission and commission, driven by the profit motive, badly augmented the buildup of under-recognized risks that ultimately exploded in 2008. At the same time, it’s preposterous, and a smear, to suggest that every bank’s “business model” is “fraud. ” Such a sweeping condemnation applies much better to the corrupt and cronyistic banks of Russia, China or parts of the Middle East. Fair-minded people understand that the U.S. capital market possesses, in the words of a newly published article by Treasury Secretary Jacob J. Lew in Foreign Affairs, “unparalleled depth, transparency, liquidity, and openness.” This is why, Mr. Lew adds, “the United States continues to provide the safety net that global investors value most.” Translation: Savers and investors from all over the world turn to the United States — and, yes, that means Wall Street — because they know their money will be safe here, far safer than it would be in less democratic or law-governed nations. That is because, contrary to Sen. Bernie Sanders’s (I-Vt.) sloganeering, fraud is not the business model.
In short, the U.S. financial sector is a potential source of crisis — but it is also a tremendous national asset, one that bolsters the larger economy and, from time to time, enables the country to exercise leadership on behalf of important security interests as well, such as the imposition of financial sanctions on Iran or North Korea. “It is incumbent on U.S. policymakers not to take for granted the reserve-currency status of the dollar,” Mr. Lew notes, “but rather to ensure that the country’s economic policies and stewardship of U.S. capital markets sustain this track record of trust and reliability.” Hyperbole from the right and left notwithstanding, that’s the right goal, and the nation is making progress toward it.