Much of the heavy lifting has been done.

Photographer: Daniel Acker/Bloomberg

Sanders Is Late to the Wall Street Revolution

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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If there is one presidential candidate who embodies the nation’s lingering post-2008 rage at Wall Street, that surely has to be Bernie Sanders. No other candidate has argued as strenuously for financial reform, or used rhetoric that so forcefully paints a struggle between the financial industry and the rest of the economy. Whether that narrative is accurate, Sanders’ concrete proposals give the impression that he hasn't carefully evaluated the policy landscape.

Some of the things Sanders is suggesting have largely been done. For example, he recently declared that in its first 100 days, his administration would “create a list of too-big-to-fail banks and insurance companies.” Such a list already exists. Under the Dodd-Frank Act of 2010, the Financial Stability Oversight Council -- a branch of the Treasury Department -- must maintain a list of systemically important financial institutions (SIFIs) -- that is, banks, brokerage firms and insurance companies that are considered too big to fail because their collapse would endanger the financial system. So Sanders’ proposal is already reality.

Other proposals don’t seem like they would address the problems Sanders thinks they will address. For example, he recently tweeted:

Real Wall Street reform means…re-establishing firewalls that separates risk taking from traditional banking.

Here Sanders is talking about re-implementing the Glass-Steagall Act -- a Depression-era rule that separated investment banking from commercial banking -- which was repealed in 1999. Sanders has attacked rival Hillary Clinton for not strongly supporting its return.

The problem is, there is no indication that Sanders really understands what Glass-Steagall does. All aspects of banking involve risk-taking. Investment banks underwrite and sell securities for corporations, which entails the risk that these companies will not be able to repay their obligations. Commercial banks take deposits and make loans, thereby incurring the risk that the loans will not pay off. Separating these two activities will do very little, if anything, to make banks less risky.

In particular, Glass-Steagall would have done almost nothing to prevent the 2008 financial crisis. The costly mistakes made by the big banks that led to their insolvency weren't in the area of investment banking. Banks got into trouble by buying toxic mortgage-backed securities and using too much leverage, not by underwriting failing companies.

There are better ways of separating risk-taking activities from the banks that hold Americans’ deposits. One major such reform has already been accomplished -- the Volcker rule, which bars banks from making many kinds of speculative investments with taxpayer-guaranteed deposits. Sanders, however, doesn't acknowledge this success.

Other financial reform proposals of Bernie’s seem either bizarre or inadvisable. For example, Sanders has declared that he wants to fund free college tuition with a tax on financial transactions. However, Italy’s experience shows that while this sort of tax -- called a Tobin tax, after the economist James Tobin -- is effective at reducing trading volumes, it isn't very good at raising money. In that country, taxing financial transactions yielded only a fifth of the expected revenue, and this number will probably drop even more in the long term. Estimates confidently predicting hundreds of billions of dollars in revenue from this sort of tax are almost certainly overblown. A financial transaction tax would help curb high-frequency trading -- another activity that had no real role in the 2008 crisis -- but it won't provide a stable source of education funding for U.S. colleges.

Another example is Sanders’ obsession with fees charged for using automated-teller machines. He has repeatedly vowed to cap ATM fees at $2 per transaction. How he arrived at the $2 number is anyone’s guess.  But regardless of whether a $5 ATM fee is unfair, it’s hardly much of a burden. If the ATM fee is higher, just go to the ATM less often, and take out more cash each time. So it isn't clear why Sanders has chosen to focus on this fee, especially when ATMs are obviously a product that provides great value to millions of people.

A final example is Sanders’ proposal to audit the Federal Reserve. Sanders has been working with Senator Rand Paul on this initiative. But as former Fed Chairman Ben Bernanke has explained, the Fed is already audited. What Sanders and Paul and his father before him, former Congressman Ron Paul, want to do is to give Congress close oversight of the daily operation of monetary policy, compromising the Fed's independence. That would dramatically decrease the central bank’s ability to respond to crises and recessions like the one the U.S. recently experienced.

In all of these cases, Sanders seems either uninformed or seems not to have thought very carefully about the actual ramifications of his specific proposals. His general anti-big-bank attitude might be beneficial, if he appointed tougher regulators who were less likely to fall under the influence of the companies they oversaw. But the effect of that kind of attitude shift isn't easy to predict.

If Sanders really wants to improve the financial system, there are almost certainly better ways to do it. One solution that economists across the political spectrum have been converging on is the idea of higher capital requirements for banks. This would prevent banks from borrowing large amounts of money relative to the value of their businesses. Not only would higher capital requirements make the banks better able to absorb losses, but the financial system would be safer because lower leverage equals lower risk.

For example, higher capital requirements for globally important financial institutions have been in place in the U.S. since 2014. These requirements, and higher capital requirements in general, are slowly reducing leverage in the financial sector. Along with closer regulatory supervision of SIFIs and the restrictions created by the Volcker rule, capital requirements are slowly chipping away at the big-bank model that defined Wall Street before the crisis. Many people are fighting for even higher capital requirements than now are mandated, but Sanders, curiously, isn't among them.

In other words, Sanders’ crusade against Wall Street might do a little good, but his main objectives have already been accomplished to a large degree. He likes to say that he wants a revolution, but what he is proposing isn't very revolutionary.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Noah Smith at nsmith150@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net