--:-- Sean Rameswaram: Listener, it's me, Sean Rameswaram, and I know what you're thinking. Why are we already getting rid of all of these bank regulations we put in place to prevent another financial disaster? We just got out of that last one. We're going to figure it out today because this is Today Explained. Matthew Yglesias, economic policy reporter here at Vox.
--:-- Matthew Yglesias: Rumor has it our government is rolling back some rules. It is. There's a lot of rules getting rolled back. This is all about the Dodd-Frank disaster, and they fixed it, or at least have gone a long way toward fixing it.
--:-- Sean Rameswaram: Mike Grapo, thank you very much. Steve Daines, thank you, Steve. So Congress passed a law recently that rolls back some provisions of the Dodd-Frank financial regulation overhaul. The Federal Reserve also promulgated a new rule that's going to roll back a different aspect of it. Is one of the rules the Volcker rule too?
--:-- Matthew Yglesias: Yes, that's what's been in the headlines most recently. Wednesday, the Federal Reserve voted to change how the rule is enforced in a way that's going to make life much easier for banks.
--:-- Sean Rameswaram: So I suppose before we get into the weeds on all those rules. Can we go back to 2008 and talk about why these rules were implemented to begin with? Because there was a very serious thing that happened around then, right? In 2008, computer-generated financial models that were widely used in the financial services industry had led people to make a lot of bets based on the assumption that there could not be a large, sustained nationwide decline in house prices. But of course, there was a large, sustained nationwide decline in house prices.
--:-- Matthew Yglesias: So individual loans went bad. Banks wound up being insolvent. Their debts to each other froze up. Lehman Brothers and Bear Stearns were pushed to the point of failure. It created a panic throughout the industry. Institutions didn't want to lend to each other. The stock market was plummeting.
--:-- Sean Rameswaram: So then policymakers changed course and they said, no, no, no, we're going to put all this capital into the institutions. Make sure we don't have any more failures, try to staunch the bleeding. And they did. Under our proposal, the federal government would put up to 700 billion taxpayer dollars on the line to purchase troubled assets that are clogging the financial system.
--:-- Matthew Yglesias: In the short term, this will free up banks to resume the flow of credit to American families and businesses. And this will help our economy grow.
--:-- Sean Rameswaram: The crisis hurt a lot of banks in the short term, but it like destroyed people's lives, right? Yes. I mean, Three different things happened, right? First, it was the decline in housing prices themselves. That destroyed a lot of people's lives and that started happening before there was a financial crisis.
--:-- Matthew Yglesias: Then there was the crisis itself, which mostly hurt banks. But then there were the consequences of the financial crisis, which was this prolonged recession in which millions of people lost their jobs. When people lose their jobs, you know, they often lose their homes as well.
--:-- Sean Rameswaram: They suffer devastating consequences, not just to their finances, but to their sense of self-worth, They're standing in society. And then lots of us who did not lose our jobs still suffered from the fact that unemployment was so high and the economy was so weak.
--:-- Matthew Yglesias: Workers have spent a decade with very little bargaining power, very little ability to get raises at work because there have been so many unemployed people.
--:-- Sean Rameswaram: So financial crisis is a really devastating thing. There was also a lot of social movements that came out of this, right? I mean, after banks went under and people started losing their jobs, we had the Occupy movement. We got sold out. Banks got bailed out. We got sold out.
--:-- Matthew Yglesias: We had the Tea Party. President Obama, are you listening? We're thinking of having a Chicago Tea Party in July. All you capitalists that want to show up to Lake Michigan, I'm going to start organizing.
--:-- Sean Rameswaram: Something went badly wrong and people suffered a lot from it. And it appeared that the people who had benefited the most on the way up were not the people who suffered during the crash.
--:-- Matthew Yglesias: And, you know, I think you can trace a lot of the origins of political turmoil in the United States to those events back there. This is all sort of happening in the like last months of George W. Bush's presidency. Yes.
--:-- Sean Rameswaram: Then Barack Obama is elected. What exactly does he propose? And do people support it?
--:-- Matthew Yglesias: Obama came to be associated with the bank bailouts that had actually been voted for while George W. Bush was still president. Obama spent much of the initial months of his administration essentially implementing the end of the Bush bailout type schemes, stabilizing the situation.
--:-- Sean Rameswaram: And then he puts forward this wide range of new rules that are going to make things work better. For the last year, Chairman Barney Frank and Chris Dodd have worked day and night to bring about this reform. And I am profoundly grateful to them for their leadership.
--:-- Matthew Yglesias: Under Dodd-Frank, banks are supposed to take on less debt, which inherently makes them safer. They're supposed to report more about what it is exactly that they are doing. There's supposed to be a more robust consumer protection agency directly focused on whether there's abusive lending happening.
--:-- Sean Rameswaram: There supposed to be more monitoring of derivatives transactions which is a complicated way of making financial bets There supposed to be less intermingling of trading money and regular banking money
--:-- Matthew Yglesias: Okay so I hearing like three big things come out of all this Dodd-Frank business. The first is more reporting transparency. The second is create a strong federal agency to protect people against predatory lending. And then the third thing is this Volcker rule, keep consumer money safe and separate and secure.
--:-- Sean Rameswaram: Exactly. So let's get into the weeds now. Starting with the more reporting, how does that work? So the key element of this is something that's called stress tests. Under Dodd-Frank, banks that have over $50 billion in assets need to sort of go to regulators with all their information about what their investments are, what their debts are, and show that, you know, they have models that the bank can survive even certain kinds of bad economic outcomes so that we won't have the kind of cascading failures of large financial institutions that we had in the past.
--:-- Matthew Yglesias: All right. And the second thing, create this federal agency, which they did, right? Yes. The idea of the Consumer Financial Protection Bureau pretty literally is, look, we should have an agency whose job is to regulate financial products with an eye to consumers' interests.
--:-- Sean Rameswaram: And that this is similar to the Consumer Product Safety Commission, which, you know, it's like if I'm making a baby crib, but it turns out that the crib is like dangerous and hurts children, they make it illegal. So the CFPB is supposed to do that for financial products.
--:-- Matthew Yglesias: So that's CFPB. There was a lot of activist energy around it. It's important. And right. And then the third big part of this is the Volcker rule. So the Volcker rule, Paul Volcker was the chairman of the Federal Reserve back in Jimmy Carter's presidency early Ronald Reagan years.
--:-- Sean Rameswaram: He has a lot of prestige. He's tall. He's very tall. Tall Paul. I also he's he's also like a kind of regular guy. I saw him at a bus stop one time in New York just getting on the M86.
--:-- Matthew Yglesias: And, you know, it's charming. He's a man of the people. Exactly. To the extent that people on the Upper East Side riding the bus are men of the people. Paul Volcker is kind of brought in by Obama as a sort of outside expert to give his view on things.
--:-- Sean Rameswaram: And so he says, OK, one thing we should do is we should ban proprietary trading. So proprietary trading is when a bank wants to sort of make speculative moves in financial markets. They want to buy and sell stocks or options, derivatives, bonds, things like that.
--:-- Matthew Yglesias: He says we need to make sure that that proprietary trading is separated from taking on of clients' money. So separate out the trading aspects of banking from the banking aspects of banking.
--:-- Sean Rameswaram: So there used to be a rule called the Glass-Steagall rule. And that said that a bank that takes deposits and makes loans, right, that that's a commercial bank. And then an investment bank buys and sells securities on financial markets. Right.
--:-- Matthew Yglesias: And that those have to be completely separate companies. Yeah. So that law was repealed in the 90s. Clinton. Yes, in the Clinton years. And now you have combined operations.
--:-- Sean Rameswaram: So Volcker says, OK, we can have the combined operations, but we need to separate the money. OK. Right. So you can't be doing investment banking with your commercial bank deposits. So like you got to keep customer money kind of safe. Exactly. And separate. Exactly.
--:-- Matthew Yglesias: OK. So all of this passes in the middle of this huge recession. Does it happen with bipartisan support or what? No. It was erected with almost exclusively Democratic votes. Three Senate Republicans voted for it, but two of them have left the Senate. So only Susan Collins remains.
--:-- Sean Rameswaram: So it was a democratic bill and it's not incredibly surprising that Republicans are now chipping away at it. Were Americans generally in support of it even though it was only one party instituting it?
--:-- Matthew Yglesias: I don't know that the law ever became either popular or unpopular in the minds of normal people. I think people wanted to see punishment doled at. I mean there was a sense that something had gone wrong and that there deserved to be consequences for wrongdoing.
--:-- Sean Rameswaram: And it's important to note when Donald Trump campaigned, he implied that he was going to get tougher on the banks than Obama had been and especially than he said Hillary Clinton would be. And he's very much done the opposite as president.
--:-- Matthew Yglesias: All right, listener, you've got your Dodd, your Frank, your Volcker, and now you've got your Trump saying, we don't really need all of these rules. Does this mean we're heading straight back where we started, another great recession, or even worse? That's next. This is Today Explained.
--:-- Sean Rameswaram: Our friends over at SB Nation have a new sports show. It's called Foul Play. Actually, it's called Foul Play Paid in Mississippi. It's a documentary series about the shady economy that fuels college football in the South.
--:-- Matthew Yglesias: It's got scandal, it's got a big, huge firing, it's got a bitter rivalry, and big dreams getting crushed. Foul Play is the result of five years of reporting by SB Nation writer Stephen Godfrey You can find four 25 episodes of the show on Verizon free streaming platform on your phones on your computers on any of your devices really It called Go90 That the streaming service Foul Play, paid in Mississippi. The series just launched yesterday. Check it out on Verizon's streaming service, Go90.
--:-- Sean Rameswaram: Matthew, how are the banks doing now? Are they behaving better? Are they cool with these rules?
--:-- Matthew Yglesias: The big banks are better capitalized than they were before, which means they are relying less on borrowed money. And so it is less likely that small downturns will make them go bust. So that is a big change. That's an important change.
--:-- Sean Rameswaram: At the same time, you know, objectively, there were record profits last quarter. And the other thing worth saying is that this law passed in 2010. We all remember 2011, 2012. The national economy was fairly weak. And so at that time, you would hear a lot from industry. They would claim to get the economy strong again, you need to unleash us from these regulatory shackles. And they didn't get unleashed. And then in 2013, it got a little better. 2014, better. 2015. Year after year, it kept getting better. Without the unshackling. Without the unshackling to the point where six months ago, Donald Trump is on Twitter all the time saying we have record low unemployment. Like everything is amazing.
--:-- Matthew Yglesias: And that raises the question of like what are we doing this for, right? Like the old story was the economy is terrible because you've regulated the banks too strictly. The new story is like, well, the economy is great. So then why do we need to change the bank regulation, right? Like what is the problem here?
--:-- Sean Rameswaram: You know, that's a tough question for the deregulators here, right? And who are the deregulators and why are they deregulating now and how are they doing it? So Mike Crapo, senator from Idaho, was the sort of prime mover behind the legislation that moved recently that exempts the smallest banks from a lot of the regulatory supervision, from the need to do stress tests, from the need to comply with certain consumer protections, things like that.
--:-- Matthew Yglesias: It also raises the ceiling for what counts as a small bank and it raises it really high to about $250 billion. Okay, so this is very specifically rolling back this sort of banks need to report on their activity more part of Dodd-Frank. So far fewer banks need to do that now.
--:-- Sean Rameswaram: What else is happening? Another thing that's happening is that the Federal Reserve is changing its interpretation of the Volcker Rule to make it easier for banks to comply with and to say, no, we're good. So they're going to be able to do more trading and get certification that the trading is allowed under vocal world exemptions.
--:-- Matthew Yglesias: The Fed is also putting forward new rules that are going to let big banks essentially use more borrowed money to finance all the different things that they do. And then the Trump administration has put new appointees in charge of a bunch of regulatory agencies and basically all of them are taking a step back away from Obama-era rules.
--:-- Sean Rameswaram: That's been happening very aggressively at the Consumer Financial Protection Bureau. It's been almost kind of shut down by the Trump administration. They've put in a new acting director and he has them doing no new enforcement activities.
--:-- Matthew Yglesias: It's not totally clear what's happening. But Mick Mulvaney, he said as a congressman that this agency shouldn't exist. He's now there as acting director and he seems to be trying to get them to do as little as possible.
--:-- Sean Rameswaram: And who's asking for these reinterpretations? It doesn't feel like the American people are clamoring for changes to bank regulations. There's no Occupy Tea Party.
--:-- Matthew Yglesias: Coal miners in eastern Kentucky have been very upset. You know, someone is finally listening to them. No, I mean, look, it's bank lobbyists. It's bank lobbyists.
--:-- Sean Rameswaram: So is it the big banks? Is it the small banks? Is it all of them? I mean, it's all the banks. You know, I mean, there's a little bit of something for banks of all sizes in these deregulatory moves.
--:-- Matthew Yglesias: And they're all – Wall Street has become very enthusiastic about Donald Trump, who they were quite skeptical of during the campaign. But they've come to see that he and they like really see eye to eye.
--:-- Sean Rameswaram: So what changes for a regular person right now? Nothing? Does their money just become a little less secure? This is what's insidious about this. I mean nothing changes. I mean I always like to try to highlight how does this impact like a normal person.
--:-- Matthew Yglesias: And the answer is it doesn't. You know, like you are not going to see anything change in your life until maybe one day you hear some weird story about some cascading series of investment bank failures and your neighbor loses his job and nobody can get a loan for two years.
--:-- Sean Rameswaram: But it's like nothing happens. And then, boom. Depending on how old you are, you know, if you were around as an adult participating in the economy in 2005, 2006, you could ask yourself, like, well, how did the proliferation of structured credit products impact my life? And, like, it didn't, right?
--:-- Matthew Yglesias: Then when the crash comes, it impacts your life. But, like, while it's happening, nobody notices. Right. And it's why it's so troubling. And is that exactly what's happening right here is that these changes are being made and you get some push notifications that says Volcker rule rolled back, Dodd-Frank rolled back.
--:-- Sean Rameswaram: And you're like, I don't know what this means. Right. And part of the trouble is that to an extent we not going to really be able to tell unless something goes wrong And this is exactly what the regulators were telling us in the last crisis was you know because people say like what the hell are you guys doing Like, why did you do such a terrible job?
--:-- Matthew Yglesias: And they say, well, you know, we couldn't know. We didn't know what was happening. Banks didn't need to report. So, you know, moving back to a world in which compliance is more checkbox, there's less disclosure, it just it makes it harder to even know what's happening.
--:-- Sean Rameswaram: And Democrats, some of them are signing up for this? For some aspects of it. So the legislative fight is telling in this regard because, A, you had 17 Democrats signing on for a bill that weakened bank regulation. But I think what's telling is that they didn't get anything in exchange.
--:-- Matthew Yglesias: Why? Why? Because some of them represent very red states and they wanted to show that they could do something bipartisan because some of them are very under the thumb of their local banks because some of them enjoy financial contributions and because some of them feel, I think, accurately that this is not an issue that people are really paying attention to or fired up about.
--:-- Sean Rameswaram: And so, you know, it's an easy topic to take a dive on. What about the Democrats who stood up for people who got screwed by the banking system in the first place? Barack Obama, Elizabeth Warren, Chris Dodd, Barney Frank, where do they all stand on this? Have they said anything?
--:-- Matthew Yglesias: Elizabeth Warren, Bernie Sanders, Sherrod Brown, they always took the view that this Dodd-Frank approach did not go far enough and that we needed structural remedies in the financial sector, basically hard caps on the size of banks.
--:-- Sean Rameswaram: Under this bill, a bank that controls up to a quarter of a trillion dollars in assets and has offices around the country and around the globe will follow the same rules and regulations and same oversight as a tiny little bank in Adams, Massachusetts.
--:-- Matthew Yglesias: Now, that's great if you are a quarter of a trillion dollar bank, but not so great for anyone else. So they obviously are not a fan of this kind of rollback. And then if you really want things to stick, you need to kind of take a big hammer and change the situation when you have the opportunity.
--:-- Sean Rameswaram: And did that hammer never happen? Right. And reasonable people could disagree about the merits of this. But it's unquestionably true that if you had just broken up J.P. Morgan and Wells Fargo and Citigroup and just said, look, banks of this kind cannot exist anymore, then they wouldn't exist. they'd be gone.
--:-- Matthew Yglesias: But that seems radical. That seems like something that was never even considered. It was not considered by the Obama administration. What they wanted to do was put Humpty Dumpty together again and then make sure that Humpty Dumpty had some good foam mattresses for next time he fell off the wall. You know what I mean?
--:-- Sean Rameswaram: Whereas an Elizabeth Warren approach would have been to say, good, the egg is broken. We are done. We are done with you. We're going to move on with our lives and have a whole different situation going forward. We're vegans now. No more eggs. Yeah, exactly. Exactly.
--:-- Matthew Yglesias: What is it about this country that can't learn this lesson? I mean, Clinton was deregulating Glass-Steagall in the 90s. We have this crisis in the aughts. Obama comes in. There's more regulation. And that doesn't even feel like a generation ago. That just feels like recent memory where everyone you knew was affected by this recession.
--:-- Sean Rameswaram: And now we're already trying to forget it. That's what's remarkable about this. I mean, I think in all countries throughout history, you see a natural cycle. Something bad happens, the regulations get tighter, the regulations work. So then over time, people start to get less and less afraid. They get looser. Eventually there's a new problem.
--:-- Matthew Yglesias: That's like a cycle that's been with us from hundreds of years, if not more. What's remarkable is that, you know, this was just 10 years ago. It's not like seven presidents ago we had lax bank regulation and there was a big problem. This just happened.
--:-- Sean Rameswaram: And it's a little mind-blowing to me how quickly we're reversing course and how much the kind of constant din of Trump-era controversy prevents us from having any real dialogue or scrutiny or attention paid to what's happening here.
--:-- Matthew Yglesias: Matthew Iglesias is the host of the Weeds podcast here at Vox. I'm Sean Rameswaram from this is Today Explained. Irene Noguchi is our executive producer. Bridget McCarthy is our editor. Noam Hassenfeld and Luke Vanderplug produce. Afim Shapiro is our engineer. And the usurious Breakmaster Cylinder makes music for us. Shoutouts to Jillian Weinberger for helping out with the show this week.
--:-- Sean Rameswaram: You can find Today Explained on Twitter at today underscore explained. The show is produced in association with Stitcher and we're part of the Vox Media Podcast Network.
