SEC’s Approval of Bitcoin Markets May Set the Stage for Financial Disaster

Over the past several decades, there have been rapid and fundamental changes in the finance and banking sectors. The banking reforms of the New Deal, which endured up until about 1980 and provided a relative degree of banking and financial stability, were reversed by the neoliberal counterrevolution with an eye toward increasing profits and shredding social responsibility. A new book by world-renowned progressive economist Gerald Epstein, Busting the Bankers’ Club: Finance for the Rest of Us, shows us the result: a financial system dominated by megabanks and shadow financial institutions prone to instability and crises that at the same time rely on government bailouts.

The neoliberal financial system, controlled by what Epstein calls “The Bankers’ Club,” benefits exclusively powerful people and institutions, is linked to the growing inequality of wealth and income, and is a net drain to the U.S. economy. Nonetheless, bankers not only see themselves as “essential workers,” a view that Epstein shreds into pieces, but as former Goldman Sachs Chief Executive Lloyd Blankfein claimed, many think they do “God’s work.”

The latest development in the evolution of the modern financial system is the Securities and Exchange Commission’s approval of bitcoin exchange-traded funds last month, concluding a decade-long fight and marking a turning point for cryptocurrency. This may be a game changer for the global money system but could also very well lead us to another financial crisis.

In this first of a three-part exclusive interview for Truthout, Epstein discusses the ascendence of financialization, the dangers of cryptocurrency and his pathbreaking book Busting the Bankers’ Club. Epstein is professor of economics and co-director of the Political Economy Research Institute (PERI) at the University of Massachusetts Amherst.

C. J. Polychroniou: Financialization, a process by which financial markets and financial incentive increasingly become the predominant forces in domestic and international economies, dates back to the early 20th century but has intensified over the past five decades. Your new book, Busting the Bankers’ Club, explores virtually all the major features and aspects of financialization, divulges the staying power of finance while exposing at the same time the failures of the current banking and financial system, and offers concrete pathways toward building a system of finance that works for the average people. Let’s start by asking you to talk about your description of the financial system as having a Jekyll-Hyde personality. What is good and what is bad about the financial system?

Gerald Epstein: In the first chapter of Busting the Bankers’ Club I refer back to the old Robert Louis Stevenson story, Strange Case of Dr. Jekyll and Mr. Hyde. In this tale Dr. Jekyll, an upstanding member of the community, also contains within himself a hidden other: the murderous criminal Mr. Hyde. Jekyll is sometimes tempted to turn himself into Hyde to indulge his perverse pleasures, but sometimes wants to resist the evil urges of the Hyde side of his personality in order to remain on the right side of society and the law. This is a good metaphor for finance. On the one hand, finance is a positive and even necessary force in our society: It facilitates the payment system so we can sell and buy things; it provides a safe place to hold and augment our savings; financial institutions can lend us money to enable us to buy important big-ticket items, like houses and educations, or to open businesses; and financial institutions provide us with insurance against accidents, health disasters and other life traumas. But the Hyde face of finance is always lurking in the background, driven by capitalist greed and excess. And if it is unchecked by laws and regulations (and, perhaps, moral fortitude), reckless and destructive finance can dominate our financial system, and at times, our economy. We saw the havoc that finance could create with the great financial crisis of 2008-2009. But such finance can also undermine our economy on a daily basis: overcharging for basic financial services like asset management and payments services; excluding some groups from financial services altogether; and perhaps most dangerously, engaging in high-risk speculative ventures that, if they crash, the top financiers will expect to get bailed out by the government.

Over the course of time, the world has witnessed virtually countless financial and banking crises, but there also have been periods with no such crises. For instance, you point out in your book that there was “a long period of financial tranquility” in the U.S. economy between World War II and 1980. What was different in the operations of the financial system during this period, and does the absence of financial and banking crises mean that the system had no failings and was in no need of reform?

In the U.S., the big banks and highly speculative financial institutions were widely perceived as having greatly contributed to, if not caused, the Great Depression of the 1930s. The Roosevelt administration implemented a set of New Deal financial regulations that greatly helped to stabilize the U.S. financial system for more than 30 years. Since the U.S. economy was the biggest economy in the world following WWII, these — along with the Bretton Woods Institutions created in 1944 and other factors — helped stabilize the global economy as well. The New Deal financial reforms focused on cutting the financial institutions down to manageable sizes (the Glass-Steagall Act separated investment from commercial banking); limiting bank runs by implanting deposit insurance; restricting speculation and predation by limiting leverage and what assets financial institutions could buy and sell (including limiting obscure products such as complex derivatives); and imposing social missions on various segments of finance — e.g. commercial banks would take deposits and make short-term loans to business, savings and loans would offer mortgages, investment banks would underwrite securities for businesses and state and local governments, etc.

The financial structure has often been called a system of “boring banking.”

Of course, these regulations were not perfect. Far from it. The financial structure formally and informally embedded the highly discriminatory aspects of U.S. society. The financial system excluded people of color, especially Black Americans, from getting mortgages and other financial services; women were dependent on their husbands or fathers to obtain financial services; and the poor and working class were generally underserved by these financial institutions or charged exorbitant prices. Still, this New Deal financial structure was relatively stable and did provide credit for businesses and some households, and did facilitate the economic growth of the early post-World War II period.

The postwar financial regulatory regime, which had been created during the 1930s under the New Deal, begins to break down between the late 1960s and early 1970s. What caused the breakdown of the New Deal financial structure, and why do we end up with the full liberalization of the financial and banking system instead of improvements to the regulatory framework?

The breakdown of the post-WWII New Deal monetary regime was due to both domestic and global financial, economic and political factors. Worldwide, there was increasing globalization and the revival of major economic and financial competitors to U.S. dominance, including Japan and some countries in Europe. U.S. banks and financial institutions wanted to break out of the strictures of the New Deal regulatory regime, including limitations on asset portfolios and on interest rates they could pay on deposits, in order to compete with foreign rivals, especially with respect to providing business services for U.S. and other multinational corporations. Second was the increasing inflation caused first by increased U.S. spending on the Vietnam War and military buildup connected with the Cold War and then by the OPEC oil price increases in the 1970s. This inflation harmed U.S. banks, which could not sufficiently increase interest rates on deposits to compete with new unregulated financial institutions like money market funds created by asset managers like Fidelity. In the face of these structural problems, the New Deal system had to be reformed in order to provide more flexibility for the banks subject to their strictures. It is very likely that such reforms could have been implemented. But the big banks such as Citibank, Bank of America and Chase Manhattan Bank used these disruptions as an opportunity to gather together their allies, both inside and outside of government, to push regulators, the Federal Reserve and Congress to destroy the old New Deal System entirely. I call this group “The Bankers’ Club.”

You point out in the book that the changes that were brought about allowed the banks to create a new business model, which you label “roaring banking.” How does roaring banking work, and who are the primary beneficiaries of this new business model?

The current financial system is dominated by huge “universal” banks that combine deposit taking, lending, bond and derivatives trading, underwriting and even commodities trading. Banks like Citigroup, JPMorgan Chase, Bank of America, Goldman Sachs, etc. have virtually no financial boundaries and are so huge that if they get into serious trouble, they are too big to rescue, and their failures, like that of Lehman Brothers, might create a major panic. We…