The Real Reason It’s Hard to Take Bernie Sanders Seriously on Wall Street Reform
In fact, the problem with Sanders' approach to Wall Street regulation is that he’s too focused on breaking up the banks—so much so that he's pinning his hopes on regulatory schemes of dubious legality, to the exclusion of equally important issues. The Clinton campaign often criticizes Sanders for failing to address the shadow banking sector—the vast network of financial firms that, while not technically banks, act a lot like them, and which played a central role in the 2008 crisis. But even on the issue of the banks themselves, Sanders is oddly myopic.
As Federal Reserve Bank of Minneapolis President Neel Kashkari recently outlined, there are (at least) three broad ways you can try to deal with the issue of “too big to fail.” First, you can deal with the “big” part and just break them up, either through an approach like Glass-Steagall's, or perhaps by simply capping their total assets. (The latter would probably be more effective, since pure investment banks can get plenty large. Remember Lehman Brothers?) There are advantages to this approach. The failure of a small- or medium-size bank is probably less likely to pose an existential risk to the global economy, and as a side benefit, you might create some extra competition in the market for financial services while reducing the political power of individual institutions (though probably not the financial sector as a whole).
But the biggest problem with just breaking up JPMorgan and Bank of America and calling it a day is that downsized banks are still perfectly capable of taking stupid risks and failing. And if enough of them go bust at once, it can create systemic problems. For instance, the 1980s savings and loan crisis, which involved the failure of more than 1,000 small thrifts, ended up costing U.S. taxpayers some $124 billion and likely damaged the economy. That's why many financial reform advocates—most notably Anat Admati and Martin Hellwig—have argued that instead of shrinking banks, we should make them fail-proof by keeping them from borrowing too much. The most direct way to do that is through dramatically higher capital requirements, which force banks to fund more of their business through things like cash from retained profits and selling stock, rather than debt. (The less your bank is fueled by borrowing, the less likely it is to go bust if your loans and other investments go sour.) Dodd-Frank already raised capital requirements for the largest financial firms, but many think the government should go much further.
Finally, you can also try to reduce risk in the financial markets by simply taxing them, since making it expensive to borrow an obscene amount and leverage up your bets should encourage banks to do less of it. This is basically Clinton's preferred method, and while it might be the lightest-touch approach of the three, the way that financial institutions have slimmed down to avoid Dodd-Frank's regulatory requirements suggests it could be very effective. Plus, it has the advantage of directly addressing risk instead of size. Too-big-to-fail isn't quite such a problem if you don't have to worry about the fail part.
http://www.slate.com/blogs/moneybox/2016/04/06/the_real_reason_it_s_hard_to_take_bernie_sanders_seriously_on_financial.html
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