Reforming Global Finance

Financial Reform With Real Teeth

What are the potential costs if Wall Street is successful in weakening the Dodd-Frank financial regulations?

Credit: EricDS/


  • More than $12.8 trillion in GDP has been or will be lost due to the financial collapse and the economic crisis it caused.
  • JPMorgan Chase, Goldman Sachs, Morgan Stanley and the others are in business today only because they were bailed out by the U.S. government.
  • Wall Street was able to cause the crisis precisely because it used its economic power to gain political, academic, media and other power.
  • After financial regulations were put in place in the 1930s, the United States did not have a major financial crisis for more than 70 years.
  • After 70 years of heavy regulation, it took just seven years of deregulation for Wall Street to cause almost a second Great Depression.

To protect the American people and the U.S. economy, the financial reform and Wall Street re-regulation law needs to have real teeth in order to rein in the worst abuses.

Even though the memory of the financial collapse and economic crisis that began in 2007 is still very fresh, and its effects on the real economy have barely begun to be remediated, the Wall Street machinery continues to deny or minimize its role in the financial collapse and the ensuing economic crisis.

As if to add insult to injury, Wall Street firms and financial industry associations are trying to obscure and conceal the cost of the collapse and crisis.

Perhaps most importantly, they are also engaged in a comprehensive misinformation campaign that has refocused the public debate away from the crisis and Wall Street’s role in creating it to the financial reform law, the rules to implement it and the alleged cost to the industry.

Disregarding the law’s goal of preventing another crisis and protecting the American people, taxpayers, Treasury and economy, the industry has bogged down the process by delaying the rules, enlisting purchased allies to frustrate the regulators and killing, gutting or weakening reform according to a rule-by-rule attack plan.

And yet, the core fact remains: Wall Street was able to cause the collapse and crisis precisely because it used this very same economic power to gain political, academic, media and other power.

That strategic maneuver enabled it, over time and with pliable officeholders from Congress to the White House, to tear down the many laws, rules and regulations put in place during the Great Depression of the 1930s after the last big calamity caused by Wall Street.

It ought to be remembered that, after those laws, rules and regulations were put in place, the United States did not have a financial or economic crisis on or near that scale for more than 70 years — until Wall Street had chipped away at the armor that had been built up and worked so successfully.

It must also be remembered that, even with all those many laws, rules and regulations, the United States still prospered.

Indeed, the United States built the largest and most broad-based middle class in the history of the world. And Wall Street, the financial industry, nonfinancial businesses and the U.S. economy all thrived during that same time of heavy regulation.

However, by 2000, virtually all of those protections had been torn down. Wall Street was not just deregulated, but almost entirely unregulated.

Incredibly, this was a bipartisan activity. Before the deregulatory zeal of the Bush administration after 2001, Wall Street’s lobbying to get rid of regulations was aided and abetted by plenty of Democrats, such as then-Treasury Secretary Robert Rubin and his successor, Larry Summers, among many others.

The results are clear: After 70 years of heavy regulation that protected the American people, its financial system and economy, it took just seven years of deregulation for Wall Street’s investment, trading and other activities to cause a financial collapse and almost a second Great Depression.

Since then, those actions by Wall Street have required the U.S. government to spend, lend, guarantee, pledge, assume or otherwise use trillions of dollars to save Wall Street from itself and to prevent the crisis from becoming even worse.

While they may still have the arrogance to deny it, every single major bank and all of the other too big to fail financial institutions would have collapsed into bankruptcy were it not for the actions of the U.S. government and the taxpayer dollars expended to bail them out and put them back on the road to profitability.

Thus, JPMorgan Chase, Goldman Sachs, Morgan Stanley, Merrill Lynch, Bank of America, AIG, Citigroup and the others are in business today only because they were all bailed out by the U.S. government and the American taxpayer.

When accounting for the costs of the crisis, it is important to remember that those bailouts, though, were only part of the costs of the crisis. The economic wreckage caused by Wall Street’s actions has touched every corner of the United States. (Better Markets has recently completed a comprehensive study that details the costs.)

It has brought about:

  high and persistent unemployment and under-employment
  historically high foreclosures and underwater homeowners
  slow-to-no economic growth
  business failures
  untold wealth destruction
  widespread and growing poverty

Many other non-economic costs continue to mount as well. This includes nothing more vital and potentially destructive than a growing loss of belief in the American Dream.

There are many ways to measure the cost of the crisis. One is gross domestic product (GDP): More than $12.8 trillion in GDP has been or will be lost due to the financial collapse and the economic crisis it caused.

Another measure of these costs reveals just how deep and overwhelming the crisis has been and continues to be in the United States. The Federal Reserve Board recently released a study that shows that the net worth of the median family declined 38.8% in just three years (from 2007-10), wiping out more than $19 trillion in wealth — almost two decades of prosperity.

This financial and economic calamity has proved yet again that, other than war, nothing devastates a country economically more than the economic ruin that follows a financial crisis such as the one that began in 2007.

Given all that, it is more than appropriate that he Dodd-Frank financial reform law — which should really be known as the Wall Street re-regulation law — was passed. Its intent is to prevent such a crisis from ever happening again.

Without any doubt, it is necessary to protect the American people, taxpayers and Treasury from Wall Street, as well as to eliminate or minimize the need for any future bailouts.

The law is smartly (and actually conservatively) designed to do that largely by re-regulating Wall Street and systemically significant institutions and activities. After all, the financial crisis and the costs it created arose due to the deregulation and non-regulation of Wall Street

While Wall Street and its allies are irresponsibly busying themselves at a frenetic pace with an unprecedented effort to stall as many provisions of the law as possible, great caution is warranted regarding these efforts.

This behavior is especially reckless because, even to this day, no one knows exactly why or how a complete disaster, like a total collapse of the financial system or a second Great Depression, was averted.

We were, in a sense, lucky: While plenty of actions were taken, no one knows for sure which policy, program, intervention, action or expenditure — or what combination or order of those measures — eventually arrested the downward spiral.

That is why comprehensive financial reform and the re-regulation of Wall Street was — and is — so essential. Its purpose is to prevent another Great Depression from afflicting the United States and the globe.

That this dire outcome was avoided, but just barely and through a measure of good luck, cannot give us any sense of comfort or relief. The American people may not be so fortunate next time and, most importantly, they should not have to depend on luck.

They should have the benefit of laws, reforms, rules and regulations to protect them, and they should be able to count on their elected representatives and regulators to fulfill their duties and ensure that those safeguards are put in place.

The benefits of avoiding another financial crisis are enormous, totaling trillions of dollars, measured not just in terms of the current crisis but also in light of a potentially worse financial disaster that may befall our country in the future if reform is not fully implemented.

There is no alternative to a vigorous implementation of the Dodd Frank law to spare economies and societies around the globe the devastating consequences that another financial collapse and economic crisis would bring, both in the form of both monetary losses and human suffering.

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About Dennis Kelleher

Dennis M. Kelleher is the president and CEO of Better Markets, Inc., a nonprofit organization that promotes the public interest in the U.S. and global financial markets.

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