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Wall Street Reform: Preserving Dodd-Frank and Beyond

February 23, 2015

The International Labor Organization has found that the growing power of finance is the Number One cause of the declining amount of the world’s economy that is made up of the wages of the people who do the work.  This trend was vastly accelerated by the 2008 financial crisis.  That crisis may be a distant memory for Wall Street’s friends in Congress, but millions of working people still are living with the consequences every day.  Whether measured in foreclosures, layoffs or lost retirement savings, working people suffered the consequences of Wall Street greed.  Now Wall Street is reaping the benefits of record stock prices while working people struggle to get by as wages remain stagnant.

America emerged from the crisis with a fresh appreciation for the value of financial regulation and accountability for Wall Street.  In 2010 Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act to rein in Wall Street excess.  The act created an agency in Washington whose sole purpose is to protect consumers from tricks and traps in consumer financial products such as mortgages and credit cards.  It reined in the casino economy by limiting excessive risk-taking by too-big-to-fail banks and derivatives traders. Dodd-Frank put in place investor protections, including new regulations for managers of hedge funds and leveraged buyout funds. And it improved disclosure by requiring public companies to publish the ratio of the pay of their CEOs to their median worker’s pay.

The AFL-CIO strongly supports the Dodd-Frank Act.  We fought hard to make sure it passed.  We will continue to work hard to prevent Wall Street’s friends in Congress from tearing it down. But let us be clear: It was a compromise.

Now, with Congress’s attempts to undermine the reform that was achieved in 2010, we risk unleashing again the high-risk activities that led to the 2008 crisis.  Wall Street’s friends in Congress already have won painful rollbacks. In one instance, an amendment written by Citigroup lobbyists that stripped an anti-bailout provision from Dodd-Frank was snuck into a bill to fund the government.  We are grateful for the work of House Minority Leader Nancy Pelosi, Congresswoman Maxine Waters, Sen. Sherrod Brown and Sen. Elizabeth Warren, who led the fight against this sneak attack on Wall Street reform.

In his State of the Union address, President Obama said enough is enough.  “We can't put the security of families at risk by… unraveling the new rules on Wall Street,” he said.  He added that if he is asked to sign legislation that undermines Dodd-Frank, “it will earn my veto.”

Congress must stand with the president against efforts to weaken Wall Street reform. It is time to send the message to the big banks and their lobbyists: Congress will not agree to any weakening of Wall Street regulation, particularly through attachments in the dead of night to “must-pass” bills.  Those who care about financial reform can never again submit to this kind of extortion.

It is also time to look beyond Dodd-Frank.  For all that Dodd-Frank accomplished, it left the too-big-to-fail banks intact and did not finish the job of returning Wall Street to its proper role as servant of the real economy.  This leaves us with three major next steps in Wall Street reform.  First, we must put in place a modest tax on financial speculation. Second, we must break up the too-big-to fail banks.  And third, we must separate the business of commercial banking from the business of trading in stocks, bonds and derivatives.

Finance is supposed to serve the real economy—it is supposed to provide money to businesses that are developing products and services that consumers in the United States and abroad would like to buy, businesses that are growing and creating jobs.  Over the past 30 years, finance has moved away from this important function. Now a tremendous amount of what Wall Street does is gambling, plain and simple. For example, by some estimates more than 70% of stock market trading is done by hedge funds using high-speed computer models.

It is time to rein in excessive speculation in the financial markets. We need to require Wall Street speculators to pay their fair share of taxes by implementing a financial speculation tax.  We applaud Congressman Chris Van Hollen’s announcement in January that he will propose a “high-roller fee,” a 0.10% tax on Wall Street trading.  We also support Congressman Keith Ellison’s Inclusive Prosperity Act and look forward to its reintroduction.  A small tax on sales of stocks, bonds and complex financial instruments will raise needed tax revenue.  These are critical funds that could pay for infrastructure and education to lay the foundation for long-term productivity growth.  Moreover, a financial speculation tax will deter the type of casino capitalism that has become too rampant in our capital markets.

 We need to make banking boring again—to break up the too-big-to-fail banks by separating commercial banking, taking deposits and making loans for consumers and businesses, and investment banking, which entails more risky and speculative activity. Risky investment banking activities must not be permitted within commercial banks, which are insured by the government. This is exactly what Congress did when it passed the Glass-Steagall Act during the Great Depression. And for 50 years after Glass-Steagall went into effect, bank failures were rare and our economy generated the longest period of broad-based prosperity in U.S. history.

Glass-Steagall was repealed in 1999 and since then we have experienced financial market instability that is unprecedented in modern history.  But the dangers of too-big-to fail banks were not fully addressed in the aftermath of the crisis.  Instead, big banks bought up failing firms and increased concentration within the financial sector.  Today, the six largest bank holding companies hold approximately 70% of bank holding company assets.

When a handful of banks hold such vast sums of money, it places our entire financial system at greater risk.  It also increases the likelihood that the government will bail out Wall Street banks again in the future.  The best way to prevent future government bailouts of too-big-to-fail financial institutions is to end too-big-to-fail once and for all.

Seven years after the onset of the worst financial crisis since the Great Depression, the economy is growing but working families are not being allowed their share of the growth.  The gains have only gone to Wall Street and the wealthy few.  It is time to raise wages for all working people.  For this to happen, Wall Street needs to invest in the real economy.  This means we need to preserve the basic reforms in Dodd-Frank that limit gambling on Wall Street.  We also need to put in place stronger protections by breaking up the too-big-to-fail banks, enacting a modern day version of Glass-Steagall and implementing a modest tax on financial speculation.

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