Silvers: We Need Comprehensive Financial Reform

by Seth Michaels, Nov 18, 2009

AFL-CIO Director of Policy Damon Silvers has a prescription for moving our economy forward: Make the financial sector the servant of the real economy—not its master.

Silvers debated American Bankers Association President Edward Yingling on the need for financial reform in a hard-fought discussion at the Aspen Institute yesterday, and the differences between the two were most apparent when it comes to protecting consumers and applying stronger rules to banks, credit cards and the mortgage industry.

Silvers, who sits on the Congressional Oversight Panel for the Troubled Asset Relief Program (TARP), says we cannot allow the financial industry to drive our economy into the ground again. We must have new, tough regulations that protect consumers and put the financial sector to work for the real economy. And we absolutely can’t bail out the CEOs and stockholders of failed banks.

One of the first steps, Silvers said, is to have a new agency strictly tasked with protecting consumers. Our old strategy—of having one regulator overseeing both how well banks are doing as a business and how they’re treating consumers—undermined consumer protection. This is especially true given the immense power of a few large banks, as financers of the credit card and mortgage industry. Yingling, however, strongly opposed giving a new agency the ability to oversee consumer protection, saying such a regulator would be too powerful.

Silvers also said we need stricter oversight of “shadow markets,” like the trade in derivatives and hedge funds, and a fully public entity to regulate systemic risk, not one run by the banks themselves.

While Yingling and Silvers agreed about many of the causes of last year’s financial crisis and the damage it wreaked on our economy, they differed strongly on the solutions, particularly when it comes to consumer protections for the many ways people must interact every day with the financial markets.

When we’re thinking about reforming and regulating the finance industry, Silvers said, we need to be sure we’re rebuilding a financial sector that works on behalf of the real economy, rather than driving it:

What kind of economy are we going to become, and what kind of role will the financial markets and financial enterprises have? We made this mistake in the past 10 years of thinking we could found our economy on finance. That whole illusion came to an unpleasant end…we have paid a terrible price.

The fact that the financial sector made up such a huge portion of our economy should have been a warning sign, Silvers said. The United States, through deregulation, pursued a strategy of building a low-wage economy with consumption based on enormous amounts of personal debt, and it should have been no surprise when that economy unraveled.

The approach of just making the world safe for “too big to fail” banks—asking them to regulate themselves and giving them an implicit guarantee of a public bailout when they get it wrong—has failed, Silvers said. There’s no public interest in bailing out the stockholders of a failed institution, and the mistakes made in the bank bailouts have undermined people’s trust in the government. We have to close the door completely, Silvers said, on allowing large, powerful institutions to get into high-risk, high-reward situations with the expectation that taxpayer dollars will be there to protect them.

Dismantling and weakening regulation got us into this mess, Silvers said. We need comprehensive reform, not a “Swiss cheese” regulatory system that will just replicate the crisis.

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