The Big Lie of the Post-Crisis

The WSJ editorial page says government, not Wall Street, "won" the aftermath

Bill Black is always worth reading and his column flagging a line in a Wall Street Journal editorial is no exception. Naturally, the entire WSJ piece deserves a closer look, as well.

The WSJ argues that government came out ahead in the power race with banks after the financial crisis and it backs up that obtuse argument with examples like this, which is the what has Black seeing red:

The regulation micromanages bank decisions down to the kind and quality of loan.


The Dodd-Frank Act bans a “kind” of loan based on the inherently fraudulent “quality of [the] loan.” The Act bans liar’s loans. The WSJ considers this ban so appalling, so obvious a violation of the divine right of banks, that it labels it “micromanage[ment]” and assumes that the label proves the absurdity of banning liar’s loans.

As I have been explaining for over two decades, no honest lender would make liar’s loans.

Believe it or not, the Journal actually favors tougher regulation of the banks, in a way. It wants (or says it wants, anyway) “much tougher capital standards for banks that take insured deposits, set clear rules that limit risk-taking at such institutions, and let other companies innovate and take risks knowing they get no taxpayer protection.”

You can imagine the “clear rules” the WSJ has in mind when it carps about banning a notorious type of loan that encourages mass fraud. The point of post-financial crisis reforms is to prevent another similar crisis. Liar loans were made primarily by companies that would remain protected from regulation in the WSJ’s laissez-faire carve-out. The Journal wouldn’t change a thing for the future Countrywides and Ameriquests of the world, in other words.

To argue that government has “won,” you have to leave aside the fact that Wall Street wouldn’t exist without the government’s intervention. Forget about the fact that it’s making record profits or that none of its executives have been prosecuted for their banks’ crisis-related activities. Or that the Too Big to Fail banks are now 28 percent bigger than they were when they were TBTF in 2008.

Most important for our purposes here: Expunge the fact that the regulation the Journal decries as so arcane and bumbling becomes that way because Wall Street still has the power to make it so.

The Volcker Rule and a Glass-Steagall II are pretty simple, really. It’s the power of the bank lobby—the survival of which after 2008, much less its resurgence, proves the WSJ’s lie—that makes them complicated and, oh by the way, prevent common-sense capital standards the WSJ pushes.

This is quite the passage:

Far and away the biggest winner is the government.

This isn’t the conventional view in media and politics, where the spin is that Wall Street has triumphed. This is politically convenient because it maintains Washington’s self-serving fiction that the banks alone caused the crisis, and that after bailouts they have emerged richer and less regulated than ever. This leaves politicians free to bash the banks in perpetuity even as they constrain their business and fleece them at regular intervals.

The truth is that across the U.S. economy the government has far more power than it did five years ago, especially in finance. The same politicians and regulators who pulled every lever they could to force capital into mortgage finance have not only escaped punishment for their role in the 2008 crisis. They’ve also awarded themselves more authority to allocate credit….

Regulators have ordered a top-to-bottom overhaul of foreclosure processes even after extorting more than $25 billion in payouts for exaggerated past offenses.

If we’re starting from the baseline that the government has more power over banks that it did in 2007 and 2008, then, well, no kidding. The government had all but abdicated its responsibility to exercise power over the banks in the thirty years leading up to the crisis, and the banks themselves called for more regulation (by the way, responsibility for laying the groundwork for that devastating deregulatory spree goes more to the Wall Street Journal editorial page than to just about anyone else).

Nobody—not even the WSJ—believes that the government has Wall Street under its thumb, much less unable to wreck the global economy again.

That government “fleecing” of banks and its demand “a top-to-bottom overhaul of foreclosure processes even after extorting more than $25 billion in payouts for exaggerated past offenses”? The Journal is referring to the foreclosure scandal, where banks ran roughshod over the courts and the law and hundreds of thousands of homeowners. That’s yet another example of how Wall Street has trampled the government, gone on a crime spree, and still come out relatively unscathed, (most of that $25 billion being phantom money).

The core problem is that the WSJ believes (or, again, says it believes) Big Lie of the Financial Crisis: that it was government, not market failures, that caused the housing bubble and collapse.

Now it’s trying out a Big Lie of the Post-Crisis: that it was the government, not Wall Street that “won” the regulatory aftermath.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,