The Clinton and Sanders Plans to Rein In Wall Street

How do they differ, and what should we think of them?

BY JOHN MILLER | March/April 2016

This article is from Dollars & Sense: Real World Economics, available at

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[W]e have got to end, once and for all, the scheme that is nothing more than a free insurance policy for Wall Street, the policy of “too big to fail.” And, if we are serious about reforming our financial system, we have got to establish a tax on Wall Street speculators. We have got to discourage reckless gambling on Wall Street and encourage productive investments in the job-creating economy.

— Bernie Sanders, “Wall Street and the Economy” (prepared remarks), Jan. 5, 2016

I would also fight for tough new rules, stronger enforcement and more accountability that go well beyond Dodd-Frank.

My plan also goes beyond the biggest banks to include the whole financial sector ... including certain activities of hedge funds, investment banks and other non-bank institutions. We need to tackle excessive risk wherever it lurks, not just in the banks.

—Hillary Clinton, “Hillary Clinton: How I’d Rein In Wall Street,” New York Times, Dec. 7, 2015

Hillary Clinton and Bernie Sanders both talk as if they would describe Wall Street just as Woody Guthrie once did: The street that keeps the rest of us off Easy Street. Both are promising to rein in Wall Street by tightening regulations and imposing taxes to dull the incentives that fueled the financial recklessness of the last couple of decades. But which of these candidates has the better program to discipline Wall Street? That question has sparked a sharp debate among economists and financial reformers. For instance, after an exchange on financial reform during the October 2015 Democratic presidential debate, Keynesian economist and New York Times columnist Paul Krugman concluded, “Mrs. Clinton had the better case.” On the other hand, 170 economists and financial experts, including myself, endorsed Sanders’ plan for comprehensive financial reform.

Let’s take a closer look at the Clinton and Sanders plans, how they differ, and what to make of them.

Banking in the Shadows and Glass-Steagall

In some ways, Hillary Clinton did get the better of Bernie Sanders in their October debate.

Much of the dispute revolved around the effectiveness of the Depression-era Glass-Steagall Act, which separated traditional commercial banking from investment banking, and much of it involved mysterious terms like “shadow banking.” Clinton contends that restoring Glass-Steagall would not restrain much of the modern banking sector. “Many of the firms that contributed to the crash in 2008, like A.I.G. and Lehman Brothers, weren’t traditional banks,” she argued. “So Glass-Steagall wouldn’t have limited their reckless behavior.” Sanders sees it otherwise. He argued that a “modernized” version of the law, like the 21st Century Glass-Steagall Act sponsored by Sen. Elizabeth Warren (D-MA), would do much to prevent the recklessness on Wall Street that brought on the financial crisis.

Glass-Steagall separated commercial banks that take in deposits, through checking and savings accounts and the like, from investment banks that underwrite the sale of stocks and bonds on behalf of corporations and governments. The law’s intent was to stop banks from creating affiliates that were investing in the stock market or engaging in other speculative ventures (which had contributed to so many banks failing during the Great Depression of the 1930s).

Clinton is right that commercial banking was not a part of the operations of some of the largest investment banks and insurance companies—such as Lehman Brothers and the American Insurance Group (A.I.G.)—that got into trouble in the financial crisis. Glass-Steagall would not have prevented the financial crisis.

But it would have slowed its spread. With the repeal of Glass-Steagall in the late 1990s, during the presidential administration of one Bill Clinton, giant banks like Citibank, JP Morgan Chase, and Bank of America were transformed into conglomerates that mixed commercial banking with investment banking. They undertook a wide array of risk-laden activities that have come to be known as “shadow banking.”

While there is no consensus definition of shadow banking, the term roughly refers to all financial institutions that don’t take deposits in the way traditional banks do, and are not subject to traditional banking regulations, but do engage in lending and issuing securities. That includes investment banks as well as money market mutual funds, hedge funds, and some insurance companies, among others. In March 2008, on the eve of the financial crisis, the shadow banking sector was larger than the traditional banking sector, according to the estimates of liabilities for each sector made by the Federal Reserve Bank of New York. Reining in today’s Wall Street requires regulating shadow banking. Clinton provides some explicit measures—missing from the Sanders proposal—which would help do that. Most importantly, Clinton’s plan would impose a fee on large financial firms (including banks and other kinds of financial institutions) with more than $50 billion in assets. This risk fee, which would increase as a firm took on more debt or riskier short-term debt, would discourage banks from relying on excessive borrowing (or “leverage”).

Breaking Up Is Hard to Do

In the next Democratic presidential debate, when Clinton once again laid out her plan to fix Wall Street, Sanders responded, “Not good enough. ... If Teddy Roosevelt, the good Republican, were alive today you know what he’d say? Break them up. Re-establish Glass-Steagall.”

Breaking up financial institutions that are “too big to fail” is a cornerstone of the Sanders proposal. The failure of any one of the financial behemoths that dominate the industry could have far reaching and disastrous effects on the financial sector and the broader economy. In addition, these banking colossuses are not just too big fail, but also too big to regulate. Their size and complexity stand in the way of the tougher enforcement of existing banking regulations favored by both Clinton and Sanders.

But breaking them up is hard to do. Today’s mega financial institutions are larger, not smaller than at the time of the financial crisis—due in large part to government-arranged mergers that rescued failing banks during the financial crisis, such as Merrill Lynch becoming part of Bank of America. And the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) in the wake of the crisis has not worked to reduce the size of these financial giants. By the end of 2014, the assets of the six largest bank holding companies (J.P. Morgan Chase & Co., Bank of America, Citigroup, Wells Fargo & Company, Goldman Sachs Group, and Morgan Stanley) had grown to $9.8 trillion, or 57% of U.S. GDP, and were about two-fifths greater than they had been in 2008.

A modernized Glass-Steagall is an important part of Sanders’ plan to break up these oversized banks. Were Glass-Steagall restored, each banking conglomerate would either have to restrict its business to commercial banking or investment banking, or split into multiple companies. By enforcing the separation of commercial and investment banking, the law would force giant banking conglomerates to break themselves up, helping to limit “too big to fail.”

In addition to re-enacting Glass-Steagall, and therefore breaking up banks by type of business, the Sanders plan would also directly limit the size of banks of all types. Sanders supported the 2012 SAFE Banking Act that would limit the liabilities of any financial institution to no more than 3% of GDP, or about $520 billion in 2014. The liabilities of all six of the largest bank holding companies (ranging from about $750 billion to over $2.3 trillion) far exceed that limit, so they would be broken up.

But even those downsized giants would remain powerful economic and political actors, larger than every other firm in the financial industry, and large enough that their failure could still be calamitous. While breaking up these banks reduces the likelihood of having to bail them out, other safeguards and regulations are needed.

Sen. Warren’s 21st century Glass-Steagall Act would impose one especially tough new regulation on shadow banking. It would repeal the current legislation that allows lenders holding a wide variety of financial instruments and security contracts to get repaid before a bankrupt borrower enters bankruptcy court. For example, one of those financial instruments is a repurchase (or “repo”) agreement. That arrangement lets a bank borrow money by selling a security if the bank agrees to repurchase the security on an agreed upon fixed date at a fixed price. The current law makes it easier for the buyer of the security to still get paid, even if the borrower goes bankrupt. That creates a major incentive for lenders to continue to lend to banks that are taking huge risks. Repealing the current law would reduce this type of lending, and discourage bank risk-taking.

These Banks Were Made for You and Me?

Clinton and Sanders promise that their plans will not only discourage reckless short-term gambling on Wall Street but also encourage long-term productive investment and create good-paying jobs and rising incomes on Main Street.

The Clinton plan combats short-termism by taxing “harmful” high- frequency trading (HFT), specifically that involving excessive order cancellations. Some financial institutions simultaneously place large numbers of orders to buy financial securities at one price and sell them at another, in hopes of buying them at the lower price and selling them at the higher one. One reason for large number of order cancellations is that, if the financial institution does not find a combination of securities to buy and sell at prices that yield a profit, they can cancel the original orders and try again. Another reason, however, may be that the financial institutions are engaging in “spoofing,” or attempting to push prices in one direction or the other by placing orders they have no intention of executing. While worthwhile, the Clinton proposal is quite limited. It would not shrink the HFT market. Nor would it discourage other short-term transactions.

The Sanders financial transaction tax is far more aggressive and much broader in scope than the Clinton HFT tax. (This anti-speculation tax would finance his “College for All Act,” which would eliminate undergraduate tuition at public four-year colleges and universities. See Why Free Higher Ed Can’t Wait, D&S, March/April 2016.) The Sanders legislation would impose a fee on investment houses, hedge funds, and other speculators—0.5% on all stock trades (50 cents for every $100 worth of stock), a 0.1% fee on bond transactions, and a 0.005% fee on derivative trades. A study conducted by economists Robert Pollin and James Heintz, of the Political Economy Research Institute, found that a financial transaction tax could raise up to $300 billion a year.

The commitment that Sanders and Clinton bring to following through on what they propose and their political independence are critically important as well. Sanders has been steadfast in his advocacy of financial reform. Even the editors of the Wall Street Journal allowed, “Bernie Sanders ... actually means what he says about bankers.” Clinton has not been so consistent. When the Boston Globe reporters reviewed her record in the Senate, they concluded, “Hillary Clinton was hands-off on Wall Street.” On top of that, the securities and investment industry has contributed more than $17 million to the Clinton campaign and other pro-Clinton political operations, while they have given just $78,000 to the Sanders campaign, according the Center for Responsive Politics.

Should it be enacted, Clinton’s plan to regulate the financial sector would be an important step in the right direction. But Sanders, not Clinton, is the proven champion of financial reform. His plan, despite its lack of specific proposals on shadow banking, rests on the essential cornerstones of ending “too big to fail” by breaking up the banks and imposing a tough-minded transactions tax (with the bonus of devoting its revenues to free higher education), both of which are missing in the Clinton plan. When combined with Warren’s 21st Century Glass-Steagall Act, Sanders’ plan becomes a powerful set of measures that would transform the financial sector. It could and should be made better still by including some of Clinton’s proposals to directly regulate shadow banking. If that set of reforms were enacted, admittedly an unlikely proposition for either Sanders or Clinton, banks just might be made to serve you and me, instead of keeping us off Easy Street.

is a professor of economics at Wheaton College and a member of the Dollars & Sense collective.

Paul Krugman, “Democrats, Republicans and Wall Street Tycoons,” New York Times, Oct. 16, 2015 (; Robert Reich, et al., “Economists and Financial Experts In Favor of Sen. Sanders’ Wall St. Reforms” (; Jennifer Taub, “What We Don’t Talk About When We Talk About Banking,” in Gerald Epstein, Martin H. Wolfson, eds., Oxford Handbook of the Political Economy of Financial Crises, Oxford University Press, 2013; Zoltan Pozsar, et al., “Shadow Banking,” FRBNY Economic Policy Review, Dec. 2013 (; Congressional Research Service, “Summary of S.3048 – SAFE Banking Act of 2012,” (; Elisabeth Warren, “21st Century Glass-Steagall Act, Fact Sheet,” July 11, 2013 (; Congressional Research Service, “Summary of S.1709 —21st Century Glass-Steagall Act of 2015,”(; “The Briefing: Hillary Clinton: Wall Street Should Work for Main Street” (; Bernie Sanders, “Summary of Sen. Sanders’ College for All Act” (; Robert Pollin and James Heintz, “Memo to Robin Hood Tax Coalition: Thoughts on Tax Rates and Revenue Potential for Financial Transaction Tax in U.S. Financial Markets,” Political Economy Research Institute, March 2, 2012 (; “Review and Outlook: Hillary’s Wall Street Reckoning,” Wall Street Journal, Feb. 5, 2016 (; Annie Linsky, “As a senator, Hillary Clinton was hands-off on Wall Street,” Boston Globe, Jan. 17, 2016 (; Mike Konczal, “Bernie’s Wall Street Plan Is Actually Not Enough,” The Nation, Jan. 26, 2016 (; Zach Carter, Jason Linkins, and Shahien Nasiripour, “The Clinton Team is Writing ‘Too Big to Fail’ Out of the Financial Crisis,” Huffington Post, Jan. 20, 2016 (; Matt Levine, “Why Do High Frequency Traders Cancel So Many Orders?” BloombergView, Oct. 8, 2015 (

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