Five years after the U.S. economy began sliding into the worst downturn since the Great Depression, Senator Elizabeth Warren, D-Mass., is questioning the adequacy of steps taken since then to prevent a rerun of the recession.
In a speech delivered to Better Markets and George Washington Law School’s Center for Law on Thursday, Warren, a bankruptcy expert turned legislator, pointed attention to the "too big to fail" mentality that led to the government pouring millions of taxpayer dollars into the nation's largest financial institutions to prevent their collapse.
In Warren's view, the fact that the four biggest banks in the country are 30 percent larger than they were five years ago and the five largest banks currently hold more than half of the total banking assets in the country are indications that things are trending in the wrong direction.
"The crash happened quickly and dramatically, and it caught our nation and apparently even our regulators by surprise. But don’t let that fool you. The causes of the crisis were years in the making, and the warning signs were everywhere," Warren said. "Who would have thought five years ago, after we witnessed firsthand the dangers of an overly concentrated financial system that the Too Big to Fail problem would only have gotten worse?"
Warren, a proponent of increasing the regulatory oversight of the financial industry, also used her speech to push her renewed 21st Century Glass-Steagall Act as a tool to potentially mitigate future issues.
The concept behind the Glass-Steagall Act has roots in the Great Depression era as lawmakers aimed to limit commercial banks, which take deposits from the public, from engaging in certain kinds of financial trades and transactions used by investment banks. In essence, the two types of banks were separated and their actions restricted based on their classification.
Those provisions of the Banking Act of 1933 were repealed by the Financial Services Modernization Act of 1999, which became law under President Bill Clinton. At the time, it was argued that decades of alterations to the previous law had already made the Glass-Stegall Act's limitations all but nonexistent. On the campaign trail in 2012, Warren told a New York Times columnist that although she thinks a new Glass-Steagall Act would have limited banks like JPMorgan from becoming "too big to fail," the provision alone "probably" wouldn't have prevented the bank's financial loss in the risky trade.
Still, she considers it a common-sense measure which has actually gained support from Republicans and independents, despite the staunch opposition from some in the GOP to any further financial industry regulations.
"In other words, the new Glass-Steagall Act would attack both 'too big' and 'to fail.' It would reduce failures of the big banks by making banking boring, protecting deposits and providing stability to the system even in bad times. And it would reduce 'too big' by dismantling the behemoths, so that big banks would still be big – but not too big to fail or, for that matter, too big to manage, too big to regulate, too big for trial, or too big for jail," Warren said.
"Big banks would once again have understandable balance sheets, and with that would come greater market discipline. Now sure, the lobbyists for Wall Street say the sky will fall if they can’t use deposits in checking accounts to fund their high-risk activities," Warren said. "But they said that in the 1930s too. They were wrong then, and they are wrong now."
The full text of Warren's speech, as prepared for delivery, can be read here.