Economy Still At Risk Until We Reform Wall Street

By Ann McLane Kuster
Guest column in the Union Leader, April 29, 2010 (print edition only)

Here is an alarming fact: Eighteen months after Lehman Brothers collapsed and the stock market drove off a cliff, Wall Street is still governed by more or less the same broken rules that helped bring our economy to its knees.  Economic growth should be our #1 national priority right now, but the truth is that nothing Washington does - neither the biggest stimulus nor the deepest tax cut - can get our economy back on stable footing until our financial markets are fixed as well.

Unfortunately, the status quo politicians are digging in their heels.  Former congressman Charlie Bass helped loosen Wall Street regulations back when he was in Congress, and now that he is on the campaign trail again he is calling the pending reform “extremist.”  I couldn’t disagree more - either with his point or with his fringe-courting rhetoric.

Better rules for Wall Street are hardly “extremist.”  Coherent regulation helps all of us - it helps families who are trying to save for college or for retirement and it helps businesses that are growing and need stable capital to fuel more hiring.

The financial collapse didn’t happen on its own.  In 1999, the U.S. Congress passed the sweeping “Financial Services Modernization Act,” which allowed giant financial firms to own investment banks, commercial banks, and insurance firms all at once - something that had been banned since the Glass-Steagall Act of 1933.  It set up some new regulations, but also left glaring regulatory holes for investment banks such as Bear Stearns and Lehman Brothers, and for insurance giants like AIG.  Numerous economists have faulted this law as one of the prime causes of the sub-prime mortgage crisis and the origin of the words “too big to fail.”

It should be no surprise that the strongest voices warning against reform today - like Congressman Bass - are the very same people who voted to pass this law which laid the groundwork for the crisis.  

It is time to reform Wall Street, and the place to start is to undo the damage of that 1999 law. We simply cannot allow massive financial corporations to simultaneously act as both a bank and a private investor (ie, through owning their own hedge funds or private equity funds).  Limiting their role will make it harder for the Goldman Sachs of the world to profit off their customer’s misfortunes, and at the same time we must regulate the complex derivatives that even the bankers themselves don’t fully understand.  Further, we need to make sure that Wall Street pays back the costs of the bailout in full, and that any future costs for failing banks are paid for by the finance industry, not taxpayers. We must consolidate and strengthen regulatory oversight so companies are not incentivized to ‘game the system’ by manipulating which regulator they answer to.  And finally, we must consolidate not just protections for investors but also protections for consumers such as those buying a mortgage, a credit card, or a bank account.

This should not be a partisan fight.  You don’t have to be a Democrat or a Republican to admit that the current system is broken and needs change.  It is easy to over-simplify this debate into a shouting match between those who hate the market and those who hate the government, but the truth is that each institution has an important role.

At about the same time Congress was re-writing the rules for Wall Street, I was working as an attorney and public policy advocate with a focus on making higher education more affordable for New Hampshire families.  In the late nineties I helped bring together lawmakers, educational institutions, nonprofits, and businesses to create the "New Hampshire UNIQUE" college savings plan - one of the nation's first tax-advantaged college savings accounts.  A decade later, tens of thousands of middle-class New Hampshire families have now used the UNIQUE plan to save for college.  But savings plans like this only work when the market works for everyone, and today the rules of the road favor the big banks at the expense of everyone else.  

We’ve seen the cost of a broken financial system and we can’t afford to stay stuck in the past.  Reforming Wall Street will guard against future market failure and will provide stability for the economic growth our country needs.

Concord Attorney Ann McLane Kuster is a Democratic Candidate for Congress in New Hampshire’s Second Congressional District.