Busting the bankers’ club
Busting the bankers' club - finance for the rest of us
Published by University of California Press, 2024
Gerald Epstein is a leading expert in critical economic approaches to banking and finance, not least for his concept of financialization (Epstein, 2005): the transformation of everyday life into financial activity. I have discussed financialization in more depth elsewhere, but one of its consequences is that “public provisioning and policy-making [is] increasingly investor orientated” (Hofferberth, 2022, p. 86). Epstein’s book can be read partly as an attempt to explain these processes of financialization. It also reinforces the view that banking and finance, at least as they currently operate, should not be relied upon to facilitate just transition. These are important messages for Greens, many of whom view finance more benignly, seeing it as key to transition to a sustainable economy, for example in the Global South.
In the book, Epstein brings to bear decades of research, advocacy, and other experience to tell the story of the Bankers’ Club, “the powerful political groups [and others] that protect” (p. 90) banking and finance: a network of individuals and institutions in government (both executive and legislature), politicians, lawyers, economists, as well as bankers and financiers. Most of the book’s thirteen chapters are spent outlining the Club’s membership, and how its influence works. The book openly (p. xv) concerns mainly the USA, a focus justified by this being Epstein’s area of expertise and given the country’s centrality in global banking and finance.
The book’s title is also a pun: the bankers’ club is “the club the bankers hold over our head”, which is that “they can threaten to bring down the economy every time they get into trouble” (p. 90). Epstein’s main argument in the book is that such a situation has been manufactured by the bankers, ably facilitated the Bankers’ Club. He documents the myriad ways, over a sustained period, this network has cemented bankers’ and financiers’ power. Nonetheless, Epstein tries to offer hope of achieving a banking and finance sector fit for the public purpose, by outlining its principles, and highlighting existing examples of it.
What is the Bankers’ Club and how does it work?
Epstein takes an historical approach, examining banking and finance before the Wall Street Crash in 1929 and, driven by the combined anger of the public and industrial capitalists about the wider economic depression, post-Crash reforms to banking. Under that new regulatory structure, banks “could not legally engage in highly speculative investments in stocks, bonds and other securities” (p. 21). The Banking Act 1933 included the Glass-Steagall provisions separating retail (everyday loans and deposits) from investment (speculative) banking.
However, in a detailed Appendix, Epstein charts how the Bankers’ Club, through a sustained period of lobbying, gradually reversed the regulation and prevented further legislation from being passed, even after the Great Financial Crash of 2007-8. The much-trumpeted Dodd-Frank Financial Reform Act, which was supposed to ensure that banks were no longer ‘too big to fail’, did not do so, being undermined from its inception, not least by the insertion of incomplete clauses that allowed lobbyists to neuter it. Epstein quotes former Senator Dick Durbin: “the banks, hard to believe in a time where we’re facing a banking crisis that many banks created, are still the most powerful lobby on Capitol Hill. And they frankly own the place” (p. 12).
Epstein devotes separate chapters to different members of the Bankers’ Club, detailing their contribution. Epstein (chapter 7) identifies the Chair of the Federal Reserve (the ‘Fed’, the US central bank) as the chair of the Bankers’ Club. He notes that the Fed was initially established, demanded by leading bankers such as JP Morgan, to create greater financial stability, to allow New York to compete with major financial centres such as London, who benefitted from the regulatory force of a central bank (p. 131).
The Fed (as do most central banks) has much-vaunted independence from fiscal policy (and other political interference); however, Epstein notes how the Fed consistently favours finance. For instance, it keeps interest rates (and therefore savings rates) low, to make borrowing cheap. But, he argues, the Fed is also hawkish about inflation, not because of its destabilising effects (including hysterical concerns about hyperinflation) but because inflation lowers returns on lending (since it lowers the value of future loan repayments). Epstein (citing Dickens, 2016) claims the Fed even deliberately sparked economic downturns to weaken the power of labour.
If the Fed is central to the Bankers’ Club, Epstein also identifies the role of what he calls the ‘money spigot’, a seemingly endless supply of campaign finance and other lobbying that allows banks and finance to capture politicians. He notes that the clash between capitalists that facilitated financial reform in the 1930s has now been avoided by what he calls the financialization of the CEOs, which ties the personal remuneration of corporate managers to the prices of stock options.
Epstein notes that regulation has become diluted and ineffective, partly via the ‘revolving door’ between the banks and finance companies, the regulators, and politics, in which bankers and financiers enter government and change its thinking, and in which politicians get rewarded for helping banking and finance firms with jobs with them after leaving office. As one example, Epstein notes that the Trump administration’s pro-bank reforms were facilitated by the former Goldman Sachs employee Steven Mnuchin. We might note that former UK Prime Minister Rishi Sunak is a former (and possibly future) hedge fund partner, and that in the 2010s there was a rapid acceleration in the number of UK MPs who had backgrounds in finance. Here, group think is crucial. Just as the Bank of England’s Monetary Policy Committee is always chaired by a Bank official and always has Bank staff as its majority, if everyone in the room thinks like a banker, one is more likely to get policies in their image.
Epstein also criticises the roles of lawyers (chapter 8) and economists (chapters 5 and 10) in supporting the Bankers’ Club. He notes that the financial regulatory structures in the USA are overly complex, leading to what he calls regulatory shopping, sector actors playing off one regulator against the other. Here, lawyers play a significant role. He also notes that bankers have become ‘too big to jail’, despite widespread evidence of malpractice. Lawyers have also facilitated the use of tax havens by the very rich, another source of wealth for them. Meanwhile, Epstein argues that many economists have provided (flawed) theoretical justifications for less regulation and less redistribution. For instance, he argues against the common tropes that there is a ‘fiscal cliff’ prohibiting extra government spending, or that shareholder value should be the main concern of firms.
The combined actions of the Bankers’ Club, Epstein argues, allowed bankers to return to something akin to the ‘roaring banking’ of the 1920s. This new banking operates an ‘originate-to-distribute’ model of creating complex financial products, which banks then charge fees to manage, using the argument that their expertise is necessary to do so. Meanwhile, products were created that were too complex for anyone to understand, meaning that bankers (and credit rating agencies) believed they were managing risk, so took more, when in fact they were creating financial instability. This new model was high risk, but yielded high profit for banks, but also for unregulated private equity firms, venture capitalists, shadow banks (i.e. those institutions providing money for banking but are not banks), and hedge funds, investment vehicles which charge high fees for managing risk, despite what Epstein claims is their poor record at doing so (p. 66). It also brought extremely high remuneration for hedge fund managers.
Epstein offers a damning evaluation of current banking (chapter 4) as failing to perform the basic functions of a desirable financial system. Rather than allocate funds to productive investment in firms and households, current banking is focused on trading. Private equity firms are predatory and associated with bankruptcies. Poorly performing asset management companies have failed to protect retirement incomes. Financial innovation has had many negative consequences, notably in driving inequality by extracting wealth from homeowners, savers and retirees. The current system is dominated by ‘too big to fail’ mega-banks taking excessive risks in an interconnected, global web of liabilities, too complex to regulate. Consequently, the financial system is more unstable, which through the greater dependence on non-financial corporations on finance, has wider destabilizing effects. As Epstein asks rhetorically, “Would we tolerate a government-subsidised automobile industry in which the majority of cars randomly caught fire every six or seven [economic cycle length] years? Wouldn’t we also demand that the cars actually get us from point A to point B?” (p. 224).
It is sometimes claimed that banking and finance make a large (for example for the UK, the oft-quoted estimate of eight per cent) contribution to GDP. Contrarily, Epstein (pp. 88-90) estimates that banking and finance’s contribution to the economy may well be negative, once account is taken of what he calls excess wages (salaries compared to similarly skilled jobs in other sectors), excess profits (removing subsidies and underwriting by the government), misallocation costs (taking away investment from more socially productive sectors) and recession costs (those associated with the great financial crisis of 2007-8). Cumulatively, Epstein estimates that the ‘roaring banking’ that has typified the sector for recent decades has cost the US economy between $45trn and $75trn (or more than $500,000 per person) between 1990-2019. Thus, he concludes, bankers are most certainly not essential workers (chapter 4) and the sector is not good for the economy. So, he concludes: “next time the bankers threaten to move their headquarters abroad, we should say goodbye and good riddance” (p. 90).
How might socially-useful banking work/be/look, and how would we get there?
Despite all that, and bearing in mind Epstein’s general scepticism about capitalism, the book is not anti-banks or banking per se. Epstein recognizes that cheap and effective banking services are necessary for buying things; provide safe places for savings; facilitate long term borrowing for housing; secure retirement savings; facilitate affordable housing investment; give small businesses (including co-operatives) access to credit, perhaps to bridge the gap between production and sales; and might provide funding for green transition.
Early in the book, Epstein describes the ‘Jekyll and Hyde of finance’ (chapter 1), recognizing that banking and finance have many functions, some beneficial, some benign, others malign. He notes that the mission-oriented reforms of the New Deal era created financial institutions and an overall financial environment that were important in the so-called Golden Age of capitalism post-World War 2. Epstein is sanguine about what he calls ‘boring banking’, which was characterized by sensible attitudes to risk, a healthy amount of profit for the banks, reasonable rewards to those working in the sector, and the public mostly being served well. Not all was rosy: banks partook in discriminatory lending (‘redlining’) that harmed people of colour. Mainly, though, banking did its job, in its place, and did not risk a return to the recklessness of the 1920s that precipitated the Wall Street Crash.
The final section of the book, entitled ‘Finance for the rest of us’, outlines how banking and finance with a suitable public purpose might look. It should be said that the book is thinner on this than on diagnosing the problem but makes useful points.
Epstein sees the route to better banking and finance via better regulation. A criticism one could make of Epstein here (and elsewhere) is that he does not discuss the effect of the various regulatory changes made to banking post-GFC. For example, the Basel III accords placed considerable restraints on banks, who now appear more risk averse and reluctant to lend. One consequence of this is that they are starving the real economy in both developed and developing countries of financial resources. These restrictions have fed the upsurge in the very shadow-banking activities Epstein discusses, and argues should be brought under regulation. Epstein presents some considerable attention to crypto-currencies, arguing that these too ought to be brought under regulation.
Regulation could directly try to stop financial panics and bank runs, one proposal being for banks to have 100% reserve requirements. Other proposals include ‘limited purpose’ banking (lending to safe projects only) and prohibiting short term access to shadow banking funds. He specifically argues for a precautionary approach to regulation, seeing problems on the horizon and considering less obvious or clear systemic risks. Here Epstein directly advocates banks explicitly accounting for the potentially catastrophic effects of climate change on financial stability; indeed, he argues doing so is “actually required by the mandates governing these financial regulatory authorities to preserve financial stability” (p. 234).
Epstein primarily advocates breaking up the banks, limiting both their size and concentration; however, he also advocates for changes in how banks operate. As noted, after the 1930s reforms, banks had public missions to serve. Echoes with Mazzucato’s mission economy notion are clear here. Such public missions now could be to provide stability, address equity and equality concerns, and have clear purposes, such as addressing climate change. Socially mission-driven institutions would not be motivated primarily by profit – they could be publicly owned but not necessarily; whatever their ownership structure, they would be expected to be pro-social, be prohibited from predatory lending, and working towards protecting workers’ pensions.
At the end of chapter 5, Epstein identifies that an important enabling myth that reinforces bankers’ power is that their position is impregnable. Part of the purpose of the book is to offer hope to those who might, quite reasonably, read the remainder of the book and conclude that nothing much can be done. Epstein tries to inspire hope by outlining an alternative vision and by showing working examples of that vision.
As Epstein notes, after the 2007-8 financial crisis, and accelerated by the Occupy movement, there has been a surge in interest in public banking. Culturally, public ownership and provision in the USA are criticised heavily, often being labelled ‘socialist’; but Epstein notes public banking was implicit in the establishment of banks, for example the Bank of Pennsylvania, set up to feed troops in the War of Independence. Government war bond schemes have been regular and popular in the USA. Public banking is not such an alien idea, claims Epstein, given the level of support banks already get: “The government charters and licenses banks, determines what serves as money and what does not, and bails out some financial institutions that get in trouble and not others: banks and financial institutions are ‘creatures’ of the government. In that sense they are all public financial institutions. The problem is that most of them recognise only their very private responsibilities” (p. 245).
Throughout the book, Epstein acknowledges the work of so-called ‘club busters’, admittedly under-sized but often effective groups that have successfully fought to change regulation and laws, and to present a counter-narrative to those of the Bankers’ Club. These include campaigning organisations such as Better Markets; Stable, Accountable, Fairer, Efficient financial Reform (SAFER), a group in which Epstein and others have worked directly; and Americans for Financial Reform including the pan-union labour organisation the AFL-CIO, and consumer protection groups. Again, though, while AFR had $2m to fight on the Dodd-Frank legislation, their opponents announced more than $100m of their own spending.
Epstein is at times scathing about the actions of Democrat politicians, most notably Presidents Clinton and Obama, who are viewed as being compliant and enabling the financial sector. Nonetheless, he notes some important, possible exemplar legislative actions. For example, under the Community Reinvestment Act (1977) lenders are evaluated in terms of how much they lent to the communities they are meant to serve – Epstein claims it was successful but needs updating – and could include climate change in its criteria. The Act has survived despite other legislation and regulation being removed. He also applauds the Stop Wall Street Looting Act proposed by Senator Elizabeth Warren in 2021, which included closing tax loopholes that private equity firms get and preventing asset sales for the first few years after buyout, preventing aggressive asset stripping.
He also mentions asset management companies that screen companies for ESG behaviour – assuming these data are meaningful – as examples of better practice. Epstein favours local or regional banking initiatives support by a better-motivated national structure, and postal banking services, offering lower costs of financial services to people living in the neighbourhood. For greens these would have added benefits of developing community relations and supporting greater localism. In terms of mission-oriented banking, he advocates a green energy bank, infrastructure banks, community reinvestment banks, and community development financial institutions, of which more than 1100 were already existing in the USA.
Some wider political implications
As discussed, Epstein is generally sceptical about political routes to financial reform, as they are currently configured, arguing that for the change we need, “we will have to tackle our democracy problem writ large” (p. 272). Moreover, “[f]inancial regulation comprises one set of tools, but society and the government have to make the financial system do a lot more” (p. 241). This implies that any social contract between banks and the public, which enabled the relative stability of banking in the post-World War 2 period, has been broken. Banking and finance now require bail outs, but this is a one-sided bargain, entailing privatisation of benefit (to banks) and the socialisation of risk (p. 37).
Further, as already discussed, Epstein says banking and finance now appear to have aims misaligned with those of the public. A new mission for banks is needed, and the public needs (as in the approach advocated by Mazzucato) to tell banks that they either work to the public’s mission, or get out. Such a mission would prioritise productive investment, for instance that helpful to a green transition. It would also prioritise awarding workers who make positive social contributions. Central banks could require much more forcefully than they currently do that all banks factor in large uncertain systemic dangers of climate change. However, traditional methods of democratic change – or indeed the pressure from industrial capitalists – have stopped working (or stopped altogether), because of the power of the Bankers’ Club. Even a major crisis such as Covid, which had been an opportunity for change, predictably did not have the desired effects. Perhaps a large popular revolt against finance is needed.
Indeed, Epstein cites the Tea Party protests as exactly that. Unfortunately, such a mood of protest has typically had embedded in it, an agenda in which the target of protest is not banking and finance but already vulnerable groups including migrants, asylum seekers, disability benefit claimants, under-paid workers, people in poorer communities, et al. A combination of rapidly increasing and high incomes for bankers and financiers, plus their use of tax havens, have fed into the twin problems of rising inequality at a time of wider wage stagnation and lower tax revenue for central government, feeding into the narrative that public sector cuts are needed. Further, narratives about the poor efficacy of public provision get advanced, underpinned by laissez-faire economic doctrine. All of this combines to persuade those who might otherwise pay more tax, for instance to support healthcare, instead to support groups who advocate the opposite.
Thus, in the UK, bodies such as the Taxpayers Alliance and the Reform Party advance a small government agenda. They gain support because, for example, bank bailouts (as well as Covid era bailouts for dodgy PPE) are seen as handouts for friends of the government; a story given extra weight by the close connections between government and finance, strengthened by the revolving door. The pressure on tax revenues does not, generally, manifest in higher taxes on the wealthy, but instead on income, national insurance and VAT rises on those around median incomes, fuelling a narrative of two-tier taxation. Failure to prosecute those guilty of white-collar crime further feeds narratives of ‘two-tier justice’, again, though, aimed not at the rich, but at the vulnerable.
As Epstein’s book makes clear, a key barrier to pro-social change is the access lobbyists have to policy makers, and the influence that money has on the political system. Social network analysis has shown clear patterns in who is able to get meetings with UK Government ministers, which is also partly facilitated by the informal social networks facilitated by the revolving door between finance and the polity. Thus, whilst populist politicians claim people have had enough of experts, some such people are important to the power of finance. As Kuttner (cited by Epstein, p. 175) notes, “…it is not expertise that the Bankers’ Club craves. It is expertise with the right ‘motivation’”. As documented by Earle et al (2016), the public, on the other hand, has tired of commentators whose claims of expertise mask ideological or pecuniary biases. This of course has implications for think tanks (p. 215), of which Green House is one. It is difficult for smaller, less well-funded outfits such as Green House to get access to decision makers. Whilst others such as Positive Money, the New Economics Foundation, and the Finance Innovation Lab have greater resources, these still pale next to the funds available to pro-banking bodies. Moreover, it is hard for think tanks to complain about others when they are merely trying to occupy the same space.
Conclusions
Epstein’s book is a rich resource for those who want to understand current banking and finance. It is aimed at a popular audience. Sixty pages of notes and references to research, including his own, colleagues and PhD students, offer strong evidential foundations for his claim. Putting the material in notes does allow the reader to skip some of the detail and stay focused on the argument. As discussed, the book is strongest on outlining the anatomy, and the supporting processes, of what he’s called the Bankers’ Club. It is also strong on debunking its many enabling myths, including how it drives growth and is essential to development.
Being more critical, the book’s coverage of alternatives to the status quo is less well developed and feels more speculative. Interestingly, for greens, the book does not ask fundamental questions about the nature of money – interestingly, given its recent prominence, the book does not discuss Modern Monetary Theory, for example. Similarly, despite the book’s engagement and clear concern with questions of climate change, it does not fundamentally question the growth imperative, which is entwined with the banks’ desire for expansion. Certainly, Epstein’s engagement with climate and mission-based banking implies a concern for the quality and distribution of growth and not merely its quantity; however, the question is not asked explicitly.
References
Dickens, E. 2016. Political Economy of US Monetary Policy: how the Federal Reserve gained control and uses it, London: Routledge.
Epstein, G.A. ed. 2005. Financialization and the world economy. Edward Elgar Publishing.
Hofferberth, E. 2022. Pathways to an equitable post-growth economy: towards an economics for a social-ecological transformation. PhD thesis, University of Leeds.
Kuttner, R. 2022. Will Congress let crypto pick its regulator? American Prospect, August 16, 2022.
Marois, T. 2021. Public banks: decarbonization, definancialisation, and democratization, Cambridge University Press.
Mazzucato, M. 2021. Mission economy: A moonshot guide to changing capitalism. Penguin UK.