January 14, 2016

Why Larry Summers is Wrong and Bernie Sanders is Right on Glass Steagall

Since Clinton and her operatives have become aggressive in trying to discredit Bernie Sanders on issues where he both has a better track record and better proposals, it’s time for a wee reality check, in this case, on Sanders’ financial reform package.

There’s a lot to like, for instance his insistence that executives be prosecuted for serious misconduct and his backing of a Post Office Bank. There are also some things that need to be reworked, like his usury ceiling proposal. Classical economists like Adam Smith were keen supporters of usury ceilings because they could see the consequences of letting lenders charge whatever interest rate they could get. Creditors targeted wealthy gamblers first and foremost, and the rates they were willing to pay was punitively high compared to what productive enterprises could support. Thus Smith and his colleagues saw usury limits as key to forcing lenders to find the best targets at a reasonable rate of interest, rather than search out the most reckless, who tended also not to be socially beneficial users of funds either. The failing with the Sanders proposal is that he sets as fixed limit of 15.9%; it should be set in relationship to prevailing interest rates, as well as the length of the loan.

Larry Summers, acting as a proxy for Team Clinton, took a swipe at the Sanders’ views in a Washington Post op-ed at year end. Admittedly this was a case of dueling op-eds; Summers was responding to a Sanders article in the New York Times which outlined his reform priorities.

However, one of Summers arguments, and one that Clinton has taken up now that Sanders has set forth his plan in more detail, is that Sanders’ “Glass Steagall” reform idea is all wet.

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