Historically, Thomas Jefferson and Andrew Jackson saw the danger of and resisted big banks. Theodore Roosevelt also saw the danger in over sized corporations and declared a governmental right regulate them.
From his 1901 State of the union address:
"Great corporations exist only because they are created and safeguarded by our institutions; and it is therefore our right and our duty to see that they work in harmony with these institutions." He was successful in creating legislation for that purpose. That right of regulation exists today and such resolve is sorely needed today
Our early history is rife with financial panics due largely to excesses of unregulated and greedy banks. This continued into the 20th century with the panic of 1907 which led to the creation of the Federal Reserve Bank and public distrust of the banks. It also was a harbinger of a shift in political power to progressives. Never-the-less little was done to correct the behavior of banks and excessive speculation and leveraging, sandwiched around WWI, led to the crash in 1929 and the Great Depression. The election of 1932 elected FDR and led to sweeping bank reform highlighted by the Glass-Steagall act which most importantly separate commercial, or traditional banking where bankers loaned money and made money the interest they charged, and investment banking. Considered a traitor by his peers, Roosevelt took on the banking industry like no one had before or since.
The result was over 50 years of banking stability and concomitant economic growth before and after WWII. Being by nature amnesiac, the American public forgot the bad times before the New Deal and was deluded by a lovable actor turned politician who successfully played the part of President of the United States on behalf of big money and started chipping away at the reforms of the New Deal and regulation of the banking industry. In spite of the banking crisis brought about by the the Garn-St. Germain Act of 1982, bankers, now embedded in Washington, continued their unabated binge of investment gambling - with other peoples money. It all came to a head in 2008 when a collapse in housing prices brought the house of cards crashing down over Main Street's head.
Kwak and Johnson describe the revolving door between Wall Street banking and Washington and how the term "Too Big To Fail" became part of our vernacular. Investment banks replaced traditional accountants with whiz kids from the business colleges in the country who developed investment vehicles so intricate that each variety became an academic discipline of it's own. I read the book and the description of the investment schemes over and over and it is too complex for the most part to understand. Regulators were so ignorant that they had to use people from the investment banks as regulators. The foxes were guarding the hen house. As an illustration of the complexity of the investment schemes, look at the explanation of "derivatives" by Investipedia:
Futures contracts, forward contracts, options and swaps are the most common types of derivatives. Derivatives are contracts and can be used as an underlying asset. There are even derivatives based on weather data, such as the amount of rain or the number of sunny days in a particular region.
Derivatives are generally used as an instrument to hedge risk, but can also be used for speculative purposes. For example, a European investor purchasing shares of an American company off of an American exchange (using U.S. dollars to do so) would be exposed to exchange-rate risk while holding that stock. To hedge this risk, the investor could purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back into Euros.
In 1994, the County of Orange went bankrupt through investments in derivatives recommended by the county treasurer who simply did not understand them. Derivatives salesmen were lying to customers. In a famous quote by an employee of Bankers Trust, "Lure people into that calm and then just totally F them.
During the time between the S & L failures in the eighties and the crash in 2008 there was talk of regulation but by then the banks had taken over our government, both on capital hill and the White House. There were a lot of factors involved in the runaway speculation and de facto ponzi schemes but the primary fuel was provided by the housing industry and packaging mortgages into securities. Investment banks would make loans to home buyers and then package a number of mortgages into a security which was sold on Wall Street. In other words the mortgage on my house would be owned by numerous individuals or businesses. The initial lender would in this way divest itself of the loan and free up it's asset to loan ratio for further leveraging. The commissions rolled in! It was so lucrative that incredibly creative ways of putting people into homes or selling homes to speculators were developed and the upward spiral continued. The price of houses continued to rise and more and more mortgage securitized stocks were sold. Income of the upper income groups rose and they were eager to find new places to make easy money. The conventional wisdom at the time, as championed by the financial genius Alan Greenspan, was that outside regulation was not needed because the free market would somehow regulate itself. Big banks thrived, bank employees became the highest paid workers in the world. CEO salaries and bonuses were in the six and even seven figures. And then the bottom fell out. People became unable to make their payments and the housing prices, held up by their own bootstraps spiraled downward and banks holding the loans went bankrupt. It became apparent that without outside help, the collapse would be disastrous for the world economy.
By now the banking world consisted primarily of a half dozen or more banks and they turned to the government for help. Knowing that the government had more to lose than they did, they ended up dictating the terms of the bailout first to the Bush administration and then to the Obama administration. Obama, overwhelmed by the complexity, turned to people from Wall Street and the banking industry for advice. The result was a tax payer bailout of unprecedented in size which ultimately staved off disaster but left the bankers bigger and stronger than ever and still not regulated. The government had been held hostage by their size...they were "Too Big to Fail." The authors of the book, predict another financial meltdown resulting in a crash that will make 1929 look like the good old days without intervention. The only thing they see as workable is limiting the size of the banks; the coining of a new phrase, "Too Big to Exist. Kwak and Johnson recommend that banks be limited in size of 4% 0f GDP for commercial banks and 2% of GDP for investment banks. These limits would only effect six banks: Bank of America (16% if GDP), JPMorgan Chase (14%), Citigroup (13%), Wells Fargo (9%) Goldman Sacks (6%), and Morgan Stanley (5%). "Saying that we cannot break up these largest banks is saying that our economic futures depend on these six companies (some of which are in serious states of ill health). That thought should frighten us into action.
Today, the public attitude toward banks is negative and sentiment for regulation is favorable and although the banks still have fearsome power in Washington, a lame duck president Obama and a cooperative congress could get it done. Our future depends on it. The voters are for it.
The threat is more dangerous and more dire than Al Qaeda.