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TAMING THE STREET: The Old Guard, the New Deal, and FDR’s Fight to Regulate American Capitalism
Author: Diana B Henriques
Publisher: Random House
Pages: 431
Price: $30
THE PROBLEM OF TWELVE: When a Few Financial Institutions Control Everything
Author: John Coates
Publisher: Columbia Global Report
Pages: 188
Price: $17
“The rulers of the exchange of mankind’s goods have failed, through their own stubbornness and their own incompetence,” President Franklin D Roosevelt said at his first inaugural in 1933 as he kicked off his New Deal. “The money changers have fled from their high seats in the temple of our civilisation. We may now restore that temple to the ancient truths.”
The direct reference to Matthew 21 and FDR’s implication that he was going to do the work of the Lord in cleansing the temple of impiety were deliberate. The United States was suffering from the most virulent stage of the Great Depression. Key to the New Deal was regulation to try to make American finance work for the people and the economy, rather than for the plutocrats. Supporting Roosevelt in this crusade were overwhelming majorities in the House and Senate.
That’s not to say it was easy. In Taming the Street, the veteran financial journalist Diana B Henriques tells the extraordinary story of how New Deal financial regulation was accomplished. It was indeed a feat of cleansing temples by driving out money changers. The Glass-Steagall Act of 1933 separated the investment bankers from the institutions with bank deposits; the Banking Act of 1935 strengthened the Federal Reserve’s independence by getting the Treasury Secretary out of the Chair’s seat.
The system the New Deal created was supposed to be impersonal in that no single individual’s thumb up or thumb down could make or break your business. The idea was that no one should find himself in the situation that the Chicago business magnate Samuel Insull and his overleveraged utility network did in the early 1930s, when J P Morgan Jr had offered Insull an extortionist loan to save his Depression-stressed network from collapse and made it clear to other financiers that he would regard it as extremely unfriendly if they were to offer Insull another way out. Ms Henriques’s narrative is full of complex financial instruments and institutions. She has sweated gallons of blood to make it readable and succeeded by bringing her characters to life. We hear about Ferdinand Pecora, the Sicilian-born attorney with “a distinctive curly black pompadour” who exposed the corruption and fraud of the old system in a series of dramatic Senate hearings. His findings inspired the reforms that the Roosevelt administration put in place.
Those reforms broadly worked. Stock prices once again served as indicators, even if not perfect ones, of the companies that would be profitable, and hence, hopefully, serve the public good.
Yet, by the 1970s, people began to see the American economy as dominated by the big firms that had the most practice working the regulatory levers. Legislators sought to use the creative destruction of the market to make things more mobile again. To many — including me — the risks from loosening up the system seemed low: The Federal Reserve felt powerful enough to construct a firewall to keep financial chaos at bay.
Bit by bit, financial interests concentrated again. In the 21st century, the old trusts appear to be back, but in different garb. It’s a far more complicated and less sexy story to tell. Today, we have what the Harvard economist John Coates calls The Problem of Twelve. Professor Coates’s book, an expansion of a scholarly paper from 2018, identifies only eight problems: The four index fund giants — Vanguard, Fidelity, State Street, BlackRock; and the four private-equity giants — Apollo, Blackstone, Carlyle, KKR. So why 12? It’s not clear. Perhaps we should add the four trillion-dollar banks: JPMorgan Chase, Bank of America, Citigroup, Wells Fargo.
A couple of decades ago, financiers at Vanguard and Fidelity convinced a whole generation of middle-class professionals that index funds — in which millions of small-time retail investors effectively put their money into tiny slivers of hundreds of stocks — were a safe, friendly way to make money off the good fortune of the overall economy. They were broadly right.
Then the funds grew. As Professor Coates notes, the shares the four fund giants hold for their investors today amount to about one fifth of the stock shares across corporate America. That makes them quite powerful, especially because few index fund customers think about the corporate consequences of the decisions that fund managers make.
Economists also worry that the overwhelming sway of index funds could be stifling price competition. You don’t need a fund’s anointed board members to sit across many boards in an industry where it is the largest shareholder for the CEOs of, say, United Airlines and Delta, to get it in their heads that competing on routes might drive down prices and therefore stock value and that this might cause undesirable instability for the fund overall.
Now we should not overstate: None of the 12, not even in their particular sphere, even taken all together, has anything like the reach and power that the House of Morgan held over the US economy a century and more ago. And yet it is undeniable that there are now an uncomfortably small number of uncomfortably large players in the fund-management and private-equity branches of American finance, in addition to our too-big-to-fail super big banks. But we understand much less than we should about today’s money changers, as they do their business in the temple courtyard.
The reviewer is a professor of economics at UC Berkeley and a former US Treasury official. © 2023 The New York Times News Service
