Broken banking hurts Main Street

Both political parties say Americans need a new Glass-Steagall

(See here for a list of 11 central bank bailouts since 1998.)

Both parties say it’s time to go back to old-fashioned banking that served most Americans well for nearly 70 years.

Three decades[1] of Too-Big-To-Fail finance, that serves the rich on Wall Street and hopes the benefits trickle down to Main Street, has been a dud, critics say.

Americans increasingly complain that capitalism, the powerful engine that once boosted living standards worldwide, is no longer benefiting many of them very much, while about 10% of them are getting wildly rich.[2] Income inequality has skyrocketed.

“The growth in income for the middle class since 1970 has not kept pace with the growth in income for the upper-income tier. And the share of total U.S. household income held by the middle class has plunged,” reported the Pew Research Center in May 2024.[3]

A key cause of this inequality is called “financialization,” where a growing amount of money winds up with the financial markets and traders on Wall Street instead of with businesses and families on Main Street, according to studies.[4]

The situation is eerily similar [5] to conditions in the 1920s, when booming financial markets contrasted with a struggling lower class, ultimately erupting in the 1929 crash and a decade-long depression.

Many observers argue that a national conversation on financialization is overdue.

“We would be crazy to let finance once again run wild in our economy,” said journalist Diana Henriques in Taming the Street (2023). [6]

With both political parties now focused on the well-being of middle America, that conversation may be possible.[7]

“We support reinstating the Glass-Steagall Act of 1933 which prohibits commercial banks from engaging in high-risk investment,” said the 2016 platform of the Republican Party, [8] which was repeated in 2020.

The 2024 platform is a list of 20 promises that doesn’t mention banks.[9] But it does pledge to “keep the U.S. dollar as the world’s reserve currency,” which could be threatened[10] by the Federal Reserve’s disarray described below.

“Democrats will work to reverse the over-financialization of the American economy … and will support an updated and modernized version of Glass-Steagall,” said the Democrat Party platform in 2024.[11]

Financialization and inequality

Here’s a taste of the data on rising inequality:[12]

In data collected since 1913, the top 1% of U.S. families got a peak of 22.3% of all U.S. income in 1928, fell to a low of 10.3% in 1978, and peaked again at 20.7% in 2023. The top 10% went from 49% in 1934, to 33.6% in 1970 and 1974, to 46.8% in 2023.[13]
The cumulative growth in income 1979-2021 was about 170% for the top 20% and about 75% for the mid-60%.[14]
The average income in 2021 for the wealthiest 20% of Americans was $300,000+, while the middle 60% earned $75,000+.[15]
CEOs are paid almost 200 times what their median workers make, up from about 50 times in the 1980s.[16]

Financialization in the U.S. began growing during the murderous inflation of the 1970s, and it cemented its reign when both parties gave up decades of limiting big business[17] and embraced free markets.

Through the ensuing 50 years, legislators relentlessly deregulated banking and investing, to goose the economy, and created a world that most Americans never see, a world that makes a lot of money for Wall Street insiders.

Today the 4% of Americans who work in finance get 23% of our nation’s profits.[18]

Key deregulation steps included:

Eliminating caps on interest rates[19] and adjusting taxes[20] to favor borrowing and investing over working and producing.[21]
Encouraging too-big-to-fail banks to mingle federally insured banking with speculative investing.
Letting shadow banks [22] use risky short-term loans like repurchase agreements (repos).[23]
Expecting the Federal Reserve and the FDIC to save Wall Street every time the 21^st century financial markets stumble.

The hot spot in all this is #3. That’s because repos are vulnerable to runs. And panics are always triggered by runs.

“Panics, to repeat, are widespread redemptions of short-term debt, period,” wrote Vanderbilt professor Morgan Ricks in The Money Problem, Rethinking Financial Regulation (2016).

Runs are what happen when lenders suddenly demand their money back from borrowers.,[24] Repos are vulnerable to runs because they’re loans that are short-term, often overnight, and borrowers often use the money to make long-term loans or investments. So, repo borrowers often borrow short and lend long. That’s dangerous.

If the repo lender suddenly demands repayment, and the repo borrower can’t repay, that can trigger a run and a global panic in today’s investing markets where banks and shadow banks do trillions of dollars of repos with each other every day and are fiendishly interconnected.[25]

That’s what happened in 2008.[26] It devastated economies and invigorated authoritarianism worldwide.[27]

Financialization and banking

Here’s a taste of the data on deregulated banking:

The number of U.S. commercial banks has fallen from about 14,000 banks in the 1980s[28] to 3,985[29] in 2024. In the five years since 2019, community banks declined by 646.[30]
Four banks had more than $1 trillion in assets at mid-2024. They were JP Morgan Chase at $3.5 trillion, Bank of America at $2.6 trillion, Wells Fargo at $1.7 trillion and Citibank at $1.7 trillion.[31] These are also among our riskiest banks, according to the Office of Financial Research.[32]
In 1981, Bank of America was the largest bank with only $121.2 billion in assets ($439.2 billion in today’s dollars[33]).[34]
In 2021, the three largest banks controlled 38.4% of all bank assets ($22.8 trillion[35]), up from 21.5% in 2000.[36]

(Editor’s note: What’s $1 trillion? Spending at $1 a second, it would take you almost 32,000 years to spend $1 trillion.)[37]

“The greatest ongoing threat to the safety and soundness of the U.S. banking system is the dominance of a small number of too-big-to-fail megabanks, which … are too big to manage, too big to prosecute, and their executives are too big to jail,” said the Independent Community Bankers of America.[67]

As Americans work today to bring jobs back onshore, multiple experts believe a key step to restoring the vitality of Main Street may be to downsize and de-risk giant banks[38] and shadow banks, by bringing back Glass-Steagall, and to re-build community banks.[39]

“Community banks may be small[40] but their contributions to local communities are mighty,” said Fed governor Michelle W. Bowman. “There simply is no alternative or replacement ….”[41]

Americans are entrepreneurs. In 2023 there were more than 33 million small businesses in the U.S., which were 99.9% of all firms and almost half of all private-sector jobs.[42] As communities rebuild, they will need financing and investing on Main Street.

“The continued decline in the number of small banks could have significant adverse effects on access to credit for small businesses and threaten a key strength of the U.S. economy,” a 2024 FDIC study said.[46]

If significant bank re-regulation is needed to control financialization, that will present a big challenge for many of today’s large banks and shadow banks, as it did in the 1930s when Congress broke up big institutions like the House of Morgan[47] and restructured U.S. banking and investing.[48] Particularly affected will be large banks, broker-dealers, hedge funds and money market funds.[49]

“But we see no reason to regard Wall Street’s current funding model as sacrosanct – particularly in view of the events of the past 15 years,” said Lev Menand and Morgan Ricks, law professors at Columbia and Vanderbilt universities, in 2023.[50]

Too-Big-To-Fail bailouts

Most remarkable among those “events of the past 15 years” is how the Federal Reserve has repeatedly chosen to prop up entire financial markets, causing the Fed to suffer huge losses since 2022, for the first time in its history.[51]

In its bailouts, the Fed is trying to avoid another 2008-style devastation, it’s trying to prop up banks so big they can’t be allowed to fail and it’s trying to protect the value of U.S. Treasuries, which investors own, traders use for repo collateral and other purposes, and the federal government needs to sell to pay for its soaring debt.[52]

To be clear:

Taxpayers do not usually[53] finance bailouts.[54] The Fed and the FDIC use their own money and often require payback.
Bailouts help financial markets and major companies, but finance employees may suffer.
Bailouts benefit all Americans, because bailouts can prevent much bigger crises.

But bailouts also promote inequality. For example, if a small business repeatedly struggles financially, or if someone continually can’t make their car or credit card payment, does anyone step up to help them through each rough spot?[55]

And bailouts encourage Wall Street risk-taking instead of investing in working Americans.[56]

Bailouts also are a big financial hit to American taxpayers. That’s because when the Fed makes a profit, it gives that profit to the U.S. Treasury, often about $10 billion a month.[57] But now the Fed is losing money because of the bailouts,[58] and it stopped making monthly payments to the U.S. Treasury in September 2022.[59]

Worried bank regulators have taken significant steps in recent years to try to bring stability to the financial markets, including requiring bank owners to take more financial responsibility[60] and setting up ways for banks and shadow banks to quickly get help during crises, especially runs.[61] The Securities and Exchange Commission, which regulates shadow banks, has also tightened controls.[62]

But the bailouts continue.

When Pres. Trump announced tariffs on April 2, 2025,[63] financial markets began to swoon[64] and a collapse was prevented only when on April 9 he suddenly announced a 90-day pause.[65]

“The bond market is very tricky, I was watching it,” Trump later told reporters.[1] “The bond market right now is beautiful. But yeah, I saw last night where people were getting a little queasy.”

“They were getting yippy,” he said. “They were getting a little bit yippy, a little afraid.”

Until that moment, the Fed was standing by to bail him out.[2]

“We would absolutely be prepared to do that as needed,” Susan Collins, head of the Boston Fed, told the Financial Times.[3]

Sources for financialization:

Makers and Takers, How Wall Street Destroyed Main Street, 2017, by Rana Foroohar

https://www.bu.edu/eci/2022/08/02/mad-money-the-financialization-and-rising-inequality-of-the-us-economy/

https://www.atlanticcouncil.org/blogs/econographics/financialization-has-increased-economic-fragility/

https://www.seattletimes.com/business/boeing-and-wall-street-how-financialization-wrecked-a-great-company/

https://www.jstor.org/stable/24696306

https://www.ksjomo.org/post/financialization-at-heart-of-economic-malaise

https://cepr.org/voxeu/columns/too-much-finance https://www.tandfonline.com/doi/full/10.1080/13604813.2013.853865#d1e82

https://scholarship.law.unc.edu/cgi/viewcontent.cgi?article=1365&context=ncbi https://onlinelibrary.wiley.com/doi/full/10.1111/dech.12385 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4568656

https://robertreich.substack.com/p/the-declining-power-of-the-middle https://time.com/4327419/american-capitalisms-great-crisis/

http://www.ipsnews.net/2017/11/finance-following-growth/

Sources for income inequality data:

https://wid.world/country/usa/

https://www.census.gov/topics/income-poverty/income-inequality/about/metrics/gini-index.html https://www.census.gov/topics/income-poverty/income/data/tables.html

https://fred.stlouisfed.org/release?rid=414

https://www.irs.gov/statistics/soi-tax-stats-statistics-of-income

https://www.pewresearch.org/race-and-ethnicity/2024/05/31/the-state-of-the-american-middle-class/#income2

https://www.cbo.gov/topics/income-distribution https://www.federalreserve.gov/releases/z1/dataviz/dfa/distribute/chart/ https://www.rand.org/pubs/working_papers/WRA516-2.html https://www.cbpp.org/research/poverty-and-inequality/a-guide-to-statistics-on-historical-trends-in-income-inequality

https://usafacts.org/articles/how-has-wealth-distribution-in-the-us-changed-over-time/ https://www.nber.org/papers/w33823

https://inequality.org/

Footnotes:

[1] https://www.congress.gov/crs-product/R44349

[2] https://wid.world/country/usa/ and https://www.wsj.com/economy/consumers/us-economy-strength-rich-spending-2c34a571

[3] https://www.pewresearch.org/race-and-ethnicity/2024/05/31/the-state-of-the-american-middle-class/#income2

[4] See list of some financialization stories above.

[5] https://repowatch.org/2021/08/11/yep-the-2020s-feel-like-the-1920s/

[6] https://www.penguinrandomhouse.com/books/611070/taming-the-street-by-diana-b-henriques/

[7] https://www.americanbanker.com/news/congress-turns-back-to-banking-in-trumps-washington

[8] https://prod-cdn-static.gop.com/media/documents/DRAFT_12_FINAL[1]-ben_1468872234.pdf

[9] https://www.gop.com/press-release/icymi-rnc-platform-committee-adopts-2024-republican-party-platform/

[10] https://apnews.com/article/russia-brics-summit-china-india-ukraine-war-39e90fce8443b922f4d224c65c2ec932

[11] https://democrats.org/where-we-stand/party-platform/

[12] See list of some income inequality sources above.

[13] https://wid.world/country/usa/

[14] https://www.cbo.gov/system/files/2024-09/60342-Trends-Income.pdf, (after transfers and taxes)

[15] https://www.cbo.gov/system/files/2024-09/60342-Trends-Income.pdf (after transfers and taxes)

[16]https://apnews.com/article/ceo-pay-compensation-ratio-workers-fa25db3338b68ad9eb395dfd46190383 and https://www.epi.org/publication/ceo-pay-in-2020/

[17] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4568656

[18] https://apps.bea.gov/iTable/?reqid=19&step=3&isuri=1&1921=survey&1903=239 (profits per industry) and https://www.bls.gov/news.release/empsit.t17.htm (employment per industry) and Makers and Takers, How Wall Street Destroyed Main Street, Rana Foroohar, pp. 8, 324 (needs upating)

[19] https://www.nerdwallet.com/article/loans/personal-loans/usury-laws and https://www.hup.harvard.edu/books/9780674066199

[20] https://publicintegrity.org/inequality-poverty-opportunity/taxes/unequal-burden/how-four-decades-of-tax-cuts-fueled-inequality/

[21] https://www.businessinsider.com/american-billionaires-tax-avoidance-income-wealth-borrow-money-propublica-2021-6?op=1

[22] Shadow banks, or non-bank financial institutions, include money market funds, hedge funds, primary dealers, asset managers, insurance companies, pension plans, mutual funds, investment banks, non-bank subsidiaries of giant banks, lending firms, private equity and private credit companies, broker-dealers, large businesses, finance companies, mortgage lenders, endowment funds, real estate investment trusts …. just about anything that borrows and lends but isn’t a commercial bank. They are regulated by the Securities & Exchange Commission.

[23] https://repowatch.org/

[24] https://repowatch.org/about-repo/

[25]https://libertystreeteconomics.newyorkfed.org/2024/06/nonbanks-are-growing-but-their-growth-is-heavily-supported-by-banks/

[26] https://repowatch.org/

[27] https://billmoyers.com/story/legacy-financial-crisis-authoritarianism/

[28] https://www.kansascityfed.org/banking/community-banking-bulletins/the-critical-role-of-community-banks/

[29] https://www.fdic.gov/quarterly-banking-profile/fdic-quarterly-banking-profile-second-quarter-2024

[30] https://www.fdic.gov/quarterly-banking-profile

[31] https://www.federalreserve.gov/releases/lbr/

[32] https://www.financialresearch.gov/bank-systemic-risk-monitor/

[33] https://www.bls.gov/data/inflation_calculator.htm

[34] https://www.nytimes.com/1982/01/22/business/rating-us-banks-by-assets.html

[35] https://www.fdic.gov/system/files/2024-09/qbp.pdf#page=1

[36] https://fred.stlouisfed.org/series/DDOI01USA156NWDB

[37] https://www.denverpost.com/2024/07/09/us-national-debt-35-trillion-unsustainable/

[38] https://www.icba.org/our-positions-a-z/current-policies/ending-too-big-to-fail

[39] https://www.fdic.gov/resources/community-banking/report/2012/2012-cbi-study-full.pdf and https://www.sciencedirect.com/science/article/abs/pii/S0378426621000352?via%3Dihub

[40] Community banks roughly have less than $10 billion in assets. https://www.fdic.gov/resources/community-banking/report/2012/2012-cbi-study-full.pdf and https://www.federalreserve.gov/supervisionreg/community-and-regional-financial-institutions.htm and https://www.kansascityfed.org/banking/community-banking-bulletins/the-critical-role-of-community-banks/

[41] https://www.bis.org/review/r241003a.pdf

[42] https://www.fdic.gov/news/press-releases/2024/fdic-issues-2024-small-business-lending-survey-report

[43] https://www.kansascityfed.org/banking/community-banking-bulletins/the-critical-role-of-community-banks/

[44] https://www.fdic.gov/quarterly-banking-profile/fdic-quarterly-banking-profile-second-quarter-2024

[45] https://www.fdic.gov/quarterly-banking-profile

[46] https://www.fdic.gov/publications/small-business-lending-survey-2024

[47] https://guides.loc.gov/this-month-in-business-history/april/jp-morgan-born/

[48] https://www.federalreservehistory.org/

[49] https://www.suerf.org/events/repo-market-turmoil-at-the-core-of-the-financial-system/

Presentation by Mark Paddrik of the Office of Financial Research.

[50] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4568656

[51] https://www.aei.org/wp-content/uploads/2024/02/Fed-losses-and-monetary-policy-Jan-31_2024-WP-updated.pdf?x85095 and https://wallstreetonparade.com/2024/10/jerome-powells-fed-notches-an-historic-record-of-204-billion-in-cumulative-operating-losses-losing-over-1-billion-a-week-for-more-than-two-years/ and https://www.wsj.com/articles/for-the-first-time-the-fed-is-losing-money-mortage-backed-securities-treasurys-interest-rate-risk-svb-ad92e96f and https://crsreports.congress.gov/product/pdf/IN/IN12081

[52] https://fred.stlouisfed.org/series/GFDEBTN

[53] https://www.annualreviews.org/content/journals/10.1146/annurev-financial-110217-022532 and https://www.federalreservehistory.org/essays/fed-credit-programs and https://www.fdic.gov/bank/historical/crisis/overview.pdf

[54] For example, the Fed can create new money to buy securities or lend, which buys time for stressed banks and shadow banks to get their act together, and then the Fed often gets repaid. The FDIC bailouts are financed by FDIC insurance paid for by banks. The U.S. Treasury uses taxpayer money but sometimes get repaid.

[55] https://wallstreetonparade.com/2022/04/while-jpmorgan-chase-was-getting-trillions-of-dollars-in-loans-at-almost-zero-percent-interest-from-the-fed-it-was-charging-americans-hit-by-the-pandemic-17-percent-on-their-credit-cards/

[56] https://www.hoover.org/research/rebuilding-firewall-against-moral-hazard

[57] https://www.stlouisfed.org/on-the-economy/2023/nov/fed-remittances-treasury-explaining-deferred-asset

[58] https://wolfstreet.com/2024/11/23/operating-losses-and-unrealized-losses-of-the-federal-reserve-in-q3-2024/ and https://www.aei.org/wp-content/uploads/2024/02/Fed-losses-and-monetary-policy-Jan-31_2024-WP-updated.pdf?x85095 and https://www.stlouisfed.org/on-the-economy/2023/nov/fed-remittances-treasury-explaining-deferred-asset

[59] https://www.stlouisfed.org/on-the-economy/2023/nov/fed-remittances-treasury-explaining-deferred-asset

[60] https://www.federalreserve.gov/newsevents/pressreleases/bcreg20230727b.htm

[61] https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation/repo-reverse-repo-agreements

[62] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4936041 and https://www.sec.gov/newsroom/press-releases/2023-247 and https://home.treasury.gov/system/files/221/TBACCharge2Q12025.pdf

[63] https://apnews.com/article/trump-tariffs-liberation-day-2a031b3c16120a5672a6ddd01da09933 and https://www.foxnews.com/politics/heres-close-look-trumps-tariff-plan-what-know-about-new-duties

[64] https://www.investmentnews.com/fixed-income/treasuries-tumble-toward-worst-selloff-since-2019-repo-blowout/260090

[65] https://www.centralbanking.com/central-banks/financial-stability/7972722/inside-the-week-that-shook-the-us-treasury-market?check_logged_in=1 and https://www.nbcchicago.com/news/business/money-report/10-year-treasury-yield-spikes-higher-as-trump-tariffs-continue-to-rattle-markets/3717637/ and https://lipperalpha.refinitiv.com/2025/04/bond-market-turbulence-triggered-huge-concerns/

[66] https://www.ft.com/content/0273371d-b90c-43e4-845a-e51982dd4fdf and https://www.bloomberg.com/graphics/2025-tariffs-markets-reaction/?sref=qlFlbvqE