August 27th, 2019

With the Volcker Rule Now Dead, Democrats Need to Bring Back Glass-Steagall

Richard Drew/Associated Press

It’s clear that overabundant trading with cheap funds backed by public guarantees now represents the major break in the firewall of our financial regulatory apparatus. 

In 2017, when Obamacare looked to be a vote or two away from oblivion, a popular argument in left circles went like this: The Rube Goldberg contraption that is the Affordable Care Act represented a compromise from the easier and cleaner way to do universal health care, and if Republicans and the medical industry couldn’t even stomach that, the next time Democrats take power they might as well go to full single-payer. If Democrats are going to be called socialists either way, the left theorized, they should choose the best policy instead of a half measure in the faint hope of winning bipartisan support.

Democrats now have another example of this in financial reform. Trump’s regulators have finally eviscerated the compromise version of a structural separation between deposit-taking banks and trading institutions, known as the Volcker Rule. The financial sector could not allow even minor constraints on its practices of betting prodigious sums with other people’s money. Well, fine. Then I guess when Democrats retain control they should just go back to the gold standard in this department, the firewall between commercial and investment banks passed in 1933 as the Glass-Steagall Act.

The Volcker Rule was a poor man’s version of Glass-Steagall. Part of the 2010 Dodd-Frank financial reform, it was intended to stop deposit-taking banks from what is commonly called proprietary trading, which amounts to speculative buying and selling of securities or derivatives on its own accounts. The idea here is that bank deposits are some of the cheapest funding there is. Most checking accounts pay either next to nothing or nothing at all in interest. We want banks taking deposits to make loans, but using that cheap funding to gamble adds no productive value to the economy, while increasing risks. And the government backs up that risk with deposit insurance and the prospect of bailouts. So banks get to privatize profits while socializing losses.

Senators Jeff Merkley (D-OR) and Carl Levin (D-MI) wrote the Volcker Rule, and it made its way into Dodd-Frank after a series of struggles. But it was battered along the way. Initially, the rule prevented commercial banks from owning or investing in hedge funds or private equity funds, but then-Senator Scott Brown (R-MA) forced in a loophole that allowed 3 percent of bank capital to be put toward such investments. A number of other types of trading instruments, like Treasury bonds, municipal bonds, and securities issued by government-sponsored mortgage giants Fannie Mae and Freddie Mac, were also exempted. Finally, there were exceptions for so-called “market-making” or hedging strategies. If a bank traded certain financial products and claimed that they offset potential losses on other parts of their business, it would be allowed under the rule.

After the legislation passed, regulators kept making concessions to Wall Street, delaying key pieces of the rule repeatedly and buying time for lobbyists to continue to chip away at it. That paid off last week, when the Federal Deposit Insurance Corporation approved a revamped version of the Volcker Rule. The Office of the Comptroller of the Currency also signaled support; other regulators with jurisdiction over the rule are expected to follow suit in the coming weeks.

The new version expands the market-making and hedging exemptions to cover a large number of possible bank trades. It eases the “covered funds” provision, allowing banks to invest more in hedge funds and private equity. If a bank holds a financial instrument for more than 60 days, it’s presumed not to be proprietary trading under the rule, forcing regulators to rebut that.

Perhaps most important, an “accounting test” that would help regulators identify speculative trades was dropped, in favor of what amounts to self-policing. There is a “presumption of compliance” for certain activities, and an exemption for all trades within “risk limits” that the banks themselves have created.

All you need to know about what’s left of the Volcker Rule can be summed up by Tyler Gellasch of the organization Healthy Markets, who wrote on Twitter: “After tens of millions of dollars and a decade of lobbying, the #VolckerRule is a shadow of the original idea and simply no longer works for anyone—it certainly cannot protect the public from another disaster.” Gellasch is no ordinary financial-reform advocate: He co-wrote the Volcker Rule, while serving as a top staffer to then-Senator Levin. If Gellasch says it’s over, it’s over.

So where does that leave us? With the rewritten rule, there is effectively no structural separation, direct or indirect, between commercial and investment banks. Regulatory authorities the world over, from the Liikanen report in the EU to the Vickers report in the U.K., have recognized the need to “ring-fence” risky assets and prevent governments from subsidizing investment banks with public money. We shouldn’t want ordinary Americans’ savings entangled with, and indeed funding, high-stakes casino gambling. Banks shouldn’t be staking hedge funds and private equity firms to make their reigns of terror more robust and predatory, either.

So how can we stop this now? A half measure, the Volcker Rule, was nicked to death and finally sent off to its resting place. The alternative is to move forward with the thing that the Volcker Rule stood in for: Glass-Steagall. It’s clear that overabundant trading with cheap funds backed by public guarantees now represents the major break in the firewall of our financial regulatory apparatus. That leak can be plugged simply, by separating commercial from investment banks. We tried it the Rube Goldberg way, and Republicans at the behest of the industry revolted. The next step is a direct restoration of the real thing.

Financial regulation has played no role whatsoever in the Democratic presidential primary. Elizabeth Warren has a long-standing bill restoring Glass-Steagall, and Bernie Sanders ran on the idea in 2016. Everybody else has been silent. You can certainly go further than Glass-Steagall, by banning unproductive trading activities, reducing conflicts of interest, and eliminating financial intermediaries with no value for the economy.

But we should at least hear something from would-be Democratic standard-bearers. We’re at the scariest point on the pendulum between financial implosion, re-regulation of the system, and then relaxation of those rules. The Trump administration is laying the groundwork for the next financial crisis, and we need to know what candidates would do to reverse that trend before we have another crash.

The simplest way to attack the most dangerous facet of the financial system, its extreme interconnectedness that enables problems in one section to cascade everywhere, is to just separate out the activities. The Volcker Rule was the end-around version of this, and Wall Street killed it. The time for half steps that financial lobbyists treat like Armageddon anyway has ended.

Using College Athletes as Concussion Test Subjects Makes Nobody Safer

Ed Reinke/AP Photo

Florida quarterback Tim Tebow lies on the turf after being sacked during an NCAA college football game, September 26, 2009. He received a concussion on the play that put him in the hospital for a night. 

Since the mid-1990s, American universities have routinely obtained millions of dollars in annual government funding by using athletes, primarily those involved in high-risk collision sports such as football, as research subjects. A significant amount of the brain injury research comes from sports medicine and relies on the college athlete population.

In 2014, the National Collegiate Athletic Association (NCAA) and the U.S. Department of Defense (DoD) signed a cooperative research and development agreement (CRADA) to jointly fund concussion research using the college population, with an ostensible mission to “enhance the health and safety of NCAA student-athletes and service members.” Dubbed the “CARE Consortium,” the ongoing project includes as study subjects college athletes from various sports among 30 universities and service academies across the country.

To date, the CARE Consortium has received millions in DoD funding. The claimed benefit to service members is critical for the NCAA to obtain DoD funding for this research. Military funding for the CARE Consortium occurs through the Psychological Health and Traumatic Brain Injury Research Program (PH/TBIRP), a congressionally directed medical research program (CDMRP). The key requirement to obtain funding through this program is that the research must “benefit Service members, veterans, and other beneficiaries of the military health system.”

The benefit for the population of collegiate athletes is another matter. The preferred end state would be fewer individuals with concussions, not more. There’s no reason the research grant should affect measures to make collegiate athletics safer, even though funding relies on a stream of test subjects with concussions. But the existence of the financial benefit and the potential for that entering into thinking about policies to prevent concussions should worry athletes and their families.

But the bigger question lies in whether this research carries any benefit to concussion research for military subjects.

According to NCAA Chief Medical Officer Brian Hainline, the justification for extrapolating results from concussion research using college athletes, who constitute the majority of CARE Consortium study subjects, to the military is that college sports is a much more controlled environment than the military theater and the two populations are “similar in age, athleticism, risk taking and pushing to the edge of excellence.”

Not only has the NCAA produced scant evidence to support such claims, but its own CARE Consortium research shows just the opposite. Recent research from the CARE Consortium has acknowledged that military cadets are a unique population and that findings likely cannot be generalized beyond NCAA Division I athletes. Another study using football players observed that not only were results unlikely to generalize to other settings; they were unlikely to generalize even to other sports.

Service members can be placed at great risk if results from a noncomparable population are applied to them and used to make medical-care decisions. One standard medical-care component of return-to-activity following a brain injury involves comparing pre-injury (baseline) tests to post-injury. When an individual’s post-injury scores approach their pre-injury baseline (e.g., 95 percent), then a gradual return to activity can proceed.

However, individual testing, as required by the 2008 National Defense Authorization Act, is expensive. As a result, the military has explored the cost-benefit trade-offs of other alternatives. One such alternative is reliance on “normative” baseline average scores from a similar population of individuals. The problem with comparing service members’ post-injury test scores to normative baselines from college athletes rather than military-specific normative data is that college athletes are not a similar population.

For example, individuals with learning disabilities and attention deficit disorder (LD/ADHD) have lower baseline scores on neurocognitive tests. LD/ADHD are prevalent among college athletes. At one university, over 39 percent of tested incoming athletes in some sports were diagnosed with LD/ADHD. One CARE Consortium study found approximately 27 percent of football players at a member university were diagnosed with LD/ADHD.

Further, use of stimulant medication (e.g., Adderall or Ritalin) is known to affect neurocognitive test scores and is common among college athletes. It is noteworthy that the use of such medications is an exclusionary criterion for military enlistment.

The characteristic differences between the military and college athlete population were discussed in some detail in a 2018 Ph.D. dissertation of Kathryn Van Pelt (née O’Connor), whose committee included various CARE Consortium researchers. Dr. Van Pelt offered strong evidence that the cadet population was “substantially different” from the traditional NCAA athlete.

Service members can be placed at great risk if results from noncomparable populations are applied to them and used to make medical-care decisions. When comparison benchmarks are set too low, injured service members can be prematurely declared ready for return to activity and still be symptomatic. In other words, this can have a negative impact on clinical decision-making.

Where does that leave us? It is clear that the CARE Consortium involves three different populations: college athletes, service academy cadets, and enlisted service members. The differences among them mean that the college athlete population cannot, and should not, be used to produce normative baseline data for service members. The solution that best protects military personnel is for the DoD to focus research efforts on its service member population instead.

Stephen Casper is currently retained in concussion litigation pending against the NCAA in multiple cases as an expert witness in history. The authors were not paid for this piece.

Poverty Doesn’t Sell, but We Wrote About It Anyway

M. Spencer Green/Associated Press

Those living on the edge can testify to the inadequacy of public benefits and the stinginess of the so-called welfare state for millions of Americans, many of them children.

For the past two years as a Prospect writing fellow, I’ve carved out a beat on poverty and inequality, writing about marginalized populations and overlooked issues. Stories on inequality are depressing. They don’t sell ads. But in an era where the chasm between rich and poor is only widening, and wages have stagnated for decades, this is the stuff we need to talk about.

Thanks to the Prospect for letting me—a person from the working class—write about issues close to me, and issues I think are important. Here are ten of my favorite stories I’ve written, either because of the people I spoke with or the topics that were highlighted.


Could California End Childhood Poverty?

California, as far as I know, is the only state whose department of human services convened a task force to come up with solutions to end childhood poverty. And the Prospect, as far as I know, is the only outlet outside of California that covered this groundbreaking commitment to low-income kids. The state recently passed what’s pretty much the first guaranteed income for low-income families with children in the country—though they intentionally left out families with undocumented parents.

Benefits on the Line

So much of my work has been explaining how complicated policies affect the most marginalized people. Sometimes these policies are designed to be complex so that, unless you have a Ph.D. in economics, they go over our heads. This story attempts to explain one.

Building Worker Solidarity Across Borders

American consumers have tended to ignore the labor conditions of workers internationally—cheap stuff wins out. But the Communications Workers of America has, for the past few years, slowly built relationships with call center workers in the Philippines. I wrote a follow-up story, here, in which I interviewed via Skype a Filipino worker who had been fired for organizing.

Reproductive Rights at Risk With or Without Roe

There was a lot of panic for the future of Roe when Trump appointed two new Supreme Court justices. Rightly so, but abortion has never been easy to access, especially if you’re a person of color, have low income, or you live in a rural area. This story also saw me on C-SPAN … eek!

Who Cares for the Care Workers?

I interviewed two care workers who are also organizing their colleagues in their respective cities in the South. Home care workers are a “hidden” workforce, laboring away, typically alone, in buildings you unknowingly pass on the street.

The Idle Poor and the Idle Rich

This is an essay about societal expectations and how we think about who is deserving of government assistance. It is also a song in the 1968 musical film Finian’s Rainbow.

Scott Walker and the Failure of Trickle Down

Two states, two directions, widely different outcomes. Governor Scott Walker, national disgrace, threw Wisconsin into disarray by a commitment to trickle-down economics, and by cutting welfare and gutting unions. Minnesota, which did the opposite, is doing much better on nearly all counts.

West Virginia Teachers Won Their Strike. Now, They’re Rebuilding the Local Economy.

Possibly my favorite story: I traveled to McDowell County in southern West Virginia, the poorest county in a struggling state, to report on an anti-poverty initiative led by the American Federation of Teachers. This project is a throwback to the days when labor unions provided community resources and support—but in a region that knows how quickly do-gooders will drop one project for the next, the initiative has had a rocky start.

Food Stamps Aren’t a Substitute for Work. They’re How Low-Wage Workers Avoid Hunger.

For this piece, I interviewed a woman who used to receive SNAP to learn about her experience with the program, and held onto the interview for a few months until I came upon a report from the Center on Budget and Policy Priorities that perfectly explained her difficulties. In contrast to the stereotype, Sarah used the program when she needed it most—when she was in between unstable jobs—not so that she wouldn’t have to work.

The Poverty on Disney’s Doorstep

The Prospect isn’t known for publishing movie reviews, which is why I loved writing this piece about how indie movie The Florida Project depicted not just childhood poverty, but childhood itself.

Don’t Blame Mental Illness for Mass Shootings

Elaine Thompson/AP Photo

By all means, let’s keep making progress on the prevention and treatment of mental illness. But let’s not kid ourselves. Mass gun violence is its own malady.

In addressing the spate of mass shootings, President Trump and the gun lobby have tried to deflect attention from our gun-crazy society and lax gun laws to the issue of mental health. After the El Paso Walmart killings, President Trump referred to mass shooters as “mentally ill monsters.” While this ploy may help bring needed resources to prevention and treatment of mental illness, it’s a totally bogus story when it comes to explaining mass gun murder.

If you think about what has changed in the past several decades, there is no evidence that mental illness is on the rise. And other rates of violent crime have been declining for decades.

Rather, four things have changed, three of them having to do with guns. First, gun control laws are weaker; second, military-style weapons are more lethal and readily available; and third, magazines can carry more rounds of ammunition so that a killer can pull the trigger and just keep shooting.

One other thing has changed. The president of the United States identifies with violence and hatred.

On the mental health front, there is actually good news. Not only is serious mental illness more treatable and preventable than ever, but studies show little correlation between mental illness and mass shootings. 

Dr. Richard A. Friedman, writing in The New York Times, summarized the major studies. One comprehensive piece of research found that some 80 percent of mass killers had no diagnosable mental illness. An FBI study found that just 5 percent of mass shooters could be considered psychotic.

A better diagnosis would be that they are haters. Were military-style guns not available, they could go right on hating, but not killing.

Stand-your-ground laws, meanwhile, make it all too easy for people to gun each other down in fits of rage over parking spaces. Without guns, they might scream at each other and resort to fists.

Modern life has far too much stress from multiple sources—the stress of not being able to earn a decent living; the stress of figuring out how to juggle kids and work; the stress of navigating an intimate relationship. But most stress isn’t serious mental illness though it can indeed trigger violence.

Meanwhile, advances in the early diagnosis and treatment of mental illness are remarkable.  One of the most impressive is the Portland Identification and Early Referral (PIER) program pioneered by psychiatrist William McFarlane in Maine in 2000, and now extended to several cities and states. (Disclosure: Dr. McFarlane is a cherished friend.)

The basic clinical insight of PIER is that if incipient major mental illness can be detected early, then young people at risk of a psychotic break can be spared that trauma and go on to live a normal life. PIER researchers found that it was the psychotic break more than the underlying risk of illness that was life-destroying.

After PIER was instituted in Portland, the incidence of major mental illness declined by 34 percent between 2001 and 2007.

The federal Substance Abuse and Mental Health Administration is now funding preventive services based on the PIER model in 21 locations across the country.

The strategy enjoys bipartisan support because Democrats think it’s humane policy, and Republicans like the distraction from gun control.

By all means, let’s keep making progress on the prevention and treatment of mental illness. But let’s not kid ourselves. Mass gun violence is its own malady. It will decline only when we get serious about banning military weapons—and ending the preaching of hatred from the Hater-in-Chief in the Oval Office.