No-Stress Tests

The resurrection of Wall Street is at hand. That isn’t quite the intended message of the results of today’s stress tests, but it’s pretty likely to be the bottom line. Led by Citigroup and Bank of America, the 19 big banks that got us into much of this trouble will, by government-orchestrated means, receive the tens of billions of dollars in additional capital they need. But that’s mainly for another rainy day (as opposed to another perfect storm). “All the banks are solvent,” Federal Reserve Chairman Ben Bernanke said today, declaring he was “very pleased with the results.”

All of which means that whatever opportunity once might have existed for fundamental change in the financial system – with its giant institutions privately trading derivatives with each other globally --is probably slipping away. Oh, the reigning authorities won’t quite say that. There is going to be all sorts of new regulatory oversight, new capital requirements, reduced leverage rules, and such. But basically you’re going to have a lot of the same banks (minus Bear Stearns, Lehman and some 1,500 hedge funds that are no more) trading the same kind of stuff.

It’s not that Barack Obama isn’t aware of what’s at stake. That’s very likely why on April 27, the president gathered in some of his chief outside economic critics —including two of the most vociferous, Nobelists Joseph Stiglitz and Paul Krugman—for a secretive dinner in the old family dining room of the White House. Also in attendance: Paul Volcker, who has one foot in and one foot out of the administration as the head of Obama’s largely cosmetic economic recovery board; Princeton economist and former Fed vice chairman Alan Blinder; Columbia’s Jeff Sachs; and Harvard’s Ken Rogoff. Representing the home team, as it were: Obama’s chief economic adviser Larry Summers, Treasury Secretary Tim Geithner and Chief of Staff Rahm Emanuel. Why did Obama hold the meeting? “I think he wanted to hear the [opposing] arguments right in front of him,” says Blinder. “All I can say is if the president of the United States devotes that much personal time, and it was about two-hour dinner, he must want to hear what people outside the administration are saying and hear what his own people say in rebuttal to that. Why would you do that if you aren’t at least turning over your mind what to do next?”

But after Krugman and Stiglitz made their now-familiar case for nationalizing the banks and forcing other dramatic changes, Obama gave no indication he was changing his policies, Blinder added.

On Capitol Hill, meanwhile, there is a movement afoot to create a “financial markets commission” that will look into the causes of the financial crisis. The hope among its sponsors is that it will carry the weight of the famous Pecora Commission, which led to Glass-Steagall and other reforms in the early ‘30s. But in today’s environment, it’s just as likely to get bogged down in partisan bickering. And while it’s doing that, Wall Street will be off and running again.

“Too big to fail” could soon become “too powerful to change.”