Dennis Kelleher of Better Markets

SUMMARY

Paul Krugman interviews Dennis Kelleher, president of Better Markets, to discuss the ongoing rollback of financial regulation and its implications for economic stability and democracy. Kelleher highlights the concentration of wealth, regulatory capture, the influence of crypto, and the urgent need for public engagement in financial policy.

MAIN POINTS

• Kelleher explains the long-term economic and political consequences of the 2008 financial crisis, noting that most Americans remain poorer than before the crash. [2:00]
• Discussion centers on the structural drivers of wealth inequality, including how financial rules favor Wall Street over community banks and the real economy. [7:00]
• Kelleher criticizes the Federal Reserve for reducing capital requirements for large banks to pre-2008 levels and hiring advisers with deep Wall Street ties. [13:01]
• The conversation highlights the resurgence of shadow banking and the weakening of both regulation and supervision, drawing parallels to conditions before the 2008 crisis. [18:01]
• Recent Supreme Court decisions are discussed, with Kelleher warning that they centralize executive power and undermine the independence of regulatory agencies. [23:02]
• The SEC's shift from investor protection to management protection is detailed, including new rules that undermine independent proxy advice and reduce disclosure requirements. [29:02]
• Kelleher recounts Better Markets' opposition to FTX and Sam Bankman-Fried, arguing that crypto's primary uses are illicit and that industry money is distorting political priorities. [36:01]
• The integration of crypto into the financial system is identified as a major new systemic risk, with bipartisan political support driven by campaign finance and lobbying. [41:01]
• AI's impact on finance is discussed, with concerns about automation, bias, and the vulnerability of community banks, emphasizing the need for regulatory safeguards. [48:01]
• Kelleher ends on a hopeful note, citing successful public engagement in SEC rulemaking and calling for broader civic involvement to counterbalance moneyed interests. [53:00]

DETAILED ANALYSIS

The conversation between Paul Krugman and Dennis Kelleher provides a comprehensive critique of the current state of financial regulation in the United States, emphasizing the risks posed by regulatory rollbacks and the concentration of economic power. Kelleher begins by contextualizing the lingering effects of the 2008 financial crisis, noting that while the event may be fading from public memory, its repercussions continue to shape the economic fortunes of most Americans. He cites Federal Reserve data showing that, as of 2016, 90% of Americans were still significantly poorer than they were before the crisis, with the broad unemployment rate only recovering to pre-crash levels a decade later.

This persistent economic malaise, he argues, has fueled political dissatisfaction and the rise of populist movements in the US and abroad, as described in Martin Wolf's 'The Crisis of Democratic Capitalism.'

Kelleher underscores the extreme concentration of wealth in the United States, pointing out that the top 10% own 87% of stock market value, while the bottom half of the population holds just 2.5% of national wealth. He attributes much of this inequality to structural policy choices that favor financialization and wealth extraction over productive investment. Community banks, which hold a modest share of total banking assets but provide a disproportionate share of small business loans, are contrasted with large Wall Street institutions that prioritize trading and capital markets activities due to regulatory incentives.

Kelleher criticizes bipartisan policymaking in Washington for perpetuating rules that channel profits to the financial elite, often at the expense of the broader economy.

A significant portion of the discussion focuses on the weakening of regulatory safeguards. Kelleher details how large banks are increasingly lending to non-bank financial entities, or 'shadow banks,' which face lower capital and regulatory requirements. This shift, he warns, mirrors the conditions that led to the 2008 crisis, with the shadow banking system now larger and less regulated than before.

He expresses alarm that the Federal Reserve, particularly under its current leadership, is reducing capital requirements for the largest banks to levels seen before the last crisis and is hiring advisers directly from Wall Street, raising concerns about regulatory capture. The reduction in both regulation and supervision, including the gutting of stress tests and daily oversight, is described as a deliberate move that increases systemic risk.

Kelleher also addresses recent Supreme Court decisions, notably Slaughter v. FTC, which he argues have dismantled the administrative state by granting the president direct control over independent regulatory agencies. This shift, he contends, removes crucial checks on profit-driven excesses and endangers public protections in areas ranging from financial markets to consumer safety.

He draws historical parallels to the New Deal era, when a robust regulatory framework helped build the American middle class and reduce inequality, warning that these gains are now at risk.

Turning to the Securities and Exchange Commission, Kelleher laments its transformation from a global standard-bearer for investor protection to an agency increasingly aligned with corporate management. He cites new rules that restrict the independence of proxy advisory firms and reduce disclosure obligations, making it harder for investors to hold companies accountable. This regulatory retreat, he argues, threatens the integrity of US capital markets and could undermine their global standing, with potential negative consequences for capital formation and economic growth.

The discussion then shifts to the influence of the cryptocurrency industry. Kelleher recounts Better Markets' early and vocal opposition to FTX and Sam Bankman-Fried, describing the crypto business model as inherently predatory and lacking any legitimate economic use case. He asserts that crypto's primary functions are tax evasion, money laundering, and facilitating illicit activities, yet the industry has successfully captured political attention through massive campaign spending.

Kelleher highlights the deceptive nature of crypto-funded political advertising, which avoids mentioning crypto due to its unpopularity with voters, and criticizes both major parties for accepting industry money and prioritizing crypto interests over public welfare. He warns that the integration of crypto into the mainstream financial system poses new systemic risks, potentially exceeding those of the pre-2008 subprime crisis.

Artificial intelligence is identified as another emerging challenge, with Kelleher expressing concern about its impact on jobs, lending, and financial decision-making. He notes that AI-driven automation could disadvantage community banks and small businesses, while algorithmic bias and insufficient oversight present additional dangers. Kelleher calls for a balanced regulatory approach that preserves innovation while safeguarding the public from unforeseen harms, drawing analogies to the evolution of automotive safety standards.

Despite the sobering assessment of current trends, Kelleher concludes on a cautiously optimistic note. He emphasizes the reasonableness and civic-mindedness of most Americans and highlights recent successes in mobilizing public engagement, such as a record number of retail investor comments on SEC rulemaking. He advocates for greater civic participation to counteract the influence of moneyed interests and restore balance to the political and regulatory systems, suggesting that the core values of the American dream can still be reflected in public policy if more citizens become actively involved.

LINKS

• Paul Krugman's YouTube channel with interviews and more content.
• Better Markets, an independent think tank focused on financial reform.
• Profile of Dennis Kelleher, president of Better Markets.
• About Better Markets and its mission.
• Review of Martin Wolf's book 'The Crisis of Democratic Capitalism'.

KEYWORDS