This is the introductory post from the May 2024 edition of Hypertext, the Niskanen Center’s journal of liberalism, political economy, and policy. Every month we publish a series of essays – featuring thinkers with a wide variety of viewpoints – that defies the tired dichotomy of left and right while engaging with a vision of America where competitive markets, robust public goods, and an effective state reinforce one another. This month’s issue focuses on banking and equity in aftermath of the 2008 financial crisis.

Future histories of our populist era may well begin with the 2008 financial crisis and the revolts it touched off. On the left, the short-lived Occupy Wall Street movement gave voice to widespread anger about economic inequality and maximalist demands to rein it in — largely from denizens of the professional classes, who now drive Democratic politics. On the right, rage over Republican support for the bank bailouts culminated in the Tea Party, which then drove the GOP’s mutation into Trumpism.

On both sides, Wall Street titans’ collapse and subsequent frantic rescue seemed like a metaphor for capitalist malaise — a system run increasingly on shell games and insider protection over innovation and market discipline, with ordinary people left behind. A political and intellectual reckoning has since led some to declare the end of “neoliberalism.” 

But for the sector that kicked it all into motion, relatively little has changed.

That is the grim reality Anat Admati and Martin Hellwig laid out in their epic explainer, “The Banker’s New Clothes,” written in the wake of the 2008 financial crisis and now updated for the post-Trump era of regulation. In the book, the authors persuasively argue that the surest way to prevent a repeat of the 2008 disaster is to require that banks, like most other corporations, fund their operations with much less debt and much more equity investment. 

This volume of Hypertext, a forum on the book, leads off with “Capital confusion,” an excerpt that makes this case. You’ll also read:

  • Former Kansas City Fed Chairman Thomas Hoenig on “The myths that fuel the megabanks”
  • Admati and Hellwig on “Bailouts Forever”
  • Sociologist and Niskanen fellow Colleen Eren on “Giving power to truth”
  • My essay, “Wall Street’s supply side needs an update.”

The debate is happening now

The updated book is a timely intervention: Even now, banks are lobbying fiercely against a proposal, developed in the wake of last year’s Silicon Valley Bank debacle, that would indirectly nudge up equity requirements for the very largest institutions—those with assets over $100 billion. Regulators are reportedly preparing to back down even though most banks already have enough capital to comply, anyway.

There is a simple reason why banks don’t want to raise more money by reinvesting earnings or selling new shares of stock: They can borrow at a discount, thanks to the continued assumption in the markets that the government will bail them out again if things go sideways.

As always, former Kansas City Fed Chair Thomas Hoenig explains, they tout the myth that requiring more equity would inevitably stifle lending:

“Preceding the Great Financial Crisis of 2008, I was repeatedly told by those in the banking industry that requiring banks to rely on investor capital would deprive small businesses and individuals of much much-needed loans necessary to grow their businesses. These arguments carried the day, as many of the very largest banks in the country were allowed to fund themselves with as little as 3 percent of investor money for every dollar of assets on their balance sheets. When the crisis erupted … the low-capital approach hardly left those small businesses and individuals better off: Loan volume declined most among the largest, less well-capitalized banks.” 

But while equity ratios in the single digits are unsustainable economically, they have proven themselves remarkably stable politically. As Admati and Hellwig explain throughout the book, politicians are cowed by the types of warnings that Hoenig recounts, or motivated by parochial concerns such as campaign donations, financing for pet projects, or backing their big banks against those of other nations.

Sociologist and Niskanen Center fellow Colleen Eren largely accepts this analysis but emphasizes that reckoning with how the government deploys finance for popular purposes requires us to push deeper.

“The U.S. government has been implicated heavily in many of the institutional changes in banking that led to the crisis. And, importantly, it has done so not out of some kind of nefarious plan to ensconce an aristocracy and immiserate the masses, but to the contrary, to expand the vaunted American dream of a middle-class lifestyle to a larger subset of the populace—without increasing government debt … It has been countered that to the extent lax equity requirements promote these goals, there are much more efficient and less-risky ways to go about it, such as direct subsidies. But as Niskanen Center Senior Fellow Monica Prasad has argued, over the decades, ‘Financialization became the political path of least resistance for addressing citizens’ social needs.’”

It’s also unclear, Eren notes, how to mobilize a constituency that will break up these political alliances and demand fundamental change.

In my essay, I argue that the emerging “abundance” movement is equipped to tackle this nasty problem. It’s an opportunity for a community seeking to revitalize the supply side of the economy and build a more capable state to address distortions (or market failures) in capital deployment and improve an impossibly complex regulatory regime by lowering the stakes of failure. Meanwhile, core commitments of the movement, such as boosting housing supply, could relieve some of the coalitional pressure brought on by the tradeoffs.

We hope you enjoy the essays, share them widely, and let us know your thoughts on this vital debate. On democracy’s balance sheet, economic failure is paid for in political legitimacy. We can’t afford another big write-off.