Although the economy is doing well, and the unemployment rate is low, there are still millions of Americans living paycheck to paycheck. Some estimates are there are 45 million Americans who are living in poverty, depending upon how poverty is measured. Even though there is much more technology and productivity these days, the median family income is $5,000 lower than 20 years ago.
Half of Americans have less than $10,000 in savings and millions do not know how they will ever be able to retire. Real unemployment is probably close to 10%, when you count all the people who are not able to find work and have to settle for part time.
Of course, Wall Street and the big banks are doing well. Some argue that greed, recklessness and illegal behavior were major factors in driving the country into a very bad recession. Millions of Americans lost their homes, jobs, savings and the ability to send their children to college. Today, the middle class is still suffering somewhat the effects of what financial institutions and insurance companies did to the US 10 years ago.
Since the market crash, it has become common to read about large financial institutions being fined or reaching settlements for questionable behavior. During the financial crisis, taxpayers were told that they needed to do bailouts for these big financial institutions because they were too big to fail. The argument was that if they went down the tubes, we would have a depression.
Still, three of the four biggest financial institutions in the country today – Morgan Chase, Bank of America and Wells Fargo – are 80% bigger now than they were in 2007 a year before US taxpayers bailed them out.
Many argue that no one financial institution should be so big that the failure would cause a major financial risk to Americans and to the US economy. No one financial organization should have such large holdings that the failure of it would spiral the world economy into a crisis.
As of 2016, there were only six huge financial organizations that had assets of $10 trillion. This is 60% of the country’s GDP. These large banks deal with 2/3 of the credit card purchases in the country and write 35% of home mortgages. They also control half the bank deposits in the US.
Some argue that if Teddy Roosevelt were alive he would break up these big banks, and some politicians have proposed to do so in the past. There have been bills written that would mandate financial regulators within a year to identify and break up giant banks and financial institutions such as JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs, Wells Fargo and Morgan Stanley. The idea behind this would be that they cannot cause another financial crisis like the one that swamped the country in 2008.
That legislation, while it has not been passed of course, was endorsed in 2015 by the Independent Community Bankers of America that represents 6000 banks. Their support was a big recognition that banking functions should be boring and the situation today still has too much risk and, some would say, too much stress on making money.
Many argue the function of banking should be to provide affordable loans to people and businesses so that jobs can be created, and also for people to be able to afford to buy homes, cars and so on.
Another problem with the current regulatory environment is that the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, while it was intended to banish financial institution abuses of consumers, it has led to more problems for middle class taxpayers. Recent research has showed that after Dodd-Frank, the number of mortgages given to the middle class dropped by 15%, but for the wealthy, they increased 20%. It was determined that Dodd-Frank changed mortgage lender origination behavior, as it increased the costs of originating loans.
Lenders were faced with more costs of origination and costs of compliance even before Dodd-Frank was passed. It makes sense that lenders began to focus more of their business on bigger loans for wealthier customer, so the lenders and banks could make more money. Big lenders also may offer more financial services than smaller banks, so it makes sense to acquire wealthy customers as they make the banks more money. Thus, the biggest drop in loan originations for middle class buyers was for the big banks.
When politicians promote new financial regulation, the general aim is to protect consumers. But it is important for regulators to be aware of the changes of incentives of private companies who will react in their own ways. In the case of the Dodd-Frank law, many middle-class taxpayers found that they were unable to get cheaper mortgages after the law was passed. In fact, many of them were unable to get a mortgage at all.