Hillary Clinton's presidential campaign did something a little unexpected early this week in advance of an expected Bernie Sanders speech on Wall Street reform — it tried to hit Sanders from the left by having campaign chief financial officer Gary Gensler accuse him of taking "a hands-off approach to some of the riskiest institutions and activities in our economy, which were among the biggest culprits during the 2008 crisis." Sanders fired back through a spokesperson, Michael Briggs, who sniffed that the Vermont senator "won't be taking advice on how to regulate Wall Street from a former Goldman Sachs partner."

But while it's certainly true that Gensler used to work at Goldman Sachs, he's better known in policy circles for his more recent job chairing the Commodity Futures Regulatory Commission in the Obama administration, a vantage point from which he became a hero to many financial reformers by clashing with Tim Geithner and Larry Summers over a desire for stricter rules for Wall Street.

In a bit of a reversal of the usual political pattern, though, what began largely as an exercise in cynical gamesmanship and name-calling has evolved into a wonky policy dispute. It is one that touches on important aspects of financial regulation but that also more broadly speaks to a century-old divide in American thinking about how to deal with the problems of corporate power in sensitive segments of the economy. Is the most important thing to break up existing large companies and prevent the emergence of new large ones? Or is the most important thing to regulate and supervise companies, in which case having a market dominated by a finite number of small players might even be helpful?

The debate reflects the particular political circumstances of 2015 and the specific dynamics of the financial sector, but also essentially restages an argument between Woodrow Wilson and Theodore Roosevelt in 1912.

This started with an argument about "shadow banks"

The original policy argument between Clinton and Sanders started with what have come to be known as "shadow banks." The issue here is that while the term "bank" is sometimes used loosely to refer to any financial institution, in regulatory terms a bank is a specific kind of business that takes deposits from customers and then takes the money to go make loans.

Because a bank deposit is very flexible (you can walk to the ATM and get your money anytime you want), banks can get away with paying a lower interest rate on deposits than they charge for loans. That's a profit opportunity, but it also makes banks prone to runs. To prevent runs, banks receive both government support (depositors generally get bailed out even if the bank goes bust) and government regulation (to prevent excessive risk-taking).

The term "shadow bank" was coined by Paul McCulley of the bond firm PIMCO, and the basic idea is that you don't need to be an official bank to be essentially in the business of borrowing short-term money in order to finance long-term lending. This also means you don't need to be an official bank in order to be subject to bank runs.

Much of the financial crisis originated via this kind of non-bank banking in which mortgage originators, insurance companies, investment banks, hedge funds, and even foreign sovereign wealth funds teamed up in various combinations to lend money to US homebuyers outside the traditional banking system.

The way the Sanders-Clinton spat started was that months ago Sanders came out in favor of two very tough rules on traditional banks. First, he favors a return to an old part of a Depression-era banking law called Glass-Steagall, which was repealed in the 1990s and said that a bank can't be part of a company that offers non-bank financial services like insurance or investment banking. (If you're confused by the fact that investment banks are not banks, that is because the terminology is genuinely confusing — you're not missing anything.) Second, he favors a hard limit on the overall size to which a bank can grow.

Hillary Clinton, fitting her more moderate persona, declined to endorse either of those proposals. But she is also more of a policy wonk than Sanders, and her campaign has a bigger policy apparatus, so her financial regulation plan is considerably more comprehensive than Sanders's and addresses issues — like shadow banking — that are outside the scope of Sanders's proposals. That became Clinton's opportunity to argue that her plan is actually tougher than his — that he would, in effect, let shadow banks off the hook.

Clinton poses that bank breakups aren't sufficient

Zachary Carter at the Huffington Post argues that Clinton's jabs at Sanders amount to little more than "semantic gamesmanship" and mischaracterize the situation. The Clinton camp, for example, notes the huge problems that arose at Lehman Brothers and AIG that were primarily in the investment banking and insurance industries respectively.

Carter retorts that "both AIG and Lehman operated traditional banking units that engaged in boring bank activities like accepting deposits and extending loans," so Sanders's Glass-Steagall idea would, in fact, have impacted both companies.

This is true, but it is also, in most ways, beside the point. The trouble with AIG and Lehman wasn't that shadow activities pushed them to bankruptcy and imperiled their (small) traditional banking units. The problem was that their shadow activities pushed them to bankruptcy and imperiled the entire banking system.

to dwell on the point: BIG wasn't what made Bear or Lehman dangerous. it was the ability to spill damage onto others. — Austan Goolsbee (@Austan_Goolsbee) January 5, 2016

Sanders's regulatory proposals would have touched these institutions, but they wouldn't have necessarily solved the problem or eliminated the need for shadow banks to be regulated as such.

All of this is to say that the Clinton camp's main argument against Sanders is that breaking up big banks is insufficient to the challenge of adequately regulating the financial system.

Sanders argues that bank breakups are necessary

The counterargument from Sanders's camp really rests on another point entirely. He is focused, as he often is, less on specific points of policy implementation than on big questions of political economy. He says that large financial institutions "have acquired too much economic and political power, endangering our economy and our political process."

In keeping with this focus on power rather than bank risk, Sanders also touts his co-sponsorship of a bill that would ban the current practice at many banks of paying executives a special exit bonus if they leave to take a job with the government. Sanders sees those bonuses as implicitly corrupt and as part of a problematic revolving door whereby wealthy financial interests exercise undue influence over the political process.

But this particular bill aside, it's obviously difficult to piecemeal ban every possible way through which large banks can influence the political process. Better to smash them all at once, so that it's simply not possible for any one institution to wield the kind of influence a Goldman Sachs or a JP Morgan currently can.

This in part reflects longstanding disagreements over the bank bailouts of 2008.

One view — certainly Clinton's view and the Obama administration's view — is that distasteful as these bailouts were, they would also be necessary and correct actions to take given the circumstances. Their hope is that an improved regulatory framework will make future crises less likely and future bailouts unnecessary. Sanders, by contrast, voted against bailouts on several occasions — a clear indication that he never thought they were necessary.

To Clinton, the bailouts were made necessary by inadequate bank regulation, so she is proposing to improve bank regulation.

To Sanders, unnecessary bailouts were made possible by excessive bank political power, so he proposing to cut banks down to size.

A historic debate

Sanders's critique of Clinton in many ways recapitulates an old argument between Woodrow Wilson and Theodore Roosevelt when both men were competing for a pool of progressive-minded voters in the odd three-way campaign of 1912. (Conservative voters were expected to back William Howard Taft, and Taft was expected to lose badly, making the real question which progressive alternative to Taft would prevail.)

Roosevelt was running on a platform he called New Nationalism, which argued, among other things, that the new 20th-century world of big business required the construction of a large federal regulatory apparatus to oversee the activities of big business. Given the stakes involved in the actions of major companies, it wasn't good enough to just let the invisible hand fall where it might — regulators were needed to mind the store.

Wilson offered a different critique of big business under the heading New Freedom. As Robert Saunders recounts in his book In Search of Woodrow Wilson, he "sought to convince Roosevelt's potential progressive supporters that Roosevelt's posture on bigness in industry constituted an acceptance of monopoly and as such posed a threat to individual freedom and democracy in the United States."

Roosevelt called on the federal government to create stronger commissions to regulate big business, while "Wilson questioned the wisdom of the experts who would staff the commissions and opposed the granting of broad, discretionary power to the commissioners since it would lead to a 'legitimized continuation' of the alliance between government and monopoly."

Wilson wasn't against commissions per se (and, indeed, as president he ended up creating several), but he argued that breaking up big industry-dominating trusts and preventing the emergence of new ones had to be job number one.

In practice, the choice has rarely been as stark as Wilson's campaign trail portrayal of it, and real-world regulatory agencies tend to do either some of both or neither, depending on their political orientation. But the general difference in philosophical approach is real and important. Clinton sees regulating Wall Street as important and necessary but also (fittingly for a former senator from New York) sees the fact that New York City is a global financial center as a source of US economic strength. She wants the United States to be home to globally competitive financial services companies just as it is home to globally competitive airplane manufacturing, technology, pharmaceutical, and entertainment companies. Sanders, by contrast, doesn't really see what Wall Street does as in any way valuable or useful enough to justify big banks, and takes a "better safe than sorry" approach to the idea of smashing up its biggest players.