Great News! The good life will soon return to America. Auspiciously, months before the holiday shopping season began, Americans were told that after more than a year of fiscal recession, or what some have characterized as akin to an economic depression, consumers were optimistic. The confidence index and other indicators were much improved. Manufacturing executives assured the public, the engine that drives the free enterprise system was in a "sustainable recovery mode." In the very near future, products, and people's sense of need, would be fabricated again. Everything will be right with the world, economically. Few feared the threat that, long ago, Americans had come to accept. The foundation of a democratic system had eroded in favor of consumption.
The economy is still getting worse. Foreclosures are surging above last year's epic highs and the unemployment rate marches upwards every month. As the misery grinds on, Wall Street lobbyists and their allies in Congress are pushing hard to distract the public from the real causes of the current global economic crisis. Corporate America is trying to pin the blame for our empty pocketbooks on President Barack Obama and the phantom socialist menace, and cable news pundits are taking the bait.
As David Korten explains in a blog post for Yes!, this surge of distractions is a conscious political strategy designed to sabotage reform. "Wall Street's greatest fear is that the public might demand Congress and the president shut down the casino," Korten writes. "Any issue that shifts attention away from Wall Street and pins the blame for job loss and mortgage foreclosures on President Obama works in its favor."
The banking lobby is kicking and screaming over President Obama's plan to overhaul consumer protection in finance. As a result, the battle over the proposed Consumer Financial Protection Agency (CFPA) has become the most heated economic controversy in the nation's capital, even though the issue isn't controversial where ordinary citizens are concerned.
The existing hodgepodge of bank regulators completely failed to stand up for consumers as the housing bubble grew and burst. Our current bank regulators are charged not only with consumer protection, but safety and soundness regulation, which basically means making sure that banks don't fail. Preventing bank failures often means protecting bank profits, even when those profits come at the expense of communities. Instead of relying on the same inept and conflicted agencies, consumer regulation of credit cards, mortgages, student loans, payday loans should be funneled into a single, new agency with no other priorities: The CFPA.
As Greg Kaufmann details for The Nation, recent economic history isn't stopping Wall Street's favorite lawmakers from pushing against the CFPA. Kaufmann highlights some of the most outrageous comments from a hearing on the CFPA last week. Rep. Jeb Hensarling (R-TX) claimed that if the CFPA had existed a few years ago, there would be no ATMs or frequent flyer miles. David John, a researcher from the Heritage Foundation, said that employees of the new agency would spend too much time trying to find their new desks to actually do any regulating. Bank lobbyist Ed Yingling tried to erase the last ten years with his claim that "no real case has been made" for better enforcement of consumer protection in banking.
These are not serious arguments. They are intentional distractions designed to kill an obviously productive policy. Kaufmann's headline says it all: "Do They Take us for Schmucks?"
But loudmouth Republicans like Hensarling aren't the only politicians we need to keep tabs on. Plenty of lawmakers on the Financial Services Committee won't stand up and make crazy speeches about ATMs, but will still go to bat for Wall Street behind the scenes. As I emphasize in a piece for AlterNet, with outsized Democratic majorities in both chambers of commerce, conservative, pro-Wall Street Democrats pose just as great a threat to our economic security as loony Republicans.
If you think that sounds pessimistic, consider Ralph Nader, who Matthew Rothschild profiles in The Progressive. Nader knows corporate America has its hands on nearly every lever in the U.S. political system. Lobbyists don't just hurl money at lawmakers, they spend tremendous sums on misleading advertisements to sway public opinion. Rothschild quotes from a recent speech Nader gave on his current book tour. He argues that progressives don't just need concerned citizens on our side. They need concerned citizens with money to counter the flood of corporate cash in the political system.
"There is a poignance in listening to Ralph Nader these days," Rothschild writes. "Here is a man who, for the last 45 years, has hurled his body at the engine of corporate power. He's dented it more than anyone else in America. But he knows it's still chugging, even more strongly than ever."
Even when lawmakers talk tough about Wall Street, it's not obvious what's really going on. Senate Banking Committee Chairman Chris Dodd (D-CT) recently rolled out an extremely ambitious plan to overhaul the bank regulatory system. It has very little common ground with Obama's plan, and in some respects would be an improvement. Obama's plan is very strong on consumer protection and not much else. But Dodd's plan is so ambitious, it seems like a politically impossible waste of time, one that could easily delay reforms into next year. Dodd wants to consolidate all four bank regulators into a single agency to prevent a race to the bottom and strip the Federal Reserve of all of its regulatory responsibilities. They aren't bad ideas, but they have absolutely no political momentum. Dodd has been holding hearings on the financial crisis since 2007-- he could have started pushing for this plan a long time ago. By introducing it so late in the process, major legislative delays seem inevitable. The longer it takes to pass a regulatory bill, the more time the bank lobby has to water it down. Writing for Mother Jones, Nick Baumann suggests this may be exactly what Dodd intends.
"Maybe getting it done by 2010 isn't the point. Dodd is up for reelection that November. If he manages to win by talking populist while raising money from Wall Street, he'll have plenty of time afterward to figure out what to do next."
For now, the economy is still absolutely horrible. Writing for In These Times, David Moberg translates the statistics from the government's most recent unemployment report and deciphers some recent polling on the economy. Things are bad, and people know it. Many economists believe the recession may have technically already ended. The Gross Domestic Product, a statistical measure of the country's economic output, may no longer be declining. But the unemployment rate keeps going up. It was 9.8% at the end of September.
Moberg notes that if the rate counted the long-term unemployed who have given up looking and people who want full-time jobs but settled for part-time work, the unemployment rate is a staggering 17%. Over one-third of the 15.1 million would-be workers encompassed by the 9.8% unemployment rate have been out of a job for at least six months. Voters overwhelmingly believe that government policies have helped Wall Street, while just 13% think the government has given a lot of help to the average working person.
Economics and politics are inextricably linked. To strengthen our economic foundation, we need policymakers who are willing to stand up to corporate America and corporate media and serve the citizens who elect them.
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The prevailing wisdom in this week's press reports about credit card reform legislation now being debated in the Senate is that Senator Dodd's version is stronger than the Credit Cardholders' Bill of Rights, which passed the House easily last month. The New York Times' Carl Hulse concluded:
[The Senate bill] goes farther than a measure already easily passed by the House in imposing an array of new restrictions on credit card companies.
Politico's Victoria McGrane was slightly more accurate:
The compromise [between Banking Committee mates Senator Dodd and Republican Senator Richard Shelby] softened some provisions in Dodd's original bill - which came out of committee without a single Republican vote - but still would give the industry a stronger dose of medicine than the bill passed by the House last month.
As far as they go, these reports are not inaccurate, but they tell far from the whole story. Indeed, the current version of the Dodd bill is significantly weaker than the version that was passed by the Banking Committee. Indeed, the Dodd-Shelby compromise looks very, very similar to Rep. Maloney's bill of rights. The real story is the direction in which compromising with Senator Shelby pulled Senator Dodd. That is, in the direction of the credit card companies.
The Credit Card Accountability, Responsibility, and Disclosure Act, though an important milestone in consumer protections, exhibits the signs of the credit card industry's powerful influence. Unlike the previous version, the bill likely to be passed by the Senate does not explicitly prohibit universal default, the practice whereby a credit card company uses information unrelated to a consumer's credit card as the basis for increasing the interest rate. Instead, card companies are left to decide for themselves when improvements in a cardholder's credit warrant a rate reduction. The previous version, like the House version, limit the number of over-the-limit fees - fees applied when a cardholder charges more than their card limit - that card companies can apply. This version does not.
Instead of outright prohibition of abusively high fees, the Credit Card Accountability, Responsibility, and Disclosure Act requires that fees be reasonable and proportional; the card industry, with easy access to political power, will determine what "reasonable and proportional" mean. Though the Act improves oversight of the credit card industry, the previous version required the collection of comprehensive and detailed information about an industry whose practices are at best opaque and at worst purposefully deceptive.
While compromise is necessary to the legislative process, in this case compromise seems to have been largely one-sided.
While the bank lobby continues to hold significant clout in Congress, President Barack Obama entered the fray on behalf of consumers Thursday, demanding that lenders put an end to abusive fees and predatory interest rates.
One of the particularly exasperating characteristics of the current financial crisis is that the institutions responsible for the crisis are on kamikaze missions: as they go down, they exact maximum damage on their customers and on the economy at large before crashing and burning. This is, in part, simply due to organizational decision making: an organization's leadership will attempt to keep a firm afloat as long as possible, no matter the larger social and economic costs.
Credit card companies are currently on such a destructive mission. Credit card defaults, long feared as the financial crisis's second coming (after housing defaults), are at their highest level in 20 years with so-called "charge offs" - the amount a credit card company believes it will never be repaid - rising significantly in recent months to 8.7% at American Express and 9.33% at Citigroup. As a consequence, credit card companies are squeezing their remaining customers dry. As James Surowiecki pointed out in last week's New Yorker:
[C]redit-card companies have had to rein in their lending and shed accounts . Since that risks shrinking profits, they're also trying to get as much as they can out of their existing customers, by doing things like sharply increasing their interest rates.
Apologists call these increased interest rates "risk-based pricing", which they claim allows credit card companies to keep credit widely available. But Adam Levitin at CreditSlips undermines this claim, made recently by Meredith Whitney in the Wall Street Journal:
Just as an insurer cannot decide premiums after the coverage event occurs, so too can a lender not decide what interest rates apply after the borrowing. Pricing after a risk materializes isn't risk-based pricing. It's rent extraction.
The larger story involved with consumer-adverse lending practices is laid out in an interesting article by Thomas Geoghegan in next month's Harper's ("At interest rates of 25 percent, or 50 percent, or 500 percent, lenders don't really want the loan to be repaid - they want us to be irresponsible, or at least to have a certain amount of bad character."). But the particular pain being exacted on individual consumers and on small business owners (are you listening, John Boehner?) by increased interest rates at a particularly bad economic time for American households is the simple and all-too-familiar story of failed regulation.
Just over a year ago, Rep. Carolyn Maloney introduced legislation - the Credit Cardholders' Bill of Rights - to prohibit credit card companies from instituting these very interest rate increases on outstanding card balances. The House passed the legislation last September, but it died in the Senate. At the same time, the Federal Reserve has drafted its own rules to regulate credit card lending which, to the Fed's credit, include a provision mirroring that of the Cardholders' Bill of Rights. The problem is that the Fed's prohibition on retroactive interest rate hikes does not take effect until July of 2010.
As the economy continues to sour and unemployment rises, credit defaults will only worsen and credit card companies will extract even higher interest rates and more fees from vulnerable households and small businesses. The lack of regulation not only eased us into this financial crisis, but is exacerbating the pain it inflicts on us.
The credit card associations and the banks that support them have gotten away for too long without answering serious questions about their practices, and at long last, tomorrow there will be a hearing on Capitol Hill to consider the Credit Card Fair Fee Act - HR 5546. It hasn't had the same press as the Credit Card Bill of Rights but it is no less important, and I say that not just because I work with the merchant group that has done tons of work over the last couple years to bring the issue to this point.
One co-sponsor of the bill who speaking up on the issue is Vermont's Peter Welch, one of the best progressives we have in the House. Comments from Welch and more details via the Rutland Herald below:
The past week has been highly important in the ongoing battle between consumers and merchants vs. the credit card industry. The focus has tightened on the duopoly of Visa and MasterCard in recent years, and after many hearings and much work, a solution might be on the horizon. However, the banks have considerable lobbying assets at their disposal, which means victory is not assured. I realize it's a bit of a long-shot, but I would love to see either Hillary Clinton or Barack Obama pick this up as an issue. If John Edwards was still in this race, I'm sure he would. This is another opportunity for them to appeal to his supporters.
Two bills have been introduced in the House that could make all the difference, both for everyday cardholders and for merchant account holders. Both are hit with ostentatious fees on a daily basis, and the former can incur harsh penalties without even knowing about it. The first is called the Credit Cardholders' Bill of Rights (H.R. 5244), and the second is the Credit Card Fair Fee Act (H.R. 5546). The first is supported by Rep. Carolyn Maloney, the second by Rep. John Conyers.
The great thing about giving to charity is that you give what you can, even if it's a small amount. I didn't always think of it this way. I used to think that my donations wouldn't matter unless I could give large amounts of money. And in fact, I didn't give anything until Hurricane Katrina. Before that I was in school, and what little money I had was earmarked for Ramen. Could I have given a dollar or two for various causes? Yes, but I figured it wouldn't be worth it. And so I waited until I was done with school, and ensconced in a job with a livable wage, until I started giving back. And even now, I'm only making enough that it's 25 here or 50 there.
But I am not upset with Red Cross. And you might recognize that sign as one similar to the ones you see next to the cash register at coffee and sandwich shops and independent convenience stores. They're all facing the same problem...
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