In the fall of 2008, decades of finance-first, bankers-know-best economic policies coalesced to create one of the worst economic crises in history, one that the banks themselves could not survive without staggering levels of government support.
Yet astonishingly, nearly two years after the crash, Wall Street is still setting the economic agenda in Washington. As Congress begins to examine broader economic policy, lawmakers are under heavy Wall Street pressure to reduce the federal budget deficit-even though that could mean deepening the jobs crisis without any substantive economic benefits.
Small-bore reforms
At the same time, the financial reform bill that Congress is on the verge of passing leaves quite a bit to be desired. As the editors of The Nation emphasize, that legislation includes several small-bore fixes to ease the damage caused by Wall Street excess, but almost nothing to actually curb the excesses themselves. The capital markets casinos will largely be left untouched. Congress still has time to improve the bill over the next month as the House and Senate iron out their differences, and many useful reforms remain in play.
Nevertheless, Wall Street's lobbyists have succeeded in taking the most important reforms off the table. We will not break up the biggest banks this year, nor will we tax reckless financial speculation. We aren't even banning economically essential banks from participating in risky securities businesses.
Et tu, Buffet?
As Annie Lowrey notes for The Washington Independent, the crisis has even discredited Warren Buffett, one the few financial superstars who previously had a reputation as a "straight-shooter" that invested in responsible enterprises.
Buffett was once a harsh critic of credit rating agencies, the firms who slapped top ratings on toxic mortgage-backed securities and derivatives. But Buffett himself is also a top shareholder in Moody's, one of the worst ratings agencies. The Financial Crisis Inquiry Commission had to compel Buffett's testimony at a recent hearing via subpoena after Buffett turned down multiple requests to appear. At the hearing itself, Buffett did everything he could to pass the buck from himself and Moody's to any other possible target.
Slashing the deficit
Wall Street's ugly influence on economic policy extends far beyond the realm of bank regulation itself. Right now, financial elites are pushing hard on a right-wing plan to slash the federal budget deficit, and even many moderate Democrats are coming out in support of reduced government spending.
This strategy is a tremendous political blunder, as Steve Benen emphasizes for The Washington Monthly. It's true that the deficit does not poll very well-but the deficit is only one side of the issue. Cutting the deficit means slashing federal support for jobs-we can help the economy or we can slash the deficit, but we cannot do both at the same time.
Nearly everyone believes that creating jobs should be a top priority for the government, but if politicians only ask questions about the deficit, they won't hear answers about the economy. The political imperative is clear, as Benen notes:
This really shouldn't be complicated: invest in more job creation, help struggling states as they keep laying off workers, and make clear to voters that the economy is more important than the deficit. Do this immediately, without apology.
Replacing Social Security with credit cards?
Wall Street loves cutting social services in the name of deficit reduction. Every public good that can be efficiently provided for by the government can also be inefficiently provided by the private sector-replacing public benefits with corporate profits. The bank lobby would like nothing more than to replace Social Security with credit cards for senior citizens. Wall Street doesn't make a dime on the government's Social Security payments-but they can make a killing on a privatized market.
Weak job growth=Weak private sector
Lest there be any question about whether or not the government needs to take strong action to strengthen the labor market, take a look at Friday's jobs report. As Tim Fernholz notes for The American Prospect, this report was the most disappointing piece of economic news in months. While the economy gained 431,000 new jobs during the month, 411,000 of them were temporary hires by the U.S. Census, meaning the private sector is not able to support much new hiring.
There's a critical lesson there: The only serious engine of job growth in the month of May was the federal government. Absent government hiring, the economy is not improving at all. There is an almost bottomless supply of critical social needs that require work right now, but no private-sector momentum to meet those needs.
The BP oil catastrophe should underscore how important new, green energy is to the U.S. economy-yet U.S. efforts to develop green energy solutions have fallen far behind those of China and other industrial powerhouse nations. Major federal investment into the research and implementation of green energy would be good for our environment and good for our economy.
Don't let social services suffer
But astoundingly, the advice on the world economy currently coming from top policymakers at the Federal Reserve, the International Monetary Fund and European central banks is echoing the bank lobby line: Slash social programs now, and let the job market fend for itself. As Dean Baker emphasizes for AlterNet, these are the exact same policymakers who missed the housing bubble, made the wrong calls on bank regulation and sent the global economy into freefall.
There has been little change in personnel and no acknowledgment of error at the central banks whose incompetence was responsible for the crisis . . . . their agenda seems to be the same everywhere, cut back retirement benefits, reduce public support for health care, weaken unions and make ordinary workers take pay cuts.
In short, Wall Street and the Wall Street policy agenda remain ascendant, despite economic catastrophe. In the Great Depression, the government actually learned its lesson-we regulated the banks, created Social Security and put millions to work through government hiring programs. That same basic agenda is needed today. Failing to meet it could well mean decades of economic decline.
This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.
Senate Banking Committee Chairman Chris Dodd (D-CT) unveiled his latest financial reform proposal on Monday, and the stakes for the new legislation couldn't be higher. After consumer groups raised a major ruckus, Dodd has dropped one of his most egregious concessions to the bank lobby-cutting enforcement authority from the proposed Consumer Financial Protection Agency (CFPA). That's good news: Without a major regulatory overhaul, the U.S. economy's destructive boom and bust cycle will start all over again.
We've been down this road before. The Enron fiasco should have served as a wake-up call for policymakers, but instead, the weak federal response to Enron's major fraud helped pave the way for the current economic slump.
What does Enron have to do with the crisis?
As Megan Carpentier emphasizes for The Washington Independent, one of the key "reforms" Congress enacted in the Enron aftermath was a law requiring every CEO to sign-off on their company's accounting statements-but it has accomplished almost nothing.
Enron collapsed due to accounting fraud. Its executives weren't stupid or careless-they made their money by engaging in deliberate and coordinated acts of illegal deception. But CEOs of companies like Enron had always been able to deny that they knew about the shenanigans that were playing out in their accounting departments. By forcing CEOs to sign off on their accounting statements, Congress was attempting to "deny them plausible deniability," as Carpentier puts it.
But accounting fraud has plagued the U.S. economy, even after the Enron scandal. It also plays a major role in the Wall Street crisis. A recent court report from Lehman Brothers' bankruptcy examiner reveals that the company arranged a series of complicated transactions to hide $50 billion in debt, making Lehman appear healthier than it was. By hiding this debt, Lehman was able to make bigger bets on the mortgage market. The defense issued by Lehman CEO Richard Fuld? He apparently didn't know the accounting hijinks were happening
An epidemic of fraud
Most U.S. policymakers are still having a hard time coming to grips with the fact that our financial system is rife with fraud at almost every level. Writing for AlterNet, Joe Costello reports on a recent Roosevelt Institute conference featuring several major economic luminaries. Costello argues that some of Wall Street's biggest problems were driven by run-of-the-mill fraud. And a key vehicle for this fraud, Costello notes, was the derivatives market-the same market that allowed Enron to perpetrate its own frauds. Many of the scams aren't even particularly new or creative. They're simply the same cons that helped usher in the Great Depression.
"If we're going to get our economy up and running again, the first thing we're going to have to do is end the fraud," Costello writes.
Protecting Whistleblowers
But astonishingly, even after the worst financial crisis in history, bigwig bankers have been able to avoid fraud charges and investigations. Even when the Justice Department went after Swiss banking Giant UBS for a massive tax evasion scheme, they let the company's U.S. executives off the hook and instead jailed the very whistleblower who told the government about the fraud.
The whistleblower, Bradley Birkenfeld, is by no means innocent of wrongdoing-he even smuggled diamonds in a toothpaste container for a wealthy UBS client. But as Corbin Hiarr notes for Mother Jones, jailing the man who blows the whistle sends exactly the wrong message to anybody in Big Finance who recognizes a problem. Not only will your employer come at you with everything it has, but the government you aid will actually send you to prison. The fraudsters you finger get to retire to the Caymans.
This is part of the reason that successful financial reform is not just what the rules are, but who gets to enforce them. There were many reasonable rules against predatory lending that bank regulators at the Federal Reserve and the Office of the Comptroller of the Currency (OCC) could have used to thwart the financial crisis early on, but neither agency was interested in doing so. They were more concerned with short-term banking profits, and up until 2007, sketchy accounting was allowing banks to book big gains on the subprime market.
Why we need a CFPA
That's why all the way back in June of 2009, President Barack Obama proposed establishing a CFPA focused exclusively on defending consumers against banks. With no concerns for bank profitability, CFPA regulators could go after unfair practices and fraud because they were wrong, regardless of what they did for bank balance sheets.
The proposal was watered down significantly in the House, as Kai Wright notes for The Nation, and just a week ago it appeared that Dodd was ready to completely torpedo the new regulator in an effort to craft bipartisan support for a so-called "reform" bill.
He's backed off since then, but without strong enforcement authority, nothing is gained-the same corrupt regulators will simply continue to look the other way. But Dodd would still house the new agency at the Federal Reserve. Dodd insists the Fed would have no authority over the CPFA, but if that were the case, why would he introduce the provision at all?
"Reform in name alone will be useless to both consumers and politicians," writes Wright.
Strong financial reform is overwhelmingly popular. While it's good to see Dodd backing away from some of the gifts he'd previously proposed to bank lobbyists, progressives must keep the pressure high to ensure that financial reform is strengthened as it moves through the Senate.
It's easy for a corrupt lawmaker to vote against a weak bill: He can always plead that the bill wasn't good enough and be right. But serious, popular reform is not so easy to oppose. If Dodd and the Democratic leadership make the politicians backed by the bank lobby-that's literally every Republican, plus a handful of conservative Democrats-stand up and vote against a good bill, many of them will have to choose between their lobbyist friends and their political future.
This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.
Reps. Ron Paul and Alan Grayson are trying to get the Federal Reserve audited. Last week the House Financial Services Committee passed an amendment to their financial regulatory reform bill that would mandate an audit.
So ... Have any of you heard the name Stephen Friedman, former Chair of Goldman Sachs? While still on the Board of Goldman Sachs he was Chairman of the Federal Reserve Bank of New York. Now there's some independence for you! (Never mind the stuff about buying GS stock after the Fed became their regulator in late 2008, etc.)
I'm just sayin'... one person's "independence" is another person's ... something else. The Fed is not independent of the giants of the financial sector. Of course we want independence so they set interest rates based on sound policy and independent of political considerations. So when do they start doing that?
Unemployment figures in the U.S. are staggering: The official rate stands at 10.2%, the highest in 26 years. A broader measure that includes people who are involuntarily working part-time or who have given up looking for work is at 17.5%. That's a full-blown economic emergency.
But, as Joshua Holland explains for AlterNet, President Barack Obama's response to the unemployment crisis has not matched the urgency of his response to the crisis on Wall Street. This isn't just unfair, it's bad economics.
"It's important to understand that the economic crisis in which we find ourselves is not just a function of a shaky financial system but of a crash in consumption that's come along with the evaporation of $14 trillion worth of the wealth of American families," Holland writes.
Widespread joblessness can be every bit as damaging to the economic structure as a financial crisis. When people are out of work, they buckle down on household expenses. When several million people cut back at the same time, the economic machine grinds to a halt. If people are not buying and selling stuff, the economy isn't working.
As Mary Kane explains for The Washington Independent, about 40% of families don't have enough money to cover expenses through a three-month stretch of unemployment-even if one member of the household is receiving unemployment benefits. Kane highlights a Brandeis University study that reveals the haggard state of the American household and the unfair distribution of wealth along racial lines. A full 66% of African-American and Latino families can't afford three months without work. At a time when 5.6 million workers have been jobless for at least six months, the study highlights just how dire finances have become for many households.
GRITtv's Laura Flanders discusses potential labor market remedies with economist Dean Baker and The Nation's John Nichols. Baker suggests a work-share arrangement, in which employers cut back on their workers' hours to allow more people to work. To prevent losses for households, the government would step in and pay for the shortfall in hours. Employers would have more part-time jobs available, but the government would make sure everyone was paid as if they were working full-time. Baker also endorses a public jobs program, which he says could be especially useful in cities like Detroit and Cleveland that have been hit particularly hard by the economic downturn.
Nichols highlights the political consequences of failing to fix the unemployment mess. Unemployment directly affects the lives of voters. If widespread joblessness persists through November 2010, Democrats will net huge Congressional losses. If Obama thinks it's hard to garner bipartisan support for his legislative priorities now, imagine a few dozen more Republican obstructionists.
It's not that Obama failed to respond to the unemployment crisis. He did. That's what the stimulus package was all about. Today's 10.2% unemployment is a catastrophe, but it would be more like 12% without the stimulus package. But, given the seriousness of the issue, Obama is not giving unemployment enough attention.
In fact, Obama's economic priorities are a mirror-image of his campaign promises, as Robert Scheer argues in both a column for TruthDig and an interview with Amy Goodman on Democracy Now! After talking tough about reining in recklessness on Wall Street and making the financial system more accountable, Obama has hired many of the very policy makers who pushed through the deregulatory agenda back in the 1990s. Top Obama administration officials like Larry Summers, Timothy Geithner, Gary Gensler and Neal Wolin helped make this mess in the first place.
"This is not a minor criticism," Scheer says. "I think the guy is betraying his own presidency."
Obama's timid efforts to rein in Wall Street and heal the ailing job market are setting the stage for a political disaster. If Obama and Congressional Democrats can't take strong action to fix the economy, they will find themselves with much narrower majorities next November. The economy, and the public institutions that support it, are supposed to work for everyone, not just the financial elite.
This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.
Washington, March 18 - The Federal Reserve said today that it plans to purchase up to $300 billions of longer term Treasury securities over the next six months, and will purchase up to an additional $750 billions in agency mortgage backed securities, bringing its total purchases up to $1.25 trillion this year
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Just as I predicted two or three months ago, as soon as the Stimulus package had passed, the financial community would flood the world with dollars, force devaluation of the dollars and its accompanying hyper-inflation, all of which would be blamed on the Administration. Rightly enough, because it's being done by the people President Obama selected to run these key financial jobs.
The Secretary of the Treasury, Henry Paulson, has proposed some rather significant reforms to the Federal Reserve. These changes would allow the Fed to intervene and review the books of any company with significant financial business in the American economy. On the face of it, his proposal looks more like something from the New Deal than the Bush Administration, but that may be the very point.
The Executive may be setting up the Fed to fail.
Treasury Secretary Henry M. Paulson Jr. is trying to turn the complicated muddle that is the U.S. banking regulatory system into something more coherent. To that end, he would replace a sprawling set of regulators aiming to ensure the soundness of the nation's financial institutions -- including the bank-supervision arm of the Fed, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the National Credit Union Administration -- with a single Prudential Financial Regulatory Agency.
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But the Fed would give up its power to regulate the day-to-day affairs of banks, responsibilities that many in the institution view as essential to its role as guardian of the economy -- even as the central bank gains new powers to insert itself into the affairs of any business creating risk for the financial system as a whole.
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"The Fed's ability to deal with diverse and hard-to-predict threats to financial stability depends critically on the information, expertise and powers that it holds by virtue of being both a bank supervisor and a central bank," Chairman Ben S. Bernanke said in a January 2007 speech.
In the Treasury Department's plan, the Fed would lose the responsibility for day-to-day monitoring of banks' financial stability. It would gain a more loosely defined ability to monitor and correct risks to the entire financial system, whether they come from banks, investment firms or hedge funds.
To many people with ties to the central bank, that is a lousy trade.
"The Fed should not be enamored of this proposal at all," said Ernest T. Patrikis, a former senior official at the Federal Reserve Bank of New York who heads the banking regulation practice at the law firm Pillsbury Winthrop Shaw Pittman. "It takes away a lot of authority, power and involvement." - The Washington Post
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