With the Wall Street reform bill finally cleared through Congress, activists and intellectuals are pushing hard to make sure that this bill isn't the last word Congress utters about Big Finance. We need deeper and more robust reforms, but it's also critical to ensure that the new bill is implemented as effectively as possible. Part of that means appointing officials with a proven record as robust reformers-people like Elizabeth Warren.
On April 25, 2010, a day before a vote that would decide whether the Senate would debate financial reform, Senator Bernie Sanders spoke of the oft-stated belief, some enormous economic engines are to "Too Big To Fail."
The stakes in the war over financial reform are deadly serious, but I also have to admit it is fun to watch. It has dawned on politicians of both parties that voters' anger at Wall Street is not fading anytime soon, and that the usual insider establishment political tactics aren't working exactly the way they usually do. I have heard a peep lately whining about class warfare because, well, everyone is doing it whether they mean it or not. Republicans and certain Democrats who have taken a lot of money from Wall Street are trying to sound populist, but they are getting nervous that they may have to face some tough decisions on votes around certain amendments. It happened in the House when Alan Grayson forced a vote on opening up the Federal Reserve to an audit, and the banking lobbyists that control the Federal Reserve weren't able to defeat the amendment in a public vote on the floor, and it may well happen again in the Senate on some amendments.
The Republicans have put themselves in a tricky situation by using the Frank Luntz talking points about how the bill encourages more Too Big To Fail bailouts. In the short run, it's a good line, but now when they have to vote on specific amendments being offered to break up the big banks and bring them down to size, thus actually doing something real about the Too Big To Fail issue, they have put themselves in a very bad place. One amendment that will make them squirm for sure is the one just introduced by Sherrod Brown and Ted Kaufman. They call it the Safe Banking Act of 2010. It puts hard leverage and size caps financial institutions, limiting total assets to 3% of GDP for any financial company, and only 2% for banks. Given that the six biggest banks have holdings equal to over 60% of GDP, this bill would force the mega-banks to break themselves up. The bill also puts a hard cap of 6% on banks' ability to leverage loans, making the ratio about 16-1 rather than the 50-1 or worse leveraging going on in recent years.
In the meantime, the battle on the issue is being joined off the senate floor by both progressive reformers and fake grassroots groups on the side of the bank lobby. The Roosevelt Institute put together a letter signed by 36 economists and businesspeople calling for a much stronger bill, while the bankers are funding phony front groups with an anti-bank progressive populist message opposing any bill (their cynicism would be stunning if they weren't, well, the Wall Street bankers who destroyed the economy and then screamed for a bailout). Check out this unbelievably cheeky ad the bank front groups are running, and check out this superb segment on Rachel Maddow's show last night where she exposed their game and nailed the hypocrites to the wall. We are going to see a lot more of this faux populism paid for by bailed out bankers before the year is through, and progressives have to be quick to expose it. Thanks to Rachel for calling out their lies last night.
Goldman Sachs, JP Morgan Chase, and these other mega-banks committed fraud in banking, and now they are committing fraud in messaging. The banking wars are in full scale battle mode. If we can continue to expose their fraud, we can win this battle. Here's how I look at the House and Senate bills: they both have nuggets of gold, they both have some weak links, they both have some solid reasonable language, and neither goes far enough. But the big banks are overplaying a weak hand by this kind of blatant lying ad campaign, and we have a chance to isolate them even further in this debate. The potential for making the final bill better if the big banks get ostracized they way they deserve is huge. Forcing a vote on the Brown/Kaufman amendment is incredibly important. We might just win at least some of these battles in spite of the tens of millions being spent by the big boys on Wall Street.
Last week, the Securities and Exchange Commission filed fraud charges against Goldman Sachs and underscored what most Americans have believed for some time: Wall Street has rigged the economy in its own favor, and will stop at nothing-not even outright theft-to boost its profits. What's worse, Goldman's scam could have been completely prevented by better regulations and law enforcement.
Goldman's heist
Let's be clear. "Financial fraud" means "theft." Goldman Sachs sold investors securities that were stocked with subprime mortgages and had been cherry-picked by a hedge fund manager named John Paulson. Paulson believed these mortgages were about to go bust, so he helped Goldman Sachs concoct the securities so that he could bet against them himself.
Goldman Sachs, like Paulson, also bet against the securities. But when Goldman sold the securities to investors, it didn't tell them that Paulson had devised the securities, or that he was betting on their failure. By withholding crucial information from investors, Goldman directly profited from the scam at the expense of its own clients. If ordinary citizens did what the SEC's alleges Goldman did, we'd call it stealing.
As Nick Baumann emphasizes for Mother Jones, the SEC's suit against Goldman is just the tip of the iceberg. During the savings and loan crisis of the late 1980s, literally thousands of bankers were jailed for financial fraud. Today's crisis was much larger in scope, yet the Goldman allegations are among the first serious charges of legal wrongdoing to emerge (other complaints have been filed against Regions Bank and former Countrywide CEO Angelo Mozilo). If the SEC or the FBI are doing their jobs, we should see many more of these cases.
Bust 'em up.
How do banks get away with these kinds of shenanigans and still secure epic taxpayer bailouts? It's all about their political clout, as Robert Reich notes for The American Prospect. So long as banks are so enormous that they can ruin the economy with their collapse, the institutions will always carry tremendous political clout.
Even in the case of Goldman Sachs, which is too-big-to-fail by any reasonable standard, the SEC's fraud case is being filed three years after the company's alleged offense. That's well after the company rode to safety on the Troubled Asset Relief Program, the AIG bailout and billions more in other indirect assistance-and only after multiple journalists made Goldman's offensive transactions general public knowledge.
If we don't break up the big banks, politically connected Wall Street titans will make sure they get bailed out when the next crisis hits, regardless of whatever laws we have on the books.
Fix the derivatives casino
If Congress doesn't soon pass a bill to break up behemoth banks, it will be neglecting the gravest problem in our financial system today. But several other reforms are needed if Wall Street is ever going to serve a useful economic function again.
As Nomi Prins emphasizes for AlterNet, much of the Wall Street profit machine has been divorced from the economy that the rest of us live in. These days, banks make most of their money from securities trades and derivatives deals. Their actual lending business is taking a beating. That means big banks have very little incentive to promote economic well-being for every day citizens. We need to create these incentives by banning economically essential banks from engaging in securities trades, and make sure all derivatives transactions are conducted on open, transparent exchanges, just like ordinary stocks and bonds.
Better derivatives regulations could help protect against fraud. If Goldman Sachs' sketchy subprime deal had been subject to market scrutiny on an exchange, it's very unlikely that any investor would have bought into it. Goldman Sachs almost got away with it because the deal was secretive and beyond the scope of most regulatory oversight.
Protect whistleblowers
The Goldman case also raises significant questions about the government's enforcement of existing financial fraud laws. Bradley Birkenfeld, a banker for Swiss financial giant UBS, helped the Department of Justice bring the largest tax fraud case in history against his company, which was helping rich Americans hide money from the IRS in offshore bank accounts.
For his cooperation, Birkenfeld was rewarded with a four-year prison sentence, even though nobody else at UBS-nobody-has been sentenced to prison over the scam. As Juan Gonzalez and Amy Goodman emphasize for Democracy Now!, Birkenfeld's imprisonment could have something to with who exactly is hiding money with UBS.
Gonzalez discusses an interview with Birkenfeld, in which the former banker notes that the bank had a special office to handle the accounts of "politically exposed persons"- American politicians. Moreover, the top brass at UBS includes key advisors to top politicians in both parties. This is exactly the kind of influence smuggling that breaking up the banks would help fix. UBS is a multi-trillion-dollar institution with no less than 27 U.S. subsidiaries.
But protecting Birkenfeld would accomplish still more-by jailing him, the Justice Department is actively discouraging others from coming forward, and making it more difficult for regulators to enforce the law.
Greenspan's failure
It's abundantly clear that almost every major regulatory agency charged with curtailing financial excess failed to prevent the Crash of 2008. But that failure doesn't mean that effective regulation is impossible-it only shows that the regulators in power failed. The top bank regulator in the U.S., John Dugan, was a former bank lobbyist.
As Christopher Hayes demonstrates for The Nation, former Federal Reserve Chairman Alan Greenspan has never had any interest in regulation whatsoever. After the crash, Greenspan insisted that nobody could have seen it coming. But as Hayes notes, many people did-Greenspan simply didn't listen to them. These days, Greenspan is revising his story, claiming that he did in fact see the crisis coming, but that nobody could have prevented it. That is simply not credible.
Hayes draws a useful parallel Hurricane Katrina, a problem sparked by a natural event that became a catastrophe when regulators failed to take the necessary precautions. The lesson from both Katrina and the financial crash is not that government always screws up-we have plenty of examples of government preventing floods and economic calamity. The lesson we should learn is that people who don't believe in government will never do a good job governing. As Hayes notes:
If Greenspan couldn't figure things out, that doesn't mean others can't. In fact, developing systems for doing just that is called-quite simply-progress, and Alan Greenspan continues to be one of its enemies.
That is exactly the task that now presents itself before Congress: Developing a system to prevent and constrain economic destruction wielded by Wall Street. The U.S. had a system that did exactly this for more than fifty years. For the last thrity years, it has been systematically dismantled. How well Congress lives up to that challenge will define much of our economic future for decades to come.
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.
The story of the golden calf in Exodus is the perfect allegory for the conservative movement's rapturous worship of the free market uber alles. In their religious fervor, the free market is always good, and therefore corporations- no matter their size, power, or history of malfeasance- are always good too, and all government is always bad, all of the time, no matter what. They worship their idol of gold no matter what actually happens in the world around them, and nothing can change their religion. The economy can collapse in a terrible financial panic on their watch, and it still doesn't shake their faith in their golden idol. The big banks can commit fraud and create massive bubbles they know will pop and it still doesn't shake their faith- they still don't want financial regulations. Mine accidents can kill people, and they still don't want more safety inspectors. Toys with lead in them can kill toddlers, and they still don't want stronger consumer protections. The number of people killed from E Coli can rise to record levels, and they still don't want stronger food safety rules. Bridges can collapse, and the still don't want to raise taxes to pay to rebuild our infrastructure. 40,000 people a year can die from a lack of health insurance, millions can be denied coverage because of pre-existing conditions, Medicare can prove to be a popular and effective way of delivering health care to people, and they still don't want government involved in health care. Social Security can lift generations of senior citizens out of abject poverty, and they still want to get rid of it.
I could go on and on and on, because heaven knows conservatives do. But the government is always bad, corporations are always good, religion is going to cost them politically on the banking issue. Republicans are threatening to filibuster a bill to regulate the big banks and hedge funds that trashed our economy and that would be the greatest gift they could possibly give Democrats. Filibuster to your heart's content, Sen. McConnell. Let's have this debate go on and on and on. Let it drag on for weeks, or even better, months. I know you will keep repeating Frank Luntz's talking points word for word about how reining in the power of these mega-banks would lead to more bailouts, but voters are already seeing through the act. Even tea partiers, as anti-government as they are, hate the big banks, so go ahead and do your ritual incantations at your altar of gold, and we'll see how this debate plays out.
I'm happy to have this debate, I'm happy to have the debate over whether people want to repeal the ban against insurance companies not covering people with pre-existing conditions, and I'm happy to have the debate over whether to worship corporate America and the free market in all situations. Progressives understand that businesses, big and small, and entrepreneurs of every type, have a centrally valuable role in building our economy. But we also understand that government has a valuable role to play as well, and that sometimes corporations do abuse their power and hurt people. Conservatives want to leave each of us on our own to deal with corporate oligopolies without any help or support from our government. If we get hurt, so be it, because after all, as Glenn Beck puts it, in nature the lions will eat the weak. Progressives believe that power is corrupting- government power, yes, but also corporate power- and that government should be on the side of the little guy instead of on the side of the richest and most powerful in society.
So let's have this debate. Mitch McConnell wants to make the debate this week about big banks and whether government should play any role in holding them accountable and reining them in. I'm good to go on that debate- and I want to have it on all those other issues as well.
It's time to melt down the golden calf of the free market above all else. That golden calf has turned into golden bull, and it's time to stop worshipping it.
Congress returns from its April recess this week with financial reform at the top of its to-do list. With millions of Americans still bearing the brunt of the worst recession in 80 years, Congress needs to start protecting our economy from Wall Street excess, and repair the shredded social safety net that has allowed the Great Recession to exact a devastating human cost.
Big banks are an economic parasite
In an excellent multi-part interview with Paul Jay of The Real News, former bank regulator William Black explains how the financial industry has transformed itself into an economic parasite. Black explains that banks are supposed to serve as a sort of economic catalyst-financing productive businesses and fueling economic growth. This was largely how banks operated for several decades after the Great Depression, because regulations had ensured that banks had incentives to do useful things, and barred them from taking crazy risks.
The deregulatory movement of the past thirty years destroyed those incentives, allowing banks to book big profits by essentially devouring other parts of the economy. Instead of fueling productive growth, banks were actively assaulting the broader economy for profit. None of that subprime lending served any economic purpose. Neither do the absurd credit card fees banks charge, or the deceptive overdraft fees they continue to implement.
As Matt Taibbi explains in an interview with Amy Goodman and Juan Gonzales of Democracy Now!, banks didn't just cannibalize consumers. They also went directly after local governments, bribing public officials to ink debt deals that worked wonderfully for the banks, and terribly for communities. In Jefferson County, Ala., J.P. Morgan Chase helped turn a $250 million sewer project into a $5 billion burden for taxpayers. The deal generated nothing of value for either citizens or the economy, but J.P. Morgan Chase was still able to line the pockets of its shareholders and executives. This kind of behavior was illegal, but the transactions involved were complex financial derivatives, which are not currently subject to regulation. To this day, nobody at J.P. Morgan Chase has been prosecuted for bribery or corruption.
Congress set to avoid tough regulations
There is a clear need for Congress to enact some firm restrictions against risky and predatory bank activities. But at the behest of Treasury Secretary Timothy Geithner, Congress is doing its best to avoid inserting any hard terms in legislative language, instead leaving the specifics to federal regulators to work out. As Tim Fernholz emphasizes for The American Prospect, this is an exercise in futility. Regulators already have the power to impose more stringent rules on nearly every arena of Wall Street business that matters (derivatives are a very noteworthy exception). If they wanted to fix things, they could do it without Congressional help. The trouble is, the financial sector has polluted most of the regulatory agencies, so that many regulators now act more like lobbyists for the banks they regulate, rather than law enforcers. Indeed, as I note for AlterNet, the top bank regulator in the U.S. spent over a decade lobbying for the nation's largest banks before taking up his current job. If Congress doesn't establish firm rules, regulators under future administrations would be free to simply undo any measures that the current agencies actually implement.
Megabanks equal mega risks
As Stacy Mitchell illustrates for Yes! Magazine, most of the problems in the financial sector are connected to the size of our banking behemoths. Big banks have enormous power-if they fail, the economy goes off a cliff. As a result, any responsible government wouldn't allow any of our megabanks to actually fail. But knowing that the government will protect them from any true catastrophes, big banks take bigger risks-if the risk pays off, they get rich, if it backfires, taxpayers will suck it up. That puts the interests of big banks at odds with the public interest, and creates an economy where bankers don't try to finance useful projects with a safe and steady return, but instead back crazy bets that just might pay off.
You can't fix that problem with regulations or idle threats of taking down a big bank when it gets itself in trouble-the markets won't believe it, and the banks will still take risks. The only solution, Mitchell notes, is to break up the banks into smaller institutions that can fail without wreaking havoc on the economy.
Economic inequality weakening the economy
All of this ties into rampant economic inequality in the United States. Since the 1970s, conservatives have waged a constant battle on the social safety net, shredding protections for ordinary people, while empowering corporate executives to take advantage of them. In an illuminating blog post for Mother Jones, Kevin Drum highlights the fact that average income has only rose from about $20 an hour in 1972 to $23 an hour today. This isn't because workers were slacking off-productivity has increased at roughly five times that rate. In other words, nearly all of the economic gains since the Nixon era have accrued to the wealthy.
When people don't have access to strong and improving income, they finance things with credit. But if wages never actually improve, that debt becomes a significant burden. When an entire society finds itself overly indebted, people stop buying things, and the economy tanks. The predation in the American financial sector makes this problem even worse.
But political theatrics are even trumping efforts to provide relief to those hit hardest by the recession. Sens. Jim Bunning (R-KY) and Tom Coburn (R-NE) have blocked the extension of unemployment benefits twice in the past month. As Kai Wright emphasizes for ColorLines, that recklessness puts up to 400,000 Americans at risk of losing their unemployment checks. That's a human tragedy-hundreds of thousands of people will have no way to pay the bills. It's also bad for business, since those people won't have any money to buy things that businesses produce. It is, in short, short-sighted economic insanity.
The economy is supposed to work for everybody, not just the rich, not just bankers. For that to happen, politicians have to establish meaningful regulations to make sure finance works for the greater good-- and safety nets to make sure that anyone who falls through the cracks doesn't see her life prospects permanently diminished.
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.
Next week, the debate over financial reform will begin in earnest when Congress returns from its Easter break. Both political parties are gearing up for a major fight, and the stakes couldn't be higher. An out-of-control banking sector has cost the economy over 7 million jobs since 2007, and without major reforms, Wall Street could repeat this disaster in just a few years' time. But thanks to Wall Street's lobbying might, all of the necessary reforms are currently in jeopardy.
Key Reforms
Writing for The Nation, Christopher Hayes offers a useful primer on financial regulation, highlighting three reforms that are crucial to any bill.
With no effective regulation of consumer protection issues for years, the existing banking regulators were more focused on preserving bank profitability than on going to bat for ordinary citizens. If banks could make big profits with unfair gimmicks (or even fraud), regulators usually looked the other way. The solution is a strong, independent Consumer Financial Protection Agency (CFPA) charged with nothing but protecting consumers from banker abuses, an agency with the broad authority to both write rules and enforce them.
We need to rein in the $300 trillion market for derivatives, the complex financial contracts brought down AIG. Unlike ordinary stocks and bonds, derivatives are not traded on exchanges, so nobody really knows what is going on in this tremendous market. When something goes wrong, like with the collapse of Lehman Brothers, nobody can tell who the problem will effect. Without information, markets panic, and the entire financial system can collapse within a matter of days. Fortunately, this problem has a simple solution: require all derivatives to be traded on exchanges.
Too-big-to-fail is too big to exist. The U.S. has never had banks as large as those that exist today, and their size gives them enormous political clout. It's part of the reason why regulators didn't make banks obey consumer protection laws, and why banks have been so effective in derailing reform. It's been almost two years since the Big Crash, yet we are still wrangling over reform because giant banks deploy giant lobbying teams, and have almost unlimited resources to devote to their lobbying efforts. If we can't scale back the banks' power by breaking them up into smaller institutions, it's unlikely that other reforms will be effective.
As Margaret Dorfman emphasizes for American Forum, a strong CFPA would help protect small businesses, since a huge proportion of them are financed with credit cards and home equity loans (Dorfman is CEO of the U.S. Women's Chamber of Commerce, an advocacy group for women that should not be confused with the U.S. Chamber of Commerce-a nasty lobbying front for a few hundred high-flying executives). As Dorfman notes, small businesses are where most new jobs come from-- if a regulator can ensure that these businesses are not pushed around by abusive banks, they can help repair our jobs.
Unfortunately, all three reforms are in real jeopardy as the bill moves to the Senate floor for a vote, as Simon Johnson notes in his Baseline Scenario blog carried at AlterNet. Senate Banking Committee Chairman Chris Dodd (D-CT) hasn't included any language on breaking up the banks, he has significantly watered down the CFPA proposal President Obama put forward, and derivatives reform was almost entirely gutted in the House.
What's at stake
So what's at stake? For some perspective, consider last week's jobs report. As Steve Benen notes for The Washington Monthly, the U.S. economy added 160,000 jobs in March, the first significant monthly gain since the start of the recession, and the best jobs report in three years. But while it's good to see the economy actually adding jobs, at the March rate, it would take more than three-and-a-half years to win back the 7 million jobs lost since 2007.
This jobs disaster was not caused by faceless and unpreventable forces-it was the direct result of a reckless and unregulated banking system. Without major reforms, banks will always have this economic leverage when that recklessness overpowers them: bail us out, or watch your economy collapse.
This is an issue of basic democratic fairness, as Noam Chomsky explains for In These Times. Wall Street has purchased the right to bend public policy to anything that benefits banks-the rest of society is not their concern. The bailouts of 2008 and 2009 make that clear. After wrecking the economy to enrich themselves, bank executives then looted the public coffers with the threat of still further economic havoc.
And the political clout of America's largest banks insulates them from criticism when they profit from abuses-particularly when those activities don't spark wider economic crises. As Andy Kroll highlights for Mother Jones, J.P. Morgan Chase is currently making a killing by financing mountaintop removal mining (MTR). MTR is an ecological nightmare-literally a bombing campaign in which entire mountains in Appalachia are destroyed to make way for cheap coal. That's meant billions in profits for J.P. Morgan, and an environmental catastrophe for the United States.
Obama and Congress have a choice. They can play financial reform for campaign contributions, pushing a watered-down bill that will function as a set of reforms-in-name-only. Alternatively, they can do their jobs, confront a dangerous financial oligarchy head-on, and help build an economy that works for everyone.
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.
Progressives have waited a year for President Barack Obama to roll up his sleeves and fight for serious financial reform. Last week, he finally jumped in the ring, telling weak-kneed Senators to stand up to Wall Street and endorsing a critical ban on risky securities trading.
But while it was good to see Obama start throwing financial punches against the banks, this week he also started throwing them at workers. His recent rhetoric on implementing a spending freeze to reduce the deficit is an economic catastrophe in the making. It indicates that Obama is willing to sacrifice jobs to try and win over Republicans.
A spending freeze would kill jobs
A three-year spending freeze is crazy talk. It's a right-wing ideologue's dream that accomplishes nothing and drives millions of people out of work. John McCain campaigned on it during his 2008 presidential run. Our long-term deficit problems are tied to the rising cost of health care. If you want to fix the deficit, fix health care. In the short-term, there is no deficit problem. In fact, the U.S. fiscal position looks very good compared to many European nations.
As Matthew Rothschild notes for The Progressive, a spending freeze would kill any legislation to create jobs. With unemployment at 10%, the economy desperately needs another round of government spending to put people back to work. While the abrupt policy reversal is clearly a political ploy, voters care much more about results than they care about ideology. If Obama actively sabotages the job market to win over conservative deficit-hawks, he'll be putting his political future in serious jeopardy.
And yet, as Steve Benen notes for The Washington Monthly, Obama's recent, ramped-up rhetoric against banks still marks a significant change in tone. For most of the year, Obama hasn't been involved in the financial reform debate at all, letting Treasury Secretary Timothy Geithner capitulate to Wall Street and the politicians it owns. Benen highlights the end of Obama's speech announcing his new banking rules on Jan. 21. Obama says:
So if these folks want a fight, it's a fight I'm ready to have. And my resolve is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see soaring profits and obscene bonuses at some of the very firms claiming that they can't lend more to small business, they can't keep credit card rates low, they can't pay a fee to refund taxpayers for the bailout without passing on the cost to shareholders or customers -- that's the claims they're making. It's exactly this kind of irresponsibility that makes clear reform is necessary.
Saving the CFPA
Katrina vanden Huevel lays out Obama's new financial reform agenda in a column for The Nation, praising a new $117 billion tax on the nation's largest banks, a plan to cap overall bank size, and a proposal to ban high-risk trading by economically essential commercial banks (more on thatlater).
But vanden Huevel also rightfully denounces recent indications that Senate Banking Committee Chairman Chris Dodd (D-CT) may cave to lobbyist pressure and drop the measure to create a new Consumer Financial Protection Agency (CFPA) from the Senate's financial reform bill.
The death of the CFPA would be a devastating blow to reform. Existing bank regulatory agencies see their primary job as protecting bank profits, meaning that any time the interests of the U.S. consumer conflict with those of bank balance sheets, the regulators have shafted consumers. Current federal banking regulators not only failed to enforce consumer protection laws, they went so far as to join the bank lobby in suing state regulators who were trying to protect households from predatory lending.
Fortunately, Obama isn't taking Dodd's bank lobby-induced cowardice sitting down. At Talking Points Memo, Rachel Slajda highlights a New York Times report that claims Obama met with Dodd and told him that the CFPA is a "non-negotiable."
Commercial banks are important
There's a lot to like in Obama's plan to bar commercial banks from participating in risky securities trading. As I emphasize in a piece for AlterNet, commercial banks form the backbone of the U.S. economy. They're the institutions that accept your paychecks as deposits and keep businesses moving with loans. They also form the core of the economy's payments system. Without commercial banks, nobody can pay anybody else for goods and services-the economy literally shuts down.
Nevertheless, in the late 1990s, regulators and lawmakers tore down the walls between commercial banking and riskier, complex securities trading, allowing these critical economic utilities to gamble in the capital markets like high-flying hedge funds. That kind of behavior puts the entire economy in jeopardy, and Obama's proposal to end such behavior is very urgently needed.
But, as vanden Huevel and I both note, Obama's cap on bank size is a little too timid. Obama indicated that he wants to prevent big banks from getting bigger going forward. That misses the point.
Bustin' up "too big to fail"
Financial giants like Citigroup and Bank of America are already much too big and pose an economic threat. That's why we refer to them as "too big to fail," and why the government had to devote over $17 trillion to saving them. Obama must cap bank size and break up our behemoth banks into companies that are small enough to fail without wreaking havoc on the economy. A good rule of thumb: 1% of gross domestic product.
Shouting down the bank lobbyists
In Mother Jones, David Corn emphasizes that Obama's credentials as a serious reformer depend more on his policy maneuvering than on his rhetoric. While it has been extremely promising see Obama finally demanding something serious from the financial giants that taxpayers saved, he'll have to shout down the bank lobbyists to secure meaningful economic-or political-gains. Corn writes:
If Obama aims to be widely regarded as a warrior for the middle class, he will have to take some mighty swings that cut through the clutter. Proclaiming 'I am a fighter' will not be enough. He will have to name his foes (financial institutions, insurance companies, Republicans, and perhaps recalcitrant Democrats) and truly exchange blows.
Obama's stance on the CFPA alone should be enough to get the lobbyists into a lather, but he'll have to keep up the fight on multiple fronts if he wants to protect our economy from the Wall Street recklessness that spurred millions of foreclosures and sent the unemployment rate soaring into double digits.
Last week, Obama finally told us he was willing to fight for economic change. Now it looks like he's going to attack anyone who is looking for a job. Let's hope he turns it around before it's too late.
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.
I was planning to write a piece on banking issues today, but with three surprise retirements of Democratic incumbents in statewide positions yesterday (Dorgan and Dodd in the Senate, Gov. Ritter in Colorado) I have to comment on that situation. Fortunately, the two things are pretty closely linked.
Look, I have no doubt that personal considerations entered into all three of these decisions, and we don't want to overdraw our conclusions here. Byron Dorgan and Chris Dodd have both been in the Senate a very long time, and are both getting to the age where retirement is an understandable option. There are all kinds of rumors about Ritter's more surprising news, but again there are likely very personal reasons for him wanting to not run for re-election.
Having said all that, though, there is very little doubt that a tough-looking 2010 for Democrats weighed into the decision-making here. Base enthusiasm is lagging, Obama's approval rating is sinking, unemployment isn't going down: political professionals are looking at all these factors and getting very nervous. Anyone who was considering retiring already has to be thinking that the 2010 election trends make the decision to get out while the getting is good a pretty smart one.
I'm not going to sugarcoat anything here: anytime you have a bunch of incumbents retiring, it's not a good sign for what people think of the party's chances in the fall. However, there is one really important silver lining: in a year when voters are in this foul a mood, non-incumbents and anti-establishment candidates have some significant advantages over incumbents. In 2006 and 2008, in many of the big primary races the anti-establishment insurgent won, including that 2008 Presidential race you might remember.
Which brings me to the banking issue. The biggest single mistake President Obama has made politically and economically was the one he made in the very earliest days of the transition, which was to signal he wasn't going to take on the big banks aggressively. Swing voters, Democratic base voters, and Democratic activists are all united on one key point: they hate the big banks on Wall Street, and are angry that politicians are not being far tougher on them. In order to survive and win elections in 2010, Democrats are going to have to separate themselves from Bob Rubin-style economic policies and be far more aggressive and populist in their campaigns. Doing that as a non-incumbent will be easier in many cases than trying to do it as an incumbent.
The movement against the banks is building and growing. On May 6th of last year, I wrote a piece about what would need to happen to take on the power of the big banks. I listed six ideas, the first of which- creating a new coalition to take on financial reform issues- happened in the weeks after my article with the formation of Americans for Financial Reform. The middle four ideas are all being worked on to one degree or another- progressives coming up with an economic Plan B to the one we care on now, working to get public financing of campaigns passed, encouraging investigative journalism in the banking arena, progressives forming more alliances with independent community bankers. The sixth idea, starting a nationwide movement to switch over money from the big banks and credit unions, got a huge burst of momentum with the launch of the Move Your Money campaign. Inspired by a dinner one night with Arianna Huffington and a group of top flight political and media strategists (and, no doubt, by the one line in my seven-month-old post- I'm sure everyone there has great memories about my blog posts), a new campaign was launched to encourage people to move their money from the too-big-to-fail banks which wrecked our economy into smaller independent community banks. Read about it here, and join the action.
Bailing out and coddling the big banks is the number one reason that swing voters, Democratic base votes, and Democratic activists have gotten angry at the establishment and less inclined to support Obama. If Democratic candidates on the ballot this year take up the anti-big bank banner, they will reap big benefits, because the anti-Wall Street movement is gaining momentum. And if the rest of us start challenging Wall Street's power in other ways, we might really begin to change America in a serious way.
In January of 1998, the news about Monica Lewinsky exploded in the Washington media world. It was 24-7, and red hot intense. Within 72 hours, Republicans were calling for Clinton's resignation or impeachment, and some Democrats- even some liberal ones like Paul Wellstone- were on the verge of doing the same. Clinton survived the first barrage of calls for him to step down, but as that long year wore on, and more and more salacious news came out- topped off by the stained dress in August- it looked worse and worse for both Clinton and the Democratic Party.
Republicans were salivating at their prospects in the November elections, and Democrats were running scared. Pundits were predicting big losses for the Democrats in Congress: 30 plus seats in the House and five or six in the Senate. It didn't turn out that way, though. For the first time in 176 years, the party with a President in office in his 6th year actually picked up seats in the Congress (we picked up 5 in the House, while staying even in the Senate.) Without going into detail as to why (if you want to know more about that, you can go here), the bottom line is that progressives outside the party structure helped chart a bold strategy for winning that made all the difference.
Instead of avoiding the President's problems, we made the case that it was time for the country to move on, that all the Republicans wanted to do was wallow in the mud, and instead the country needed to focus on solving our problems. After initially resisting this approach, Democrats ended up embracing it, and we shocked the political world by picking up five seats instead of losing 30.
2010 is a very different kind of year, but it also looks bad for Democrats right now. It feels a lot like 1994 right now, with a weak economy, an impassioned right wing movement, and a discouraged Democratic base. We didn't do very well in the 2009 elections, and forecasts of ugly job numbers for a long time to come are making a lot of voters feel angry and discouraged. But I am convinced that there is a strategy that can turn the 2010 election around. That strategy needs to be built around health care, jobs, and taking on the big banks. None of these things are easy, but I am convinced that they are by far the best hope Democrats have.
Last week, President Barack Obama released key legislation designed to fight the banking industry's too-big-to-fail problem. But Obama's plan doesn't actually address too-big-to-fail at all. It reinforces a broken system in which economically dangerous companies are bailed out whenever they drive themselves to the brink of failure.
If we want the economy to support all people, we have to break up the big banks and start treating the creation of good jobs as an economic priority on par with Wall Street rescues.
The editors of The Nation break the political debate over banking into three camps:
The first camp is composed of bank lobbyists, Republicans and conservative Democrats and wants to do nothing.
Camp two, endorsed by the White House and influential Rep. Barney Frank (D-MA), would impose tougher regulations on too-big-to-fail banks to keep them from getting out of control.
The third camp wants to go even further: If a bank is too-big-to-fail, it is also too-big-to-regulate. Companies that pose a danger to the economy have to be split up into smaller firms that cannot induce economic ruin.
The Nation editors rightly see the third strategy as the most sensible. While the "break-up-the-banks" policy is being portrayed as a left-wing pipe dream by cable news networks, the policy actually relies on an age-old observation of conservative economists. Regulators make mistakes, and they often get co-opted by the very industries they are supposed to be supervising.
The practical policy is to impose structural limits on what activities banks can participate in and how big they can get. Just look at the list of high-profile supporters: former Federal Reserve Chairman Paul Volcker, former Citigroup Chairman John Reed, Bank of England Governor Mervyn King. I don't remember seeing any of those guys at the Iraq War protests.
Many of the regulatory blind spots that brought down the economy were obvious to some policymakers for years. Back in 1994, Sen. Byron Dorgan (D-ND) wrote an article for The Washington Monthly warning that derivatives trading was putting the economy in grave danger. Commodities Futures Trading Commission Chair Brooksley Born tried to take action on these derivatives, but was overruled by other regulators, including then-Fed Chair Alan Greenspan, and then-Treasury Secretary Lawrence Summers, now the top economic adviser to President Obama. Summers and Greenspan even convinced Congress to pass a law banning the regulation of key derivatives, including credit default swaps, which ultimately brought down insurance giant AIG.
Fifteen years after Dorgan's article first ran, The Washington Monthly is featuring it again, along with a recent speech by Dorgan that details massive failures in Wall Street and Washington.
"We had regulators come to town in recent years and willfully boasted that they wanted to be blind as regulators," Dorgan says.
There are good elements of Obama's plan to deal with too-big-to-fail. It gives policymakers the option of putting a too-big-to-fail institution through a special bankruptcy process administered by the executive branch, thus avoiding the problems created in bankruptcy court when Lehman Brothers failed. But the bad part is really bad: Officials would also have the option to provide unlimited bailouts to Big Finance via loans, guarantees and even asset purchases.
As Mike Lillis notes for The Washington Independent, some responsible Democrats like Rep. Brad Sherman (D-CA) have been objecting to this aspect of the legislation for months. Sherman, in fact, calls it "TARP on steroids," noting that the bank bailout at least came with some meager oversight and a limit on the program's actual size.
The bank lobby is spending money like mad to maintain their stranglehold on the economy. Neither Congress or the administration will change course without intense public pressure. So it was very reassuring last week to see thousands of people protesting the annual meeting of top bank lobby group, the American Bankers Association. David Moberg chronicles the protest in a blog post for Working In These Times that covers speeches by both key union leaders and ordinary people facing foreclosure after watching their tax dollars go to the very bankers who wrecked the economy.
"There was broad agreement on anger at the banks for providing so little, if any, public benefit for the massive bail-out, and for so quickly returning to the greed and abuse that precipitated the crisis," Moberg writes.
Laura Flanders covers the protests for GRITtv, including video of protesters chanting "Bust up big banks!" In a roundtable discussion with Christina Clausen of the United Food & Commercial Workers Union, George Goehl of National People's Action and Rob Robertson of the Right To The City Alliance, Rolling Stone journalist Matt Taibbi explains the overriding impotence of the regulations Congress is about to approve. Regulators will not be able to crack down on abusive derivatives, a full 8,000 of 8,200 banks will be exempt from Consumer Financial Protection Agency oversight, while the same agencies that screwed up heading into this crisis will be charged with preventing the next one.
"They've had sweeping powers to do whatever they wanted," Taibbi says. "They've had this regulatory power all along."
What we need are good jobs, and lots of them. Obama's economic stimulus package has made tangible economic progress. It's saved hundreds of thousands of jobs, and is clearly responsible for the turnaround in gross domestic product (GDP) we saw in the third quarter. But a full 17% of the workforce remains unable to find full-time work, as Julianne Malveux explains for The Progressive.
When Wall Street crashed in 1929 and unleashed the Great Depression, the government eventually stepped in as an employer-of-last-resort. The Works Progress Administration (WPA) and Civilian Conservation Corps (CCC). built schools, parks, roads and bridges which still serve our communities today. Both the WPA and the CCC employed literally millions of people-in the 1930s. It's a model that could work very well today.
As the current recession makes clear, ending too-big-to-fail and guaranteeing a good job for everyone in our society who wants one are the two most critical structural reforms our economy needs. Don't let lawmakers forget it.
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Two new economic studies just came out that, especially taken in combination, are truly stunning and profoundly troubling. The first, by the Center for Economic and Policy Research (a DC-based think tank), reported that the federal government is essentially subsidizing the Too Big to Fail (TBTF) banks in terms of the interest rates banks must pay to borrow funds. The second, coming out of Rutgers University, tells us that- if all goes quite well- that we don't get back to our pre-recession level of employment until the last half of 2017.
These two things are each worthy of huge concern. In combination, they spell very, very big economic trouble for America.
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