Although Arianna Huffington's recent book Third World America was mostly about economics, my great fear is that her idea that this great country is moving too far in the direction of a third world nation was eerily prescient in more ways than one.
When members of Congress start being assassinated, when the rhetoric about politics and politicians becomes increasingly violent and extreme in nature, and when corrupt oligarchs with way too economic and political power assume they can operate outside the bounds of the law, you have the hallmarks of a Third World country. I have been focusing more and more on the incredible crisis brewing in the financial sector because the corruption there is at the core of so much that is messing up our country's economy, but the assassination attempt on Gabby Giffords this weekend was a deadly and tragic reminder of how we have the potential to slide more and more toward Third World status in more than just economics. When media figures like Beck and Limbaugh, politicians like Palin, and way too many others so loosely talk about "death panels", or the President being "friends with terrorists", or the need to reload, we have a big problem in our democracy: the mentally ill who are close to the edge can easily go over the edge, and the far right borderline violent militia types start seeming like they are mainstream.
I am not an alarmist, a conspiracy theorist, or a pessimist about all this. I don't think we are on the verge of a Third World dictatorship. This country has seen waves of political violence and terrorism repeatedly in its history, including assassinations, bombings of churches and clinics, and lynchings, and we have survived and overcome. This country has seen waves of economic concentration of wealth and power in the late 1800s and the 1920s before the Great Depression, and we survived that too, making the reforms we needed to make to get stronger. But we are at a very dangerous moment, and not just because of the threat of violence we saw play out this weekend.
What troubles me the most is the combination of violent and extreme rhetoric, increasing incidents of violent actions (including the shooting this weekend, the shooting of an abortion doctor, the shooting at the Holocaust Museum, the attempted assassination of people at the Tides Foundation), and the economic signs of a Third World mentality by the big banks who have become so powerful in this economy. Unnoticed this weekend in all the focus on the Giffords assassination attempt was the massively important Massachusetts Supreme Court decision US Bank National Association vs. Antonio Ibanez, which essentially and decisively laid bare the big banks' economic strategy on foreclosures. Check out this piece by Numerian at The Agonist for a great explanation of the stakes in this case. As Numerian says, "all it took for the banks to win was to show up in court with the proper legal documents", and the bankers weren't even close to being able to do that. In fact, if you read the growing literature- including a ton of great books, blog posts, magazine and newspaper articles- on the behavior of the big bankers leading up to the financial crisis and in terms of this rapidly mushrooming mortgage and foreclosure crisis, it is impossible to escape the sense of these big banks as feeling so powerful and wealthy that they no longer need to worry about following the law. They can create massive bubbles they know will pop, set up and bet against their own clients, create real estate securities they know are toxic, and recklessly obliterate existing law on mortgage documents while all the while assuming they will always be bailed out through the power of being too big to fail.
Political leaders engaging in rhetoric with violent undertones and economic elites deciding they can pretty much ignore the law and run roughshod over anyone they want to is a formula for political violence and instability plus an economy that looks like a banana republic. We need to step back from the brink of Third World America before it is too late.
I was heartened to see a group of Democratic Senators write this great letter to Ben Bernanke and administration officials on the foreclosure fraud issue. They came out strongly for several important things regarding homeowners' rights, and they framed the issue perfectly: this is not some minor technical problem regarding some mislaid paperwork in a few cases, this is fraud by bankers on a massive scale. Along with this letter, check out this great op-ed by Sen. Whitehouse on the subject. Once again, in keeping with the pattern Digby first reported, this is all Democrats doing the right thing, and not a single Republican lifting a finger to help. Another bit of great news: Elizabeth Warren echoed the Senators message, calling the foreclosure issue "big and serious". This puts the administration clearly on the side of the idea that this problem isn't just a minor paperwork hassle, and that it matters a lot.
This foreclosure fraud issue is yet another domino falling, where once again the big Wall Street banks are wreaking havoc with our economy in order to come away with outlandish profits at the expense of poor and middle-class people. These huge banks are so powerful both politically and economically that they haven't worried about playing by the rules and following the law. Their thinking is that because they are too big to fail, and too influential in Washington, they can just get Washington to change the rules as they go along and bail them out whenever needed. They were shocked that their sneak attack at changing the mortgage rules got exposed by progressives and vetoed by the President, but they almost certainly still assume they can eventually get the rules changed to save them from their own fraud one more time.
This issue is example number one on why progressives need to remain focused on cleaning up Washington and standing up to the special interests who still act like they own the place. And our message has been getting through. Check out this striking new poll from MoveOn.org:
• An overwhelming 84% of voters polled, including 80% of Republicans and 81% of Independents, believe voters have a right to know who is paying for ads for a particular candidate.
• Fifty-six percent of voters overall (including 53% of Independents) are less likely to vote for a candidate if they know the ads supporting that candidate are paid for by anonymous corporations and wealthy donors.
• Forty-seven percent of all voters are more likely to support a candidate who insists that voters have a right to know who is paying for ads, with only 9% of total voters saying they are less likely to support a candidate who holds that position.
• Almost two out of three voters (63%) do not believe that the anonymous groups running ads hold the voters' best interest in mind. This belief is held by 65% of Independent and 70% of Democratic voters.
• A straight majority of total voters (53%) are less likely to trust a candidate to improve economic conditions if that candidate is supported by anonymous groups.
Those are very big, very dramatic numbers. People want to know who is behind these ads, and they want to kick the special interests off their throne of power. This message of changing and cleaning up Washington, challenging big corporate interests, and standing up to the banks on behalf of the middle class has the chance to come through in spite of the swarm of corporate money flowing into attack ads.
Whatever happens in the elections, this foreclosure crisis is ugly, and the economic dominoes that could fall as a result should scare all of us. It may well be that this fragile economy gets pushed into another crisis. The question then will be do we again arrange some kind of backroom sweetheart deal for the big banks that got us into this mess, or do we go the opposite direction, and save the economy by helping middle class homeowners first. If the bankers still "own the place" in Dick Durbin's famous words, we will get screwed again. If voters say no to these secretive special interest ads, and elect some more good down home Democratic populists like the Senators who wrote this letter, we might just win this round.
Last week, Social Security advocates learned something they had long suspected. Arguments for cutting Social Security aren't really about economics or the deficit. They're all about waging war on social services.
During the heady times of economic growth, its banks expanded operations far beyond what the country could possibly support. When the global financial crisis came, all three collapsed. Millions of depositors in Britain and the Netherlands would have lost their savings.
When banks collapse nowadays, fortunately, governments intervene. The governments of both Britain and the Netherlands guaranteed the accounts of their citizens. In total, this cost said countries approximately 3.9 euros (or 5.3 billion dollars).
Understandably, said countries were also angered at picking up the tab of Iceland's failed banks. The root of Iceland's current troubles lies in their demands that Iceland repay the €3.9 billion. To force Iceland's hand, Britain - in a rather mean gesture - used anti-terrorism laws to freeze Iceland's financial assets. This helped crush the country's economy.
Now, there are two problems with the demands of Britain and the Netherlands.
Along with Americans for Financial Reform (AFR) and many great progressive bloggers and activists, my most important task between now and the final passage of the financial reform bill is to try to keep this zombie-like army of lobbyists from picking every detail that matters off the bill and dumping all the good things in the trash. The thing about a subject this huge is that all these "details" and "side issues" are actually quite enormous. Even though this bill is disappointing on many centrally important issues (the biggest of which is to actually break up these monster banks), each provision the House and Senate conferees are currently negotiating over matter a lot.
One example of an under-the-radar side issue with big consequences is this swipe fee issue. I got intrigued by this issue a few weeks ago when my friends at AFR alerted me to it, I started writing about it, and have now managed to talk a bunch of retail business folks into paying me to work on it (is this a great country or what?) Here's the deal: every time a restaurant owner or taxicab driver, a small business person or, for that matter, a blogger, swipes a credit or debit card, the credit card company can charge a fee. Any fee they want. The bigger the business, the lower the fee that can be negotiated, so the folks this really screws over are the smallest businesses who use credit card machines. My cabbie the other day told me he gets charged 10 cents on the dollar, and I know a bunch of other small business people in the same boat. You know who else gets screwed by this? Charities. The swipe fee costs charities around $250 million a year, according to an analysis by the Huffington Post.
So 10 cents here, 10 cents there - not such a big issue, you say? Well, you know what, there are a lot of credit and debit card transactions in this country every day. The definitive estimate on the amount of money being taken out of the pockets of retail businesses and put into the pocket of the banks stands at $48 billion per year. And here's a shocker: 80% of all this money is received by the top 10 banks (actually, I'm a little surprised it is not even more concentrated).
In the world of trillion dollar Federal Reserve bailouts for the banking industry, $48 billion may not seem like much, which is why people call it a side issue in financial reform. But a $48 billion dollar infusion of cash into the real economy as opposed to the profits of the biggest banks would have a lot of benefit right now. And left unregulated, that number will inevitably get bigger, because the big banks' profits will likely be curbed 15-20% by the financial reform bill, and they will be looking for new ways to boost their profits. Any part of the financial industry left unregulated will be in for new rounds of price gouging and market manipulation. The amount Americans pay in swipe fees, who are already paying the highest fees in the world, has already gone up 3 times the amount it was in 2001. Left unregulated, it will go up a lot more.
So if we win this fight, and the banks don't get the $48 billion, what happens to it? Retailers say they will be able to lower prices as a result, so consumers will benefit, but it's hard to know whether or not that will be true. I suspect that some of the $48 billion will benefit consumers with lower prices; some will benefit business owners directly. Hopefully some of those businesses will use the money to hire more workers or even given the workers they have a much needed raise. The extra dollars gained by small businesses might be enough to keep some struggling restaurants and local businesses alive in these tough times.
Regardless of how that $48 billion pie gets sliced, though, getting that money pumping through the rest of the economy and out of the hands of the very biggest banks is a big plus. The big banks have too much power and too much concentrated wealth: anything that takes money out of their hands and puts it into the Main Street economy is a very good thing. This "side" issue matters a lot.
The legislative process is irritating and exhausting. Its two steps forward and one step back - on a really good day. The last couple of days have been relatively good days. The two steps forward were on the Defense Authorization bill: Don't Ask Don't Tell is blessedly about to become history, and we got a big boost for the idea of buying American and preserving America's industrial base with the passage of the Fair Defense Competition amendment, which directs the Department of Defense to consider unfair competition from foreign companies when awarding defense contracts. The step backward was on the "jobs" bill, where the deficit hawks are turning the bill into blue smoke and a mirror or two (Reminder to the deficit hawks, from my time as a Clinton advisor: the best way to get rid of deficits is to create a strong economy with full employment).
The biggest legislative news, though, is now behind the scenes: the conference committee negotiations over the banking bill. I am very concerned about a dynamic developing, and I want to beg every progressive activist and writer to stay deeply engaged in this fight. I'm getting the feeling form a lot of people I'm talking to and a lot of posts I'm reading that people are seeing the fight over this bill as pretty much done. The posts I'm reading have a retrospective quality, people speaking in past tense about how the bill is pretty good versus those who say it didn't go far enough, etc. This fight is a very long way from being over, however.
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.
The bill does this through several mechanisms. Firstly, it expands federal Pell Grants, which are government grants to low-income college students. These individuals would not be able to attend college without such types of aid (although an average Pell Grant these days would cover barely more than one-tenth the cost of attending a place like Harvard). The bill also sets Pell Grants to rise year after year, in line with inflation. President Barack Obama perhaps best explains the significance of this reform:
...we are also changing the way the value of a Pell Grant is determined. Today, that value is set by Congress on an annual basis, making it vulnerable to Washington politics. What we are doing is pegging Pell Grants to a fixed rate above inflation so that these grants don't cover less and less as families' costs go up and up. And this will help prevent a projected shortfall in Pell Grant funding in a few years that could rob many of our poorest students of their dream of attending college. It will help ensure that Pell Grants are a source of funding that students can count on each and every year.
Unfortunately, if the bill does not pass, this year's Pell Grants will be cut by more than half. In a bad recession and with ever-rising college tuition prices, this would severely impact a large number of Americans. Many individuals seeking to better their lives through college would be deeply hurt. Some might be forced to drop out. Others might have to add on yet more crushing student debt, forced to take exorbitant loans from private lenders.
The American Dream is perhaps our most powerful and enduring story. Through booms and busts, we insist (oftentimes in the face of overwhelmingly contrary evidence) that anyone who is willing to work hard can succeed. To the extent that the American Dream is a reality, it is due in large part to our secondary education system and the patchwork of loans, scholarships, and grants available for students. As sky-rocketing rates of student debt show us, though, these tools for expanding access to secondary education need retuning. There is talk of reform in Washington but, in a story that has become all too familiar, large financial institutions are standing in the way, protecting their profits at the expense of young people’s hopes and dreams.
President Obama faced a remarkable political challenge in his recent State of the Union. Beset on all sides—by populists on the left and right who are highly suspicious of him and all of institutional Washington, by an economy that can produce GDP growth but not jobs, by an increasing consensus that he has failed to connect his legislative priorities to core values since the election—he succeeded in, if nothing else, reminding us of the energy and passion that helped him build a network of committed volunteers, grassroots campaign staff, and small dollar donors. In the speech he offered a litany of new financial policy prescriptions, including one—rolling $30 billion of TARP funds that big banks have already repaid into smaller, local banks—that has not garnered many headlines, but which represents an affirmation of the critical role that our communities play in our economic vibrancy.
In my mind, this bill constitutes one of the Obama administration's most important accomplishments.
To understand why, provided hereafter is an explanation of what the bill does. In recent years, the cost for college has increased tremendously, to the point where total expenses exceed per capita American income. Therefore the federal government encourages banks to loan money to students. These loans are guaranteed and subsidized by the government.
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.
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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