I have that Han-Solo-encased-in-carbonite feeling this morning. The powers that be in modern America- the insurance industry, big oil and coal companies, most of all the big Wall Street banks that control 60% of our country's wealth- had gotten used to having everything go exactly their way in Washington. They had come to expect that they would write the laws, and then get to rewrite them if something happened to make the original law inoperative. They were used to politicians say "yes, sir" and "what hoop do you want me to jump through now, sir." And when a new group of politicians came to town that wouldn't say yes to every single demand, that stood up to them some of the time, they hit back hard- very hard. And they won this round.
Our elections were awash in big business money this year, and it went overwhelmingly to the Republicans. We don't even know for sure which industries gave the most to the Republican slush fund that the Chamber of Commerce has become, or to the new ones set up by folks like Karl Rove, because they don't have to disclose their donors. But we do that these corporate front groups played almost exclusively for the Republicans, and that the direct contributions to candidates and party committees shifted dramatically toward them as well. Given the Democratic control of both Houses and the White House, this kind of giving shift is unheard of, since usually corporations give to the party in power. But because Obama, Speaker Pelosi, and Congressional Democrats had stood up to insurers on pre-existing conditions, had stood up to the energy giants on pushing for climate change, and had stood up to Wall Street on the new Consumer Financial Protection Bureau and some other new regulations, these corporate leaders were pissed and looking for blood. The fact that the Democrats had unfortunately made major concessions to these corporate interests on things like the public option and breaking up the big banks didn't mollify them at all: they were still loaded for bear and ready to pull the trigger.
So they funded the tea party uprising, and they funded Republican candidates, and they funded secretive groups to run attack ads. It worked, for two simple reasons. The first is that middle-class swing voters are mad at everyone in Washington. They think both parties have failed them, that neither party cares about them, and they are happy to send a message to whichever party is in power- as they have three elections in a row- that they will keep voting out those in charge until something changes to make them think that government works again. The second is that the voters most hurt by this terrible economic crisis the Bush presidency handed to us are precisely the voters most open to voting for Democrats: young people, working class women, blacks, Hispanics. Getting hammered as hard as they have been economically put them in no mood to come out to vote.
Democrats' fate was probably sealed when the same Wall Street bankers who wrecked the economy and who we had to bail out were still giving themselves hundreds of millions in bonuses while the rest of the economy continued to tank. It was the ultimate insult, and it fed the idea that our system is only working for the fat cats but has stopped working for ordinary folks. As long as the economy stayed as bad it did, voters were not going to be convinced that Obama had brought the change he had promised.
What now? Democrats have a choice. They can cower in fear at all the corporate money that will be thrown against them, and backpedal on everything that would actually help working families get out of the bind that they are in. Or they can be determined fighters for jobs, a stronger economy, and cleaning up special interest corruption in Washington. Having rejected both parties so thoroughly in the last 3 elections, Americans will be looking in 2012 to figure out who will be truly fighting for them in the years to come.
The battle immediately in front of us, of course, is this fascinating, unpredictable election season. Everyone in Democratic and progressive politics is doing everything they know how to turn back a Republican tide, and the polling shows some interesting possibilities: it is ugly out there, but still not impossible to imagine Democrats avoiding the worst. Smart folks like Stan Greenberg, Bob Creamer, and Simon Rosenberg see some signs of life out there. I think voters are still trying to decide which party they dislike the most, and these last couple of weeks there will be some last minute trend one way or the other that will make things far worse or quite a bit better than anyone is predicting right now.
But for the purposes of this post, I want to take a moment to look ahead to the next big battle that will face us no matter what happens on election day. Our next big battle is an unavoidable fight about economics that goes to the core of whether the economy will start to improve, and whether the big banks will be in control of our government. It will be at least initially less a legislative fight than a battle over how Obama and his team will respond to the latest huge challenge in front of them, the foreclosure mess. Our economic system has been done far more damage by the last decade of recklessness in the financial industry than most conventional economists and policy makers understand, and the Bernanke/Paulson/Geithner rescue revived but did not restructure the financial industry. The toxic assets on the books of the big banks, which are primarily in the terribly damaged real estate sector, were never resolved, and are still sitting there like a huge millstone hung around the necks of these banks. The only reason the banks looked healthier in the last 18 months is that their lobbyists were able to get the accounting board to change the rules so they could value those real estate assets at whatever imaginary number they needed to in order to get profits and bonuses showing up on their books again.
The banks' strategy for getting this mess cleaned up was to run huge numbers of people through this fraudulent and obscene foreclosure mill process, but the law and community organizations have caught up to them, and the process is bogging down into a slow moving morass that, for the second time in 2 years, is threatening the very existence of these big banks. Herein lies our country's next big political and economic battle. The bankers who got themselves and all the rest of us into this mess will once again argue that they are too big to fail, that the health of our entire economy depends on their ability to cut legal corners with homeowners' legal rights, and that they might even need other kinds of bailouts from the government to survive. The argument will be that if we don't push all these foreclosures through ASAP, the entire housing market will sink even lower into the pit it is already in, and the economy will go from weak to terrible. And if these banks themselves fail, we will be told, we will see another great depression set in.
There are other policies that could be pursued, though. Thoughtful economists have been putting out a mix of proposals that could be successful in keeping more people in their homes, stabilizing home prices, and other measures that would help rebuild the middle class that has been so harmed by the last decade's economic trends. These policies include a large scale principal reduction program for distressed homeowners, creating a right to rent for homeowners whose home prices have fallen so much their mortgages are under water. Such policies would create big losses for the banks, but given all their profits and bonuses over the last decade, I'm certain the Wall Street tycoons and government regulators could figure out a way to keep these banks going. The cowboy traders for these companies probably wouldn't be getting any bonuses for a while, and that would cause some howling, but I think our system would survive their having to cut back purchases of $6,000 bottles of wine for a while. It might even force these banks to restructure themselves, perhaps even breaking themselves apart (there would be nothing more healthy for our economy than that event). So the bank lobby and their sycophants in the media will be in high gear, trying to make sure nothing happens that would scale back their power and profits, threatening us with the end of the world, but we need to push back hard against them.
This debate is different from the one we went through a couple of years ago, the main reason being what we went through over the last couple of years. There is no political will in either party, no matter how much many politicians and policy makers want to help their banking industry friends, for another big bailout of Wall Street. If the bank lobby could sneak something through without anyone noticing, as they came very close to with this mortgage modification bill Obama vetoed, that could work, but having failed at their first attempt and the foreclosure fraud crisis now being in the center of the public eye, that will be tougher to do now. With tea party populists and progressives united in not wanting to bail out the banks again, and with the immense unpopularity of TARP, straightforward bail out bills will be very tough to pass. Bernanke will use all his tools to help grease the wheels for the industry, but he doesn't have as many tools in the toolbox as he used to, and if the actual law on these foreclosure proceedings is not changed, Bernanke may not have the ability to help as much as he would like. The biggest question at this point is the Obama administration, and they are genuinely divided on how to move forward. There are still those in powerful positions inside the administration who believe that the fate of the economy is inextricably tied to the financial well being of the Wall St financial sector. There are others inside, especially Elizabeth Warren but also influential people like Volcker and Goolsbee, who are more skeptical about the big banks being the end-all and be-all of the country's economic health.
How all this plays out will be the central, fundamental issue by far in how the next two years of this administration turns out. The economy is too damaged to get healthy without a restructuring of the housing sector in a way that actually benefits the middle class. If the banks win this battle, I fear we are stuck with deflation, high unemployment, and low housing prices stretching several years out, and in that circumstance, the President's future political prospects look pretty bleak. However, if the President sides with homeowners on these issues, and creates a path out of this mess that actually helps strengthen the middle class, he will have new momentum going forward. Whatever Congress is elected a couple of weeks from now, this issue will be mostly resolved within the administration, and if Obama proves himself a champion of the middle class in opposition to the bank lobby, he will be well-positioned for future fights no matter how the 2010 elections turn out.
The government has an increasingly free hand in deciding what information it releases to the public, and its response has unsurprisingly been towards less disclosure.
For more on pruning back executive power see Pruning Shears.
In a very encouraging sign for those of us trying to reform banking law, there are growing signs of splits in the banking industry. In the letters to the editor (reprinted in the extended entry), printed last week in the NYTimes and American Banker, 2 leaders in the banking industry both come out strongly in favor of the Consumer Financial Protection Agency Act, the very important and very strong centerpiece of the Obama administration's financial regulatory reform proposals.
These letters are significant but not surprising to me, as I think they represent the views of a lot of bankers around the country who do not work for Goldman Sachs or JP Morgan Chase or Bank of America. In my book tour and other speaking assignments I have done over the last 6 months, I have run across several community bankers, Savings and Loan and Credit Union execs who agreed with me very strongly that too big to fail is too big to exist, and that tougher banking regulations on the big banks were desperately needed. I hope and believe there will be more business leaders coming out in the next few weeks breaking with the big banking conglomerates on Wall St, because we need to start regulating these behemoths far more aggressively than we do now. Anything we can do to lessen their market power would be a major boon not only to consumers but to our entire economy.
by Zach Carter, Media Consortium MediaWire blogger
While the economy sinks into the abyss, some of the financial industry's most egregious scam artists are already back on the prowl looking to take advantage of troubled borrowers.
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