The chairman of the House Financial Services Committee has cultivated a pugnacious persona, but on financial reform he may be fighting for the wrong side.
For more on pruning back executive power see Pruning Shears.
"Now you don't talk so loud/Now you don't feel so proud/ About havin' to be scroungin' for your next meal"-Bob Dylan
It is not that the big banks themselves are "too big to fail". They are too big because they can cause all of us to fail. In the military terms, that tragedy is cleansed by the use of the innocuous sounding term, "collateral damage".
The problem is this: One is just as dead from collateral damage as from a targeted hit.
We launched www.BreakUptheBigBanks.com because the political power wielded by the big banks is incompatible with a functioning democracy. Such political power renders regulation inadequate-we have already seen Congress bow to the will of the very people whom a year ago it rescued from oblivion.
Various attempts to reform the financial system are bouncing around the capitol these days. The reaction of one of Wall Street's biggest players to them may be as good an indicator as any of how serious they are.
For more on pruning back executive power see Pruning Shears.
More than 5,000 people are packing the streets of downtown Chicago this morning, chanting, marching and rallying against Big Bankers and financial institutions that have taken taxpayer money and are using it to give big bonuses to CEOs and to lobby against financial reforms that would ensure they don't go back on the public dole.
The crowd is marching to the Sheraton Chicago Hotel & Towers, site of the American Bankers Association meeting, to protest the banking industry's greed and irresponsibility that crippled our economy, leaving millions of workers behind.
After the house of cards they built collapsed, bankers and the financial industry took $700 billion in taxpayer funds for a bailout. But rather than reform their failed practices, they want to go back to business as usual-with the chance of again precipitating another financial collapse and need for taxpayer bailout in coming years.
Have you seen the latest stories about the profits and bonuses of the biggest banks on Wall Street? Are they going out of their way to try to piss everyone off? Are they intentionally thumbing their nose at democracy to make it clear that they can and will get away with anything they want?
If you want to do something about it, I'd recommend going to Chicago next week. The American Bankers Association- which as far as I can tell is a wholly owned subsidiary of Goldman Sachs opposed to all those small independent banks that are still trying to lend to customers and are getting badly hurt in the real economy- is doing their big convention in Chicago next week. And you know what? Thousands of regular folks are showing up to crash their party. Planners of these protests, which is called the Showdown in Chicago, have all kinds of things planned- marches, rallies, direct actions, and some really cool stuff I've been sworn to secrecy on. It will be fun and deadly serious all at the same time. Check out their website at showdowninchicago.org. They have all kinds of people coming- workers, farmers, students, retirees, religious leaders. Busloads from all over the country of people coming to raise hell.
These big bankers need to understand that they are in for a fight, that we are not going to let them wreck our economy and our democracy without an all out, no holds barred battle. Show up for the Showdown in Chicago. You will be glad you did.
At a retreat this last weekend sponsored by the Roosevelt Institute on financial reform issues (I have to take a break from health care every once in a while to keep my sanity), I met a very impressive guy named Bill Black, who as a regulator was a major reason why the Savings and Loan fraud of the 1980s got discovered and prosecuted. When I got home, I discovered this incredibly smart piece Bill just posted, along with another terrific piece, this one by Bob Creamer, posted earlier that day. Everybody who wants to know how important the battle for financial reform is should real these posts.
The bottom line for me of these articles is that there should be one central goal that drives all policy and legal initiatives for progressives in the coming fights over financial policy- that the biggest banks on Wall Street should have less economic and political power. These companies are already responsible for wrecking our economy, not just in the big economic collapse of last year but in all the ways Black describes regarding the impact on the real economy. If left unchecked, they will continue to drain jobs and income from the rest of the economy, and they will--sooner rather than later, within a few years not a generation or two--cause another major economic collapse, this one almost certainly worse than 2009 because our economy has already been so weakened.
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.
Once the health care fight is over, the next big fight is the battle over financial regulation. As challenging and frustrating as healthcare has been, at least reformers have been in the game in terms of a decent bill. The odds have never been even, but a decent bill, in my view, is a possible ending. With the financial regulation fight, the odds are much tougher because the Wall Street lobby is so powerful, and the forces on the other side are still relatively weak, and the Obama proposals overall are a weaker starting place than in health care. As important as it is, though, the financial regulations fight is only a pre-cursor to the massive economic policy debates that we will be engaging in for the next four years. These fights are symbolized by a phrase that the President and his economic advisors repeat too often, a phrase that is both politically tone deaf and potentially indicative of a much deeper problem in their thinking. It's the phrase, "jobs are a lagging indicator" of our recovery. I worry less that they say it, though, and more that they might actually believe it.
That "jobs are a lagging indicator" thing is a phrase that conservative economists (which is most of them) like to use because in their neo-classical economic models about recessions and financial crises, first the bankers regain confidence and their economic health, then they start loaning to businesses again, then businesses get healthy - and finally at the end of the happy cycle - they start hiring workers again. Of course, as the brilliant Paul Krugman piece on the economics profession in the NYT magazine pointed out, many of the same economists said both a real estate bubble and a financial panic were actually impossible because they didn't correspond to their free-market-cures-all-problems-and-provides-perfect-equilibrium models.
If the basic ideas behind the jobs being a lagging indicator phrase sound vaguely familiar, it's because they are essentially another version of the trickle-down economics we have been hearing for years from the two Presidents Bush and President Reagan: give those rich people and corporate CEOs more money, and it will eventually trickle down to the rest. There are a great many problems with this theory, but they can be summed up rather simply with the fact: pretty much nothing ever trickles down. In all the years of the Reagan and Bush presidencies, 20 years in all, the income of middle class workers stagnated (or worse), while the income of the rich skyrocketed.
So now we see one article after another on the economy reporting some version of the news that banks have recovered, businesses are starting to do better, but workers are getting left behind. You can grab any article on the economy at random written over the last couple of months, and find the same kind of quote, such as this one from a WP article from September 1st: "The emerging economic recovery suffers from a great contradiction: Even as factories seem to be cranking out more stuff, the job market remains terrible."
Now I am not suggesting that Obama's economic philosophy is the same as the right-wing Republican trickle-down philosophy of Reagan and the Bush kin. There are lots of things to like about what he has done and proposed so far. The stimulus was classically liberal Keynesian, with hundreds of billions in job-creating public capital investments, and it is clearly helping prop up the economy right now. Even the tax cuts that were included in the stimulus bill were considerably more progressively structured than any tax cuts ever passed or proposed by Republican Presidents. Obama's budget proposal was also very progressive: the most money for poor people of any federal budget in history, even LBJ's War on Poverty budgets, for example. He has generally argued strongly for a more progressive tax system than we have seen in the Bush or Reagan years. Although we don't know what we will get in the end, his initial health care and energy proposals included solid policy ideas with lots of good progressive notions in them. And he clearly does believe in a stronger regulatory hand than Republican Presidents whose lack of support for even basic regulation is so much of the reason we are in the economic mess we are in today.
In spite of all this though, I do have a couple of deep worries about Obama's economics, and neither of them are small things, they go to the very core of whether the "lagging indicator" ever catches up to the happy days the Wall Street bankers are experiencing right now. One worry is about the President and his economic team's core belief system, and the other is his tactical mindset.
On the economic belief side, I worry that he doesn't fundamentally get that the neo-classical theories that have dominated the economics profession over the last couple of decades are just flat out wrong, and that our economy, despite the recent uptick in some statistics because of the stimulus and the trillions of dollars the Fed injected into the system over the last year, is on some level truly broken. Neo-classical economics assures that once we stabilize the banking system, more credit will go to businesses to invest, and they will all eventually start hiring people. The problem is that this economy is still fundamentally weakened, that the cracks and bruises it suffered in its sudden fall last year made it vulnerable to other problems that will sap its strength. If the neo-classical economists are wrong again- just like they were about the housing bubble, just like they were about deregulating finance and the financial crisis in general- and the economy stays soft, will the jobs ever start getting ginned up again, especially after all that stimulus money runs out in the middle of 2011? (What a delightful time for the economy to turn south for an incumbent President gearing up for his re-election campaign.)
The other thing I worry about with President Obama is on the tactical level. I give him huge credit (in fact of all the things I like about him, what I like best is this) for his willingness to swing for the fences, to try to do big things, transformational things: health care reform, climate change, financial reform, immigration reform. His ambition and desire for big change is his best quality. But when it comes to how you get things passed, his instinct seems to be to follow Rahm Emanuel's more conservative lead and stay carefully within the cautious conventional wisdom lines: rather than being as gutsy on his tactics as he was on his big change agenda, he seems to be pulling back. In order to break through the power of DC special interests, I think Obama is going to have to take them on directly, pick fights with them, and beat them decisively. Because not only is the economic system broken, the political system is broken as well. He needs to think big about programs that create jobs directly, and think bigger than he's done so far about taking on Wall Street.
In the 1930s, FDR figured out that the economic theories that he studied in college were no longer working, and needed to be directly challenged. He put money directly into jobs and income for the poor and working class people rather than doing bank bailouts and tax cuts for the wealthy. He took the fight to the big special interests, the "economic royalists", with pride and with gusto. And the American people supported him. Now is the time for President Obama to take FDR's example, and to fully embrace bottom-up policies rather than the trickle-down variety.
Just when you thought that the big Wall Street banks couldn't do anything more to tick you off after giving their executives huge bonuses and going back to their risky trading ventures while taking so much government bailout money, they do more things to make any decent person crazy. Did you see the Business Week article that came out on August 5th? If you have high blood pressure, you probably shouldn't check it out, but otherwise you should:
A new trend in business loans is to link credit lines to credit default swaps, those financial weapons of mass destruction that were a major prime mover around the 2008 market collapse. Citibank, JPMorgan and Bank of America are all doing it.
With many states passing laws against the local firms that were doing payday lending, or at least passing usury laws against this outrageous practice that is essentially legalized loan sharking targeting poor people, the big banks are using interstate commerce laws to get into the market. Wells Fargo and U.S. Bancorp are among the loan sharkers expanding into this market.
Morgan Stanley, Smith Barney and UBS are now selling a new kind of highly complex derivative for small investors. Offering attractive rates early on, they can easily turn into massive potential losses down the road. But because of their complexity, it's hard for small investors to understand the potential losses.
Seriously, when do these Wall Street bankers have no shame whatsoever? Sorry, I guess we all know the answer to that question. And since they have none, the federal government needs to come down on these firms like a ton of bricks. Regulate them, prosecute them, and break them up are the only answers to keep these amoral leeches from bringing our fragile economy down again.
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.
Like many good progressives in DC and around the country (along with the insurance company lobbyists of course), I am working virtually around the clock at the moment on health care reform. As I have written, this fight will almost certainly determine the fate of the rest of the Obama administration, and whether we have a chance to take on and beat the big business special interests on any other issue. But I have to take just a moment to sit back, take note, and calmly reflect on another rather important topic, financial reform. Andrew Cuomo came out with a report that should be noted. In other words:
DID YOU SEE THE FREAKIN' BONUSES WALL ST FIRMS GAVE OUT LAST YEAR, EVEN IN THE MIDST OF THE BIGGEST ECONOMIC COLLAPSE SINCE THE GREAT DEPRESSION, EVEN THOUGH THEY WERE TAKING BILLIONS OF DOLLARS IN GOVERNMENT MONEY? ARE THESE THE GREEDIEST AND MOST IMMORAL PEOPLE WHO HAVE EVER LIVED?
Okay, now that I have been thoughtful and diplomatic, let me tell you how I really feel. A couple of weeks back I wrote a piece on a gritTV panel I was on with Matt Taibibi and Rob Johnson entitled We Don't Care. We Don't Have To Care. We're Goldman Sachs. And that pretty much sums up the situation. Rather than getting fired, going to jail, or even just hanging their head in shame and slinking off to some cave someplace- as I think would have happened in a more rational society- they are still the most powerful people on the planet. They are still flying in on their corporate jets to DC every week, and telling congress what to do. They are still making the same risky deals that ruined the economy in the first place, and paying themselves outrageous bonuses to do it. And they are still utterly puzzled as to why any of the rest of us thinks they show any shame or remorse.
Read this remarkable piece by Rob Johnson. It should be required reading for every lawmaker, and every citizen worried about our country's future. It talks about how the captains of Wall St and their messaging gurus sold us on the outrageous techniques for greed that they were pursuing, techniques that should be illegal or at least very heavily regulated.
Our number one job today is to take on and beat the health insurance industry, who don't want any changes to a system that lets them allow people to die so that they can make bigger profits, and doesn't give them any real competition even when people are being totally screwed. That's why we need a public option, as good in quality and as affordable as the plan for members of congress. But even as we are fighting the insurance companies today, we have to get ready to fight the even more powerful Wall St lobby tomorrow, because otherwise our economy, and our very democracy, will be in mortal danger again.
There have been some good pieces out in the last few days by Dean Baker and Bob Kuttner on the politics of a modern version of the 1930s Pecora Commission on what happened to cause the Great Depression. The original Pecora Commission was an essential reason why FDR was able to be so successful in enacting sweeping New Deal programs to regulate the banks and stock speculators that had caused the crash. As Dean and Bob allude to, the modern version might not be so effective, but that's all up to Speaker Pelosi, Senator Reid, and (indirectly) the Obama administration. What I'm guessing that Dean and Bob are reacting to is the same rumors that I'm hearing: that Brooksley Born may be the only real progressive on financial issues appointed to the commission.
That would be a tragedy. A strong commission with subpoena powers and a serious mandate from Congress could really dig into the dirty deeds that Wall St. traders purposed that caused this crash. The education of the media and the public that could come with such an investigation would be invaluable. If instead you appoint a commission where a majority of members want to obscure what happened, and in fact want to protect the Wall St. system we have now, you both lose any chance of engaging the public and you make the people angry at both government and the bankers all the more suspicious.
I have said to my friends in the White House over and over again what to me is a plain and obvious truth: another year of economic pain, and a majority of the country is going to be spittin' mad. The only question is whether they are mad at the bankers and de-regulators who caused this mess, or mad at the Obama administration for not doing enough to solve it.
President Obama told Wall Street CEOs awhile back that he was the only thing that stood between them and pitchforks. As a person who has been involved in national politics for a very long time now, I am absolutely certain about one thing regarding next year's election: if Democrats protect Wall Street from the populist "pitchforks", they will be skewered by the pitchforks themselves.
