A lot of progressive leaders and writers, yours truly included, have expressed concerns about Bill Daley's appointment as COS. One of the most depressing pieces was written by Simon Johnson, the former IMF chief economist who has written brilliantly and compellingly over the last couple of years about banking issues. His entire piece is well worth reading, especially in light of the mess these uber-powerful big banks have made of the housing, mortgage, and foreclosure situation. With judges increasingly incredulous and angry at the fraud and shoddy record keeping of the banks and their lawyers, and an ever wider spectrum of economists and bank analysts increasingly alarmed by the implications of the foreclosure crisis, and the size and economic dominance of the big banks, it is not surprising that folks like Simon are expressing these concerns.
Simon's basic argument, which as he writes is shared by many other major economists across a wide ideological spectrum, is that the big banks' size, fundamental business model, and political clout are both preventing a stronger economic recovery and virtually guaranteeing another major financial crisis in the near future. He points out that the 6 biggest banks now control assets worth 64% of GDP, up dramatically from the 55% they controlled before the crisis at the end of 2006, and up overwhelmingly from the 17% they controlled in 1995- only 16 years ago. Economic changes that massive are unprecedented and terrifying.
Simon's fear is that since Bill Daley comes from one of the big banks, any hope of taking the banks on in terms of these big issues is gone. As he writes:
Bill Daley now controls how information is presented to and decisions are made by the president. Daley's former boss, Jamie Dimon, is the most dangerous banker in America - presumably he now gets even greater access to the Oval Office. Daley is on the record as opposing strong consumer protection for financial products; Elizabeth Warren faces an even steeper uphill battle. Important regulatory appointments, such as the succession to Sheila Bair at the FDIC, are less likely to go to sensible people. And in all our interactions with other countries, for example around the G20 but also on a bilateral basis, we will pursue the resolutely pro-big finance views of the second Clinton administration.
Top executives at big U.S. banks want to be left alone during relatively good times - allowed to take whatever excessive risks they want, to juice their return on equity through massive leverage, to thus boost their pay and enhance their status around the world. But at a moment of severe financial crisis, they also want someone in the White House who will whisper at just the right moment: "Mr. President, if you let this bank fail, it will trigger a worldwide financial panic and another Great Depression. This will be worse than what happened after Lehman Brothers failed."
Let's be honest. With the appointment of Bill Daley, the big banks have won completely this round of boom-bust-bailout. The risk inherent to our financial system is now higher than it was in the early/mid-2000s. We are set up for another illusory financial expansion and another debilitating crisis.
I think Simon is right on the economics of the financial system, that the big banks are way too big and powerful, and have a stranglehold on both our economics and politics. But I am a little more optimistic on the political dynamics with Daley, simply because by the President appointing a JP Morgan Chase banker, I think the administration will have to bend over backwards to look like they are not doing sweetheart deals for the bankers. Anytime they do something to help the big banks, or even just to defer to them on something, activists, analysts like Simon, media people like Dylan Ratigan and Eliot Spitzer, and maybe even Republicans for political advantage will be jumping all over the administration. In an odd sort of way, Daley's appointment could be the best thing for the progressive organizers and media people on the banking issues, because it gives us a hook we can use in our organizing. Anytime Elizabeth Warren is being messed with, we can push back and ask why. Any attempts to help bail the banks out again, or help them out of the legal problems they have created for themselves on foreclosure, we can raise hell and ask what the hell is going on. Bill Daley is a smart enough guy to understand this dynamic, and will not want to be seen favoring the banks with the access he provides or appointments that are made.
Here's the other thing to remember, though: White House Chiefs of Staff, while of course very powerful players, are not the end-all and be-all in terms of administrative decisions. I worked with all 4 chiefs of staff in the Clinton White House, and they ranged from Erskine Bowles at the most conservative to John Podesta at the most liberal, but there were no appreciable differences as far as I could tell in the kinds of policy decisions being made by Clinton. Or look at Rahm in this White House: his advice got ignored a lot of the time, including on the biggest decision of Obama's presidency so far, whether to push forward on comprehensive reform after Scott Brown won. The fact is that Presidents make decisions for all kinds of reasons and are influenced by all kinds of factors. Chiefs of Staff organize decision flow and staffing operations, but don't tend to drive Presidents to do things they wouldn't ordinarily do. The COS is important, but not determinative. What is more important by far than the Chief of Staff's personal views on issues are the outside political dynamics that drive the debate. That is why progressive activists need to redouble our organizing efforts, and use the political dynamics that are in our favor.
One thing people should not forget is that the single most progressive populist Presidential campaign in the last 35 years, the Gore campaign in 2000, (remember "the people vs the powerful"?) was chaired by Bill Daley. That wasn't because of Bill, but because of the political dynamics of that race and the political instincts of the candidate.
Progressives cannot afford to take the attitude that with Daley as COS, all is lost and we should just give up on trying to influence policy and politics in regards to economics and other issue areas. We need to keep pushing the administration to listen to us, but also use every other leverage point we have to influence the political dynamics around us.
I mean, if folks think that we could have gotten Ben Nelson, Arlen Specter and Susan Collins to vote for additional stimulus beyond the $700 billion that we got, then I would just suggest you weren't in the meetings.
This notion that somehow I could have gone and made the case around the country for a far bigger stimulus because of the magnitude of the crisis, well, we understood the magnitude of the crisis. We didn't actually, I think, do what Franklin Delano Roosevelt did, which was basically wait for six months until the thing had gotten so bad that it became an easier sell politically because we thought that was irresponsible. We had to act quickly.
There are so many things wrong with this--as well as so many things wrong with that surrounds it. For one thing, as Ron Thompson added:
It's Not True It's not only narcissism gone mad, it's historically inaccurate on any number of points. FDR took office on Saturday, March 4, 1933, and called Congress into special session to meet five days later on March 9th. That was unusual at that time: the pattern up until then was that Congress didn't meet until thirteen months after the election: the first sessions of the preceding five Congresses met on December 3, 1923, December 7, 1925, December 5, 1927, April 15, 1929, and December 7, 1931.
By June 15, 1933, at the end of the "Hundred Days" almost all of the early New Deal financial legislation had been passed.
It's increasingly a mystery how people can view Obama as an intelligent man. He's articulate, and a good schmoozer, but it's plain that he has no depth of understanding, and doesn't know what he doesn't know.
Indeed, FDR's "100 Days" is the most famous period of legislative activity in American history. We might take for granted that George W. Bush would be totally ignorant of it, but a Democratic President? It blows the mind. Such staggering ignorance cannot be simply explained. It reflects membership in an alien culture with an alternative history, and that's just what it is: America's oligarchy. Indeed, Obama's naive, unquestioning embeddedness in the oligrachy explains virtually every kooky thing in quote above: Obama's insistence that all truth resides inside the meeting rooms he was in, for example. (Did Martin Luther King know that? If he had, would Obama be washing dishes somewhere? Or shining shoes?)
But simply evoking the oligarchy is not enough of an explanation. One needs to understand it, and why and how it shapes things as it does. One of the best relatively short explanations is last year's Atlantic magazine article, "The Quiet Coup" by former IMF Chief Economist Simon Johnson, who I'll be quoting from in just a minute. But first, I want to note that this article was linked to in a passage of a Sunday DKos diary, "An unlearned lesson about neoliberalism ", in which Laurence Lewis talks about this period in Obama's Presidency from a decidedly different perspective. This quote picks up just after Lewis has quoted Stiglitz talking about the dismal record of neo-liberal policies in developing nations, which is the "phenomenon" referred to in the first sentence:
Slowly and tentatively, in fits and starts yet with gradually gathering momentum, the iron grip that big corporate interests have on the throat of our democracy is loosening a little. Credit card companies got needless delays in the implementation of last year's reform bill, but they were forced to live with the outlawing of several of their most egregious practices. The insurance companies stripped the public option and some other great things out of health reform, but would have much preferred no bill at all, and certainly not one with new regulations and expectations about pre-existing conditions, lifetime caps, and recissions. The student loan industry got an outright smackdown which will result in more money for student loans. Now Wall Street is in a wild fight on the floor of the Senate, and Senators are either deserting them on major issues like auditing the Fed and consumer protection, or else Senators are having to make very uncomfortable votes on the big bankers' behalf. Progressives who want to rein in Wall St's power are losing on some important issues, but we are making our mark on this bill, and setting the stage for future fights.
Check out Simon Johnson's brilliant post on the vote to break up the banks, suggesting that while they won this round, they may be facing their Waterloo soon. He points out that as things like Greece continue to happen that unravel the world financial situation further, that it will become harder and harder for the defenders of the big banks to hide. Although our side lost the vote, getting over half the Democrats, the Majority Leader, the 2nd ranking member of the leadership, and the ranking Republican on the Finance committee to all vote with us on a bill to fundamentally restructure the financial system was a pretty big deal. With Senators now all on the record as to whether they support the big banks or not, we have a lot of potential to do some damage in the coming elections. Even when we lose, we are getting these issues aired and getting people on the record. That's all to the good.
Let me throw a couple of electoral examples into the mix. Take Delaware, a pretty strongly Democratic state where a locally popular Republican congressman, Mike Castle, is a heavy favorite to win an open seat. He voted against breaking up the big banks. If the Democratic candidate Chris Coons makes this big issue in a pretty working class state, maybe Castle's easy victory gets a little- or even quite a bit- harder.
Or take an old home state of mine, Iowa, where voters have a very deep populist streak in them (see Harkin, Tom). Grassley, the ultimate incumbent insider, ranking member and former chair of the Finance committee, voted for letting the 6 biggest banks continue to own the equivalent of 63% of our GDP. Roxanne Conlin is a crusading lawyer who has made her living going after corporate malfeasance. Grassley is favored in this race, but his vote makes things a lot more interesting, especially for a strong populist like Roxanne.
Moving on to the issue of auditing the Federal Reserve. Yes, Sanders compromised on the issue. But most observers following the issue see this as a solid compromise, not a cave-in: we got something real out of the deal in terms of looking at what went down over the last few years. And the House language they go into conference on is very strong. Rumor has it that Geithner is still trying to figure out how to unravel this deal, so we can't take anything for granted, but we have the momentum on this issue, and winning on it would be a very big deal.
We're winning so far on the consumer protection agency; we're making progress on derivatives. It is the progressive amendments that have the wind at their back right now.
Look, I don't want to overstate this. This bank bill has some serious weaknesses in it, and with the Brown-Kaufman bank break-up amendment failing, it still doesn't solve the most central failing of our banking system. On health care and other issues, progressives have had our share of truly bitter and disappointing defeats. But progressive populist economics and a political strategy of challenging special interest corporate power is gaining traction right now. A citizen movement is bubbling up through the barriers of special interest concrete in our nation's Capitol that is not driven by tea party anti-government fervor, but by the hopes of regular folks who believe we can take our country back. Let's keep building on our momentum.
Simon Johnson and I were talking this morning about his appearance on Rachel Maddow's show last night (I wrote about here this morning), and about the sleazeball Wall Street front group that funded this ad targeting Harry Reid, Claire McCaskill, Mark Warner and Jim Webb. That conversation led to an idea, and then I got the good folks at Americans United for Change involved: let's do a video calling these fraudulent bankers out. Simon volunteered that he was doing a big speech at Harvard this afternoon, and if AUFC got the ad done in time, he would show it as part of his presentation. We got it done in time, Simon used it in his speech, and I think it came out pretty good. Check it out:
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.
In the days and weeks after the 1994 election, working in the Clinton White House was a little surreal. After a 1992 campaign, transition, and first 22 months in office when we were moving at the speed of light, being asked to get a million things done, being driven relentlessly to work 18+ hours a day, seven days a week (and always on call!), all of a sudden we were directionless. The inner, inner circle was around Clinton night and day, trying to console him and buck him up simultaneously, taking the brunt of his frustration, trying to figure out what to do next. Those of us the next level down were quite literally adrift for a few weeks. I occupied my time analyzing the election results, writing a memo on what happened and where I thought we should go next, and keeping in touch with group leaders and donors and other democratic activists I was close to. But I wasn't doing any of this because I was being told to, I was just doing what I thought I should, and most of my colleagues were in the same boat.
Democrats on the Hill, having been in control for so long and utterly stunned by the results, were in even worse shape, completely adrift for weeks and weeks. There was no leadership to do anything for a long time.
Even though Scott Brown's victory merely means Democrats lack 60 votes in the Senate, I am getting much the same feeling right now from stunned Democrats. Partly because the path they thought they were on to get health care done suddenly blew up on them, and partly because a sense of panic has gripped a lot of members especially on the House side, Democrats are having trouble getting themselves together. There's a big difference this time, though: first of all, their fate is still in their hands, Democrats still control the Hill; secondly, we don't have time to wander around stunned in the wilderness for the next several weeks. What needs to happen, in a matter of days (not weeks or months), is that Democrats need to (a) calm down, and (b) stiffen their spines. If they make decisions in panicked mode, they will be decisions that seal their fate in terms of losing the House. If they calm down and look at things rationally, they will realize that voters don't like panicked wimps who can't get things done. Fortunately both Nancy Pelosi and Senate leadership seem to understand this, but the worry is that the House rank and file aren't there yet at all.
If we want our economy to be strong and stable, we have to start thinking about it as a product of community-not a get rich quick scheme. As unemployment escalates and the housing crisis deepens, ordinary people are feeling the economic pinch. In the meantime, corporate executives and shareholders are coasting above the storm. If we want to tear down the useless casino that is Wall Street, our wealthiest citizens will have to pitch in when times get tough.
Salon carries an excellent three-part email exchange between Simon Johnson, former Chief Economist for the International Monetary Fund, and John Talbott, a reformed Goldman Sachs investment banker. Taken together, the emails constitute a thorough, in-depth analysis of the causes of the economic crisis, needed reforms and political hurdles to making policy changes. Johnson's basic argument is as frightening as it is accurate: Bankers line our elected representatives' pocketbooks, convincing them to re-write regulations that made big bonuses for bankers and a catastrophe for everyone else.
Some of Talbott's most interesting observations concern Wall Street's epic transformaiton. Over the past three decades, our financial sector has morphed from a kind of economic rebar to a wrecking ball. Once upon a time, the financial industry provided loansto businesses and entrepreneurs and funded constructive enterprises. Today, almost all of this activity has been replaced by hedge fund speculation. As a result of excessive deregulation, a wild array of complex transactions called derivatives have developed on Wall Street. Many derivatives, including the credit default swaps that brought down AIG, are intended to provide insurance against losses.
But this readily available "insurance" has removed any sense of risk from the minds of U.S. financiers. All kinds of casino experiments have come in play over the last several years because traders could insure any bet, however crazy, against losses. The whole point of a financial sector is to make sure that good ideas get funding. Instead, we've guaranteed that risky ideas gets funding, even when the idea is socially destructive and financially unsound, like, say, subprime lending.
As David Sirota emphasizes in Truthdig, this financial recklessness has only deepened existing economic inequality. The wealthiest 1% of U.S. citizens have the greatest share of the nation's income since 1929, the onset year of the Great Depression. That's not just a coincidence. When economic inequality is out of control, the economy itself becomes unstable. If everybody is broke, no one has enough to buy the stuff that makes the economy go-round.
There's a paradox buried in all the instability. Even though outrageous inequality is bad for business, it's not necessarily bad for businessmen (Yes, businessmen. Women are still largely excluded from the top tier of corporate decision-making). When the whole economy pays the price for executive excess, the executives themselves don't actually take the hit. Even when elites lose their jobs, they stay rich. When people who depend on their paychecks for survival get the axe, it's a life-altering, often devastating, experience.
There's something we can do about this, Sirota notes. We need to treat the rich like members of a community, rather than an isolated special interest whose demands must be balanced against other special interests. When a community needs to pay for something, the people who can afford to pay pony up. We have real problems right now. There's nothing wrong with taxing the wealthy to fund them.
But why worry? The bailout is working, and banks on the mend, right? Maybe not so much. The Real News explains how bank profits don't always equal economic progress. Wells Fargo just booked a massive second-quarter profit, but the numbers are largely divorced from any economically useful activity.
Foreclosures are soaring, and bank lending is way down. Even though the banks are booking big profits, they aren't putting much money into the economy. How is this possible? Well, banking basically involves two steps. First, the bank borrows money at a low interest rate. Then, it makes a loan at a higher interest rate. The difference is the profit. Right now financing costs for banks are next to nothing, thanks to a host of government programs. Even if you don't make many loans, it's hard to lose money when you can borrow it for free.
As Steve Benen emphasizes for The Washington Monthly, using the stock market as as measure of economic vitality has proven pretty silly over the past few years. Back in February, just about every conservative pundit was screaming that the decline in the Dow Jones Industrial Average was purely a result of President Barack Obama's economic policies.
Obama's economic record is not perfect. He has continued the Bush administration's bank bailouts, and his stimulus package wasn't nearly big enough to fight this recession. But some of Obama's reform ideas have been very good, and he actually got a stimulus package through a very reluctant Congress. Now that the Dow is back on the ascent, are any of those conservative talking heads cheering Obama's proposal to create a new financial regulator focused on protecting consumers? Well, no. As it turns out, the stock market is pretty fickle. Its daily and weekly movements can rarely be attributed to individual economic policies. The things that make stocks advance don't necessarily create new jobs.
That new consumer regulator is by far the best part of Obama's financial regulatory overhaul. Harvard Professor and bailout watchdog Elizabeth Warren explains why in this video, available at AlterNet. They've also published a piece I wrote on the bank lobby's insane assault on the plan.
But even if the entire crazy bailout actually does work, the solution won't last without other major economic reforms. In The Progressive, Naomi Klein argues that the surreal boom-and-bust cycle of U.S. capitalism is an awful lot like a Sarah Palin fairy tale, a world in which the most outrageous structural imbalances never result in problems for ordinary people because a new dose of market magic swoops in at the last minute to save the day.
"What Palin was saying is what is built into the very DNA of capitalism: the idea that the world has no limits. She was saying that there is no such thing as consequences, or real-world deficits. Because there will always be another frontier, another Alaska, another bubble. Just move on and discover it. Tomorrow will never come," Klein writes.
If we want to get away from this predatory cycle, we have to give ordinary citizens more influence over the legislative process. As Talbott noted in Salon, that means demanding our due.
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