Some articles to understand better the meaning of the Financial Reform Bill.
The first is the news about the passing od the Bill in the Senate.
The second explains the main parts of the Bill, it’s effects, the difference between the House and the Senate Bills and the Proposals that didn’t make it to the Bill.
The third shows the main differences between the House and the Senate Bills.
The fourth explains some of the ammendments that didn’t make it to the Bill and shows the two main proposals that would be important to restrain the power of the financial sector.
The fifth explores the limits of the Bill, specially regarding the “too big to fail” problem, but argues that the Bill might reduce the power of the big banks.
The sixth analyses the relations between Democrats, Republicans, the Obama asministration, the Congress and the Lobbyists and discusses if it was possible to go further on the regulation.
The last one makes an analysis of the shift in the power relation inside the U.S. represented by the passing of the Bill.
Despite their differences, all articles tend to reach a similar conclusion: the Bill is an important step towards regulation of the financial sector, but it should go further.
The problem is that the financial sector still have a lot of power, even after the crisis and it’s not that easy to defeat them. In the 30’s, the New Deal was able to do it, but now it’s a different moment.
But the fact that a Bill regulating the financial sector was even able to go to Congress and be approved may signal a change in the power relations in the U.S. Let’s hope this change is real and continues.
The fact is that it was the U.S. government that started deregulation in the first place (together with the U.K.) in the late 60’s. And it did it because the expansion of the American financial capital may create some problemas, but it benefits the U.S. government, by helping to spread the Dollar as the international currency.
But now it seems that the deregulation created a problem for the U.S. government, because it affected the internal economy, so that’s probably why they are coming back with some regulation.
Senate Passes Financial Reform Bill, 59-39
AP / Huffington Post First Posted: 05-20-10 08:51 PM
WASHINGTON — Prodded by national anger at Wall Street, the Senate on Thursday passed the most far-reaching restraints on big banks since the Great Depression. In its broad sweep, the massive bill would touch Wall Street CEOs and first-time home buyers, high-flying traders and small town lenders.
The 59-39 vote represents an important achievement for President Barack Obama, and comes just two months after his health care overhaul became law. The bill must now be reconciled with a House version that passed in December. A key House negotiator predicted the legislation would reach Obama’s desk before the Fourth of July.
The legislation aims to prevent a recurrence of the near-meltdown of big Wall Street investment banks and the resulting costly bailouts. It calls for new ways to watch for risks in the financial system and makes it easier to liquidate large failing financial firms. It also writes new rules for complex securities blamed for helping precipitate the 2008 economic crisis, and it creates a new consumer protection agency.
It would impose new restraints on the largest, most interconnected banks and demand proof that borrowers could pay for the simplest of mortgages.
“Our goal is not to punish the banks but to protect the larger economy and the American people from the kind of upheavals that we’ve seen in the past few years,” Obama said earlier Thursday after the Senate cleared a key 60-vote hurdle blocking final action.
The financial industry, Obama said, had tried to stop the new regulations “with hordes of lobbyists and millions of dollars in ads.”
Two Democrats, Sens. Maria Cantwell (D-WA) and Russ Feingold (D-WI), voted against the bill. Four Republicans, Sens. Scott Brown (R-MA), Olympia Snowe (R-ME), Susan Collins (R-ME), and Chuck Grassley (R-IA), voted in favor of the bill.
In a statement released after the vote, Feingold explained that the legislation does not address the root causes of the financial crisis:
“The bill does not eliminate the risk to our economy posed by ‘too big to fail’ financial firms, nor does it restore the proven safeguards established after the Great Depression, which separated Main Street banks from big Wall Street firms and are essential to preventing another economic meltdown. The recent financial crisis triggered the nation’s worst recession since the Great Depression. The bill should have included reforms to prevent another such crisis. Regrettably, it did not.”
Cantwell echoed Feingold’s concerns in a separate statement after the vote:
“While this bill takes much needed steps to help prevent a crisis of this magnitude from ever happening again, it fails to close the very same loopholes in derivatives trading that led to the biggest economic implosion since the Great Depression,” Senator Cantwell said. “Throughout this debate I have fought hard against efforts to weaken this legislation as well as to pass language to strengthen it further. But the fact of the matter is, without key reforms in derivatives trading, this bill does not safeguard America’s economy from a repeat of this crisis.It sets up a process for responding the next time we have a financial crisis, but it doesn’t prevent this kind of thing from ever happening again. We have to stop these kinds of dangerous activities. We need stronger bans on banks gambling with depositors’ money. We need bright lines – like Glass-Steagall – that separate risky activities from the traditional banking system. We need to refocus our financial system away from synthetic bets and get more capital into the hands of job creators and Main Street businesses. There are good, strong provisions in this bill, and I’m proud of the work we did to get them in there, but I fear that without closing the loopholes primarily responsible for this economic meltdown, we are missing the entire heart of the matter.”
The Senate passed the bill without the Merkley-Levin amendment, an addition that would have imposed stricter language on the “Volcker Rule.” Named after Obama economic adviser Paul Volcker, the “Volcker Rule” bars commercial banks from using taxpayer-backed money to trade for their own gain. Without the Merkley-Levin amendment, sponsored by Sens. Jeff Merkley (D-OR) and Carl Levin (D-MI), regulators who were blamed for their lack of oversight preceding the financial crisis will be empowered to shape the “Volcker Rule” and possibly water it down.
Levin and Merkley’s amendment was never debated on the Senate floor. Instead, “last-minute maneuvering” killed it. Levin said that it showed “the power of Wall Street,” reports Reuters:
Last-minute maneuvering on the Senate floor killed two controversial amendments: one to tighten proposed restrictions on risky trading by banks, and another exempting car dealers that do not finance their own lending to auto buyers from oversight by a new federal consumer watchdog.Republicans withdrew the auto-dealer amendment, offered by Senator Sam Brownback, so that the bank trading amendment, offered by Democrats Jeff Merkley and Carl Levin, would not come to a vote. It is firmly opposed by major financial firms.
Twice the Senate had to beat back efforts by Republicans to delay the bill before achieving final passage.
“The decisions we’ve made will have an impact on the lives of Americans for decades to come,” said Sen. Richard Shelby, R-Ala., who voted against the legislation. “Judgment will not be rendered by self-congratulatory press releases, but, rather, by the marketplace. And the marketplace does not give credit for good intentions.”
Major Parts of the Financial Regulation Overhaul
Published: May 20, 2010
|Effect||Notable differences between
House and Senate bills
|Proposals omitted or defeated|
|Derivatives||For the first time, establishes federal oversight of derivatives, complex products that bet on the future movement of underlying securities. Requires most deals to be insured by a third-party clearinghouse and traded on public exchanges.||The Senate bill bars banks from derivatives trading. It also requires a larger share of derivatives to pass through clearinghouses and trade on exchanges.||A ban on derivatives called naked credit-default swaps, in which investors essentially purchase insurance on the performance of assets they don’t own. The Senate voted down this amendment.|
|Consumer protection||Creates a federal regulator to write and enforce rules protecting consumers of financial products like checking accounts, mortgages and payday loans. Increases the authority of state regulators to enforce protections.||The Senate bill gives the federal regulator broader authority, including over loans made by auto dealers. The House bill creates a free-standing regulator, while the Senate bill places it inside the Federal Reserve.||The administration proposed requiring lenders to offer each borrower a “plain vanilla” loan, like a 30-year, fixed-rate mortgage, to illuminate the range of possibilities, but the proposal didn’t make it into either bill.|
|Financial regulation||Creates a council of regulators to watch for systemic risks. Gives the Federal Reserve new authority over large financial companies. Consolidates banking regulators, merging the Office of Thrift Supervision into the Office of the Comptroller of the Currency.||The House bill places tighter limits on the Fed, authorizing regular audits, and limiting its authority to impose new restrictions and to make emergency loans.||Senator Christopher J. Dodd, Democrat of Connecticut, proposed creating a single agency to regulate financial companies. There are still three: the Office of the Comptroller of the Currency, the Fed and the F.D.I.C. A proposal by the Bush administration for a single agency to regulate financial markets also never materialized. There are still two: the Securities and Exchange Commission and the Commodity Futures Trading Commission.|
|Too big to fail||Authorizes regulators to impose restrictions on large, troubled financial companies. Creates a process for the government to liquidate failing companies at no cost to taxpayers, which is similar to the F.D.I.C. process for liquidating failed banks.||The House bill would cover costs with a $150 billion fund collected from the largest financial companies. The Senate bill would recoup costs from the same group of large companies after the fact.||An amendment to impose size limits on the largest financial companies failed in the Senate.|
|Shareholder protections||Requires companies to have executive compensation set by independent directors. Gives shareholders a nonbinding vote on those decisions.||The Senate bill also requires so-called clawback provisions that force executives to repay any earnings based on inaccurate financial statements.||An early populist swell of support for a “bonus tax” on top earners never found its way into either bill. Neither did any other limits on compensation.|
|Proprietary trading||The Senate’s bill includes the Volcker Rule, which restricts banks from making “proprietary” investments that do not benefit clients, including in hedge funds and private equity funds. The provision particularly affects banks like Goldman Sachs, which make much of their income from this type of activity.||The House bill does not contain any version of the Volcker Rule, which President Obama proposed in January, after the House bill had already passed.||The Senate never voted on an amendment to restore the barrier between commercial banking and Wall Street trading, adopted as part of the Glass-Steagall Act of 1933 and repealed in 1999.|
|Investor protections||Requires companies selling certain complex financial products, most notably mortgage-backed securities, to retain a portion of the risk. Allows investors to sue credit ratings agencies.||The House bill also requires risk retention when banks sell investors basic products like mortgages. It also requires brokers to act in the interest of their clients. The Senate bill would create a new federal system for assigning work to ratings agencies to limit the influence of banks over the ratings of their own products.||The Senate never voted on amendment to change the business model of ratings agencies, in which banks pay for ratings on the products that they sell to clients.|
By Pat Garofalo at 10:51 am
Last night, the Senate approved Sen. Chris Dodd’s (D-CT) financial regulatory reform bill by a vote of 59-39. Four Republicans — Sens. Charles Grassley (R-IA), Susan Collins (R-ME), Olympia Snowe (R-ME) and Scott Brown (R-MA) — voted in favor of the legislation, while two Democrats — Sens. Maria Cantwell (D-WA) and Russ Feingold (D-WI) — voted against it. Sens. Arlen Specter (D-PA) and Robert Byrd (D-WV) did not vote.
Next, the bill moves to a conference committee, where it will be merged with the bill passed by the House of Representatives last December. Already, lobbyists for the financial services industry have their eye on the conference, hoping to weaken various provisions of the legislation. “We are going to have to try and clean up as much of this as we can,” said Ed Yingling, the American Bankers Association’s president.
Due to the fairly open amendment process on the Senate floor, and the considerably different point from which Dodd’s bill started, there are several key differences between the two pieces of legislation that will have to be ironed out in conference. This is by no means an exhaustive list, but here are some of the major ways in which the bills differ:
|Consumer Protection Agency||Creates a Bureau of Consumer Financial Protection, placed inside the Federal Reserve, with an independent director and budget. Its rules could be vetoed by a two-thirds vote of a council of bank regulators.||Creates a new Consumer Financial Protection Agency (CFPA), with an independent director and budget. The CFPA has full rule-writing authority.|
|Derivatives||Mandates exchange trading and clearing for most derivatives, with a limited end-user exemption. Forces federally insured banks to spin-off their swaps desks.||Mandates exchange trading and clearing for most derivatives, with wide exemptions for end-users.|
|Volcker Rule||Gives regulators discretion regarding whether to implement the Volcker rule, which is a ban on proprietary trading.||Does not include a proprietary trading ban.|
|Auto Dealer Exemption||Does not currently include a provision exempting auto dealers from new consumer protection rules. However, the Senate on Monday will vote on whether or not it wants to recommend to the conferees that such an exemption be added.||Includes an exemption for auto dealers from the CFPA’s rules.|
|Resolution Fund||The resolution authority for unwinding systemically risky financial institutions will be funded by an after-the-fact levy on the biggest financial firms. Any money necessary for the unwinding will be fronted by the Treasury Department.||Raises a $150 billion resolution fund from the biggest financial firms, which would be tapped in order to unwind a failed institution.|
There are plenty of smaller differences between the bills, including the way in which they address capital requirements, preemption of state consumer protection laws (the Senate allows more preemption leeway), and cracking down on interchange fees (which the Senate bill does, but the House does not). House Financial Services Chairman Barney Frank (D-MA) said today that he expects the bills to be fully reconciled and passed by the Fourth of July. “I’ve cleared my calendar for the month of June to get this done,” said Frank.
Focus On This: Merkley-Levin Did Not Get A Vote
By Simon Johnson
After 9 months of hard fighting, yesterday financial reform came down to this: an amendment, proposed by Senators Jeff Merkley and Carl Levin that would have forced big banks to get rid of their speculative proprietary trading activities (i.e., a relatively strong version of the Volcker Rule.)
The amendment had picked up a great deal of support in recent weeks, partly because of unflagging support from Paul Volcker and partly because of the broader debate around the Brown-Kaufman amendment (which would have forced the biggest 6 banks to become smaller). Brown-Kaufman failed, 33-61, but it demonstrated that a growing number of senators were willing to confront the power of our biggest and worst banks.
Yet, at the end of the day, the Merkley-Levin amendment did not even get a vote. Why?
Partly this was because of procedural maneuvers. Merkley-Levin could only get a vote if another amendment, proposed by Senator Brownback (on exempting auto dealers from new consumer protection rules) got a vote. Late yesterday afternoon, Senator Brownback was persuaded, presumably by his Republican colleagues and by financial lobbyists, to withdraw his amendment.
Of course, Merkley-Levin was only in this awkward position because of an earlier lack of wholehearted support from the Democratic leadership – and from the White House. Again, the long reach of Wall Street was at work.
But the important point here is quite different. If Merkley-Levin did not have the votes, it was in the interest of the megabanks to have it come to the floor and be defeated. That would have been a clear victory for the status quo.
But Merkley-Levin had momentum and could potentially have passed – reflecting a big change of opinion within the Senate (and more broadly around the country). The big banks were forced into overdrive to stop it.
The Volcker Rule, in its weaker Dodd bill form (“do a study and think about implementing”), perhaps will survive the upcoming House-Senate conference – although, because this process likely will not be televised, all kinds of bad things may happen behind closed doors. Regulators may also take the Volcker Rule more seriously – but the most probable outcome is that the Fed and other officials will get a great deal of discretion regarding how to implement the principles, and they will completely fudge the issue.
Most importantly, everyone who wants to rein in the largest banks now has a much clearer idea of what to push for, what to campaign on, and for what purpose to raise money. This is the completely reasonable and responsible ask:
- The Volcker Rule, as specifically proposed in the Merkley-Levin amendment
- Constraints on the size and leverage of our largest banks, as proposed by the Brown-Kaufman amendment
When the mainstream consensus shifts in favor of these measures, or their functional equivalents, we will have finally begun the long process of reining in the dangerous economic and political power of our largest banks.
Written by Simon Johnson
May 21, 2010 at 9:02 am
Last night the Senate approved a major financial reform bill almost a year in the making. A few hours before the vote, the president hailed the legislation, which he said ensures that “the American people will never again be asked to foot the bill for Wall Street’s mistakes.” He elaborated:
There will be no more taxpayer-funded bailouts–period. If a large financial institution should ever fail, we will have the tools to wind it down without endangering the broader economy. And there will be new rules to prevent financial institutions from becoming “too big to fail” in the first place, so that we don’t have another AIG.
But is this really true? Does the financial reform bill really solve the problem of “too big to fail”? The answer is: “Sorta,” but not quite in the way the bill’s supporters suggest.
The gist of the administration’s attack on the too-big-to-fail (TBTF) problem is a provision known as “resolution authority.” Under the status quo, the government basically has two choices for dealing with a major financial firm on the brink of collapse: It can get out of the way and hope for the best, as it did to disastrous effect with Lehman Brothers. Or the Federal Reserve can float the company a massive loan, as in the case of AIG.
The idea behind resolution authority is to avoid these lousy choices. Under the new law, the government would be able seize the wobbly firm, fire its executives, and fund its operations until it could sell them off in pieces. The proceeds from these sales would pay the government back; whatever was left would go to bondholders, who would presumably suffer some losses. The shareholders—the people who own common stock—would get wiped out entirely. (If the proceeds weren’t enough to repay the government, it would recoup the rest by levying a fee on the industry.) This is basically a scaled up (and stretched out) version of the way the FDIC handles smaller-bank failures.
Long story short, resolution authority is unquestionably an improvement over the status quo. The biggest reason is that the prospect of losses for bondholders mitigates the most pernicious consequence of TBTF: moral hazard. That is, because people who lend money to megabanks assume the government will make them whole if the bank collapses, the lenders have little incentive to rein in excessive risk-taking by the bank’s managers. In fact, they actually encourage it by under-pricing their loans. The threat of being “resolved” by the government should change that calculus.
That’s how it’s supposed to work, in any case. In practice, there are a number of complications. For one thing, it’s not clear that bondholders actually will suffer losses in the end, at least not all or even most of them. The government isn’t likely to impose losses when it first takes over a failing megabank because doing so in the middle of a financial crisis—and you’re almost by definition in a crisis if a megabank is failing—risks accelerating the panic. (Investors might refuse to roll over their loans to other troubled companies for fear of suffering similar losses.) And if the government waits to impose losses until it’s done liquidating the company—a process that could stretch for years—the short-term bondholders will have long since taken their money and run. So, at the very least, the people who lend short-term can probably count on being bailed out, which encourages companies to fund themselves with short-term debt, which is the least stable form of funding.
And there are other potential problems. First, the new law only extends to U.S. companies, while most megabanks have an international footing. It’s not clear what happens to the overseas operations of American companies while their U.S. assets are in receivership. In the case of AIG, the Fed loan kept the overseas affiliates solvent. But Congress is on the verge of explicitly preventing the Fed from extending such a loan in the future. The upshot could be chaos. For example, U.S. creditors might have to take big, upfront losses to make bondholders in overseas subsidiaries whole. That would worsen the panic at home for the reasons described above (and could eventually force Congress to step in with a bailout). All of which is to say that, while resolution authority is clearly a step in the right direction, it raises almost as many questions as it answers.
The good news is that resolution authority isn’t the only way to deal with the problem of too big to fail. Congress could simply break up the banks, for example. Alternatively, if you think of “bigness” as an externality—which is to say, something we get too much of because, like pollution or unhealthy eating, it imposes a social cost that the producer doesn’t entirely pay—then you can discourage it through taxation. (In economist-speak, this would force the banks to internalize the true social cost of their size.) One way to do this would have been to simply impose a tax on the biggest banks, which even conservative economists like Harvard’s Greg Mankiw support. Another way would be to impose stricter limits on leverage for the largest banks—that is, the amount of debt banks can take on relative to equity. Because banks earn more profits when they’re more leveraged (just like you make a larger profit, percentage-wise, when you flip a house on which you put down 5 percent versus 10 percent), this is similar to a tax on bigness.
Alas, none of these things is in the bill that Obama will soon sign. Congress voted down, and the administration opposed, an amendment by Senators Sherrod Brown and Ted Kaufman that would have shrunk some of the country’s biggest banks. Republicans then deployed a variety of underhanded tactics to block a vote on an amendment by Senators Carl Levin and Jeff Merkley that would have shut down the banks’ proprietary trading desks—which is to say, the trading they do for their own bottom line. (The administration and the congressional leadership supported the amendment, which was a relatively strict version of the so-called Volcker Rule.) And, while the government may soon assess a fee on banks to bridge the difference between the bailout money it paid out and the bailout money companies have returned, there won’t be a permanent tax on big banks.
And yet, perhaps unwittingly, the upshot of financial reform will have been to make it costlier to be a big bank relative to being a small or medium-sized bank—which is to say, it has effectively taxed bigness. That’s because the legislation imposes a handful of new mandates and regulations—like oversight by a soon-to-be-established consumer financial protection agency, as well as limits on fees for debit-card transactions—from which small and medium-sized banks are exempt. Other reforms—such as a bill Congress passed last year to limit hidden credit-card fees and make statements more transparent, and new restrictions on trading derivatives—would disproportionately dent profits at megabanks. These banks tend to have far bigger credit card operations, and are the only bona fide derivatives brokers around.
The big banks typically complain that these efforts will drive them out of this or that line of business, or at least curtail their activity significantly. And there may be something to those concerns. But in a world in which we worry about megabanks doing too much rather than too little, that’s not necessarily a bad thing. If only there were a bit more of it.
Noam Scheiber is a senior editor of The New Republic
The Senate passed a historic finance reform bill on Thursday night, fulfilling a major goal of the administration. But, Eric Alterman writes, the legislation is a thicket of compromises.
Whatever you think about the financial regulation bill that finally passed in the Senate Thursday night, you can’t say it’s not a big deal. It’s 1500 pages long, and just take a look at Journal’s précis of its major provisions.
When was the last time Congress passed a bill so large that even its significant provisions resisted summarization, both for reasons of complexity and enormity? If you said “health care,” well, perhaps you’re noticing a pattern. Once again, Democrats spent the better part of a year playing three-dimensional chess with themselves, lobbyists, and Republicans to pass a middling bill whose ultimate effect no one can confidently predict. And forget this “No Drama Obama” nonsense. This bill, like the health care legislation, had more than its fair share of cliffhangers.
The Obama team lets Congress take the lead and there, the lobbyists play their game of tug-of-war with the public interest.
Harry Reid had to get Maria Cantwell (D W.A) to vote to allow the legislation onto the Senate floor, only to see her vote against its final passage because she finds it to be too wimpy. Reid also had to prevent a vote on what might have been one of the bill’s most popular provisions: the amendment proposed by Jeff Merkley (D-Ore.) and Carl Levin’s (D-Mich.) to strengthen the Volcker Rule, barring banks from risky proprietary trading. The banks were so afraid that this would pass, they convinced Sam Brownback to drop his amendment exempting the lending institutions set up by car dealers from regulation by the new Consumer Financial Protection Agency (something they got in the House version). No amendments were allowed and the bill passed as proposed.
And again, like with health care, liberals left feeling queasy at best. Cantwell and Feingold voted against the bill. Merkley voted for it but complained that the reason his amendment was barred by the leadership was the fact that “it would probably pass and Wall Street doesn’t want it to pass, but the second reason is, I believe that colleagues who were planning to vote no didn’t want to have to vote no. If they voted no it would make Wall Street happy but would make their constituents mad, because this is the type of fundamental reform that is expected for us to get done.”
For a bit more déjà vu, Republicans, save three Northeasterners, and one Iowan up for re-election, all think it stinks. Once again, they are as one with Thomas J. Donohue, president of the U.S. Chamber of Commerce, who said, “If you want to drive capital out of the United States, this is your bill.”
So yes, we have a pattern here. The Obama team lets Congress take the lead and there, the lobbyists play their game of tug-of-war with the public interest. A watered-down rough draft emerges, in which the Republicans, after long negotiations, decide that, after all, they can’t really support the thing, much as they would like to in, say, some other universe. Even so, they get much of what they want simply because a) Democrats need lobbyists’ cash just as much as Republicans do, and b) the Obama administration remains desperate to pursue bipartisan solutions to America’s problems, even though it has long ago lost any hope of actually achieving them.
In the case of financial regulation, they made these compromises even though, unlike health care, they enjoyed strong public support for a harder line. It’s not just Levin/Merkley that was dropped. Sheldon Whitehouse (D-R.I.) was unable to pass his amendment that would have let states cap credit-card interest rates and impose restrictions on rates charged by out-of-state lenders. With some banks charging nearly 30 percent interest on money the government is lending them for free, who would be against that? (Merkley, as it happens, is from Delaware, where the banks holding this usurious debt are located.)
Meanwhile, the Federal Reserve, whose asleep-at-the-switch regulation turned out to be so costly, came away happy. They need to deal with only a one-time audit of previous mistakes, and lost almost none of the agency’s awesome power to make them again. As the AP reported, the Fed “retained supervision over bank holding companies and state-chartered banks and would also oversee any large interconnected nonbank financial firm deemed a potential risk to the financial system.”
All of this is the result of an extremely complicated and confusing set of compromises among too many forces even to name, much less explain. But they all occur inside a pretty simple framework. On the one hand, taxpayers were mad as hell. When Goldman Sachs found itself facing both civil and potential criminal charges, the story had its clear villain and Democrats could have tried to go much further than they did in reigning in abusive practices.
But that’s the public game. In private, the banking industry has been making friends and influencing Congress, literally, for centuries. (“They frankly own the place” explained Sen. Richard Durbin, D-Ill., in 2009.) And for the past year, they have been using every resource at their collective disposal to weaken both houses’ reform plans. Remember, according to Public Citizen, over seventy ex-members of Congress could be found lobbying for Wall Street and the financial services sector in 2009, including two former Senate majority leaders, two former House majority leaders, and a former House speaker. At the staff level, the numbers are even more impressive, with literally hundreds of ex-staffers on the banks’ payrolls and hundreds more planning to join them in the near future. They will still be there when the rest of us have stopped paying attention.
But given that even in dumbed-down, oversimplified journalese, the actual provisions of this bill are beyond the capacity of most of us to understand, it must be counted as a major political victory for Obama and his maddening commitment to reasonableness at all costs. The dude got the job done, again. He’s “doing something,” and looking like a winner as he does it. And Republicans, worried about the Tea Party/Jacobin element of their own base, are going to be hard-pressed to make too much of their failure to protect the banks next time around.
Should the Obama and the Democrats have done more? Sure. Could they have done more? Well, that’s the question that keeps haunting Obama supporters. In the meantime, we’re back where we were the first time he disappointed us… hoping he really does know best.
Eric Alterman is a professor of English and journalism at Brooklyn College and a professor of journalism at CUNY Graduate School of Journalism. He is the author, most recently, of Why We’re Liberals: A Handbook for Restoring America’s Important Ideals.
Political organizer, strategist and author
Senate Vote Signals Historic Change in Wall Street
The Wall Street Reform bill passed last night by the United States Senate goes a long way toward reining in the reckless casino economy that cost eight million Americans their jobs, and brought our economy to its knees.
But its passage signals an even more significant shift in the economic assumptions and power relationships that undergird American political and economic life.
For four decades Wall Street had its way with American government. The big Wall Street banks and their economic apologists dominated the main stream of economic thought – and their army of lobbyists called the shots on Capitol Hill. Last night their domination came to a screeching halt.
Wall Street’s minions – and their Republican enablers – did fend off many proposals that would have strengthened the bill that passed last night. But, contrary to conventional wisdom, as the original Wall Street Reform bill moved from the House to the Senate – and then to the Senate floor – the bill actually got tougher.
The bill that passed the Senate includes provisions detested by the biggest Wall Street banks that would prevent them from trading in derivatives – the economic time bombs that were at the center of the 2008 financial collapse. That provision alone would cost the big Banks $40 to $50 billion in profit.
As the bill moved through Senate debate, provisions were added to place new restrictions on credit rating agencies, limit fees that credit card companies can charge to merchants, and force big banks to maintain higher capital requirements.
Wall Street failed in its attempt to stop a new Consumer Financial Protection Bureau that would protect borrowers from many of the abusive and fraudulent financial practices that lead to the economic collapse and siphoned billions — from the pockets of those who work in the real economy — to the bloated financial sector.
In the final hours of the debate, Republicans made one last attempt to exempt auto dealers from consumer protection rules when they make auto loans. They couldn’t manage to get the provision to a vote.
The reason for their change in fortunes is simple. Wall Street is toxic. Support for Wall Street is becoming another third rail in American politics. Even the Republicans justified their defense of Wall Street in Orwellian terms that made it appear they were attacking their Wall Street sponsors. Democrats found that attacking Republicans for supporting the Wall Street banks was like shooting fish in a barrel.
The economic collapse, the taxpayer bailout, and then their subsequent return to business as usual – to the same old recklessness and greed — have sickened everyday Americans. Now the chickens are coming home to roost. Or to put it another way: the pigs get fat, the hogs get slaughtered.
Not that it’s time to have a tag day for the “ten million dollar bonus” crowd. And Wall Street’s army of lobbyists will do everything they can to weaken the final bill in House-Senate conference. But a significant turning point has been reached. The notion that the “geniuses of Wall Street” know best – that they should be left on their own to suck up as much of the nation’s wealth as possible because it serves the “common good” – that dog will no longer hunt.
In 1792, the nation suffered its first credit crisis. Financial crises recurred in the United States roughly every 15 years until the Great Depression. Then New Deal reforms changed the game. The Security and Exchange Commission instituted tough new rules for the stock market. The Federal Deposit Insurance Corporation provided stability to the nation’s banks – and its means of allocating credit to the real, productive economy. And the Glass-Steagall Act created a firewall between banking and the risky speculative activities that had – in large measure – caused the credit collapse that led to the Great Depression.
For the next fifty years America had uninterrupted economic growth – with no recurrence of financial meltdown. That ended when the resurgent “markets-know-best” conservative economic movement led to the deregulation of the savings and loan industry. Undaunted by the bust that followed the savings and loan disaster, Wall Street successfully pushed to repeal Glass-Steagall – and prevent the regulation of its new “innovative” esoteric derivative securities. The casino economy and financial sector exploded.
During the period 1973 to 1985, the financial sector never earned more than 16% of domestic profits. This decade, it has averaged 41% of all the profits earned by businesses in the U.S. In 1947, the financial sector represented only 2.5% of our gross domestic product. In 2006, it had risen to 8%. In other words, of every 12.5 dollars earned in the United States, one dollar goes to the financial sector, much of which, let us recall, produces nothing.
Wall Street’s expansion is one big reason that most of America’s economic growth during the last decade has flowed into the hands of investment bankers, stock traders and partners in firms like Goldman Sachs. The Center on Budget and Policy Priorities reports that fully two-thirds of all income gains during the last economic expansion (2002 to 2007) flowed to the top 1% of the population. And that, in turn, is one of the chief reasons why the median income for ordinary Americans actually dropped by $2,197 per year since 2000.
The passage of Wall Street Regulatory Reform symbolizes a fundamental change in the political power of Wall Street, and a collapse of the economic and political narrative that it used to justify its confiscation of an ever-growing portion of the economic pie.
Wall Street is in political retreat. But the most important lesson of politics is that when they’re on the run, that’s the time to chase them. Progressives – and all advocates for the interests of everyday working people – need to make sure that we consolidate our victories as the Wall Street Reform bill goes to conference. And once that is done we should continue the crusade to limit the size and power of the financial sector, and redirect resources to the people in our economy who actually create the goods and services that generate widely-shared economic growth.
Robert Creamer is a longtime political organizer and strategist and author of the recent book: Stand Up Straight: How Progressives Can Win, available on Amazon.com.