Monday, April 26, 2010

Real Banking Reform

The US Senate is looking to change laws governing financial and banking practices. This comes after passage last December of a banking “reform” bill in the House. President Obama says major changes are needed to prevent a repeat of the financial implosion of 2008.

The casino that is Wall Street, gambling with other people’s money on bizarre and complex investments backed up with next to nothing in real money, must end. The path of destruction from Wall Street’s recklessness -- millions of people who lost homes, pensions, jobs; business foreclosures; and communities blighted – must never happen again.

The question is: are the proposed changes real reform or simply real good politics to placate voters who are angry at Wall Street and their political supporters in Congress?

The issues and proposals are highly detailed and confusing. I’m no expert in banking or financial laws. I haven’t read the Senate reform bill…or know for certain what offered amendments will make the final version.

These shortcomings aside, from readings and listening to a few talking heads on the Sunday morning programs, here are 10 points that you might want to consider when judging whether what comes out of Congress constitutes real reform or just real good politics.

1. I have not seen or heard in either the Senate of House version anything addressing criminal investigation or prosecution of anyone responsible for any part of the Wall Street induced economic implosion. The government obtained hundreds of felony convictions of those responsible for the collapse of Savings and Loans in the 1980’s. To date, not a single Wall Street CEO or executive has been charged with a criminal felony. No one is serving jail time – those who were responsible for causing millions of people to lose their homes, pensions and jobs. If you or I stole a loaf of bread from the corner store, we’d receive criminal punishment greater that what any Wall Street executives have received. That’s a crime. It should be noted that the recent charges against Goldman Sachs corporation are civil, not criminal.

2. Without knowing many of the details of the any of the bills, it’s hard to believe much substantively will change given President Obama’s attitude expressed last week on Wall Street. He said: “I believe in the power of the free market.” “I believe in a strong financial sector …” “We do not have to choose between markets that are unfettered by even modest protections against crisis, or markets that are stymied by onerous rules that suppress enterprise and innovation.” Note to the President: it was exactly and precisely the power of virtually free markets of Wall Street that caused the crisis. The lack of strong regulations allowed Wall Street to pursue greed. A strong financial sector does not equate to a strong economy. The strong financial sector (“financialization” of the economy) has come at the expense of a strong productive sector – producing actual products and services for the real economy rather that pushing money around from one place to another simply to make more money. Wonder if this attitude has anything to do with his campaign receiving $1 million alone from the Goldman Sachs political action committee in 2008 and $14 million more from the rest of the financial industry?

3. Neither the Senate or House bill seems to contain any provision that would rebuild the firewall between commercial and investment banking. This separation existed between 1933 to 1999 when the Glass-Steagall Act was in force – a law designed to control speculation. Financial entities were required to choose between safer commercial banking practices or riskier investment practices. Permitting banks to engage in both types of investments meant that investment banks that collapsed due to risky investments like credit default swaps or collateralized debt obligations would drag down their commercial banking side as well.

4. Speaking of which, the Senate bill doesn’t ban credit default swaps, collateralized debt obligations, and other exotic forms of speculation that played a major role in the financial crash and global recession.

5. Nor does the bill establish even the feeblest of measures that has riled the average American – capping excessive executive pay.

6. A lauded Consumer Financial Protection Bureau (to protect consumers against abusive, unfair and deceptive lending practices) is in both the Senate and House bills. There are many positive features. But there are several major shortcomings and differences between the two versions. One of the major differences is that the Bureau in the Senate version would have enforcement powers limited to only some banks and credit unions. Both versions maintain the ability of the federal government to preempt tougher state consumer protection laws. Historically, one of the ways corporations have escaped tough state controls is to push for weaker federal laws that supersede state laws.

7. The Federal Reserve will acquire new regulatory powers under the Senate bill. Only a few months ago it seemed the Fed (a quasi private agency) might lose much of its powers to oversee financial markets and agencies given its cheerleading of the financial free market policies leading up to the global financial crisis and subsequent Great Recession. Now, the Fed might well become the major regulator of many of the banking “reforms” affecting hundreds of financial corporations. So much for the Fed being “independent.” Oh, by the way, the Senate version has a much weaker provision to audit the Federal Reserve – a measure seeking to expose where exactly the tens of billions of taxpayer bailout money that went through the Fed ended up. The Fed has resisted being audited.

8. There are provisions to beef up regulations and transparency of derivatives, a major source of profits for the top Wall Street banks. Some claim the provisions are loaded with loopholes and exemptions. It’s estimated that there are more than $600 trillion (not billion but trillion) in these financial bets on bets. Hard to tell at this point how real these reforms are. Some have asserted the real solution is to outlaw these super-charged speculative “investments” altogether.

9. A provision to break up “too big to fail” banks is contained in the Senate bill. A much stronger amendment has been offered by US Senator Sherrod Brown (D-Oh) and Ted Kaufman (D-Del) that would prevent future bailouts according to its supporters. Overall, it seems to be a good bill. It’s unclear at this point whether it will receive sufficient support by the Senate to be added. President Obama has not yet stated his position either. A summary of the bill is at http://thehill.com/blogs/blog-briefing-room/news/93551-senators-will-file-too-big-to-fail-amendment

10. Underneath, above and surrounding all the above is political pressure – from both the financial industry that would love first and foremost a “reform” bill to its liking (and if not, then no bill at all) and the public that wants justice and fairness. The influence peddling and campaign contributions/investments by the financial industry is real. Financial corporations have spent $455 million to date to lobby Congress. The securities and investment industry has thus far invested $34 million for the 2010 election cycle. And counting. The public is angry – from progressive to tea baggers. It’s critical we know enough to be able to distinguish the difference between real and phony reform.

More important is to understand that even if “reforms” are passed exactly as we would hope and dream for, business as usual both economically and politically must end. Corporations cannot nor should not be in control of our politics and economics. We need real democracy – politically and economically. The economy as currently constituted is simply unsustainable. Other economic collapses are inevitable (“reforms” will only determine when and to what degree they will happen) given our money as debt-based economy and a system that has perfected making money by transforming natural resources into stuff into pollution and waste that is destroying economies and ecologies.

There are other ways that are well worth banking on.

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