Posts tagged with 'bank bailout'
Weekly Audit: Will Obama Squander Wall Street Success By Gambling On Social Security?
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by Zach Carter, TMC Blogger
After nearly a year of debating and haggling, Congress is finally about to take a modest, positive step forward with its bill to overhaul Wall Street. But by readying social security cuts and tax breaks for big corporations, the Obama administration is setting up an economic disaster that could have been crafted by President George W. Bush. It’s a political nightmare for the Democratic Party.
How did we get here?
While the road to our current economic mess has been three decades in the making, we know how we got here. Washington pushed policies that favored short-term Wall Street profits over the living standards of our citizens, eroding the middle class and destabilizing our entire financial system in the process.
As University of Texas economist James K. Galbraith explains for AlterNet, this strategy is enshrined in the ideology of mainstream U.S. economists, who simply refuse to acknowledge the existence of financial fraud. Economists’ blind faith in the power of markets is so strong that they cannot envision market systems in which the rules are systematically broken for profit on a massive scale. That is what happened in the savings and loan crisis, and it is what happened in the years leading up to the Great Financial Crash of 2008. (more…)
Weekly Audit: Wall Street Goes to the Movies
by Zach Carter, Media Consortium blogger
Last week, the U.S. Senate rejected a plan that would have broken up the nation’s six largest banks firms into firms that could fail without wreaking havoc on the economy. Even though the defeat reinforces Wall Street’s political dominance, there is still room for a handful of other useful reforms, like banning banks from gambling with taxpayer money and protecting consumers from banker abuses. After looting our houses, banks are now pushing for the ability to bet on movie box-office receipts, and will keep trying to financialize anything they can unless Congress acts.
Wall Street calls the shots
Writing for The Nation, John Nichols details last week’s Capitol Hill damage. Today’s financial oligarchy, in which a handful of bigwig bankers and their lobbyists are able to write regulations and evade rules they don’t like, will still be in place after the Wall Street reform bill is passed. The lesson is clear, as Nichols notes:
Whatever the final form of federal financial services reform legislation, one thing is now certain: The biggest of the big banks will still be calling the shots.
Still worth fighting for
As I emphasize for AlterNet, Congress has made a terrible mistake here, but there is still room for reform. It took President Franklin Delano Roosevelt seven years to enact his New Deal banking laws. It took even longer to reshape public opinion of monopolies when President Theodore Roosevelt took on Corporate America in the early 1900s.
What’s still worth fighting for? We have to curb the derivatives market—the multi-trillion-dollar casino that destroyed AIG. We have to impose a strong version of the Volcker Rule, which would ban banks from engaging in speculative trading for their own accounts. We have to change the way the Federal Reserve does business and force the government’s most secretive bailout engine to operate in the open. And we have to establish a strong, independent Consumer Financial Protection Agency to ensure that the horrific subprime mortgage abuses are not repeated.
As Nomi Prins details for The American Prospect, the current reform bill will not effectively deal with the dangers posed by hedge funds and private equity firms—companies that partnered with banks to blow up the economy through investments in subprime mortgages. That means that whatever happens with the current bill, Congress must again take action next year to rein in other financial sector excesses.
The derivatives casino at the movies
As Nick Baumann demonstrates for Mother Jones, banks are doing everything they can to gobble up other productive elements of the economy. The economy crashed in 2008 in large part because banks had used the derivatives market to place trillions of dollars in speculative bets on the housing market. This wasn’t lending, it was pure gambling: Instead of using poker chips, bankers placed their bets with derivatives. But, as Baumann emphasizes, banks are now looking to expand the sort of thing they can make derivatives gambles with. The latest proposal is to allow banks to bet on the box office success of movies. That’s right, banks would be gambling on movies.
Hollywood may be shallow, but it isn’t stupid. It doesn’t want to see the banking industry repeat its destructive looting of the housing industry on the movie business, and is pushing hard to ban banks from betting on movies. But we can’t count on every industry having a powerful lobby group to counter every assault from the banking system.
Taking stock in schools
Consider the unsettling report by Juan Gonzales of Democracy Now!. Gonzales details how big banks gamed the charter school system to score huge profits while simultaneously saddling taxpayers with massive debts that make teaching kids supremely difficult. By exploiting multiple federal tax credits, banks that invest in charter schools have been able to double their money in seven years—no small feat in the investing world—while schools have seen their rents skyrocket. One school in Albany, N.Y. saw its rent jump from $170,000 to $500,000 in a single year.
About that unemployment rate…
It’s not like public schools are flush with cash right now. The $330,000 increase in rent could pay the salaries of more than a few teachers. As the recession sparked by big bank excess grinds on, even the good news is pretty hard to swallow. As David Moberg emphasizes for Working In These Times, the economy added 290,000 jobs in April, but the unemployment rate actually climbed from 9.7 percent to 9.9 percent in March. That’s because the unemployment rate only counts workers who are actively seeking a job—if you want a job but haven’t found one for so long that you give up, you’re not technically “unemployed.” All of those “new” workers are driving the official figures up.
In other words, it’s still rough out there. And likely to stay rough as state governments try to deal with the lost tax revenue from plunging home values and mass layoffs. Nearly half of all unemployed people in the U.S. have been out of a job for six months or more. And while we’d be much worse off without Obama’s economic stimulus package, that percentage is likely to grow this year, Moberg notes.
This is what unrestrained banking behemoths do. They book big profits and bonuses for themselves, regardless of the consequences for the rest of the economy. Congress absolutely must impose serious financial reform this year. After the November election, breaking up the banks must once again be on the agenda when Congress considers the future fate of hedge funds, private equity firms, Fannie Mae and Freddie Mac. If we don’t rein in Wall Street, banks will continue to wreak havoc on our homes, our jobs and even our schools. Congress must act.
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.
Weekly Audit: Wall Street Reform, Financial Fraud, and Foreclosures
by Zach Carter, Media Consortium blogger
Last week, Senate Democrats broke the Republican filibuster on Wall Street reform. This week, Senators are introducing key amendments to strengthen the bill. While the current legislation is not strong enough to seriously curtail Wall Street abuses, all hope is not lost: A mere handful of amendments could make reform a reality. Unwinding the excesses of the Bush-era economy will require tough new rules on the nation’s largest banks. It will also require aggressive prosecution of fraud, and a serious new plan for helping homeowners in distress.
Ending too-big-to-fail
As Sen. Bernie Sanders (I-VT) emphasizes in an interview with GRITtv’s Laura Flanders , the four largest U.S. financial institutions have more than $7 trillion in assets—that’s over half the size of the entire U.S. economy. With that kind of political and economic muscle, banks can influence just about any financial reform that makes it through Congress simply by intimidating the regulators who try to implement them. (more…)
Weekly Audit: How Deregulation Fueled Goldman Sachs’ Scam
by Zach Carter, Media Consortium blogger
Last week, the Securities and Exchange Commission filed fraud charges against Goldman Sachs and underscored what most Americans have believed for some time: Wall Street has rigged the economy in its own favor, and will stop at nothing—not even outright theft—to boost its profits. What’s worse, Goldman’s scam could have been completely prevented by better regulations and law enforcement.
Goldman’s heist
Let’s be clear. “Financial fraud” means “theft.” Goldman Sachs sold investors securities that were stocked with subprime mortgages and had been cherry-picked by a hedge fund manager named John Paulson. Paulson believed these mortgages were about to go bust, so he helped Goldman Sachs concoct the securities so that he could bet against them himself.
Goldman Sachs, like Paulson, also bet against the securities. But when Goldman sold the securities to investors, it didn’t tell them that Paulson had devised the securities, or that he was betting on their failure. By withholding crucial information from investors, Goldman directly profited from the scam at the expense of its own clients. If ordinary citizens did what the SEC’s alleges Goldman did, we’d call it stealing. (more…)
Weekly Audit: Congress to take up financial reform, but will it be strong enough?
by Zach Carter, Media Consortium blogger
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.
Weekly Audit: The GOP Hates Jobs
By Zach Carter, Media Consortium blogger
Through inaction and timid legislative negotiations, Congress just keeps letting the U.S. sink deeper and deeper into the economic abyss. Last week, Congress denied relief to the jobless and is currently poised to undercut a proposal that would rein in predatory lending. With unemployment out of control and banks pillaging citizens’ pocketbooks at every turn, the economy is in dire need of serious financial reform and a major jobs package.
More than one million have lost unemployment benefits
As James Ridgeway emphasizes for Mother Jones, over a million people receiving unemployment benefits ran out of financial rope on March 1 thanks to Sen. Jim Bunning’s (R-KY) self-righteousness. As a result of bizarre Senate procedural rules, Bunning’s sole “no” vote was enough to stop a bill that would have extended unemployment benefits for those who are out of work. Of course, Bunning had plenty of moral support from his fellow Republicans. Ridgeway highlights a Think Progress post on Rep. Dean Heller’s (R-NV) preposterous argument that it is time for the government to cut off unemployment benefits, since there are so many bums. (more…)
Weekly Audit: Don’t Let Citizens United Wreck Our Economy
By Zach Carter, Media Consortium Blogger
In a landmark decision last week, the Supreme Court ruled that corporations could spend unlimited funds to influence American elections, overturning a century of legal precedent. The Court’s ruling in Citizens United v. FEC undermines the integrity of the U.S. government, as President Barack Obama emphasized at his State of the Union address. But the decision also deals a damaging blow to the U.S. economy by encouraging lawmakers to write economic rules that benefit specific companies at the expense of everyone else.
The editors of The Nation lay out the High Court’s hubris in no uncertain terms:
The Citizens United campaign finance decision by Chief Justice John Roberts and a Supreme Court majority of conservative judicial activists is a dramatic assault on American democracy, overturning more than a century of precedent in order to give corporations the ultimate authority over elections and governing. This decision tips the balance against active citizenship and the rule of law by making it possible for the nation’s most powerful economic interests to manipulate not just individual politicians and electoral contests but political discourse itself. (more…)
Weekly Audit: Crashing the Corporate Christmas Party
By Zach Carter, Media Consortium Blogger
While Wall Street will ring in the new year with huge bonuses and taxpayer-fueled profits, there is little holiday cheer for the workers whose tax dollars funded the bank bailouts. Although bank stock prices have soared for most of the year, the unemployment rate has steadily climbed and the foreclosure crisis has swelled to epic proportions.
Nomi Prins details the disconnect between Wall Street and the rest of us for AlterNet. The government’s massive giveaways to big banks did not stop with the $700 billion Troubled Asset Relief Program. In fact, earlier this month, the Internal Revenue Service granted Citigroup a $38 billion tax break for, well, nothing. Like every other financial boon the Treasury and the Federal Reserve have granted banks since 2008, this special holiday gift will help boost Citigroup’s profits, but does little to boost lending to small businesses, lower credit card interest rates or help struggling borrowers stay in their homes. (more…)
Weekly Audit: Stop Wall Street’s Economic Rampage
By Zach Carter, TMC Blogger
Over the past year, Wall Street’s excess has helped push the unemployment rate to epic levels and created millions of foreclosures. Yet the rules of the financial road remain unchanged. As 2009 draws to a close, it’s astonishing that so little progress towards financial reform has been made.
President Obama, Congress and federal regulators have not been tough enough on the nation’s financial elite. As Monika Bauerlein and Clara Jeffery emphasize for Mother Jones, the government has committed about $14 trillion in bailout funds to save the banking system without demanding much of anything in return. Goldman Sachs and other big banks are now planning to pay giant bonuses that come straight from taxpayer giveaways rather than invest that money in socially constructive banking.
“Bankers aren’t being rewarded for pulling the economy out of the doldrums,” Bauerlein and Jeffery write. “Nope, they’re simply skimming from the trillions we’ve shoveled at them.”
The major banks are even spending our bailout money to lobby against reform. When President Obama called a meeting for leaders of the nation’s largest banks to scold them for their lobbying, the heads of Morgan Stanley, Goldman Sachs and Citigroup didn’t even bother to show up, as Matthew Rothschild describes in a podcast for The Progressive.
It’s easy to see why the bank execs are so indifferent, Rothschild argues, even to the president. Now that almost all of these banks have repaid the loans they received under the Troubled Asset Relief Program (TARP), Obama has no negotiating leverage and the bankers know it. Even though it represents just a tiny fraction of the $14 trillion bailout, TARP was the only program that attached any strings to that money. Prior to those TARP repayments, Obama could have demanded that banks do more lending to help the economy, work harder to keep troubled borrowers in their homes—or face executive compensation restrictions or other penalties.
And many of the same regulators who helped bring about today’s economic disaster are still in power. As Sen. Bernie Sanders (I-VT) explains for Brave New Films (video below), Federal Reserve Chairman Ben Bernanke blew just about every major policy decision he faced in the years leading up to the crisis. Bernanke, who was recently named person of the year by Time magazine, failed to rein in reckless mortgage speculation, predatory lending or excessive compensation packages. Nevertheless, President Obama has appointed him to another term.
“This recession was precipitated by the greed, recklessness and illegal behavior on Wall Street,” Sanders says. “One of the key responsibilities of the Fed is to maintain the safety and soundness of our financial institutions … The Fed was asleep at the wheel, Bernanke did not do the job.”
Sanders notes that even Bernanke’s financial clean-up operations have been deeply flawed. Bernanke has helped make today’s too-big-to-fail banks even bigger. If we want to stop the lobbying and policy deference that politicians grant to Wall Street, we have to break up the biggest banks into smaller firms that do not endanger the economy if they fail.
Bernanke is not the only holdover from the Bush administration that wields significant economic power under Obama. As I note in a piece for The Nation, John Dugan, the top bank regulator appointed by President George W. Bush, remains in office today, despite failing to ensure the financial health of our largest banks and actively working to undermine consumer protection.
Campaign contributions from the bank lobby will not be enough to counter the voter outrage that President Obama and members of Congress are facing, nor should they. If our leaders want a serious shot at re-election, they need to recognize the need for significant change on Wall Street. That means breaking up the big banks and setting economic policy that helps all of our citizens, not just financiers.
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.
Weekly Audit: House Bank Bill Fatally Flawed
By Zach Carter, Media Consortium Blogger
Last week, the House of Representatives finally approved a financial regulatory overhaul and President Barack Obama announced a new initiative to address the unemployment crisis. Both are a step in the right direction, but neither offer effective solutions to problems that still plague the U.S. economy.
The House bill doesn’t do away with too-big-to-fail banks and that’s a big problem. As John Nichols explains for The Nation, “the big banks aren’t going to get sidelined—let alone broken up—anytime soon.” Instead of splitting large, risky banks into smaller firms that could fail without wreaking economic havoc, the House bill gives regulators more power, including the ability to bail out a faltering bank with billions of taxpayer dollars. When push comes to shove, regulators are not going to risk letting a major bank fail. They’ll just bail the company out. We all saw what happened when Lehman Brothers collapsed last year.
By imposing a tougher set of rules on banks, it’s conceivable that regulators could prevent some future failures. But as Mary Kane notes for The Washington Independent, Congress carved so many loopholes in the new laws that banks will have little trouble skirting them.
Obama had hoped to create a new Consumer Financial Protection Agency (CFPA) to crack down on predatory lending, but a coalition of bank-friendly Democrats pushed through amendments that significantly weaken it. Obama wanted states to have the power to enforce stronger rules on predatory lending. Under a loophole that Rep. Melissa Bean (D-IL) pressed into the House bill, states are prevented from writing or enforcing rules that limit interest rates charged by credit card companies and payday lenders. That’s a really destructive move, Kane notes, since it was state regulators, not federal regulators, who cracked down on abusive lending over the past decade.
Obama also hoped to require that risky derivatives transactions would be conducted via exchange like ordinary stock trades. Derivatives are the type of trades that brought down AIG. But the House bill exempts a huge portion of transactions from this requirement and changes the definition of “exchange” to include private, unregulated derivatives trades, as Nick Baumann explains for Mother Jones. This is a fatal flaw in the regulatory overhaul. Derivatives are the primary technique that banks use to make themselves too-big-to-fail. Over 95% of the $290 trillion derivatives market is housed at just five banks. These derivatives tie the bank to other financial firms in a complicated web of risk that is impossible for regulators to navigate. If one of those five banks goes down, there’s no way a regulator can predict the consequences.
The only hope for meaningful reform right now rests in the Senate, which is considering a much tougher bill than what the House approved. But the Senate has yet to even conduct mark-up hearings on its legislation and the pressure from the banking lobby is going to be enormous. Progressives have to keep pushing for a better bill if we want to protect our economy from the abuses that brought on the current recession.
And while huge federal bailouts for banking giants like Citigroup and Bank of America have helped the financial sector recover, the broader economy is battling the highest unemployment levels since the early Reagan era. Things are poised to get a lot worse. As Daniela Perdomo emphasizes for AlterNet, a full 3.2 million workers will lose their unemployment benefits by the end of March 2010. Even if the unemployment rate stays where it is—and Perdomo notes that a vast majority of experts think its going to go higher—the impact on ordinary people is going to be even more severe than today’s nightmare.
In a blog post for Working In These Times, Roger Bybee highlights a piece by Harvard University Law School Professor Elizabeth Warren, who emphasizes the hardships faced by ordinary families. The statistics are grim—one-eighth of Americans are on food stamps, one-eighth cannot pay their mortgages and 120,000 families are filing for bankruptcy every month.
We need to take serious steps to get people back to work. Mass unemployment means that consumers don’t spend money, which means that companies don’t sell as much, which makes companies lay off more workers to cut costs. It’s a self-reinforcing cycle. The market can’t fix unemployment without help.
So Obama’s Dec. 8 speech announcing a new job-creation plan was a welcome event. But the concrete aspects of Obama’s plan are not effective. All the tax cuts in the world won’t necessarily put people back to work. Obama did endorse a public jobs plan which involved the government hiring people to improve the nation’s infrastructure and clean up communities ravaged by the economic crisis, but he shied away from any specific numbers.
As David Roberts explains for Grist, Obama’s willingness to sign off on a $23 billion program for environmentally friendly home renovations is a step in the right direction. The plan is being referred to as “cash-for-caulkers” and is modeled on the very successful cash-for-clunkers program. The government will pay people to increase the energy efficiency of their homes, helping people cut down on utility bills and increasing the demand for construction labor and products like new windows and doors. It’s a good idea. But if all we get are tax cuts and $23 billion for greener homes, the jobs bill is not going to assuage the unemployment crisis.
There is no reason to be concerned about the cost of a thorough jobs program. Taxpayers committed trillions of dollars to help the financial sector weather the economic storm. Anybody who is worked up about the prospect of spending money on jobs should read Amitabh Pal’s piece for The Progressive. A modest tax on speculative trades of stock and derivatives could easily raise $150 billion a year to finance a robust jobs program.
At this point in the economic downturn, the government needs to take much stronger steps to rein in Wall Street and create jobs. We know what needs to be done to protect the economy from risky banking and we can afford to fix the unemployment crisis. All we need is the political will.
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.