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.

If we want to fix the banking system, we have to break up the banks into smaller firms that can fail without wreaking havoc on the economy. The current bill would not break up the banks, but Sens. Sherrod Brown (D-OH) and Ted Kaufman (D-DE) have introduced an excellent amendment that would do just that.

Keep it simple

Writing for The American Prospect, economist Robert Johnson proposes a few other critical changes. In principle, banking is not a terribly complicated business—you borrow money at low interest rates, lend it out at higher interest rates, and keep the difference as profit. But Wall Street has grown very powerful by injecting needless complexity into the business, everywhere from consumer credit cards to derivatives and securities.

Complexity makes it easier for banks to overcharge their customers—it’s no accident that the fine print on your credit card agreements are next to impossible to decipher. It also makes it harder for regulators to identify and crack down on abuses, or recognize risks to the economy.

Congress can counter this willful deception by imposing straightforward, loophole-free consumer protections, like a cap on interest rates, and by standardizing financial contracts between banks and requiring them to be traded openly on transparent exchanges. Yes, bank profitability will take a hit, but our economy will be safer.

Close derivatives loopholes

Over-the-counter derivatives are a prime example of unnecessary complications. This market is enormously abusive—the alleged Goldman Sachs fraud occurred here—and nearly all of it is unregulated. As I emphasize for AlterNet, Sen. Blanche Lincoln (D-AR) authored a great bill reining in the sector, but a few key elements of her proposal were thrown out last week when her bill was combined with a weaker bill from Sen. Chris Dodd (D-CT).

Lincoln’s bill gave both courts and regulators expansive powers to enforce new rules reining in the derivatives market. But the new Dodd-Lincoln mash-up jettisons much of that language, blocking regulators from bringing legal actions against banks that violate the rules, and explicitly declaring that even illegal trades are still valid. Even though the trades are illegal, banks can still collect on them as if they were perfectly acceptable. These provisions take a lot of wind out of the reforms—if the new regulations cannot be effectively enforced, there’s no point in having them at all.

In a piece for The Washington Independent, Annie Lowry highlights a clever deception from the bank lobby on derivatives reform. 90 per cent of the derivatives market consists of financial firms placing bets with other financial firms. About 10 percent of the market consists of non-financial companies hedging against legitimate risk—airlines protecting themselves against an increase in the price of fuel, for instance. But the U.S. Chamber of Commerce and the bank lobby have been deploying some of these legitimate “end users” to fight reform, arguing that it will increase their cost of doing business.

As Lowry notes, there is no reason for end-users to be worried. They’re exempted from the reforms. What’s more, if they are not exempted from the regulations, these end users they might actually benefit from lower prices established by increased transparency.

Fighting Fraud

Christopher Hayes notes for The Nation, financial reform isn’t the only battle to be waged for a fair economy. Much of the banking system is built on outright fraud:

The earliest chronicles of the meltdown tended to portray it as a tale of groupthink and mania, of hubris and shortsightedness: all these smart people got it wrong! And while that’s certainly true for many, it grows clearer by the day that a lot of people on Wall Street realized early on that the entire enterprise was headed for a crash and responded by smashing and grabbing all they could carry.

Holding Wall Street accountable doesn’t just mean implementing better, safer rules of the road. It also means prosecuting those who violated even the lax rules during the heyday of the housing bubble.

Lest we forget, our economy is still struggling to recover from Wall Street’s mess. In a piece for In These Times, David Moberg chronicles the horrific toll of unaffordable mortgages. The problem is no longer limited to subprime loans—as home prices continue to slip and unemployment remains near triple-digits, more and more borrowers find themselves on the brink.

There are several good options for averting foreclosures, as Moberg notes. Congress could create a new agency that buys up mortgages at their current market rate and modifies them for borrowers. Since plunging home values have reduced the value of the mortgage, this plan would force banks to take a loss, and then remove them from the negotiation process to prevent them from further abusing borrowers.

Second, Congress can also change the bankruptcy laws to allow judges to modify mortgages for borrowers. Unlike every other form of credit, mortgage debt is currently excluded from bankruptcy, meaning that even if borrowers file for it, they cannot get relief on their mortgages. Third, Congress can require banks to allow troubled borrowers to rent their homes at a market rate for at least five years. Banks don’t want to be landlords, so this plan would give borrowers greater leverage over banks that are reluctant to modify their loans.

Any of these policies would work. But Congress has been reluctant to act, even in the face of millions of foreclosures, and the Obama administration has not pressed them on it. There is a remarkable disparity between the plight of borrowers and big banks. Banks and borrowers alike were hit hard by the housing downturn, but when big banks needed help, it came fast and furious. Borrowers are still waiting.

As Moberg emphasizes, the government did not ignore troubled homeowners in prior crises. During the Great Depression, we bought up millions of loans through the Home Owners Loan Corp., and ultimately turned a profit on the effort.

Wall Street reform is critical and necessary. Nothing about it will make the financial elite happy—they’ve prospered on the outrages embedded in the current system, and they are not going to give them up without a fight. If Congress is going to help homeowners, it’s going to take strong leadership from Obama and a willingness to go after the bank lobby head-on. Let’s hope they’ve got the will to do it. The future of American prosperity is at stake.

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The stimulus package may be an absolutely essential step for fending off economic catastrophe, but it does nothing to overhaul the deeply flawed structure of our economic system. “In unleashing a flood of deficit spending and avoiding tax increases, the legislation didn’t threaten moneyed interests, didn’t alter the existing economic topography, and therefore didn’t attract the withering hostility from business groups that typically prevents ‘hope’ from becoming ‘change,’” David Sirota writes for Salon.

The Obama team seems to be considering nationalizing big, troubled banks temporarily, a prospect which was politically unthinkable just a few weeks back. Progressives have been pushing nationalization hard and it seems to be working. Several Republican Senators are supporting the idea, as temporary nationalization is already government policy for smaller banks that don’t employ massive lobbying teams.

But getting Obama and Treasury Secretary Timothy Geithner on board is only half the battle. In a piece for The Nation, Thomas Ferguson and Robert Johnson detail how hedge funds and private equity firms hope to capitalize on a big bank nationalization policy by using political clout to score unfairly cheap prices from the government.

“Much of the wind in the sails of this new push comes from private equity firms like KKR, Blackstone, or their political allies, mostly, though not entirely within the Republican Party,” Ferguson and Johnson write.

When the government nationalized troubled banks with the Resolution Trust Corp. under President George H.W. Bush, politically connected investors made out like bandits when the government resold the banks into the private sector. It is important that this corruption not be repeated. We don’t tolerate our politicians doing favors for wealthy constituents, and we shouldn’t allow our financial regulators to do so either.

The current recession has roots in excessive consumer debt—some of it predatory, some of it spawned by consumerism run amok. U.S. economic well-being has depended on destructive and environmentally unsustainable spending habits of its citizens for too long. Writing for In These Times, Terry Allen notes that “our own addiction to consumerism and failure to save tie us to debt and stress.” While consumer spending kept the economy from crashing until last year, it was very bad for individual households.

Over at The American Prospect, Matthew Yglesias discusses the global implications of lower levels of U.S. consumption. As the U.S. consumes less product, there will be major consequences for economies that rely on U.S. demand. Yglesias emphasizes that the current downturn is fully global, unlike every U.S. recession since the Great Depression. Potential solutions will have to involve coordinating policy responses with other countries to ensure that everyone is shouldering the stimulus load—and to help everyone adjust to an era in which U.S. consumers buy less stuff.

As Nomi Prins explains in Mother Jones, Wall Street bankers have always had a knack for bestowing lavish compensation upon themselves. Bonuses are routinely based on ill-conceived criteria that focus on short-term gains and create unnecessary risk. The key reforms, Prins says, do not merely involve capping executive compensation for bailed-out firms, but regulating bonus compensation and imposing heavy taxes on it in both good times and bad.

In recent years, Wall Street has dealt homeowners an absolutely devastating blow with various exotic mortgage schemes, but another major housing crisis is now looming for renters. Despite an overabundance of sprawling suburban developments, U.S. cities are facing a dramatic shortage of affordable rental housing. As hard as the economic crisis is for homeowners, those who rent in urban areas are being hit even harder. Many renters who cannot afford to buy a home under still face housing hardships today.

In the below video for American News Project, Garland McLaurin and Mike Fritz reveal the dire straits currently facing federal affordable housing programs. The Department of Housing and Urban Development, known as HUD, received a significant funding boost under Obama’s economic stimulus package—its $40.4 billion 2009 budget was supplemented by $13.6 billion. But thanks to years of neglect and political cronyism under the Bush administration, HUD housing units have a backlog of at least $22 billion in needed repairs, which severely hinders HUD’s ability to expand operations.

And the number of affordable rental housing units falls well short of what is needed. McLaurin and Fritz highlight Baltimore in their video, a city that has roughly 30,000 subsidized housing spaces, but will require 60,000 more to built in order to meet the city’s needs.

The proliferation of subprime mortgages was one of the chief drivers of the foreclosure epidemic. They seem absurd in retrospect. Lenders charged people with relatively weak credit scores higher interest rates to counter the risk in making loans to people with bad credit. But since credit scores are fairly closely linked to income level, lenders were essentially charging people with less money more than they would have charged an ordinary borrower. Not surprisingly, that business model is now completely destroyed.

But, as Daniel Fireside reveals in Yes! Magazine, there is a more effective way to expand access to homeownership, one that relies on charging—shock!—less for homes. Several U.S. cities now make use of non-profit land trusts to lower the costs of homeownership.

Here’s how it works: The land trust purchases a swath of property and builds housing on it if none already exists. The trust then sells homes to new homeowners, but does not sell the underlying land. The trust negotiates mortgages with banks on behalf of low-income borrowers. By using the land equity as part of the mortgage calculation, the necessary down payment is dramatically reduced. As a result, the home never falls into the hands of real estate speculators and the cost of owning a home falls by around 25%. If borrowers ever run into trouble on their loan, the trust works with them and the bank to fend off foreclosure. Land trusts feature foreclosure rates 30 times—not 30 percent, 30 times—lower than the national average.

Each of these initiatives is absolutely essential and will, unfortunately, involve brutal policy battles. Many people make a lot of money from the status quo. Let’s hope Obama has the political clout to tell corporate opportunists that the times are a-changing.

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