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Financial Reform Endgame
The problem, not too surprisingly, lies in the Senate, and mainly, though not entirely, with Republicans. The House has already passed a fairly strong reform bill, more or less along the lines proposed by the Obama administration, and the Senate could probably do the same if it operated on the principle of majority rule. But it doesn't - and when you combine near-universal Republican opposition to serious reform with the wavering of some Democrats, prospects look bleak.
How did we get to this point? And should reform advocates accept the compromises that might yet produce some kind of bill?
Many opponents of the House version of banking reform present their position as one of principle. House Republicans, offering their alternative proposal, claimed that they would end banking excesses by introducing "market discipline" - basically, by promising not to rescue banks in the future.
But that's a fantasy. For one thing, governments always, when push comes to shove, end up rescuing key financial institutions in a crisis. And more broadly, relying on the magic of the market to keep banks safe has always been a path to disaster. Even Adam Smith knew that: he may have been the father of free-market economics, but he argued that bank regulation was as necessary as fire codes on urban buildings, and called for a ban on high-risk, high-interest lending, the 18th-century version of subprime. And the lesson has been confirmed again and again, from the Panic of 1873 to Iceland today.
I suspect that even Republicans, in their hearts, understand the need for real reform. But their strategy of opposing anything the Obama administration proposes, coupled with the lure of financial-industry dollars - back in December top Republican leaders huddled with bank lobbyists to coordinate their campaigns against reform - has trumped all other considerations.
That said, some Republicans might, just possibly, be persuaded to sign on to a much-weakened version of reform - in particular, one that eliminates a key plank of the Obama administration's proposals, the creation of a strong, independent agency protecting consumers. Should Democrats accept such a watered-down reform?
I say no.
There are times when even a highly imperfect reform is much better than nothing; this is very much the case for health care. But financial reform is different. An imperfect health care bill can be revised in the light of experience, and if Democrats pass the current plan there will be steady pressure to make it better. A weak financial reform, by contrast, wouldn't be tested until the next big crisis. All it would do is create a false sense of security and a fig leaf for politicians opposed to any serious action - then fail in the clinch.
Better, then, to take a stand, and put the enemies of reform on the spot. And by all means let's highlight the dispute over a proposed Consumer Financial Protection Agency.
There's no question that consumers need much better protection. The late Edward Gramlich - a Federal Reserve official who tried in vain to get Alan Greenspan to act against predatory lending - summarized the case perfectly back in 2007: "Why are the most risky loan products sold to the least sophisticated borrowers? The question answers itself - the least sophisticated borrowers are probably duped into taking these products."
Is it important that this protection be provided by an independent agency? It must be, or lobbyists wouldn't be campaigning so hard to prevent that agency's creation.
And it's not hard to see why. Some have argued that the job of protecting consumers can and should be done either by the Fed or - as in one compromise that at this point seems unlikely - by a unit within the Treasury Department. But remember, not that long ago Mr. Greenspan was Fed chairman and John Snow was Treasury secretary. Case closed. The only way consumers will be protected under future antiregulation administrations - and believe me, given the power of the financial lobby, there will be such administrations - is if there's an agency whose whole reason for being is to police bank abuses.
In summary, then, it's time to draw a line in the sand. No reform, coupled with a campaign to name and shame the people responsible, is better than a cosmetic reform that just covers up failure to act.
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30 Comments so far
Show AllSome have argued that the job of protecting consumers can and should be done either by the Fed...
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Greenspan and Bernanke are both criminals who should be in jail (which, by the way, is the best reform measure of all).
"The Case Against Greenspan and Bernanke"
http://www.informationclearinghouse.info/article24887.htm
I heard Obama tell Congress late last year "don't overregulate the banks..it will stifle innovation".
Its hard to agree when the author blames the Repubs more than the Dems when the chief Dem unequivocally admonishes Congress not to solve the problem.
And we now know, if we didn't then, that "innovation" is just a polite term for cooking the books.
Draw a line in the sand. Good for you Krugman. But where were you on health reform that leaves millions uncovered?
On banking reform. Bring back Glass-Steagall. Regulate hedge funds. Break up the "to big to fail" banks; nationalize them if necessary. Force banks to start lending at respectable rates. Tax investments and transactions. And that's just a start. banks have been very bad boys and need a big spanking.
Gary
“There's a way of transferring funds that is even faster than electronic banking. It's called marriage.”
-- James Holt McGavran
My bet is that there will be no significant financial reform. The democrats and republicans (particularly in the Senate) AND OBAMA are too closely tied to the financial oligarchs.
Consequently, WE WILL DEFINITELY SEE another financial collapse and another bailout.
Jim Shea
Mr. Krugman makes a good point in terms of the intention of financial reform. But he fails to make the deeper point.
He said: "The problem, not too surprisingly, lies in the Senate, and mainly, though not entirely, with Republicans. The House has already passed a fairly strong reform bill, more or less along the lines proposed by the Obama administration, and the Senate could probably do the same if it operated on the principle of majority rule."
It is not just that the Senate has a filibuster rule. The most-progressive 50 senators represent well over 50 percent of the American people—about 57 percent. So well under 50 Democratic Party senators still represent a majority of Americas. Whereas the current 41 Republican Senators represent only 166 congressional districts comprising only 38.2 percent of the American people.
Thus the underlying constitutional blueprint for our government, with current demographics, is one of the most disproportionate legislatures in the world among established democracies—one that favors conservatives. (And controls our Supreme Court.) To fix this and many other constitutional problems we need a constitutional convention and/or a set of amendments to fix such obvious problems.
Our nation has had only one national constitutional convention (1787) since our first Constitution was adopted in 1781. Meanwhile we've had 233 state conventions under the 1787 Constitution. It is time for a second national constitutional convention. This is the obvious point Krugman doesn't get—he fails to connect the dots between broken government and a flawed constitutional blueprint.
Word. But, this was done to give small states more power, not just conservatives. imo, Krugman might get it, but it's also another discussion. For example, we could take some power away from small states and have 2, 4, or 6 senators per state depending on population relative to other states - or strictly based on population. But, I don't think the small states would ever agree and you can't amend the constitution without a lot of them. I think 400+ reps is too many also. Meanwhile, we don't other things such as limiting the filibuster:
1. limit the # of times you can call for it per year.
2. make people actually do it, not just threaten it. Threatening it now works 100% of the time.
3. make the number 51 instead of 60 to override filibuster.
4. probably there are some other methods too..
Actually, this was done to give State governments a voice at the Federal level. Small states did benefit regardless of their population's political leanings. Originally, the House represented the people and the Senate represented the States. This worked as planned, until the 17th Amendment did an end-run around State's rights and put the control of both chambers in the hands of the people. Originally one of our checks and balances, it has been corrupted (as have all of the institutions our Founders left to us). It was another way to guard against the tyranny of the majority that was the beauty of the Constitution and the Republic that it founded.
The health care bill should be defeated, along with the Democrats who want it.
Elect pro single payer candidates, if they can be found, and the problems are solved.
No more half steps.
"Better, then, to take a stand, and put the enemies of reform on the spot."
Yeah right, with a president that approaches the very Republicans that Krugman talks about backwards with his pants and undies down holding his anlkes.
It's not going to be reformed because collapsing the economy is the plan.
"The problem, not too surprisingly, lies in the Senate, and mainly, though not entirely, with Republicans."
Well, at least we know that the problem isn't that the banking establishment has more power than the government.
Thanks, Mr Krugman, for letting us know that the bankers are innocent in all of this. Was that the point you were trying to make with all of your text?
...
"Some have argued that the job of protecting consumers can and should be done either by the Fed..."
Some have argued that the job of protecting Red Riding Hood can and should be done by that kindly looking old lady with the pointy tail sticking out of her skirt.
Endgame? Ha! They don't want a new agency because regulator capture is expensive, and if a new agency is created it may actually do something for about five years until enough people in key positions are bribed to make it another corporate-government schill.
The endgame comes with the next crash. In broad outline I think we should let them fail and then socialize the banking ssytem in its wake. Let's begin to think about how we would do that because what we know now is that our Congress is too corrupt to enact any meaningful reform and that banks will fail again. Oh maybe we should start by taking over the political system first and then socializing the banks.
Here's an even easier solution:
Bankster to a "least sophisticated borrower": 'Hey, I got this great investment. Short-term, high-yield. It's very complex, but it's a guarantee score.'
Least sophisticated borrower: 'No, thank you.'
See? Now, if said LSB instead says, 'Well, I don't understand this investment. But here's all of my money anyway,' then said LSB shouldn't be too upset when the investment tanks.
No amount of laws and oversight can cure a Greedism epidemic.
[No amount of laws and oversight can cure a Greedism epidemic.]
We have laws that ban murder. None of those laws has ever been proved to have prevented any murder, but we maintain them anyhow. Why bother?
We have laws that regulate the flow of traffic on the roads. When those laws are broken people die, or are badly injured. Yet if we were to repeal those traffic laws, people would still die and be badly injured.
And your point?
You seem to be arguing against yourself, and also using inept analogies.
For one thing, there are any number of people I would trust absolutely not to murder me, even if they knew they could get away with it. I cannot say the same about people I would trust with my wallet.
Of course we need regulations.
Your bad logic is showing! Because we have traffic laws, a lot less people die on the roads. If we had no traffic laws, a lot more people would be speeding, driving drunk,stoned,texting, eating,or even talking on the phone and lots more people would die. My logic says that if we had financial regulatons in place that had been enforced to the letter of the law that we would not have this financial fiasco. A couple posters have already pointed out the obvious; we can have all sorts of laws on the books but if they are not enforced, bad things happen.
You've restated my point.
I was pointing out the flaw of arguing that legislating against greed won't stop greed, to do that I gave a couple of examples...
[we can have all sorts of laws on the books but if they are not enforced, bad things happen.]
I agree.
for a nobel prize winner Krugman is AN IDIOT if he thinks that the Obama admin wants any true reform....
well - either an idiot or a LIAR...
which is it krugman?
You my friend took the words right out of my mouth.
Once again, Prof. Krugman is peddling reformist ("liberal") illusions. Says he: "The problem, not too surprisingly, lies in the Senate, and mainly, though not entirely, with Republicans . . . . it [is] important that this [consumer financial] protection be provided by an independent agency . . . ."
Why is the Senate problematic? Because the Senate, like the state apparatus generally, serves the dominant socioeconomic system called "capitalism"--a term that Prof. Krugman is afraid to use. (They don't give out Nobel Prizes in Economics to radicals, you know.)
Why is Krugman's advocacy of an "independent" agency to protect consumers against Big Finance a reformist illusion? --Because the "independent" agency would work for those it is supposed to police, just like the other "independent" agencies that have come down the political pike; such as the Federal Reserve, which Krugman admits is a handmaiden of Wall St.
Prof. Krugman wants us to believe that, with the right reform, This Time Will Be Different. --Haven't we heard something like that before?
Nowhere is it written in stone that the independent agency must or will "work for those it is supposed to police." True, regulatory capture is a danger meriting constant vigilance - and the big corporate players have enormous tenacity - but it is simply not true that independent federal agencies are condemned to fail. Early in their existence, the ICC, the FCC, the FTC, the NLRB, and the EEOC all helped level the proverbial playing field a bit, counterbalancing heavy handed corporate interests and excess in the general public interest.
Just because some (or most) of these federal agencies have been gutted from within or twisted grotesquely away from their original missions does not mean all are predestined to be similarly coopted.
Bill from Saginaw
Bill from Saginaw: Just because almost all swans are white doesn't mean that it is written in the sky that all swans must be white--so goes your first defense of Krugman. No, thanks, I'll place my bet on the white swan.
Your second defense proceeds by default of any analysis of the reasons why some regulatory agencies were somewhat effective in their infancies, but later reversed course to serve those they were supposed to police. The answer is a function of the balance of classes in the struggles of the day. In the 1930's, for example, there was massive popular discontent and considerable popular organization against the predations of big capital. Wounded, big capital in the USA gave a little in order to save a lot--as in Glass-Steagall. But as the class balance of forces/organization shifted, Glass-Steagall was removed at the behest of big capital. They who giveth, taketh back.
What eludes both you and your mentor (Krugman) is that the current balance of class forces is greatly stacked in favor of big capital. (Perhaps you have noticed that the situation for progressive change is so dismal that Ralph Nader is fantasizing that Only The Super-Rich Can Save Us.) Ergo, completely consistent with all class-historical experience, even if a nominally "good" bill were passed--say, the Volcker Rule--big capital would have its way, either through loopholes, nonenforcement, or eventual removal of any offending features.
Moral of the story: The big lie of reformism, which you and Krugman peddle, is that the political state apparatus is independent of the class/economic structure; such that fundamental improvement is just a matter of electing the right politician, or enacting the right reform.
Never worked that way. The historical record declares that, sooner or later, in one way or another, big capital gets its way. That's why the capitalist system is properly called the dictatorship of the bourgeoisie. That's why the corporate capitalist/imperialist elite is properly called our ruling class. That's why "liberal" Prof. Krugman refuses to use the word "capitalist" (or its cognates). That's why you peddle illusions when you pretend that "we" can keep capitalism and make it work for the noncapitalists too.
You might as well have your cake and eat it too--a very popular notion, I hear.
SOLODUFF: Were you asleep back in the good old days, before the demise of Glass-Steagall? Actually, that was the last gate that the children needed to open, so they could rip off the candy store! It didn't take long to get that ball rolling under the "mumbler", Allan Greenspan! Greenspan admitted that he was "shocked", at the result! Really!
The first gate the children crashed, was in the early 1980's, under Reagan. If you were awake back then, you might recall the "S&L Scandal", that soon followed! If you don't, you might look it up. I'm sure you will be shocked at some of the names that appear in that story!
There are three child proof gates needed: 1) in the home, to keep the little ones out of harms way, 2) the gates advocated for by Prof. Krugman, the House, and the Administration, and 3) the gates at the Gray Bar Hotel, for the children who think the rules are just for the other kids!
I think Paul Krugman makes a couple of good points here.
First, I like the distinction he draws on the old saw about the perfect being the enemy of the good. A mediocre, watered down health care reform bill is less dangerous in the long run than a mediocre, watered down bill ostensibly re-regulating the banks and Wall Street.
A half-assed, compromised baby step towards transition into a national health care system can be revisited in the next legislative term, and the next one after that, until eventually you get a real public option, or Medicare-for-All, or single payer, or whatever you personally define as the optimal system. But a half-assed, compromised baby step that gives merely the appearance of regulating the banksters simply guarantees they will loot and divert more and more funds out of the real economy until the next bubble of their own creation bursts, and the system crashes into crisis and bail out rip off again. I tend to agree with the distinction Krugman draws here (dreary and depressing as discussing the tactical ethics of habitual triangulation invariably turns out to be).
Second, Krugman is correct that setting up a genuine independent federal commission to police consumer rights in such areas as credit cards, small business loans, and residential mortgage servicing could have a major salutary long term impact. I speak here as one who has actually tried to utilize the existing "consumer remedies" through the Federal Reserve, the Office of the Comptroller of the Currency, and other esoteric existing federal administrative agencies. A big, big joke. Regulatory capture everywhere you look.
If that particular Obama administration proposal (for an independent consumer protection entity capable of confronting mega-banks and other big financial players) gets gutted from the financial regulatory "reform" package, then Congress passing nothing is actually better than Congress passing something that is pure fig leaf. The reason creation of such a Main Street friendly entity is so vociferously opposed by the Masters of the Universe who gave us all the great meltdown of 2008 is because big government can regulate big business (if the political will can be mustered to do so), and that's a very scary precedent to set if you've become used to making up all the rules as you go.
Bill from Saginaw
Read this:
"The Case Against Bernanke and Greenspan"
http://www.counterpunch.org/whitney03012010.html
When is Obamageddon going to prosecute the perp's Ben and Alan?
Why is the Hell did the Senate reconfirm Ben "the Burglar" Bernanke?
The system is completely corrupt.
to professor krugman: we need you or someone else to do a chart or graph. here is what information that i would like it to show: the thirty year progression (from reagan to obama) of certain trends in the economy. for example, 30 yars ago the dow jones index was at about 1000, a good baseline for measuring the value of capital. then, we could chart the progressive increase in the our national debt, again starting in 1980, when it was barely 1 trillion dollars. then, we need to look at the inflation rate since 1980, letting 1000 serve as the baseline for that, to see how many of today's dollars it takes to buy what one dollar could buy in 1980. now, to show the value of labor, add to the chart a line showing the increase in wages for blue collar labor and then a different line for increases in white collar pay. then, let's chart from 1980 to 2010 the effective tax rate on the top tenth of income earners in the u.s.a.; next, over the same time frame, let us chart changes in the percentage of the nation's financial wealth that the top tenth have held. and, finally, let's graph the annual changes in worker productivity from 1980 to the present. my posted comment above will tell you the hypothesis that i start with, which is really no surprise. but, a good graph maker could display the statistics so powerfully as to make the point about how and maybe why our economy is near shambles. i suppose we could also chart the changes over these same years in the percentage of federal taxes that come from corporations. how we could get all this into one graph, i have no idea.
since 1980, the value of capital has increased about 12 fold. the dow jones industrial average in 1980 was about 1000, and now it is 10400. i have added dividends to this part of the equation. ironical is the fact that over this same period, the federal government has increased its unpaid obligations, as we have seen the 1 trillion dollar national debt of 1980 swell to 12 trillion. yet, the value of labor has nowhere increased apace: blue collar wages have lagged inflation, diluting the value of unskilled labor; on the other hand, earnings of white collar workers did outpace inflation, but have in no wise approached the rate of growth that the value of capital has set. while the value of capital and national indebtedness rise together, so does the percentage of financial assets held by the wealthiest tenth of americans. furthermore, growing corporations now pay only about 8% of the treasury's receipts, down from 26% in 1954. inflation has held steady , averaging about 4% to 5% over the last 30 years, meaning that it takes $3300 dollars today to buy what $1000 would buy in 1980. yet, both the national debt and the value of capital have grown at about three times the rate of inflation, despite the warnings traditional economists have often posed about the inflationary effect of both federal overspending and the accumulation of speculative wealth. these increases dwarf inflation, which in its turn dilutes the real wages of blue collar workers to historic lows. yet, the tax rates on the top 10% have fallen dramatically since 1980, and that tenth has converted its tax windfall into an ever larger share of the country's financial assets; at the same time, growing international corporations shoulder less of the country's tax burden. so, i tentatively conclude that the top 10% have harvested massive tax savings since 1980, transplanted them into the securities' markets, in which they more than trebled their wealth in real dollars. investments into sectors that could have raised the wages and job opportunities for unskilled labor lagged as a consequence, widening the wealth disparity between the blue collar laborer and the investment class. their national identities fading, corporations internationalized, their duties narrowed to those of enlarging shareholders' return on capital, the top tenth of whom held 90% of the value of all securities. many who had equated corporatism with patriotism became disabused of that notion, though others still see their fondness for all things corporate as a sign of their own patriotism. so, what do we have here, in sum? perhaps it's something close to what marx predicted when he wrote that such intense internationalization of finance capitalism, when mixed with the american brand of imperialism, augurs capitalism's last stage. we'll see.
It will be prolonged for ever and a day ...
http://www.worldreports.org/news/273_s.e.c._phantom_shares_fraud_new_intelligence