Subscribe to Common Dreams News Updates
Most Popular This Week
Popular content
Today's Top News
Obama’s Regulatory Brain
The most important thing to know about the 1,500-page financial reform bill passed by the Senate last week -- now on he way to being reconciled with the House bill -- is that it's regulatory. If does nothing to change the structure of Wall Street.
The bill omits two critical ideas for changing the structure of Wall Street's biggest banks so they won't cause more trouble in the future, and leaves a third idea in limbo. The White House doesn't support any of them.
First, although the Senate bill seeks to avoid the "too big to fail" problem by pushing failing banks into an "orderly" bankruptcy-type process, this regulatory approach isn't enough. The Senate roundly rejected an amendment that would have broken up the biggest banks by imposing caps on the deposits they could hold and their capital assets.
You do not have to be an algorithm-wielding Wall Street whiz-kid to understand that the best way to prevent a bank from becoming too big to fail is preventing it from becoming too big in the first place. The size of Wall Street's five giants already equals a large percentage of America's gross domestic product.
That makes them too big to fail almost by definition, because if one or two get into trouble -- as they did in 2008 -- their demise would shake the foundations of the financial system, even if there were an "orderly" way to liquidate them. Because traders and investors know they are too big to fail, these banks have a huge competitive advantage over smaller banks.
Another crucial provision left out of the Senate bill would be to change the structure of banking by resurrecting the Depression-era Glass-Steagall Act and force banks to separate commercial banking (the classic function of connecting lenders to borrowers) from investment banking.
Here, too, the bill takes a regulatory approach instead. It includes a provision barring banks from "proprietary trading," or making market bets with their own capital. Even if this regulation were tough enough (and the current Senate bill requires various delays and studies before it's applied), it would not erode the giant banks' monopoly over derivatives trading, adding to their power and inevitable "too big to fail" status.
Which brings us to the third structural idea, advanced by Senator Blanche Lincoln. She would force the banks to do their derivative trades in entities separate from their commercial banking.
This measure is still in the bill, but is on life-support after Paul Volcker, Tim Geithner, and Fed chair Ben Bernanke came out against it. Republicans hate it. The biggest banks detest it. Virtually every major Wall Street and business lobbyist has its guns trained on it. Almost no one in Washington believes it will survive the upcoming conference committee.
But it's critical. For years the big banks have relied on taxpayer-funded deposit insurance to backstop their lucrative derivative businesses. Obviously they want the subsidy to continue. Bernanke argues that "depository institutions use derivatives to help mitigate the risks of their normal banking activities." True, but irrelevant. Lincoln's measure would allow banks to continue to use derivatives. They just could not rely on their government-insured deposits for the capital.
Requiring banks to do derivative trading in separate entities would force them to raise extra capital. But if such trading is so useful, banks should foot the bill, not taxpayers. Bernanke and others say the measure would give foreign banks a competitive advantage. Even if he is right, since when is it up to taxpayers to guarantee profitability at America's largest banks relative to foreign ones?
The trading of derivatives is not so crucial to the US economy that taxpayers should subsidize the practice. If the past two years have taught us anything, the lesson is just the opposite. Derivatives can generate huge risks unless carefully regulated.
Wall Street's lobbyists have fought tooth and nail against these three ideas because all would change the structure of America's biggest banks. The lobbyists won on the first two, and the Street has signaled its willingness to accept the Dodd bill, without Lincoln's measure.
The interesting question is why the president, who says he wants to get "tough" on banks, has also turned his back on changing the structure of American banks -- opting for a regulatory approach instead.
It's almost exactly like health care reform. Ideas for changing the structure of the health-care industry -- a single payer, Medicare for all, even a so-called "public option" -- were all jettisoned by the White House in favor of a complex set of regulations that left the old system of private for-profit health insurers in place. The final health care act doesn't even remove the exemption of private insurers from the nation's antitrust laws.
Regulations don't work if the underlying structure of an industry -- be it banking or health care -- got us into trouble in the first place. Wall Street's big banks are just too big, and their ability to draw on commercial deposits for investment banking activities, including derivatives, will make them even bigger. It will also subject the economy to greater and greater risks in the future. No amount of regulation can cure that.
Similarly, the underlying system of private for-profit health insurance is a key driver of America's bloated and ineffective health care delivery. We can try to regulate it like mad, but no amount of regulation will cure this fundamental problem.
A regulatory rather than structural approach to deep-seated problems in complex industries like banking and health care is also vulnerable to the inevitable erosion that occurs when industry lobbyists insert themselves into the regulatory process. Tiny loopholes get larger. Delays get longer. Legislative words are warped and distorted to mean what industry wants them to mean.
Both Senate and House financial reform bills exempt "customized" derivatives from the exchanges, for example, but leave it to regulators to define what contracts will be excused. Yet many of the derivatives that caused the most trouble (read: Goldman Sachs and other banks' deals with AIG) might well be thought of as customized. Another potential problem: in assigning consumer protection to the Fed, the bill puts it under Fed chiefs who in the past displayed a patent disregard of such safeguards (read: Alan Greenspan).
Inevitably, top regulators move into the industry they're putatively trying to regulate, while top guns in the industry move temporarily into regulatory positions. This revolving door of regulation also serves over time to erode all serious attempt at overseeing an industry.
The only way to have a lasting effect on industries as large and intransigent as banking and health care is to alter their structure. That was the approach taken to finance by Franklin D. Roosevelt in the 1930s, and by Lyndon Johnson to health care (Medicare) in the 1960s.
So why has Obama consistently chosen regulation over restructuring? Because restructuring Wall Street or health care would surely elicit firestorms from these industries. Both are politically powerful, and Obama did not want to take them on directly.
A regulatory approach allows for more bargaining, not only in the legislative process but also, over time, in the rule-making process as legislation is put into effect. It's always possible to placate an industry with a carefully-chosen loophole or vague legislative language that will allow the industry to continue to go on much as before.
And that's precisely the problem.
Robert Reich, one of the nation’s leading experts on work and the economy, is Chancellor’s Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. Time Magazine has named him one of the ten most effective cabinet secretaries of the last century. He has written thirteen books, including his latest best-seller, Aftershock: The Next Economy and America’s Future; The Work of Nations; Locked in the Cabinet; Supercapitalism; and his newest, an e-book, Beyond Outrage. His syndicated columns, television appearances, and public radio commentaries reach millions of people each week. He is also a founding editor of the American Prospect magazine, and Chairman of the citizen’s group Common Cause. His widely-read blog can be found at www.robertreich.org.
- Posted in
43 Comments so far
Show AllThe political establisment needs restructuring as well. Campaign contributions should be seen as what they are---bribes, thereby public funding of campaigns should be instituted. The voters should end the Democratic and Republican monopoly on political power by voting for candidates outside of the corporate controlled parties.
I agree. But how? We know that the banksters own congress and yet, we're expecting the slaves to reform their masters?
Same thing with campaign "contributions". How can those who benefit from this scheme be expected to change it?
I'm willing to bet it will take an immense natural disaster or revolution or both, but I do not expect change to come from within.
There is another way - vote for those who DON'T benefit from this scheme.
Basically, this means doing a little do diligence to find those candidates you don't see in big commercials or on MSM because they don't have the money to buy this stuff because they are not funded by corporate interests. Obviously this takes a bit more doing but the internet does make it possible to do this on the cheap. Once you've found a candidate worth supporting, you can spread the word via "social sites", U-Tube, etc. "Going viral" IS a known phenomenon and there is really no predicting what will catch on.
E.g. I am suggesting that folks should check out and support Howie Hawkins for Governor in NY. He is running against a Dem, the well funded and well connected Andrew Cuomo and could use the exposure that he can't buy but Cuomo can. So, in that spirit, check out: http://www.howiehawkins.com/2010/.
You are right that the current crop has no incentive to reform a campaign finance system that benefits them enormously; if they were really serious they would have passed a Constit. amendment that denies the concept of corporate personhood without which any legislative "fix" they passed will be tossed out by the SC, and they know this.
I still believe, fool that I am, that it CAN be done, we just have to roll up our sleeves and do it .....
Try telling that to the majority of Americans who are dialed in to American Idol and make their voting choices the same way they make their toothpaste choices.
While the title of this article implies that Obama is programmed to regulate rather than restructure, his first year in office proved that he is programmed to gun for the corporations by whatever means possible.
Cicero: "Freedom is participation in power."
Obama's regulatory brainlessness.
It has become obvious that the man who is President is NOT the man who ran for that office!!!!
The American citizens have been duped again.
In not one of the critical issues that have risen since his inauguration has Obama matched his inaugural promise of "Change You Can Believe In."
He most certainly will be a one-term President. I'm sorry to say that he seems so bent on not "upsetting" the "Corporate Powers That Be" that he has rendered himself neutered in terms of actually making progress in restoring the economy or racheting down the Military Industrial Complex's "breaking the bank" of the American Economy.
Now the governments' eyes are set on paring down the critical pittance that Social Security pays to retired individuals who have worked all their lives for some security when they could no longer work! And the government's doing it without any remorse whatsoever.
Our government is truly BROKEN!!!!!
When Obama zealously promoted the TARP in September 2008 (more than one month before he won the election) we had the opportunity to see PRESIDENT Obama, compared to BRAND Obama that we had seen up to that point.
While TARP may have been a viable program if strings swere attached, Obama applied the same quick fix "any bill is better than no bill" drama that he has subsequently applied to Ir-Af-Pak Occupation, Obamacare, Bankster reform, social security dilution, etc.
With all due respect, the man who is Pres. IS the man who ran for office. For me tipoffs were when he took single payer "off the table" and his NAFTA gaff in the primaries; it was all downhill from there. I followed his votes, the advisors he surrounded himself with (Rubin was an early clue) and, perhaps most importantly, where the largest amounts of his money were coming from, and so I can honestly say that nothing he is doing surprises me one whit.
If many were fooled, I think it's because they wanted to be - "Don't confuse me with facts, my mind's made up" and they had to justify their decision on more legitimate grounds than the "can't win" mantra they actually used to refuse to vote for third party candidates even if they liked their platforms better .....
Our government did not "just break", it has been broken for some time. In some ways it has always been broken. Through the "wealth" that (Nature) (God) (Allah) gave us, we have used the system of capitalism to rape and plunder that "wealth" in the creation of an Imperialist Empire that one day will pay for its sins.
There is one sliver of hope in this dark drama, and that hope is in the people of this nation. They are the believers in a new world a’coming. Mr. Obama rises on that hope. He owes allegiance to that hope. Should he fail to honor it, he will be judged harshly, the hope and its power remains, still searching and seeking...These are not mere dreams, there is evidence if we choose to see.
Why Socialism?
by Albert Einstein
"The economic anarchy of capitalist society as it exists today is, in my opinion, the real source of the evil. We see before us a huge community of producers the members of which are unceasingly striving to deprive each other of the fruits of their collective labor—not by force, but on the whole in faithful compliance with legally established rules. In this respect, it is important to realize that the means of production—that is to say, the entire productive capacity that is needed for producing consumer goods as well as additional capital goods—may legally be, and for the most part are, the private property of individuals".
Monthly Review (May 1949).
Einstein was ahead of his time, in more ways than one .....
Obama doesn't want to "take them on" my ass!
He's a true believer.
Obama DOES wants to take the corporations' money on.
On board the Democratic Party coffers, that is.
Obama is a front for corporate interests. That is the problem.
I would like to believe that Obama is just naive. It would be pretty to think so. However, he isn't just a chicken shit, he is the most corrupt, ruthless, cunning shill for big business this country has ever known.
I voted for the devious, lying bastard. I just hope My Creator will see fit to forgive me.
But, he DOES give a good speech. I suppose it is better the hot air comes out of his mouth than the alternative.
Why don't we have structural reform--of health care, of banking, of energy policy? Come on now Robert. You're not the class dunce. You know why. Because the real bosses don't want it. In fact they are angry that it is even being brought up. They look at Congress and the Presidency with a contemptuous, "and after all I've done for them" attitude. Or maybe it's more like the typical upper class consternation, "It's so hard to find good help these days."
Meanwhile in the servant's quarters, (Congress)there is hope that they can please their bosses and still have enough dignity left to show the public that they are really not lapdogs, or as Mary Landreau said, "I am not the handmaiden of big oil". But the servants know the limits of their master's patience and they clearly see and feel it when they act too uppity. That's why a "regulatory approach" is so appealing. I can see Chris Dodd saying to his donors, "You don't really have to give up anything of substance, nothing that would really threaten your position of power and privilege--you just have to appear to go along with a few style concessions that make you look less avaricious, less self serving, more patriotic--you know it's just for appearances but really the public is angry and we have to give them a bone to chew on--really it doesn't take much to pacify them--"
These lapdogs in Congress are defanged and they will never bite the hand that feeds them. There is no outrage from the media--they are mostly bought off too. But something is happening. Fewer and fewer of us think that the show our "Representatives" put on is going to pacify us. We laugh when Mary Landreau says she is not big oil's handmaiden and call her a lot worse. We see all too clearly who calls the shots. We know how corrupt and sold out our politicians are and we are groping for a new strategy to put them out. If these "Representatives" are going to growl-- it will be at us. Or should I use the metaphor of the cornered rat.
Actually, I think this IS what Reich is saying, though perhaps not as strongly.
"We know how corrupt and sold out our politicians are and we are groping for a new strategy to put them out." I really believe the time has come for campaign finance reform. Reich is arguing that structural change is needed in certain powerful industries, not simply regulatory change. But the reason he gives ('regulatory capture') suggests we need structural change in DC as well. I believe campaign finance reform would go a long way (though not the whole way) toward structurally changing our democracy into something that actually represents all of us, and not just the upper 1% and their corporate mouthpieces.
Check out 'fixcongressfirst.org'. We need change of this sort.
Sioux Rose
TAMMONS: Your Chris Dodd "impersonation" is right-on, as is your post.
EPHRAIM: Exactly so. If only the MSM was not owned by the same masters, a lot more people would be connecting all the dots by now.
"If only the MSM was not owned by the same masters, a lot more people would be connecting all the dots by now."
M$M outside the US is not that much better but people are able to resist the pro-US slant and will often think in terms of what is best for them and each other. Usually, that results in electing pols that will deliver and then deliver some unlike the US which is empty promises at best and negative change at its worst. I was told by one of my relative's friend who lives there that the media will be somewhat responsive to the people if and when they detect enough resistance unlike the US where everything is too predictable. A change of media ownership combined with finding ways to train people to resist M$M bias is needed.
He DOES know why. If you go to the parent site of this article you will see a couple of his other posts in which he urges us to pay attention to who votes against needed amendments to the finance "reform" bill and act accordingly at the polls .....
From the banking industry debacle to the health care fiasco to the Massey Coal Company negligence and land rape to the BP catastrophe to the ongoing never-ending Middle East wars for nothing but oil and power projection, Obama is continuing the Bush agenda like a seasoned professional. He never appoints anyone to any agency that studies or "investigates" any major issue or disaster, like those mentioned, who are not themselves the very instigators and profiteers of these same disasters. Never, no one. Only the criminals are allowed to get anywhere near the crime scene they have created, and we're expected to believe this president in any way whatever truly wants to correct a single one of these things. As if.
It's exactly as if Bush is still presiding in the White House, only wearing an Obama costume, including the rubber Obama mask. This is how power and institutional corruption (social and political evil) actually operate. Never again vote for ANY Democrat or Republican.
Obama is the caretaker of the Oval office for our next president, Jeb Bush, in 2012
"So why has Obama consistently chosen regulation over restructuring?"
Actually, Obama is doing neither. I had a chance to read the bill, a throbbing headache, and my general knowledge in finance and accounting helped me to understand what the bill really meant as a lot of the crap in that bill is tough to interpret for those who haven't taken a basic course in finance or accounting to understand white collar crooked language. To save you the trouble of reading that throbbing bill, it is nothing more than simply rearranging a few musical chairs with no enforcements and limited accountability on the white collared financial crooks. "Too big to fail" is still out there but waking up from its brief nap from last year and tip-toeing its way back with a little window dressing to keep it out of the public eye.
In order to get different results, like a structural approach to reform, you have to DO something different.
In this case, that means escaping the 2-party trap, in which you switch back and forth between Horrible and Horribler, Hoping against Hope that this time, it isn't just a con.
Or in this case, neocon.
You DO have an alternative: the Green Party, www.gp.org.
Structural reform, real "Change."
To listen to the MSM, with Senator Dodd's mouth often open and uttering platitudes, you'd think we just got a major finance reform bill. It will be interesting to see what he does after his term is up.
Meanwhile, this is one of Reich's better pieces; less waffling than usual.
-30-
I'm not sure it will be interesting as CT has plenty of top paying jobs for guys like him. I don't watch MSM but is even Fox News saying great things about this horrible bill?
Yeah, the usual corporate media label is "sweeping", used non-ironically: the No Insurer Left Behind healthcare corporation bailout is referred to as "sweeping health care reform", and the phony, limp fist-shaking at the banksters is entitled "sweeping finance reform".
Besides the moribund Metro-Goldwyn-Mayer studio, doesn't the Dreyfus Corporation have a lion head logo? And didn't Dreyfus once produce teevee ads showing four majestic lions plodding around? I can't recall exactly what the lions did in that ad, but I wouldn't be surprised if they re-released it with Chris Dodd on all fours joining the pride.
The Amerikan public, alas! is lulled by such salutary deceits and largely remains sound asweep.
"Requiring banks to do derivative trading in separate entities would force them to raise extra capital. But if such trading is so useful, banks should foot the bill, not taxpayers".
Senator Lincoln should be congratulated, "let every tub sit on its own bottom". Why should the banks use public collateral to subsidize risk?
Mr. Obama seems to prefer the political solution as opposed to the principled solution. He will learn soon enough, the political decision accomodates but does not produce change. The price of "half a loaf" keeps rising.
It's all about how to keep the Dem. party in power - this has been true since at least the days of Clinton. The "battles" you see in Congress are not about health care or finance or any of the things they are ostensibly fighting over, they are about who can position themselves to stay in power and hand out the goodies. If they can throw us a few bones without pissing off their corp. funders too much, so much the better, but they will never throw us a bone with meat on it - we might get enough energy to demand more .....
It is time to revolt against both parties at the polls; at this point we have nothing to lose but our abject servility ....
Well put.
All our institutions need a way to fail when they no longer serve, including the government. Waiting for the next election isn't cutting it.
The longer we wait, the more we lose.
Look at the damage that was done because a broken election system put the wrong man in White House and kept him there.
That same system put a bunch of corporate employees in the halls of Congress. The same system put another liar in the White House.
Congress doesn't serve. the White House doesn't serve. Energy corporations don't serve. Financial institutions don't serve. The DOJ doesn't work. NGOs don't work. Our food isn't safe and medical intervention is one of greatest causes of premature death. Unnecessary, unpopular wars are continuing into their second decade.
The persistance of failure is number one problem we all face in all areas of life.
This bill does absolutely nothing to help the American people. I agree with others who have said that Obama showed his hand a long time ago when he voted for TARP. In fact, until he came out in support there was a groundswell of opposition that could have derailed it. (Same with the illegal wire taps, etc.)
By the way, Lincoln does not deserve any credit since she only saw the light when it became possible she might lose her primary. Financial reform is not really that complicated. If the people of Arkansas get it, how hard can it be? Sorry. I love Arkansassians. I can be a little sassy myself.
The complicated bit is seeing how evil the Democratic Party has become.
This bill, as I understand it:
1. Does not impose limits on size as a percent of GDP or maximum share of savings or by any other measure.
2. Does not limit leverage (Senate, House says 15:1).
3. Does not establish an independent consumer protection agency with teeth.
4. Does not really even audit the Fed though at least there apparently will be some sunlight on the bailout loans (Senate, House version better).
5. Does not end the ongoing bailouts including the front door bailouts with newly minted Fed money or the backdoor bailouts through Fanny and Freddie.
6. Does not recommend a pardon for Brad Birkenfeld or add any protections for whistle blowers.
7. Does not impose a financial transactions tax.
8. Does not impose a windfall profits tax on all salary and bonuses for employees of banks that have gotten bailout money.
9. Does not, as mentioned, regulate derivatives sufficiently including outlawing synthetics.
10. Does not help homeowners in danger of losing their homes.
11. Does not prevent companies that received bailout money from donating to political candidates.
12. Does not reform the rating agencies or make them independent (does allow them to be sued in certain cases).
Because these issues were and still are so popular I kind of thought something might get accomplished. When will I ever learn?
I think our efforts were too disparate. All interested organizations should have come together with consensus demands. (Could still happen I suppose but has been made all the more difficult since the world is bleeding into the Gulf of Mexico.) Most Hill observers think the bill will be watered down further in conference.
If I ever vote again, it will be for Republicans since slap-in-the-face evil is better than knife-in-the-back evil.
You could vote third party or write in as an alternative to voting Republican or Democrat.
My whole life, Marco, except I supported George McGovern when I was wee.
A vote for Reps is a "mandate" for their program, just as it is for Dems ......
here is my "been to the mountain, had a dream" speech: the end is coming chiron, there will be gnashing of teeth, but before the apocalypse a man will appear (and much before that a convocation of progressive elders/ see metals frequent entreaties) and like garibaldi (fill in the blank) he will go to the democratic convention and wrest from president "nothingburgers" lying grasp, the mantle of sanity...and...and what should have happened last time, will be made real...and 'lo, unlike in the past, there will not be dissolution but unity and sustaining (and a little permaculture, and ccc, and etc, lots more etc.) and joy....someone say amen!.........for awhile i thought a third party was the next step....now i think there is no time...honestly i don't think garibaldi fantasies are much better...but this is as close as i get to "adult"....peace
We don't need any more "parties", we need fewer, or, better yet, none at all. We do need more good candidates, and they are out there - what we need to do is actually VOTE for them!
I wouldn't call that a "been to the mountain, had a dream" speech. It's more like "Broken shift key, rambling incoherently".
Keep your mouth shut. I voted Green. You voted for Obama and you deserve it.
Only one problem ... the fact that so many people voted Democrat screws the entire United States over, not just the people that voted him or the Republicans.
Look around, I'm not even an American and I'm affected by your decisions.
Don't blame me. I voted for Mckinney.
Excellent article. Robert Reich gets right to the heart of the matter, as usual.
Obama's economic policies are so Hooverite, so stupid, that they are great news for those of us who long for the day that the dumb old USA finally gets tossed into the dumpster of history.
Obama is not a stupid person by nature and not even a bad person. But he has swallowed, hook, line and sinker, all of the crap that they teach at Yale and Harvard.
He has been so well "educated" that he can't think for himself.
I am pleased that he has chosen to help the Wall Street greed heads steal even more money because their unfettered larceny is exactly the thing that will bring down the "global" economy.
The USA has become a rotten and malevolent force in world affairs. Helping Russia to defeat the Nazis was a grand achievement. So was going to the Moon. The USA has done little else since then except lie, cheat, steal and kill.
"Governments are instituted among Men, deriving their just powers from the consent of the governed, — That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it"
dear kyle...you are obviously a superior human being, thank you...... (I deserve it? me?)....to dismiss the DEMOCRATS! is to loose site of the reality of numbers of votes (i.e. a difference between leadership and votes) as well as showing me you are still in the "anger phase" ("i feel your pain")...plus the notion of a "fantasy" dependent on a mythical SAVIOR of the coming TURNING, appears beyond your grasp.....i "see" the "democrats" as a focal point to push a meme factored in with time constraints...you do get that don't you? ideas? PRAGMATISM? falling off a cliff?! i don't see any ideas getting to the TABLE through the greens....."a voice at the table aids digestion!" CAPISCE?.....p.s. i have been in my life "actively apolitical" frankly i see lottsa doom no matter how we squeal .....AND you, you are a mo mo, YOU shut up....peace
Common Dreans us our only hope
If only we could learn to proofread.
-30-