In fact, close your eyes and you could be back in the wilds of 2007.
Bankers are still making wild bets, still devising new derivatives,
still piling on debt. The big banks have access to money almost as
cheaply as in 2007, courtesy of the Fed, so bank profits are up and
bonuses as generous as at the height of the boom.
The only difference is that now the Street's biggest banks know they
are "too big to fail" and will be bailed out by taxpayers if they get
into trouble - which means they have every incentive to make even
riskier bets. And, of course, American taxpayers are out some $120bn,
while millions have lost their homes, jobs and savings.
All could be forgiven if the House and Senate committees with
responsibility for coming up with new regulations were about to come
down hard on the Street and if the Obama administration were pushing
them to. But nothing of the sort is happening. Yes, the White House has
indicated interest in charging banks for the cost of the bailout, but
this is not real reform; it's just making up for some of the direct
costs of cleaning up the mess.
Last week, Senator Chris Dodd, chairman of the Senate banking
committee, announced he would not seek re-election next November,
recasting himself as a lame duck who will do whatever the banks want.
Mr Dodd's decision "makes it more likely that regulatory reform will be
enacted", says Edward Yingling, chief executive of the American Bankers
Association, because it "frees him from political dynamics that would
have made it more difficult for him to compromise". Translated: Dodd's
committee will report out a bill - Democrats would be embarrassed not
to - but it will be weak because voters can no longer penalise Mr Dodd
for rolling over for the Street.
The bill that has already emerged from the House is hardly
encouraging. Dubbed the "Wall Street Reform and Consumer Protection
Act", it effectively guarantees future Wall Street bail-outs. The bill
authorises Fed banks to provide up to $4,000bn in emergency funding the
next time the Street crashes. That is more than twice what the Fed
pumped into financial markets last year. The bill also enables the
government, in a banking crisis, to back financial firms' debts - a
wonderful insurance policy if you are a bondholder. To be sure, the
bill authorises the Fed and Treasury to spend these funds only when
"there is at least a 99 per cent likelihood that all funds and interest
will be paid back," but predictions about pending economic disasters
can be conveniently flexible, especially when it comes to bailing out
the Street.
If this were not enough, the House bill creates regulatory loopholes
big enough for bankers to drive their Ferraris through. Consider
derivatives. Last year, as taxpayers threw money at the Street,
congressional leaders promised to put derivative trading on public
exchanges. The prices of derivatives could be disclosed and margin
requirements imposed, making it more likely that traders would make
good on their bets. Yet the House bill exempts nearly half the
$600,000bn of outstanding derivatives trades.
The bill also allows - but, notably, does not require - regulators
to "prohibit any incentive-based payment arrangement". This makes fat
bonuses the norm unless a regulator has reason to prevent them. And as
we witnessed last year, bank regulators tend not to disturb the status
quo. The House bill does not even make an attempt to unravel the
conflict of interest that led credit ratings agencies to turn a blind
eye to the risks the Street was taking on.
To its credit, the House bill does create a Consumer Financial
Protection Agency to protect borrowers from predatory lending. Banking
regulators have authority to protect consumers but failed to do so, so
consolidating these powers in a new agency makes some sense. But Senate
Republicans are dead-set against it, and Mr Dodd's new willingness to
compromise may well doom it in that chamber.
What is truly remarkable is what Congress and the administration
have shown no interest in doing. Large numbers of Americans have lost
their homes to bank foreclosures or are in danger of doing so. Yet
American bankruptcy law does not allow homeowners to declare bankruptcy
and have their mortgages reorganised. If it did, homeowners would have
more bargaining power to renegotiate with banks. But neither Congress
nor the administration has pushed to change the bankruptcy laws. Wall
Street opposes such change and was instrumental in narrowing the scope
of personal bankruptcy in the first place.
Nor have lawmakers shown any enthusiasm for resurrecting the wall
that used to exist between commercial and investment banking. The
Glass-Steagall Act, passed in the wake of the Great Crash of 1929,
separated the two after it became obvious that commercial deposits
needed to be insured by government and kept distinct from the betting
parlour of investment banking. But Wall Street forced Congress to take
down the wall in 1999, enabling financial supermarkets such as
Citigroup to use its deposits to make all sorts of bets. Even Obama
adviser and former Fed chief Paul Volcker has argued that the two
functions should be separated again.
Nor is anyone talking seriously about using antitrust laws to break
up the biggest banks - the traditional tonic for any capitalist entity
that is "too big to fail". Five giant Wall Street banks now dominate US
finance. If it was in the public's interest to break up giant oil
companies and railroads a century ago, and the mammoth telephone
company AT&T, it is not unreasonable to break up the almost
infinitely extensive tangles of Citigroup, Bank of America, JPMorgan
Chase, Goldman Sachs and Morgan Stanley. No one has offered a clear
reason why giant banks are important to the US economy. Logic and
experience suggests the reverse.
What happened to all the tough talk from Congress and the White
House early last year? Why is the financial reform agenda so small, and
so late?
Part of the answer is that the American public has moved on. A major
tenet of US politics is that if politicians wait long enough, public
attention wanders. With the financial crisis appearing to be over, the
public is more concerned about jobs. Another 85,000 jobs were lost in
December, bringing total losses since the recession began in December
2007 to over 7m. One out of six Americans is unemployed or
underemployed.
Yet if the president and Congress wanted to, they could help
Americans understand the link between widespread job losses and the
irresponsibility on Wall Street that plunged America into the Great
Recession. They could make tough financial reform part of the answer to
sustain-able jobs growth over the long term.
True, financial regulation does not make a powerful bumper sticker.
Few Americans know what the denizens of Wall Street do all day. Even
fewer know or care about collateralised debt obligations or credit
default swaps. To the extent Americans have been paying attention to
the details of any public policy, it has been the healthcare reform
bill. But that only begs the question of why financial reform has not
been higher on the agenda of the president and Democratic leaders.
A larger explanation, I am afraid, is the grip Wall Street has over
the American political process. The Street is where the money is and
money buys campaign commercials on television. Wall Street firms and
executives have been uniquely generous to both parties, emerging as one
of the largest benefactors of the Democrats. Between November 2008 and
November 2009, Wall Street doled out $42m to lawmakers, mostly to
members of the House and Senate banking committees and House and Senate
leaders. In the first three quarters of 2009, the industry spent $344m
on lobbying - making the Street one of the major powerhouses in the
nation's capital.
Money is powerful. Talk is cheap. Mr Obama recently called the top
bankers "fat cats", and the bankers insisted they were shocked -
shocked! - to learn how intransigent their lobbyists had been in
opposing financial reform. The bankers even claimed a "disconnect"
between their intentions and their lobbyists' actions. This was all for
the cameras, of course.
But the widening gulf between Wall Street and Main Street - a big
bail-out for the former, unemployment checks for the latter; high
profits and giant bonuses for the former, job and wage losses for the
latter; buoyant expectations of the former, deep anxiety and cynicism
by the latter; ever fancier estates for denizens of the former,
mortgage foreclosures for the rest - is dangerous. Americans went
ballistic early last summer when AIG executives got big bonuses after
taxpayers had bailed them out. They will not be happy when Wall Street
hands out billions in bonuses very soon. Angry populism lurks just
beneath the surface of two-party politics in America. Just listen to
Sarah Palin or her counterparts on American talk radio and yell
television. Over the long term, the political stakes in reforming Wall
Street are as high as the economic.
