A year and a half after the financial meltdown, Congress is about to conclude Round One of the fight over reining in Wall Street. Let's hope they're not planning to hang up their gloves.
The House and Senate are still working out the differences in their respective versions of the financial reform bills. It's not too early, however, to say that while the legislation will make some positive differences in the lives of ordinary people and small businesses, it will not be enough.
If we're to restore the financial sector to its original purpose of serving the real economy, there will need to be more battles to come.
First, though, here are some of the highlights:
- Consumer protection: A new Consumer Financial Protection Bureau will crack down on predatory lenders and fraudsters and make sure credit card and mortgage documents are written in plain English.
- Mortgage reform: The Senate version bans kickbacks to loan officers who steer clients to higher-risk, higher-cost products. According to Bob Kuttner of the American Prospect, "had this been in force in 2006, there would have been no sub-prime crisis."
- Derivatives reform: Although corporate lobbyists won some big loopholes, most derivatives trading will be brought out of the shadows and onto open exchanges. The hope is regulators will be able to better track and respond to the kind of out-of-control gambling that inflated the last financial market bubble. A Senate provision also forces the big banks to spin off some types of derivatives trading, but that's expected to die in the House-Senate conference committee.
- Shareholder rights: Shareholders will get a "say on pay" on executive compensation. Although it's a nonbinding vote, the embarrassment factor might discourage boards from approving particularly obscene pay packages. The bills also make it easier for investors to nominate candidates for corporate boards, giving them more power to hold directors accountable.
These are small, positive steps in the right direction, but they do not alter Wall Street's basic business model. They will shine a brighter light on the financial sector and make some dangerous behavior less profitable. But big-time gamblers will still have too much power to run our economy like a casino.
That's why we need to start planning for Round Two. Here are two key pieces of unfinished business:
- Breaking up the banks: The pending bills give government the power to seize and close down large failing firms that threaten the financial system, but they do nothing to limit bank size in the first place. As long as we have banks that are "too big too fail," taxpayers will always be on the hook for future bailouts.
- Taxing the speculators: There is growing momentum around the world behind proposals to place a tiny tax (not more than 0.25%) on trades of derivatives, stocks, and currencies, as a way to curb excessive short-term speculation and raise hundreds of billions of dollars that could go to green jobs, health care, and climate finance.
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On May 17, more than a thousand people rallied in Washington, DC, calling for such a "financial speculation tax" as part of a broader financial reform agenda. Under a steady cold rain, protestors expressed the high level of anger over Wall Street's continued excesses at a time when ordinary working families are still suffering from the crisis.
This Institute for Policy Studies video captures diverse perspectives on why financial speculation taxes are one piece of the solution:
The Washington rally was part of an international week of action to "Make Finance Pay," with events in at least seven countries. Many chose a Robin Hood theme, to make the point that a financial speculation tax could generate massive revenues to fight poverty and other urgent needs.
In London, for example, campaigners dressed as Robin Hood delivered giant mosaics of pictures of supporters to new members of Parliament. In Berlin, activists performed a stunt in front of the Brandenburg Gate, attacking a bankers' carriage with big bags of money and redistributing it in smaller packets for the poor and the planet. In Ottawa, the Canadian campaign staged a tug-of-war in front of the Parliament building that pitted bankers against "the people" (plus one polar bear).
As we roll up our sleeves for the next battle, it's important to remember that it took 1930s reformers seven years to enact the six landmark bills that helped stabilize the financial industry for many decades. Less than two years into this crisis, it's time to join our allies around the world and build a long-term, creative campaign to transform the Wall Street economy.