A New Way Forward Blog – Restore the Economy in the Public's Interest

This article is written by our guest blogger and ANWF member, Robert Roth

The Three Stooges – Moe, Larry and Curly Joe – gave a comic definition to the term “stooge.”  But one of the dictionary definitions of “stooge” is “one who plays a subordinate or compliant role to a principal” – “principal” meaning one who calls the shots.  “Puppet” is said to mean the same thing.  The dictionary I’m looking at even gives, to illustrate the definition of “stooging,” “congressmen who stooge for the oil and mineral interests.”  So how apt is the use of the term for Ben, Larry and Curly Tim – Federal Reserve Chair Ben Bernanke, Larry Summers, director of the National Economic Council, the White House office that coördinates economic policy in the Obama Administration, and Treasury Secretary Tim Geithner?

In a general way, all three are stooges for Wall Street, in that their reaction to the near-collapse of the financial system that nearly brought us a Second Great Depression – and still could, in my view – has been to try to revive the institutions and practices that gave rise to the problem in the first place.  In short, they have been representing financial interests, rather than Main Street.  More specifically, Ben Bernanke supported and now continues the low-interest policies that helped inflate the Bubble Economy, enabled widespread fraud by failing to exercise the Fed’s regulatory powers while the Bubble was inflating, and has arranged trillions in backing for the credit markets, making more billions for Wall Street at the expense of the rest of us.  And it seems entirely fair to give Larry Summers, as the chief advisor to the White House on economic policy, an ample helping of blame for Obama’s failure to fight for a more substantial jobs program.  And there is evidence Tim Geithner arranged for a secret bailout of AIG when he was chairman of the New York Fed.  Others have made the case in more detail – see, for example, Chris Hedges, “Wall Street Will Be Back For More” and the other sources cited below – but I think it’s clear the terms are apt, and a useful way to draw attention to the need for President Obama not only to do an about-face on the subject of financial regulatory reform, but to clean the White House of the influence of those who have until now served as stooges for Wall Street while occupying positions of public authority and trust.  And a good start would be firing Ben, Larry and Curly Tim.

Perhaps in desperation after the Democrats’ loss in Massachusetts, President Obama has finally come out swinging at Wall Street.  Previous “reform” efforts were a smokescreen, but there is potential for real change in the latest proposals.  Those should be evaluated against our own program for fundamental restructuring of the financial system and the economy, and as their impact is complex and they will surely change, I don’t propose to evaluate them fully here.  Suffice it to say that in adopting the proposals of former Fed Chief Paul Volcker, Obama may have taken a page directly out of the playbook outlined by Simon Johnson a few days previous.  But as the dust flies and may not settle for some time, there are some things we can and should do to impact the situation.  This article outlines some of those first steps and provides a toolkit of information resources for following the action.

First, Obama should conduct a clean sweep, and divest his administration of those who produced the near collapse of the financial system and the economy and have thus far been working to preserve the pre-crisis status quo.  That means dumping the Three Stooges who laid so much of the groundwork for the recent near collapse of the economy and have worked ever since to preserve in its current form the financial system that caused it:  Amid the talk of possibly replacing Bernanke at the Fed, Summers’ name has been floated as an alternative.  That would be a change we could believe in – from the frying pan to the fire, or vice versa, take your pick.  Instead, progressive forces should mobilize behind figures like FDIC Chair Sheila Bair or economists like Joseph Steiglitz or James K. Galbraith.  And the few Senators who have thus far announced opposition to Bernanke’s reappointment – Oregon’s Jeff Merkley, Wisconsin’s Russ Feingold, and California’s Barbara Boxer – should hear from us in support, and the rest should hear from us in protest until they change their tune.

Second, something constructive should come out of the hearings of the Financial Crisis Inquiry Commission.  Thus far, we’ve seen softball questions lobbed at the giants of the finance industry on heavily reported Day One, while the media all but ignored the second day, at which Sheila Bair and Illinois Attorney General Lisa Madigan, among others, systematically described the ways in which the Fed helped enable the rampant fraud that led to the crisis and proposed serious steps to avoid a repetition.

Third, we should understand generally Wall Street’s program at this point – so we can oppose it – and devise and promote specific steps toward genuine and effective reform.  Ms. Bair’s testimony before the Commission is a wonderful resource for this purpose, and in reviewing it, we should also recognize that the People have a genuine champion in Sheila Bair.  Ms. Bair deserves our thanks, praise and support for taking on the – literally – Old Boys network who have empowered Wall Street’s fraud machine and are working to preserve it.

I published last May a comprehensive assessment of the financial and economic crisis, and a set of proposals for restructuring the economy.  Nothing in my assessment has changed, and I suggest it to your attention as a starting point if you want one.  Fast-forwarding to the present, possibly the best short resource I’m aware of on the background to the current situation and how it is evolving is Michael Hudson’s “The Revelations of Sheila Bair: Wall Street’s Power Grab (CounterPunch, January 19, 2010).

There are some straightforward proposals, already on our table if not Wall Street’s, that we should keep sight of and continue to mobilize behind.  Wall Street’s program provides a sort of mirror image of what they are and ought to be.  First, the Old Boys want to be allowed to continue to gamble with other people’s money and the financial system as a whole, and they want the financial sector to stay as it is even though it is already too big a part of the overall economy and is full of institutions whose practices continue to pose systemic risk.  Second, they want the proposed new Consumer Financial Protection Agency to be dumped.  Third, they want to avoid any structural reforms like reenactment of Glass-Steagall.  And of course, they want their own Three Stooges – Ben, Larry and Curly Tim – to remain in charge at the Fed, the Treasury, and the White House.  So if they lost Bernanke at the Fed, for example, they’d want to replace him with Larry Summers.  Flip those coins and we have the beginnings of our own program.

First, the big banks should be broken up.  Too big to fail means too big to be allowed to exist.  However, the financial system has evolved so that there are now institutions other than banks whose failure can pose systemic threats.  That’s one reason Obama’s proposals are more complex than the old Glass-Steagall firewall between commercial and investment banking.  There should be limits on the size of financial institutions.  But just as importantly, any institution engaged in financial activity should be required to hold sufficient reserves to cover its deposits if it takes them, and its bets if it makes them.  Simon Johnson recommends tripling capital requirements so banks hold at least 20-25 percent of their assets in core capital.  Peter Boone and Simon Johnson, “A bank levy will not stop the doomsday cycle,” Financial Times, January 19, 2010.  If implemented, such a requirement would make it more expensive for financial entities to expand beyond their usefulness or to pose systemic risk by making bets they couldn’t cover.  Of course, such a rule would have to be vigorously enforced, and that would require a regulator with integrity as well as authority.

Another key proposal is creation of a Consumer Financial Protection Agency.  On the need for it, see “Elizabeth Warren: Pass A Consumer Protection Agency Or Forget Regulatory Reform,” and Michael Hudson’s article including his report of Sheila Bair’s testimony.  In the meantime, Connecticut Senator Chris Dodd, who has floated the idea of dumping such an entity or burying it in another agency in order to obtain, excuse the expression, bipartisan support, should hear from his constituents by all available means.

And the financial sector itself should be reduced in size to the point where it can serve the needs of the economy without putting it at risk.  As Ms. Bair pointed out, “our financial sector has grown disproportionately in relation to the rest of our economy,” from “less than 15 percent of total US corporate profits in the 1950s and 1960s…to 25 percent in the 199s and 34 percent in the most recent decade through 2008.”  While financial services are “essential to our modern economy, the excesses of the last decade” represent “a costly diversion of resources from other sectors of the economy.”  In other words, what is spent on financial services is not available for investment in plant, equipment, research and development, training, or the production of goods, services and jobs outside the financial sector.

As the battles that have now been joined proceed, I’d suggest, among many excellent resources, those listed below, and the ongoing commentary of Simon Johnson, Michael Hudson, Mike Whitney (often posted on the website of CounterPunch, and others whose work appears here and on the home page of Progressive Democrats of America).

Robert Roth is a retired public interest lawyer who prosecuted marketplace fraud for the Attorneys General of New York and Oregon.

Other valuable reads from Robert:

Dan Geldon, http://baselinescenario.com/2010/01/20/how-supposed-free-market-theorists-destroyed-free-market-theory/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+BaselineScenario+%28The+Baseline+Scenario%29″>“How Supposed Free-Market Theorists Destroyed Free-Market Theory”

Robert Roth, “Fixing the Economy: For Starters, Fed Chief Ben Bernanke Should Not Be Re-Appointed”