More Lies from Obama? by ANWF member, Nate Powell
Last week, Obama announced a surprise head turner: had the sane voices of reason represented by Paul Volcker prevailed over the loot-the-riches Robber Baron Larry Summers and his crackpot team from Chicago? Or, could this possibly be too good to be true given Obama’s proven knack for saying what we want to hear, then going in a completely opposite direction. This has been true in the past, so, for our protection, let us vet his proposal before giving it consideration. Obama needs to be pushed in the right direction since he seems so prone to manipulation by the wrong crowd… so it is imperative that it is we the people that do the pushing.
As the recent Scott Brown electoral victory shows, Americans are sick and tired of Wall Street giveaways as the national priority. Geithner himself gave approval for the 100% payout on collateralized debt obligations (CDOs) and credit default swaps (CDSs) to Goldman Sachs, and the personal OK to hide it from the public reports, as the latest press reports indicate. Independents and liberals voted Republican to send a message to the Democratic “leadership” that we’re tired of betrayal.
The leadership is unfortunately blind to reality and is suicidally pressing forward with more irresponsible schemes. Take for example the recent agreement reached where Obama will create, by executive order, a panel whose duty will be to make cutbacks to our standard of living. I’m not making this up. Recommendations will then be voted on as an entire package, with an up or down vote, and will be impossible to amend. Sniff, sniff, do you smell that? Smells like our constitution is burning away. So, instead of cutting off the bailouts and taking the money back, President Obama is going to propose that we continue feeding the vampires on Wall Street. Talk about going off the deep end.
The answer is not draconian austerity; the answer is to leverage the power of our (still) sovereign currency and create loans for improvements to the physical economy, instead of the near zero interest loans given to large banks specifically to buy the near worthless “toxic assets” called derivatives.
Derivatives are instruments that derive their value from other things, such as mortgages, as in the famous “mortgage backed security,” or commitments from institutions, such as CDOs and CDSs. They are basically valueless in and of themselves, but were used by banks to claim as assets upon which they used as collateral to make other leveraged financial “investments” like when the speculators drove the price of gas up. See, the banks have really bankrupt all along, but they have used derivatives to hide it. When the house of cards came falling down, they ran to the taxpayer to bailout their little scheme, so they could start all over again… Now instead of rebuilding the nation and the world, they continue to trade derivatives. Talk about a waste of time and money. Rome is figuratively burning while the bankers trade worthless “assets” on the public dime.
Meanwhile, the still somehow prevailing delusion is that the speculators must be protected! Why do we even need to protect them at all? The Federal Reserve Board, Inc. created trillions of dollars in loans to trade for these financial instruments at nearly 0% interest. Their measures have allowed the big banks to “earn” so much profit at taxpayer expense under the various bailout programs. Let’s instead use the awesome power of money creation to create trillions of dollars in loans for fantastic new technology and infrastructure for the nation and the world. We can eventually wipe poverty, hunger, and disease out of existence if we can make this decision. We’ll build a real recovery so we don’t need to make austerity cuts like those that were forced upon Haiti, for example, by the IMF.
The Four Disingenuous parts of the Obama/Volcker Proposal
Smokescreen #1, More gambling with your money in tow: An article in the Financial Times explains why Obama’s putative “war on Wall Street” is no threat to the Casino Economy. As concerns “proprietary trading,” banks will be able to continue proprietary trading related to their customers’ business (i.e., on behalf of their customers). “Glass-Steagall [Act] largely banned proprietary trading with certain exemptions for safety and soundness concerns. The trading, in which a bank buys and sells stocks and other securities from its own account, led to big profits at institutions after Gramm-Leach-Blilely allowed the transactions…. But implementation of Obama’s plan for proprietary trading could be messy since banks often conduct trading on behalf of clients from their own account.”
The Economist says, “Commercial banks may be unfazed by curbs on trading. Most have already pared their prop-trading desks. JPMorgan Chase derives a mere 1% of its revenues (and 3-5% of its investment bank’s) from such business. But having to divest Highbridge, a big hedge-fund firm, would be “horrible”, says a JPMorgan insider. The bank thinks that may not be necessary since its capital is not invested directly in Highbridge’s funds. But no one is sure.”
Smokescreen #2, Risky bets will continue: While banks would be forced to spin off or close proprietary trading desks, they could continue to take risky bets on their own account as part of market-making activities, as counterparties to derivative and structured credit products demanded by clients, and in securitization activities. As the Economist goes on, “Enforcement could be tricky, too. Regulators will struggle to differentiate between proprietary trades and those for clients (someone is on the other side of every trade) or hedging. Getting it wrong would be counter-productive: preventing banks from hedging their risks would make them less stable.”
Smokescreen #3, Cover-up for investing in hedge funds: Prohibiting banks from investing in hedge funds means nothing: banks would still be able to lend to hedge funds and private equity funds — and could structure these loans in ways that mimicked equity participation, in much the same way as shariah-compliant securities provide debt-like exposure without violating Islamic prohibitions on interest. The Economist says, “Nor would they be able to engage in “proprietary” trading—punting their own capital—though they could continue to offer investment banking for clients, such as underwriting securities, making markets and advising on mergers.”
Smokescreen #4 No real break up plans: According to Simon Johnson,
“The White House background briefing is that their proposals would freeze biggest bank size “as is” — this makes no sense at all. The Bush and Obama administration’s solutions to banking failure was to federally subsidize the already behemoth banks, and encourage them to eat their competition.
Twenty years of reckless expansion, a massive crisis, and the most generous bailout in human history are not a recipe for “right” sized banks. There is a lot of work the administration hasn’t done on the details — this is a classic policy scramble, in which ducks have not been lined up. But we should treat this as the public comment phase for potentially sensible principles — and an opportunity to propose workable details. The banks are already hard at work, pushing in the other direction.
It’s a big potential policy change, and my litmus test is simple – does it, at the end of the day, imply breaking Goldman Sachs up into 4 or 5 independent pieces?
The same Economist article says, “Moreover, the plan is unlikely to help much in solving the too-big-to-fail problem. Even shorn of prop-trading, the biggest firms will still be huge (though also less prone to the conflicts of interest that come with the ability to trade against clients). As for the new limits on non-deposit funding, officials admit that these are designed to prevent further growth rather than to force firms to shrink.”
John Carney notes “The banks are hesitant to speak out in any official capacity, although Goldman Sachs did say they thought less than 10% of their business would be affected. How is this going to really going to break up the banks?
This caused one executive at a competitor to scoff: “Goldman thinks it can still be Goldman, huh? Well, if they’re right, nothing changes. But I’m not sure Obama really can get away with leaving Goldman untouched,” the person scoffed.”
What actually needs to be done
Banks that we deposit our money into should be commercial banks, and do things that commercial banks do, you know, like lend commercially to the community. I don’t see any need for banks larger than community and regionally sized banks. The big national/international banks don’t know how to address the needs of the community. Roosevelt’s Glass-Steagall Act was banking modernization. The 1999 “Banking Modernization Act” was demodernization.
In order to achieve this, first, the scoundrels surrounding the President must be removed. This includes Summers, whose removal along with Geithner, Bernanke, Orszag, and the Emanuel brothers will probably be the first step away from careening over the edge of a pit of no return. This is essential because they will vehemently oppose what reforms that must be done. The President is apparently not capable of thinking for himself. We must therefore remove all corrupting influences whispering into his ears. We must completely split commercial banks from investment banks so banks will return to traditional banking activities, such as making investments in the community, in the physical economy. They may presently make more profit risking our deposits as leverage to speculate rather than produce. This is why we must separate them– in order to remove the temptation and turn them yet again into good servants of our communities.
Wealth is in production, not paper. Speculation produces no true wealth. Yet, strangely, investment banking functions are valued over commercial lending. This activity actually threatens us all because it dries up credit for the real economy– the place where we all live and work. This is why we need a true return to Glass-Steagall, because it will largely eliminate the derivative trade which is toxic to growth of the real economy.
Most of the credit in the world is now controlled by the big banks, thanks to the Bush-Obama bailout. This credit is being tied up by these toxic investment banking activities, like derivative trading that is actually counterintuitive to the health of the real economy, and there is little leftover for any traditional banking functions. Either we force Obama to implement the true Glass-Steagall and really break up the banks, or it’s the austerity panels for all of us.
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”