Wall St. Reform

This is serious

The U.S. economy is in real danger. It might pull through on it's own, but no one knows—no one. Least of all Michael Moore or Mike Huckabee. They and the naive democrats and the more numerous extreme republicans are a danger.
I'm an economist—but finance is not my field. During the California electricity meltdown I attended a meeting with several high-level financial economist about how it was turning into a financial crisis. This was their message: It is extremely dangerous and can move very fast without warning. Basically, a financial market, without enough government stabilizers, can self distruct in a flash.

What's going on

It's complex, but it's also simple. From 1870 -- 1934 we had a banking crisis every ten years. Banks and financial markets work well when people have confidence in them. But when something goes wrong in one corner, it's impossible to know how widespread it is, and people lose confidence. They want to grab their money and put it somewhere safe -- that's sensible for the individual, but it causes a financial panic that is self perpetuating.
In the Great Depression the government began requiring deposit insurance, and limiting banks leverage. This gives people confidence even when something goes wrong in one corner. No more bank panics. The government makes the market work, the market makes the country work.
But financiers don't like to pay for insurance and like to leverage their investment. Market fundamentalism--the idea that all we need is markets--began to spread because the markets were working well (no more bank panics). Eventually the financiers found ways around the government stabilizers and now we are back into pre-depression instabilities. But today it more global and more complex.

But Wall Street is Ripping off Main Street !!!

Yes there was some of that going on. And there will be more of it in the $700 B bailout. But when the ship is sinking it's the wrong time to dock the captain's pay. Focus on saving the ship. Sure, improve the bailout plan from what Paulson presented. Get more collateral for the bailout money. But pass a bailout bill and pass it now.
There were a lot of stupid Michael-Moore Democrats against it, but a lot of them just didn't want to get beat up by all the Republicans who voted against it and would then blamed the Dems for what will be a messy bailout. Truth is, the conservative Republicans who tanked the bailout (on the first round) are the same Republicans that always vote against regulations to stabilize the financial sector. The Huckabee Republicans were the bigger problem before and again now.

Then What?

In the long run, Republicans need to stop demonizing the government, and Democrats need to stop demonizing the market. In my view Obama is the best antidote to both Michael Moore and Mike Huckabee




Steps to Financial Cataclysm Paved with Industry Dollars

March 4 - The financial sector invested more than $5 billion in political influence purchasing in Washington over the past decade, with as many as 3,000 lobbyists winning deregulation and other policy decisions that led directly to the current financial collapse, according to a 231-page report issued today by Essential Information and the Consumer Education Foundation.

The report, "Sold Out: How Wall Street and Washington Betrayed America," shows that, from 1998-2008, Wall Street investment firms, commercial banks, hedge funds, real estate companies and insurance conglomerates made $1.725 billion in political contributions and spent another $3.4 billion on lobbyists, a financial juggernaut aimed at undercutting federal regulation. Nearly 3,000 officially registered federal lobbyists worked for the industry in 2007 alone. The report documents a dozen distinct deregulatory moves that, together, led to the financial meltdown. These include prohibitions on regulating financial derivatives; the repeal of regulatory barriers between commercial banks and investment banks; a voluntary regulation scheme for big investment banks; and federal refusal to act to stop predatory subprime lending.

"The report details, step-by-step, how Washington systematically sold out to Wall Street," says Harvey Rosenfield, president of the Consumer Education Foundation, a California-based non-profit organization. "Depression-era programs that would have prevented the financial meltdown that began last year were dismantled, and the warnings of those who foresaw disaster were drowned in an ocean of political money. Americans were betrayed, and we are paying a high price -- trillions of dollars -- for that betrayal."

"Congress and the Executive Branch," says Robert Weissman of Essential Information and the lead author of the report, "responded to the legal bribes from the financial sector, rolling back common-sense standards, barring honest regulators from issuing rules to address emerging problems and trashing enforcement efforts. The progressive erosion of regulatory restraining walls led to a flood of bad loans, and a tsunami of bad bets based on those bad loans. Now, there is wreckage across the financial landscape."

12 Key Policy Decisions Led to Cataclysm

Financial deregulation led directly to the current economic meltdown. For the last three decades, government regulators, Congress and the executive branch, on a bipartisan basis, steadily eroded the regulatory system that restrained the financial sector from acting on its own worst tendencies. "Sold Out" details a dozen key steps to financial meltdown, revealing how industry pressure led to these deregulatory moves and their consequences:

  1. 1. In 1999, Congress repealed the Glass-Steagall Act, which had prohibited the merger of commercial banking and investment banking.
  2. Regulatory rules permitted off-balance sheet accounting -- tricks that enabled banks to hide their liabilities.
  3. The Clinton administration blocked the Commodity Futures Trading Commission from regulating financial derivatives -- which became the basis for massive speculation.
  4. Congress in 2000 prohibited regulation of financial derivatives when it passed the Commodity Futures Modernization Act.
  5. The Securities and Exchange Commission in 2004 adopted a voluntary regulation scheme for investment banks that enabled them to incur much higher levels of debt.
  6. Rules adopted by global regulators at the behest of the financial industry would enable commercial banks to determine their own capital reserve requirements, based on their internal "risk-assessment models."
  7. Federal regulators refused to block widespread predatory lending practices earlier in this decade, failing to either issue appropriate regulations or even enforce existing ones.
  8. Federal bank regulators claimed the power to supersede state consumer protection laws that could have diminished predatory lending and other abusive practices.
  9. Federal rules prevent victims of abusive loans from suing firms that bought their loans from the banks that issued the original loan.
  10. Fannie Mae and Freddie Mac expanded beyond their traditional scope of business and entered the subprime market, ultimately costing taxpayers hundreds of billions of dollars.
  11. The abandonment of antitrust and related regulatory principles enabled the creation of too-big-to-fail megabanks, which engaged in much riskier practices than smaller banks.
  12. Beset by conflicts of interest, private credit rating companies incorrectly assessed the quality of mortgage-backed securities; a 2006 law handcuffed the SEC from properly regulating the firms.

Financial Sector Political Money and 3000 Lobbyists Dictated Washington Policy

During the period 1998-2008:

  • Commercial banks spent more than $154 million on campaign contributions, while investing $363 million in officially registered lobbying:
  • Accounting firms spent $68 million on campaign contributions and $115 million on lobbying;
  • Insurance companies donated more than $218 million and spent more than $1.1 billion on lobbying;
  • Securities firms invested more than $504 million in campaign contributions, and an additional $576 million in lobbying. Included in this total: private equity firms contributed $56 million to federal candidates and spent $33 million on lobbying; and hedge funds spent $32 million on campaign contributions (about half in the 2008 election cycle).

The betrayal was bipartisan: about 55 percent of the political donations went to Republicans and 45 percent to Democrats, primarily reflecting the balance of power over the decade. Democrats took just more than half of the financial sector's 2008 election cycle contributions.

The financial sector buttressed its political strength by placing Wall Street expatriates in top regulatory positions, including the post of Treasury Secretary held by two former Goldman Sachs chairs, Robert Rubin and Henry Paulson.

Financial firms employed a legion of lobbyists, maintaining nearly 3,000 separate lobbyists in 2007 alone.

These companies drew heavily from government in choosing their lobbyists. Surveying 20 leading financial firms, "Sold Out" finds 142 of the lobbyists they employed from 1998-2008 were previously high-ranking officials or employees in the Executive Branch or Congress.

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Essential Information is a Washington, D.C. nonprofit that seeks to curb excessive corporate power. The Consumer Education Foundation is a California-based nonprofit that supports measures to prevent losses to consumers.