EDITORIAL

Taking It to the Street

The Wall Street reform bill that passed the Senate May 20 is a lot like health-care reform — a good start, but not enough to make an immediate difference in the lives of average Americans.

Speaking at Cooper Union April 22, President Obama said, “Ultimately, there is no dividing line between Main Street and Wall Street. We rise and fall together as one nation.”

Except that, a year and a half after the nation’s largest banks panicked Congress into lending them hundreds of billions of dollars to bail them out, Wall Street has recovered and bank profits are back on the rise while millions of Americans have lost their jobs. Now they face the loss of unemployment benefits and health insurance and foreclosure on their homes.

The financial industry deployed more than 3,000 lobbyists and spent more than $1.3 billion to influence the reform bills in the House and Senate. If the bankers couldn’t kill the bill, they managed to turn away most of the populist reforms. In their most blatant power play, the bankers got senators to shut down an amendment by Sen. Sam Brownback (R-Kan.) to exempt auto dealers from consumer regulation because Sens. Jeff Merkley (D-Ore.) and Carl Levin (D-Mich.) had attached a provision to limit the kinds of risky trades FDIC-insured banks could engage in.

A conference committee will resolve differences between the House and Senate versions — and that is where the real sausage will be made. House Financial Services Chairman Barney Frank (D-Mass.) hopes to televise the meetings on C-SPAN, but it is behind closed doors that the conferees will earn their “campaign contributions” and lobbyists will earn their bonuses.

The biggest victory so far was a provision by Sen. Bernie Sanders (I-Vt.) to require the first-ever audit of the Federal Reserve’s emergency lending facilities. The House ordered a full annual audit of the Fed. The House should stand fast for full Fed disclosure.

The biggest disappointments were defeat of the proposal to break up “too-big-to-fail” banks and the failure of Democratic leaders to even bring up the proposal by Merkley and Levin to ban “proprietary trading” by banks.

Neither bill restores the clear division between federally insured commercial banks and risky investment banks that kept the financial system boring but profitable from the 1940s through 1999, when the Republican Congress repealed the New Deal’s Glass-Steagall Act to let the bankers get creative. These are some issues to watch in the conference:

• Volcker Rule. The Senate has a weak version of the Volcker Rule, named after former Fed Chair Paul Volcker, who proposed to discourage risky proprietary trading (that is, trading for their own benefit rather than for their customers) by federally insured commercial banks. The Senate version calls for a study and leaves it up to the regulators. Merkley and Levin would go for a full Volcker and ban proprietary trading; Merkley hopes Senate negotiators will pursue the stronger provision in the conference. The House has no such provision.

• Consumer Financial Protection Agency. The House has an independent CFPA, but with more exemptions. The Senate’s CFPA is part of the Federal Reserve, but with broader authority. Both versions limit state consumer protection laws, although the Senate gives state attorneys general some enforcement authority. The House also exempts auto dealers from CFPA oversight. The Senate regulates car dealers, but on May 24 the Senate adopted a non-binding resolution to exempt car dealers from regulation.

• Derivative reform. The Senate bill includes Sen. Blanche Lincoln (D-Ark.)’s provision to reform derivative exchanges. Derivatives are financial agreements, such as futures, options or swaps, whose value is linked to expected price movements of an underlying asset. Credit default swaps based on subprime mortgages, in unregulated “swaps markets,” were blamed for causing the worldwide economic meltdown. Lincoln’s measure would require derivatives to be traded and cleared in regulated exchanges, and it would force banks to spin off their derivative-swap business to a separate entity so that federally insured deposits would not be used for the derivative bets. It also would ban swaps that cause financial instability. The regulation is opposed by Wall Street and Federal Reserve Chairman Ben Bernanke, who argued that “depository institutions use derivatives to help mitigate the risks of their normal banking activities.”

Bank lobbyists have marked the derivatives regulation for elimination. There has been speculation that the provision would stay in the bill at least until after Lincoln’s June 8 primary runoff with Arkansas Lt. Gov. Bill Halter.

• Capital and leverage. The House has a 15:1 leverage cap, forcing banks to keep money on hand to cushion against losses. The Senate bill leaves capital requirements up to regulators — which is the approach favored by bankers.

• Ratings agencies. Sen. Al Franken (D-Minn.) scored a major victory when he pushed through an amendment that would let securities regulator assign which agency would rate securities, stopping the practice of banks shopping for the most lenient ratings agency. The House has no such change in the ratings agency business model.

• Mortgage underwriting. Both versions discourage lenders from pushing borrowers into riskier loans, and they force the borrower to show some ability to pay.

• “Swipe” fees. Sen. Dick Durbin (D-Ill.) also scored a victory when he pushed through language cracking down on debit card fees. There is no such language in the House bill and the banks will try to kill the Senate provision.

If the bill is not as populist as we would like, it is because members of Congress fear the bankers’ lobbyists more than they fear working-class voters.

The low point was when the Senate voted 80-18 to prohibit states from enforcing consumer protections that are stricter than the federal standard. The 18 senators (listed in Dispatches, page 22) who stood up for states’ rights to protect their citizens were progressive Democrats. The amendment they were trying to stop, sponsored by Sen. Tom Carper (D-Del.) actually was an improvement on the previous amendment by Sen. Bob Corker (R-Tenn.), which would have stripped the states of authority to enforce consumer protections at all. Every Republican except Sen. Scott Brown (R-Mass.) voted for the Corker amendment.

It is possible that a few progressive Dems voted for the Carper amendment in good faith to stop the worse Corker amendment. But it tells you there is a core of about 20 progressive populists in the Senate today. That is a base to build on, but not enough to pass a bill on. Also, the Corker and Carper votes stand as proof that any Republican senator who tells you he or she is in favor of states’ rights is a liar and a scoundrel.

In the months remaining until the mid-term election, Congress must pass a major jobs bill to put jobless Americans back to work rebuilding our roads, bridges, dams, schools and sewers. The Obama administration also proposes to transform our energy system and break our dependency on foreign oil by investing in renewable technologies such as wind, solar, geothermal and biomass generation.

Congress can pay for the jobs bill with a tax on securities trades. A tax of 0.5% on stock exchanges, similar to one levied in Britain, would raise an estimated $150 billion annually. It would have minimal impact on working people investing in mutual funds for their retirement, but it would curb short-term speculators.

Progressives also need to keep an eye on the special commission Obama named to recommend ways to cut the federal deficit. Democrats need to take a stand against cutting social programs for the middle class and lower-income groups. Allowing tax rates to return to the Clinton-era levels, when the budget actually was balanced, would be a good start. — JMC

From The Progressive Populist, June 15, 2010