The Pillage People

One year after the Wall Street bailout, real reform of the financial sector is still a dream.

Roger Bybee October 30, 2009

Former U.S. Treasury Secretary Henry Paulson arrives for testimony before the House Oversight and Government Reform Committee July 16, 2009 in Washington, D.C. (Photo by Win McNamee/Getty Images)

It’s as if last year’s melt­down – caus­ing a $16 tril­lion bailout of the finan­cial indus­try, the dou­bling of America’s unem­ploy­ment rate and the loss of 2 mil­lion man­u­fac­tur­ing jobs in 2008 – had nev­er tak­en place. Two of the five biggest invest­ment banks, Bear Stearns and Lehman Broth­ers, have bit­ten the dust, but the sur­vivors intend to par­ty on, fed­er­al dol­lars in hand.

The diversion of federal resources to bailing out the financial sector has created a far more polarized society.

The Oba­ma administration’s pas­sive atti­tude cre­ates despair for observers like Wall Street vet­er­an Nomi Prins, a for­mer man­ag­ing direc­tor of Bear Stearns and Gold­man Sachs and author of It Takes a Pil­lage: Behind the Bailouts, Bonus­es, and Back­room Deals from Wash­ing­ton to Wall Street (John Wiley & Sons, Sep­tem­ber). Where­as the New Deal meshed gov­ern­ment res­cue with eco­nom­ic restruc­tur­ing,” Prins sees few signs that the Oba­ma team is going to insist that the big bailout be cou­pled with seri­ous re-reg­u­la­tion of the finan­cial sector. 

I think we are less sta­ble now,” Prins told In These Times. There are few­er banks and they are more con­cen­trat­ed and more influ­en­tial than before. We might not have a cri­sis on sub­prime loans in five years, but it might turn out to be the finan­cial sec­tor not ful­ly pay­ing back their loans that caus­es a new crisis.”

Thus far, Oba­ma seems unwill­ing to engage in an all-out fight with Wall Street or even fun­da­men­tal­ly break from the trick­le-down approach fol­lowed by for­mer Trea­sury Sec­re­tary Hank Paul­son (the for­mer Gold­man Sachs chair­man and CEO). Paul­son argued that major invest­ment banks were too big to fail” and then unleashed a gush­er of fed­er­al assis­tance to Wall Street, start­ing with $787 bil­lion in TARP funds.

A very dif­fer­ent, bot­tom-up approach would have been far less expen­sive. A total of about $1.7 tril­lion would have han­dled the sub­prime cri­sis,” says Prins. With that invest­ment, the gov­ern­ment could have bought or sub­si­dized every sin­gle house on the verge of fore­clo­sure. That would have been a very cheap fix for sub­prime loans.

But such an approach was appar­ent­ly unthink­able to Paul­son. On July 8, 2008, Paul­son took a free-mar­ket stance toward mod­er­ate-income fam­i­lies fac­ing fore­clo­sure, many of whom had been vic­tim­ized by decep­tive prac­tices asso­ci­at­ed with sub­prime loans. Acknowl­edg­ing that these fam­i­lies will lose their homes,” Paul­son nonethe­less said, There is lit­tle pub­lic pol­i­cy­mak­ers can or should do to com­pen­sate for unten­able finan­cial decisions.”

How­ev­er, in the fall of 2008, just two months after his speech about hold­ing home­own­ers respon­si­ble for their unten­able finan­cial deci­sions,” Paul­son came up with a relief strat­e­gy for these too big to fail” banks and insurers.

Pro­posed reforms by the Oba­ma admin­is­tra­tion have been dis­ap­point­ing, says Prins. They’re using the same approach [as the Bush Admin­is­tra­tion] of giv­ing mon­ey to the banks and assum­ing that they’ll lend it to the peo­ple. There’s nev­er been an inde­pen­dent drill-down to dis­cov­er banks’ real assets and lia­bil­i­ties like the 1930’s. The stress tests’ were val­ued by traders who sold them in the first place, so it becomes kind of cir­cu­lar and meaningless.”

Instead of insti­tut­ing reform, Oba­ma and Co. mere­ly calls their ideas reform’,” Prins writes. 

Even some pro­gres­sive Democ­rats like House Finan­cial Ser­vices Com­mit­tee Chair Bar­ney Frank (D‑Mass.) have expressed wor­ries that too-strin­gent leg­is­la­tion could cur­tail finan­cial inno­va­tion.” That was the argu­ment behind repeal­ing the Glass-Stea­gall Act,” says Prins. Glass-Stea­gall was a cru­cial New Deal bank­ing reg­u­la­tion enact­ed to pre­vent a replay of the spec­u­la­tion-induced 1929 crash. It was repealed by the Gramm-Leach-Bliley Act of 1999 on a 92 – 8 vote.

The Trea­sury Department’s call for more trans­paren­cy so all finan­cial trans­ac­tions – includ­ing deriv­a­tives and cred­it default oblig­a­tions – are record­ed is a good step, but enforce­ment pro­ce­dures are vague. The indus­try should be dis­sect­ed and cut into parts that can be reg­u­lat­ed,” instead of being per­ma­nent­ly posi­tioned for gov­ern­ment hand­outs in the name of being too big to fail.” The fed­er­al gov­ern­ment needs to take away the abil­i­ty for the finan­cial sys­tem to lever­age and trade itself beyond its capac­i­ty to absorb the risk,” says Prins.

Par­tic­u­lar­ly vital, she says, is re-insti­tut­ing the Glass-Stea­gall Act, which sep­a­rat­ed banks into oper­a­tions mak­ing con­ven­tion­al loans (mort­gages, car loans, com­mer­cial lend­ing, etc.) and those allowed to engage in spec­u­la­tion. There can be a role for spec­u­la­tion – that is, any invest­ment with risk – but not a role for gov­ern­ment sub­si­diz­ing that speculation.”

One par­tic­u­lar­ly use­ful idea to emerge from the Oba­ma Admin­is­tra­tion is estab­lish­ing a Con­sumer Finan­cial Pro­tec­tion Agency. Hav­ing a real enforce­ment agency would make a dif­fer­ence; but cer­tain­ly it would encounter push­back from Wall Street,” she says. Even if the agency comes to fruition, it will be hard to do its stat­ed job.”

Over­all, the diver­sion of fed­er­al resources to bail­ing out the finan­cial sec­tor has cre­at­ed a far more polar­ized soci­ety, with spread­ing con­di­tions of pover­ty and depri­va­tion across Amer­i­ca, Prins argues.

We’re cre­at­ing cuts at the police sta­tion, the fire sta­tion, the pub­lic parks, the libraries,” she says. We’re see­ing much more of a Dick­en­sian soci­ety, and these effects will be long-lasting.” 

Despite her exhaus­tive research in doc­u­ment­ing the size of the ever-bal­loon­ing gov­ern­ment bailout of the finan­cial sec­tor, Prins is still stunned by how quick­ly the fed­er­al gov­ern­ment jumped to bail out bankers. It’s amaz­ing how much mon­ey the gov­ern­ment can come up with… with­out ask­ing any ques­tions or putting any new rules in place,” she sighs. 

Roger Bybee is a Mil­wau­kee-based free­lance writer and Uni­ver­si­ty of Illi­nois vis­it­ing pro­fes­sor in Labor Edu­ca­tion.Roger’s work has appeared in numer­ous nation­al pub­li­ca­tions, includ­ing Z mag­a­zine, Dol­lars & Sense, The Pro­gres­sive, Pro­gres­sive Pop­ulist, Huff­in­g­ton Post, The Amer­i­can Prospect, Yes! and For­eign Pol­i­cy in Focus.More of his work can be found at zcom​mu​ni​ca​tions​.org/​z​s​p​a​c​e​/​r​o​g​e​r​d​bybee.
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