[Marxism] Obama Tip-Toes Around Wall Street's Looming Meltdown

Louis Proyect lnp3 at panix.com
Wed Sep 16 07:39:36 MDT 2009

Obama Tip-Toes Around Wall Street's Looming Meltdown
By Nomi Prins, Mother Jones
Posted on September 16, 2009, Printed on September 16, 2009

On Monday-one year after the once-mighty Lehman Brothers collapsed in 
the nation's biggest bankruptcy-President Obama addressed the state of 
the economy and again outlined his proposals for what he calls reform. 
The location-Federal Hall at 26 Wall Street, near the New York Stock 
Exchange and New York Federal Reserve Bank-was fitting. George 
Washington took his presidential oath there, a precursor for how 
intertwined Washington and Wall Street would become. And Obama's speech 
indicates that he's still making the grave error of mistaking the health 
of Wall Street for the health of the American economy.

Obama chose not to deliver his speech on, say, the streets of Bend, 
Oregon, or Fresno, California, which provide different indicators of our 
economic predicament. That's because Washington's approach to the crisis 
has been to focus on the banking system, throw a few crumbs to citizens, 
and hope everything else will magically work itself out.

The problem with concentrating on the banking system is that it allows 
the administration to present an overly optimistic assessment of its 
actions. "The storms of the past two years are beginning to break," 
Obama pronounced, attributing this to a government that "moved quickly 
on all fronts, initializing a financial stability plan to rescue the 
system from the crisis and restart lending for all those affected by the 
crisis." He continued: "By taking aggressive and innovative steps in 
credit markets, we spurred lending not just to banks, but to folks 
looking to buy homes or cars, take out student loans, or finance small 
businesses. Our home ownership plan has helped responsible homeowners 
refinance to stem the tide of lost homes and lost home values."

Those steps were certainly aggressive. Under both the Bush and Obama 
administrations, the government, from the Federal Reserve to the 
Treasury Department, has flushed the banking systems and other 
components of the financial markets with $17.5 trillion worth of loans, 
guarantees, and other forms of support. About another $1 trillion has 
been provided to citizens through the recovery package, first-time 
homeowner tax benefits, auto purchase credits, and approximately $800 
billion to help guarantee the loans of certain lenders-which somewhat 
helps borrowers, but helps lenders more.

But these measures have hardly brought the economy back from the brink. 
They brought Wall Street back from capital starvation and prevented the 
possibility of more big banks going bankrupt-instead of the slew of 
smaller and mid-size ones that have since met the same fate as Lehman 
Brothers. Taking credit for stabilizing the financial system after 
feeding it with massive amounts of federal money is like a teacher 
bragging about turning around the academic performance of a failing 
student after handing them all the answers to the big tests.

Here's how the economy is really faring (and how Washington is failing 
to take adequate steps to fix it):

     * National unemployment is at 9.7 percent, higher than last year's 
5.8 percent, with double digit jobless rates in 139 metropolitan areas 
this July, compared to 14 last July.
     * The number of foreclosures is greater than last year: nearly 2 
million new foreclosure filings occurred in the first half of 2009, up 
15 percent from the same period in 2008.
     * While homes in some areas have begun to slowly sell again, they 
are doing so at deeply depressed prices, in many instances below their 
mortgage value.
     * Wall Street bonuses are back to pre-crisis levels. For some 
firms, such as Goldman Sachs, they are even higher.
     * Bank leverage, or excessive borrowing on the back of risky 
assets-a major cause of the meltdown-is rising again.
     * Geithner recently reported that his program to enable private 
financial firms to buy up toxic assets with government help will wind up 
costing less than the $1 trillion he had first envisioned. However, he 
did not mention that there are less toxic assets available to buy partly 
because the Fed has allowed banks to use some toxic assets as collateral 
in return for cheap loans.
     * Big banks are bigger than they were last year. Since the Fed 
blessed more mergers last fall, the nation's three largest banks-Bank of 
America, JPMorgan Chase and Wells Fargo-hold the maximum percentage of 
legally permissable US deposits or more.
     * Mid-size and smaller banks keep closing. This year, the Federal 
Deposit Insurance Corporation (FDIC) has closed 92 banks and depleted 
its deposit insurance money in the process.
     * We still don't have detailed information on the trillions of 
dollars of loans the Fed handed out to the banking sector or about the 
quality of the collateral banks provided in return.

Obama did acknowledge that the picture isn't entirely rosy. He also 
outlined his ideas for avoiding another catastrophe: reshuffle the decks 
of regulatory agencies, slap a few trading constraints on some 
derivatives, and create a Consumer Financial Protection Agency (CFPA). 
But while Obama's rhetoric was stern-"normalcy cannot lead to 
complacency," he vowed-the proposals themselves are hardly sweeping.

Obama's plan calls for eliminating the Office of Thrift Supervision and 
providing greater oversight by the Fed of "systemically important" 
institutions. The Senate is trying to water that down, in part because 
some members of both parties in Congress remain skeptical about the 
power of the Fed itself. The Senate also wants to consolidate regulatory 
authority into fewer entities, but leave oversight to a council of 
regulators. Of course, consolidating regulatory oversight only works if 
regulators are doing their jobs and the banking system is transparent 
enough to allow them to do so.

The last leg of Obama's proposal would be establishing the CFPA, which 
would monitor financial products in an effort to protect consumers from 
risky instruments such as subprime mortgages. Legislation to create such 
an agency is expected to be taken up this year by the House Financial 
Services Committee, chaired by Rep. Barney Frank (D-Mass).

A strong CFPA is a sensible plan. Right now there is no other body 
imbued with the power not just to protect consumers but also to foster 
the general economic stability that would be achieved by closely 
monitoring the integrity of financial products. This proposal has drawn 
the most ire from the banking community, so you know it's good. The 
Chamber of Commerce launched a $2 million ad campaign to convince people 
that a CFPA would mean that local butcher couldn't extend credit to his 
customers without government interference.

But Obama's reforms do not strike deeply enough. The banking crisis has 
been subdued, not fixed, because of enormous amounts of government 
assistance. Ignoring that fact, and failing to overhaul the sector, 
leaves us open to another crisis. And the next round will be worse, 
because there is now so much more federal money invested in the banks.

Simply funding the banking system without reforming it is an expensive 
and dangerous game. Obama is capable of truly fixing things-by dividing 
up the Wall Street mega-banks with a new Glass Steagall Act, thereby 
enabling the success of more extensive regulatory reforms. Or, he could 
introduce a set of cosmetic changes that allow banks to keep doing what 
they did before last year's crisis and that put us on the path for the 
next one.

Nomi Prins is a senior fellow at the public policy center Demos and 
author of Other People's Money and Jacked: How "Conservatives" are 
Picking Your Pocket (Whether You Voted for Them or Not)

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