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