Thursday, June 25, 2009

Feeding the Bulls IV

Even the New York Times called it "back to business as usual" when the newspaper of record panned 44's financial regulatory reform proposals. The plan is a Wall Street wet dream. As economist Michael Hudson points out in his piece for Counterpunch, the reform proposals fail to address several critical issues:
  • Regulatory capture. Expanding the role of the Federal Reserve as the uber-agency of financial regulation is like putting the fox in charge of the hen house. The Fed is essentially a private bank. Its shares are owned by the commercial bank members, and its chairmen have been banking advocates. The regulatory framework established after the Great Depression was systematically gutted at the request of banking interests. Alan 'Fedspan', creator of the bubble currently deflating us all, is the archetypal example of a Fed chairman under the influence of Wall Street. Andrew Jackson did not spend his second administration fighting the Second Bank of the U.S. and Nicholas Biddle for nothing. He knew that the power to print money should be a monopoly controlled by a democratically elected government. In modern terms, the ability to create credit has devolved to any business willing to sell debt--the shadow banking system. 44 is doing nothing to correct this problem. The Federal Reserve is already the lender of last resort charged with the safety of the banking system, now referred to as "systemic risk". It failed to stop the abusive practices leading to the near melt down of the system. A first step to real reform and public accountability would be to allow GAO--an agency of Congress-- to regularly audit the Federal Reserve since the power to print money is reserved to Congress in the Constitution[1].
  • Failure to prosecute fraud and abuse. A second step would be to prosecute credit companies, including banks, for fraudulent extensions of credit. Bush used an obscure civil war era law in 1864 National Bank Act to block eleven state Attorney Generals from prosecuting financial fraud. He assigned the cases to the federal regulator who refused to prosecute citing 'free market' principles. 44 does not propose repealing this archaic law, and pays lip service to more vigorous federal fraud enforcement without proposing additional funding for it.
  • Consumers left to the mercy of predatory lending. 44 proposes a Consumer Financial Products Agency to protect consumers from predatory lending, but does not support re-instituting usury laws, capping mortgage rates, or rescission of predatory mortgages in bankruptcy court. Nor does he support an actual consumer bank such as postal banks {Another Free Radical Idea, 2/3/09}that could issue their own credit/debit cards and provide automated payment services to insure competitive credit card rates from private banks.
  • Opaque financial derivatives are not eliminated. Wall Street advocates call it financial engineering, but in reality complex derivatives like credit default swaps are casino capitalism. Only a casino wins in the long run, and the same is true for derivatives. Wall Street firms make their money on the fees associated with designing and marketing custom derivatives. 44 does not propose restricting this cash flow based in essence on gambling. He also does not touch the off-balance sheet vehicles used to hide debts an assets beyond the purview of regulators and the public. Requiring banks to hold only 5% of their mortgage loans is simply child's play for the wizards of private credit creation.
  • Favoring financial capitalism over industrial capitalism. The existence of well paid manufactory jobs made a large, financially secure middle class possible. But now the United States is making fewer and fewer capital goods. This de-industrialization is encouraged by a skewed tax system that encourages the selling of debt as the major product of our economy. FICA wage withholding is regressive and only wages below $102,000 are subject to the tax. Yet capital gains, the 'wage' of Wall Street speculators are only taxed at low rates--15% for long term capital gains. As a result of this and other fiscal subsidies for debt leveraging, industrial cash flow is diverted to pay interest and dividends rather than being reinvested in the means of production. This condition leads to further social stratification in which a shrinking middle class is mired in a low-wage debt peonage to the financial elite.
Critics of FDR called him a "traitor to his class" because his progressive programs diverted wealth from the plutocracy of which he was a member to rebuild the country's economy. If only Barack Hussein Obama were inconsistent with his aspirations.

[1] There are bills in the Senate and House intended to assert Congressional oversight of the Federal Reserve: Rep. Ron Paul's Federal Reserve Transparency Act (HR 1207) and Senator Bernard Sander's Federal Reserve Sunshine Act (S604).