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Jobs, Rules, Too-Big-to-Fail: House Bank Bill Fatally Flawed

Jobs, Rules, Too-Big-to-Fail: House Bank Bill Fatally Flawed

Last week, the House of Representatives finally approved a financial regulatory overhaul and President Barack Obama announced a new initiative to address the unemployment crisis. Both are a step in the right direction, but neither offer effective solutions to problems that still plague the U.S. economy.

The House bill doesn’t do away with too-big-to-fail banks and that’s a big problem. As John Nichols explains for The Nation, “the big banks aren’t going to get sidelined—let alone broken up—anytime soon.” Instead of splitting large, risky banks into smaller firms that could fail without wreaking economic havoc, the House bill gives regulators more power, including the ability to bail out a faltering bank with billions of taxpayer dollars. When push comes to shove, regulators are not going to risk letting a major bank fail. They’ll just bail the company out. We all saw what happened when Lehman Brothers collapsed last year.

By imposing a tougher set of rules on banks, it’s conceivable that regulators could prevent some future failures. But as Mary Kane notes for The Washington Independent, Congress carved so many loopholes in the new laws that banks will have little trouble skirting them.

Obama had hoped to create a new Consumer Financial Protection Agency (CFPA) to crack down on predatory lending, but a coalition of bank-friendly Democrats pushed through amendments that significantly weaken it. Obama wanted states to have the power to enforce stronger rules on predatory lending. Under a loophole that Rep. Melissa Bean (D-IL) pressed into the House bill, states are prevented from writing or enforcing rules that limit interest rates charged by credit card companies and payday lenders. That’s a really destructive move, Kane notes, since it was stateregulators, not federal regulators, who cracked down on abusive lending over the past decade.

Obama also hoped to require that risky derivatives transactions would be conducted via exchange like ordinary stock trades. Derivatives are the type of trades that brought down AIG. But the House bill exempts a huge portion of transactions from this requirement and changes the definition of “exchange” to include private, unregulated derivatives trades, as Nick Baumann explains for Mother Jones. This is a fatal flaw in the regulatory overhaul. Derivatives are the primary technique that banks use to make themselves too-big-to-fail. Over 95% of the $290 trillion derivatives market is housed at just five banks. These derivatives tie the bank to other financial firms in a complicated web of risk that is impossible for regulators to navigate. If one of those five banks goes down, there’s no way a regulator can predict the consequences.

The only hope for meaningful reform right now rests in the Senate, which is considering a much tougher bill than what the House approved. But the Senate has yet to even conduct mark-up hearings on its legislation and the pressure from the banking lobby is going to be enormous. Progressives have to keep pushing for a better bill if we want to protect our economy from the abuses that brought on the current recession.

And while huge federal bailouts for banking giants like Citigroup and Bank of America have helped the financial sector recover, the broader economy is battling the highest unemployment levels since the early Reagan era. Things are poised to get a lot worse. As Daniela Perdomo emphasizes for AlterNet, a full 3.2 million workers will lose their unemployment benefits by the end of March 2010. Even if the unemployment rate stays where it is—and Perdomo notes that a vast majority of experts think its going to go higher—the impact on ordinary people is going to be even more severe than today’s nightmare.

In a blog post for Working In These Times, Roger Bybee highlights a piece by Harvard University Law School Professor Elizabeth Warren, who emphasizes the hardships faced by ordinary families. The statistics are grim—one-eighth of Americans are on food stamps, one-eighth cannot pay their mortgages and 120,000 families are filing for bankruptcy every month.

We need to take serious steps to get people back to work. Mass unemployment means that consumers don’t spend money, which means that companies don’t sell as much, which makes companies lay off more workers to cut costs. It’s a self-reinforcing cycle. The market can’t fix unemployment without help.

So Obama’s Dec. 8 speech announcing a new job-creation plan was a welcome event. But the concrete aspects of Obama’s plan are not effective. All the tax cuts in the world won’t necessarily put people back to work. Obama did endorse a public jobs plan which involved the government hiring people to improve the nation’s infrastructure and clean up communities ravaged by the economic crisis, but he shied away from any specific numbers.

As David Roberts explains for Grist, Obama’s willingness to sign off on a $23 billion program for environmentally friendly home renovations is a step in the right direction. The plan is being referred to as “cash-for-caulkers” and is modeled on the very successful cash-for-clunkers program. The government will pay people to increase the energy efficiency of their homes, helping people cut down on utility bills and increasing the demand for construction labor and products like new windows and doors. It’s a good idea. But if all we get are tax cuts and $23 billion for greener homes, the jobs bill is not going to assuage the unemployment crisis.

There is no reason to be concerned about the cost of a thorough jobs program. Taxpayers committed trillions of dollars to help the financial sector weather the economic storm. Anybody who is worked up about the prospect of spending money on jobs should read Amitabh Pal’s piece for The Progressive. A modest tax on speculative trades of stock and derivatives could easily raise $150 billion a year to finance a robust jobs program.

At this point in the economic downturn, the government needs to take much stronger steps to rein in Wall Street and create jobs. We know what needs to be done to protect the economy from risky banking and we can afford to fix the unemployment crisis. All we need is the political will.

This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. This is a project of The Media Consortium, a network of leading independent media outlets.

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BY Zach Carter, Media Consortium

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17 comments

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5:11PM PST on Dec 16, 2009

Jim Steve - I'm just very glad that Congress and the President are demonstrating how much they care about the working class...

Unreal..

12:39PM PST on Dec 16, 2009

Here's an interesting one Paul. Remember that the Government is crowing about getting back the TARP money from the Banks? Well, the Government has provided a tax loopholes. CitiCorp will actually be able to pay back the TARP money with ta tax breaks worth $38 Billion!!!!. Nice.

I suppose it's only fair because other Financial Corporations including Goldman Sachs got Billions through AIG Credit Default Swaps. That was enough to repay their TARP money using OUR money. Citi missed out on that one, so now they are getting a piece. From the Washington Post, Headline: Citigroup Gets Huge New $38 Billion Bailout, Wiping Out All of Taxpayer's "Profits" Full article:
http://www.businessinsider.com/citigroup-gets-huge-new-38-billion-bailout-wiping-out-all-of-the-taxpayers-profits-2009-12

9:59AM PST on Dec 16, 2009

Jim Steve - Great article in Rolling Stone, thanks.

Gabriella A - "Been there, done That anwhat did it get consumers? A Big Fat Nothing! Need I remind you that it was our Former President that put is into this economic mess"

How can you remind me of something that didn't happen? The former President, though far from perfect, did not put us in this economic mess. The last part of my comment that you referenced is talking about small business. Even those with liquidity are not doing much until they get comfortable with the plans and changes of the new Administration and Congress. If you are, or were, one of them, how comfortable would you be taking a financial risk without knowing about Cap and Trade, the Health Care bill, and tax changes that will happen during the fastest increase in the National Debt in the history of the country?

Also, card carrying member of what exactly?

8:12AM PST on Dec 16, 2009

Jim-Thanks for the share. I read and passed the article that you shared on. Another example of how the powes that be keep us at each others throats while they take care of their own in the back ground. I paticuarly like how the writer points out that TeaBaggers are this administrations best friends! LOL!!!

7:22AM PST on Dec 16, 2009

Judy S...... You make an excellent point. In fact it can be argued the US Constitutions actually forbids the Government from interfering. By the way, it's people like you, who continue to make America function by taking personal responsibility. If everyone had the attitude that the Government has to "save" them; the country would soon collapse.

7:19AM PST on Dec 16, 2009

The blame is bi-partisan if politicians REALLY wanted to resolve the problem, instead of giving all those tax dollars to the greedy idiots on wall street et. al. they could have taken a fraction of the 787 Billion and spread it among the U.S. populace - result NO RECESSION - NO FORECLOSURES - NO BANKRUPTCIES - NO FAILING ECONOMY. I have concluded that to be a politician you are required to be a prevaricator with an IQ less than room temperature.

7:12AM PST on Dec 16, 2009

Gabriela.......
There is a lot of blame to place at the doorstep of the Republicans. Especially the removal of leverage limits for Banks and Investment Banks. That action was successfully lobbied for by Paulson when he was CEO of Goldman Sachs Paulson later was responsible for the massive Wall Street Bailouts. But we should also note that the TARP bill (demanded by the same Henry Paulson) had no strings attached despite assurances of leading DEMOCRATS who wrote the Bill. ..

That being said, the actions of the CLINTON administration should not be overlooked. Under his Presidency, Glass Steagal was repealed. Brooksley Born was stopped from regulating derivatives by Rubin, Summers, Greenspan and Geithner. All Clinton Picks.

The Commodity Futures Modernization Act was passed with "strong White House Support". That last opened the door to the derivatives (especially Credit Default Swaps) that nearly wrecked the Worlds economies. That action, which was signed into law in Dec 24th, 2000 included the Enron Loophole.

So, why is Larry Summers THE key person for Obama as economic adviser? Why is Geithner the Sec of the Treasury? ...........You might want to look at an article by Matt Taibbi of Rolling Stone......... http://www.rollingstone.com/politics/story/31234647/obamas_big_sellout/6

6:08AM PST on Dec 16, 2009

Somebody tell me if there is anything in the Constitution of the United States that makes our government responsible for any of this. If I lose my job because the business closed or because I didn't make it to work on time - it is my responsibility and freedom to look elsewhere and do whatever it takes to take care of my needs. I have worked 3 jobs at one time in the past in order to reduce my debt and be a single parent - if necessary I could and would do it again.

5:48AM PST on Dec 16, 2009

Good article but I thinj a lot of people commenting that the President is the problem, ought to be pointing the finger at Congress! President Obama is on the right track, it is Congress (Especially Blue Dogs) that are massivly Messing Up Everything. They are GOP in Demovratic clothing.

In response to Paul Puckett: Been there, done That anwhat did it get consumers? A Big Fat Nothing! Need I remind you that it was our Former President that put is into this economic mess and initiatef the tax cuts And the first stimulus..what have the big banks done for the consumers sunce they were bailed out? That would be a Big Fat Nothing. Small business is the first and biggrat creator of jobs and without the banks lending money, that won't happen.Big Banks Are the "wealthy Supporters" and they spend Milluohbs lobbying against the reforms that would limit their abuses of consumers! You sound like a card carrying member.

5:48AM PST on Dec 16, 2009

Good article but I thinj a lot of people commenting that the President is the problem, ought to be pointing the finger at Congress! President Obama is on the right track, it is Congress (Especially Blue Dogs) that are massivly Messing Up Everything. They are GOP in Demovratic clothing.

In response to Paul Puckett: Been there, done That anwhat did it get consumers? A Big Fat Nothing! Need I remind you that it was our Former President that put is into this economic mess and initiatef the tax cuts And the first stimulus..what have the big banks done for the consumers sunce they were bailed out? That would be a Big Fat Nothing. Small business is the first and biggrat creator of jobs and without the banks lending money, that won't happen.Big Banks Are the "wealthy Supporters" and they spend Milluohbs lobbying against the reforms that would limit their abuses of consumers! You sound like a card carrying member.

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