On Tuesday, banking regulators finalized one of the most important provisions of the 2010 Dodd-Frank financial reform law. It's called the Volcker rule, and it's supposed to prohibit the high-risk trading by commercial banks that helped cause the financial crisis. Here's what you need to know about it.
What's the reason for the new rule? In the run-up to the financial crisis, big banks invested in low-quality mortgage-backed securities. When those over-leveraged bets turned sour, the economy collapsed, and the government had to bail out big financial institutions. The Volcker rule ensures that banks don't engage in what is called proprietary trading—that is, when a firm trades for its own benefit instead of trading on behalf of its customers. In May 2012, JPMorgan Chase lost $2 billion on a bad trade, which led to calls for a strong Volcker rule.
Why is it called the Volcker rule? The rule is named after Paul Volcker, the chairman of the Federal Reserve in the 1980s, and later an adviser to President Barack Obama. He advocated this change in financial regulation and persuaded the president to back the rule in 2010, when the Dodd-Frank bill was passed.
2010? What took so long? One reason it took three years to finish the rule is that after the legislation was passed, the actual regulation had to be crafted jointly by five banking regulators—the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC). That's a lot of coordination amongst people with different backgrounds and priorities. And during the 2012 campaign, Mitt Romney vowed to repeal Dodd-Frank. So for several months, wait-and-see regulators slowed down devising the details of the rule.
Wall Street lobbying also played a big part in delaying the unveiling of the final rule. The financial industry pushed like mad to get key loopholes into the regulation. "It's relentless, nonstop, day and night lobbying," Dennis Kelleher, the president of the financial reform advocacy group Better Markets, said a year ago. "It is absolute total nuclear war that Wall Street is engaged in here." One loophole Wall Street tried to get written into the regulation would characterize certain forms of risky trading as hedging against risk. (Yes, you read that correctly.)
So who won? Kelleher says financial reformers won; these loopholes were not included. "Today’s finalization of the Volcker rule ban on proprietary trading is a major defeat for Wall Street and a direct attack on the high-risk ‘quick-buck’ culture of Wall Street," he said in a statement. Treasury Secretary Jack Lew said the rule would have prevented JPMorgan's $2 billion trading loss last year. CFTC commissioner Bart Chilton, a fierce Wall Street critic, is happy with the rule. Former Rep. Barney Frank (D-Mass.), one of the authors of the Dodd-Frank law, told Mother Jones today, "I have been confident all along that it would be a tough rule. I'll make one prediction: all of the cries of doom that you're going to hear from the financial institutions, three years from now will come to about as much validity as the cries of doom we heard about same-sex marriage."
Obama noted, "Our financial system will be safer and the American people are more secure because we fought to include this protection in the law....I encourage Congress to give these regulators adequate funding to effectively and efficiently implement the rule, which will help protect hardworking families and business owners from future crisis, and restore everyone’s certainty and confidence in America’s dynamic financial system."
But the success of the rule depends on how it is implemented. Marcus Stanley, the policy director at Americans for Financial reform, says that he's "lukewarm" on the rule, mostly because a lot hangs on how it is interpreted by banking regulators who supervise compliance. "Whoever is the primary supervisor has enormous discretion about how this [rule] will affect trading," he says, adding that the final Volcker rule does not include transparency provisions that would allow the public to judge whether banks are complying.
So is financial reform all finished now? No. Proprietary trading contributed to the crisis, but it was not the main cause. Regulators still have other Dodd-Frank provisions to finalize. Wall Street watchdogs have to implement plans to wind down failing banks; finish writing rules governing derivatives trading (which was largely unregulated before the financial crisis); and enforce strong requirements regarding the level of reserves banks must maintain.
Last week, the president and vice-president of the centrist think-tank Third Way accused Sen. Elizabeth Warren (D-Mass.) of ignoring what they call Social Security's "undebatable solvency crisis." In an interview with Mother Jones, Warren fired back, countering the charge, and elaborating on how Social Security could be expanded.
"If we made no changes at all to Social Security," Warren said, "it would continue to make payments at the current level for about 20 years," meaning there is no immediate crisis facing the program, which assists some 58 million Americans. "Modest adjustments," she added, "will make certain… we could increase benefits for those who need it most."
One way to increase monthly benefits to seniors, Warren said, would be to broaden the program's funding pool. She did not elaborate on how, but one proposal that has been floated in recent years would raise the cap on the level of earnings subject to the Social Security tax. In 2013, for example, Americans paid a Social Security tax of 6.2 percent on wages up to $113,700. Earnings over that amount were not subject to the tax. Several members of Congress have introduced legislation that would lift or eliminate this cap, including Sens. Tom Harkin (D-Iowa), Mark Begich (D-Alaska), and Bernie Sanders (I-Vt.), and Reps. Gwen Moore (D-Wisc.), Pete DeFazio (D-Ore.), and Linda Sanchez (D-Calif.). Harkin's bill would increase Social Security payments by $70 a month for low- and middle-income beneficiaries.
A less obvious, but effective way of directing more money into the Social Security pot, Warren said, would be to increase the federal minimum wage. "Raising the minimum wage means we have workers paying more in to support the Social Security system," she said. Warren backs Obama's call for a minimum wage hike from $7.25 to $9 an hour.
The average monthly Social Security payment is $1,162. Americans have become more dependent on the program in recent years because a growing portion of retirees can no longer rely on pensions through their employer. Twenty years ago, 35 percent of private sector employers offered workers a traditional pension that provided monthly payments to retirees. Today, only 18 percent of employers offer such a plan. About 44 million workers get no retirement help from their employers.
In the interview, Warren emphasized that Third Way, as well as many in Congress and the media, are framing the debate over Social Security in the wrong way. "We should stop having a conversation about cutting Social Security a little bit or a lot," she said.
Warren has said time and again that she will not run for president in 2016, but this conflict between the progressive wing and the centrist wing of the Democratic party could serve as a warning for the next Democratic presidential nominee not to stray too far towards the center.
Employment increased in the private and public sectors, despite the continuing effects of the drastic budget cuts that went into effect in March. Industries including transportation, manufacturing, retail, and leisure and hospitality saw jobs gains, and average hourly earnings increased by 4 cents to $24.15.
The stock market rose on the news, and economists say the new employment numbers make it likely that the Federal Reserve will halt its stimulus efforts early next year. But many Americans are still out of luck.
As my colleague Kevin Drum notes, 90,000 of the 203,000 new jobs created last month were needed to keep pace with population growth. That means net job growth last month was more like 113,000.
And although about 2.1 million unemployed workers found jobs last month, 2.4 million stopped looking. November is the 43rd month in a row in which more job seekers left the labor force than found employment. A total of only 63 percent of American adults are either working or looking for work. That's the second-lowest monthly labor force participation rate in 35 years. (The lowest-ever labor force participation rate was recorded in October, but the data for that month was skewed because of the government shutdown.)
The number of long-term unemployed—those without a job for 27 weeks or more—edged up slightly to 4.1 million. Unemployment amongst African-Americans and Latinos remains much higher than average—at 12.5 percent, and 8.5 percent, respectively. For those without a high school diploma, the unemployment rate is 10.8 percent. It's 14 percent for people under 25.
About a third of employment gains in the private sector last month came in the form of low-wage service jobs in retail, hotels, restaurants, bars and temp agencies. Retail employment added 22,000 jobs last month, and bars and restaurants added 18,000. Low-paying service sector jobs have been the hallmark of the recovery. The growth of these low-wage jobs has given rise to a string of strikes over the past year by workers at Wal-mart, and fast-food joints like Wendy's, McDonald's and Burger King, who are demanding a living wage.
In his speech on the economy on Wednesday, President Barack Obama called on Congress to boost job growth by investing in infrastructure and education; doing away with harmful sequestration cuts; ending incentives for companies to ship jobs overseas; and increasing the minimum wage. "[I]f we refocus our energies on building an economy that grows for everybody," the president said, "then I remain confident that the future still looks brighter than the past."
"We don't get enough respect," says KFC worker Naquasia LeGrand, who joined strikers outside a Wendy's.
Lisa Reid is a cashier at a KFC in Brooklyn. She's 27, with three kids. She works 16 to 26 hours a week at the federal minimum wage of $7.25. That's not enough to live on, so sometimes she takes a second or third gig at McDonald's or Burger King. But right now, she just has the one job. She lives with her mom to make ends meet.
But immigrant advocates say that the two cities' laws are doomed because they are very similar to Arizona's draconian immigration law, passed in 2010, which also criminalized being an immigrant. The Supreme Court invalidated most of the provisions of Arizona's statute in June 2012 because they interfered with the federal government's authority over immigration. Both the Hazleton and Farmers Branch laws were struck down by lower courts for this precise reason.
"The Supreme Court spoke clearly in the Arizona decision about overriding the federal role of immigration enforcement," says Sam Brooks of the Souther Poverty Law Center's Immigrant Justice Project. Not only are these types of laws likely unconstitutional, he adds, they encourage racial profiling by community members worried about giving leases to the wrong people.
Other towns have proposed laws that would stop landlords from renting to undocumented immigrants. San Bernardino, California, was the first to consider such a law in 2006. It was eventually voted down. Valley Park, Missouri, enacted this type of ordinance in 2006. It was challenged twice but upheld by a federal court in 2008. Scores of other municipalities and states have considered legislation that mimics the city housing ordinances and Arizona's law.