Obamanomics: The Good, the Bad, the Weak
On bank regulation, the White House goes too far, and not far enough.
On Wednesday, after weeks of the requisite press leaks and prefabricated spin, the Obama administration released details of its new "rules of the road" financial regulations, which had been billed as the most sweeping overhaul of the financial system since the Great Depression.
Obama, alas, is no FDR. Roosevelt's New Deal reforms included the Glass-Steagall Act of 1933, which split complex financial institutions into commercial banks (for consumers) and investment banks (for speculators). This enabled government to safeguard the boring, conventional activities of consumer banking without insuring the dice-rolls of high-risk investors. His reforms also opened the banking sector to independent audits to ensure financial soundness—as opposed to just taking the banks' word for it, as Treasury Secretary Tim Geithner's recent stress tests effectively did—and established the Home Owners' Loan Corporation, which helped people at risk of foreclosure cover their mortgages.
The administration's new 88-page white paper, titled "Financial Regulatory Reform: A New Foundation," focuses more on alterations than true reform. Some of them are useful, like requiring lenders to keep a stake in the loans they make, and requiring banks to keep adequate capital on hand. The bill would also regulate a portion of the problematic financial instruments known as over-the-counter derivatives. But other aspects are ill advised, like giving the Federal Reserve more oversight, creating an uber-regulator, and allowing Wall Street's biggest players to keep their hands in every pot imaginable.
Let's break it down:
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Is Obama Blowing It on Derivatives Reform?
The gaping loophole in the administration's new financial regs.
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MoJo Video: Economist Nomi Prins on Death and Taxes
Mother Jones writer (and former Bear Stearns analyst) Nomi Prins asks students at St. Francis college in New York: What...
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Regulatory Reform
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Obama's Weak Tea
The Good
Obama's plan consolidates certain regulatory functions and imposes restrictions on certain securities. The Office of Thrift Supervision, which monitors thrifts and S&Ls, including AIG—which was misclassified as an S&L even though it operated an insurance company hedge fund—gets the axe. The duties of OTS and another regulatory body, Office of the Comptroller of the Currency, would go to a new agency called the National Bank Supervisor. Now OTS was an easy target, since few who aren't employed there really care one way or the other. Still, it'll be a while before we know whether the move really does anything to streamline the regulatory system.
A stronger provision of the Obama proposal gives the Federal Deposit Insurance Corporation wider authority over banks on the brink of failure. So far, the FDIC has done an excellent job resolving failed banks—selling their assets, renegotiating loans with consumers—and bringing them back to health. So giving it additional responsibility makes sense.
Obama's plan would also establish the Consumer Financial Protection Agency to oversee mortgage- and other credit-related consumer products, and to enforce the Community Reinvestment Act, which encourages banks to make loans in disadvantaged areas. If the CFPA is given the enforcement and indictment power of the Securities and Exchange Commission, and actually uses it (unlike the SEC), then so much the better.
Other winners include a proposal to weaken the influence of credit ratings by agencies like Moody's and Standard & Poor's, which helped drive the crisis by downplaying the risk of subprime and other risky securities. Then there's Team Obama's requirement that lenders keep 5 percent of their loan risk on the books rather than selling all of it to Wall Street—a move that will make lenders think twice before handing half a million bucks to some McDonald's cashier, but one that Wall Street is already fighting.
Another nice idea, though it doesn't stand a snowball's chance in hell, calls for bankers in these complex securities deals to be paid based on the long-term performance of the product, as opposed to simply taking their cut as soon as the deal closes. In practice, though, this would be a bureaucratic nightmare—policing it would require almost as many regulators as there were bankers involved.
The Bad
To oversee big insurers, the Obama team wants to create an Office of National Insurance within the Treasury Department. Now, if it weren't for the fact that many insurance companies, notably AIG, had themselves classified as S&Ls, while others are housed within the bank holding company complexes of firms like Citigroup—thanks to the repeal of Glass-Steagall in 1999—this plan might even work. But this isn't the case, and since the plan makes no mention of reconstructing the financial system, this part of it is unlikely to help matters.
Establishing a Financial Services Oversight Council chaired by the Treasury Department seems redundant; slapping a new layer of regulatory bureaucracy on an increasingly complex banking system seems more an exercise in appearances than action.
On the subject of derivatives, the clear winner is Wall Street. "We propose to bring the markets for all OTC [over-the-counter, meaning they are traded between private parties] derivatives and asset-backed securities into a coherent and coordinated regulatory framework," notes the Obama white paper.
If you didn't quite get that, neither does anybody else. The paper gives no hints about how this would be accomplished, the constraints of this so-called framework, or the reporting requirements. And by noting that the derivatives in question include "all standardized OTC derivative transactions," the white paper implies that the derivatives deemed too complex to be traded in this more generic fashion can still trade off-exchange—a loophole coveted by the banks that lets them continue to create convoluted securities with little scrutiny. (Mojo's Nick Baumann has more on this, as does Rachel Morris: Cap-and-trade derivatives, anyone?)
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In the relitively short
In the relitively short 2-1/4 centuries the USA has been in existance, the central banks have created an economic meltdown 6 times. One such event precipitated the formation of the Federal Reserve (which did not end up as promised anyway).
This time is different in one respect. For the first time in US history, the big banks virtually own the federal courts.
Campers beware. There is everything to fear.
Financial Reform
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When I bought my first house almost 40 years ago, getting a mortgage loan was a very serious matter. Plenty of people were turned down. It was like going before a Judge. The bankers knew that they were lending their own money, and that if you defaulted on the loan as a minimum it would be a real pain in the ass for them, and that in the worst case scenario the bank could actually lose money. In the current street lingo they had what is called “skin in the game.” The same was true when you applied for a credit card.
Over the years various greedy con artists realized that they could bundle lots of home mortgages and/or credit card debt, call these securities, and sell them off to investors. It goes without saying that the banks and consultants both earned big fees in these transactions. It worked especially well when the ratings companies like Moody's and Standard & Poor's gave their blessings and said that the securities were safe for the risk adverse investor to buy. If the home buyer eventually defaulted, all of the risk had been shifted to the investors who purchased the loans, so the lending standards by the mortgage bankers went down. Way, way extremely far down.
Eventually at the peak of the bubble borrowers could quickly get a $400,000 mortgage loan and buy a brand new house with a zero down payment loan and do so without providing any proof of income or even claiming that they had a job or some source of income. Of course lots of these borrowers couldn’t pay back their loans. The banks knew full well that the income many of these borrowers were earning was terribly insufficient to pay their normal living expenses and also make the payments on their mortgage loan. The lenders really did know this full well. Really. It was a clear cut case of dishonesty which should openly be called fraud or a con game.
When this change to securitization of mortgage and credit card debt took place the bankers started to look less like rock solid, stable members of the community elite and more like used car salesmen. Or maybe unrepentant ex-cons.
With the bubble bursting the American people gradually began to see how crazy the economic policies of the Republicans had been. Constantly lower taxes on the wealthy, and spend spend spend on warfare and wasteful military technology that in some cases even the military didn’t want. All the while the Republicans were disingenuously accusing the Democrats of spending too freely. Some of the very worst budget deficits in the nation’s history took place while Republicans like Reagan and Bush were at the helm.
So the American voters decided to change course and elect as President the Senator who had the very most liberal/left-wing voting record of any of U.S. Senator. Even though he had a strange name, his middle name was Hussein, he smoked cigarettes in the closet, and he was half white-half black he easily got elected to the unenviable job of President of the United States.
And then almost magically within just a few months, Mr. Obama began behaving more and more conservatively. Even though the Democrats had a solid majority in the House of Representatives and a thin majority in the Senate, he did not go for the bold solutions which were necessary and appropriate. It became clear that he did not have the balls for a fight. His penchant for compromise and reaching across the aisle became a sad, sick joke.
In the early 1600’s when Galileo Galilei came out of the closet and stated publicly that the earth revolved around the sun rather than the egotistical view that the entire universe revolved around the Earth, this was a controversial and extremely dangerous thing to do. The rich and powerful members of the community considered this idea to be enormously threatening. People’s reputations and lives were ruined by standing up for controversial ideas like this.
The analogy goes this way: There is no middle ground here, no possibility of compromise. One side is 100% wrong and the other view is 100% right. One could make a similar analogy when discussing the controversial subject of ending slavery. It would have been wrong to try and find a middle ground where slavery was legal and ethically appropriate in certain well defined sets of circumstances. No, just like with Galileo, the concept of slavery had to be opposed in all cases. Period. No compromise appropriate.
So now the Obama administration is proposing some new and badly needed rules and regulations for the country’s financial players. This comes after years and years of the pro-business, pro-greed dismantling of vital regulations which the right wingers worshiped and called Deregulation. Of course all these greed driven bankers, MBAs, and Wall Street types are now screaming like stuck pigs. We all would like to live in a world where laws and rules applied to others but not to us.
Obama’s team should have come out and openly admitted that securitization of mortgage and credit card debt encourages excessive risk taking, is bad for the stability of the economy, and that it has to cease entirely. But of course this would have been mildly controversial and might have resulted in a bit of a conflict, so the Great Compromiser Obama (read weak and sadly almost pathetic) made this proposal: Banks could only securitize and sell off 95% of their loans.
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They could securitize and sell off 95% of their loans, which contained 100% of their risky or shaky loans, but now after these new “reforms” they would be required to keep 5% of the very most rock solid loans. Smoke and mirrors, nothing more. It reminds me of the illusions by the Wizard of Oz.
The Obama administration is smart and politically savvy. They know that before any proposal is passed and becomes a law it will normally get watered down quite a bit.
The Obama approach is absurd. They should have started out by taking the position that all securitization and selling off of loans would be flatly prohibited, with full knowledge going in to the discussions that during the process of negotiation they would probably have to back off somewhat to something like: Banks can only sell off 50% of the loans they make. But to initially go into the negotiations demanding that banks only keep 5% “skin in the game” is indicative of the weakness and the sad need for approval by this administration. It is so incredibly distressing.
And the same thing is happening with universal single payer health care. If anything at all passes, it will only be teeny, tiny so called reform. It certainly won’t make sure that ALL Americans have access to the health care system, even the poor or sick Americans. Basically the Obama team seems to have given up even before the real fighting begins.
Barack we love you. Come on, Get Some Balls Man!!!
Paul Garland
http://www.paulgarland.net
obama economics
Obama's economic conservatism is no surprise to those who were paying close attention to what he said (well before he was a candidate) and to who his advisers were and their own records. He was NEVER progressive on economics. In his Audacity of Hope, he says, more or less that Democrats who oppose intervention in the bedroom are inconsistent because they support intervention in the market, and Republicans are equally inconsistent when they support intervention in the bedroom but oppose it in the market. (See NYT Book Review, December 25, 2006) Many progressives were blinded by their own enthusiasm for all of the other aspects of Obama. Edwards and even Clinton were more progressive than he was, and now we have the consequences of that in full bloom. Watch him back away from the employee free choice act. Labor doesn't get its phone calls returned, and the Summers/Geithner/Barr regime continues to see the world through the eyes of Wall Street. If this is the best we can get.......
We're at 1930, not 1932, and The Depression This Isn't Yet
The goal is to keep this mess from turning into a ten-year-long episode of national ~ and international ~ misery. Certainly, most of us want the toxic behemoth banks and those who finance folly to be controlled for the public good, and much remains to be done. But we gain nothing by comparing Obama to FDR, who took office nearly four years after the stock market crashed in 1929. By then, Hoover had tried much that failed and the country was desperate for more radical measures ~ short of dissolution or revolution.. We do well to keep in mind that we are not yet in a parallel situation. If that day comes, more stringent reforms will be feasible but may not be enough.
For the past few months the
For the past few months the Obama administration are facing many challenges regarding the stabilization of financial system. Obama was trying to fix everything. He never stops fulfilling his promises to his constituents, I just can't understand why Sherri Goforth come to become unethical sending emails with a racist image. She has confirmed she sent this e-mail, and well the apology she makes is that she “sent it to the wrong list” (It's not that Republicans are racist; they just hate people of color.) This is after the "Birds of a feather" and "Barack the Magic Negro" emails that circulated amongst Republican staffers, further cementing conservatives as proponents of racism. She's been reprimanded, but doubtless Republicans would give cash advances to make racist associations and Sherri Goforth go away.
"He never stops fulfilling
"He never stops fulfilling his promises to his constituents..."
Unless you're gay.
re: lets see
As he entered office, Obama planned to center his attention on handling the global financial crisis. Since before his inauguration, he lobbied Congress to pass an economic stimulus bill, which became the top priority during his first month in office. As President, Obama made a high profile trip to Capitol Hill, Washington, D.C. to dialog with Congressional Republicans and advocate for the bill. On February 17, 2009, President Obama signed into law a $787 billion plan which included spending for health care, infrastructure, education, various tax breaks and incentives, and direct assistance to individuals.
As part of the 2010 budget proposal, the Obama administration has proposed additional measures to attempt to stabilize the economy, including a $2–3 trillion measure aimed at stabilizing the financial system and freeing up credit. The program includes up to $1 trillion to buy toxic bank assets, an additional $1 trillion to expand a federal consumer loan program, and the $350 billion left in the Troubled Assets Relief Program. The plan also includes $50 billion to slow the wave of mortgage foreclosures. Auditors from the Congressional Budget Office have said that Obama's budget would produce $9.3 trillion in deficits over the next decade. And now, with the oil prices going high, lets just see what will be the move of our president.
Obama's Banking Transformation
It is comforting to know that, at the end of the day, when the average American can't trust the future purchasing power of a dollar, the inflation-phobic Fed will have even more opaque market manipulation power. I know that I will sleep easier knowing the newly reformed banking system will be able to curb any inflation which might impact social entitlement increases tied to the CPI. With sweeping banking reform like this, I can hardly wait to see Team Obama's healthcare reforms. I'm sure the mega-millions in lobbyist money will buy equally sweeping and populist reforms in this area too. No doubt with the model of public/private "partnership" Obama is using as an executive governance model, like the mega-financial corporatations, the healthcare triad (private insurance, hospitals/providers and pharma) will soon be able make trillions on the backs of tax payors as they provide less and less benefits to more and more people. Isn't global capitalization wonderful?
Nomi Prins rocks! Get rid of
Nomi Prins rocks! Get rid of Geitner and put her in charge. Obama's choice of dishonest men on his team is tragic.
Massive Goverment
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The US government has never run a profitable business. The framers of our Constitution called for a limited government. Obama has this whole thing backwards.
Privatize certain sections of government with oversight committees reducing our budget. Ally with Big Business and create new consumers in third world countries with an alliance with non-profits and laid off construction workers providing a cash flow back to the USA, and build new economies with schools and apprentice programs. Expand solar power and desalinization plants.
Africa, McDonalds, Wal-mart, etc. Train local populations and export workers from the USA who want to go. Building new economies and lifting up the poor is the key to expansion and global profits and only reliable solution to new cycle of short term recurrent bull and bear markets. It will bring cash to the USA as workers send money home for their families, reduce the deficit, insure a strong economic recovery worldwide, reduce taxes on small business the lifeblood of our economy.
And if properly coordinated this plan must include full birth control for all third world nations. In addition it would save the 23,000 children dying every day which I might add would be pennies to the USA budget compared to the Billions of dollars being thrown around. It is the only sound solution to keep the United States Government from going Bankrupt and will restore a strong balanced worldwide economy. If we as a nation do not take these steps immediately I see a dark horizon for all industrial nations, sooner or later we are headed for a meltdown that will make this recession look like a buying frenzy. In addition when is the USA going to stop Japan from exterminating whales. We as a nation have got to stand up to the Japanese with trade a embargo or stiiff import tariffs. We have leverage as Japan imports a significant part of our GDP. Streamline government or I see a very very bleak future for our children and grandchildren it these steps are not taken seriously by the Obama Administration!
Richard "Pete" Lauf
Common Sense in a upside down world...
