Really interesting editorial in today’s New York Times that hits the mark with the threat that an un-check and powerful bank lobby poses to achieving much needed bank and financial industry reform to protect consumers against industry collusion, predatory and price-gauging practices, as well as disproportionate risk-taking that threatens a sustained economic recovery. These practices have reached crisis proportions and is pervasive in Washington. The tactics of the bank lobby also subverts the U.S. Congress’s Constitutionally-ordained obligation to protect the ‘public welfare’ against all enemies, foreign AND domestic. The “Big Business” lobby constitutes a clear and present threat to our citizens Republic. And “Big Government” represents the only realistic check against “Big Business.” It is time to demand that “Big Business” be good “corporate citizens” to act in the public’s interest, and to show ‘corporate patriotism’ to their country and government for coming to their rescue. It is also time for Washington lawmakers to take heed to public needs, as well as the public mood: something must be done.
(NYT) New York – Pretty much everyone agrees on the causes for the country’s desperate financial mess: predatory lenders, weak regulations, even weaker regulators, and risky nigh unto incomprehensible financial instruments.
Congress’s willingness to address those problems will have its first real test on Wednesday when the House Financial Services Committee puts finishing touches on what could be essential reform legislation — or a major disappointment, depending on what they do.
At the top of the committee’s agenda is regulation of the largely unregulated and dangerously opaque multitrillion-dollar derivatives’ market. Next on the agenda is the creation of a new Consumer Financial Protection Agency to oversee the consumer-credit offerings of banks and other financial firms — including mortgages, credit cards, overdraft “protection” and payday loans. Both reforms are crucial, and we fear both are in danger of being irreparably weakened. Derivatives are supposed to help investors and businesses manage risk, but their unchecked and unregulated use led — directly and indirectly — to the financial crash and subsequent trillions of dollars in taxpayer interventions.
Congress should require that all derivatives’ dealers and users — including banks, hedge funds and corporations — conduct their trades on exchanges where they would be subject to considerable regulation and public scrutiny. Regulators could create exceptions for customized contracts that are negotiated one on one for truly complex and unique circumstances. But most derivatives contracts are highly standardized and can be, and should be, exchange-traded.
The threats to the consumer protection agency are even more blatant. To curry favor with the banks, several lawmakers are intent on amending the proposed legislation so that no state could impose its own — tougher — consumer protection laws on banks. That would be a mistake because in the past, many states have demonstrated the will and the expertise to protect consumers. But federal rules were issued in 2004 that basically barred states from enforcing their laws over national banks and their subsidiaries. That short-circuited state efforts to control, among other things, the subprime lending that sparked the financial crisis. Some lawmakers are also intent on weakening the proposed power of the new agency to examine the books of the banks and firms that it would regulate. Current bank regulators have that power, but they have not used it with a sole focus on protecting the best interests of consumers. Read more here.
Unfortunately, the proposed legislation has too many loopholes and exemptions. For example, many corporations and hedge funds would still be able to trade standardized derivatives privately. That may protect bank profits — without transparency, there is no chance for comparison shopping — but it would put taxpayers at risk of a repeat calamity. Like the banks, some corporate investors in derivatives resist exchange trading. They argue that more regulation would raise their transaction costs to hedge any given risk. That’s debatable because greater transparency is likely to reduce costs. But even if true, somewhat higher costs would be a small price to pay for systemwide stability. Still, there is reason for hope and the Obama administration seems to be taking the lead on this.
Such growing sentiment about the odious nature of Wall Street was also echoed by administration officials on the Sunday morning talk circuit. “The bonuses are offensive,” said the President’s senior adviser David Axelrod on ABC’s “This Week,” adding that banks must do more to support lending across the country and should stop their lobbying efforts aimed at blocking the passage of new consumer financial protections and needed industry regulations currently being considered in Congress.
“They ought to think through what they are doing, and they ought to understand that a year ago a lot of these institutions were teetering on the brink, and the United States government and taxpayers came to their rescue” Axelrod said. “They have responsibilities, and they ought to meet those responsibilities” by displaying good corporate citizenship, playing fair, and by supporting American business and responsible citizens by making loans. They also have a public duty as corporate citizens to their government as well as to the American taxpayers for coming to their rescue. Read more here.
