Tough reforms, but not tough enough
This week, assuming the now-routine Republican filibuster can be overcome, Congress will pass what President Obama hails as "the toughest financial reform since . . . the aftermath of the Great Depression."
The president is right. The reform legislation is far stronger than many Congress-watchers expected. Public fury at the Wall Street bailout and continued scandals stiffened congressional spines. Popular mobilization ensured that backsliding would be exposed. And as a result, there are some good things in this bill. It provides consumers with protection from various forms of abusive and predatory lending (except from auto dealers, who managed to exempt themselves from the reach of the new consumer-protection bureau).
It gives regulators a mandate to monitor the biggest financial institutions and clear authority to shut down failing institutions. It promises that the multi-trillion-dollar market in over-the-counter derivatives, the risky exotica that exacerbated the financial collapse, will be better regulated through open exchanges. And it gives regulators the authority to impose high capital requirements, forcing banks to hold more equity and thus assume less risk. The bill even taxes the larger banks to pay for its costs. These are significant changes, and, as illustrated in last weekend's meetings of the G-20 nations, are far ahead of reforms in other nations.
But are these changes adequate? That depends largely on how you see the problem. If you believe, as Treasury Secretary Tim Geithner presumably does, that the current banking system is basically sound, then the bill -- which largely tracks the administration's reform proposals -- has much to offer. But if you believe -- as do former International Monetary Fund chief economist Simon Johnson, Nobel Prize-winning economist Joseph Stiglitz and other economists, thinkers and activists -- that the big banks are simply too big and engaged in exotic gambling with great risk and little societal return, then the reforms are merely a decent first step.
Obama has said that we can't go back to an economy where the banks make 40 percent of all corporate profits. But the big banks are emerging from the crisis more concentrated than ever, and financial sector profits are already up to nearly 30 percent of total corporate profits. The reform bill does nothing to break up the big banks or to change their basic way of doing business.
The legislation also gives immense discretion to obscure regulators who will make up the rules. These days, given the catastrophe wrought by misplaced faith in self-regulating markets, a revived Securities and Exchange Commission, a beleaguered FDIC and even the bankers' bank, the Federal Reserve, are showing some muscle. But the bank lobby is still extremely effective. Many political appointees are products of Wall Street. And regulators, charged with ensuring the soundness of banks, are attentive to arguments against costly regulation.
And there's the rub. The current banking structure and practices virtually ensure repeated financial crises. Take that from uberbanker Jamie Dimon, CEO of JPMorgan Chase. In his testimony before the Financial Crisis Commission, Dimon said: "It's not a surprise that we know we have crises every five or ten years. My daughter called me from school one day and said, 'Dad, what's a financial crisis?' And without trying to be funny, I said, 'It's the type of thing that happens every five to seven years.' And she said: 'Why is everyone so surprised?' So we shouldn't be surprised."
But Dimon's insouciance about recurrent financial crises is misleading and dangerous. First, it applies only to recent history. After the New Deal reforms, as Harvard Law professor Elizabeth Warren has noted, America went nearly 50 years without a major banking crisis. The New Deal regulations closed down the financial casino and turned banking into a safe and boring occupation. It is only since those regulations were shredded that we've seen recurrent and increasingly costly financial crises.
Second, Dimon implies we should just relax about financial crackups. This ignores how costly they are to society. This most recent collapse has cost millions of people their jobs, their homes and their retirement savings. It has endangered pensions, forced ruinous cuts of public services and doubled the national debt as a percentage of gross domestic product in the resulting recession. Having been bailed out by taxpayers, Dimon may feel serene about a financial crisis every five years; the rest of us can't afford to be.
We've seen the stakes at risk, the forces arrayed, the leaders involved. We've witnessed the first skirmishes. But the fight to create a system in which the financial masters of the universe serve the real economy has only just begun.
Katrina vanden Heuvel is editor and publisher of the Nation and writes a weekly column for The Post.