Wall Street Deregulated More by Congress, Increasing the Risks of Another Economic Crash

Congress deregulated Wall Street in 1999, and then less than a decade later, the crash of 2008 that lead to the Great Recession happened. There’s a similar story from the deregulation of the 1920s that lead to the 1929 crash and the Great Depression. And big banks already make record profits, and lessening oversight and regulation of them will allow them to push those profits higher at the expense of consumers.

In a strong indication that they are well aware of how politically toxic a vote to reward big banks is in the eyes of the American public, not a single one of the 33 Democrats who voted for the bill—many of whom have received substantial sums of campaign cash from big banks—had the courage to speak in favor of it on the House floor.

By approving the deregulatory measure, which weakens oversight of 25 of the nation’s 38 largest banks, the House cleared the final obstacle on the bill’s path to Trump’s desk. In a tweet early Wednesday, the president applauded the measure’s passage and vowed to sign it into law “shortly.”

“It is reprehensible that our Congress has abdicated this responsibility in a clear move to cater to Wall Street,” Morris Pearl, chair of Patriotic Millionaires, said in a statement on Tuesday. “This is bipartisanship at its worst—members of both parties coming together to bow down to their wealthy donors on Wall Street instead of protecting their constituents. 2008 was just a decade ago, have we already forgotten the lessons we learned?”

Other article:

On Capitol Hill, Congress passed sweeping legislation to exempt thousands of banks from key regulations in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, meaning the vast majority of banks will no longer have to follow the regulations aimed at preventing another financial meltdown. The Dodd-Frank Act was passed after the 2008 economic crisis, which was provoked by years of risky lending by Wall Street banks.

Yet, in a rare bipartisan effort Tuesday, House lawmakers voted 258 to 159 to exempt banks with less than $250 billion in assets from many of these regulations, even though banks’ profits are soaring. A report issued Tuesday from the Federal Deposit Insurance Corporation said the net income of banks and saving institutions hit $56 billion in the first quarter of this year—a 27 percent increase from a year ago. Thirty-three Democrats joined their Republican counterparts in voting for the financial regulation rollback, which, if signed into law, would leave fewer than 10 banks in the U.S. subject to stricter federal oversight.

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Deregulating the Banks and Risking Another Economic Disaster

The economic crash that happened around 2008 was truly horrible, as many who lived through it are aware. The negative effects of the crash were felt overall worldwide and included trillions of dollars lost in worker pensions and savings, chronically high unemployment, trillions of dollars worth of lost output, and lots of other residual suffering. There were also woefully inadequate positive changes — there have been insufficient measures to help the vast majority of the population and the criminogenic structure of the too big to fail banking industry is mostly the same as it was in 2007.

All of these considerations about the economic crisis warrant thinking about why it happened in the first place, so that the same foolish mistakes that caused immense human suffering don’t have to be repeated again. Beyond possibly referring to the inevitable instability of the state capitalist economic system, it’s rational enough to look back to 1999, when a large part of the consequential deregulation happened.

In 1999, the U.S. Congress passed the Graham-Leach Act that (among other things) repealed important sections of the 1930s Glass-Steagall Act. Glass-Steagall’s important provision was that it by law set a firewall between depository banking and investment banking. There were unpunished violations of this law by the banks over the decades, but it’s a rational law and it did quite well at its specific purpose, which is to try to prevent the reckless gambling with consumer savings that’s actually still allowed today.

The big story of why the crash happened though is the housing bubble that the big banks and certain other financial corporations (with immoral behavior and using predatory lending practices to consumers) largely created. This housing bubble was evident enough to reasonable economists that don’t serve plutocratic interests, but there are few of those, so only a select few economists spotted the bubble early on.

“We had a 8 to 10 trillion dollar housing bubble over the decade from ’96 to 2006,” said economist Dean Baker, who in 2002 predicted the bubble and the recession it caused. “House prices rose by more than 80 percent by one measure, 100 percent in excess of inflation. Over the prior hundred years — 1895 to 1995 — house prices had just kept even with inflation. This should have been real simple.”

The housing bubble did drive the economy forward through what’s known as the wealth effect, where people (primarily lower- and middle-income people) spend more money — typically 5 to 7 cents on a dollar — if they have a higher net worth. The higher spending (estimated at between 400 to 500 billion dollars a year, about a twentieth of $8 trillion, and about $3000 per 2018 U.S. household) drove more demand and contributed to some economic gains. These gains came with a heavy cost though, and that cost was the bubble popping and causing the worst economic collapse since the Great Depression.

Why the Great Recession was as bad as it was in the U.S. is actually fairly simple. About $8 trillion worth of housing bubble wealth disappeared with the bubble’s pop, and with that went a lot of consumer purchasing power or what’s known as demand. The main problem for the Great Recession being as horrendous as it was is due to there not having been enough demand in the economy, or to use different terms, the vast majority of people were screwed over too hard and weren’t given adequate resources to recover with. Instead, the U.S. government (and some other governments with different measures) acted with urgency to bail out the financial corporations that primarily caused the crash problem.

The story of the big bank bailouts is particularly noteworthy because it was unnecessary. Actually, a strong majority of the U.S. population was opposed to the bailouts, and if the U.S. had a real, functional democracy, that strong majority opposition would have translated into policy. The bank bailouts were unnecessary though because it was known how to keep the financial system operating when the banks failed — this was seen in the S&L crisis of the late 1980s, for example. There were also simply other ways to help most people — the central bank of the U.S. that loaned trillions of dollars at extremely low interest rates to failed banks could have been used for numerous superior purposes, such as providing an investment stimulus that would actually fully compensate for the shortfall of demand. The stimulus enacted by the Obama administration simply wasn’t large enough, and many people suffered for that.

Now today on March 15, 2018, it’s being reported that the U.S. Congress is about to deregulate the banks again. The process of another significant economic recession and expensive public bailout are a real possibility. This is noted as banks such as Morgan Stanley and Citigroup wouldn’t even exist today if they hadn’t been bailed out, and it’s disturbing that the deregulation will allow them increased opportunity to boost profits through extracting money from consumers via fraud.

It’s also noted as the implicit regulation — that there will be a bailout if a big bank fails — also remains in place, and this implicit subsidy (which prompts riskier financial activities) has been estimated by the IMF to cost about $70 billion ($550 per U.S. household) annually. This is yet another drain on the economy through the corrupted financial system, which could be eliminated or reduced through enacting a financial transactions tax, breaking up the big banks, and/or bringing democratizing measures to economic institutions.

In sum, the history of this deregulation and misregulation of the financial sector presents a clear picture of the problems it causes. More people must be aware of this and organize effectively to prevent these same unnecessary mistakes from being made yet again.

A Lower Unemployment Rate, Inflationary Pressures, and Central Banks in Policy

How low can the unemployment rate go without causing excessive inflation? It’d be a nice experiment to find out. Usually not mentioned is that big banks – which of course wield pretty significant power – dislike inflation because they’ll typically have a supply of long-term loans on their books. Those loans stand to depreciate in value with higher inflation, and that’s largely the reason why there’s such pressure to keep inflation lower than necessary through central bank interest rate increases.

The loans of banks and other financial corporations typically are set at a fixed rate, so again, the repayments of those loans will be worth less to them if inflation rises. For one example, if a bank offered a 5 percent home loan while expecting that inflation would be 1 percent, the bank would assume that it would receive a real interest rate of 4 percent. If the inflation rate actually becomes 2 percent, the bank will take a considerable profit loss (receiving a 3 percent real interest rate) compared to what it expected, as there’s less loan money for it in real terms because of the higher inflation.

The interest rate increases do of course have the side effect of slowing the economy, and that contributes to a higher unemployment rate that leaves lower-income employees less bargaining power for wage increases. Along with how interest rate raises (beyond a certain point, of course) lead to less job opportunities, the point about worker bargaining potential is important, as a central bank wields a lot of power in society. It’s preferable to see that power used for the common good instead of for the financial conglomerates that have caused too many problems already.

Just four years ago the Congressional Budget Office put the floor of the unemployment rate at 5.5 percent. This estimate implied that if the unemployment rate fell below this level that the inflation rate would begin to spiral upwards.

The unemployment rate has now been well below this level for more than two-and-a-half years, and there is still no evidence of an inflationary spiral. In fact, the inflation rate remains well below the Federal Reserve’s 2 percent target.

If the Fed and Congress had tried to craft monetary and fiscal policy around this 5.5 percent figure, as many economists advocated, millions of workers would have been needlessly denied the opportunity to get jobs. Tens of millions would be looking at lower wages, as the tighter labor market has finally allowing workers at the middle- and bottom-end of the labor market to finally share in the gains of economic growth.

Further Examination of Federal Reserve Reform Proposals

On MLK day, reform of the Federal Reserve should be noted as important to advancing the policy of what’s referred to as full employment, which MLK was very plausibly a strong advocate for. The link contains proposals for that objective, with particular attention being directed towards the malign effects banking interests currently mechanistically have on the Federal Reserve.

The Federal Reserve System has an unusual status as being a mix of public and private entities. The governors are of course explicitly part of the public sector, as presidential appointees subject to congressional approval. However, the 12 regional banks are private, being owned by the member banks in the district, which have substantial control over the district bank’s conduct.

This structure was put in place more than a century ago to fit the politics and the economy of the time. It is inconceivable that anyone constructing a central bank today would use the same framework. The archaic nature of the Fed’s design is perhaps best demonstrated by the distribution of the regional banks. Two are located in the state of Missouri. Meanwhile, the San Francisco region not only includes the whole state of California, but the rest of the west coast, and the states of Alaska, Hawaii, Nevada, Utah, Arizona, and Idaho, in all accounting for more than 20 percent of the nation’s economy.

While there were reasons that a mixed public–private central bank and regulatory system may have made sense at the start of the last century, this is no longer the case today. The United States is the only major economy with this sort of mixed approach. The Bank of England, the Bank of Canada, the Bank of Japan, and the European Central Bank are all purely public entities. It is recognized that the conduct of monetary policy, along with the lender of last resort and regulatory functions of the central bank, are necessarily responsibilities of the government.

[…]

While there does not seem to be much basis for concerns that the Fed will act to support the political party in power, there is a real concern about a structure that gives the financial industry a direct voice in the conduct of monetary and regulatory policy through their control of the regional banks. This is really an extraordinary structure without any obvious parallels in our governmental system.

Both aspects of this relationship make little obvious sense. The financial industry certainly has useful insights on the conduct of monetary policy, but it makes no more sense to give them seats at the table than the manufacturing or tech industry. Monetary policy has an enormous impact on the national economy and affects every sector in it; there is no reason to believe that the perspectives gained from working in the financial industry are uniquely valuable.

Similarly, the idea that an industry would be able to pick its own regulator is truly extraordinary. It is understandable that industry groups will try to lobby and in other ways influence the decisions of regulatory bodies. The pharmaceutical industry places pressure on the Food and Drug Administration (FDA) to approve drugs more quickly, the telecommunications industry lobbies the Federal Communications Commission (FCC) for looser standards on universal service, but in neither case are they given a direct role in appointing their regulators. No one would suggest that Pfizer or Merck should be able to appoint a commissioner on the FDA or that Verizon and Comcast should select one of the members of the FCC. The Federal Reserve Board is unique in this way, as the member banks within a district largely have the ability to control the selection of the bank president who plays a direct role in both determining monetary policy and regulation of the banks within the region.[1]

[…]

Inflation has been at relatively steady and low levels for most of the last three decades. In fact, since the Fed officially adopted the 2.0 percent average inflation target in 2012, the core inflation rate has consistently been below this pace. In other words, if we view the 2.0 percent inflation target as a proper goal of monetary policy, the Fed has failed by having too little inflation, not too much.

[…]

This subcommittee is considering a wide range of proposals that would alter the structure of the Fed. Several are quite useful in increasing openness and accountability. However, the ones which aim to give more control of the Fed in the hands of the banking industry, rather than officials appointed through the democratic process seem at odds with recent trends both in the United States and the rest of the world. It is difficult to understand the effort to privatize the conduct of monetary policy and to turn over control of financial regulation to the industry that is being regulated.

 

Student Debt Slavery: Big Banks Profiting Off of the Young

The big banks are repaying the American public for bailing them out with hundreds of billions of dollars worth of direct expenditures — and maybe more notably, the allowance of trillions of dollars worth of almost zero interest loans — by harming millions of students with debt slavery. There is no good moral or good economic principle behind this effective debt servitude to the banks; it’s simply a giant scam. There is no rational reason that public university in world history’s richest country shouldn’t be free for students, as it could easily be financed for about $70 billion a year, with that money plausibly being generated through a financial transactions tax.

The advantages of slavery by debt over “chattel” slavery—ownership of humans as a property right—were set out in an infamous document called the Hazard Circular, reportedly circulated by British banking interests among their American banking counterparts during the American Civil War. It read in part:

Slavery is likely to be abolished by the war power and chattel slavery destroyed. This, I and my European friends are glad of, for slavery is but the owning of labor and carries with it the care of the laborers, while the European plan, led by England, is that capital shall control labor by controlling wages.

Slaves had to be housed, fed and cared for. “Free” men housed and fed themselves. For the more dangerous jobs, such as mining, Irish immigrants were used rather than black slaves, because the Irish were expendable. Free men could be kept enslaved by debt, by paying wages insufficient to meet their costs of living. The Hazard Circular explained how to control wages:

This can be done by controlling the money. The great debt that capitalists will see to it is made out of the war, must be used as a means to control the volume of money. … It will not do to allow the greenback, as it is called, to circulate as money any length of time, as we cannot control that.

[…]

Slavery by debt has continued to this day, and it is particularly evident in the plight of students. Graduates leave college with a diploma and a massive debt on their backs, averaging more than $37,000 in 2016. The government’s student loan portfolio now totals $1.37 trillion, making it the second highest consumer debt category, behind only mortgage debt. Student debt has risen nearly 164 percent in 25 years, while median wages have increased only 1.6 percent.

Unlike mortgage debt, student debt must be paid. Students cannot just turn in their diplomas and walk away, as homeowners can with their keys. Wages, unemployment benefits, tax refunds and even Social Security checks can be tapped to ensure repayment. In 1998, Sallie Mae (the Student Loan Marketing Association) was privatized, and Congress removed the dischargeability of federal student debt in bankruptcy, absent exceptional circumstances. In 2005, this lender protection was extended to private student loans. Because lenders know that their debts cannot be discharged, they have little incentive to consider a student borrower’s ability to repay. Most students are granted a nearly unlimited line of credit. This, in turn, has led to skyrocketing tuition rates—because universities know the money is available to pay them—and that has created the need for students to borrow even more.

Students take on a huge debt load with the promise that their degrees will be the doorway to jobs that allow them to pay it back, but for many the jobs are not there or are not sufficient to meet expenses. Nearly one-third of borrowers today have made no headway in paying down their loans five years after leaving school, although many of these borrowers are not in default. They make payments month after month consisting only of interest, while continuing to owe the full amount they borrowed. This can mean a lifetime of tribute to the lenders if the loan is never paid off, a classic form of debt peonage to the lender class.