Financial Reform: the Train That Passed Us By

June 24
Stan G. Duncan

The house and Senate have finally passed their legislation on financial reform and now the two bills are in the “reconciliation process. “ That’s where they hammer out the differences and produce a single bill that both houses will then have to pass. Some changes may be made, but we’re pretty clear by now what will be in the final bill and it isn’t pretty. All of you who were hoping that finally we had a tragedy large enough for government to act like adults and pass some meaningful reform will be disappointed.

What’s in it?


Here’s a run-through of some of the things in the new legislation:

First it calls for Banks to have more capital on hand to borrow against when making investments. It’s like when you borrow money for a house, the bank wants to know how much of your own money you have to put down. Similarly, banks should have a big stash of cash on hand when they borrow money in case the deal goes bad and they have to cover some of it with their own money. So the new bill requires that they have something in the range of 10 to 12 percent of what they are borrowing before they borrow. The good news is that they will now be required to have it. The bad news is that most economists have been recommending around twenty to thirty percent. Twelve percent collateral is what Lehman Brothers had on hand when it bellied up a couple of years ago. It’s a paltry, almost humorously small amount of collateral.

Second, it calls for stronger oversight of derivatives, especially “credit default swaps,” which have been described as essentially bets against the success of a business transaction. If two companies hook some kind of deal, other companies who are unrelated to the transaction can make bets on its success. If too many bets are made against it, it begins to look weak and investors will start pulling their money out and both the transaction and the company can go under. And all of the bystanders who made the bets on its failure get paid. Credit Default Swaps were one of the most insidious of the tools that nearly took down Wall Street and the world in 2008. So a new provision in the law, drawn up primarily by Sen. Blanche Lincoln of Arkansas is a good thing.
However, the Wall Street lobby monster has become a major player in the negotiations and at present liberals, conservatives, Republicans, and Democrats have been working very hard to “compromise” the provision down. And the Treasury and Obama Administration has shown no interest in tightening or enforcing the existing regulations against derivatives. God only knows why, but I have my suspicions.[1]

Third, the bill calls for “More transparency and disclosure.” Transparency is always good. It’s a common piece put in this kind of legislation. But it seldom does much in practice. There were clear rules for transparency put into the new regulations for corporate disclosure following the horrible Enron scandal of the early 2000s, but all it mean was that the Annual Reports disclosed the obscure, arcane, Byzantine deals and swindles in even denser language and smaller print.

What is not in it?


Missing from the bill are new anti-trust tools or strengthening of the old ones. And at this point the reconciliation conference looks likely to deny them the self-funding. The Commodity Futures Trading Commission (CFTC) and the Federal Deposit Insurance Commission (FDIC), for example, both collect a portion of their fees from the industry they should be regulating.

Another missing piece is any way for “winding down large global firms” (a line included in the bill). There is language in the bill saying this should happen, but no mechanism to make it a reality. Just how, exactly will the President or the US trade Representative go to Spain, whose Santander Bank just bought up the U.S. Sovereign Bank and say they ought to shrink the company. Actually there are ways that we could do that by capping the size of banks, splitting them up, and making smaller banks. Caps could also be placed on the size that foreign owners could expand their holdings here. That would address the “Too Big to Fail” problem. There’s something inherently unhealthy about the wealth of four or five firms on Wall Street being larger than the Gross Domestic Product of thirty or forty countries in the world. Senators Sherrod Brown and Ted Kaufman pulled yeo-person’s duty trying to get a mechanism for breaking up the behemoth banks, but the Treasury and White House pushed against them and ultimately language for the change was removed.[2]

The “BP Clause”: Finally, there’s provision the White House asked for that sounds eerily like it was designed with the BP disaster in the backs of their minds. According to economist Simon Johnson at MIT, the bill includes “principles for the financial sector to make a fair and substantial contribution towards paying for any burdens.”[3] That provision is absurd. I’m not convinced that BP will in the long run be able to make a “substantial contribution” to paying of the cataclysmic tragedy that is unfolding in the gulf. It would have been even more impossible—fundamentally impossible—for Wall Street financial institutions to have socked enough money aside to pay off the damage they have done to every country on the planet. Countries large, small, and middle stumbled; companies, families, farms, individuals everywhere were damaged. Schools, libraries, clinics, were closed in every country. Churches—who were often very precarious before—are failing now at an unprecedented rate. With their members out of work or living on reduced pay, their pledges have shrunk. In turn, they can’t make their donations to Seminaries and they are bleeding or closing. Many are merging to stay alive just a little while longer. What will all of this mean for the future of the church and theological education for our children? World Hunger organizations also, who were for generations a major recipient of donations from churches, are also closing, merging, or shrinking. Think how many people in poor countries will be damaged by the loss. The “straight up” cost of the global destruction meted out by Wall Street activities has been estimated at somewhere around twenty trillion dollars.[4] The “collateral” damage to the innocent bystanders near and far is inestimable. The planet and its culture, climate, and heritage, will never be the same. It will take generations to pull ourselves back up to the level we were just pushed down from. And that’s assuming we have sufficient renewable energy to do so.

So, just what, exactly, does the president have in mind when he says that Wall Street is going to make a “substantial contribution” toward fixing the damage done? It can’t be done. He is dreaming if he believes that.

Why is the White House so reserved about meaningful reform and why is it so deferential to the Wall Street tycoons who plundered your grandmother’s pension for their billion dollar incomes? My guess has always been that Obama made a big mistake in the early parts of his administration and populated it with economists of the right who love--or even worked in--Wall Street. People like Robert Rubin-Former Treasury Secretary (1995-1999), Gene Sperling-Former National Economic Adviser (1997-2001), Lawrence Summers-Former Treasury Secretary (1999-2001) (and fired Harvard president). And he left out well known and respected progressives like Dean Baker at the Center for Economic and Policy Research, Jared Bernstein of the Economic Policy Institute (and now economic advisor to Vise President Joe Biden), Robert Reich former labor secretary (1992-1996), now at Berkeley, Paul Krugman at Princeton, Joe Stiglitz at Columbia, or Simon Johnson at MIT, Dani Rodrik at Harvard, Robert Shiller at Yale, Edie Rasell at the UCC, and so on. There is no clear, articulate voice in his cabinet (except for Joe Biden) who speaks for Main Street and I think that that has had a major impact on policy decisions. And it may leave its impact on the nation and the globe for as long as we all will live. 

Frankly, it may be too late. The financial reform train may have left the station. The Wall Street firms that survived are stronger than ever, smug in their power, and newly armed with a Supreme Court decision saying they can spend more money than God to buy and sell politicians to do their bidding. And you and I will have to just adjust to a new diminished democracy and living standard, with an ever stronger oligarchy running our country.

Some organizations have launched campaigns to get key Senators and Representatives to stand up for the values of the American public (not to mention those of the equally damaged international community), and make major changes in the reconciled bill. One of the more significant is Public Citizen, a forty-year-old corporate watchdog group. Click here to go to their "Strengthen Wall Street Reform" page and send a letter to your representatives.
 
Do it now. If it doesn't happen now, it may be too late.
 
 

[1] “A.I.G., Greece, and Who’s Next?” The New York Times, March 4, 2010, p. A 26.
[2] Interview with Sen. Ted Kaufman, The American Prospect, April 30, 2010, web edition: www.prospect.org/cs/articles?article=tap_talks_financial_reform_with_ted_kaufman.
[3]http://baselinescenario.com/2010/06/21/dead-on-arrival-financial-reform-fails/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+BaselineScenario+%28The+Baseline+Scenario%29
[4] A good survey of the costs of the destructive force of Wall Street gambling is Anup Shah’s “Global Financial Crisis” page. It’s a year or so old, but still good for background, http://www.globalissues.org/article/768/global-financial-crisis

Globalization and Workers

Stan G. Duncan

Dani Rodrik, a very thoughtful economist at Harvard (yes, it's possible), posted the chart below the other day (his original is here) and it got me thinking.

It's a little confusing, but here's what you want to look at. There are three bars. The bottom bar represents the growth in labor productivity before the modern leap into globalization, 1950 to 1975. He refers to this as the era of "Import Substitution," when countries tried to substitute imports with their own internal manufacturing.

The middle bar is the time during the heart of the debt crisis, when the Reagan and Thatcher administrations and the IMF were trying to use the debt of poor countries as a tool to launch the world into a radical "free" market economy, 1975 to 1990. And the top bar represents full bore, "Washington Consensus" economic globalization, 1990 to 2005.

I might argue a bit with his dates (he puts the beginning of the debt crisis with when they started borrowing. I would have set it at when they had to start paying the debts back) but basically I get his point.)

Now look at the shading. The movement of labor within one sector of the economy is the gray area, between sectors, say farming and manufacturing is black and across both is white.

Ignore the middle period for now and note that the growth of workers within one sector didn't change much in the bottom and top. But the really interesting thing to look at is the black band.

The chart measures the amount of labor productivity of the two eras. The first thing to notice is that labor productivity in the pre-globalization era, which was based on import substitution, is almost twice as large as the era of extreme globalization. Even more interesting to me is the growth in workers who move around between industries. In the pre-globalization age, labor is about seven times larger than in the globalized age.

Here's why. During both eras people moved from the farms to the cities. That's not always a good thing, but in the first era they at least moved off the farm and into productive work. They then moved around within the jobs. They advanced. Their incomes by and large went up . In the era of rapid globalization, they also moved from the farms to the cities, but then they got a job with pud wages and eventually when their wages were about to go up they got laid off and the plant hired somebody else just off the farm and hungry enough to work for pud wages again. The age of globalization brought very high productivity (mainly for exports) but with seven times less employment. People came to the cities, took a job, lost it, then moved to the beaches to sell tee-shirts and Chiclets, or sell drugs, or beg, or move to the US to pick water melons or clean houses. The human cost of globalization has been catastrophic. And in it's own geeky simple way, this chart shows that.


Weak Savings Numbers


This week the Commerce Department released its May data on retail spending. And the numbers were very weak. Some of the pundits and economists interviewed in the Post and the Times were concerned about that, but don’t get scared. Actually the numbers strike me as normal, based on what we have gone through recently.

Before the collapse of 2007-8, consumer spending was wildly out of proportion to our actual wealth. It was expanded by the $8 trillion in (inflated) housing wealth. People believed that they had beau coups of extra money because the real estate pages told them that the price of their homes had doubled in the last five years, so gobs of them took equity out of their homes in the form of refinancing and spent that money, which then sent consumption sky high and pushed saving rates down to record lows.

But now we’re on the down hill side of all of that and consumption is returning to more normal levels. As a rule of thumb, consumption typically increases by 5-7 cents for every dollar that the value of your house goes up. This is sometimes called the “Housing Wealth Effect.” During the housing bubble, that consumption number took flight into Twilight Zone numbers, but now it’s back down to roughly where it should be.

The bigger concern to me is that the savings rate is around 4.0 percent, and that is below its levels before the stock and housing bubbles, which averaged more than 8.0 percent. In fact, with most of the huge baby boom generation in its 50s and early 60s, and with bupkis saved up for retirement, one would think that there would be a lot of people stashing away more money right now to save their butts later. But we aren’t Consumption is still relatively high, even as out incomes have gone down and the values of our houses have gone down.

The Problem with Greece (and us)


Greece is beginning to remind me of one of those old movies of the fifties where Uncle Charlie in the big extended family is up to gambling shenanigans that embarrass the family and threaten the father’s business deals. Everyone tells him to stop but Charlie has gotten in too deep and both “Big Al” and the police are after him. If he gets arrested it will be in the papers and the father will lose millions because his investors will pull out and if he gets killed by Al, the family will be in disarray and collapse. Of course, in the old Hollywood movies, at the last minute the father goes to the legitimate creditors and pays them off and then the police arrest Al and his “collectors.” Charlie repents his foolish ways and everybody is happy. Don’t expect that to happen in Europe anytime soon.

My hunch is that Greece, Europe’s “Uncle Charlie,” is eventually going to have to do some jail time (in terms of severe economic punishment), it will default on many of its bad debts, and will eventually either pull out or be thrown out of the Euro family, and that would throw the entire “family” into disarray. The Euro Zone created some of this mess by letting in let in too many countries who had too little capability of sustaining their membership. Some of them, most notably Greece, tried to look like they were wealthy enough to walk with the big kids by (dishonestly, deceitfully, illegally) borrowing most of its wealth and putting on a show. When the global economy slumped, creditors called in their investments and Greece had to admit that it didn’t actually own the money it had been throwing around and it imploded. Now it threatens to pull the whole of the EU down with it. Hence my guess that it will eventually leave the union.

One very ominous sign of just how serious is its condition was that when the rest of Europe pull together a one trillion dollar bail out, the market tanked. I think investors looked at that and said, “Jeez, if they’re trying to fix Greece with that much money, then it must have been lot worse than we suspected. Let’s pull our money out just to be safe.”

So, what would help? One thing being talked about is for Greece to do a partial default on all of its debts, just stop paying on its commitments. But the majority of its present outgo is unrelated to debt, so that wouldn’t help much. Cancelling totally all of its loans will not solve the total package of its problems. It would still need to make enormous, horrific, painful cuts in its budget that will drive a whole lot of people into poverty.

The only big thing that could bring it back from this disaster would be a general (and international) economic recovery. If the tide rose, it would lift the boats. The US is in an analogous position, though not nearly as bad. Thought it’s hard to believe from listening to Republicans, Tea Partiers, and Fox News, most of our recent Federal deficit has come from the recession. People lost their jobs or their incomes went down and then tax revenues went down. So if we ever recover from the recession, our tax income will come up and that will make paying down the deficit a whole lot easier.

However, Greece has some other very serious problems, one of the biggest is that the Euro-Zone doesn’t have a central government. What that means is that in the US, if we have a state that goes under (like California), then Social Security, Medicare, and other federal revenue checks still flow in. But if a European Union state goes under (like Greece), nothing outside comes in, and people starve.

A second problem of being in the Euro Zone is that it doesn’t have any control over its own currency. Right now the Euro is “strong” (that is, expensive) and that means among other things that tourists are more likely to go to neighboring Turkey rather than the Parthenon and no one can afford its exports. If Greece had its own currency, it could devalue it and make its exports look cheaper and therefore sell more. That would go a long way toward helping it dig its way out of its deficit hole. Countries in Southeast Asia did this following their deep recession of 1997. They lowered the value of their money, which lowered the costs of their products and they sold boatloads of computers, CDs, TVs and, well, drugs to the US and the West. China is in fact still doing that, which has been hard on our domestic producers, but it has been good for them.

However, since Greece is a member of the European Union, it has the added problem of not owning its own currency and therefore doesn’t have the option of devaluing it. It would be like Texas saying it wanted to devalue the Dollar to lower the price of oil. It could never happen. Greece’s currency is the Euro and it can’t go down unless the entire union goes down (and don’t even think about that).

Our US situation is slightly different. We could devalue our currency a little bit but we don’t have too much to export any longer. For the last twenty-five years or so we have been supporting policies that encourage industries to move to places like China, and in the process we have been sliding steadily toward becoming a service income economy. That has helped the home offices of those industries and it has helped the international financial sectors, mainly on Wall Street, but it hasn’t been good in terms of producing anything. So, now, if we wanted to sell a bunch of stuff to help pay down our deficit, we have fewer things to sell.

Which brings me back to the conclusion that Greece’s days on the Euro are limited. The amount of spending they would have to cut to balance the national check book would be beyond imagination. You can talk all day about how they have too many government workers making too much money (and they do), but to now fire or cut all of them sufficiently to have a balanced budget would drive their economy into the stone age. If you think the riots look bad, imagine civil war. It would be ugly and the suffering brutal.

One parallel to what I’m imagining would be Argentina. You may recall that Argentina fell into an economic black hole in the early 2000s, because it had over spent and was too closely tied to the economies of South East Asia, which had tanked in 1997. Their local currency was tied to the US dollar in a way that was functionally similar to how Greece is tied to the Euro. If our economy went up, theirs went up and if ours went down, theirs went down. Usually. Under normal circumstances it would be inconceivable for them to break with the dollar. But their crisis was so severe that they were forced into inconceivable policies, one of which was to break with the dollar. They went to hell and back over the next couple of years and emerged at the end a much healthier, much more vibrant economy. Which brings me again to say to Greece: blow off the euro and save yourself from oblivion.

But I’m just a preacher from Quincy, so what do I know.

The Problem with Greece (and us)

Greece is beginning to remind me of one of those old movies of the fifties where Uncle Charlie in the big extended family is up to gambling shenanigans that embarrass the family and threaten the father’s business deals. Everyone tells him to stop but Charlie has gotten in too deep and both “Big Al” and the police are after him. If he gets arrested it will be in the papers and the father will lose millions because his investors will pull out and if he gets killed by Al, the family will be in disarray and collapse. Of course, in the old Hollywood movies, at the last minute the father goes to the legitimate creditors and pays them off and then the police arrest Al and his “collectors.” Charlie repents his foolish ways and everybody is happy. Don’t expect that to happen in Europe anytime soon.

My hunch is that Greece, Europe’s “Uncle Charlie,” is eventually going to have to do some jail time (in terms of severe economic punishment), it will default on many of its bad debts, and will eventually either pull out or be thrown out of the Euro family, and that would throw the entire “family” into disarray. The Euro Zone created some of this mess by letting in let in too many countries who had too little capability of sustaining their membership. Some of them, most notably Greece, tried to look like they were wealthy enough to walk with the big kids by (dishonestly, deceitfully, illegally) borrowing most of its wealth and putting on a show. When the global economy slumped, creditors called in their investments and Greece had to admit that it didn’t actually own the money it had been throwing around and it imploded. Now it threatens to pull the whole of the EU down with it. Hence my guess that it will eventually leave the union.

One very ominous sign of just how serious is its condition was that when the rest of Europe pull together a one trillion dollar bail out, the market tanked. I think investors looked at that and said, “Jeez, if they’re trying to fix Greece with that much money, then it must have been lot worse than we suspected. Let’s pull our money out just to be safe.”

So, what would help? One thing being talked about is for Greece to do a partial default on all of its debts, just stop paying on its commitments. But the majority of its present outgo is unrelated to debt, so that wouldn’t help much. Cancelling totally all of its loans will not solve the total package of its problems. It would still need to make enormous, horrific, painful cuts in its budget that will drive a whole lot of people into poverty.

The only big thing that could bring it back from this disaster would be a general (and international) economic recovery. If the tide rose, it would lift the boats. The US is in an analogous position, though not nearly as bad. Thought it’s hard to believe from listening to Republicans, Tea Partiers, and Fox News, most of our recent Federal deficit has come from the recession. People lost their jobs or their incomes went down and then tax revenues went down. So if we ever recover from the recession, our tax income will come up and that will make paying down the deficit a whole lot easier.

However, Greece has some other very serious problems, one of the biggest is that the Euro-Zone doesn’t have a central government. What that means is that in the US, if we have a state that goes under (like California), then Social Security, Medicare, and other federal revenue checks still flow in. But if a European Union state goes under (like Greece), nothing outside comes in, and people starve.

A second problem of being in the Euro Zone is that it doesn’t have any control over its own currency. Right now the Euro is “strong” (that is, expensive) and that means among other things that tourists are more likely to go to neighboring Turkey rather than the Parthenon and no one can afford its exports. If Greece had its own currency, it could devalue it and make its exports look cheaper and therefore sell more. That would go a long way toward helping it dig its way out of its deficit hole. Countries in Southeast Asia did this following their deep recession of 1997. They lowered the value of their money, which lowered the costs of their products and they sold boatloads of computers, CDs, TVs and, well, drugs to the US and the West. China is in fact still doing that, which has been hard on our domestic producers, but it has been good for them.

However, since Greece is a member of the European Union, it has the added problem of not owning its own currency and therefore doesn’t have the option of devaluing it. It would be like Texas saying it wanted to devalue the Dollar to lower the price of oil. It could never happen. Greece’s currency is the Euro and it can’t go down unless the entire union goes down (and don’t even think about that).

Our US situation is slightly different. We could devalue our currency a little bit but we don’t have too much to export any longer. For the last twenty-five years or so we have been supporting policies that encourage industries to move to places like China, and in the process we have been sliding steadily toward becoming a service income economy. That has helped the home offices of those industries and it has helped the international financial sectors, mainly on Wall Street, but it hasn’t been good in terms of producing anything. So, now, if we wanted to sell a bunch of stuff to help pay down our deficit, we have fewer things to sell.

Which brings me back to the conclusion that Greece’s days on the Euro are limited. The amount of spending they would have to cut to balance the national check book would be beyond imagination. You can talk all day about how they have too many government workers making too much money (and they do), but to now fire or cut all of them sufficiently to have a balanced budget would drive their economy into the stone age. If you think the riots look bad, imagine civil war. It would be ugly and the suffering brutal.

One parallel to what I’m imagining would be Argentina. You may recall that Argentina fell into an economic black hole in the early 2000s, because it had over spent and was too closely tied to the economies of South East Asia, which had tanked in 1997. Their local currency was tied to the US dollar in a way that was functionally similar to how Greece is tied to the Euro. If our economy went up, theirs went up and if ours went down, theirs went down. Usually. Under normal circumstances it would be inconceivable for them to break with the dollar. But their crisis was so severe that they were forced into inconceivable policies, one of which was to break with the dollar. They went to hell and back over the next couple of years and emerged at the end a much healthier, much more vibrant economy. Which brings me again to say to Greece: blow off the euro and save yourself from oblivion.

But I’m just a preacher from Quincy, so what do I know.

Obama hews to status quo on finance



Simon Johnson
May 19, 2010 11:39 PM EDT
The consensus on President Barack Obama is that he seeks consensus. He’s always been a centrist, we are told by his many biographers, so it is no surprise — they say — that he hews to the center on issues like financial reform.

His staff reinforces the message that Obama is all about moderation: The president wants reform, but not in a way that would disrupt the recovery or prospects for longer-run sustainable growth.

There is just one fly in this ointment. In the current Senate debate about reforming the financial system, the push for stronger measures has come largely from the center — not from any radical wing.

But this is not the center that Obama claims. Obama’s moderation is quite conservative on finance — i.e., stick with the devil you know.

Centrist senators like Ted Kaufman (D-Del.), Carl Levin (D-Mich.), Jeff Merkley (D-Ore.) and Sheldon Whitehouse (D-R.I.), among others, have pushed hard to strengthen the financial reform legislation — working with little or no support from the White House.

These moderates have championed reform because they see extreme dangers posed by our existing financial system. In stark contrast to the president’s view, their attitude is: “Hey, it’s quite a devil.”

Even the centrist Democratic leadership — Senate Majority Leader Harry Reid of Nevada and Sens. Byron Dorgan of North Dakota and Dick Durbin of Illinois — all supported (or still support) amendments that would have made the legislation far more effective.

Among Obama appointees, it is Gary Gensler at the Commodity Futures Trading Commission — not the core White House-Treasury team, and, of all things, a former Goldman Sachs executive — who has pushed hardest, with some success, for stronger rules on derivatives.

And it is Mary Schapiro who took the risk to pursue Goldman Sachs — against the votes of the GOP appointees at the Securities and Exchange Commission.

With them all, of course, stands the intellect and vision of Paul Volcker — the man who remained apart, with apparent diffidence, from the initial reform effort last summer. But he then launched an effective sub rosa campaign that culminated in the “Volcker rules” that, at least initially, proposed a hard size on our largest banks and would still force megabanks to drop “proprietary trading” activities — the big speculative bets they make that are implicitly backed by the taxpayer.

No one has yet accused Volcker of being a left-wing radical.

It becomes increasingly clear that the divide is not left-right within the Democratic Party, or even across the aisle but, rather, between people who want to rein in the power of our largest banks vs. those broadly comfortable with the status quo.

Treasury Secretary Timothy Geithner, chief White House economic adviser Larry Summers and the White House-Senate core — which includes some Democrats and most Republicans — are all about not being too tough on the Big Six banks.
But what is “too tough” at this point? The big banks have no good arguments. They are reduced to asserting that being able to take risks in their current manner makes the financial system more stable — a point directly contradicted by their actions in the run-up to September 2008.

It was these banks’ own holdings of “toxic assets” that were the focus of rescue attempts organized by former Treasury Secretary Henry Paulson and Geithner. Holdings at this scale were not acquired in the mundane business of bringing buyers and sellers together. Instead, very smart people at the big banks saw this as a good investment, which proved devastatingly wrong.

The idea that our economy needs banks at the scale and with the characteristics of JPMorgan Chase, Citigroup, Bank of America, Wells Fargo, Goldman Sachs or Morgan Stanley is preposterous.

Try finding someone in the financial markets or otherwise well informed about how global banking really operates (say, the CEO of a big nonfinancial company) who thinks there are economies of scale in banking more than $100 billion in total assets.
The megabanks — with assets between $500 billion and $2.5 trillion, leaving aside their true derivative exposures, which no one knows — are far beyond the size needed by society. They are so big that their size has become very dangerous.

To be fair, the Senate bill most likely will include steps in the right direction.

On consumer protection, Elizabeth Warren paved the way, and the administration — to its credit — largely followed her lead. On derivatives, Gensler has brought us to a better — though far from ideal — set of rules. On compliance, Schapiro is picking the SEC up off the floor.

The White House supports Warren consistently, has been brought around to Gensler’s approach and hopefully will stick by Schapiro.

But the biggest banks have simply proved too powerful to overcome without sustained and intense counterlobbying by the White House.

A moderate reformist president could have taken, and held, the center ground by putting greater limits on any future damage that our biggest banks can cause.

But, for whatever reason, this is not what Obama chose to do. He presumably had his reasons. But they have nothing to do with being a centrist in general.

As a result, the financial system could well remain largely as it was before September 2008. Perhaps the megabanks will be slightly constrained in their activities; most likely not — at least for Goldman, JPMorgan Chase and Morgan Stanley.

Prepare now for new extremes.

Simon Johnson, former chief economist at the International Monetary Fund, is now the Ronald A. Kurtz professor of entrepreneurship at the Massachusetts Institute of Technology. He is the co-author of “13 Bankers: The Wall Street Takeover and the Next Financial Meltdown.”
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Prevent Future Financial Crises: Protect Consumers, Re-regulate the Banks
Edith Rasell, Minister for Economic Justice
"Can I tolerate wicked scales and a bag of dishonest weights?" – Micah 6: 11 

The prophet Micah cried out the words he heard from God condemning the dishonest business practices of his day. Faithful people have long been decrying fraudulent and unethical business practices.  We must continue to do so today.
Historically banking was a staid, low-risk, somewhat boring industry. That was before it became hot, glamorous, and extremely profitable. Salaries and bonuses skyrocketed. Then in late 2007 the high flyers fell, bringing the world economy down with them. Jobs disappeared, incomes fell, and foreclosures mounted as savings and retirement security evaporated.
It is now clear that the banks’ enormous profits stemmed from very high-risk activities which were unleashed by deregulation and under-regulation. Age-old problems of usury, fraud, racist lending, and extraordinary greed went unchecked. As new financial institutions and practices developed, regulation (and regulators) failed to keep up.
Trillions of dollars cycled through the financial institutions. Some of the money paid for new homes which today may be vacant or worth less than the value of the outstanding mortgage. But overall, there was little investment in new businesses, infrastructure, research and development, or other things with lasting value. Instead much of the money was used for speculation.
The frenzy of financial speculation and fraud has left behind enormous pain and stunted lives. Our children and young people may be the most severely impacted. Unemployed parents are stressed, depressed, and afraid. Children’s opportunities are constrained by fallen incomes. Young adults, who are bearing half of the net job losses, cannot find employment. Research shows their career paths and earnings will likely never recover from the harm of entering the job market during such a downturn. Neighborhoods – especially those of the working class and people of color – have been devastated by foreclosures and a growing number of vacant homes.
To address the risky, fraudulent and usurious dealing that led to our current financial crisis, Congress is considering a package of reforms that, together, can help restore integrity to our financial markets. This package:
• Establishes an independent consumer financial protection agency to protect people from fraudulent, misleading, and abusive practices in mortgages, credit cards, payday loans, bank fees, and other lending.
• Regulates high-risk financial instruments like derivatives and require they be traded in exchanges where there is oversight and transparency.
• Establishes an orderly process to dissolve a failing bank, funded in advance by the large banks, in order to avoid future tax-payer bailouts.
• Prohibits banks from using depositors’ money to make speculative investments for the bank’s own benefit (or loss).
• Enacts greater regulation and oversight of all elements of the banking industry including commercial and investment banks and bank holding companies, rating agencies, hedge funds, private equity firms, brokers, and mortgage companies.
• Empowers banks’ shareholders to exert greater influence on institutional practices and policies including executive compensation. 
The banking frenzy that brought pain and destruction to millions of people in the U.S. and billions around the world did not have to happen. It must not happen again. People of faith are called to act, to work to end the deceptive, risky, and fraudulent practices that caused the financial crisis.
For more information:
On the economic crisis from Justice and Witness Ministries 
On banks and regulation
• Center for Responsible Lending   
• Faith and Credit  
• Americans for Financial Reform 
• U.S. PIRG Guide to Wall Street Reform