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.
 

 

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[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

The Economic Meltdown and the Third World

Stan G. Duncan

Years ago I was drinking sangrias at a cock fight outside of Cuernavaca, Mexico, with a guy who had just gotten fired from the Mexican finance ministry (long story, don’t ask).

Among other things we talked about (like why did you take me to a cock fight?) also asked him why he got fired. He said something like, “The US is in a financial crisis, and whenever your economy stumbles, ours collapses. You are like a giant water buffalo and we are the little animals that live in its coat. When you are healthy, we are fine. But if you fall over, or run stupidly into a fire, you get hurt, but we burn up. We are your needed, but unwanted bastard step-child.”

That was a long time ago and the financial crisis passed and now we are in another one. But our conversation has been haunting me as our nation is once again mired in the worst financial briar patch in generations. I wonder how my friend is doing these days?

During the fake money boom years of the US, a better than average amount of money tricked down to the poor and developing countries of the global south, but recently most of that has disappeared. For example, basic credit has dried up and what’s out there cost twice as much. It’s bad for banks in the US but awful for banks in Honduras. Bank lending to emerging markets slid from $410 billion in 2007, to $167 billion in 2008 and will be around $ 60 billion in 2009. A new World Bank study of the effects of the recession on developing countries found that private investments (which is different than loans) fell from $1.2 trillion in 2007 to $707 billion in 2008. And it projects that the inflows will be cut in half this year to just $363 billion.[1] I realize all of this looks like just a bunch of numbers, but in real terms it is about real people. On the ground in real countries it means no schools, no health care, no infrastructure improvement, and many people will die.

The second thing is trade. Developing countries are like export platforms to places like the US and Europe. In Trinidad, for example, exports of commodities account for almost twenty-five percent of their entire GDP. But the World Bank has recently projected that prices for developing country commodities will fall by around twenty-three percent this year. And that doesn’t even count the black hole of tourism this year. Hotels in the Caribbean, a major magnet for tourists, are expecting an eighty-percent drop in occupancy and are offering sixty percent discounts[2] (if you still have a job, this deal’s for you). Imagine what your own life would be like if your income dropped that far in less than a year (no, wait, some of you probably can imagine that).

The third thing is remittances, Those are the extra money that immigrants send home after cleaning toilets in Tulsa or picking watermelons in California. In many countries remittances are so high they are greater than what they receive in foreign aid and they rival the income from their major exports. Remittances make up 24 percent of Guyana’s GDP and 25 percent of Honduras’. Migrant workers sent over $ 8 billion to the Caribbean and $ 11 billion to Central America to support their families during 2006. That is expected to suffer a steep decline this year, probably around a fourteen percent drop.[3] It will be devastating to communities that depend on them.

As if we didn’t need any evidence, a recent study put out by the British Institute for Development Studies[4] showed that underclasses in poor countries are eating less often, pulling their children out of schools to work the fields, and families are being broken up as husbands are forced to leave home looking for work. Remember too, that in addition to the present crisis, last year’s oil price spike and multi-national crop failure and creeping climate change, had already begun causing human destruction throughout the third world like a modern black plague.

So, what can you and I do about it? Well, the short answer is not much. On a macro level, even if the wealthy countries stepped up to the plate and spent the paltry $20 billion they promised in April to help the developing world (which they won’t) it still wouldn’t make up for the amount that has been lost by the decline in remittances. And if you and I gave more money to Church World Service (which we should), cumulatively it would help only a fraction of the people who have lost their homes to the global destruction.

What it would take in the long run would be a complete re-drawing of the global economic map. The financial crisis that we are going through is terrible, but it is a bi-product of a much deeper economic structural problem that until addressed will continue to force these wild and painful bi-polar economic mood swings onto the world forever.

Things like an international regulatory agency with enforcement powers which could reign in the banks who make dangerous obsessive compulsive bets with other peoples’ money. And do it with impunity because they know that they will always be bailed out by rich country governments if they bet the farm and lose everything.

Re-writing of global trade rules that are now subtly (and sometimes not so subtly) biased towards the countries with the most money (remember the Golden Rule: Those who have the gold get to make the rules). And an end to policies that force poor countries to continually over produce, which is good for us because we can buy things for less money, but bad for them because they have to sell things for less money.

Dismantling (and in some cases arresting) the oligarchies who have ruled both rich and poor countries (starting with our own) since at least the beginning of the modern age of globalization (which I put at August, 1982, but that’s for another time).

And a few others.[5]

What small things can you do? Well, we’re not helpless. Don’t do nothing because you can’t do much. For one thing, if you have a job you really ought to be giving more money to Church World Service, or Oxfam or another fine development organization. It can’t save the world, but it can save a family, and that’s a start. Click here for Church World Service.

For another, there are several bills in Congress right now that are a down payment on a new international economic order and you can write your senators and representatives in support of them.

For example, Bread for the World, the Christian hunger and poverty lobby is sponsoring a bill that would completely overhaul and make more effective the way the US allocates its foreign aid money. It’s in John Kerry’s Senate Foreign Relations committee right now. Write him a letter telling him you support it. (More on the bill here, and how to write Kerry’s office here).

Second, JubileeUSA, known best for its relentless campaign to lift the crippling debts that have been drowning most of the developing world for thirty years, is still alive and involved in a number of important campaigns for better financial structure and terms of trade around the world. A good example is their “Vulture Fund” campaign. Vulture funds are the insidious, immoral companies that buy the defaulted debt of poor countries from the original lender, often for pennies on the dollar. Then they wait until a country receives debt cancellation from governments or international financial institutions and then sue in US or European courts to seize the newly available resources and make the poor country pay top dollar. It seems impossible to do, but they are doing it and they should be stopped. There is a bill in Congress about it now. Click here to go to their web page and get more information.

Interestingly, both Bread and Jubilee host a special Sunday for churches each year to highlight their issues in a worship setting. This year, by total coincidence, they have fallen on the same Sunday, October 18. This is a tremendous opportunity for you to lift up the global economic crisis and our churches’ response to it. Both organizations offer sermon notes, worship ideas, and Bible studies that can help you. Put the two together and celebrate the possibility of making a contribution to lightening the darkness of this global crisis. It would be a great way to educate and motivate your congregations on how to be a part of the global community.

Bread for the World Sunday
Jubilee Sabbath resources


When my banker friend down in Mexico decided to leave the cock fight both of us had had a little too much to drink and he left the parking lot and started driving in exactly the wrong direction to get us back to Cuernavaca. After about half an hour he figured it out and turned around. “What happened?” I asked him.

He laughed. “It’s you,” he said.

“What do you mean?” I said. “I’m just sitting here.”

“Seems like every time we’re around you Americans,” he said, “we start going off in the wrong direction. I think you are a bad influence on us.” He was kidding, but he also made a point.

Maybe someday—probably not soon, but some day—there will be a time when none of our children are step-children, all of us are in the same family, and all of us will be going in the same direction. It’s a possibility, it's worth a shot, and it’s worth a prayer.

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[1] http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/EXTGDF/EXTGDF2009/0,,menuPK:5924239~pagePK:64168427~piPK:64168435~theSitePK:5924232,00.html

[2] Dirk Willem te Velde, “Poor countries hit harder than expected by global financial and economic crisis” (Overseas Development Institute: June 04, 2009), http://blogs.odi.org.uk/blogs/main/archive/2009/06/04/global_financial_crisis_poor_developing_countries.aspx?utm_source=newsletter&utm_medium=email&utm_campaign=20090707

[3] Ibid.

[4] http://www.ids.ac.uk/

[5] Joseph Stiglitz gives a list of about twenty suggestions coming out of the “UN Commission of Experts,” which he chairs. See “A Global Recovery for a Global Recession” The Nation, July 13, 2009.