So Obama’s (The Fed’s) solution is to centralize all regulation with the FED. So who regulating the Fed then?
This is perhaps the best written analysis so far of the Fed TARP and Cash for Trash scam that was used to save those that were “too big to fail.” But they weren’t too big when it came to the reckoning with how it was they lust destroyed the American way of life and our free enterprise system.
It’s a long one so plan to dedicate about a half hour of your life to reading it and more importantly understanding it. It is not for the faint of heart. Got better things to do with your time? Sorry can’t help you there. Anyway what’s more exciting than reading about how Wall St. just ruined America. It was a combined Democrat and Republican effort. Not only are they getting off scot free, they are setting us up to do the same thing again. But the good old American taxpayer is always there to carry the burden of their debt for them.
Instead of Real Financial Reform, Obama’s Plan capitulates to Wall Street
by Prof. Michael Hudson
The story is worse than just “Pres. Obama labored, and brought forth a mouse.” He is morphing into Joe Lieberman in reaching across the aisle for Republican support – and no doubt future campaign contributions from the financial sector. There also is a touch of Boris Yeltsin in sponsoring a financial “reform” disturbingly similar to what advisor Larry Summers backed in Russia – relinquishing government power to a banking elite (the notorious “Seven Bankers” in post-Soviet Russia). The Financial Regulatory Reform proposal promotes Wall Street’s “product,” debt creation, at the expense of the economy at large, and lets financial chieftains continue to self-regulate the debt industry – and by the way, to keep all their gains from the past decade’s worth of fraudulent lending, scot-free.
Confronting the wreckage of a debt crisis worse than any since the Great Depression, Mr. Obama has achieved what no Republican could have: rescuing the Bush Administration’s pro-creditor policies that fostered the Bubble Economy in the first place. “Most of the financial sector lobby community is happy with what has emerged,” the Financial Times summarized. A spokesman for the Financial Services Forum, a major Wall Street lobbying organization, called the proposals “careful and balanced.” With such endorsements, victims of predatory lending have good reason to worry. The Obama plan is just the opposite from reforming the financial system along lines that progressive Democrats and other critics have urged.
The plan’s six most fatal flaws are apparent in its preamble, which lays out a false diagnosis of the financial problem in a way that whitewashes Wall Street (in contrast to Mr. Obama’s nice televised populist speech giving verbal criticism to “culture of irresponsibility”). A false diagnosis must lead to wrong-headed cures – rarely by accident. There invariably is a financial beneficiary who gains from blind spots in a legal “reform” package.
1. Regulatory capture. Preparing the ground for future Alan Greenspan “free market” ideologues
The most serious problem is “regulatory capture”: control of the public regulatory process by the special interests being regulated. Mr. Obama’s speech introducing his reform was forthright in acknowledging that “some companies shop for the regulator of their choice … That is why, as part of these reforms, we will dismantle the Office of Thrift Supervision [OTS] and close loopholes that have allowed important institutions to cherry-pick among banking rules. We will offer only one federal banking charter, regulated by a strengthened federal supervisor.” It was the OTS, after all, that AIG and Washington Mutual chose as their regulator, as did GE Capital. The most incompetent, most ideologically opposed to serious regulation, its idea of a “free market” in practice was one free for fraud-ridden subprime lenders to do whatever they wanted.
One could go down the list of non-enforcement agencies – the Securities and Exchange Commission (SEC) not responding to warnings about Bernie Madoff, and the most deregulatory agency of them all: the Federal Reserve under Bubblemeister Alan Greenspan. Traditionally, the Fed has acted as lobby for the commercial banking system and indeed for Wall Street as a whole. (Its shares are owned by the commercial bank members of its system.) The Fed’s refusal to intervene to stop the subprime mortgage bubble, fraudulent lending and other elements of the Greenspan Chairmanship does not give much faith that it will take actions that will interfere with Wall Street’s money-making at the expense of the rest of the economy. Even today, the Fed is stonewalling Congress by refusing to release details on its $2 trillion “cash for trash” giveaway to favored Wall Street institutions.
It is supposed to be the Treasury’s role to represent the public interest. Unfortunately, appointing Treasury Secretaries from the ranks of Wall Street management – or giving Wall Street veto power over the nominee – undermines this mission. Elsewhere in what is supposed to be the regulatory system of public-private checks and balances, the simple tactic of underfunding the criminal justice system, the FBI, state and local prosecutors – or actively blocking them, as George Bush did – leaves the economy without adequate protection against financial fraud and predatory credit. Putting the Congressional financial committee heads up for sale to the highest campaign contributors caps the process of transforming economic democracy into oligarchy.
Britain affords a horror story that serves as a case in point. The management guru John Kay wrote a column in the Financial Times this week tracing how bank lobbyists managed to de-tooth meaningful regulation. The moral is that “self-regulation” by finance has become a universal tendency these days, and is utterly ineffective – by design!
Meaningful regulation should start with the premise that the right of banks to create credit out of thin air (actually, out of strokes on a computer keyboard, as long as bankers can find borrowers to sign IOUs) is a public utility. Mr. Obama and his Treasury do not agree. They treat credit creation as a private Wall Street monopoly, to be regulated more in name than in practice. The result is a Thatcherite giveaway to the banking sector – and as Tim Geithner noted, Wall Street institutions of all stripes, from brokerage houses to automobile lenders and retail stores are now declaring themselves “banks” in order to get government handouts to anyone who is a credit (but nothing for their debtors). This is part of the New Class War that the Bush-Obama administration has sponsored to polarize the economy between creditors and debtors.
The politically astute way to deregulate a public utility – especially in the wake of a financial crisis that has much of the population up in arms – is to shed crocodile tears over Wall Street’s “culture of irresponsibility,” as Mr. Obama did on Wednesday, and then claim that you are “centralizing” regulation to make it stronger rather than weaker. If you are going to block future bank regulation, of course you promise that your act will provide greater public oversight. Mr. Obama has tapped the Federal Reserve for this role. But this is precisely what exacerbated the Greenspan Bubble.
The problem is what has now become a tradition throughout the world, not only in the United States itself. Presidents Bush Sr., Bill Clinton, George W. Bush and Mr. Obama all appointed deregulators drawn from the Wall Street’s managerial ranks or those of its lobbyists. This is the path of least political resistance in blocking meaningful regulation. All that is needed is for “regulators” to do nothing, OTS, SEC or Fed style. It is the same with the Federal Drug Administration and other regulatory agencies whose officials come from the managerial ranks of the industries to be regulated. The Japanese have a long experience in such matters. The retirement of Bank of Japan heads is called “descent from heaven”: They return to the banking sector to reap their just rewards, or at least to get a lifetime of exorbitantly paid dinner speeches.
The deregulation-by-centralization ploy peaked when Pres. George W. Bush used it to nullify attempts by state attorney generals to prosecute Countrywide Financial, Washington Mutual, Citibank and other financial crooks as criminal enterprises for making fraudulent subprime mortgage loans. The ruse Mr. Bush used to block their lawsuits was an obscure small-print rule from the 1864 National Bank Act giving Washington the power to overrule local states in bringing criminal charges. The motivation for this Civil War law was clear enough: Local governments and their courts tended to be venal and corrupt. Washington asserted its oversight so as to prosecute “wildcat banking” in an era when bankers issued their own bank notes, many of which were worth much less than their face value when their holders tried to spend them.
Pres. Bush turned this law on its head, blocking eleven state AGs from prosecuting financial fraud. Taking matters out of their hands, he assigned the complaints to the Washington national bank regulator – who refused to prosecute, claiming that fraud was all part of America’s wonderful free market. This has cost the U.S. economy over a trillion dollars so far. Washington has preferred to let the banks make their fraudulent loans, and then pay them in full (along with the financial companies they’ve victimized, but not the personal debtors of course) for their bad loans that defaulted, so as to “save the system.”
The moral is, let the fraudsters do what they want, let the appropriate congressional committee heads take enough campaign contributions from Wall Street to ensure their safe re-election, and end up using taxpayer-funded “cash for trash” swaps to make sure that crime (now rechristened as the “free market”) pays. This is what happens when a criminalized class achieves “regulatory capture.” And of course, nearly the same objective can be served by permitting financial affiliates to operate out of unregulated offshore tax-avoidance centers.
Mr. Obama’s reform does not propose repealing or qualifying this clause of the National Bank Act so as to permit any prosecutor to prosecute (but not to allow prosecutions of financial fraud to be blocked). Placing regulatory power in the Fed has the potential to sterilize any serious fraud prosecution to make an industry behave whose slogan these days should be “Frauds ‘R Us.” This is the Robert Rubin and Larry Summers-style free market – free for criminalized finance to proceed unchecked. And if Mr. Summers is to become the next Fed Chairman … well, you can guess where this will lead on the regulation/deregulatory spectrum between creditors and debtors!
And that is just the first part of a very comprehensive analysis! You can read the rest here.