Washington: support the public welfare over Big Business lobby

Really interesting editorial in today’s New York Times that hits the mark with the threat that an un-check and powerful bank lobby poses to achieving much needed bank and financial industry reform to protect consumers against industry collusion, predatory and price-gauging practices, as well as disproportionate risk-taking that threatens a sustained economic recovery.  These practices have reached crisis proportions and is pervasive in Washington.  The tactics of the bank lobby also subverts the U.S. Congress’s Constitutionally-ordained obligation to protect the ‘public welfare’ against all enemies, foreign AND domestic.  The “Big Business” lobby constitutes a clear and present threat to our citizens Republic. And “Big Government” represents the only realistic check against “Big Business.”  It is time to demand that “Big Business” be good “corporate citizens” and to exercise their patriotic duty as such to act in the public’s interest.  It is also time for Washington lawmakers to take heed to public needs, as well as the public mood: something must be done.

(NYT) New York - Pretty much everyone agrees on the causes for the country’s desperate financial mess: predatory lenders, weak regulations, even weaker regulators, and risky nigh unto incomprehensible financial instruments.

Congress’s willingness to address those problems will have its first real test on Wednesday when the House Financial Services Committee puts finishing touches on what could be essential reform legislation — or a major disappointment, depending on what they do.

At the top of the committee’s agenda is regulation of the largely unregulated and dangerously opaque multitrillion-dollar derivatives’ market. Next on the agenda is the creation of a new Consumer Financial Protection Agency to oversee the consumer-credit offerings of banks and other financial firms — including mortgages, credit cards, overdraft “protection” and payday loans. Both reforms are crucial, and we fear both are in danger of being irreparably weakened. Derivatives are supposed to help investors and businesses manage risk, but their unchecked and unregulated use led — directly and indirectly — to the financial crash and subsequent trillions of dollars in taxpayer interventions.

Traitors to the public will

 Congress should require that all derivatives’ dealers and users — including banks, hedge funds and corporations — conduct their trades on exchanges where they would be subject to considerable regulation and public scrutiny. Regulators could create exceptions for customized contracts that are negotiated one on one for truly complex and unique circumstances. But most derivatives contracts are highly standardized and can be, and should be, exchange-traded.

The threats to the consumer protection agency are even more blatant. To curry favor with the banks, several lawmakers are intent on amending the proposed legislation so that no state could impose its own — tougher — consumer protection laws on banks. That would be a mistake because in the past, many states have demonstrated the will and the expertise to protect consumers. But federal rules were issued in 2004 that basically barred states from enforcing their laws over national banks and their subsidiaries. That short-circuited state efforts to control, among other things, the subprime lending that sparked the financial crisis. Some lawmakers are also intent on weakening the proposed power of the new agency to examine the books of the banks and firms that it would regulate. Current bank regulators have that power, but they have not used it with a sole focus on protecting the best interests of consumers.  Read more here.

Unfortunately, the proposed legislation has too many loopholes and exemptions. For example, many corporations and hedge funds would still be able to trade standardized derivatives privately. That may protect bank profits — without transparency, there is no chance for comparison shopping — but it would put taxpayers at risk of a repeat calamity. Like the banks, some corporate investors in derivatives resist exchange trading. They argue that more regulation would raise their transaction costs to hedge any given risk. That’s debatable because greater transparency is likely to reduce costs. But even if true, somewhat higher costs would be a small price to pay for systemwide stability.

Guru Greenspan endorses Obama Consumer Protection agency.

A keystone of Obama’s Wall Street reform agenda is getting support from the unlikeliest of corners. Alan Greenspan, an acolyte of Ayn Rand and extreme free-marketeer, is backing one of the most far-reaching elements of the financial overhaul: the Consumer Financial Protection Agency. Greenspan told the Washington Post that pushing for the CFPA was “probably the right decision.” Given the former Fed chairman’s penchant for obliquity, the straight-forward endorsement takes on greater weight.

Wall Street and community bankers argue that the proposed agency will restrict financial innovation and otherwise inhibit economic growth. Those are the types of arguments that Greenspan was prone to make during his tenure as chairman, but the financial crisis has persuaded Greenspan that the “intellectual edifice” buttressing radical free-market ideology has, in his words, “collapsed.”

Rep. Brad Miller (D-N.C.), the lead backer of the CFPA in the House Financial Services Committee, recalled the Greenspan opposed consumer protections while he was chairman. “It’s a dramatic turnaround from his public position and even more so, apparently, from what he was privately pushing within the deliberations at the Fed,” he told HuffPost.  Greenspan has acknowledged that the collapse has led to a crisis of faith. “I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms,” Greenspan said at a House hearing last October under questioning from Rep. Henry Waxman (D-CA).  “In other words,” said Waxman, moving in for the kill, “you found that your view of the world, your ideology, was not right, it was not working.”

“Absolutely, precisely,” said Greenspan. “You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.”

It’s one thing to reject a failed ideology, but another altogether to embrace the kind of regulation represented by the CFPA. “He has already said that he erred in assuming that the market would take care of things–the Ayn Rand point of view–but this seems to go farther than he’s gone before in calling for a new agency to protect consumers from financial products,” said Miller.  Greenspan told the Post that the Fed has enough responsibilities to manage and that consumer protection would be too much. Miller noted that Greenspan’s position is “diametrically opposite of what leadership at the Fed are saying now.”

Top Fed officials are pushing to make consumer protection a core Fed responsibility. But Democrats passed a law in 1994 requiring the Fed to adopt rules protecting financial consumers. When the GOP took over Congress in 1995, the Fed decided not to act. It didn’t write the rules until Democrats retook Congress in 2007 and began work on a new set of laws. “The damage was already done,” noted Miller.

The CFPA would gauge the safety of financial products and be given broad powers to require understandable explanations of the terms of financial instruments and otherwise restrict behavior that now goes on unmolested. It was first proposed by Harvard Prof. Elizabeth Warren, the head of the congressional panel overseeing the financial bailout. It is fiercely opposed by the banking lobby. Financial Services Committee Chairman Barney Frank (D-Mass.) earlier postponed a vote on the agency until after the August recess. The banking lobby’s stiff resistance made it difficult for the chairman to be sure he had enough votes to pass it. The vote is now expected in October.

Last week, Frank issued a memo to committee members outlining proposed changes to the original package, which had been blasted by the Chamber of Commerce for over-reaching and going so far as to regulate butchers who give meat on credit.  The original bill would have required financial institutions to offer standard, “plain vanilla” financial products meeting certain basic guidelines for transparency and safety. That requirement has been dropped, according to the memo, which was obtained by HuffPost. Some consumer advocates expressed alarm at the proposed changes, but others following it closely say that the changes are largely technical and that the real fight is yet to come.

The Memo:   …Read more here.

The World's Central Bankers

The world’s central bankers and finance ministers emerged from this weekend’s Federal Reserve  annual Summer retreat in Jackson Hole, Wyoming (WY) amid growing concerns and debate in the world markets and financial centers about the outlook for a global economic recovery. One of the key issues on the agenda was whether, or not, to keep coordinated interest rates low in order to help boost world economic growth. Prolonged low interest rate environment can lead to persistent inflation if not delicately managed. Another central concern is whether the better and faster than expected rebound in China, Germany and France will dampen recovery in the U.S. and what impact this imbalance might have on international capital flows for trade and investments going forward. Central bankers warned that a global economic recovery shouldn’t delay an overhaul of financial market regulations following the worst banking crisis since World War II.

Federal Reserve Chairman Ben S. Bernanke said the global economy is beginning to emerge from recession after “aggressive” action by central banks and governments.  Among other things, he noted that “Economic activity appears to be leveling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good,” Bernanke said in a speech at the Federal Reserve’s annual symposium in Jackson Hole, WY.

Bernanke, speaking to an audience of central bankers and academics, warned that the world still confronts “critical” challenges. The note of caution underscored the Fed’s decision last week to leave interest rates near zero for an “extended period” and to delay by a month the scheduled end to its $300 billion program to buy U.S. Treasuries.

“Strains persist in many financial markets across the globe, financial institutions face additional significant losses and many businesses and households continue to experience considerable difficulty gaining access to credit,” Bernanke said. Recovery “is likely to be relatively slow at first, with unemployment declining only gradually from high levels.”

While economists predict the U.S. will return to growth this year, they say the jobless rate is likely to rise beyond 10 percent, restraining consumer spending and casting a cloud over the strength of the recovery.

“Economic activity appears to be leveling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good.” Critical challenges still exists and “Strains persist in many financial markets across the globe, financial institutions face additional significant losses and many businesses and households continue to experience considerable difficulty gaining access to credit.” Recovery “is likely to be relatively slow at first, with unemployment declining only gradually from high levels.”

Federal Reserve Chairman Ben S. Bernanke used the weekend symposium — which began on Thursday, and ran through Sunday – to single out the creation of rules limiting risk as one of the “difficult challenges” ahead. European Central Bank President Jean-Claude Trichet said “green shoots” aren’t enough for him to declare the recovery sustainable and cautioned that officials must do “an enormous amount of work.”