Opinion

The Great Debate

Time to stand up to the banking lobby

July 15, 2009

Christopher Swann– Christopher Swann is a Reuters columnist. The views expressed are his own —

The crusading spirit that at one stage threatened to lead to the nationalization of U.S. banks and the downfall of their top executives now seems like ancient history.

Banks are again flexing their muscles and have turned the tables on America’s politicians. Remarkably, policy makers now seem to be struggling to secure even a modicum of needed change in the regulatory system.

The winter’s paroxysm of public anger has dissipated with astonishing speed. This is in spite of the fact that economic recovery still seems a distant goal and the woes of CIT Group suggest that even the financial system is not out of the woods. As a result there is now a real danger that the administration and Congress will fail to live up to Rahm Emanuel’s famous injunction never to let a crisis go to waste.

The ability of the financial lobby to hold onto its political power has been one of the great mysteries of the crisis. Few special interest groups have shown such  flexibility in their logic.

As profits soared in the 1990s, their strength was taken as proof of their genius and politicians bowed to their every whim. After their crisis their weakness became a trump card. Hurt the banks, they argued, and the economy would go down with them. Now the banks are taking credit for a revival in profits that is almost entirely due to the extraordinary contortions of public policy.

The administration and Congress should not be taken in again. We are entering a crucial phase in the revamping of regulation and there is still little sign that the White House is putting enough political muscle into the process.

And as the self-confidence of the banks increases — along with TARP repayments and climbing profits — the window for reform narrows.

The industry is digging in its heels over efforts to create a credible consumer protection agency and to sanitize credit default swaps. These are debates the Obama administration cannot afford to lose. Keeping anything close to the status quo would expose the United States to a repeat of 2008.

Banks might have less money to throw around. But they do not appear to be skimping on lobbying. Political action committees run by the Independent Community Bankers of America have already raised 40 percent more funds than last year. Overall the finance, insurance and real estate sectors spent $110.7 billion on lobbying in the first three months of the year — second only to healthcare providers.

Financial lobbyists could be forgiven for a certain swagger of late. In May they managed to defeat President Obama’s push for a change in the bankruptcy law that would have allowed judges to cut the principal owed on home loans. They even capped this unlikely victory by extracting a concession that saved banks and credit unions at least $13 billion in fees to top up deposit insurance funds.

Now the industry would dearly like to abort Obama’s new Consumer Financial Protection Agency, which they believe would pay too little attention to the health of banks. Failing this, they want to defang the agency, limiting its powers to vet and approve products.

Given the prominent role played by poorly designed loan products in the financial crisis, this is a hard case to make. There is a pressing public interest in creating a vigilant gatekeeper for consumer products. Not only would it limit much individual misery, it should reduce the chances of bank collapses and public bailouts. It would not, as opponents have misleadingly suggested, seek to monopolize the design of financial products.

On credit default swaps the industry seems determined to stick as close to the status quo as possible, restricting any move towards transparency. If they get their way, the system will still be vulnerable to crises.

The determination of the financial lobby to obstruct moderate regulation on such key components of the recent crisis indicates an alarming lack of humility. Given their recent success, the industry may get much of what it wants.

This makes it especially important that the White House provide a stronger lead to Congress.

Obama appears to have been reluctant to spend his political capital. In fact a defeat of the powerful financial services lobby may actually help him get his way on the rest of his agenda. It would also leave America with a much safer financial system.

Comments
21 comments so far | RSS Comments RSS

You’ve been drinking too much Obama Kool-Aid. I believe banks flexing their muscles and preventing the enactment of incredible destructive, poorly conceived policies is incredibly positive. Bad political policies are the primary cause of the problem. Reforms enacted by an administration with seemingly a complete lack of understanding of how a modern economy works would certainly worsen the problem. The less Washington does, the better.

Posted by Daniel Wildermuth | Report as abusive
 

It’s a wonder that any banking regulatory legislation will be suggested by the White House considering that the Goldman Sachs crowd is so entrenched in the Treasury Department and in other advisory roles to the President.

Posted by Angelo_Frank | Report as abusive
 

The banks have escaped from the ICU. No way now. Banks eventually win. American taxpayer lose permanently.

Posted by Rose Eli | Report as abusive
 

A form of government in which all political and financial power is controlled by a few persons in high places is, in fact, an Oligarchy. This is a degradation of our Democracy (after it quickly degraded from a representative form to a Republic in 1804). The oligarchs had been growing in power and sophistication and checked only by the main competing Oligarchies of JD Rockefeller and JP Morgan as their respective ‘heads of state’ since the late 1800′s. Only after an economic calamity of Titanic proportions did the ‘elected’ government step up in the 1930′s. This only came about because there was no place for the oligarchs and their cronies to hide from the real voters, sans the lobbyists, the average American suffering the vagaries of The Great Depression. One who preaches about the so-called ‘Modern Economy’ fails to see the dramatic similarities between today’s economy and that of the 1920′s – 1930’s. Surely one is drinking cherry Kool-Aid (TM) if another is drinking grape. If serious reform and consumer protection is not enacted there will be more trouble as Oligarchs have proven time and time again throughout history their inability to disallow the corrupting influence of unbridled power and earth shaking calamities have always eventually ensued until there is a corrupting influence on Democracy itself. Think Octavian and the junior politician Adolph Hitler, who were both aiding in their political goals by the super rich in their day, and the result was an Imperial and Fascist Dictatorship with the untimely fall of one civilization and the World War 2 for the latter times. Things kinds of disasters are the ultimate result of concentrations of political and economic power as the system of checks and balances in human societies evaporate, like they are surely doing once again in the USA. These checks and balances need to be restored to stop the metaphorical government bus from careening off the proverbial cliff.

Posted by J | Report as abusive
 

The first I head of Consumer Financial Protection Agency was the proposal put forth by Robert Schiller. Who if memory serves correctly, did a correct analysis of the sub-prime problem. The bank lobby wants the profits, but if the losses get too big, has no issue asking the taxpayer pick up the tab/debt.

The financial markets need regulation and a centralized clearing mechanism for derivatives. If not, then officers of these companies should be held liable.

 

The proponents of unbridled free-market policies must remember that the tax-payers footed this bill, with nothing creative about the global destruction it caused. The truth however remains that burocratic policies are undynamic by their very nature and are usually outfoxed and priced in before the ink dries. The real political challenge for the Obama administration, and intellectual challenge for Congress, will be to get the smartest guys in town keep the banks in line by paying them more than the banks ever can. You need a wolf to catch a wolf, not a slow-moving burocrat.

Posted by Etienne | Report as abusive
 

People who deny the need for a credible consumer protection agency simply are in denial. I have spent over 20 years on “Wall Street” and in my view many senior financial people are vampires who profit by draining the blood of the living. We know how to destroy vampires, don’t we?

Posted by Steve Numero Uno | Report as abusive
 

Very perceptive commentary by “J”. Those who do not learn from history as destined to repeat it…….

Posted by Kil Jooy | Report as abusive
 

It is interesting that Mr. Swann grants so much power to the Financial Lobby, and completely ignores the fact that the administration’s misguided attempts to scare the public have worn thin. The danger of running the same plays from Saul Alinsky’s playbook is that eventually the defense does adjust. As the facts of the financial problems have come to light, sweeping reforms are simply not necessary. Many could very reasonably argue that governemnt “reform” got us into the current mess. Bill Fleckenstein proposed a very thought provoking thesis on this recently (http://articles.moneycentral.msn.com/In vesting/ContrarianChronicles/blame-reaga n-for-our-financial-mess.aspx?page=2).

Government Motors, Goverment Health Care, Government Energy, Government Banking.

A Free Economy is not without risk, but the risk of overt government involvement is a far greater risk to our Liberties than the occasional (and somewhat predictable) financial crisis.

Posted by David O'Brien | Report as abusive
 

We are all just so many little animals in the farm, your dream of being represented by democracy is an illusion shared by many of us, but sadly it is just that an illusion… and probably always has been.
The farmers (bankers) will fatten us up for shearing, sale or slaughter to suit themselves and their desire to own everything, and the politician is little more than a shepherd to coo soothingly to keep us animals from panic or straying.
The likelihood of the re-regulation of the financial markets this side of WWIII is probably zero (and WWIII will probably take us back to the stone age with added radiation).
The likelihood of politicians not being corrupted by big money is zero. Your interests are only of interest to the politician at election time, otherwise you are zero.

Posted by Peter H | Report as abusive
 

Agree with the thrust of the article. I believe we are in a time where the public will challenge the governmental system if it cannot demonstrate substantive reform of the financial system since, if Govt cannot act effectively as an agent for the taxpayer in a critical area that could bankrupt us all permanently, then what is the point of Government?

Fundamental change is needed to the financial services and related industry sectors where moral erosion and high wastage is endemic (for example who actually needs the management consultancy industry which preys mainly on the gullible public sector and thus us the taxpayer (just like the banks) and whose value added is virtually all to the consultancy’s owners and not to companies, government or society who they powerpoint to death claiming to support for very large amounts of taxpayers money).

We taxpayers hold a lot more power than voting power and this may be a time when we need to start wielding it. Some sort of revolution is needed to address the causes of the current crisis as the establishment cannot right itself and is capable of destroying all our livelihoods for ever.

Posted by mark | Report as abusive
 

Ths Banks will not be touched. They are the only companies going to report increased earnings this season. ( all be it due to doubtful accounting) These earnings are the only thing that are stopping the DOW going to 4000 !

Posted by d | Report as abusive
 

Aaah, Patriotism and the Best Interest of the Nation!

What a great way to get volunteers for the Army, not something bankers feel inclined towards. Only suckers will feel morally indebted to the nation. At least, not this one.

Posted by Dan | Report as abusive
 

Forget marching on Washington… Wall Street wields the power.

March on Wall Street – Monday, August 10th, 2009.

In the proud American tradition of government for the people – regardless of your political convictions, you cannot argue that the banking situation is good for the United States and the people.

So, let us take action, join forces as Republicans, Democrats, Independents, etc. and tell Wall Street that THIS MESS is not working for the American People!

March on Wall Street, beginning at 8 AM on Monday, August 10th, 2009.

Posted by WorriedParent | Report as abusive
 

These banks – are they not private organisations owned by wee gnomes? Why then are they so brazen as to come and ask money from tax payers, then in return for their salvation we are subjected to more pain and disinformation? If I default on my house loan, will the taxpayer save me? Probably not. The banks have an enormous responsibility to run their businesses ethically. If I am forced to support them as a tax payer, then I feel I am absolutely entitled to tell the banks how they should conduct themselves. If we allow them to go back to pre-crisis conditions, then in a short time we shall all be right back where we are now. To not legislate heavily against the banks is simply not an option: it is a prerequisite for ensuring future stability for the world…..

Posted by Larry | Report as abusive
 

Can you believe the banks results? really great aren’t they ! Only an idiot would believe them, but Ben and Tim will tell you they are green shoots.

Posted by d | Report as abusive
 

The bank results aren’t that surprising given the massive amounts of tax-payer funds kindly donated by our leaders. I’m currently reading a book about the recent events and it would seem that one of the banks reporting great profits dipped in and and then out of the sub-prime mortgage scam before it blew out, and still got buckets of bail-out money to play with… resulting in great results, courtesy of the gullible tax payer! Charitable assistance for bankers is second only to the assistance being given by the armed forces to the trans-national oil companies.

Posted by Peter H | Report as abusive
 

Comment to J’s entry: We currently have a oligarchy – the financial and insurance industries currently rule the U.S. Having the government taking back all of the power its lost would only hand over the “reins” so to speak to another oligarchy. Our government has become powerless or paid off from both of the industries and if any American thinks his/her say or vote can change that is deluded. We’ve lost democracy a long time ago.

Posted by Irish | Report as abusive
 

One more thing – to the writer of this article – the people’s anger hasn’t subsided – we’re too distracted in keeping our heads above water to fight a fight we can’t win. We’re all beginning to think the same things about our personal lives as well.

Posted by Irish | Report as abusive
 

The banking community seems to bring about most of the economic illnesses.It will continue in dictate their bussines phylosophy, unles regulatory practises are created and enforced, so banks act more in step with the idea that all activities must in the final analysis benefit the people and not just cater to the wealthy and powerful.Of course balanced position hast to be reched for a fiscal policy to effectively work.

Posted by Felix Ramon Lopez | Report as abusive
 

The virtuous circle? Some interesting quotes I came across…

“Banking Establishments Are More Dangerous Than Standing Armies.” Thomas Jefferson (1743-1826), 3rd US President

“… a serious depression seems improbable; [we expect] recovery of business next spring, with further improvement in the fall.” Harvard Economic Society (HES), November 10, 1929

“While the crash only took place six months ago, I am convinced we have now passed through the worst — and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us.” President Herbert Hoover, May 1, 1930

“Under a paper money system, a determined government can always generate higher spending and hence positive inflation.” Fed Chairman Ben Bernanke, in 2002

Posted by Peter H | Report as abusive
 

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