Financial Reform: A Win for Wall Street, A Cold Shoulder for Main Street

The financial reform bill passed by the Senate last week is more notable for what it has left undone. There's a reason a longtime investment banker said of his colleagues' reaction to the new bill was a sigh of relief.
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It's mission accomplished for financial reform.

Unfortunately, it's more of a Bush 43 "mission accomplished" than an Apollo 13 "mission accomplished." That's because the financial reform bill passed by the Senate last week, like Bush's ship deck ceremony, is more notable for what it has left to still be done.

The Restoring American Financial Stability Act of 2010 will do no such thing. First, it doesn't do enough to rein in Wall Street. It doesn't end "too big to fail" banks, doesn't create a Glass-Steagall style firewall between commercial and investment banking, keeps taxpayers on the hook for future bailouts, and leaves open dangerous loopholes in the regulation of derivatives. And we can expect more loopholes to be inserted as the bill heads to conference committee. In D.C., crafting a bill without them would be like baking bread without yeast. Though you can't see them, they're what makes a Washington bill rise.

There's a reason a longtime investment banker, speaking to the New York Times, said of his colleagues' reaction to the new bill, "If you talk to anyone privately, there's a sigh of relief."

Don't expect a similar reaction on Main Street. Despite its name, this bill will not be restoring financial stability to the tens of millions of hardworking Americans whose lives have been turned upside down by the economic crisis.

On nearly every front in the real economy -- from jobs to consumer spending to foreclosures -- we've made virtually no progress at all. While Washington and the media have been consumed with the titanic debate over this reform bill, talk of the actual suffering by actual people in the actual economy is virtually a taboo subject, at least judging by how rarely it makes the front pages or leads the TV news.

But the data points are all around us. In a speech last week, Sandra Pianalto, president of the Cleveland Fed, surveyed the landscape and did not see a lot of financial stability, partly because of the huge loss of skills that is being suffered by the long-term unemployed. "Research... tells us that workers lose valuable skills during long spells of unemployment, and that some jobs simply don't return," she said. "Multiply this effect millions of times over, and it has the potential to dampen overall economic productivity for years."

Her conclusion: "Many people are now just aiming for 'financial security' as their American dream." In other words, the core idea of the American Dream -- work hard and advance up the ladder -- has been gutted. Now the American Dream is to try to not fall, or do all you can to slow your rate of decline.

And forget about having enough in the bank to give your kids a leg up on doing better than you've done. It's hard enough just to keep a job until you retire -- if that's even going to be an option. At a D.C. jobs fair for older workers this month, more than 3,000 job seekers showed up for the event, entitled "Promoting Yourself at 50+." Not surprising, given that the average jobless stint for those unemployed who are 55 and over was around 43 weeks, as of last month. (Quick note to struggling politicians out there: want a huge crowd at your campaign rally? Call it a "jobs fair," and you'll have lines of people around the corner.)

Their children and grandchildren who are just graduating from college aren't faring any better. According to Business Week, the 1.6 million about to hit the job market with their expensive degrees will be confronting a youth unemployment rate of almost 20 percent -- the highest rate since the Labor Department started tracking youth unemployment in 1948.

And, as Laura Bassett reported on HuffPost, many workers who have managed to hold onto their jobs are increasingly doing so only by accepting less pay and taking on a higher share of their health care costs. "My company didn't eliminate my job, they just eliminated my salary," wrote marketing director Mike Cheaure in an email. "I was back at work as a freelancer the next day working at 1/4 the pay and no benefits." The experience has made him very familiar with the new reality. "For us, the American Dream is gone," he said. "Now it's just getting by."

Adding insult to injury, a growing number of working mothers are having to give up their jobs and rely on welfare because states are cutting back on child care services that allowed them to keep working. And kids across the country are scrambling to find something to do this summer as a number of states make deep cuts to summer school programs.

And what about that recent surge in consumer spending that spawned talk of "green shoots" and "recovery?" Turns out, there was a surge in spending -- but almost exclusively by the rich. As the LA Times' Don Lee put it, the "little-noticed reality" behind the "encouraging numbers" was that "much of the new spending has come not from America's broad middle class but from a small slice of affluent people at the top." In fact, according to the Labor Department, the richest 20 percent of American households accounted for 40 percent of all spending.

As the Washington Post reported last week, "lavish fringe benefits" are back at the top end of corporate America, including "country club dues, chauffeured drivers, personal financial planning services, home security systems and parking." Of the 29 biggest public companies that took taxpayer money, around one in three decided to funnel some of it to its chief executive. As the Post's Tomoeh Murakami Tse dryly put it: "Those raises contrast with the belt-tightening that many Americans have experienced during the recession." Nell Minow, co-founder of the Corporate Library, put it more directly: "Marie Antoinette could fit into this crowd without missing a beat."

The latest news in consumer lending is similarly dismal -- especially among the banks that got the most help from taxpayers. According to the Treasury Department, from February to March, the largest banks cut lending by $9 billion -- yet more evidence of the schism between the two economies. Of course, the two economies aren't entirely separate -- the Wall Street economy is happy to accept massive transfusions of cash from the fading middle class.

This isn't to say that there were no provisions that would help Main Street considered as part of the Restoring American Financial Stability Act of 2010. There were plenty -- it's just that almost all of them were either voted down or taken out and never even put up for a vote. Even something as simple and sensible as putting a cap on credit card interest rates. Sheldon Whitehouse's amendment to do just that was voted down 60 to 35. So much for "financial stability." Though I suppose it depends on whose financial stability you care about -- the banks' or the taxpayers'.

Or how about payday lending -- the largely unregulated advances on a paycheck that can carry rates in the triple digits? In Missouri, for example, rates can top 600 percent. Yes, you read that right. Not exactly a recipe for "financial stability." North Carolina's Kay Hagan offered an amendment that would have clamped down on the $40 billion industry. It was killed without a vote because of Republican objections.

Objections that were, no doubt, the end product of the mother of all lobbying campaigns by every sector of the financial industry. Of course, the line between Senator, staffer and lobbyist is pretty blurry these days. A joint report released by SEIU, the Campaign for America's Future, and the Public Accountability Initiative found that the finance industry has 70 former members of Congress and 940 former federal employees on its lobbying payroll. This includes 33 chiefs of staff, 54 staffers of the House Financial Services Committee and Senate Banking Committee (or of a current member of those committees), and 28 legislative directors. Five of Senate Banking Committee chair Chris Dodd's former staffers are now working as banking lobbyists, as are eight former staffers for Banking Committee powerhouses Richard Shelby and Chuck Schumer.

And the revolving door spins both ways. As Arthur Delaney reported on HuffPost, 18 percent of current House Financial Services committee staffers used to work on K Street. All told, the financial industry has spent nearly $600 million on lobbying since the collapse of Bear Stearns in March of 2008 -- almost a million dollars a day.

A lot of money, sure, but if what you care about is the financial stability of the banks, it was money well spent. Take, for instance, the Merkley-Levin amendment that would have forced big banks to get rid of their speculative proprietary trading activities, a version of the Volcker rule. And you can take it, because the Senate won't be using it -- the amendment never even made it to a vote. This wasn't because it wouldn't have passed. On the contrary, since debate began on this issue, anger from those mired in the real economy has reached enough lawmakers that the amendment had a real shot. Which is why, as Simon Johnson put it, "the big banks were forced into overdrive to stop it."

Another reform completely left out of the bill was any reform of Fannie Mae and Freddie Mac. This despite the fact that in just the last quarter Freddie -- one half of what the New York Times' Gretchen Morgenson calls "the elephant in the bailout" -- reported a loss of $6.7 billion.

Serious delinquencies on Freddie's single-family conventional loan portfolio are at 4.13 percent, up from 2.41 percent for the same period last year. And the number of foreclosed units Freddie controls stands at nearly 54,000, up from 29,145 at the end of March 2009.

"I don't understand why people are not talking about it," says Dean Baker, of the Center for Economic and Policy Research. "It seems to me the most fundamental question is, have they on an ongoing basis been paying too much for loans even since they went into conservatorship?"

And why would they do that? It's part of what Baker calls a "backdoor bailout" of the banks. In other words, an under-the-radar way to continue shoveling money from struggling taxpayers over to the richest Americans.

We've been told time and time again over the last two years that right after Washington deals with what's on its plate, "jobs is next." Well, it's been "next" for quite some time now, but it never seems to come to the floor. And now that a financial reform bill has passed, the talk on the Hill is that climate control or immigration will be tackled next. Or that members will just go off for the summer and campaign, flush with all the donations many of them just pocketed from the banks in this latest effort.

I often have a nightmare -- a common sort -- in which I'm stuck in a forest and I can't find my way out. I have a friend whose version is that her feet are stuck to the ground and she can't move. Not a bad description of our leaders' approach to the massive suffering that's going on across America.

A recent study by Duha Tore Altindag and Naci H. Mocan for the National Bureau of Economic Research found that the effects of unemployment can have troubling implications for a political system. The authors studied data from 130,000 people in 69 countries. Their conclusion: "We find that personal joblessness experience translates into negative opinions about the effectiveness of democracy."

No shock there. But it should frighten anyone genuinely concerned about our stability, financial and otherwise.

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