By Isaiah J. Poole — OurFuture.org
It does not matter whether today’s pronouncement on financial reform by President Obama was prompted by Tuesday’s election disaster in Massachusetts or was a long-building unleashing of his inner populist. What matters is the potential for real White House leadership on changes that must happen if we are to have a stable, growing economy on Main Street. This is the fight for which we have to bandage our wounds and pick ourselves up to win.
All you have to do is look at the Wall Street reaction to Obama’s short speech today to get a sense of what’s at stake. The reaction, on business news sites such as CNBC, borders on hysterical. “His ideas to put a straightjacket [sic] on the banks and the key to funders of business in this country will once again be a growth killer,” harrumphs Chip Hanlon, president of Delta Global Advisors in Huntington Beach, Calif. and the proprietor of the right-wing website RedCounty.com.
What growth is he talking about killing? Surely not lending to Main Street businesses and consumers, which shrank by $500 billion last year, according to Federal Reserve Board — enough, by the way, to offset all of the federal spending budgeted in the 2009 Recovery Act over 10 years.
Surely by “growth” he and other Wall Street critics of Obama’s reform proposals must mean the reopening of the Wall Street casino of derivatives and other exotic financial transactions that brought the economy down, only this time with firms that are even larger, and thus more threatening to the larger economy, than was the case just two years ago.
Fortunately, this week Obama has laid down three critical markers:
Banks should not use the federal guarantees that they get as deposit institutions as a license to operate high-risk ventures—hedge funds, private equity funds, or other trading operations. It’s not a return to the Glass-Steagall wall of separation between banking and Wall Street trading, but it is in the ballpark.
Banks should not be too big to fail, and Obama is backing limits on the percentage of deposits that one institution can control. The spate of mergers prompted by the financial crisis only perpetuated the domination of the banking sector by an elite group of gargantuan players—Citigroup, Bank of America, JP Morgan Chase among them—with the power to hold the American economy and government hostage. Obama recognizes the danger and should be encouraged to bring these giants down to size.
There must be a consumer financial protection agency that will act as a referee between the big banks and the rest of us. Obama did not mention the agency in today’s White House remarks, but he did reportedly tell Senate Banking Committee Chairman Christopher Dodd this week that he wanted to see the Senate pass legislation creating that agency, after Dodd indicated that the effort to create that agency might be dropped in the face of banking industry opposition.
Doubt the motives of Obama’s populist pivot if you must (as James Kwak does today). Nonetheless, it is noteworthy, and praiseworthy, that Obama, in openly touting what he called the “Volcker rule” on walling off Wall Street speculation from Main Street banking functions, openly favored the advice of Paul Volcker, the former Federal reserve chairman who is now an adviser on Obama’s economic team, over that of Treasury Secretary Timothy Geithner and economic adviser Lawrence Summers, Wall Street’s cheerleaders in the administration. UCLA-Berkeley professor Robert Reich notes today that Summers and Geithner “scuttled Paul Volcker’s plan to separate the banks’ commercial and investment functions, and didn’t want to limit the size of banks or the risks they could take on. Summers and Geithner have wanted to get the banks back to profitability as soon as possible. And Dems in Congress have had no stomach to take on Wall Street, a major source of campaign funding.”
But one of the lessons of Tuesday’s election is that people do not want to see their elected leaders capitulating to the very institutions whose hubris brought the economy down. It’s also a lesson some conservatives seem hell-bent not to get: When people such as Rep. Scott Garrett, R-N.J., scoff at Obama’s “faux populism”—as opposed to the very real Wall Street popularity of Garrett, who has so far already received $167,000 from banking, finance and real estate interests for his 2010 re-election campaign—it’s no wonder that Obama points to the “army of industry lobbyists from Wall Street descending on Capitol Hill to try and block basic and common-sense rules of the road” and says, “if these folks want a fight, it’s a fight I’m ready to have.” It’s a fight we should all be ready to have.