Obama Must Tame Finance at G-20 Summit: Here's How

Make no mistake about it. We are in the middle of a monumental political conflict -- with very high stakes. On one side: politicians, regulators and pundits, battling for the interests of middle-class Americans.

On the other: the banks and finance sector.

On the one side: Americans now burdened by the nationalized losses of the private finance sector and impoverished by unemployment, falling incomes or the collapse of savings, pensions, property prices, health care and investments.

On the other: financiers earning profits and bonuses and gambling with government-backed money on the stock exchange. This despite the sector's responsibility for the devastating 2008 financial crisis -- caused by self-serving greed and the collapse of a frenzied financial expansion that lasted these last three decades.

A year ago, bankers were briefly -- oh so briefly -- humbled by the liquidation of Lehman Brothers, and the gargantuan nationalization of the losses of many banks including those of AIG, Fannie Mae and Freddie Mac.

Today Robert Benmosche, AIG's new CEO, sneers at his company's rescuers -- Congressmen and women, all elected representatives, that he refers to as "all those crazies down in Washington".

Robert Benmosche has not been tamed by President Obama's teams in both the White House and the Treasury. Far from it. As Arianna points out, instead of cutting the finance sector down to size, the administration, like the British government, has instead bailed it out and simultaneously increased monopolization of the industry: "the oligopoly has tightened."

As a result the finance sector today strides arrogantly across the globe, playing 'catch me if you can', expressing open contempt for elected politicians and official regulators -- and gambling with taxpayer-backed liquidity.

Their arrogance is breathtaking -- given their reliance on taxpayers and the state -- and given the state of their balance sheets. Because let's face it, credit is tight and plummeting because banks' balance sheets are still bleeding red ink -- and will worsen as unemployment, bankruptcies and foreclosures continue rising, and individuals, households and corporations snap shut their spending purses and default on debts.

If bankers were rational, they would be fully aware of their dependence on the real -- not the speculative -- economy, and on the need to serve government, industry and consumers -- so that they, that is the banks, can raise more capital -- and recover, too. But they're not. Instead they're pouring taxpayer largesse into stock market speculation.

Hence the stock market boom.

So let's not confuse what's happening on Wall St. to economic recovery. It's just gambling - hoping for easy money and using stock market gains to hype 'green shoots' and boost economic confidence.

Real recovery will continue to evade the US economy until banks and regulators address the vast bubble of private and corporate debt that continues to drag down the balance sheets of households, companies and banks -- and that is holding back company investment. It's the 'debt overhang' that inhibits companies from borrowing, investing and hiring, and that simultaneously pushes up bankruptcies and unemployment. Astonishingly, and according to the Bureau of Economic Analysis, US fixed investment in the second quarter of 2009 declined to the lowest level since World War II -- to just 14.7% of GDP.

Without investment, where are the new jobs to come from? Not from gambling, to be sure. Without investment what hope of the real economy recovering?

So while there may be temporary gains in speculation, there will be no real economic gains until President Obama's administration deals with the overhang of debt, tames the finance sector, and obliges banks to act as servants to the real economy. In other words, until bankers are subordinated to the real world where new jobs will be created, where climate change will be tackled and where the health service will be improved.

The stakes are high. Finance must be tamed, not just so that financiers can be held accountable for their nationalized private losses dumped on millions of present and future American taxpayers. Not just because contempt and disregard for American politicians and regulators undermines the very democracy for which millions have fought and died. But also because there is still a vast bubble of unpayable debts -- individual, household and corporate -- capable of bankrupting the finance sector and driving the economy downwards in a debt-deflationary spiral.

When world leaders meet at the G20 Summit in Pittsburgh at the end of September they must address head-on a debt virus that could mutate into a pandemic of falling prices (deflation), bankruptcies and unemployment. Just ask the Japanese, who have lived through 20 years of debt-driven deflation -- resulting in 20 years of house price falls.

So what should the president propose at Pittsburgh to tame finance? We, the authors of the Green New Deal have three proposals to put on the table.

First, President Obama must address the 'catch me if you can' issue. Banks, like Citigroup, now have branches spanning 140 countries with approximately 16,000 offices worldwide. Such a global spread enables them to dodge taxes and hide gains in tax havens. Tax havens are the banks "get out of regulation free" card. Whenever the administration or Congress threatens to regulate banks and other corporations: they respond with "we'll go offshore."

Well let them. But if they do, the answer is simple: the American legal system -- paid for by American taxpayers -- is under no obligation to enforce their contracts written from dubious offshore locations through American courts. Especially when their whole purpose is to undermine the tax revenues that keeps the American legal system and its courts -- and the rest of America's public services -- in operation.

So at Pittsburgh, President Obama should issue this edict: You can lend, dear bankers, from offshore -- but the risk is yours and yours alone. American courts will not uphold or enforce your contracts -- unless you follow the example of millions of Americans -- and pay your taxes.

Second, President Obama -- for the sake of his own presidency -- has to make American banks accountable. That is entirely possible. The Green New Deal promotes a new form of accounting called country-by-country reporting. It would make a bank own up to where it is operating, how much profit it makes in each country in which it operates and how much tax it pays there. It's crazy we can't find this out now -- but we can't. So if we are to hold these organisations accountable to American taxpayers -- who, after all, bailed them out -- then President Obama must propose and enforce this new form of accounting.

Third there is the proposal put forward by Britain's top regulator -- Lord Adair Turner. This is for 'living wills' for banks -- or wind-down plans in case they fail. 'Living wills' would unravel the structural complexity banks use to minimise taxes and provide greater clarity in their legal structures.

President Roosevelt was 'magnificently right' when he challenged and faced down Big Finance at the World Economic Summit of 1933. Once he did, the world changed, and global economic recovery took hold. President Obama has the chance to emulate his achievement by taming Finance at the forthcoming G20 Summit, and by obliging the sector to step down from its lofty perch as master of the global economy, to once again become its servant.

Only then can we hope for real economic recovery.

 

Comments

[anticapitalist1983]

Obama may say he is against the protests at the G20 this week publicly, but you can bet he'll be using the protests as a threat to try to get the banks to agree to the limited reforms he wants soon enough.

he will say, "look, you deal with me, and agree to these reforms, or you'll have to deal with these angry mobs of people more and more in the future....­"

it's just like how MLK used to specter of more riots to get leaders to the table and get civil rights enacted.

support these protesters: http://www.resistg20.org
indy media on the protests: http://indypgh.org/g20/

the bigger, louder, and more often protests like this happen, the better the reforms will be.
the more room progrssive dems will have to push on obama, and the more room he'll have to push on the banks.
protests are the tip you can see of an iceberg of changes that they create.

today and tomorrow are the big days of protest i think. please support these folks!

[swkidder]

Bravo. The recommendations are concrete, most likely productive, and “doable” - presuming the requisite political will can be found.
There are at least 3 more "financial crises" ahead to weather. The ARM home mortgages have begun to reset. There will be a whole slew of homeowners who now find that they actually couldn't afford that house – even before they lost their jobs. The next hit will be commercial paper - probably about next spring. And the Tsunami hits when Asia decides that they are no longer enamored of our "paper," and China (perhaps even Japan?) move decisively in favor of a basket of currencies in which to denominate global finance. And then the chickens are mostly home to roost and the henhouse is covered in sh*t.
The "sociopaths with a modest talent for math" that populate Wall Street are arrogant enough that they are literally spitting in the face of those to whom they owe billions – without whom they would now be officially bankrupt. They aren't going to back down unless and until the world hits them with a 2x4. But that's coming. The trick for those of us who were not actually responsible - will be figuring out how to dodge the effects of the meltdown from that hit. Let's see on whose side Bernanke, Geithner, Summers, et al decide to play. We already know that the boys at Goldman and AIG drank the Kool-Aid. We have to hope that "our boys" are drinking something else.

[Billy Hell]

The IMF and World Bank with the destructive impact they've had on developing economies across the globe, need to be stopped. Without exception nations receiving "assistance" from them end up being obliged to privatize essential services like water, sanitation and others.

They are also obliged to provide access to resources at a pittance in royalties and taxes. The west, principally the US and Europe, step in and pay poverty wages for labor in industries which include not only resource companies, but clothing manufacturers like GAP who operate sweat shops.

Another condition following the provision of "aid" which initially provides some economic stimulus, is that interest rates be raised to slow down the economy. There's a catch 22 if ever there's been one.

Agricultural trade conditions are imposed with subsidies outlawed (despite subsidies to US agriculture being the highest on the planet), which lead to the decimation of local food production.

Combined these conditions have the effect of maintaining poverty levels, pillaging recipient country resources and creating/m­aintaining a small business elite.

One need look no further than backyard Haiti for a perfect example of how this has worked and "benefited" the people there. There are scores of other examples.

[kamachanda]

An excellent post. I would like a listing of what politicians are on the side of the middle class (and some proof that they are). Right not it seems that both parties are trying to be green, the green of the financial sector's bribes.

[research]

moveon.oir­g

[deminmo]

China is not happy with the increase in US money
printing. The dollar is devalued and IMF is concerned
that a weak dollar will bring down all economies again.
There has been a push for about a year for a new monetary
system that is more stable, so my guess the " New World
Order" is coming. Maybe that won't be a bad thing.

[Paramendra Bhagat]

True. The regulations have to take hold.

[ThePeacemakers]

Article says:
"On the one side: Americans now burdened by the nationalized losses of the private finance sector and impoverished by unemployment, falling incomes or the collapse of savings, pensions, property prices, health care and investments.

On the other: financiers earning profits and bonuses and gambling with government-backed money on the stock exchange. This despite the sector's responsibility for the devastating 2008 financial crisis -- caused by self-serving greed and the collapse of a frenzied financial expansion that lasted these last three decades."

People, why don't you see that without a public, non-profit health care plan the health insurance industry will be the new beneficiary of privatize the profits, socialize the losses policies???

[memphispaul]

There is a near zero chance this administration, like the one that preceded it will ever do anything that holds the banks or those that run them accountable for their actions or that we will ever see a financial regulatory system that has the interests of consumers foremost. Fact of life.

[Libbety]

Another great article Ann. You are correct in saying that the recovery will take place when we begin to invest once again in our future. We need some new venues to invest in. Manufacturing, (as we knew it in the past), is not in our future. The jobs that went overseas will stay there. We need to re-invent our niche in the world. Technology is one outlet I can see as a profitable investment for our future. I recently heard an idea to manufacture all government vehicles over to run off natural gas. I think this is a great idea! There are lots of good ideas out there and we need to begin to invest in some of them. The jobs will come.

We Americans have always been at the forefront of innovation and I believe that is what we are good at. I’m excited about our future and even tho it may not seem probable at the moment, we need to stay focused as we wade thru the murky waters that not doubt accompanies any good outcome.

[ClarcKing]

Great article. The United States is swatting flies in Afghanistan while the international financiers run roughshod over the population. Our priorities are askew. Usury, speculation, trillions in bailouts, perpetual war, unemployment in the millions, cutbacks in healthcare, foreclosures, an economic and population contraction, etc. have taken their toll; how much can we take? The United States must implement economy formation measures, or the U.S. economy will not function in less than 30 days. The United States is the only power able to confront the international monetary financier power. The world economy must be placed in bankruptcy receivership; reorganized, unpayable and fraudulent debts set aside, terminate the monetary financial derivative debt based global economic collapse. Create the policies and means for the population to produce and sustain itself. www.larouchepac.com

[Terry Mcintyre]

The sketch of the problem is right - how are the proposed answers so far off the mark?

The problem is that the taxpayers bailed out people who were taking insane financial risks. The solution is to let them augur into the ground, not bail them out. This sounds harsh, but they have already proven themselves to be wealth-destroyers - why encourage them to destroy more wealth?

The second problem is that the boom was enabled by the creation of a monetary and credit bubble. This sent false signals through the entire economy. It's easy to make money when riding on top of an inflationary bubble. In fact, the more leverage, the faster you make money. Who was pumping up the monetary bubble? The Federal Reserve System, that's who.

The third problem, as recently posted on Huffington Post, is that the Federal Reserve System has a lock on the economics profession. They have hired a whole chorus of "yes men"; their critics are left in the shadows.

Critics there have been, however. Google "Austrian School" economics. There, you'll find some genuine, sustainable answers.

[research]

Austrian School would eliminate Patents and copyrights. It's nuts. Just more blind trust in the market, without remembering all the booms and crashes and how deregulation and leveraged derivatives are what crashes economies, not housing bubbles.

[Terry Mcintyre]

@"research" - booms and crashes are an inherent feature of the so-called "flexible" or "elastic" money supply. The gov't inflates; everything feels good; people are encouraged to make risky investments; but when prices rise in consequence of monetary inflation, the gov't shrinks the money supply, and bust follows boom as inevitably as night follows day.

We will never end this boom-bust cycle until we fix the root cause: faith-based money.

As for patents and copyrights, that's a totally orthogonal topic; one can follow the monetary analysis of Austrian School economics without ever touching on the topic of patents and copyrights, one way or the other.

[research]

Great article, I hope Obama lives up to it.

But I doubt it.

FDR closed the banks for a forced audit the very first day of his administration.

See my profile for economic primer.

Nationalize the FED, let the Democracy pay for services and goods, by printing money to expand the money supply for the peoples benefit instead of the the FED private 12 deals banks.

[Terry Mcintyre]

Printing money would have all the advantages of Lincoln's experiment with greenbacks: outrageous inflation. We need a sound, honest, free-market, commodity-backed currency, not this faith-based paper. People must be free to negotiate contracts in terms of "ounces of gold" or "bales of marijuana", or whatever unit of currency they prefer; the government abolished gold clauses when it confiscated private gold under FDR's administration.

[research]

Gold is an arbitrary limit on money supply growth. Lincolns experiment saved the union from bankruptcy, but wars cause inflation. When the government spend on war, the currency is debased. When the government spends on infrastructure the and general welfare, the currency is strengthened.

Outrageous inflation, 10 times. about what the USA has gone through since houses were 20k$ about 30 years.

http://en.wikipedia.org/wiki/United_States_Note#Politics_and_controversy

Democracy needs to take control of the money supply. Of Course we have to get money out of politics first. see my profile for a complete plan.

FDR gold policy created an economy that worked great for 50 years, till deregulation of the bankers debased the currency by "printing" leveraged CDS "bank notes"

It is not the standard, it is the regulation of the market.

[TJCole]

Don't count on it...!

We're a government of the bankers, by the bankers, and for the bankers, not the people..!

Didn't you get the memo..?

[Jannsmoor]

I agree but we also need at least 7 reforms in the US:

1) Take control of Wall Street. Regulate all financial activities including collateralized debt obligations and credit default swaps, etc.

2) Break up the "too big to fail" companies so Wall Street cannot create another meltdown.

3) Take away home mortgages from the Wall Street Profiteers. If Wall Street wants to run a casino, let it be entirely on their own dime.

4) Bail out the middle class. Offer everyone, a one time, primary residence only, 30 year fixed rate mortgage at 3% interest, originated by local banks, funded by the Fed and held by Fannie Mae and Freddie Mac. Mortgage payments would pay the Fed back. This would free up enough capital to set the economy into high gear and pull us out of recession.

5) Set a fair value on all homes. Wall Street will have to take a haircut on some of their egregious loan activities.

6) Securitize the zombie bank's debts. Convert their bondholders to stockholders, just the same as where the taxpayers are now. We'll all be stockholders. If the banks can't make it on their own from there, put them into receivership.

7) Reform the rating agencies. They're crooks.

If we push our government to do these 7 things, a less corrupting form of capitalism can still prevail and the American people can sleep at night believing their home values won't be destroyed.

[LillithMc]

Great article and great ideas. This is a start and the G20 is a good place to go in this direction. Wish we had a media to discuss ideas like these.