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Ann Pettifor

Ann Pettifor

Posted: September 9, 2009 09:42 PM

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

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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.