As the financial reform bills grind through the congressional conference committee, the largest banks are howling like little brats because they haven't gotten everything they want, right now! "Gimme!"
Of course the reform package already gives the biggest banks the juiciest goody of all by letting them continue to be "too big to fail." Life will be good for the top 20 or so financial institutions. They'll have access to cheaper funds based on implicit government guarantees --since everyone on the planet knows we'll bail them out the next time they crash. (Hedge fund managers -- the top 10 each earned a cool $900,000 an hour in 2009 -- are also faring well on Capitol Hill. Senators just stalemated a measure that that would have forced them to pay income taxes like the rest of us instead of pretending their income is capital gains, which is taxed at lower levels. The idea had been to use those extra tax dollars to extend unemployment benefits and aid distressed state and local governments that are now laying off teachers. Let them eat cake.)
But the big banks still aren't satisfied. Now they're whining about the possibility that Congress might pass a version of the so-called Volcker Rule, which would prohibit them from engaging in "proprietary trading" -- trading for their own accounts -- while also receiving federal guarantees for their consumer deposits. From a taxpayer's point of view, the argument is pretty simple: Why should the government let these bonus-rich banks speculate using taxpayer guarantees as collateral? Why should we underwrite their casinos?
The banks' response to that question is extremely revealing. Their first defense is to insist that the financial crash wasn't their fault. ("Honest, I didn't break the cookie jar!") The housing bubble did it!, they wail. As the New York Times reports, "the banks assert that the financial crisis of 2008 was a lending-based crisis caused by reckless loans made to unqualified home buyers. It was not, they say, a trading crisis."
The bankers are hoping to redirect the public's wrath with this little fabrication, but haven't quite succeeded. And won't, unless (until?) they buy up all the media. In truth, the crisis was started and amplified by their own financial engineers who dreamed up a series of fantasy finance instruments like synthetic CDOs. From these, the banks built an upside-down pyramid of bets based on extremely risky assets. The banks claimed these bets were as safe as AAA-rated Treasury notes -- but of course they weren't. (That didn't stop the rating agencies from gladly joining the banks in this profitable scam.)
The banks' socially useless new financial instruments multiplied a manageable $300 billion sub-prime mortgage problem into a multi-trillion dollar global disaster. This massive gambling operation directly led to the destruction of more jobs than any time since the Great Depression. Twenty-nine million people are without work or forced into part-time jobs, not because of housing loans by low-income buyers, not because of over-leveraged consumers, but because the biggest banks in the world got too big, too powerful, and way too greedy. And now we're allowing them to get even bigger and greedier. (For an easy to read account of how calamitous financial gambling actually caused the crash, see The Looting of America.)
The banks' second defense, believe it or not, is to argue that their financial gambling operations are really safer than making loans. Say what? According to a chief lobbyist for the 19 largest financial companies:
[Making loans] "is arguably the riskiest activity that any financial entity can engage in. It is money out the door that banks hope will be paid back."
Take a deep breath and think about that one. The biggest banks in the world are telling us they're scared to make loans? That lending people money so they can start or expand a business or buy a house or car is too risky compared to their high-stakes trading games?
Hmm. Risky for whom? It's true that under the current rules governing high finance, the bankers can rig the game and win every time. They're essentially serving as "the house" within a vast global casino. That yields a lot more cash than their traditional job of moving the nation's savings into productive investments. And as we've just seen, if it all comes crashing down around their ears, the tax-paying public will rescue them.
In fact the banks' gambling games are hugely risky - just not for them. They get all the upside, while the taxpayer underwrites the downside. That's not theory. It just happened and it's likely to happen again before long.
Meanwhile, the banks have now admitted the deep, dark truth: They're no longer focusing on the old-fashioned business of moving savings to productive investments. Their mission now is to dominate the financial industry while making as much money possible.
This narrow focus on speculative gambling is the major reason behind our jobless recovery. The banks aren't making their capital readily available to the real economy where it is desperately needed. Instead, the banks are back to creating and propagating fantasy financial instruments -- the most profitable financial enterprise ever invented. They're addicted to it, like gambling junkies at the craps table.
The casino they've built is quite big and splashy. They've got their high-speed trading. They got their customized derivatives. And they've got control of the largest financial marketplaces on Earth. It's certainly a beautiful spread for the big boys, as the field narrows down to a handful of huge banks. They're amassing trillions in assets and capital...and hundreds of billions in bonuses.
But they won't be using these riches to invest in something so boring as a business or consumer loan. Instead, they'll put more money down at the casino, multiplying their returns and their influence over both global finance and our political system. (And maybe they'll spend a few bucks to ensure that the media rewrite the history of the crash while they're at it.)
So yes, Congress should make banks separate proprietary trading and risky derivatives businesses from everyday, old-fashioned banking. (Though I expect that any such rules Congress passes will be riddled with holes, leaving the largest banks free to gamble.)
But even if these reforms are reasonably strong and enforced, they attack only a small part of the problem: Too big to fail financial institutions are far too large and far too powerful to coexist with democracy. They pose an immediate threat to middle-class life. The only sensible and safe solution is to bust them into smithereens.
I don't know how we'll get there. But if we don't we may find ourselves permanently ruled by a new financial oligarchy that pulls the strings of economic and political power.
This is not the time to give up. Democracy keeps raising its head, from the striking workers in China to marches in the streets of Europe. What will happen over the next decade in this epic clash with global financiers? That's up to us.
Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It Chelsea Green Publishing, June 2009.
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