Financial Reform: Up To Us To Change The Game

There's a reason why lawbreakers don't get to negotiate the terms of their punishment or their parole. There is no bartering to be done between the protectors of law and order and the violators of law and order. There are only two basic questions for the person who dared to stand outside the law: What is required of you to atone and what must be done to prevent that lawbreaking from recurring.

Viewed from that perspective, President Obama was well within his rights to not invite the financial industry to help him write the regulatory restructuring proposals that his administration released today. Given the extraordinary level of plunder and vandalism that the biggest names in finance did to our economic system, Wall Street has no moral authority to dictate the terms of their restoration to respectability.

But Wall Street does have a still-formidable political machine that can cause members of Congress to quake. According to Ed Mierzwinski, the consumer program director of U.S. PIRG, the financial services lobby spent $42 million just in the first quarter of 2009 on trying to block reforms that would curb their reckless behavior. That show of force kept the Senate from taking such modest steps as as allowing courts to roll back usurious interest rates on mortgages when those rates drove homeowners into bankruptcy.

So Obama, saying in a television interview [1] that "we don’t want to tilt at windmills," has opted to present a plan that is constrained by a snapshot of what's politically possible today, rather than one that would rally progressives to challenge and enlarge the political paradigm.

That progressive rallying point will thus have to come from Americans for Financial Reform [2], a group of 200 grassroots organizations that is standing both as an advocate for bolder, people-centered financial reform proposals. (The Campaign for America's Future is a member of the coalition.) Drawing from a broad range of labor, consumer activist and progressive political organizations, this financial reform coalition is likely our best hope for tearing down that windmill of Wall Street power that Obama is hesitating to confront.

That is not to suggest that the Obama administration's plan is all bad. Some elements, such as the creation of a new consumer financial protection agency, are quite promising. And defending what's good in the administration plan will be a sizable fight in and of itself.

The U.S. Chamber of Commerce, for one, will vigorously oppose the creation of that watchdog agency. David Hirschmann, president of the Chamber's Center for Capital Markets Competitiveness, was quoted by Congress Daily as saying such an agency would signal to consumers that certain financial transactions are safe and "that they don't have their own responsibilities for due diligence." Yes, not having a consumer watchdog worked really well for investors during the reign of Bernie Madoff and other Ponzi schemers, or for homeowners duped into buying subprime mortgage loans, often on the basis of race.

But while we fight off the disingenuous arguments by such business interests as the Chamber of Commerce, we have the bigger struggle of expanding the political limits of what's possible.

One area where that should be easy is in reining in the powers of the Federal Reserve, which under the Obama administration's proposals would be formally expanded. The Financial Times [3] notes:

The Fed will be charged with looking at risks to the system as a whole, with a focus on core banks and markets. It will retain direct supervision of the largest bank holding companies - something the Bush administration had proposed taking away. The Fed will also directly supervise non-bank financial companies that reach a similar size or complexity, and is likely to have the final word on bank capital requirements.

The emphasis on the Fed is controversial in Congress, where some critics fault the Fed for not exerting its regulatory powers more vigorously in the run-up to the crisis and others worry about the implications for Fed independence. Mark Warner, a Democratic senator, told the FT that systemic risk authority should be vested in the council of regulators instead.

Rob Johnson, an economist with the Franklin and Eleanor Roosevelt Institute, said at a news conference Tuesday by Americans for Financial Reform that the Fed "needs to be publicly accountable to society," especially in light of the insider deals that committed trillions of dollars to propping up the likes of AIG and Citigroup without meaningful say-so from Congress. And if the Fed cannot be held to such a level of accountability, it should not have that level of unbridled power.

The principles that the coalition is fighting for—or, put another way, the yardstick that the administration and congressional reform proposals must be measured—are well stated in an article by economist and former Labor secretary Robert Reich on TPM: Stop bankers from making huge, risky bets with other peoples’ money; prevent any bank from becoming too big to fail; and root out conflicts of interest in ratings of financial instruments, in sharing of financial advice and in the selection of leaders of the regional Federal Reserve banks. Reich continues:

These three reforms will reduce the possibility that you and I and other taxpayers will ever again have to spend billions bailing out bankers who robbed us blind while amassing fortunes. But because that would make it next to impossible to make such fortunes in the future, the big bankers will fight every one of these with all guns blazing, and their lobbyists in full force. They’ll try to inundate you in a blizzard of buzz words. They want your eyes to gaze over, but don’t let them. Keep focused on these three issues. Congress, for its part, may not be much help. It’s awash in money from Wall Street. Big Finance is second only to the health-industrial complex in owning a large portion of the Hill. Barney Frank at House Banking can be relied on to try his best but others in the House and Senate may well roll over. The President wants to do the right thing but he’s spread thin and spending political capital on health care. Tim Geithner doesn’t have the stomach to take on the Street; the plan he announced a few days ago to regulate pay is a bad joke. Expect lots of blather about rearranging boxes on the regulatory organization chart.

In other words, he concludes, this fight will be about as big as the battle over health care, and it will demand every bit of our vigilance and engagement.

On that score, some positive things are already happening, George Goehl, Executive Director, National People's Action, said Tuesday that last week there were rallies around bank reform in 50 cities. In the near future, ACORN is planning events in 15 different cities, and the coalition has succeeded in getting Federal Reserve staff members to participate in 10 town hall meetings in which victims of the financial crisis will be able to tell their stories.

"This provides a clear which-side-are-you-on moment for the administration and Congress," Goehl said.

It also provides a moment for the progressive movement to prove that when the Obama administration limits itself according to the state of the political game of the moment, we have the power to change the game.