Kabuki Democracy: Why a Progressive Presidency Is Impossible, for Now
To be fair to all concerned, climate change is a terribly complicated matter whose dangers remain, for the moment, entirely invisible if not hypothetical. Representatives, like the rest of us, have meanwhile been barraged by misinformation about the issue, from oil companies and Glenn Beck and your local news meteorologist insisting that the science behind global warming is a big hoax designed in the service of Satan. The climate deniers, aided by a gullible media, have increased the percentage of Americans who tell pollsters they believe the threat of global warming to be "generally exaggerated" to nearly half of all Americans, significantly higher than it was when Obama took office. So it's not difficult to see why sacrifices in its name would be difficult for any politician to demand. Democracy simply does not work very well where costs are borne by the present but the payoff belongs to posterity. ("What has posterity ever done for me?" goes the old political cliché.) This is in almost perfect contrast, however, to the position the Obama administration faced regarding its third significant priority: financial reform. Here Obama's proposed reforms came with the added advantage of an enraged electorate and an unmistakable public mandate for strong action to prevent a repeat of 2008's emergency bailout for some of America's best-compensated companies to prevent a potential meltdown of the entire global economic system.
But while considerable oratorical firepower was focused on AIG and Goldman Sachs in front of the TV cameras, in the back rooms it was back to brandy and cigars. The banking industry has been making friends and influencing Congress, literally, for centuries. ("They frankly own the place," explained Senator Richard Durbin [D, Illinois] in 2009.)
In January 2010, as the Obama administration's first anniversary was approaching, and as the details of the financial regulation legislation were still being negotiated in various Congressional committees and subcommittees, an examination by the Wall Street Journal found that for all the ferocious rhetoric emanating from Washington about the indefensible behavior of so many spoiled and irresponsible members of the banking community, pretty much nothing of importance had changed in the way these same bankers went about their business. Back then the Journal explained:
Credit-rating companies, excoriated for placing top grades on what turned out to be toxic debt, still face the same potential conflicts of interest they always faced: These companies are paid by the very parties churning out the debt that is being rated.
Trading accounts for more than half the recent revenue of Wall Street firms, according to analysts. This suggests a continued dependence on volatile investment profits.
Just as important, there have been few big changes in markets for derivative securities, such as credit-default swaps.
Nor have rules been changed to increase the amount of capital that U.S. banks must hold as a percentage of assets.
The net result of the final bill was a compromise on each of these issues, compromises that restricted some of the most egregious excesses of the big banks' behavior but left them in most respects to continue business as usual. For instance, even in the event the current bill passes, they will still be able to trade on their own accounts in risky hedge funds and private equity funds, but these investments will be limited to 3 percent of a bank's tangible equity, a figure considered by many to be plenty high for the banks who do it. Derivative trading will henceforth be separated out into bank subsidiaries, rather than done with the money that backs up deposits, but will otherwise continue apace, generating enormous risk with little transparency. In one of the most outrageous exploitations of the power of the lobbying process, auto companies were able to get Congress to exempt their finance arms from regulation by the new Consumer Financial Protection Bureau. This is not only illogical—these finance companies operate exactly as banks do—it is also awful public policy, as such companies are notorious for the abuses they generate under cover of car loans. (For most Americans, an automobile is the second largest capital investment they make.) The fact that the bureau will be housed inside the bank-friendly Federal Reserve, rather than being a stand-alone agency, was yet another victory for the banking lobbyists. In yet another step toward even less regulation than pre-crisis conditions, the legislation will prevent the SEC from regulating equity-indexed annuities, which have been a particular problem for elderly Americans who are confused by the fine print when sold these complicated financial instruments—often not by accident. And of course, the very notion of doing away with banks that were "too big to fail"—and therefore protecting American taxpayers from being forced into future bailouts when they prove irresponsible once more—was never even on the table. Their loans are still guaranteed by the Federal Reserve, the Treasury Department and the FDIC should they go sour. What's more, Wall Street still gets zero percent (or near zero percent) loans from the Fed, which provide the basis of its lending profits. No surprise, therefore, that the share prices of Citigroup, JPMorgan Chase and Bank of America all rose on the morning of June 25 when the details were announced, despite drops across the board in most of the rest of the US stock market. What's more, even after all of the breaks for the banking industry, Massachusetts's Scott Brown still managed to convince negotiators to drop the $19 billion administration fee to cover the cost of reform, ensuring instead that the rest of us would be invited to take care of it. And in yet another familiar scenario, Brown could not bring himself to declare in favor of the legislation upon receiving this enormous taxpayer-supplied bribe. "I do think that generally the banks should be pleased that it was not worse than it was," said Jim Eckenrode, a banking analyst at TowerGroup, a financial services consulting firm, told the New York Times, in what can only be considered one of the great understatements of 2010. William K. Black, a professor of economics and law at the University of Missouri, Kansas City, puts it more bluntly:
The fundamental problem with the financial reform bill is that it would not have prevented the current crisis and it will not prevent future crises because it does not address the reason the world is suffering recurrent, intensifying crises. A witches' brew of deregulation, desupervision, regulatory black holes and perverse executive and professional compensation has created an intensely criminogenic environment that produces epidemics of accounting control fraud that hyper-inflate financial bubbles and cause economic crises. The bill continues the unlawful, unprincipled and dangerous policy of allowing systemically dangerous institutions (SDIs) to play by special rules even when they are insolvent. Indeed, the bill makes a variety of accounting control fraud lawful.