The fragile and faltering state of American democracy.
Hearts and minds leapt upward on Wall Street when the Federal Reserve announced its new effort to revive the sodden economy. Print more money, buy more financial assets—billions and billions of mortgage-backed securities or Treasury bonds. The Dow jumped 206 points on the news. Major media described the event as bold and significant. Maybe, maybe not.
A sweet day for the financial traders does not necessarily translate into good news for Joe Sixpack. Indeed, the story of this troubled era is that what wins for the suits may very well produce opposite result for ordinary folks. What the news stories generally overlooked is that the central bank has already tried this remedy a couple of times and it failed to jump-start action in the real economy, where most Americans toil.
The Fed’s “new” commitment is to buy another $40 billlion in financial assets every month until the economy really does look reinvigorated. In two previous efforts, the central bank tripled the size of its own holdings and accumulated as much as $2.7 trillion in similar buying sprees. The stock market perked up, but not the national economy. In fact, the economic engine has slowed to a crawl during the last year despite the Fed’s earnest efforts.
As I read the Fed’s latest pronouncements, I am impressed by the words, not the numbers. Chairman Ben Bernanke is expressing sincere alarm at the “weak job market” and urging every other governing institution, from the White House to Congress, to take it more seriously. The Fed will stay on the case, he promised, even if its monetary interventions are “no panacea.” When the conservative Federal Reserve chairman worries aloud about stubbornly high unemployment and identifies joblessness as the gravest threat facing the economy, we can be sure this crisis is real.
Alas, most political leaders are not listening. The grumpy Republicans attack Bernanke for meddling in their affairs. Mitt Romney proposes to do nothing to make things better. Let nature takes its course until the bloodletting is exhausted and Barack Obama is out of the White House. The president did propose a jobs bill last year, but too little, too late. Everyone knew the Republicans would block passage, and they did.
Bernanke and colleagues know this is rubbish (so do most Americans). Some central bankers can glimpse the outlines of larger crisis looming over us—a global meltdown of historic proportions if nothing is done to prevent it. If the Fed’s latest efforts fail, as I fear they will, the central bankers will try something else. Bernanke promises they will.
Israel’s prime minister is provoking another political dust storm over Iran’s nuclear ambitions, but US news stories once again fail to mention awkward facts that are the true linchpin for this threatening crisis. Israel itself already has the Bomb. It developed its own nuclear weapons several decades ago, but has never officially admitted as much. And unlike other nuclear powers, Israel has never signed anti-proliferation treaties, nor has it submitted its nuclear arsenal to regular inspections by international authorities.
Everyone knows this, at least the government officials on all sides do. Yet there seems to be a media taboo against sharing the information with the American public. Americans have a huge and dangerous stake in the matter. If things go wrong and Israel launches a pre-emptive unilateral strike against Iran, it would probably provoke retaliatory war-making by Iran. Like it or not, the United States could be pulled into yet another war in the Middle East to defend our ally. Shouldn’t people hear the whole story before the shooting starts?
Don’t take my word on this. Check out newspaper accounts in which Israeli officials complain that the United States has not been tough enough with Iran. Prime Minister Benjamin Netanyahu blisters President Obama for failing to draw a bright “red line” against Iran’s efforts to develop a Bomb of its own. Netanyahu even accuses of Washington of “moral” failure for not standing up to the mullahs. His patrons in the Republican Party are grateful for the political intrusion.
But why does the press routinely ignore Israel’s nukes and its obvious military superiority? Perhaps because that would complicate and weaken Israel’s moral claims of self-defense. Furthermore, it could help explain why Iran might be eager to join the exclusive club of nuclear nations. Iran might say—if it ever told the truth about its motivations—that it is the nation in need of self-protection.
Without a nuke of its own, Iran and other neighboring Muslim nations will always see themselves as vulnerable to bullying and the threat of unilateral attack from Israel (as Israel is now again threatening). The claims and counterclaims on both sides are subject to dispute, but honest debate is unlikely to occur unless everyone acknowledges the same set of facts.
The media taboo was broken this week by columnist Bill Keller of the New York Times, formerly the Times executive editor. His op-ed asked polite questions and sought reasoned answers. Instead of demonizing the Iranian ayatollahs as crazed and suicidal, Keller concluded that it seems very unlikely a nuclear-armed Iran would use its nukes to destroy Israel. He did not say so explicitly, but he seemed to think Iran wants the Bomb to neutralize Israel’s superiority. It is a plausible conclusion.
“The regime in Iran is brutal, mendacious and meddlesome, and given to spraying gobbets of Hitleresque bile at the Jewish state,” Keller wrote. “But Israel is a nuclear power, backed by a bigger nuclear power [the United States]. Before an Iranian mushroom cloud had bloomed to its full height over Tel Aviv, a flock of reciprocal nukes would be on the way to incinerate Iran. Iran may encourage fanatic chumps to carry out suicide missions, but there is not the slightest reason to believe the mullahs themselves are suicidal.”
Keller has proposed an excellent subject for public debate. In this conflict, on which side does insanity reside?
The Romney-Ryan ticket puts a weird twist on Republican politics, because they are essentially repudiating Ronald Reagan’s historic legacy and the fiscal alchemy with which he taught conservatives how to win presidential elections. Before the Gipper came along and erased the GOP’s sour expression, it was known as the party of pinch-penny scolds, always complaining about Democratic excesses, automatically skeptical of anything government might attempt to do for people. In traditional circles, this was called the “old-time religion.” Among younger conservative reformers, the doctrine was denounced as “root canal economics.” Since voters do not usually reward politicians for inflicting more pain on them, the GOP endured as a grumpy minority.
Ronald Reagan’s political genius was finding away around the trap. Put on a happy face and stop punishing voters for ambitious desires. Democrats won elections by making big promises and even keeping them. But why should liberals have all the fun? The Gipper did not entirely abandon the old sermons on debt and deficit spending, but in practice declined to take the red ink seriously (it could always be blamed on liberal big spenders, though the actual history shows Democrats have a consistently better record for fiscal prudence). The Gipper’s sunny optimism was bolstered by the wacky theory called “supply-side economics” that claimed big federal tax cuts would be fully replenished by rising tax revenue flowing from economic growth. The wishful theory has never been confirmed in fact. That hasn’t stopped pious Republicans from asserting its truth.
The Gipper’s presidency in fact unhinged fiscal order. Though he promised balanced budgets, Reagan governed aggressively in the opposite direction. His presidency (1980–88) launched the era of permanently swelling federal debt. The debt surpassed $1 trillion for the first time during the Gripper’s first term. It surpassed $9 trillion twenty-eight years later when George W. Bush’s term expired. Obama’s first term added trillions more, mainly driven by collapsing incomes and revenue in the depressed economy. Obama was in fact too timid in his pump-priming, though the Republicans accuse him of the opposite.
If Romney-Ryan are taken at at their word, they intend to restore the old “root canal economics” that the Gipper’s supply-side policy discarded. Of course, they intend to direct the flow of pain downward on the income ladder—the truly vicious hits reserved for the impoverished citizens who have no political clout. The wealthier citizens are to be rewarded again for being wealthy. But since the “root canal economics” was always a political loser, maybe Romney-Ryan won’t follow through with the tough talk. Or perhaps this is merely cynical rhetoric meant to manipulate voters, but not to be taken seriously as government policy.
The 2012 election also poses a hard test for the Democratic party. Responding to the irresponsible fiscal policies that began with Reagan, Democrats have attempted to steal the high ground of respectability and embrace pious sentiments of fiscal prudence. In these terms, the two parties have done a kind of ideological crossover during the last generation—a game of musical chairs in which the same defenseless people are the ones who get hurt most. Maybe this election should be about returning to older principles that seemed out of fashion.
Rome is burning while Congress fiddles. The president is out on the road trying to secure a second term, while the economy once again teeters on the brink of bad possibilities. The governors of the Federal Reserve Board seem to understand this better than most of Washington’s power hitters. But what can the Fed do? The central bank has already dispensed trillions to the financial system and pulled interest rates down to rock-bottom levels. Yet the economy doesn’t respond. Banks won’t lend, businesses won’t hire. Anxious consumers stopped buying, the order books are bare.
Miles Kimball, an imaginative economics professor at the University of Michigan, has stepped forward to propose an ingenious solution for the Fed’s dilemma. The government should create a “federal credit card” and send one to every adult in the nation, enabling each person to borrow $2,000 at a very low interest rate and not pay back any of the money until after the economy has fully recovered. The provocative kicker in Kimball’s proposal is that the Federal Reserve would itself provide the financing, not Congress or the president through the federal budget. And he argues that the central bank can do this with its unique power to create money.
A federal line of credit, Kimball suggests, could become a new, fast-acting channel for economic stimulus—more potent than the usual methods like tax rebates, and far less costly. That’s because consumers would not get any benefit from this government assistance unless they use the card—that is, borrow and spend—and do so before the government’s offer expires. After all, this is exactly what the economy needs. Why give the money in tax breaks for banks or businesses, which may not use it for the intended purpose? Why not deliver the aid to consumers, who will?
Kimball argues that this novel approach could deliver a strong, quick jolt to the stagnant economy, $400 billion or more. Yet it would add very little to the federal budget deficit, because the Federal Reserve operates under its own, independent balance sheet. Further, it’s not free money but a temporary loan, like the trillions in short-term loans the Federal Reserve gave the banking system at the height of the crisis. The low-priced credit would immediately help pressed families scrambling to pay the rent, young people without jobs and especially the desperately poor, who are “unbanked” and victimized by predatory lenders charging usurious interest rates for “payday” loans. “A big advantage of national lines of credit,” Kimball explained, “is that, once triggered, the details of spending are worked out through the household decision-making process, which is relatively nimble compared to corporate and government decision-making processes.”
The banking industry would go nuts, of course. Its lobbyists would rail against unfair competition (just as many citizens complained about the unfairness of the bank bailouts). But the homely truth about capitalism is that it cannot function without a constant cycle of new borrowing and debt. Despite popular moralistic aphorisms (“neither a borrower nor a lender be”), the capitalist process requires that someone is always lending and someone else is always borrowing. If risk-averse creditors refuse to lend and struggling consumers or businesses are prevented from borrowing, only the federal government has the power to intervene and get the money moving again. If the government does not step up, stagnation endures.
A federal credit card sounds far too radical for the conservative central bank. But it actually offers a viable solution to the Fed’s stymied monetary policy. Professor Kimball has already introduced it to Federal Reserve governors themselves, at a private conference for “academic consultants” who advise the central bank. None of the governors commented one way or the other afterward, and it is highly unlikely Kimball’s idea will be tried. It would probably require Congressional blessing, and Congress is hobbled by do-nothing paralysis. Nevertheless, policy advocates and citizens should push Fed governors and politicians to explore the concept seriously.
Kimball’s account of his proposal, “Getting the Biggest Bang for the Buck in Fiscal Policy,” can be found at his blog, supplysideliberal.com. As the title suggests, Kimball describes himself as a conservative economist with an intriguing mix of liberal impulses. As a conservative, he argues that the tax system can distort and damage economic output. As a liberal, on the other hand, he is open to income redistribution in some circumstances. “Whenever it can be done without shrinking the overall size of the pie, a dollar in the hands of the poor is socially more valuable than a dollar in the hands of the rich,” Kimball writes.
Either way, Kimball’s proposition deserves prompt debate, because it shows how the Federal Reserve’s management of the economy can be fundamentally reformed in progressive ways. Clearly, monetary policy is not working now—at least not enough to restore prosperity. Kimball argues that government should put aside the fiction of an “independent central bank” and instead learn to coordinate the Fed’s monetary policy with fiscal policy, controlled by Congress and the White House. The policy tools should be blended, he said, to create “a flavor somewhere between traditional monetary policy and traditional fiscal policy.” That would avoid the destructive “game of chicken” in which the two realms pull the economy in opposite directions, as they are doing now.
Kimball’s more provocative suggestion is that the Federal Reserve’s money-creation powers can be harnessed to major public objectives that are traditionally managed on the fiscal side through taxation and spending. That approach would make the national credit card a lot cheaper. “One of the great virtues of monetary policy is that monetary stimulus does not ultimately add much to the national debt,” Kimball explained. His recommendations would essentially revive the controversial economic policy employed by Abraham Lincoln, who printed “greenback” dollars to finance the Civil War and build the nation’s industrial base.
Traditionalists will react to Kimball’s plan with horror. But he insists the Federal Reserve already has the power under existing law to use its discount lending to support consumer credit or loosen the restraints on borrowers or underwrite public investment in infrastructure. This is all very controversial, of course, but the economic crisis invites fresh thinking—and the Federal Reserve has an obligation to consider radical remedies.
Let’s straighten out what actually happened at the Supreme Court. By refusing to reject President Obama’s healthcare reforms, the Supremes opened a clear pathway that leads in time to what right-wingers like to call “socialized medicine.” This is not what Chief Justice John Roberts had in mind. Nor what the president himself had proposed. But that is the true subtext for what the court decided, the real reason why right-wing frothers threw everything in their fevered imaginations at the liberal object for their scorn.
A line was crossed in the artful reasoning concocted by the Chief Justice. Or rather the door was opened for continuing invention and evolution toward what eventually will be recognized as nationalized healthcare, American style. Like it or not, Roberts explained, Obama’s scheme is not unconstitutional and the Court has no right to stand in the way.
The Chief Justice’s logic effectively confirms the open-ended process of discovery Obama has launched. The president’s strategy disappointed those of us who had wanted a more aggressive and coherent solution. His cautious approach means many more years of pushing and pulling between private interests and public needs. But the private sector—from doctors to drug companies and hospitals—is already trying to adjust, anxious to shape big changes in store for them.
This much has been settled. The federal government does indeed have expansive powers to reorganize the healthcare sector in whatever ways that will work for people and the broad public interest. In a backhanded way, the Court’s determination essentially secures the right to healthcare for everyone and on terms that everyone can afford. That is what Franklin Roosevelt envisioned back in 1944 in his “Second Bill of Rights” speech. Reformers who disparaged Obama’s hesitant approach should now celebrate his victory and make the most of it.
The shift in political boundaries is a huge accomplishment though, given the current ideological hysteria, neither Obama nor Roberts have much to gain by claiming full credit. The right will no doubt froth on. But the right lost the argument big-time. It created legal-eagle word games and pretended to be spouting constitutional principle. But the real motives are deeply cynical. The Republican party is playing crash-and-burn politics over this and other issues, insisting that all people want is “smaller government.” What people really want is a governing system that works for them. Those of us who argued with Obama’s caution now have a vast field of play in which to make their case, state by state, for stronger, more comprehensive solutions. Can Vermont or Oregon create an equivalent of single-payer healthcare? Will backward state governments punish their poor citizens by refusing to take the federal money for Medicaid? These are animating political issues that will test the half-baked claims of small-government conservatives.
My take on things probably sounds wildly over-optimistic. I do not suggest that reformulating healthcare in incremental ways will be free or easy, much less quick. These are knotty economic matters in which government decisions are tested in real time and mistakes will be immediately clear and costly. Nevertheless, I think the Roberts-Obama concordant has great promise and reshapes the future.
Two things of lasting impact occurred with the Supreme Court’s green light. Conservative illusions of ideological supremacy popped like a soap bubble. The major media have been under this spell for years—taking cues from Fox News or nasty talkers like Limbaugh—but the Supreme Court decision is a major, major embarrassment for pundits and reporters. How could they be so wrong with their confident predictions of doom for Obama?
It will take a while for the right-wingers to grasp this same point—maybe a couple of election cycles—but the GOP has committed itself to the loser position. If Obama should fail to win re-election, the Republican dilemma will swiftly become obvious. What does the GOP intend to do with government? Less and less? If you listen to its leaders and presidential nominee, that is their program. Romney sounds like he is full of Mitt.
The larger reason why healthcare reform will remain a driving force in politics is the necessities of our new economic condition as a nation. The free-spending days of easy credit and lopsided inequalities are squeezing folks from every side. Libertarians have no answer except to say, Get over it. Politicians, however, will be driven to find answers, even half-baked answers, or else cash out their careers. It is not that “big government” has found the answers for the national scandal of healthcare. It is that “small government” doesn’t even want to look.
Americans are clucking righteously over the financial mess in Europe, acting alarmed but privately finding pleasure in the other guy’s misfortunes. Poor, poor, pitiful Europeans. Why can’t they be more like us? American punditry assures us the end is nigh for the euro, with the slow-motion breakup of the European Union bound to follow. Now American politicians have someone to blame if the US economy goes off the rails. U-S-A, U-S-A, U-S-A.
My advice to Americans: hold the Schadenfreude. Yes, an epic drama is unfolding in Europe’s financial crisis—fraught with great risk and painful choices—but it is not the story we are being told by triumphalist American media and policy elites. Instead of sneering comparisons, people should see the similarities between our situation and theirs. Europe is not busted.
Europeans may in fact be on the brink of achieving great change—a deep turn in history that is politically explosive but profoundly progressive. They may not get there, not yet. But don’t count them out.
Events are compelling the nations of Europe to consider whether they must at last decide to become the “United States of Europe.” That is the subtext for current events. It was the old dream born after the bloody turmoil of World War II. It has been patiently nurtured step by step by two generations of postwar Europeans. Led by Germany and France in grand détente, the high-minded vision was that bitter rivals could eventually evolve into the USE—a viable economic rival to the USA.
There are lots of reasons to be skeptical. Completing the unification would require existing nations to give up a crucial measure of their sovereign power to decide taxation and spending. The peoples of Europe would have to accept a new identity for themselves, superseding ancient ethnic rivalries. The political systems of nation-states would have to organize a new unified structure of centralized governance, more or less like the United States of America. Irony of ironies, the once-defeated and disgraced nation—Germany—is now the economic powerhouse shaping the future, pushing for a centralized government and politics, to the queasy discomfort of its neighbors. Can they trust the Germans? Do they have a choice?
Despite the obvious difficulties, I see two main reasons why Europeans will push forward toward fulfilling the original expectation. First, the present system doesn’t work. The euro provides a unified currency that can be destabilized so long as individual governments are free to set conflicting fiscal policies—borrowing and spending their way into deep holes. Politicians are blameworthy, but the true culprits in this arrangement are the globalized banks that game the system country by country, piling up impossible debt burdens for nations, then demanding bank bailouts when those nations go broke. That is not really so different from the debt crisis that the deregulated banking system created for the United States.
Second, the imperative for unification is deeply grounded in European history and social reality. Across many centuries, these countries have fought repetitive wars with one another, striving for imperial power or religious supremacy or control of economic resources. After Hitler’s slaughtering reign, the Germans and the French and others came together and agreed: Never again. They must now create a different future. The alternative would be too disastrous to bear. The process is messy and studded with perilous moments, but the series of new agreements accepting shared responsibility for member nations’ debts are de facto steps toward writing a new constitution for the USE.
The greater political challenge is convincing the peoples of Europe, who are rightly skeptical about giving up national sovereignty. They suspect that it will simply create a remote new power center that favors austerity over the general public welfare. Still, the step-by-step deal-making is teaching a powerful lesson to European politicians who take care of the bankers and ignore the popular pain. They can look forward to losing their jobs at the next election. American politicians, as it happens, need to learn the same lesson.
Some ill-informed commentators are disparaging Europe’s dilemma by mistakenly contrasting it with the formative experience in early American history. After the revolution, Alexander Hamilton took charge at the Treasury Department and paid off the debts accumulated by the original thirteen states. He created a central bank to issue US currency. The founding fathers drafted a constitution that gave lasting definition to the national-local divisions of power. This is bogus history. Do not believe it.
The truth is, the United States has struggled bitterly with very similar questions of political power for generations. Some remain bitterly unresolved. From the start, the United States was pinned down and retarded in its development by the issue known as “states’ rights.” It was really about human rights—the system of slavery the founders had consecrated in the original Constitution. After repeated rounds of so-called compromises, the dispute was finally resolved by a bloody civil war. Yet retrograde battles over states’ rights are again in vogue.
Likewise for the money issues. States and regions and popular opinion persistently resisted the consolidation of banking and finance decisions at the national level. Andrew Jackson shut down Hamilton’s central bank. Popular distrust of bankers prevented a new one until the Federal Reserve was created in 1913. Yet banking and finance are back on top, despite generations of reform.
If Americans understood the real subtext of Europe’s crisis, they might be more sympathetic. If Americans were taught their own real history, there would be less gloating.
If the Justice Department wants to get serious about investigating financial fraud by Wall Street big boys, it ought to drop by the White House and interview Jeffrey Immelt, CEO of General Electric. Immelt is chair of President Obama’s jobs and competitive council, where he strategizes about how to revive American manufacturing. In some other places, only thirty miles from the White House, Immelt is known as the subprime foreclosure king.
General Electric preyed upon low-income minorities—people of color and immigrants—with notorious subprime mortgages designed to fail. And fail they did. GE Capital’s mortgage subsidiary originated some $700 million in housing loans to families in Prince William and Manasses—high-cost, predatory loans of which $218 million wound up in foreclosure. GE, well known for its inventiveness, pioneered online loan origination in which borrowers did not have to prove they had any income. Naturally, they were charged sky-high interest rates and sold weird mortgages with variable rates that went up but never went down.
Nearly 50 percent of Prince William homeowners are still “underwater” on their mortgages, still struggling to hold on their houses. The county has particular meaning for this year’s presidential election because Prince William is the first county in Virginia to have a “minority majority”—voters who are non-white. They are especially meaningful for Obama because he needs to win big again in Prince William to have any hope of carrying Virginia as he did 2008.
Mortgage-making was a messy but lucrative business for GE. It became the tenth-largest subprime lender in the nation. Its failure rate was the highest among the big-name banks working the northern Virginia territory. But GE made sure it got out before the borrowers failed. WMC Mortgage, the GE subsidiary that originated the dubious loans, immediately sold them to other companies or packaged them as mortgage-backed securities and sold them to Fannie Mae and Freddie Mac, the federally guaranteed housing finance companies now in conservatorship. Some minor portion of the $150 billion in losses Fannie and Freddie have dumped on the taxpayers can be credited to Jeffrey Immelt’s brilliant banking. When the mortgage scam became a national scandal, GE sold the company that had done its dirty work.
The federal government has not shown much interest. The Federal Housing Finance Agency that now oversees Fannie and Freddie did belatedly sue GE last fall for misrepresenting the quality of the mortgage securities it sold the government. This spring, with White House trumpets and flourishes, the Justice Department announced a major investigative task force to hunt down the swindlers (the second time such a task force was announced).
When government fails to do its duty, citizens have to step up and defend themselves, any which way they can. This month and next, we are seeing an impressive swarm of home-grown protests and nonviolent clashes around the country, citizens confronting bankers and demanding justice. The story makes the local news but has usually been ignored so far by national media.
In Prince William County, citizens are pursuing justice in a more methodical manner. Churches of nearly every persuasion, white and black, Latino and Asian, have organized a new interfaith force for community action they call VOICE—Virginians Organized for Interfaith Community Engagement. Instead of calling on government, which leaders assumed would be unresponsive, VOICE decided to go after the financial big boys up close and personal. After considerable canvassing research and helpful advice from housing advocates, the preachers and priests put Jeffrey Immelt at the top of their list.
First, they wanted a meeting with him. GE blew them off. When they asked its mortgage subsidiary to take responsibility for the damage it had done, its chief executive explained it could not help because it no longer owned the loans and GE can’t help because it no longer owned the company. “Again, we are sorry WMC is not in a position to work with your members,” James Zollo told one of the ministers.
So the people marched downtown to GE’s office on Pennsylvania Avenue with a new demand—Obama should fire Immelt as head of the White House council. Immelt is “unfit to advise the president as long as he does not take real responsibility for his lending that devastated communities and families,” VOICE leaders declared. They identified GE as the “worst lender” in the county. Now they demand that GE help finance the restoration.
Two other predator banks—JP MorganChase and Bank of America—have already agreed to begin negotiations with VOICE which leaves GE all alone. VOICE wants the three banks to finance a major reinvestment fund—$300 to $500 million—that will help finance debt reduction for still imperiled homeowners, build affordable housing and provide zero-interest second mortgages pioneered by affiliated interfaith organizations in other cities (the network known as IAF for Industrial Areas Foundation). Other IAF organizations in major cities have years of experience providing low-cost housing and home ownership to people of modest means through complex financial arrangements they call Nehemiah homes. They are the opposite of the quick-buck fraud bankers spread around the country, boosting profits and ending in ruin.
None of these proposals is assured of a positive outcome, but neither do the pastors and priests intend to settle easily. The political momentum is changing as citizens push back in varied ways. The big banks are beginning to understand that. After a little more heat, GE’s Jeffrey Immelt agreed to meet with VOICE leaders on May 14. Meanwhile, the next time Immelt goes to the White House to talk about manufacturing, the president will pull him aside and ask, “Jeffrey, tell me about the mortgage mess you created in Prince William County.”
The august Federal Reserve is not given to slapstick humor, but sometimes it can’t resist. Dylan Ratigan, the spirited talker from MSNBC, and the Huffington Post joined forces to assault the traditional secrecy of the central bank. Months ago, they filed a freedom of information request, asking the Fed to make available the meeting minutes of Fed decision makers from 2007 to 2010. Those were the critical years of financial collapse and massive bailouts when the Fed dispensed trillions of dollars to comfort the panicky financial system and prop up insolvent banks.
At this late date, the request seems reasonable. After all, the banking crisis is long over—or so they say—and by now the public ought to be able to examine how and why the Fed governors decided to launch their extravagant rescue of Wall Street. Normally, the Fed keeps the records of these official deliberations secret for five years before releasing them. But the last five years were not normal. They remain the source of popular anger and political upheaval.
Months passed. Finally, a big package was delivered to the two media outlets—513 pages of verbatim discussions by the Federal Open Market Committee, the decision makers who set monetary policy and authorize the big-ticket loans and guarantees for troubled financial institutions. Imagine the high drama those pages would reveal.
“Good morning, everybody,” Chairman Ben Bernanke announced. The page went blank, actually gray. The only words that appeared were the names of the numerous participants, followed by page after page of empty gray space. At the bottom each page it said in bold type “Authorized for Public Release.” Then Bernanke spoke again. “So we’ve had a motion without objection. Okay, then the swap lines are approved. Let’s turn now to the economic situation.” Etc., etc. More empty gray pages—roughly 500 of them.
Do you get the Fed’s joke? This is how the central bank informs the public in a timely manner—by erasing all “substantive discussions and deliberations among the committee participants during these critical years.” It acts like the CIA for money. It invokes fine-print exceptions with no effort to justify the suppression. If you want to know more, wait around five years. By then the information should be quite harmless for the policy makers.
A few months ago, the Fed released the decision-making deliberations for 2006 and that record truly did produce a lot of laughs—bitter and sardonic laughter. The distinguished governors were indulging in happy talk and self-congratulations, utterly unaware of the catastrophe that was about to befall the financial system and the economy.
If those discussions had been made public six months or a year after the meetings, the citizenry would have rightly been infuriated.
The only reason the Fed governors insist on this arbitrary rule of secrecy is to protect themselves—to keep the public uniformed of their errors and false predictions. In the meantime, Chairman Bernanke takes pride in claiming greater transparency at the institution—also infuriating.
This issue is an essential reform for the central bank, and relatively easy to accomplish. First, I hope MSNBC and the Huffington Post will continue their valiant legal battle—appealing to a federal court where a judge can examine in private some of the material the Federal Reserve hopes to suppress. Recall that Bloomberg led a similar lawsuit that succeeded. A federal judge compelled the Fed to disclose in detail the vast financial wealth it dispensed during crisis. Recall that Congress, likewise, ignored the Fed’s strenuous objections and ordered the central bank to do revealing public audits.
This may have been traumatic for Federal Reserve governors and bureaucrats or the major banks on life support from Washington, but the republic somehow survived. Democracy lives on information or perishes when the powerful keep people in the dark. The Fed’s performance is sure to benefit from a little more sunlight.
When Congress passed the Dodd-Frank financial reform bill in the summer of 2010, the Obama administration made happy talk about putting an end to “too big to fail” banks. Hold the champagne. The Federal Reserve Board has just created the fifth-largest bank in the country, despite a flood of warnings from community advocates and smaller banks.
Skeptics in financial markets are entitled to their skepticism. Capital One has been rapidly assembling this new behemoth, acquiring local deposits and credit card operations in a series of mergers. Federal Reserve governors reviewed the complaints and rejected them. In banking regulation, the “new normal” so far looks a lot like the “old normal.”
Of course, it is impossible to say this marks an end to reform. But it’s a real downer for the reform advocates. They have pleaded for a different perspective from the Fed regulators—weighing the “public benefits” of bank consolidations against the “adverse effects,” as Dodd-Frank requires. But the Fed made this calculation on very narrow grounds.The governors concluded that one more very large bank will not by itself bring down the system. True enough. But each decision the Fed makes now on applying the new rules sets a precedent for its future decisions. How big is too big? The Capital One decision seems to say size is not an issue.
Reform groups like the National Community Reinvestment Coalition argued that the new, enlarged Capital One is a bad bet on its own terms because its business model is grounded in credit card debt, with a heavy portion of so-called “subprime” credit card holders—borrowers much like the “subprime” mortgage holders now lined up for foreclosure and bankruptcy. When the credit card bubble bursts, these critics say, the government will stick with the same bad choice—bailing out the creditors when the debtors fail.
Financial market cynics have assumed all along that Dodd-Frank did not end “too big to fail” but instead created a charmed circle of protected banks labeled “systemically important” that will not be allowed to fail, no matter how badly they behave.
The Fed and other regulators were given the impossible job of changing the behavior of these megabanks without messing with their awesome size and financial power.
Good luck to the Fed. The new regulatory rules are still being written, and the banking industry has flooded Washington with comments, questions and fine-print objections. Some say the bank lobbyists are in a purposeful stall, hoping to delay the final regulations until they get a more banker-friendly president. I suspect the stalling tactics are designed to outwait the public anger.
The newspapers say the Congressional supercommittee is stalemated on how to reduce the federal deficits, but Democrats and Republicans already agree on one thing. Both parties want to whack Social Security, hoping the old folks won’t notice. Some policy wonks have shown the politicians a sly way to shrink Social Security benefits and call it a “technical fix.” By changing the formula for calculating the annual cost-of-living increases that beneficiaries normally receive, small differences add up to big pain for old folks. The same adjusted formula would be applied to disability benefits and military and veteran pensions.
The beauty of this gimmick is that it looks trivial at first and most people probably wouldn’t notice. But the impact compounds every year afterwards. The personal loss gets larger and larger the longer retired people live on. The Congressional Budget Office calculates savings for government of $217 billion over ten years, barely a scratch in a federal budget of $13 trillion.
But the ugly part of this gimmick is that it punishes most severely the very people who most need help—the lame and the halt and the poor. In the austerity hysteria that grips Washington, that has been a standard approach to deciding who accept sacrifices. If someone must lose, the poor are an easy target—a lot easier than raising taxes on the affluent and super-rich or whacking away at the bloat and waste at the Pentagon.
In the first year of this fix, Social Security recipients at retirement age would lose only about $100 in expected benefits. Ten years later, they would be losing $560 a year. If they are fortunate enough to be alive in their 90s, they would lose $1,400 a year or 9.2 percent of their Social Security check. This is perverse public policy—the older people get the more they will need for medical expenses and the more income they must sacrifice to please the budget cutters.
An advocacy group called Strengthen Social Security defined the losses in everyday terms familiar to poor people—shopping for groceries. After ten years in retirement, the COLA cut would cost recipients twelve weeks of food expenditures. After two decades, it would cost twenty-one weeks of groceries. For millions of Americans, that will not sound trivial.
Republicans always seem ready to go for deals that punish the poor first. What’s shocking is the Democrats. The six Democrats on the supercommittee included the Social Security COLA cut in the package they proposed to their Republican counterparts. That list was blessed by majority leader Harry Reid even though Reid had previously ruled Social Security off the table. Senators Max Baucus of Montana and John Kerry of Massachusetts were reportedly most zealous in promoting the hit on Social Security.
Not to worry, some Democrats insisted privately. They included Social Security as an eligible target, they explained, only to entice Republicans to make a deal that includes tax increases for the wealthy. The Dems expect Republicans to reject the offer, and so Social Security is safe.
Nevertheless, this is dangerous politics, because we know from previous episodes that Democrats are rather inept at the game of bargaining. Republicans will stand their ground and call the bluff. In the end, the Democrats’ initial concession becomes only an opening bid. Republicans always respond with higher demand. So Dems yield by splitting the difference—that is, caving in.
If this same pattern emerges in the supercommittee melodrama, people must remember who blinked first. If the Democratic Party fails to defend its own greatest legacy from right-wing assault, voters may ask themselves, Why punish Republicans when it was the Democrats who sold out Social Security?