The economy held hostage

Unless Congress passes legislation to re-regulate financial predators and break up the “too big to fail” financial institutions, we as a nation are in for repeats of what we’ve experienced in the past 10 or 20 years – long stretches of economic stagnation interrupted by economic crises.

Our future prosperity depends upon restoring the banking and financial system to its historic role of turning savings into investment in the real economy.

We know Wall Street financiers make big campaign contributions, and we know Wall Street executives have held and still hold high executive positions under Republican and Democratic administrations alike. But the source of the banking and finance industry’s greatest power is more than that. It is its power to drive up interest rates and crash stock and bond prices if the government’s actions displease it.

When President Andrew Jackson refused to renew the charter of the Bank of the United States, a privately-owned bank with roughly the same power as the Federal Reserve System today, the president of the bank, Nicholas Biddle, deliberately brought on a recession by restricting loans.  Jackson thought this was not too high a price to pay to destroy the bank’s financial and political power.

I don’t think today’s financiers and bankers would do anything that blatant, but they wouldn’t have to. The “automatic” working of the market would do the job.  This is a great danger when the federal government is running huge deficits, and needs low interest rates to keep them under control, and when the new economic recovery could be aborted by a fall in stock prices.

When Bill Clinton was President, he accepted as a fact that he could not do anything that would disrupt financial markets.  One of Clinton’s advisers, James Carville, famously remarked that if he died and was reincarnated, he wanted to come back as the bond market, because everybody would fear and obey him. But the financial markets are not a proxy for democracy. As long as we Americans are governed by the financial markets, we are not a self-governing people.

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