What I’d do about Wall Street

The original title of this post was “What I’d do about the banks”.

What to do about the “too big to fail” banks is obvious.  There are many good ideas in circulation (none of them original with me).  The only problem is accomplishing anything through the current dysfunctional U.S. political system.

The most obvious and important thing to do is to break up the “too big to fail” banks.  As even Alan Greenspan has said, if a bank is “too big to fail,” it is too big to exist.  Since the banking crisis, the biggest banks have become bigger than ever, and have resumed the practices that caused them to fail in the first place.  As some point, they will become too big to save.

Click to enlarge

Simon Johnson, former chief economist for the International Monetary Fund, and co-author James Kwak proposed in their 2010 book, 13 Bankers: the Wall Street Takeover and the Next Financial Meltdown,  that any bank be broken up if its assets are more than 4 percent of the current U.S. Gross Domestic Product or if the bank itself is more than 2 percent of GDP.   The exact percentage is unimportant.  What is important is that it be enacted into law, and not left to the discretion of regulators.  We learned from the 2008 crisis that regulators can’t be trusted to act in the public interest.

Their size limits would have applied to just six banks – Bank of America (16% of GDP), JP Morgan Chase (14%), Citigroup (13%), Wells Fargo (9%), Goldman Sachs (6%) and Morgan Stanley (5%).  Breaking up the banks would not affect their profitability.  When Standard Oil was broken up, its component parts – Exxon, Mobil, Sohio, Standard of California – did just fine.

If the banks threaten to pull up stakes and relocate to some financial haven such as the Cayman Islands, the answer would be: Let the Cayman Islands bail you out when you get into trouble.

The federal government should also:

  • Set up an orderly procedure for reorganizing bankrupt banks, as was done with savings and loan associations during the S&L crisis.  During the S&L reorganizations, the failed management was fired, the depositors were held harmless, the failed investments were liquidated and the good assets were sold to soundly-managed S&Ls.  The solvent S&Ls got bargains, but that’s okay.  They were being rewarded for good management.
  • Prosecute financial fraud.
  • Give regulatory agencies, including the new Consumer Financial Protection Board, the resources to do their jobs, and head them by people not beholden to the financial industry.
  • Reenact the Glass-Steagall Act, which separates commercial and investment banking.
  • Impose a stock transaction tax of some small amount, say 1/10th of 1 percent.  Individual traders and computerized trading programs destabilize the market by trading huge amounts of stocks and commodities several times a day.  A small transaction tax would not be noticed by regular investors, but would slow down speculative trading.

As an individual, you can shift your money to a non-profit credit union or savings and loan association if you have money in one of the “too big to fail” banks, or if you think your bank is abusing you.  I do not say all for-profit banks are bad.  Many of them perform their function, which is to provide a safe haven for savings, loans for businesses and credit for consumers.  But so long as the “too big to fail” banks are saved from the consequences of reckless and exploitative actions, the prudent and ethical bankers will be crowded out.

Those are my ideas.  Here is what Mike Konczal, a fellow at the Roosevelt Institute, says.

1. Cancel the debts.  The crisis we face is fundamentally about a giant pool of bad mortgage debt.  We need to work through these debts for recovery to really take off.   The only question is who will absorb them—the creditors who made the loans or the people on the other side.   In this case, there is no way to share these losses, and the government has stood behind the owners of many of these debts as being “Too Big to Fail.” … …

The recession is far worse in areas of the country with the most bad debts and foreclosures, and debt relief can take the edge off.   By making banks write down bad loans and work out failed mortgages, we’ll have an system where the fraud that originated on Wall Street isn’t borne entirely on the real economy.

2. Investigate Wall Street.  In the buildup to the crisis, bad loans that could never be paid back were passed out to unsuspecting homeowners.  These loans were then passed along a chain until they got to investors who thought the loans were made with the utmost diligence.  When the entire house of cards collapsed, homeowners were left with bad loans, investors looked to cover their investments, and a mind-boggling 5 million people were foreclosed on.  Loans were made so fast that proper records weren’t kept, which means it’s difficult to hold creditors and debtors accountable.

Now that the housing sector has collapsed, banks are cutting corners and using fake documentation to foreclose on properties that they don’t have proper access to.  In this mess of a system, homeowners who haven’t missed a payment are being dragged down, through faulty paperwork.  Several state attorneys general, including ones from New York and Nevada, have taken the lead in demanding an investigation, much to the chagrin of the Obama administration and financial elites.  By supporting them, we’ll help build a country where there isn’t a two-tier system of justice.

3. Create a Financial Transaction Tax.  It is hard to think of something with such a boring name as a particularly radical solution, but an FTT would be an important first step toward remaking our economy so it is not so dependent on the financial sector.

Thanks to a wave of deregulation laws in the late 1970s and early 1980s, finance has been one of the fastest-growing sectors over the past 30 years.  It’s become so important, in fact, that some argue the economy should be run in accordance with the ideas and goals of the financial sector.  This way of viewing our economy is less about long-term value than short-term price manipulation, less about investing in communities and peoples than about gaming tax codes and regulation and less about markets as a means of expression and more about consolidated, cornered market power.  A financial transaction tax would help fight back against this and begin to steer our economy toward more sustainable and workable ends.

via Politics – GOOD.

Here is what Matt Taibbi of Rolling Stone proposes.

1Break up the monopolies.  The so-called “Too Big to Fail” financial companies – now sometimes called by the more accurate term “Systemically Dangerous Institutions” – are a direct threat to national security.  They are above the law and above market consequence, making them more dangerous and unaccountable than a thousand mafias combined.  There are about 20 such firms in America, and they need to be dismantled; a good start would be to repeal the Gramm-Leach-Bliley Act and mandate the separation of insurance companies, investment banks and commercial banks.

2.  Pay for your own bailouts.  A tax of 0.1 percent on all trades of stocks and bonds and a 0.01 percent tax on all trades of derivatives would generate enough revenue to pay us back for the bailouts, and still have plenty left over to fight the deficits the banks claim to be so worried about.  It would also deter the endless chase for instant profits through computerized insider-trading schemes like High Frequency Trading, and force Wall Street to go back to the job it’s supposed to be doing, i.e., making sober investments in job-creating businesses and watching them grow.

3.  No public money for private lobbying.  A company that receives a public bailout should not be allowed to use the taxpayer’s own money to lobby against him.  You can either suck on the public teat or influence the next presidential race, but you can’t do both.  Butt out for once and let the people choose the next president and Congress.

4.  Tax hedge-fund gamblers.  For starters, we need an immediate repeal of the preposterous and indefensible carried-interest tax break, which allows hedge-fund titans like Stevie Cohen and John Paulson to pay taxes of only 15 percent on their billions in gambling income, while ordinary Americans pay twice that for teaching kids and putting out fires. I defy any politician to stand up and defend that loophole during an election year.

5.  Change the way bankers get paid.  We need new laws preventing Wall Street executives from getting bonuses upfront for deals that might blow up in all of our faces later.  It should be: You make a deal today, you get company stock you can redeem two or three years from now.  That forces everyone to be invested in his own company’s long-term health – no more Joe Cassanos pocketing multimillion-dollar bonuses for destroying the AIGs of the world.

via Rolling Stone[Added 10/31/11]

If all else fails, more drastic measures may have to be considered.  It may be necessary to turn the big banks into regulated public utilities.  This would mean regulatory agencies would set fees and a guaranteed but limited profit for interstate banks.  It may be necessary to create a public option in banking, as is done in the state of North Dakota, the province of Alberta, and many foreign countries.

I hope such measures are not necessary.  My preference is for a wall of separation between bank and state.  But regulation and public options have precedents.  They were used to curb the monopoly power of the railroads and the electric power industry, among others.

Click on The new American oligarchy for my review of Johnson’s and Kwak’s 13 Bankers.

Click on The Baseline Scenario for their web log.

Click on Three Concete Demands to Hold Wall Street Accountable for Mike Konczal’s full comment.

Click on My Advice to the Occupy Wall Street Protesters for Matt Taibbi’s full comment.  [Added 10/31/11]

Click on A Field Guide to Closing Your Bank Account for advice on how to close your bank account and switch to a credit union without having to pay fees and penalties.

Click on A Smarter Way to Occupy Wall Street for Motley Fool’s argument as to why employee pension funds should get out of speculative investments and stick to index funds.

Click on Should banks be treated as public utilities? for the argument for treating banks like gas, electric and telephone companies.

Click on The Public Option in Banking for an argument for a government-run alternative to for-profit banking.

Click on The Bank of North Dakota: Banking’s “public option” for more about a banking public option.

Click on Our Turn for ideas inspired by Occupy Wall Street of what to do about the current crisis. [Added 10/19/11]

Click on Proposed List of Demands for more ideas from Occupy Wall Street. [Added 10/19/11]

The video airs the ideas of Bill Black of the University of Missouri at Kansas City [Added 11/5/11]

Click on Where Does Occupy Wall Street Go From Here? for Michael Moore’s thoughts.  [Added 11/24/11].

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One Response to “What I’d do about Wall Street”

  1. jacksmith Says:

    REALITY!!

    ( http://my.firedoglake.com/iflizwerequeen/2011/05/16/how-about-a-little-truth-about-what-the-majority-want-for-health-care/ )

    ( Gov. Peter Shumlin: Real Healthcare reform — http://www.youtube.com/watch?v=8yFUbkVCsZ4 )

    ( Health Care Budget Deficit Calculator — http://www.cepr.net/calculators/hc/hc-calculator.html )

    ( Briefing: Dean Baker on Boosting the Economy by Saving Healthcare http://t.co/fmVz8nM )

    START NOW!

    As you all know. Had congress passed a single-payer or government-run robust Public Option CHOICE! available to everyone on day one, our economy and jobs would have taken off like a rocket. And still will. Single-payer would be best. But a government-run robust Public Option CHOICE! that can lead to a single-payer system is the least you can accept. It’s not about competing with for-profit healthcare and for-profit health insurance. It’s about replacing it with Universal Healthcare Assurance. Everyone knows this now.

    The message from the midterm elections was clear. The American people want real healthcare reform. They want that individual mandate requiring them to buy private health insurance abolished. And they want a government-run robust public option CHOICE! available to everyone on day one. And they want it now.

    They want Drug re-importation, and abolishment, or strong restrictions on patents for biologic and prescription drugs. And government controlled and negotiated drug and medical cost. They want back control of their healthcare system from the Medical Industrial Complex. And they want it NOW!

    THE AMERICAN PEOPLE WILL NOT, AND MUST NOT, ALLOW AN INDIVIDUAL MANDATE TO STAND WITHOUT A STRONG GOVERNMENT-RUN PUBLIC OPTION CHOICE! AVAILABLE TO EVERYONE.

    For-profit health insurance is extremely unethical, and morally repugnant. It’s as morally repugnant as slavery was. And few if any decent Americans are going to allow them-self to be compelled to support such an unethical and immoral crime against humanity.

    This is a matter of National and Global security. There can be NO MORE EXCUSES.

    Further, we want that corrupt, undemocratic filibuster abolished. Whats the point of an election if one corrupt member of congress can block the will of the people, and any legislation the majority wants. And do it in secret. Give me a break people.

    Also, unemployment healthcare benefits are critically needed. But they should be provided through the Medicare program at cost, less the 65% government premium subsidy provided now to private for profit health insurance.

    Congress should stop wasting hundreds of millions of dollars of taxpayer money on private for profit health insurance subsidies. Subsidies that cost the taxpayer 10x as much or more than Medicare does. Private for profit health insurance plans cost more. But provide dangerous and poorer quality patient care.

    Republicans: GET RID OF THE INDIVIDUAL MANDATE.

    Democrats: ADD A ROBUST GOVERNMENT-RUN PUBLIC OPTION TO HEALTHCARE REFORM.

    This is what the American people are shouting at you. Both parties have just enough power now to do what the American people want. GET! IT! DONE! NOW!

    If congress does not abolish the individual mandate. And establish a government-run public option CHOICE! before the end of 2011. EVERY! member of congress up for reelection in 2012 will face strong progressive pro public option, and anti-individual mandate replacement candidates.

    Strong progressive pro “PUBLIC OPTION” CHOICE! and anti-individual mandate volunteer candidates should begin now. And start the process of replacing any and all members of congress that obstruct, or fail to add a government-run robust PUBLIC OPTION CHOICE! before the end of 2011.

    We need two or three very strong progressive volunteer candidates for every member of congress that will be up for reelection in 2012. You should be fully prepared to politically EVISCERATE EVERY INCUMBENT that fails or obstructs “THE PUBLIC OPTION”. And you should be willing to step aside and support the strongest pro “PUBLIC OPTION” candidate if the need arises.

    ASSUME CONGRESS WILL FAIL and SELLOUT again. So start preparing now to CUT THEIR POLITICAL THROATS. You can always step aside if they succeed. But only if they succeed. We didn’t have much time to prepare before these past midterm elections. So the American people had to use a political shotgun approach. But by 2012 you will have a scalpel.

    Congress could have passed a robust government-run public option during it’s lame duck session. They knew what the American people wanted. They already had several bills on record. And the house had already passed a public option. Departing members could have left with a truly great accomplishment. And the rest of you could have solidified your job before the 2012 elections.

    President Obama, you promised the American people a strong public option available to everyone. And the American people overwhelmingly supported you for it. Maybe it just wasn’t possible before. But it is now.

    Knock heads. Threaten people. Or do whatever you have to. We will support you. But get us that robust public option CHOICE! available to everyone on day one before the end of 2011. Or We The People Of The United States will make the past midterm election look like a cake walk in 2012. And it will include you.

    We still have a healthcare crisis in America. With hundreds of thousands dieing needlessly every year in America. And a for profit medical industrial complex that threatens the security and health of the entire world. They have already attacked the world with H1N1 killing thousands, and injuring millions. And more attacks are planned for profit, and to feed their greed.

    Spread the word people.

    Progressives, prepare the American peoples scalpels. It’s time to remove some politically diseased tissues.

    God Bless You my fellow human beings. I’m proud to be one of you. You did good.

    See you on the battle field.

    Sincerely

    jacksmith – WorkingClass 🙂

    Like

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