Wall Street reform is a complex topic, but the issue can be summed up as follows: Conservative deregulatory zeal allowed a financial market meltdown to occur, costing our economy eight million jobs. Republicans and Democrats voted to save the financial industry through the TARP bailout. Only one party – the Democrats – has worked to address the causes of the meltdown by seeking to avoid future bailouts, creating a consumer financial protection bureau, and regulating derivatives.
While many contributing factors to the Bush Recession, which led to the loss of eight million jobs and the elimination of trillions of dollars in household wealth, have been identified, the overriding cause was the complete meltdown of our financial system in 2008. And it is widely acknowledged that this meltdown was triggered by a deregulatory ethos that overtook our political system over the past twenty years, leading to a situation where more and more risky and speculative financial products were created with little to no oversight by the government. Even Alan Greenspan, who was identified by the Washington Post’s business columnist Steve Pearlstein as “The Laissez-Fairest of Them All”, admitted in testimony to Congress that his deregulatory zeal was a flawed theory that allowed the financial meltdown to occur.
Unfortunately, members of both major political parties were complicit in allowing the conditions that led to the financial meltdown. While the failed deregulatory approach is a core principle of the conservative movement that finds its home in the Republican Party, too many Democrats fell for the allure of the snake-oil that the deregulatory zealots were selling.
But important, substantive differences between the parties have been revealed by their responses after the meltdown occurred. First, only one party – the Democrats – worked to make sure that the Troubled Asset Relief Program (“TARP”) funds were properly spent. President Bush proposed, and Congress approved by a bi-partisan vote, TARP, which authorized the government to use up to $700 billion purchasing troubled financial products in order to save the financial industry. After serious concerns were raised about the effectiveness of the distribution of the first $350 billion in TARP funds by the Bush Administrations, House Democrats passed the TARP Reform and Accountability Act, which would have dedicated $100 billion in TARP funds towards helping homeowners facing foreclosures, forced banks to report how they were using TARP funds, and limited executive compensation at firms accepting TARP funds. Unfortunately, this legislation was one of 372 bills passed by the House that have so far died in the U.S. Senate, largely due to Republican obstructionism. So, while both parties supported efforts to save the financial system, only one – the Democrats – had a significant block of members who wanted to increase government oversight to make sure that taxpayer money was being used in a transparent and effective way.
The second prong of the government response to the financial meltdown is to put in place policies that would reduce the chances of another meltdown in the future. On this front, Democrats have had to act virtually alone, as Republicans have almost uniformly opposed and worked to weaken such efforts. In July of this year, the U.S. Senate passed an historic financial reform bill by a 60-39 vote, after three Senate Republicans finally acted to break a long-running Republican filibuster. The House had previously passed financial reform by a 232-202 vote, with every Republican member voting against it.
The financial reform legislation focused on filling a number of regulatory gaps that had developed because conservative anti-regulatory zeal had prevented our regulatory structures to keep up with changes in the financial system. Three important provisions are especially worth highlighting:
- Avoiding Future Bailouts: Since the 1930s, the Federal Deposit Insurance Corporation (“FDIC”) has had the authority to step in and liquidate a bank that was in financial trouble in order to prevent failure of that bank from having negative repercussions on the rest of the economy. Unfortunately, that authority did not extend to other financial institutions, such as investment houses like AIG and Bear Stearns, which had become “too-big-to-fail.” Because their failure would have taken down the entire economy, folks in D.C. felt that they had to bail those financial institutions out through TARP. The financial reform legislation seeks to avoid this situation in the future by taking steps to prevent financial institutions from becoming too-big-to-fail, granting the FDIC the authority to liquidate financial institutions that are in trouble, and ensuring that the costs of such liquidations are borne by shareholders and creditors, not taxpayers.
- Protecting Consumers: A second contributing factor to the Bush Recession was the growth of questionable consumers lending practices by subprime mortgage lenders, payday loan stores, and credit card companies. Those practices led to an increasing wave of defaults on loans and foreclosures that undermined the real estate market and consumer spending. Because the real estate mortgages had been securitized by the financial industry, the collapse of the real estate market had reverberations throughout the industry and economy as a whole. The financial reform legislation creates a Consumer Financial Protection Bureau, housed within the Federal Reserve, which will be run by a Presidential appointee and have an independent budget. The Bureau will be charged with enforcing a wide array of consumer protections, including the new credit card industry reforms signed by President Obama, and will consolidate enforcement of consumer protections that are currently handled by seven different agencies.
- Regulating Derivatives: Another major contributor to the financial meltdown was the growth of over-the-counter derivatives, which are financial instruments whose value are based on the price of a different item. While traditional derivatives, like trades in pork or corn futures, are done in the open and relatively safe, over-the-counter derivatives, which are often based on bets about the value of a particular currency or interest rate trends in a specific country, were almost entirely un-regulated before financial reform passed. The reform legislation brings over-the-counter derivatives out of the dark, but subjecting them to regulation by the Security Exchanges Commission and Commodities Future Trade Commission.
The financial reform legislation, of course, does not solve all of the problems in the financial system, and some unfortunate compromises were made to get the legislation passed. But, as I’ve discussed previously, progressive change involves a long, ongoing struggle in which today’s progress is built on with future successes. In addition, the need for more reform is further evidence of why we need to return Democratic majorities, rather than letting Republicans who would turn the clock back on financial reform take Congress over.
The Democrats’ financial reform legislation makes a good start on addressing key causes and impacts of the financial meltdown of 2008 by avoiding future bailouts, protecting consumers, and regulating risky derivatives. And, as our friends over at The People’s View recently pointed out, these reforms, combined with international financial reforms recently achieved by the Obama Administration, are already leading financial institutions to shift their investments into more safe and secure transactions. By contrast Republicans, after voting to bailout the financial institutions that caused the Bush Recession, have largely sought to obstruct any effort to make sure that future financial meltdowns do not occur.
Are you glad that President Obama and the Democrats in Congress succeeded in passing financial reform that will end some of the worst abuses on Wall Street, avoid future bailouts, and protect consumers from subprime and payday lenders? If so, volunteer for a local Democratic candidate, write a letter to your local newspaper editor, and make sure your friends, family, and neighbors know who you are going to vote for.