[A-List] John Bellamy Foster: MR: The unsurprising failure of U.S. financial reform

[james daly]

The unsurprising failure of U.S. financial reform


The financial reform legislation just passed by Congress was proclaimed by 
Obama as "the toughest financial reform since the ones we created in the 
aftermath of the Great Depression." This, however, is a kind of doublespeak 
since the entire thrust of financial reform in the decades since the 1930s 
has been toward financial deregulation, so being the toughest financial 
reform measure by that standard merely means that it didn't give the house 
away.

The most important financial reform measure to be adopted in the 1930s was 
the Glass-Steagall Act, which was passed in 1933 and repealed in 1999 at the 
instigation of the Clinton administration. Glass Steagall separated 
commercial and investment banking. Nothing like that is involved here. 
Financial interests claim that it is impossible to go back to that earlier 
time. This means that financial reform in the deal just passed by Congress 
will not even create a regulatory situation as tough as it was when Bill 
Clinton's second term of office began.

Moreover, there is little in the new financial reform legislation that is 
actually set in stone, and this is crucial. The most important measure has 
to do with watered down application of the Volcker Rule requiring the big 
banks to cut their stakes in their in-house hedge funds and private equity 
units. These new rules are designed to curb but not stop banks from engaging 
in such risky investments in their own funds. Yet, since financial 
institutions are allowed to keep a foot in the door in this respect, the 
percentage of such trading that they are allowed to engage in - currently 3 
percent - could easily be increased at any point through future legislative 
action, which would then be treated as as a minor adjustment.

Even more important is the fact that major banks like Goldman Sachs and 
Citigroup may have up to 12 years, i.e., until 2022, to comply with these 
new rules of curbing their in-house trading in these areas, according to 
Bloomberg Businessweek. This is of course an infinity from the standpoint of 
financial trading. The whole world could change by then. There is plenty of 
time for lobbying to have its effect. Changes in Washington in 12 years 
(equivalent to three presidential terms) could substantially alter the name 
of the game. Compare this to Glass Steagall, where the big banks were given 
less than two years to separate their commercial and investment banking 
operations!

There is no ban in this new legislation on proprietary trading (banks 
engaging in speculative trading with their own money). Banks are allowed to 
keep their derivatives units. There are innumerable loopholes. In fact, that 
is undoubtedly why the legislation ends up being 2,000-pages long! Much is 
left simply to the regulatory discretion of the Federal Reserve and the SEC. 
It is true that the Fed is given more power to intervene in the case of a 
failing bank. But what this means is not clear. There is nothing in the 
present legislation that ranks as a serious consideration of the "too big to 
fail" problem. In 2008, the top 10 financial institutions in the United 
States controlled 60 percent of total financial institution assets, compared 
to 10 percent in 1990. If one of these institutions were to fail the federal 
government would be forced to bail it out, regardless of what administration 
officials and the Federal Reserve currently say to the contrary.

In short, nothing has really changed. Why is this legislation so weak? The 
answer is that given the public outrage about the financial crisis it was 
necessary to  make a show of doing something. But this had much more to do 
with face-saving in a political crisis than about limiting financial 
speculation itself. Indeed, no real change in the rules governing the 
financial superstructure of the economy was ever contemplated in this 
process. The reasons for this are to be found in the reality of today's 
monopoly-finance capital.

The economies of the United States and the other rich nations have been 
slowing down for decades, with the real rate of growth dropping 
substantially. Paul Krugman has recently referred to the current economic 
condition as "The Third Depression," comparing it to the earlier long 
periods of stagnation in the late nineteenth century and in the 1930s. What 
has served to lift the economy in this latest period of slow growth, given 
the stagnation of productive investment, is mainly the expansion of 
speculative finance, generating a long-run financialization (shift from 
production to finance) in the economy as a whole.

Under these circumstances of a finance-driven economy, what those at the top 
most fear is a stoppage in bank lending and a curbing of financial 
speculation. As a result their hands are effectively tied in terms of 
clamping down on finance. (Not to mention the fact that the richest 
Americans, as can be seen in the Forbes 400, are more and more dependent on 
the financial sector for their wealth, representing a shift in the locus of 
economic power that also has had effects on the state, as Hannah Holleman 
and I argued in "The Financial Power Elite" in the May 2010 issue of Monthly 
Review.)

Ironically, a new bubble is not so much to be feared as desired at this 
point from the standpoint of those in charge. Essentially, the same 
situation faces financial regulators generally when confronted with a 
bubble. To prick the bubble is to end economic growth. The usual response 
therefore is to try to expand the bubble as long as possible, even to deny 
its existence, until it eventually bursts.

The conclusion that all this leads to is that in our current situation 
financial reform is basically a dead letter, as is financial regulation 
itself. There is nothing in the new legislation that will prevent or even 
ameliorate future financial bubbles and their inevitable consequences. Nor 
is that the intention. What this legislation does point to is the 
irrationalities of our present system, and the fact that it is impossible to 
address such problems of the economy in a meaningful way without taking on 
the entire system.