Subject: [big campaign] New Huff Post from Creamer on Financial Regulation
From: [email-masked]
To: [email-masked], [email-masked]
Date: Mon, 12 Oct 2009 10:10:02 EDT
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The Dominance of the Financial Sector has Become a Mortal  Danger to our 
Economic Security 

.  
Over the last several decades, the financial sector has grown  
relentlessly. It has doubled in size over the last 14 years.  During the period 1973 to 
1985 the  financial sector never earned more than 16% of domestic profits.  
This decade, it has averaged 41% of all  the profits earned by businesses in 
the U.S.  In 1947 the financial sector represented  only 2.5% of our gross 
domestic product. In 2006 it had risen to 8%.  In other words, of every 12.5 
dollars  earned in the United States, one goes to the financial sector, 
much of which,  let us recall, produces nothing. 
Most of that growth has not been among community or regional banks -- or  
credit unions.  I’m talking about  Wall Street. 
Wall Street’s growth is one big reason that most of America’s economic 
growth during the  last decade has flowed into the hands of investment bankers, 
stock traders and  partners in firms like Goldman Sachs. The Center on 
Budget and Policy Priorities  reports that fully two-thirds of all income gains 
during the last economic  expansion (2002 to 2007) flowed to the top 1% of 
the population.  And that, in turn, is one of the chief  reasons why the 
median income for ordinary Americans actually dropped by $2,197  per year since 
2000.   
No surprise then that  disproportionate numbers of the “best and brightest”
 graduates of our finest  universities headed off to Wall Street.  After 
all, that’s where if you are very clever you can make tens of  millions of 
dollars before you are thirty – mostly producing nothing.  
By 2007 the top 50  hedge and private equity fund managers averaged $588 
million in annual  compensation each – more than 19,000 times as much as the 
average  U.S. worker.  And by the way, the hedge fund managers  paid a tax 
rate on their incomes of only 15% -- far lower than the rates paid by  their 
secretaries. 
This huge wealth  transfer from the “real” economy to the world of finance 
has also created a  vicious cycle of increased credit dependency.  If your 
family’s real income isn’t going  up, but costs are, you try to borrow to 
stay afloat.  That is one reason why private debt now  equals 350% of the 
Gross Domestic Product – the highest ever.  The more debt that consumers owe to 
the  shrinking number of big financial institutions, the greater the share 
of their  shrinking or stagnant incomes that is siphoned off to the finance 
sector – and  the cycle just gets worse.  And when  the disposable income of 
ordinary Americans shrinks, they don’t have the money  to buy the new 
products and services that will fuel long term economic growth in  the real 
economy. 
Something is very  wrong in this picture. 
In fact, as last year’s financial collapse make ever so clear, the  
increasing dominance of the financial sector – and its deregulation -- has  become 
a mortal danger to our economic security.  The financial sector – including 
the big  insurance companies – has morphed into a cancer growing on our 
economy – a  cancer that could easily strangle our prospects for our long-term 
economic  security.  
Later this week, Congress begins consideration of a package of measures  
that would serve as a first step in re-regulating and hopefully shrinking the  
American financial industry.  This  battle has not attracted as much 
attention as the critical fight over health  care, but it is just as important for 
the well-being of everyday  Americans. 
The “best and brightest” from Wall Street would like to make the issues  
involved in this debate look complex and technical – beyond the understanding 
of  ordinary mortals.  But there are a  couple of clear principles to 
remember as the debate unfolds: 
1). History has shown that  financial markets cannot accomplish their 
ostensible goal of allocating risk and  directing capital to their highest and 
best uses unless they function within the  context of very strict rules.  That 
is so because speculators have a natural tendency to create products  and 
systems that allow them to engage in reckless excesses that cause the entire  
system to lurch from bubble to bubble, collapse to collapse.  This is not a 
theoretical argument.  History proves the case beyond a  reasonable doubt. 
In 1792 the newly-minted United States suffered its first  credit crisis.  
Another credit  crisis followed about once every fifteen years until 1932.  
Then, the mother of all credit crises  caused the Great Depression that in 
turn spawned the Securities and Exchange  Commission (SEC) to regulate the 
stock market, the Federal Deposit Insurance  Corporation (FDIC) to guarantee 
deposits in banks, and the Glass-Steagall Act  that prevented banks from 
engaging in other forms of more risky financial  activity.  
For the next 50 years, those regulations--coupled with a wise use of  
Keynesian economic policies -- prevented another financial crisis.  That is one 
of the reasons why  America’s experienced an  unprecedented era of economic 
growth for every sector of the population – and a  massive reduction in the 
inequality of income distribution.  
But in the 1980’s the Reagan “revolution” worked its de-regulatory magic  
on the Savings and Loan industry.  It didn’t take long for many of these 
once-stable institutions to  collapse and cause the first credit crisis in a 
half-century.  That should have given the country fair  warning, but a few 
years later Wall Street convinced Congress to repeal the  Glass-Steagall Act, 
and it prevented the regulation of newly-exploding  “financial products” 
like “derivatives” that were basically bets on the movement  of underlying 
investments like stock and bonds. Wouldn’t want to “discourage  financial 
innovation,” they said. The growing predominance of private equity  financing 
also took more and more financial transactions from the light of  transparent 
regulated public markets into the de-regulated shadows.   
Then there was the securitization of debt.  Banks and other lenders bundled 
 mortgages and other loans into packages and then chopped the packages into 
units  that could be sold on secondary financial markets.  These new 
markets made a lot more money  available for loans, but there was no provision 
made for the inherent  dangers.  For years previous,  bankers made loans with 
the realization that they were on the hook if they went  bad.  The new 
secondary markets  allowed them to make the loans, and sell off the risk to a 
diffuse “market” that  left them free of any risk.   
All the while, the size of the financial sector was fed by the growing  use 
of credit cards that could legally siphon off huge streams of revenue from  
ordinary Americans into the hands of bankers.  And the elimination of usury 
laws  encouraged the development of the “payday loan” industry that 
allowed someone to  borrow $500 and pay $2,000 of interest on the loan over the 
next two years.   
The result of all of these trends has been massive consolidation of power  
by a few major financial institutions that have ranged far afield from 
banking  into highly speculative activities of all sorts.  Brokerage firms like 
Goldman Sachs and  banks like CitiBank have become indistinguishable.  
Massive portions of the credit market  now exist outside of the oversight of any 
regulator. 
Today, 45% of  the banking market in the U.S. is dominated by Bank of 
America  and CitiBank.   
Finally, of course, huge remuneration packages were paid to clever Ivy  
League graduates who could make billions in speculative profit, even if they 
did  so by taking Godzilla-sized risks.  Remuneration systems paid them on the 
basis of short-term gain and they  suffered no financial penalty for 
long-term pain.  So they were “off to the races.”     
2). Much of the financial sector does not  produce anything.  The principal 
 missions of the financial sector are to take on risk and allocate capital  
effectively. Some of the industry – especially community and regional banks 
– do  just that.  But in the last year the  financial sector as a whole didn
’t “take on risk,” it shifted risk to ordinary  Americans through gigantic 
taxpayer bailouts.  And often the Wall Streeters themselves  escaped the 
recent economic debacle, having salted away hundreds of billions of  dollars. 
Fundamentally the financial sector is made up of middlemen, who spend  
their time creating schemes that allow them to funnel society’s money through  
their bank accounts so they can take a sliver of every dollar off of the top. 
 
Right now, the private health insurance industry is busy trying to defend  
its turf against a public health insurance option.  It wants to maintain its 
“right” to take  that tribute off the top of as many health care dollars 
as possible.  Remember, the private health insurance  industry doesn’t 
deliver any actual health care.   
The same is true of most of the financial sector.  It is the farmers, 
manufacturing firms,  the health care providers, the transportation companies, 
the guys who sweep up  buildings, the cops and firefighters, the people who 
teach our kids – those are  the people who produce the goods and services that 
we consume in our  economy.   
Most “innovative financial products” like derivatives are nothing more  
than schemes that allow speculators to build up paper wealth that will fuel 
the  next credit bubble.  Creating  mechanisms to allow speculators to bet on 
the direction of stock prices or other  actual investments doesn’t do any 
more for the underlying economy than allowing  the same people to bet on horse 
races.  
Most Wall Street speculators don’t contribute any more to our common well  
being than professional gamblers – which is pretty much what they are. 
Gaming in  Las Vegas has  fine entertainment value, but providing a gigantic 
worldwide casino for the rich  is not an economically vital core function for 
the world’s financial  markets. 
I’m not arguing against using financial markets to allocate capital and  
risk.  Banks, stock markets and  other financial institutions can be – and 
have historically been – important and  efficient means of accomplishing these 
goals.  But not when the tail begins to wag the  dog.   Not when the 
financial  sector, which can be useful at serving the needs of the productive 
sectors of  the economy, comes to dominate the economy.   
After all, if so much wealth flows from the productive sectors of the  
economy into the fundamentally unproductive financial sector, ordinary people  
don’t have enough money to buy the products that drive economic growth in the 
 real economy.   
3). Left to their own devices,  financial speculators often kill off 
productive enterprises through leveraged buyouts and private  equity plays. A case 
in point was highlighted last week by the New York Times.  Simmons Bedding 
has been in business  producing high quality mattresses for almost 133 
years. Now it’s about to file  for bankruptcy protection – but not because it isn
’t a viable successful  business.   
Simmons has been milked dry by a succession of buyers and Wall Street  
investment banks that have made millions through leveraged buyouts that made  
good financial sense for Wall Street, but left the manufacturing firm deeper 
and  deeper in debt. The Times reports  that “the financiers borrowed more 
and more money to pay ever-higher prices for  the company, enabling each 
previous owner to cash out profitably.”  
Simmons now owes $1.3 billion compared with $164 million in 1991.  
According to the Times, “In many ways, what private  equity firms did at Simmons, 
and scores of other companies like it, mimicked the  sub-prime mortgage boom.  
Fueled by  easy money… these private investors were able to buy companies 
like Simmons with  borrowed money and put down relatively little of their own 
cash.  Then not long after, they often borrowed  even more money, using the 
company’s assets as collateral.” 
“The result: THL (the private equity firm) was guaranteed a profit  
regardless of how Simmons performed.  It did not matter that the company was left 
owing far more than it was  worth.” Too bad for Noble Rodgers, an employee of 
22 years, who along with 1,000  others have been laid off.   Too bad for 
the American manufacturing base. The investment bankers got  theirs.  
4). The bigger the financial  sector gets, the more power it has to hold 
the entire economy ransom for huge  bailouts when their speculative bubbles 
collapse.  Firms that are allowed to grow as large  as AIG, CitiBank and Bank 
of America create “systemic” risk that threatens the  world financial 
system.   
The bottom line is that if a  financial institution is too big to fail, it’
s just too big, period.   
The new regulatory  proposals now pending before Congress are critical 
first steps in reining in the  power of the financial sector.  The  proposed 
Consumer Financial Protection Agency is especially important.  It would end the 
anything-goes  “Dodge City”  mentality that allows consumers to have their 
pockets picked by financial  “products” like teaser-rate mortgages with 
prepayment penalties that guarantee  the consumer pays more than meets the 
eye. It will require tight regulation of  credit card interest rates and fees.  
But equally critical are tough new regulations of the entire financial  
sector – including the “derivatives” and “credit-default-swap” markets – and 
 private equity, as well as regulations to eliminate remuneration systems 
that  incentivize recklessness, and requirements that mortgage originators 
maintain a  stake in the loans they sell.  The  “resolution” authority 
proposed by the Obama Administration is also an important  step to assure that 
there is an orderly way to close even the largest of  financial institutions.   
Serious regulation will inevitably cut back on the flow of income from  
normal people to the financial sector as a whole.  But over time, our goal 
needs to be to  restore dominance of the economy to the productive sectors of 
economic endeavor,  and to break up the financial and insurance cartels that 
have a stranglehold on  our future.  
That will not happen without a monumental struggle.  The Obama 
Administration’s proposals for  financial re-regulation are the first offensive on this 
critical front in the  war for our long-term economic security.  
Robert Creamer is a long  time political organizer and strategist, and 
author of the recent book:  Stand Up Straight: How Progressives Can  Win, 
available on _Amazon.com._ 
(http://www.amazon.com/Listen-Your-Mother-Straight-Progressives/dp/0979585295/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1213241439&sr=8-1)

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