United States: Financial reform misses mark

The US Senate passed the much-ballyhooed financial reform bill this week to applause from an increasingly thin crowd of Obama administration supporters.

Most focused on the “something is better than nothing” features of the bill. But this could barely disguise the fact that the new regulations will do little to curb the activities of the mega-financial institutions at the centre of the economic crisis that ensued in 2008.

British Marxist academic David Harvey reminds us capitalism doesn’t solve problems, it moves them around. In this case, banks will have to do a little shuffling and manipulate the workings of a few more sections of the Federal government to continue the same practices the bill claims to curb.

The administration managed to cobble together a voting majority in the US Senate that included loyalists and a handful of Republicans who traded votes for the ability to make serious incursions into the bill.

The ideological odd couple of independent and self-described democratic socialist Bernie Sanders and the recently elected Republican Scott Brown were both yes votes. The majority of Republicans voted no, while publicly employing their now trademark paranoia about “bureaucracies”, the Federal Reserve and creeping socialism.

The lone dissenting Democrat, Russ Feingold, savaged the 2300-page bill, stating that the Senate had, “once again, caved to Wall Street on key issues”.

Financial companies employed the same playbook as their counterparts in the private healthcare industry. Instead of fighting to block legislation, they employed lobbying muscle to shape its outcome.

One critical area of struggle revolved around the so-called “Volcker rule”. Named after former Federal Reserve head Paul Volcker, this rule would have banned banks from running private-equity and hedge funds in order, in theory, to reduce risk-taking.

After some intense lobbying, banks managed to retain the right to invest 3% of their capital in private equity and hedge funds. They also delayed the full implementation of regulation for five years.

Bloomberg News reported that the lobbyist dilution led Volcker to describe the legislation as “disappointing”.

Another good way to judge the strength of the US bill is to examine it in relation to the global negotiations underway in Basel, Switzerland. Here, at the beginning of the year, regulators seemed to be gaining ground in their attempts to force banks to shed risky investments.

Yet, as the weak terms of the US bill became clear, banking lobbyists went on the offensive in Europe, claiming that any serious regulation might tip the fragile economic recovery toward the now infamous “double-dip” recession.

Piece by piece of the far stronger Basel proposals have been whittled away.

With the November meeting of the G20 in Korea in sight, the Wall Street Journal said participants in the Basel negotiations have adopted a “if in doubt, take it out” approach.

US officials have led this charge by pushing to allow banks to count risky mortgage securitization rights as capital when considering amounts that can be invested in hedge funds and other investments.

US Treasury Secretary Timothy Geithner’s claim that “I am very confident that with the strong hand this [the US] legislation gives us, we’re going to be able to bring the world with us in putting in place much stronger capital standards across the financial system”, should therefore be seen as more of threat to the economic stability of the planet than some call to regulatory action.

What the approval of the regulatory bill in the US most clearly represents is the passing of a moment when a global financial system, trembling under the weight of its own toxic investments, might have been brought under democratic control.

Public officials, informed by a desire to protect the public, could have acted on a democratic socialist impulse by taking the steps necessary to democratise the financial sector through public ownership.

Doing so would have created the basis for an economy that values human needs over shareholder profits.

Instead, the Obama administration and its Congressional counterparts, once again, displayed hedge-fund Democrat credentials by defending the right of rogue financial institutions to exist.

As Obama’s re-election push edges closer, it would seem to be difficult to dress this latest betrayal of the public interest up as a victory.

[Billy Wharton is the co-chair of the Socialist Party USA. He can be reached at whartonbilly@gmail.com.]

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