Wall Street Reform: A Good First Step

Members of Congress finished ironing out their differences on Wall Street reform last night, and the resulting bill deserves unequivocal support from progressives and conservatives alike. But while the final package is a necessary first step to overhauling the nation's out-of-control financial sector, it will do very little to change the destructive status quo on Wall Street. The bill is a good first step. The public deserves too see stronger reforms from Congress next year.

As a matter of history, sweeping financial change takes several years to secure. It took Franklin Delano Roosevelt seven years to enact all of his New Deal banking regulations, and President Barack Obama appropriately sees the 1930s crisis as the historical analog to today's meltdown-and-reform process. Obama is correct to state that the legislation approved by Congress late last night is the most significant since the Depression—but it is a hollow truth. The U.S. government has been steadily deregulating the banking industry ever since Roosevelt, and the mere act of moving policy in the opposite direction is enough to claim the mantle of dramatic reform. Actually living up to the precedent set by Roosevelt will take several years of serious work, and major legislative action during the next electoral cycle.

As for the current bill, Congressional leaders decided late last night to gut the only two serious structural reforms still on the table. With the political wind at their backs, and the finish line clearly in sight, lawmakers decimated an effort to end outright gambling by the nation's largest banks, and sabotaged a plan to rein in rampant speculation in derivatives—the out-of-control market that brought down AIG and necessitated the bailouts of every major U.S. bank. By adopting the plan from Sen. Blanch Lincoln, D-Ark., to fix derivatives and implement a strong version of the Volcker Rule banning proprietary trading, Congress could have made significant strides toward ending the too-big-to-fail financial oligopoly that held taxpayers hostage in 2008. Instead, Congress chose to reinforce the current destructive banking regime.

But while the resulting legislation will not end too-big-to-fail, prevent future bailouts, or significantly rein in risk-taking on Wall Street, it is nevertheless worth supporting. Three important measures made it through that will make the global economy a fairer and more just marketplace. Those three reforms will not be enough to prevent future financial crises, nor will they be able to ameliorate the fallout from those crises once they occur, but they are nevertheless critical.

First, we will get a thorough audit of the Federal Reserve, an agency which has funneled $4 trillion in bailout funding to the nation's financial system without any oversight or transparency. The public will finally know how it's money is being spent, and credit is due to Rep. Alan Grayson, D-Fla., Rep. Ron Paul, R-Texas, and Sen. Bernie Sanders, I-Vt., who fought hard for the plan in the face of overwhelming Wall Street lobbying. Kudos are also due to activist journalists Mike Elk and Jane Hamsher, who cobbled together a coalition of good government supporters across the political spectrum and made the Fed audit a centerpiece of the legislative debate. The Fed's blunders on the bailout of AIG have created significant momentum for real reforms, and further information about the secretive agency's operations will help build momentum for next year's financial fights.

The legislation also includes a critical overhaul of the nation's consumer protection regime wherever banks are concerned. For the first time, the public will have a regulator dedicated to defending consumers against bank abuses, with no other conflicts. The new Consumer Financial Protection Bureau has been pilloried with unnecessary loopholes, but the resulting agency will nevertheless be able to write and enforce meaningful regulations on the financial sector. This is a major accomplishment, made all the more significant by the fact that the front-runner to head the new agency has already established herself as one of the most important voices on U.S. economic policy.

As Chair of the oversight panel for the Troubled Asset Relief Program, Elizabeth Warren has taken a position with extremely limited statutory power and converted it into the only mouthpiece for the American middle class in Washington, D.C. She has done a far better job than even the most optimistic good government activists had hoped for, and giving her free reign to crack down on consumer abuses will be a major victory for the American economy. She has not been formally nominated for the post yet, but the world will be a better place once she is.

Finally, while Lincoln's derivative overhaul was largely destroyed, she did manage to preserve tough new rules regulating both food and gas derivatives. The resulting legislation will not keep Wall Street from gambling with our future, but it will make it much more difficult for financiers to jack up the prices of basic necessities in their quest for bigger bonuses. Back in the spring and summer of 2008, prices for food went through the roof as a result of heavy speculation in market for agricultural derivatives—raw bets placed on the future price of corn, rice and other farm products. The resulting price increases forced consumers the world over to pay too much for food, and sparked outright starvation in regions that could not afford the increases.

The same thing happened with gasoline. Remember paying over $4.00 a gallon? That had nothing to do with the fundamentals of supply and demand—it was a direct result of wild speculation in the market for energy derivatives. The bill approved last night will end that abuse. As a result of Lincoln's efforts, two excesses that created real, tangible hardship for millions of people will be eliminated.

This bill is unquestionably deserving of support. It will make the global economy a fairer marketplace. But it will not end the too-big-to-fail incentives that encourage Wall Street to take wild risks and stick taxpayers with the tab, nor will it sufficiently overhaul the market that brought down AIG, nor will it end the widespread practice of bigwig bankers gambling with taxpayer money. All of those reforms could have been enacted—explicit, concrete amendments were offered on all three, and Congressional leaders rejected them in an overt effort to rake in campaign contributions from Wall Street. Republicans resort to such political calculations all the time—catering to entrenched corporate interests has been their only economic strategy since the Reagan years. But it is enormously disappointing to see significant swaths of the Democratic Party adopt the same strategy (particularly the New Democrats, who should rename themselves the Wall Street Democrats after this episode) and even more frightening to see the Democratic leadership incapable of corralling these turncoats.

So support the Wall Street reform bill: it's a good first step toward building an economy that works for all citizens, not just bankers. But demand that your elected leaders finish the job next year. Too-big-to-fail lives on, and must be defeated.