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Why We Can't Wait To Move On Bank Reform

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Created 05/14/2009 - 10:15am

If we didn't live in the world we actually live in, Ryan's approach [1]--fix the immediate problem, then set things right for the future--would make sense. But, we do live in this world.

In this world, the folks with money--the bankers in this case--call the shots. At the moment, they are on the defensive because they have to come to Congress begging for money in the full light of day. (Actually, even now more of the bailout money is going to them through the back channels of the Fed and the FDIC and the bottomless trough of AIG, than through direct appropriations from Congress.) It is precisely because the banks have an immediate problem that there is some hope of reining them in, of imposing regulations on them and preventing them from ripping us off in the future. If we don't seize this moment, then be prepared to turn over your first born and everything else to the financial industry.

Typically, bank and financial regulatory policy draw about as much attention as a public reading of the phone book. The only people who show up for writing the legislation and overseeing the oversight are the people paid by the financial industry. In this environment, the banks have gotten and will get everything they want. [2]

Should We Bail Out This Bailout?

In the days leading up to the America's Future NOW! [3] conference starting June 1, we're hosting an online dialogue featuring conference speakers on the key issues they will be addressing during the conference. Join the conversation by clicking the "Discuss" link below or contribute your own post [4].

Register today [3] for the America's Future NOW! conference in Washington.

We have a rare moment where we have millions of people with pitchforks who are absolutely furious because Congress wants to use their tax dollars to protect the banks from the mistakes they made. This is American capitalism standing naked. The rich are not smart and talented and incredibly productive. They are pathetic failures who just happen to have the political power necessary to line their pockets. Everyone can see that right now, except the people who are paid not to.

We can impose simple demands. The public has an interest in keeping the financial system operating, but zero interest in rewarding the seven and eight-figure buffoons who wrecked AIG, Citigroup and Bank of America. This means that if we give them the money to stay afloat, then we own them.

That is real simple. The shareholders get wiped out and the bondholders likely get wiped out too. That's the way capitalism is supposed to work.

We also tell the boys and girls running the show that they are going to get more normal salaries. If they can't live on $500k a year, then they should look for another line of work.

All of this is very simple and understandable, which is where the discussion should be kept. The details are complex, but so are the details of school fire safety. The public does not need to know the details. The only thing that the public needs to know is that we can keep the financial system running without handing taxpayer dollars to the people who wrecked the economy. If we don't go this route, it is only because the people setting the policy work for the banks. It's that simple.

There is a long list of regulatory reforms that we should be demanding but the most important are the simplest. First, a financial products safety commission along the lines recommended by Elizabeth Warren, the head of the TARP Congressional Oversight Panel. The supposed downside of this one--it will slow financial innovation--is a risk we should be willing to live with.

The second key demand is to take the Fed away from the banks. There is no more reason for the banks to have special input in the setting of monetary and regulatory policy than the United Auto Workers. They can petition their representatives in Congress to have their interests protected. They should not be given majority control of the Fed.

And, we should have the words "watch for bubbles" tattooed across the forehead of the Fed chairman. It is ungodly stupid to either fail to see an asset bubble of the size of the $8 trillion housing bubble or to see it and just sit back and let it grow. If the Fed chair has "watch for bubbles" tattooed on his or her forehead maybe they will understand that containing bubbles is one of the Fed's responsibilities.

, to help cover the cost of this disaster and to put financial speculation on an even footing with other forms of gambling, how about a modest financial transactions tax? If we imposed a 0.25 percent tax on the purchase or sale of share of stock, as is done in the United Kingdom, and put scaled taxes on trade of options, futures, credit default swaps and other financial instruments, we can easily raise over $100 billion a year.

Because the development of computers has sharply reduced the price of trading over the last three decades, a tax of this magnitude would only raise transactions costs back to where they were in the 1980s, a period when we already had a highly developed capital market. It is hard to see the downside to this tax other than the political opposition of the financial industry. Does anyone have a better way to raise $1 trillion over the next decade?

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Dr. Dean Baker is a macroeconomist and Co-Director of the Center for Economic and Policy Research in Washington, D.C. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. (more...)
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