As the articles in this special report have demonstrated, America missed an epic opportunity for fundamental reform last year when the new Obama administration continued the Bush policies of propping up failing banks without demanding profound changes in return. Now that the banks are back to profitability, thanks to more than a trillion dollars of government aid and trillions more in Federal Reserve purchases and guarantees, they are healthy enough not just to pay their executives outsized bonuses but to use their resurgent political power to resist reform.
In early April, Jamie Dimon, the CEO of JPMorgan Chase, sent his shareholders a letter accusing politicians of "demonizing" big banks. Is that chutzpah or what? The banks did a perfectly fine job of demonizing themselves. Dimon added that he supported the administration's basic approach to financial reform -- a revealing indictment of its inadequacy. If only more politicians were building the systematic case for a basic structural change in the way banks do business. There's no way to accomplish that without tough criticism of the status quo.
Real reform is not about punishing banks, as Dimon contended. It is about insisting that the financial system do its job of serving the rest of the economy rather than exposing it to speculative ruin. The current legislative proposals largely fail that test. But deeper reform is possible if the administration and the Democrats will only seize it.
Since the democrats' near-death experience when Scott Brown was elected to the Senate Jan. 19, we've seen a newly assertive Barack Obama. He rose to the occasion and used presidential leadership to win enactment of a health reform that many assumed was a lost cause. Indeed, thanks to Obama's personal involvement, the final bill not only survived but was better in many respects than either the House or the Senate bill, and Obama threw in reform of the privately corrupted student loan for good measure.
If Obama is willing to demonstrate the same resolve, financial reform should be easier politics than health reform. As Dimon recognizes, large banks are not exactly popular. The problem is less Republican obstructionism than a failure of Democrats to promote tough reforms and dare Republicans to oppose them. In the case of the health bill, a combination of bad decisions by Democrats and misrepresentations by Republicans left a lot of voters skeptical. Would the health bill subject Grandma to death panels? (No.) Would it tax premiums of good insurance? (Yes.) Would it divert Medicare funds? (Yes.) This skepticism, in turn, made the vote a difficult one for many Democrats.
By contrast, Democrats should find it easy to vote for a measure to constrain the rapacity of Wall Street -- that is, if they are looking for the support of voters as opposed to lobbyists and campaign donors. Looking back at the policy proposals in this package of articles, you have to wonder: Which voters are going to be opposed to new consumer protections? Or to a tax on pure speculation? Or to policies that keep credit-rating agencies honest? Only the tiny minority of voters who represent the financial industry.
And if Democrats, beginning with the president, can muster the nerve to offer tougher reforms, how do Republicans justify their obstruction this time? During the period when Senate Banking Committee Chair Chris Dodd was trying to find common ground with either the committee's ranking Republican Richard Shelby or the quasi-populist Republican Sen. Bob Corker of Tennessee, you could see the rising Republican unease at the prospect of opposing a measure to contain Wall Street.
Some of the reforms are extremely arcane and difficult for ordinary voters to fathom. The industry and its allies in Congress are hoping that general bewilderment about derivatives or securitization will leave banking reform as an insiders' game in which the banks win. On the other hand, with some leadership, the basic abuses are not so hard to fathom. Lloyd Blankfein, CEO of Goldman Sachs, sought to defend his company's practice of selling investors securitized bundles of high-risk mortgages at the same time that Goldman was using credit-default swaps to place bets that the securities would collapse. Phil Angelides, the chair of the new Financial Crisis Inquiry Commission, memorably compared the practice to "selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars." We need more of this brand of "demonization" from our leaders.
Also, the most basic financial malady afflicting ordinary Americans -- the decline in housing values and the increase in mortgage defaults and foreclosures -- is not esoteric at all; it's pure kitchen-table economics. So far, the administration's approach of purely private and voluntary loan modifications and refinancings (lubricated with taxpayer subsidies) has been far too feeble. Foreclosures are still increasing faster than rescues. Here too, the administration's solicitude for bank balance sheets has taken priority over concern for the precarious economic condition of households facing financial ruin.
Mandatory reductions in principal and interest, coupled with a direct federal loan program, would be more effective medicine as well as better politics. If a true public option is good enough for a corrupted student-loan program, it should be good enough for a mortgage-relief program.
In the days after the Scott Brown wake-up call, President Obama started distancing himself from the big banks. In the space of four days, he called for a new tax on bank profits; he reversed the advice of his economic team and endorsed Paul Volcker's call for a new Glass-Steagall Act to control banking speculation; and he announced his strong personal support for an independent Consumer Financial Protection Agency. But it remains to be seen if Obama will put his personal influence and prestige on the line to support these proposals the way he did with health reform.
At this writing, Sen. Dodd has tucked away the consumer agency safely inside the Federal Reserve, and he is far from enthusiastic about a new Glass-Steagall Act. Despite the heroic efforts of Gary Gensler, chair of the Commodity Futures Trading Commission, tough derivatives regulation will not happen absent strong presidential leadership, either.
However, the recent fraud case against Goldman Sachs could mark a turning point in the public's understanding of the depth of Wall Street's corruption and the president's leadership to achieve deeper reform. Health care was defined by both parties as the make-or-break issue for Obama's presidency. It's time to accord that honor to fixing Wall Street.