Obama's Speech as a Thermometer for Our Sick Democracy

Sep 7, 2011Robert Johnson

Can our society reward politicians for doing the right thing to stop a crisis?

Can our society reward politicians for doing the right thing to stop a crisis?

President Obama's speech on Thursday comes at a very difficult time. He pivoted toward deficit reduction in 2010 and alienated his base with validating "fist bumps" for Eric Cantor and golf outings with John Boehner while the latter pair were doing their debt ceiling game of chicken. Now he is either 1) expected to restore his base's enthusiasm with a vigorous vision of economic recovery or 2) pander to the Chamber of Commerce with supply side gimmicks that will have little impact on employment but create mini windfalls for donors. Romantics and cynics are equally inclined to project onto the event.

As observers, I sense we would be better to watch this speech and ask the question, "What can we infer about the structural deformations of our democracy when a smart man like Obama is saying [whatever he says] when heading toward an election campaign?"

We are in effect taking the temperature on the sickness of our democracy. We have two currencies of power in America: votes and dollars. The episode of TARP, a month before the 2008 presidential election, gave us evidence that dollars are the more powerful currency even at election time. We will learn where Obama thinks the balance lies from this speech.

When demand is stagnant and 16 percent of the population does not have full-time work, we are in an obvious and profound crisis. The vigor with which both parties embrace deficit reduction contrasts violently with the helpless timidity with which they address the challenge of jobs.

The fact is, we do not have a society that is stable and functional when our politics is insensitive to a crisis of this magnitude. As Jared Bernstein said last week on his blog:

...Have we, as a nation, lost the ability to self-correct?

Any system, whether it's biological, political, or economic, must be able to diagnose and fix its problems if it is to survive. I don't mean to be gloomy or dramatic, but I'm wondering if our political/economic system is up to that task.

Are we up to the challenge as a society? The question is not whether Obama is up to the task but whether our society, as it is structured in a post-Citizens United world, is capable of responding to the needs of large segments of our population. Can Obama pursue healthy policies and believe he can be re-elected for doing so? If not, we have real work to do in reforming our politics. I suspect that it is the case or we would already see the White House and Congress on a constructive path toward demanding stimulus and employment relief.

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So what do I want to hear from Obama?

1. Corporate profits are at their highest level since the Korean War. Corporations need no more incentives to hire. Just more confidence in demand growth.

2. All this long-term deficit reduction we are planning to do is to buy space for a profound short-term stimulus over the next three years or so, until the unemployment rate is below six percent.

3. Stimulus should be focused on projects that will have lasting productivity benefits for the nation for years to come. Education investment, science spending, and infrastructure modernization all help.

4. We have to look seriously at how we subsidize foreign direct investment and change the tax code to support domestic investment. Subsidies for outsourcing and offshoring have to be terminated.

5. Single payer health insurance and negotiated drug prices are not only the essence of good budget policy in the long term, they are good policies for jobs and competitiveness because no other society has such ridiculously high prices, and employer-based health costs deter hiring.

6. Public financing of elections, and requiring our networks to donate public service time for elections, would be the best way to reduce pork and realign our incentives and would be great for budget policy and social balance in the long term.

If several of those six themes are addressed, I will be encouraged. If I see Obama make a stand and work diligently to make them into policy and openly take issue with officials in either party for opposing them, I will be inspired. It has been a long time since I have been inspired by the actions of the President of the United States.

Rob Johnson is a Senior Fellow and the Director of the Project on Global Finance at the Roosevelt Institute.

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A Symptom of Desperation? Querying QE3

Aug 18, 2011Robert Johnson

Why quantitative easing is more symptom than cure.

Why quantitative easing is more symptom than cure.

When an economy is in a slump and the fear of debt overhang and default surrounds us, there is a tendency to tighten our belts. But these actions only serve to deepen the slump. Economists suggest that to offset private caution, we should resort to public sector stimulus. Hopefully, such stimulus is directed toward building things that boost our future productivity, like science and research, infrastructure repairs and upgrades, and education. In the short term, the economic activity created by these investments allows people to work out from under debt overhangs and leads to more private sector jobs. Investing in these things will also make it easier in the future to pay off the debt incurred in the slump.

When coherent and rational approaches have left the building, as they have in the current U.S. ideological conflict over the role of government, what else can still be done?

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Expansionary monetary policy, aka "quantitative easing," is one thing, but its effectiveness is questionable. Advocates of QE believe creating the expectation of rising inflation is helpful. But in a slump, it is not clear how the Fed is connected to the inflation. The old adage "you cannot push on a string" is perhaps apt since monetary stimulus leads to a pile up of excess reserves at the banks rather than fresh lending.

Those who look at the impact of QE cite a narrowing of the spread between short-term and long-term interest rates. Others point to a compression of the spread between corporate bond rates and government bond rates that can, at the margin, get corporate investment moving --but right now the corporate sector appears to have a lot of cash in the vaults, so this channel may not produce much.

QE can also impact perceptions of the dollar's foreign exchange value. An announced QE program may lead to a decline in the dollar vis a vis foreign currencies and thereby stimulate activity in the export- and import-competing sectors.

So overall, QE is not likely to hurt much. It is mainly a symptom of desperation and reflects the dysfunction in Congress and the White House that has stopped us from using much more effective tools to spur the economy forward.

Rob Johnson is a Senior Fellow and the Director of the Project on Global Finance at the Roosevelt Institute.

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Thoughts on Dodd-Frank Birthday: Everything is Broken

Jul 21, 2011Robert Johnson

The weakness of Dodd-Frank illustrates a crisis in governance that is sapping the vitality of the country.

The weakness of Dodd-Frank illustrates a crisis in governance that is sapping the vitality of the country.

Legislation is incremental. It is a reflection of compromise. Yet rarely in the history of the United States post WWII has legislation been so revealing. Revealing because, in relation to the velocity of circumstances that revealed the inadequacy of our regulatory framework, and in relation to the damage that was done to lives and living standards across America and around the world, this legislation did very little to rebalance the relationship between finance and larger society.

In essence, it was revealed that in this era of money politics people are basically defenseless against the concentrated power (even more concentrated after 2008!!) of the financial sector. As Senator Durbin exclaimed in a 2009 radio program, "[Banks] frankly own the place". The clarity of that thought was revealed by the contrast between the magnitude of the crisis and the harm that it has done, and the lack of meaningful reform in Dodd Frank. Real balanced legislation would have gone much further to curtail embedded leverage and complexity of instruments. Real legislation would have contained a mortgage modification dimension like the Home Owners Loan Corporation. We do not have those things because they would have threatened reported profits, bonus pools and campaign contributions. This is not just a problem of government, as distinct from the private sector, it is a problem of the governance of the concentrated powerful interests who spent years shaping legislation and regulatory enforcement to unshackle themselves until they imparted great harm to the rest of society and handed it a bill for the cleanup.

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This is not a problem of governance that is confined to the financial services industry. It was also in evidence in the healthcare legislation where insurance and pharmaceutical interests had their way. It is true in the realm of national security where analysts lament that our force structure is still oriented toward a threat paradigm from the cold war and that we cannot respond because of the providers of pork. This is not a problem of the Democratic party. No, the Republican party was feeding at the same fundraising trough throughout the Dodd-Frank deliberations. This is a problem of governance that is harming a broad range of what has been the quality of life and vitality of the United States of America. If Dodd Frank's weakness makes that one point clear by unmasking this ugly process, then it has the potential to be of value. On the other hand, its weak result, which diminished trust in government, may serve to feed the anti-government sentiments. In that case, it could mark a foundational episode in the deterioration of America.

Rob Johnson is a Senior Fellow and the Director of the Project on Global Finance at the Roosevelt Institute.

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From New Deal to Raw Deal: The Real Economics of Cutting Social Security

Jul 7, 2011Tom FergusonRobert Johnson

social-security-200Contrary to the mainstream media and D.C. drumbeat, Social Security has little to do with the federal deficit. So why is there talk of cutting it?

social-security-200Contrary to the mainstream media and D.C. drumbeat, Social Security has little to do with the federal deficit. So why is there talk of cutting it?

This morning the Washington Post reported that the White House is offering to cut Social Security as part of a broader budget deal with the Republicans. At last we have the answer to the question everyone has been asking about the Democrats: How far can they go?

The financial collapse of 2008 has taught us to be skeptical of economic forecasts that simply spin trends out into an indefinite future. Most central bankers, economists, and business leaders failed not only to foresee, but even to imagine, the colossal dimensions of that catastrophe.

Now, however, the very people who said that there was no way for regulators to recognize financial bubbles in advance predict budget gloom and doom. Scary charts of the time path of U.S. debt to GDP ratios -- many originating from the Peterson Foundation -- fill the media, along with specious arguments about how budgets affect national income.

The strangest of these debates involve Social Security. The "arguments" here sort mostly into two groups: One rails on about how "runaway entitlements" are leading to a deficit explosion. The other advises that Social Security can be "saved" in the long run by timely changes, typically involving a mix of taxes and benefit cuts, including, notably, yet another rise in the age of eligibility for the program.

Neither point of view makes much sense. The simple fact is that the deficit did not swell tidally until the financial crisis hit. While George W. Bush's tax cuts destroyed the Clinton budget surpluses, enough tax revenues trickled in to keep the deficit from blowing out until the economic equivalent of Hurricane Katrina hit in the fall of 2008. It was the one-two punch of the bank bailouts and the Great Recession that led to today's giant gap between general revenues and expenditures.

But even now there is no near term threat to Social Security's solvency. In 1983, Congress enacted into law recommendations of the Greenspan Commission to raise Social Security taxes to cover the retirement bulge coming from baby boomers. Since then, the program has piled up enormous surpluses. These have been invested in government bonds, thus helping to finance the rest of the government.

The 2011 Report of the Trustees of the Social Security Trust Fund projects that the Trust Fund and interest earnings from it will suffice to cover all benefit payments until 2036. Even then, the Fund would not be empty -- the Report projects that tax revenues will still cover approximately 75% of promised benefits until 2085. Talk of the bankruptcy of Social Security is hot air.

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2036 is a long way off. The argument in 2011 is about whether there is any reason to do anything at all right now. The case pressed by self-proclaimed "rescuers" of Social Security such as Peter Orszag, the former head of the Obama administration's Office of Management and Budget who has since accepted a position at Citigroup, is unpersuasive.

The first yellow flag is Orszag's frank acknowledgment that Social Security features barely at all in any putative budget short fall: "Social Security is not the key fiscal problem facing the nation. Payments to its beneficiaries amount to 5 percent of the economy now; by 2050, they're projected to rise to about 6 percent."  A rise of 1% in four decades! Former Senator Alan K. Simpson, co-chair of the President's deficit commission, claimed that his group's deficit report "harpooned all the whales in the ocean, and some of the minnows." Lost in the blaze of publicity about the Commission is the crucial fact that Social Security is plainly one of the minnows.

But the whole discussion is even fishier. If any shortfall ever materializes, it could easily be made up by transfers from general tax revenues, though that would breach the long maintained fiction that Social Security is a contributory system on the model of most private insurance. (It is actually a pay as you go system, where current taxes pay benefits to current beneficiaries, with the final guarantee of the whole system's soundness being, in the last analysis, the success of the economy as a whole.) But if fears about 2036 are unbearable, plenty of ways exist that would fix the program without threatening anyone's life support system.

Between 2002 and 2007, for example, the richest 1% of Americans garnered 62% of all income gains, while the bottom 90% of the population saw their incomes grow by 4%. At the same time, thanks to the Bush tax cuts, the rich were also paying proportionately fewer taxes. Considering that ordinary Americans fronted most of the money for the bank bailouts and have endured most of the recession's "collateral damage," it seems only simple justice that if the program needs fixing, the best way to do it would be to raise the ceilings on earnings subject to the Social Security tax, which is currently only $106,800. That would put the burden on people who cannot plausibly claim to be suffering.

But if, for example, productivity runs even slightly higher than in the forecasts, there may be no shortfall of any kind. Considering that the projected shortfall is still a quarter century away, there is no good reason to tinker with a program that, as the Washington Post editorialized in 2005, provides the majority of income "for nearly two-thirds of the elderly...[and] the only source of income for one-fifth of all elderly people, for 25 percent of non-married elderly women, and for 38 percent of elderly African Americans and Hispanics."

But Orszag and others who agree that the program makes at most a minor dent in the budget, nevertheless argue for "fixing" it now. Their reason is remarkable: As Orszag frankly confesses, "even though Social Security is not a major contributor to our long-term deficits, reforming it could help the federal government establish much-needed credibility on solving out-year fiscal problems." Cut benefits, in other words, simply to prove to financial markets that the government can do it. As Paul Krugman observes, this position is tantamount to claiming that we should cut Social Security now, because we might have to do it in the future. Polls show strong public opposition to cuts in Social Security. Considering the havoc that the financial crisis wreaked on the home values and pensions of ordinary Americans, proposals that Democrats should roll over and join Republicans and the Peterson Foundation in cutting Social Security is outlandish. As profits for the banks the American people rescued soar, it marks a new low in the Democratic Party's long retreat from the New Deal's glittering promise that ordinary Americans, too, deserved to share in prosperity.

This essay is adapted from Thomas Ferguson and Robert Johnson's "A World Upside Down: Deficit Fantasies in the Great Recession," just appearing in the new issue of the International Journal of Political Economy (Vol. 40, No. 1, pp. 3-47). That essay is a revised and expanded version of their Working Paper for the Roosevelt Institute.

Thomas Ferguson is Professor of Political Science at the University of Massachusetts, Boston and Senior Fellow at the Roosevelt Institute.

Rob Johnson is a Senior Fellow and the Director of the Project on Global Finance at the Roosevelt Institute.

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Who is Influencing Obama's Budget Proposal? Follow the Funders.

Feb 14, 2011Robert Johnson

How the brave new world of money in politics is compromising America's future.

How the brave new world of money in politics is compromising America's future.

President Obama is a smart man. When Gallup surveys suggest that unemployment is around 10 percent -- and that unemployment plus underemployment is 19 percent of the workforce -- then it's clear that the best way to raise revenues and close the deficit is to put people back to work. President Obama surely knows this. But his actions don't seem to follow this obvious logic. Why is that?

Part of the reason lies in a group of people who pour money into our political system but don't necessarily want the same things that ordinary Americans want. In fact, some of these people benefit from municipal crises, breaking teachers unions, and increasing the fear of the workforce. They fall disproportionately into the group that Harvard professor Lawrence Lessig identified as "the funders" in his recent TedX Talk in San Antonio, Texas. The increasing power of this group produces political contortions by buying results in Congress that do nothing for regular folks. Their influence also steers President Obama to focus on his reelection rather than trying to change the climate of opinion and become America's Great Persuader.  The public has now heard the conservative mantra that government is the problem and not the solution for 40 years. Couple that with the experience of valid rage following the bank bailouts, and it's not surprising that the public overwhelmingly feels that the government has become an instrument of the wealthy and powerful. Strong leadership is needed to challenge this narrative. But the President seems content to conform to the prevailing suspicion of government. He fails to convince the public that the government can have an active response to the jobs crisis -- a response that benefits them, not monied interests.

And that suits many funders in the top 3 percent of the wealth distribution just fine.

With profits so high and so many slack resources, it is sad that President Obama continues on the path of "triangulation" and chooses to "pre-concede" so much to the Republicans. In electoral terms, the breaking of all of the unions at the state and local level will serve to benefit the Republican party in many regions and exacerbate inequality. It is surprising the the President does not resist this for the benefit of his own party's future. But Presidents often fly solo rather than represent their party when reelection looms -- especially in a post-Citizens United world that will be influenced by unprecedented rivers of money.

Looking forward, we can see that our infrastructure is worn out in many, many places. We can also see that a dearth of public goods, education, basic science and infrastructure portend a weakening of the living standard of our nation. President Obama seemed to acknowledge this in his State of the Union address vision. But his budget strategy does not. The current budgets, both Democrat and Republican, appear to be imposing cuts on the lower middle class and poor. We are, as Paul Krugman said in the New York Times on Monday, eating our future.

Unfortunately, the proposed budget appears more likely to contribute to the ongoing widening of wealth and income inequality. And it seems more likely to increase, rather than reduce, the idle resources in our society. This budget logic makes little sense, and the human costs are dreadful. Only the logic of power sheds light on our path of dysfunction in the USA. Andrew Mellon must be smiling.

Rob Johnson is a Senior Fellow and the Director of the Project on Global Finance at the Roosevelt Institute.

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Rob Johnson on Deficit Commission Recs: We Gotta Get Out of This Place

Nov 12, 2010Robert Johnson

The report is as fair a shake for everyday Americans as a rigged football game is for defense.

The Deficit Commission co-chairmen's report came out on Wednesday. The number of pundits and editorial boards who are trying to declare their first proposal as courageous or bold or balanced is testament to how silly the ritual has become. Many commentators are reveling in the fact that both the Left and Right are screaming.

The report is as fair a shake for everyday Americans as a rigged football game is for defense.

The Deficit Commission co-chairmen's report came out on Wednesday. The number of pundits and editorial boards who are trying to declare their first proposal as courageous or bold or balanced is testament to how silly the ritual has become. Many commentators are reveling in the fact that both the Left and Right are screaming.

What seems sad to me is how disappointing the analysis is. The scale of defense spending in the USA, as Chalmers Johnson has repeatedly pointed out, is beyond what any other citizen base in the world shoulders as a percent of GDP and adds up to approximately the defense spending of the rest of the world combined. So a little nip and tuck here is considered significant. Why do these commissions never ask what it is that all of this defense spending does for America?

The suggested Social Security cutbacks are similarly amazing. We are fretting over some problems that occur beyond 2037!!! This collection of wise men are ones that could not see the financial crisis right before their eyes in 2007, but somehow they are clairvoyant about the train wreck of 2037. Some, including leading progressive thinkers, have suggested that this will be good for market credibility. Since when do we need to appease markets that are charging 2.5 percent for 10 year debt?

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Raising the age of social security payouts seems fine until, as Paul Krugman points out, you see that life expectancy has only improved for those in the upper reaches of the income distribution.

Overall, this is predictable.

David Sirota may have said it best: "If you can admit the two real parties in Washington are not the Republicans and Democrats but the Money Party and the People Party, then you can admit that this commission is not a bipartisan commission -- it's purely partisan for the Money Party." These are money party recommendations from a Commission appointed by two money parties that survive on money to conjure votes through media expenditure in a money politics distorted framework. Commissioners are being treated as if heroic. Yet they take little real risk. Nothing surprising here. Shared sacrifice is the buzz phrase. Sorry, but in the money-takes-all American political system, this sacrifice is fair like giving the opposing team the ball on the 3 yard line and saying we have a fair game when they are nine feet from the end zone and 47 yards from mid field at the start. Sirota's People's Party is on defense.

As Eric Burdon and the Animals once sang:

We gotta get out of this place

If it's the last thing we ever do

We gotta get out of this place

Girl, there's a better life

For me and you

Rob Johnson is a Senior Fellow and the Director of the Project on Global Finance at the Roosevelt Institute.

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Johnson to Treasury: Resist Slick Banker Talk in Implementing the Volcker Rule

Nov 5, 2010Robert Johnson

In a letter to the Financial Stability Oversight Council, Roosevelt Institute Senior Fellow Rob Johnson explains how banks will try to evade regulation.

Financial Stability Oversight Council

Department of the Treasury

1500 Pennsylvania Avenue, NW

Washington, DC 20512

c/o The Honorable Timothy Geithner, Chairman

Re: Docket Number FSOC-2010-0002, Financial Stability Oversight Council study on Section 619

Dear Chairman Geithner and Council Members:

In a letter to the Financial Stability Oversight Council, Roosevelt Institute Senior Fellow Rob Johnson explains how banks will try to evade regulation.

Financial Stability Oversight Council

Department of the Treasury

1500 Pennsylvania Avenue, NW

Washington, DC 20512

c/o The Honorable Timothy Geithner, Chairman

Re: Docket Number FSOC-2010-0002, Financial Stability Oversight Council study on Section 619

Dear Chairman Geithner and Council Members:

I write in response to the request for public comment on the Financial Stability Oversight Council study on how to implement the Volcker Rule, embodied in section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The previous five years has proven with ringing clarity that the health of Wall Street is not sufficient to guarantee the health of Main Street, and may in fact be detrimental to the health of the non-financial economy. Following the disastrous financial crash of 2008 and the continuing economic consequences, the recent financial reform effort should, at its core, be about putting Main Street back in the driver seat economically: making investment in the real economy rather than investment in bubble financial assets the focus of our policy incentives, restoring the health and vitality of community and regional financial networks, and getting rid of the tricks, traps, and conflicts of interest of financial engineering, at every level. The Volcker Rule is a central part of that effort.

I believed strongly that a full return to the separation between banking and securities dealing would be in the best interests of our nation. At the same time, recognizing that Congress was unlikely to go down that path, I also endorsed the work of Senators Merkley and Levin -- and their two dozen Senate co-sponsors -- who crafted a strong version of the Volcker Rule that seeks to achieve many of the same objectives. Congress adopted their framework, and it is now incumbent upon you as regulators to implement that vision.

I fully expect that Wall Street will continue to place many obstacles in the path of strong implementation, just as they sought to do so during legislative consideration. Powerful interests will undoubtedly put forward arguments as to why specific details ought to be implemented in ways that do not disturb their business models or put them at perceived disadvantages with their international counterparts. You should recognize their arguments for what they are -- distractions -- and reject them.

Quite simply, banks under the protection of taxpayer guarantees should be in the business of banking: holding deposits, making loans, and serving clients. The Merkley-Levin provisions let them remain in certain parts of securities dealing, but sets limits on what those activities can entail. You should be certain to implement those limits to the full extent of your authority and ensure that the permitted activities do not swallow the protections offered by our taxpayers.

In particular, terms like "market-making-related" and "risk-mitigating hedging" should be defined narrowly. Market making is where a firm provides liquidity to trading markets but avoids long or short exposures to the instruments being traded. The goal is to provide clients with buy and sell opportunities without incurring substantial risk. This contrasts with the goal of proprietary trading, where firms seek to accumulate financial holdings and profit from changes in the value of the held financial instruments. Similarly, hedging is where firms take a position in order to reduce a specific financial exposure created by another position or holding.

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Market participants know full well when they are marking a market in a product or hedging a position in that product, versus when they are making proprietary bets. You should dive deeply into the inner workings of financial entities and subject their trading records to close inspection. Talk directly to the traders inside and outside of these institutions who will tell you how things really work. In short, do the hard work necessary to implement the Congressional directive.

It is also critical that terms such as "trading account" and "short term" or "near term", as well as "material conflict of interest," "high risk asset" and "high risk trading strategy" be defined so as to capture the full range of risk that the Congress intended section 619 to cover. When studying how to define these terms, you should look carefully at the nature of the exposures that brought down Long-Term Capital Management in 1997, Amaranth Advisers in 2006, and the major Wall Street firms, including Bear Stearns and Lehman Brothers, in 2008. The definitions of these terms should flow from those investigations, as they were clearly the types of failures that Congress is seeking to keep out of the nation's critical financial infrastructure.

Your study should also pay close attention to the provisions governing how firms relate to private funds. I agree with Chairman Volcker that our banking system would be better off if banks did not maintain any connection channel investments into hedge funds or private equity funds. There is simply no reason why the bank needs to pool client funds into these entities to invest. But Congress chose a compromise position that permitted firms to organize and manage funds, seed funds, and maintain de minimis fund investments to "align their interests" with their clients. To achieve the intent of the Merkley-Levin Volcker Rule, these provisions should be interpreted narrowly. In particular, I urge you to do a broad survey of market participants (including major competitors of the banks) regarding precisely how large seed funds need to be. I believe most will tell you that true seed funds are quite small, in the $5 million to $20 million range. Your regulations should reflect your findings, and not permit the de minimis exception to allow $100 million revolving "seed" funds.

As to the argument that nothing should be done until the international community acts, that argument should be rejected outright. The United States remains the world's most important financial market, largely because of its reputation for integrity and security built on the back of decades of thoughtful regulation. The world needs U.S. leadership, and our foreign counterparts need you to take a strong position to counter the increasingly global reach of the banking lobby, which now conducts lobbying efforts through several industry-sponsored channels. If the giant U.S. banks have concerns regarding perceived competitive disadvantages from being unable to take the same kinds of extraordinary risks that certain of their "too big to fail" foreign peers may be permitted to continue to take (and in fact, the world seems to be converging towards the U.S. approach of tougher regulation anyway), then the better approach would be to protect U.S. depositors and taxpayers from those risks by directing the Federal Reserve to reject applications to acquire U.S. institutions by foreign firms with material exposures to the risks of proprietary trading and investments in hedge funds and private equity firms. This is well within U.S. regulators' discretion under the prudential safeguards of global trade rules.

Lastly, I urge you to be aggressive in your inclusion of nonbank financial companies for supervision by the Board, and therefore, coverage by the Volcker Rule. The weakness of Glass-Steagall was its failure to keep up with the shadow banking system. The Merkley-Levin Volcker Rule properly corrects that oversight by subjecting nonbank financial companies supervised by the Board to significantly higher capital charges for their proprietary trading and fund investments. These capital charges accommodate the diversity of financial firms that could pose a risk to U.S. financial stability, but can only do their job if vigorously applied and if the right firms are covered.

If the financial reforms of 2010 are to keep the U.S. out of another financial crisis and recession, you as regulators must not be unduly influenced by the smooth talking bankers who lobby you on a daily basis. Conduct your study on implementing section 619 with an eye on keeping our nation's banks out of the business of gambling, and back in the business of serving clients and the real economy.

Sincerely,

Robert A. Johnson

Director of Global Finance, Roosevelt Institute

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