Why BP but not Wall Street?

Jun 3, 2010Marshall Auerback

oil-rig-150Marshall Auerback argues that we can't let the BP crisis go to waste, as we did the financial crash.

oil-rig-150Marshall Auerback argues that we can't let the BP crisis go to waste, as we did the financial crash.

Just 35 days after the explosion on BP's Deep Horizon offshore drilling rig, (and two months after President Obama himself opened up vast swathes of the outer continental shelf to offshore drilling), the federal government has launched a criminal probe into the massive oil spill in the Gulf of Mexico, U.S. Attorney General Eric Holder said last Tuesday.

All well and good. But it invariably begs the question as to why, some three years after the start of the greatest financial crisis since the Great Depression, there have been ZERO criminal investigations launched by Justice against Wall Street. The contrast is striking. Perhaps there are investigations proceeding as we write, but it does seem curious that Justice has held its fire against Wall Street (a large donor to the Democrats), whilst aggressively going after Big Oil (which happens to have been one of the bigger paymasters for the GOP in the last few elections).

The U.S. has two severe problems that could be in crisis next year. Commercial real estate is a disaster (another burst bubble), and banks are largely not recognizing their losses in this area. The banks used their political power, and Ben Bernanke's blessing, to cause Congress to extort the Financial Accounting Standards Board to gimmick the accounting rules to prevent loss recognition. The Department of Justice even failed to act after the release of the Examiner's Report on Lehman's bankruptcy, which provided clear evidence that as one of the largest banks in our nation teetered on the brink of bankruptcy, its executives were masking accounting gimmicks that inflated their quarterly earnings. It's worth asking again, as Eliot Spitzer and Josh Rosner asked in a blog on New Deal 2.0: where were the Treasury, the SEC and the Fed? (The Fed's inaction is particularly alarming given the new regulatory powers it is about to receive under the new financial reform bill.)

Imagine the uproar today in the US (even in oil loving states, such as Louisiana) if BP was involved in the watering down of legislation to govern energy policy and offshore drilling. Oh wait, that did happen...under the Bush Administration, where he drafted Enron's Ken Lay precisely for this purpose. We are reaping the consequences of that perverse executive action, much as I suspect that in a few years hence, we will be reaping the consequences of our failed financial regulatory "reforms" that do nothing to effect structural change and prevent a recurrence of the current crisis.

The other severe problem is nonprime mortgage paper (where losses range from 50 to 85 cents on the dollar). These losses are not being recognized. Worse, they are being hidden by the Fed and dumped on Fannie Mae and Freddie Mac while the politicians and Treasury declare that we "resolved" the greatest financial crisis in 80 years at virtually no cost to the taxpayer. We've now had a number of narratives to that effect, no doubt spun aggressively by the Geithner Treasury: Joshua Green's "Inside Man" and John Heilemann's "Obama is from Mars, Wall Street is from Venus" are two obvious examples of this genre which spring to mind.

As my friend Bill Black has noted repeatedly, our government and our regulators continue to sanction accounting fraud to hide losses that are, in fact, the product of accounting fraud. The losses are still there. Indeed, as Black argues, they've grown.

The fundamental perverse incentives that cause recurrent, intensifying crises remain in place, almost entirely untouched by the reform bills: executive and professional compensation, bad accounting, "control fraud," regulatory black holes and the appointment of anti-regulators who have a track record of failure and don't believe in regulating. Many of those regulators have been reappointed by the Obama Administration, including the non-regulator in chief, Ben Bernanke.

As awful as the BP spill is, the magnitude of its regulatory failure is dwarfed by what has happened on Wall Street over the past 30 years. The same people who have presided over the mess are still in power. There have been zero criminal charges.

Perhaps the criminal charges will come. In the meantime, Obama has an opportunity to harness public anger in a more productive direction than has been the case with financial or health care reform. There is an alternative to our addiction to oil, but as long as deficit hawks dissuade us from supporting government-funded initiatives needed to strike out on another energy path, we will not realize it.

In addition to my work in finance, I happen to do a lot of work in clean tech and come across endless science programs on alternative energies. There is no magic bullet, but there are technologies in existence today that can reduce our addiction to oil. But most require a massive government push, on a scale along the lines of the Manhattan Project. The concentrated effort of the Manhattan Project produced a bomb perhaps decades earlier than it would have otherwise, in a mere few years, literally from theoretical scratch. The government diverted 11% of the nation's electric power to produce those few handfuls of uranium and plutonium for the first bombs. The facilities were the biggest ever built by mankind. The government did it and it worked.

The Manhattan Project was done in secret, which I do not advocate. But it represented an extraordinary historical precedent. If we could devote ourselves in similar fashion to energy, just imagine the possibilities. A number of experts argue that in twenty years pushing existing technology, solar will be less than fifty cents per installed watt, which is the cheapest energy there can be. With government funding, we could vastly accelerate that timeframe (and create jobs at the same time). Many will say that we cannot store solar power. Nonsense. It can be converted it into hydrogen, which can be stored. The units are small. It works perfectly well in autos. Iceland uses hydrogen. The Swedes have a new hydrogen highway that works. We just need to change the entire gas station infrastructure. The private sector will not do it. Governments can.

The prevailing motto surrounding energy for the past few years seems to have been "Drill baby, drill." The Palinites have gone curiously quiet on that score as we've come encountered the horrible ecological calamity that awaits us thanks to "Spill baby, spill."

In finance, we let a crisis go to waste. One hopes that the same will not apply in energy and that criminal investigations will lead to something far more substantive than the Swiss cheese of "change you can believe in" which has characterized the Obama response to our respective health care and financial crises.

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Book Notes: A Presidency in Peril

Jun 3, 2010Mike Konczal

a-presidency-in-peril 150Mike Konczal reviews Robert Kuttner's latest.

a-presidency-in-peril 150Mike Konczal reviews Robert Kuttner's latest.

There is a sense of disappointment with the financial reform bill, or at least a sense of missed opportunity. Joshua Green accurately describes the financial reform effort as "modest given the scope and severity of the crisis", designed by people who, in John Heilemann's memorable phrasing, "are all technocrats who believe the system doesn’t need to be rebooted or downsized, merely better supervised."

What brought us here? Financial reform should be the bread-and-butter of a progressive movement -- it is one of the strongest legacies of the New Deal. Worries about concentration of power, efforts at promoting shared prosperity, having the government play a role in enforcing transparency and having the financial sector work as a means to build the real economy (rather than an end in itself), are all liberal values. Insomuch as Obama represents the beginning of a new, potentially more liberal generation, it is a necessary priority to show core competency on what the government can accomplish in taking the worst edges off a collapse-prone financial sector while still preserving the innovation of markets. But now people are starting to wake up to a bill in 2010 that strikes them as far from a fundamental reform of the financial system.

There is also a sense of worry that 10% unemployment is an acceptable condition in the new normal state. Even with the market showing signs of worrying about deflation more than inflation, fiscal austerity seems to be the vocal point of the day, rather than an increased stimulus.

In order to know this story you have to go back to 2008 and 2009 and see where the path was laid out, and Robert Kuttner's A Presidency in Peril is that story. Kuttner goes back to the initial selection of Obama's economic team, revealing how the ability to carve out a new direction for Wall Street was sidelined in favor of administration officials who were too close to the old system.   He walks through the Bush bailouts, and shows the continuity with both the major players, officials and tools into the new administration.  The key decisions made in early 2009, going with PPIP and the stress test as a way of signaling to the market that the current biggest banks would stay the way they are, are described in detail. Kuttner's narrative stands as the best source of how these calls brought us to where we are now.

We are now approaching a recovery in the shadows of these bad calls. A stimulus package half of what it needed to be leaves us with record high unemployment and a poor measure of what can be done about it. A dangerous financial sector that was preserved throughout 2009 leaves us with a financial reform bill that places its hope on better supervision instead of fundamental reform.  A nation underwater in their mortgages and unable to negotiate their home loans are stuck there in part because of the optimism of the numbers returned from the stress test.

Before we throw in the towel and accept that more fundamental changes aren't possible, it's worth remembering a past presidency imperiled by a financial meltdown. FDIC insurance, the social insurance that protects you from bank runs wiping out your checking account, was originally opposed by President Roosevelt and his advisors. FDR was worried about taking it on since the banking establishment hated the idea of it. But challenges from the left convinced FDR of the value of these reforms, and strategic pressure created a more just system that works to protect the financial system from itself. Kuttner holds out hope that our economic future can be recovered, and lays out a compelling plan for what can still be done. But is it already to late?

Mike Konczal is a fellow with the Roosevelt Institute and a blogger at rortybomb.wordpress.com.

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On Chocolate, Narcotics, and How Warren Buffett Thinks We’re All Gamblers: Today’s FCIC Hearing

Jun 2, 2010Bryce Covert

chocolates-150What does "I Love Lucy" have to do with the financial meltdown? You'd have to be at the FCIC circus today to know.

chocolates-150What does "I Love Lucy" have to do with the financial meltdown? You'd have to be at the FCIC circus today to know.

The FCIC dug its teeth into the mess of ratings agencies today. Lame excuses and mixed metaphors abounded. The first panel was a mix of Moody's former employees who told stories of a free-wheeling culture that couldn't say ‘no' to a deal and Moody's management who sought to tamp that image down. The second panel almost lost the Oracle of Omaha, who tried to submit written testimony rather than show up, but in the end was subpoenaed.

The first panel told a story of an ever-increasing workload handled by understaffed departments. In sympathy, Phil Angelides, chairman of the commission, compared it to the scene in "I Love Lucy" in which Lucy tries to inspect all of the chocolates that come down a conveyor belt faster and faster. "Did you feel like Lucy?" Angelides asked one witness, Eric Kolchinsky, who was is a former team managing director in US derivatives at Moody's. "All the time," Kolchinsky responded. The metaphor extended -- the chocolates coming down the shoot appeared safe on the outside, but had less and less "cocoa content." The investments looked safe on the outside, but under that hard candy coating they were empty.

Kolchinsky didn't just finger the HR department for the faulty ratings, however. He described a culture in which you cold not say no to a deal and management expected employees to protect Moody's market share above all else. "It was harder to say no than to say yes," he said, and explained that he had been able to say no to rating only one transaction -- and his refusal didn't stop the transaction from happening, it was simply rated by someone else. Angelides himself concluded, "It comes close to either the product is fraudulent or of no use to the market place."

Others on that panel were not so comfortable with making Moody's foot the bill. When asked if there was a gradual erosion in standards, Jay Siegel, another former team managing director with the firm, replied with the admirably ambiguous answer, "If someone said that, I wouldn't doubt their veracity. I wouldn't say that myself." Noclas Weill, a current group managing director, refused to incriminate himself in anything -- or provide any helpful answers to the commission's questions.

The next panel was where all the star power was, though. Raymond McDaniel, current chairman and CEO of Moody's, sat next to the Oracle of Omaha. McDaniel's opening statement made a show of contrition: "The regret is genuine and deep with respect to our ratings in the housing sector." He even admitted that "any business model in which the fee payor has an interest in the outcome is a model that has potential conflicts of interest." But does that mean that Moody's did something fraudulent or wrong? Not exactly. There may have been a slight hiccup in the way it rated transactions in the housing sector, but "it does nothing for our business to focus on the short run and to cut corners," he stated. The company is "trying to create long-term shareholder value," no matter what Kolchinsky may have to say, he claimed.

So what did Buffett have to say about all of this? He is all in favor of coming down hard on the CEOs of any financial institution that needs the government to step in and save it. "The CEO should basically go away broke." But he was less inclined to come down hard on ratings agencies, "who made a mistake that 300 million Americas made" in missing the bubble. (Which has nothing to do with the stock he still owns in Moody's.) Everyone got swept up in the bubble, like a group of addle-minded addicts. "Rising [housing] prices are a narcotic that effect reasoning power," Buffett said. To which Angelides reminded the crowd: "You don't want your police trading in crack."

On the topic of derivatives, however, there was no beating around the bush: Buffett thinks they should go. After all, "Gambling instincts are very strong in humans," and "We're always going to be fighting the human tendency to borrow more money than you should." Derivatives are "made to order" for this type of behavior, he said. You therefore "need something on the governmental side" to counteract the strong pull of monetary risk-taking.

For more on ratings agencies, listen to Mike Konczal discuss them on Marketplace.

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Are We Going the Way of the Roman Republic?

May 27, 2010Joe Costello

roman-coin-150With rampant corruption and elitism, America could be following the path of the Roman Republic.

roman-coin-150With rampant corruption and elitism, America could be following the path of the Roman Republic.

"But, as statesmen, even these better aristocrats were not much less remiss and shortsighted than the average senators of the time. In presence of an outward foe the more eminent among them, doubtless, proved themselves useful and brave; but no one of them evinced the desire or the skill to solve the problems of politics proper, and to guide the vessel of the state through the stormy sea of intrigues and factions as a true pilot. Their political wisdom was limited to a sincere belief in the oligarchy as the sole means of salvation, and to a cordial hatred and courageous execration of demagogism as well as of every individual authority which sought to emancipate itself. Their petty ambition was contented with little."

-- Theodor Mommsen, History of Rome -- the quote describes the political class of the Roman Republic's last decades.

A century ago, Theodor Mommsen was globally renown for his history of the Roman Republic. For some reason, the book went out of print around WWII and never came back. Which is unfortunate, for Mommsen's chronicles of the last decades of the republic are extremely relevant history for contemporary Americans. Remember, the Roman republic flourished from 500 BC to 50 BC, when it fell at the hands of Caesar. Of course today, if ever an American thinks of Rome, they undoubtedly think of Imperial Rome, the age of the emperors and its inglorious fall chronicled by Gibbon. Yet, Gibbon's history begins where Mommsen's ends. The fall of the Roman Republic was well known to America's founders and its lessons well contemplated, for unlike Imperial Rome, the Republic fell at the height of its economic and military power. By the end, Rome's politics were eminently corrupt and the weight of the empire that was conquered collapsed the unique system of self-government that had been created.

With most recent examples of the health care bill, the financial industry bill, the continued electoral buying and selling of our elected officials, and the growing ineptitude and corruption of our government agencies (the most recently reported in the MMS) who are responsible for regulation of the oil industry, it is obvious for all who care to look, we are on the same path of the Roman republic. And just as Rome, our political class' petty ambition is content with little. Mommsen wrote history's cold verdict on the republic's fall:

"But, when a government cannot govern, it ceases to be legitimate, and whoever has the power has also the right to overthrow it. It is, no doubt, unhappily true that an incapable and flagitious government may for a long period trample under foot the welfare and honor of the land, before the men are found who are able and willing to wield against that government the formidable weapons of its own forging, and to evoke out of the moral revolt of the good and the distress of the many the revolution which is in such a case legitimate. But if the game attempted with the fortunes of nations may be a merry one and may be played perhaps for a long time without molestation, it is a treacherous game, which in its own time entraps the players; and no one then blames the axe, if it is laid to the root of the tree that bears such fruits. For the Roman oligarchy the time had now come."

In his last years, Mommsen gave a series of lectures on Rome's early emperors. When asked why he didn't put them together in a book, he declared, "It's too depressing." The Roman republic's decline took course over seven decades, from the Gracchi, maybe the republic's last true reformers, to Caesar. The real question for us is, unlike the Romans, will we stand up and reform our unique system of self-government that has provided so much to us all? Or as Rome, will we simply succumb to a neo-Caesar? I've come to empathize a great deal more with the Republic's last great defender, Cicero. I used to consider him completely politically inept, but over the years, through experience, I have developed a much greater sympathy for the environment in which he toiled. Cicero wrote,

"Long before our time the customs of our ancestors molded admirable men, in turn these men upheld the ways and institutions of their forebears. Our age, however, inherited the Republic as if it were some beautiful painting of bygone ages, its colors already fading through great antiquity; and not only has our time neglected to freshen the colors of the picture, but we have failed to preserve its forms and outlines."

Joe Costello was communications director for Jerry Brown’s 1992 presidential campaign and was a senior adviser for Howard Dean’s effort in 2004.

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Mike Konczal Gives FinReg Postmortem; Notes Media Schizophrenia

May 27, 2010

Mike Konczal joined Annie Lowrey yesterday on Bloggingheads to discuss financial reform now that the Senate has passed its bill.

Mike Konczal joined Annie Lowrey yesterday on Bloggingheads to discuss financial reform in the wake of the Senate's passage of the bill...

Mike outlines two key dichotomies that emerged from the bill passage, pointing out that before a bill even came to be, there was a split between "the Summerites and the Volckerites": those who sided with Larry Summers and wanted to consolidate legal authority for regulators, and those who sided with Paul Volcker and wanted to see more structural changes. Now that the House and Senate have both passed their versions of the bill, there is a new split -- what Mike calls the "schizophrenic response" in the media. "You had half the media talking about how... it was a brand new New Deal. And then you had the other half of the people saying ... it's just rearranging the chairs on the Titanic."

Mike and Annie agree that the bill is very helpful in the midst of another crisis, but whether or not it prevents future crisis is less clear. So perhaps the Summerites won out over Volckerites. They go on to discuss how the bill came to be, the weird process the Senate took to pass it, Fannie and Freddie, and even the BP oil spill and Facebook privacy.

Check out the full discussion:

Read more on the topic:

"Make Markets Be Markets"

"How the Senate Financial Reform Bill Gained Strength"

"A Financial Reform Interview Recap"

"Progressive Values and Financial Reform"

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Progressives and FinReg: Where Do We Go From Here?

May 25, 2010Bryce Covert

glass-steagall-150A roundtable of thinkers, journalists, and veterans from the financial industry gathered at the Century Foundation, a nonprofit public policy research institution, after the Senate passed its version of a financial reform bill on Friday.

glass-steagall-150A roundtable of thinkers, journalists, and veterans from the financial industry gathered at the Century Foundation, a nonprofit public policy research institution, after the Senate passed its version of a financial reform bill on Friday. New Deal 2.0 was on hand for a deep dive into the day's topic: what does FinReg mean and where do we go from here?

New Deal 2.0's Mike Konczal led the talk with an overview of the history, values, and challenges in the fight for financial reform. He highlighted four main areas of focus for the progressive community:

1. Correcting concentrations of corporate power, where steps such as a modern-day Glass-Steagall law and leverage caps can come into play;

2. Promoting shared prosperity, with fixes such as the CFPA and mortgage relief;

3. Government's role in enforcing transparency, by reforming things such as derivatives trading and ratings agencies;

4. Finance as a means to build the real economy, and not as an end in itself, which should eliminate conflicts of interest and bring back a fiduciary duty to the public.

Afterward, the discussion ranged from a very micro view -- what does the current bill do to regulate derivatives trading? -- to a zoomed-out view of where progressives and the financial industry stand. What values are we fighting for? How do we fight for them? What are the hurdles?

Participants, including Raj Date, Alan Brinkley,  ND20 contributor Jeff Madrick, Joyce Purnick, and Lance Lindblom, recounted the history of the financial sector. From the 1930's, when FDR enacted serious reforms, to the 1980's, when those reforms were relaxed, bankers looked like the characters from Mad Men -- taking care of client relationships first and foremost, without a lot of flash. There was a healthy relationship between business, the public and its banks.

Then the regulations were slowly eroded, the crisis began to take effect, and the trust was broken. But the progressive movement, it was pointed out, wasn't organized on the issue ahead of time. Since the crisis, it's been about "filling a pothole" by putting money in the sector to stave off disaster. Progressives hadn't mapped out a clear position, and neither had the Democratic Party, so much of the work since then has been a patchwork game of catch up. Where FDR had a 20-year backbench of thought on the issue, we're just beginning to map it out.

And now we're in what one participant characterized as a war -- a cultural and intellectual battle against free market assumptions and the entrenched power of the financial industry. All present voiced concern about the throttlehold the financial industry has on politics, and the Democratic Party in particular. Through amassing wealth, the sector has amassed power, which has watered down financial reform and will continue to block necessary steps.

Meanwhile, without a modern-day Pecora Commission to uncover fraud, the anger and the politics to fuel reform have lagged. Both are fueled by scandalous information -- take a look at the cases against Goldman Sachs -- and we need to uncover more of those stories. But that process is also in nascent form and is moving slowly ahead.

The group also peered into the future. Some coming fights that were highlighted:

Housing policy: foreclosures and underwater mortgages are nowhere near over, and the anger those events cause is going to help fuel continued discussion of the banking sector. Finding solutions for the disappearing middle class will be key.

A VAT tax: as the deficit hawkery takes hold and fiscal austerity measures are pushed, expect a rallying call for a Value Added Tax. This will hurt middle- and lower-income families. Instead, progressives can push for a banking sector tax and get our money's worth.

The general consensus: the movement needs to get organized, because the fight isn't over yet.

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How the Senate Financial Reform Bill Gained Strength

May 24, 2010Mike Konczal

There's a general consensus that the Senate Bill is strong, even surprisingly strong, with everyone being blindsided as to how that happened. Here's Edmund L. Andrews and Katherine Reynolds Lewis:

Bulked Up, Not Watered Down

There's a general consensus that the Senate Bill is strong, even surprisingly strong, with everyone being blindsided as to how that happened. Here's Edmund L. Andrews and Katherine Reynolds Lewis:

Bulked Up, Not Watered Down

Industry lobbyists are stunned that the bill became tougher rather than weaker as it progressed through the Senate...Scott E. Talbott, a top lobbyist for the Financial Services Roundtable, which has adamantly fought against many provisions in the Senate bill, sounded almost shell-shocked by the bill’s breadth...

The bill is a major victory for President Obama and a valedictory for retiring Senate Banking Committee Chairman Christopher J. Dodd, D-Conn. Dodd was the guiding force who overcame strong opposition from many Republicans and some Democrats and skillfully navigated past numerous procedural barriers.

A lot of people, notably Americans for Financial Reform, have been fighting day in and day out for financial reform. But even with all their efforts, 3 months ago people were very greatly discouraged about what could have been accomplished in the Senate.

This also took place with health care passing in the background, so that gave the Democrats an energy that they didn't have in the Senate previously. Having watched the battle unfold both in the House and the Senate in real time, there are three key decisions that were made by individuals that turned out to be game-changers.

The first was Chris Dodd's decision to go it alone and release his own bill rather than water it down to get Republican support in committee. This watering down process between Dodd and the Republicans on his committee sent me in a serious depression over the prospects of financial reform. Shelby had walked away from the debate, Corker was trying to play the role to get a bill out, and then Dodd decided to go on his own. He also called for a vote immediately to get it out of conference without calling any amendments. And it turned out to be the right decision.

The second is the decision to have amendments go for votes. Many, including myself, are disappointed that not enough important amendments got a vote in the Senate. But it is important to remember that there was a moment where there weren't going to be any votes on any amendments. And it's only through progressive senators demanding votes on amendments that they went to the floor. And only by demanding votes, and forcing Republicans and Democrats to vote for or against Wall Street, was progress able to be made.

But the most important part of this was the third reason, and that is the primary challenge of Senator Lincoln. I think a lot of people are going to read this backwards as the Senate momentum getting strong because of the SEC's April 16th charges against Goldman, further investigations and coverage and Goldman's tone-deaf response. I'm not sure how much of an effect that had. Americans didn't go to bed April 15th thinking Goldman and the rest of the Wall Street firms were businesses that hadn't been bailed out without any major repercussions and still retained their power, while the rest of the economy suffered under massive unemployment.

I will say one thing that was a game-changer: Blanche Lincoln had written a derivatives bill that sent everyone scrambling. Everyone. On April 16th everything changed, but because of the derivatives language that was introduced into this bill.

Especially the Section 106/716 language, which would spin out the dealers from commercial banks. Noam Scheiber got this dynamic perfect, noting that all the lobbyist energy had suddenly turned to scrapping this very specific derivatives language, and even with huge opinions against it, it got out of the Senate. This left little time to attack other things.

What's important here is that Senator Lincoln didn't decide to do it randomly, as if because a butterfly flapped its wings in Brazil. She did it because she had a primary challenger in Arkansas -- Lt. Governor Bill Halter, who deserves a lot of credit for stepping up and risking his political career to challenge an entrenched incumbent. Arkansas Democratic primary voters were open to hearing different ideas about what kind of representation they wanted, but they couldn't demand better from Lincoln without an alternative in the race.

And politics is a team sport. Halter was recruited and supported by many local Arkansas Democrats, Glenn Greenwald and Jane Hamsher of Accountability Now, the hundreds of thousands of members of the Progressive Change Campaign Committee, Markos Moulitsas-Zuniga and the Dailykos community, the millions of members of Moveon, and the millions of members of the SEIU and the AFL-CIO.

The other team was mobilized as well. The bank-dominated US Chamber of Commerce, which is fighting against Lincoln's derivatives language, was advertising on her behalf in the race.

But it was the people-powered groups that had more power in the primary. Lincoln knew that if she watered down her derivatives language, it would be known and that information would be given to voters. Special thanks are owed to these groups, who deserve a central place at the story for why this Senate bill is so strong, but so far I've seen very little attention given to them.

Which is to say that when democratic officials are held accountable for their votes they do the right thing. And ordinary people can make a difference, if they pool their efforts and engage in smart and aggressive strategies at the ballot box. It's a simple set of lessons, but it's always good to relearn them.

Mike Konczal is a fellow with the Roosevelt Institute and a blogger at rortybomb.wordpress.com.

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Ben Nelson's Holograms: Aging Senate is Out of Touch

May 24, 2010Tim Price

hologram-150During a recent interview with the Omaha World-Herald, Nebraska Senator Ben Nelson was asked if he supported an amendment to the Senate's financial reform bill that would have capped ATM fees at 50 cents per transaction.

hologram-150During a recent interview with the Omaha World-Herald, Nebraska Senator Ben Nelson was asked if he supported an amendment to the Senate's financial reform bill that would have capped ATM fees at 50 cents per transaction. As the senator tried to explain his position, things took a turn for the bizarre:

"I've never used an ATM, so I don't know what the fees are," Nelson said, adding that he gets his cash from bank tellers, just not automatic ones. "It's true, I don't know how to use one.

"But I could learn how to do it just like I've . . . I swipe to get my own gas, buy groceries. I know about the holograms."

By "holograms," Nelson clarified that he meant the bar codes on products read by automatic scanners in the checkout lanes at stores such as Lowe's and Menard's.

"I go and get my own seating assignment on an airplane," Nelson said. "I mean, I'm not without some skills. I just haven't had the need to use an ATM."

The amendment in question was the brainchild of Iowa Senator Tom Harkin, who argued that it was needed to "ensure that fees charged to consumers at ATMs bear a reasonable relation to the cost of processing the transaction." However, he was not able to bring the amendment to a vote and it was not included in the bill that passed on Thursday.

Senator Nelson's response has drawn comparisons to former Senator Ted Stevens of Alaska, who famously described the Internet as "a series of tubes" that could be clogged by sending too many e-mails and videos through them. The Daily Show leaped on Stevens' mangled metaphor and turned him into the poster boy for politicians who are out of touch with the modern world.

Comparing Nelson to Stevens doesn't seem quite right, though. It was at least possible to see what Stevens was getting at, if you cocked your head to the side and squinted. Nelson sounds like he just beamed down from the mothership and didn't have time to finish reading his briefing on Earthling technology. Like poor Miss South Carolina, it's obvious that he was caught completely off-guard by the interviewer's question and just started saying the first thing that came to mind. "I personally believe that U.S. Americans are unable to pay their ATM fees because some people out there in our nation don't have holograms..."

It's easy to poke fun at politicians like Ben Nelson, but his clueless response to this issue highlights a serious concern. Many of our leaders have been so comfortably ensconced in the halls of power for so long that they have little to no memory of life on the outside. As Ezra Klein notes, this is especially problematic in the current Senate, which is the oldest on record. That's why it's so important for average Americans to engage in the political process and demand results from their representatives in Washington. When the members of Congress are crafting policies that will have a profound impact on the lives of working families, it's not enough for them to know about the holograms.

We need to speak up and remind them of what the real world is like.

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Mike Konczal on Rachel Maddow: Goldman Calls the Shots

May 24, 2010

Our very own Mike Konczal visited the Rachel Maddow show, guest hosted by Chris Hayes, the day the Senate passed its version of FinReg. He explains the Volcker Rule, which says that you can't both run a hedge fund and a commercial bank, and how it never got a vote. Even though Senators Merkley and Levin tried to "sneak" this language in as an attachment to the amendment to exempt auto dealers from regulation, both were withdrawn when it came time. "Which goes to show you who really calls the shots, auto lenders versus Goldman Sachs," Mike notes.

After giving a quick overview himself, Chris turned to Mike for his insights:

Visit msnbc.com for breaking news, world news, and news about the economy

Our very own Mike Konczal visited the Rachel Maddow show, guest hosted by Chris Hayes, the day the Senate passed its version of FinReg. He explains how the Volcker Rule, which says that you can't both run a hedge fund and a commercial bank, never got a vote. Even though Senators Merkley and Levin tried to "sneak" this language in as an attachment to the amendment to exempt auto dealers from regulation, both were withdrawn when it came time. "Which goes to show you who really calls the shots, auto lenders versus Goldman Sachs," Mike notes.

After giving a quick overview, Chris turned to Mike for his insights:

Visit msnbc.com for breaking news, world news, and news about the economy

Read some of Mike's pieces on the topic:

"Why Merkley-Levin Is Necessary"

"Merkley-Levin Amendment Can’t Get a Vote"

"A Roadmap of the Shadow Banks, plus targeting the Volcker Rule"

"Towards a 21st Century Glass-Steagall"

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More ND20 FinReg Reactions: Bill Black and Henry Liu

May 21, 2010

question-mark-150 Two more New Deal 2.0 contributors have weighed in to help you navigate the debate on the Senate bill...

Bill Black:

question-mark-150 Two more New Deal 2.0 contributors have weighed in to help you navigate the debate on the Senate bill...

Bill Black:

The key things to look for in judging the seriousness and effectiveness of any reform effort are whether it addresses the primary drivers of our recurrent, intensifying crises. Those are:

1. Compensation: Executive and professional -- control frauds use these to (a) create the "Gresham's dynamic" that allows them to suborn "controls", officers and employees and turn them into fraud allies, and (b) to convert firm assets to their personal benefit while minimizing the risk of prosecution.

2. Accounting: Capital and liquidity ratios are meaningless without good accounting. We have weakened the real capital requirements because the industry used its contributions and its economist allies to convince Congress to extort FASB to gimmick the accounting rules so that banks need not recognize losses on bad assets prior to their sale. Until this action is reversed everything done on capital/liquidity is a sham.

3. Ending the regulatory black holes that were deliberately created: You can't leave any holes. Control frauds are dynamic. If you fix five of seven holes they will exploit the other two and your five successes will be hollow.

4. Regulators: By far the largest problem was with the anti-regulators that Bush appointed for the explicit reason that they opposed regulation. Desupervision was a far greater problem than deregulation. As long as the anti-regulatory Rubin wing of the Democratic Party governs economic and regulatory policy we will fail. So watch for whether Rubin, Summers, Geithner, and the anti-regulatory Bush leftovers running the Fed, OCC, and OTS remain in power. When they hire Mike Patriarca to be their top regulator you'll know that they actually want to succeed. Track how many criminal referrals of CEOs the regulatory agencies make.

5. Control fraud: While the Supreme Court decision on corporations being persons for First Amendment purposes is obscene, it has at all times been within Congress' power to restrict conflicts of interest. When the financial services committees bar their members from receiving any political contributions from the financial services industry and its shills (and bar anyone that took money from the industry from joining the committee) we'll know that serious reform has arrived.

So, proverbial bottom line: the Senate bill did, in fact, get stronger. And that tells us something very positive about what the Members' constituents are supporting, because the organized "special interest" effort to weaken the bill was intense. The fact that the strengthened bill is zero for six on dealing with the problems driving these crises shows that the original bill was so weak in all of its fundamentals that even with the marginal improvements it will not address successfully the reasons why we are suffering recurrent, intensifying crises.

Henry Liu:

Generally speaking, while regulatory reform is obviously needed in financial markets, one should recognize the limits of reform as always being a rearview mirror endeavor. That is the difference between reform and revolution. The former is an attempt to restore a broken past while the latter is an attempt to construct a utopian future.

Based on information available so far, regulatory reform seems to have been ensnared by obscure technical details -- the systemic consequence of which have not been fully established -- and headline-grabbing red herrings that divert attention from fundamental issues. Financial innovations are adopted in the market generally because they serve a particular positive function. Yet a sharp knife can cut many ways; in the hands of a surgeon it will be a useful instrument, while in the hands of criminals or even innocent children it can be a dangerous weapon. Therein lies the dilemma of financial regulation, a problem faced also by regulation on scientific research.

There is logic in not placing unrealistic hope in regulation as a regime of forbiddance. Rather, the application of the concept of fail-safe may be more useful than the nebulous quest to eliminate the too-big-to-fail syndrome. Fail-safe incorporates systemic features which in the event of failure respond in ways that will cause no harm or at least a minimum of harm or danger to other elements in the system. Fail-safe components in a system allow, but do not cause or invite, improper systemic behavior without a system-wide contagion of penalties. It seems that the current regulatory reform effort has been focused more on the concept of fail secure -- by seeking to prevent improper systemic behavior through the impediment of proper systemic behavior.

In a market system, incentive-driven good behavior is preferable to criminalization of bad behavior. Given the ingenuity of market participant creativity, one can expect that an incentive-driven fail-safe regime can be developed for financial markets. History has shown that fail-safe regimes have been devised to successfully manage nuclear arms control during the Cold War to prevent a nuclear war.

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