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“The Government Problem”: The Central Issue Is Whom The Government Is For

Some believe the central political issue of our era is the size of the government. They’re wrong. The central issue is whom the government is for.

Consider the new spending bill Congress and the President agreed to a few weeks ago.

It’s not especially large by historic standards. Under the $1.1 trillion measure, government spending doesn’t rise as a percent of the total economy. In fact, if the economy grows as expected, government spending will actually shrink over the next year.

The problem with the legislation is who gets the goodies and who’s stuck with the tab.

For example, it repeals part of the Dodd-Frank Act designed to stop Wall Street from using other peoples’ money to support its gambling addiction, as the Street did before the near-meltdown of 2008.

Dodd-Frank had barred banks from using commercial deposits that belong to you and me and other people, and which are insured by the government, to make the kind of risky bets that got the Street into trouble and forced taxpayers to bail it out.

But Dodd-Frank put a crimp on Wall Street’s profits. So the Street’s lobbyists have been pushing to roll it back.

The new legislation, incorporating language drafted by lobbyists for Wall Street’s biggest bank, Citigroup, does just this.

It reopens the casino. This increases the likelihood you and I and other taxpayers will once again be left holding the bag.

Wall Street isn’t the only big winner from the new legislation. Health insurance companies get to keep their special tax breaks. Tourist destinations like Las Vegas get their travel promotion subsidies.

In a victory for food companies, the legislation even makes federally subsidized school lunches less healthy by allowing companies that provide them to include fewer whole grains. This boosts their profits because junkier food is less expensive to make.

Major defense contractors also win big. They get tens of billions of dollars for the new warplanes, missiles, and submarines they’ve been lobbying for.

Conservatives like to portray government as a welfare machine doling out benefits to the poor, some of whom are too lazy to work.

In reality, according to the Center for Budget and Policy Priorities, only about 12 percent of federal spending goes to individuals and families, most of whom are in dire need.

An increasing portion goes to corporate welfare.

In addition to the provisions in the recent spending bill that reward Wall Street, health insurers, the travel industry, food companies, and defense contractors, other corporate goodies have been long baked into the federal budget.

Big agribusiness gets price supports. Hedge-fund and private-equity managers get their own special “carried-interest” tax loophole. The oil and gas industry gets its special tax subsidies.

Big Pharma gets a particularly big benefit: a prohibition on government using its vast bargaining power under Medicare and Medicaid to negotiate low drug prices.

Why are politicians doing so much for corporate executives and Wall Street insiders? Follow the money. It’s because they’re flooding Washington with money as never before, financing an increasing portion of politicians’ campaigns.

The Supreme Court’s decision this year in McCutcheon vs. Federal Election Commission, following in the wake of Citizen’s United, already eliminated the $123,200 cap on the amount an individual could contribute to federal candidates.

The new spending legislation, just enacted, makes it easier for wealthy individuals to write big checks to political parties. Before, individuals could donate up to $32,400 to the Democratic or Republican National Committees.

Starting in 2015, they can donate ten times as much. In a two-year election cycle, a couple will be able to give $1,296,000 to a party’s various accounts.

But the only couples capable of giving that much are those that include corporate executives, Wall Street moguls, and other big-moneyed interests.

Which means Washington will be even more attentive to their needs in the next round of legislation.

That’s been the pattern. As wealth continues to concentrate at the top, individuals and entities with lots of money have greater political power to get favors from government – like the rollback of the Dodd-Frank law and the accumulation of additional corporate welfare. These favors, in turn, further entrench and expand the wealth at the top.

The size of government isn’t the problem. That’s a canard used to hide the far larger problem.

The larger problem is that much of government is no longer working for the vast majority it’s intended to serve. It’s working instead for a small minority at the top.

If government were responding to the public’s interest instead of the moneyed interests, it would be smaller and more efficient.

But unless or until we can reverse the vicious cycle of big money getting political favors that makes big money even bigger, we can’t get the government we want and deserve.

 

By: Robert Reich, The Robert Reich Blog, December 23, 2014

December 28, 2014 Posted by | Dodd-Frank, Federal Government, Wall Street | , , , , , , , , | Leave a comment

“Heads We Win, Tails The Taxpayers Lose”: Wall Street’s Revenge; Dodd-Frank Damaged In The Budget Bill

On Wall Street, 2010 was the year of “Obama rage,” in which financial tycoons went ballistic over the president’s suggestion that some bankers helped cause the financial crisis. They were also, of course, angry about the Dodd-Frank financial reform, which placed some limits on their wheeling and dealing.

The Masters of the Universe, it turns out, are a bunch of whiners. But they’re whiners with war chests, and now they’ve bought themselves a Congress.

Before I get to specifics, a word about the changing politics of high finance.

Most interest groups have stable political loyalties. For example, the coal industry always gives the vast bulk of its political contributions to Republicans, while teachers’ unions do the same for Democrats. You might have expected Wall Street to favor the G.O.P., which is always eager to cut taxes on the rich. In fact, however, the securities and investment industry — perhaps affected by New York’s social liberalism, perhaps recognizing the tendency of stocks to do much better when Democrats hold the White House — has historically split its support more or less equally between the two parties.

But that all changed with the onset of Obama rage. Wall Street overwhelmingly backed Mitt Romney in 2012, and invested heavily in Republicans once again this year. And the first payoff to that investment has already been realized. Last week Congress passed a bill to maintain funding for the U.S. government into next year, and included in that bill was a rollback of one provision of the 2010 financial reform.

In itself, this rollback is significant but not a fatal blow to reform. But it’s utterly indefensible. The incoming congressional majority has revealed its agenda — and it’s all about rewarding bad actors.

So, about that provision. One of the goals of financial reform was to stop banks from taking big risks with depositors’ money. Why? Well, bank deposits are insured against loss, and this creates a well-known problem of “moral hazard”: If banks are free to gamble, they can play a game of heads we win, tails the taxpayers lose. That’s what happened after savings-and-loan institutions were deregulated in the 1980s, and promptly ran wild.

Dodd-Frank tried to limit this kind of moral hazard in various ways, including a rule barring insured institutions from dealing in exotic securities, the kind that played such a big role in the financial crisis. And that’s the rule that has just been rolled back.

Now, this isn’t the death of financial reform. In fact, I’d argue that regulating insured banks is something of a sideshow, since the 2008 crisis was brought on mainly by uninsured institutions like Lehman Brothers and A.I.G. The really important parts of reform involve consumer protection and the enhanced ability of regulators both to police the actions of “systemically important” financial institutions (which needn’t be conventional banks) and to take such institutions into receivership at times of crisis.

But what Congress did is still outrageous — and both sides of the ideological divide should agree. After all, even if you believe (in defiance of the lessons of history) that financial institutions can be trusted to police themselves, even if you believe the grotesquely false narrative that bleeding-heart liberals caused the financial crisis by pressuring banks to lend to poor people, especially minority borrowers, you should be against letting Wall Street play games with government-guaranteed funds. What just went down isn’t about free-market economics; it’s pure crony capitalism.

And sure enough, Citigroup literally wrote the deregulation language that was inserted into the funding bill.

Again, in itself last week’s action wasn’t decisive. But it was clearly the first skirmish in a war to roll back much if not all of the financial reform. And if you want to know who stands where in this coming war, follow the money: Wall Street is giving mainly to Republicans for a reason.

It’s true that most of the political headlines these past few days have been about Democratic division, with Senator Elizabeth Warren urging rejection of a funding bill the White House wanted passed. But this was mainly a divide about tactics, with few Democrats actually believing that undoing Dodd-Frank is a good idea.

Meanwhile, it’s hard to find Republicans expressing major reservations about undoing reform. You sometimes hear claims that the Tea Party is as opposed to bailing out bankers as it is to aiding the poor, but there’s no sign that this alleged hostility to Wall Street is having any influence at all on Republican priorities.

So the people who brought the economy to its knees are seeking the chance to do it all over again. And they have powerful allies, who are doing all they can to make Wall Street’s dream come true.

 

By: Paul Krugman, Op-Ed Columnist, The New York Times, December 15, 2014

December 17, 2014 Posted by | Dodd-Frank, Financial Crisis, Wall Street | , , , , , , | Leave a comment

“Risky Business”: Brinksmanship And The Return Of Financial Crisis

A government shutdown once again loomed, and familiar deadlines and ultimatums flew around Washington. And Congress just used the threat to loosen the rules created in the wake of the financial crisis, a victory for Wall Street banks in their constant and well-funded campaign against reform.

The rules they have targeted are designed to reduce the risk of another financial meltdown, like the one that drove us into the Great Recession and could have been much worse. Though the repeal has been styled by some as a technical amendment, nothing could be farther from the truth.

Think about the best way to decide legislative policy in the devilishly complex and risk-laden area of derivatives. These are the financial contracts that brought down AIG, the event that triggered the crisis. You might imagine careful deliberation and debate, leading to a thoughtful vote in Congress in which elected representatives must stand up and be counted so that they could be held responsible for a difficult decision.

Of course, that is not how the House of Representatives works, especially not the current lame duck version. A 1,600 page Omnibus Spending Bill appeared Tuesday night and passed the House late on Thursday night. We have become familiar with these spending bills that have replaced reasoned budgeting and serially risk shutdowns just so the administration can be bullied every few months.

This time around, House sponsors attached a provision amending the Dodd-Frank financial reform law. They did this in the dead of night and at the last minute. Lobbyists, who are paid to make certain that the banks can continue to do as much risky business as possible despite the new regulatory regime, pushed to have a provision repealing the “swaps push-out” section of Dodd-Frank slipped into the spending bill so that any resistance to the repeal would risk another shutdown. Citigroup lobbyists wrote 70 out of 85 lines of the original bill.

That’s Washington style representative democracy for you.

The swaps push-out provision requires banks to transact their swaps business in separate subsidiaries. The concept is that any bank swaps business should be done outside the bank itself, which is backed by FDIC deposit insurance and the many supports provided by the Federal Reserve.

Swaps are complex derivatives contracts requiring payments in the future that change as markets prices for stocks, bonds, oil and many other traded assets change. Thus, they create large and volatile financial obligations going back and forth between a bank and its contract “counterparty,” either a company (like AIG), a government or another bank.

Counterparties to the banks who rely on the banks’ performance of its obligations can rely on these federal supports and can assume that the government will step in if a problem occurs. This can embroil the government in any bank default making a bailout more likely, good news for bank creditors like the swap counterparties. To avoid this, the swaps push-out requires a separate corporation, not entitled to the federal supports, to create a firewall, insulating taxpayers from the riskiest trading.

Though swaps were regulated in Dodd-Frank, there were plenty of loopholes, so a great deal of that business will go forward just as before. The swaps push-out section now under threat was already watered down in the original Dodd-Frank deliberations. Nonetheless, it still provides important protection. With swaps push-out, there’s some possibility that the federal government wouldn’t be dragged into a bank default because of the bank safety net.

But members of Congress, urged on by big money from Wall Street, decided that this sensible buffer between casino-like derivatives trading and the American taxpayer was such a bad idea that it had to be discarded through surreptitious and disguised means.

The banks have been out to kill the swaps push-out from the beginning. That makes sense for them since the capital needed to back a subsidiary would cost them more than their basic capital. Banks can raise general capital cheaply since investors have learned that failure is not a concern for banks that are too-big-to-fail. Capital funding for a subsidiary that is separated from this safety net is more costly because a bail out is less likely.

The banks also got some of their customers who often enter into swaps with the banks to urge repeal. The customers complained that their swaps would cost more. Of course they would, since the bank subsidiary’s capital backing the swaps would cost more. But the customers, as contract counterparties, have been relying on the too-big-to-fail safety net. Like investors in the banks, these customers simply should not benefit from a pipeline to the American taxpayers. Any additional cost is an element of elimination of that benefit, nothing more.

In Washington, banks have been allowed to set the terms of the regulatory debate. The financial crisis provides many lessons, but one of its central was that allowing banks free reign leads to disastrous results for all Americans. Six years after the onset of the financial crisis, it’s too soon to forget that lesson and revive too-big-to-fail.

 

By: Wallace Turbeville, The American Prospect, December 12, 2014

December 14, 2014 Posted by | Big Banks, Congress, Omnibus Spending Bill | , , , , , , , | Leave a comment

“The ‘Cromnibus’ Isn’t Without An Upside”: Funding Certainty And A Better Deal Than Could Be Extracted In Next Congress

The so-called Cromnibus is an ugly piece of work. On balance, I’m glad — no, make that relieved — it passed the House.

The Cromnibus is the giant $1.1 trillion spending bill that will keep the government functioning — no, make that open — through the end of the fiscal year in September.

The nickname stems from its dual function as “continuing resolution” and “omnibus” spending bill, but I like the term for its echoes of cronut, the calorie-laden combination of croissant and doughnut. Like the cronut, the Cromnibus is stuffed with some things that aren’t necessarily good for you.

Such as a toxic change in the campaign finance laws that helps usher back the bad old days of multimillion-dollar “soft money” donations to national political parties from wealthy individuals.

Without notice, without the legislative fig leaf of debate, the Cromnibus raised the limit tenfold for individual donations to the national party committees.

With the change, an individual could contribute $1.5 million during a two-year election cycle. A married couple — call them Mr. and Mrs. Plutocrat — could contribute $3 million. That’s enough money to get the Republicans’, or Democrats’, attention. This is bipartisanship in the service of self-interest.

There is a reasonable argument against tight caps on giving to political parties in the aftermath of the Citizens United decision and other developments that enhanced the power of super PACs and even less-transparent outside groups. With the cacophony of outside voices, the parties lose control of their message and their candidates, and the voters lose the ability to know what interests are financing the elections. The playing field could use some leveling.

Yes, but there remains a difference between the corrupting influence of money that flows straight to political parties and money that goes to outside groups. There was a reason Congress, just a dozen years ago, banned unlimited soft money donations from wealthy individuals, corporations and labor unions.

With this move, what comes next? And by what undemocratic, last-minute sleight of hand?

A similar case could be made against the stealth dismantling of part of the Dodd-Frank financial reform law, passed in the aftermath of the 2008 economic collapse. As the White House said in not threatening to veto the spending bill, the Citigroup-authored change would “weaken a critical component of financial system reform aimed at reducing taxpayer risk.”

That provision, known as Section 716, required banks and other institutions to move certain risky financial instruments into separate entities in order to limit the exposure of the Federal Deposit Insurance Corp. and Federal Reserve — i.e., taxpayers — from having to bail the financial institutions out if the deals should go south. Banks remained able to trade in nearly all derivatives, just not the more exotic ones.

Again, there are some reasonable arguments for undoing the remaining restriction. The change doesn’t unravel Dodd-Frank’s regulation of derivative instruments. Section 716 was controversial from the start, with some bank regulators arguing it would increase systemic risk, not reduce it. The impact of the change is debatable; after all, according to FDIC Vice Chairman Tom Hoenig, who opposes undoing the provision, it would not affect 95 percent of derivatives.

Of course, changes like these should be made in the ordinary course of legislative business, not stuffed into a Cromnibus. So why would I express relief about the Cromnibus’s passage?

Because, to some extent, my reference to the ordinary course of legislative business is civics textbook hooey. In practice, it has long been true that special-interest goodies are tucked into must-pass bills. Real-world legislating requires a horrific amount of nose-holding.

The reason is simple: The imperative for horse-trading and compromising is an immutable fact of political life. And so the question, for lawmakers and the Obama administration, is not whether the measure is perfect — it’s whether the trade-offs are acceptable. This is a judgment call; reasonable people, even reasonable Democrats, can differ.

In the case of the Cromnibus, the upside is a year of funding certainty and a better deal than could be extracted in the next Congress. Democrats avoid being blamed for causing a shutdown but, post-floor fight, reap the benefit of having fired a shot across the bow of Republicans and the White House as their caucus revolted.

House Minority Leader Nancy Pelosi had a legitimate point in contending that House Democrats were being “blackmailed” to vote for the spending bill. Still, there is something worse than legislative sausage-making in Washington. That is the inability to produce any sausage at all.

 

By: Ruth Marcus, Columnist, The Washington Post, December 12, 2014

December 13, 2014 Posted by | Bipartisanship, Campaign Financing, Omnibus Spending Bill | , , , , , , , | Leave a comment

“A New Day For Liberals”: What We Learned In The Epic Clash Over The Spending Bill

The House passage of the omnibus spending act is on its face a defeat for the progressive wing of the Democratic Party that fought to block it. In the end, though, risking a government shutdown over the bill’s ugliest provisions – restoring government protection to risky bank maneuvers and raising the cap on party contributions, astronomically – was probably too much to expect. According to Greg Sargent, Dem sources say that while House Minority Leader Nancy Pelosi fought it ferociously, in the end she signaled that members could vote their conscience.

And what did that vote tell us about the Democratic Party? Most of the departing Blue Dogs who lost their seats voted for the bill, predictably. In a break with President Obama, who lobbied for it, most of the Congressional Black Caucus did not. The remaining House Democrats are going to be more reliably critical of Wall Street, and less inclined to bow to the White House. 2015 is going to be interesting.

I admit, for a few hours on Thursday I thought Democrats might be able to win the public relations battle if they blocked the bill. Why should taxpayers protect risk-taking banks? The story of how Citigroup wrote the provision, and Wall Street’s friends snuck it in, is so outrageous I thought it had a chance to carry the day. So Republicans wouldn’t pass a spending bill without this giveaway to Wall Street? That would make them responsible for a government shutdown. But Sen. Ted Cruz and his allies may have thought the same thing about their message when they shut down the government last year.

We’ll never know if Democrats could have mustered populist outrage over Washington catering to Wall Street in the event of a new shutdown. But what else did we learn from the battle?

We now know that Nancy Pelosi is through guaranteeing the votes for ugly messes liberals hate (like the debt ceiling and sequester deals) but that House Speaker John Boehner can’t pass alone. In a new Congress where many Blue Dogs lost their seats, this sets the stage for House Democrats to block elements of the GOP agenda, especially when there can be left-right alliances.  Tea Party defenders say it was partly inspired by outrage at the 2008 Wall Street bailout and corporate-government cronyism; it would be nice if House adherents remembered those roots.

We also know that Elizabeth Warren wasn’t tamed by her ascent into Senate Democratic leadership; she was emboldened. While her star turn may increase the pressure on her to run for president, I’m with Elias Isquith here: I still hope she doesn’t. A President Warren would lack a Sen. Warren protecting her left flank. Giving Warren more progressive Senate allies would be more politically productive than elevating her to the White House.

We’re also seeing a more clearly defined bloc of Wall Street critics emerge in the Democratic Party, just in time for 2016. The Warren-led battle over Treasury nominee Antonio Weiss is also heating up – and both fights pit the popular progressive against President Obama.

Many news accounts have depicted the spending bill battle as Warren vs. Obama, setting up an ongoing clash between the two Democratic leaders. But I think the Warren vs. Obama story line can be overblown. It’s probably too much to expect the president to veto the spending bill and effectively shut down the government – clearly he doesn’t share my optimism that Democrats could win that P.R. battle.  But if the noxious measures hidden in the bill came to him as individual pieces of legislation, he’d be under a new level of pressure from congressional Democrats to veto them, and I expect he would. Obama made clear that while he wanted Democrats to support the spending bill he shared their opposition to both provisions.

In fact, the next two years will be a test of who the president really is: the change agent who inspired progressives, or the guardian of Wall Street power that his left-wing detractors claim he is. Bloomberg’s Dave Weigel makes the case that Warren, rather than being an Obama opponent, could be the best protector of his legacy that the president has. We’ll see.

 

By: Joan Walsh, Editor at Large, Salon, December 12, 2014

December 13, 2014 Posted by | Big Banks, Democrats, Federal Budget | , , , , , , , | Leave a comment

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