The Remarkable Political Stupidity of the Street

Wall Street is its own worst enemy. It should have welcomed new financial regulation as a means of restoring public trust. Instead, it’s busily shredding new regulations and making the public more distrustful than ever.

The Street’s biggest lobbying groups have just filed a lawsuit against the Commodities Futures Trading Commission, seeking to overturn its new rule limiting speculative trading.

For years Wall Street has speculated like mad in futures markets – food, oil, other commodities – causing prices to fluctuate wildly. The Street makes bundles from these gyrations, but they have raised costs for consumers.

In other words, a small portion of what you and I pay for food and energy has been going into the pockets of Wall Street. It’s just another hidden redistribution from the middle class and poor to the rich.

The new Dodd-Frank law authorizes the Commodity Futures Trading Commission to limit such speculative trading. The commission considered 15,000 comments, largely from the Street. It did numerous economic and policy analyses, carefully weighing the benefits to the public of the new regulation against its costs to the Street. It even agreed to delay enforcement of the new rule for at least a year.

But this wasn’t enough for the Street. The new regulation would still put a crimp in Wall Street’s profits.

So the Street is going to court. What’s its argument? The commission’s cost-benefit analysis wasn’t adequate.

At first blush it’s a clever ploy. There’s no clear legal standard for an “adequate” weighing of costs and benefits of financial regulations, since both are so difficult to measure. And putting the question into the laps of federal judges gives the Street a huge tactical advantage because the Street has almost an infinite amount of money to hire so-called “experts” (some academics are not exactly prostitutes but they have their price) who will use elaborate methodologies to show benefits have been exaggerated and costs underestimated.

It’s not the first time the Street has used this ploy. Last year, when the Securities and Exchange Commission tried to implement a Dodd-Frank policy making it easier for shareholders to nominate company directors, Wall Street sued the SEC. It alleged the commission’s cost-benefit analysis for the new rule was inadequate.

Last July, a federal appeals court – inundated by Wall Street lawyers and hired-gun “experts” – agreed with the Street. So much for shareholders nominating company directors.

Obviously, government should weigh the costs against the benefits of anything it does. But when it comes to the regulation of Wall Street, one overriding cost doesn’t make it into any individual weighing: The public’s mounting distrust of the entire economic system, generated by the Street’s repeated abuse of the public’s trust.

Wall Street’s shenanigans have convinced a large portion of America that the economic game is rigged.

Yet capitalism depends on trust. Without trust, people avoid even sensible economic risks. They also begin trading in gray markets and black markets. They think that if the big guys cheat in big ways, they might as well begin cheating in small ways. And when they think the game is rigged, they’re easy prey for political demagogues with fast tongues and dumb ideas.

Tally up these costs and it’s a whopper.

Wall Street has blanketed America in a miasma of cynicism. Most Americans assume the reason the Street got its taxpayer-funded bailout without strings in the first place was because of its political clout. That must be why the banks didn’t have to renegotiate the mortgages of Americans – many of whom, because of the economic collapse brought on by the Street’s excesses, are still under water. Some are drowning.

That must be why taxpayers didn’t get equity stakes in the banks we bailed out – as Warren Buffet got when he bailed out Goldman Sachs. That means when the banks became profitable gain we didn’t get any of the upside gains; we just padded the Street’s downside risks.

The Street’s political clout must be why most top Wall Street executives who were bailed out by taxpayers still have their jobs, have still avoided prosecution, are still making vast fortunes – while tens of millions of average Americans continue to lose their jobs, their wages, their medical coverage, or their homes.

And why the Dodd-Frank bill was filled with loopholes big enough for Wall Street executives and traders to drive their ferrari’s through.

The cost of such cynicism has leeched deep into America, causing so much suspicion and anger that our politics has become a cauldron of rage. It’s found expression in Tea Partiers and Occupiers, and millions of others who think the people at the top have sold us out.

Every week, it seems, we learn something new about how Wall Street has screwed us. Last week we heard from Bloomberg News (that had to go to court for the information) that in 2009 the Street’s six largest banks borrowed almost half a trillion dollars from the Fed at nearly zero cost – but never disclosed it.

In early 2009, after Citigroup tapped the Fed for almost $100 billion, the bank’s CEO, Vikram Pandit, had the temerity to call Citi’s first quarter the “best since 2007.” Is there another word for fraud?

Finally, everyone knows the biggest banks are too big to fail — and yet, despite this, Congress won’t put a cap on the size of the banks. The assets of the four biggest – J.P. Morgan Chase, Bank of America, Citigroup, and Wells Fargo – now equal 62 percent of total commercial bank assets. That’s up from 54 percent five years ago. Throw in Goldman Sachs and Morgan Stanley, and these six leviathans preside over the American economy like Roman emperors.

Speaking of Rome, if Italy or Greece defaults and Europe’s major banks can’t make payments on their debts to Wall Street, another bailout will surely be required. And the politics won’t be pretty.

There you have it. A federal court will now weigh costs and benefits of a modest rule designed to limit speculative trading in food and energy.

But in coming months and years, the American public will weigh the social costs and social benefits of Wall Street itself. And it wouldn’t surprise me if they decide the costs of the Street as it is far outweigh the benefits.

The result will be caps on the size of banks. Some will be broken up. Glass-Steagall will be resurrected. Some Wall Street bigwigs may even see in the insides of jails.

If so, the Street has only itself to blame.

This post originally appeared at Robert Reich’s Blog and is posted with permission.

3 Responses to "The Remarkable Political Stupidity of the Street"

  1. geegee44   December 11, 2011 at 10:20 pm

    Personally I feel powerless to right the wrongs done to the midddle class. I feel even the Supreme Court is already rigged against the average citizen.

    Give us a list of actions an individual can take to reclaim power to regulate the financial industry.

    Could the Glass Steagal regulations be reinstated? How? When?

    Joe six pack needs to be re-educated. Anyone up to the job?

    All attacks on Public Education has kept us weak to bring about change.

    This internal war has been going on for decades.

  2. Rcoutme   December 12, 2011 at 8:09 am

    "All attacks on Public Education has kept us weak…"

    I believe that the attack on public education is specifically designed for the purpose of keeping the majority of voters ignorant (or worse, deliberately misinformed). Look at where the best colleges and universities are. Are they in Red States or Blue States? Look at the scores on standardized tests given throughout the country. Where do the most-educated students reside? Hint: it ain't the South (which is almost entirely Red now).

    This site, the other internet sites, blogs, etc are the only means left for us to retake our country from the plutocrats who have hijacked it. We must keep on pounding the theme that having bankers run the country will only result (in the short term) with bankers getting lots of money and (in the long term) eventually economic disaster.

  3. Jamestennier   December 31, 2011 at 9:52 pm

    "They" really do think they've "earned" everything they've taken from the system.
    For myself, I'm more of a believer in the accident of birth and what comes after: in that "there but for the Grace of God…"
    1) We all are lucky to be Americans. Irregardless. Some are just luckier than others and that of course is by accident of to whom they happened to be born.
    2) After that event, I suppose anything is possible. It's just a damn shame the few forget all shit stinks, theirs too.
    Perhaps, if the dems get the message out that they did categorically, not cause the Great Recession, and can stay on message about the chronological order of how events did unfold going back at least to Phil Grahmn, to get us to where we are today, and who it is that has caused us to still be here, (The tea party right in spite of his highness Boehner) by listing event after event, nightly, on the news: it will finally begin to sink into the consciousness of the middle and right, that the Republicans have been running out the clock for three years with the sole purpose of defeating Obama in Nov. ie Never accept responsibility!
    We can out vote every dollar those SOBs come up with if we just get the truth out!