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US FINANCE BILL LACKS POWER TO CURB WALL ST. PT.2 – Interview with Gerald Epstein

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I’m Paul Jay in Washington. And joining us again is Gerry Epstein. He joins us from Amherst, Massachusetts. He’s codirector of the PERI institute there. And we’re talking financial reform. Thanks for joining us again, Gerry.


JAY: So in the first segment of the interview, you essentially said the bill’s extremely weak. But most importantly, I think, you said it relies so much on regulation rather than structural changes. And the regulators, there’s going to be a battle, I suppose, over every single position, enormous lobbying taking place of who gets to regulate, and then what are the rules for regulation. Talk a bit about the coming wars.

EPSTEIN: Well, the coming war’s either going to be a total bloodbath that is completely one-sided, with the banking lobby and their allies fighting against open doors and no opposition, or the reformers, our side, is going to be able to fight back against the bankers who are going to be writing these rules with regulators over the next ten years. We have a big problem. One of the good things (if we can talk about anything good coming out of this) is that over the last year and a half to two years, reformers have been mobilized at all different kinds of levels. There are academics who used to be just armchair academics, who’ve really gotten into the fray and tried to learn the details of financial reform, financial restructuring. People at PERI, people like Simon Johnson, James Kwak, many other people, have gotten really down and dirty into the nitty-gritty of this. They’ve been supported by Americans for Financial Reform, people at the grassroots who’ve really fought the good fight. The AFL-CIO has had a lot of impact in this. I’m a student of the history of monetary policy and financial reform, and I’d say this is the first time, in fact, in the history of fighting against finance where we actually see labor and community groups and academics all pulling together to try to fight for a decent financial system. This hasn’t really happened before. We didn’t win, but the coalition has been put together. And now the question is: is it going to be able to continue to the next round of the fight, which is going to be the most important round?

JAY: Give us some examples. You’ve been down on the Hill. Some of your colleagues have been lobbying for very specific proposals. How many of those proposals actually made it into the legislation? And give us a few examples of what you were fighting for.

EPSTEIN: Okay. One proposal that made it in, in modified form, is the Consumer Financial Protection Bureau, which was designed to help prevent the kind of abusive lending that is not only unfair but, in the case of subprime mortgages and so forth, helped lead to the crisis. That succeeded in modified form. Of course, instead of being independent and it’s on its own, it’s going to be lodged in the Federal Reserve. But Elizabeth Warren, who is the mother of this organization, this institution, believes that they’re going to have enough independence to make a difference. So I think that clearly is a victory. Again, it’s going to depend on who Obama names to head it.

JAY: That’s kind of a rather important point, because we hear that [Timothy] Geithner’s against the appointment of Warren, whose people were all hoping [sic]. So if you have wind up having somebody who’s not that strong—.

EPSTEIN: Yeah, in fact it could wind up being nothing. So it’s very important who Obama names and it’s very important that he name Elizabeth Warren. That’s one thing. A second thing that we were fighting for, as I said, was limits on the size of banks. The Brown-Coffman amendment would have really limited the size of too-big-to-fail banks. That could have made a difference. Nothing like that made it in, except for one thing: the Kanjorski amendment made it in, which allows this council of regulators to break up banks if they prove to be systematically very dangerous. It’s a difficult thing to do, but it’s one element that did make it in. Another element is derivatives regulation made it in—in modified form, but the derivatives have not been regulated before, so that’s a small victory. But there were things that were really important that we couldn’t even get a vote on. So, for example, if you’re going to have capital requirements to limit the risk, if you’re going to have liquidity requirements to keep buffers of liquidity on hand so that the banks don’t have to go running to the public, you need to have a good sense of what’s happening on the balance sheets, you need to know how much risk is being hidden off the balance sheet, you need to know how much short-term borrowing there is. There’s nothing in this reform bill that gives a clear picture of what the banks are actually doing, how much risk they’re actually holding. Now, Senator Menendez from New Jersey had developed a bill with the help of people at SAFER and PERI to open up, make transparent these balance sheets, which really is essential for any reform of the banks, and they couldn’t get it voted on. There are other examples like that as well. So, for example, regulating the shadow banking system, the hedge funds, private equity funds, and so forth, we need a much stronger oversight and regulation of those. We couldn’t get anything through the bill, through the legislation on that. Regulating executive compensation in a very strict way so that bankers don’t make millions and millions of dollars for taking excessive risks, again, we have legislation that we were working on. We really couldn’t get any decent legislation.

JAY: So, Gerry, let’s say this scenario all happens again. If the legislation doesn’t have the kind of teeth to prevent this too-big-to-fail and something happens in Europe or next time another bubble breaks, whether it’s housing or something else, and we’re back in the same situation of a freeze of credit and these banks in trouble and they want to get bailed out again, what’s going to be the alternative that people should be fighting for? And what’s a different scenario than playing the same piece of theater again?

EPSTEIN: I think the different scenario has to have two components. First of all, the scenario has to be: let’s let more of the banks fail. But at the same time, to prevent that from dragging down the world economy, we have to develop alternative institutions that are publicly controlled, publicly owned, that actually serve the needs that finance is supposed to serve, that is, the needs of business, the needs of consumers, the needs of workers. We don’t need this financial system the way it’s structured. It doesn’t need to be this big. It doesn’t need to be doing what it’s doing. It’s engaging mostly in casino capitalism and not in real investment. So I think the next time around we shouldn’t bail it out. But if we don’t do anything else beside that, it will cause a catastrophe. So at the same time, we have to develop institutions that can come in and take over the role that these financial institutions are supposed to be playing. So we need cooperative banks. We need state-owned banks. We need cooperative insurance companies, state-owned insurance companies. We have to start building these alternative financial institutions so that next time around we can just let these other ones go.

JAY: And there’s even an immediate issue about AIG right now, because the government essentially owns AIG, which is the main insurer of these banks. And is there going to be any kind of fight waged—instead of insuring Wall Street, AIG should start insuring loans to small businesses and ordinary people and get credit flowing? Is that even on anybody’s agenda?

EPSTEIN: I don’t know if it’s on anybody’s agenda, but you’re resolutely right: that should be. Let me say a word about the Republicans and the tea party people. The Republicans in a sense are getting a free ride on this, I think, because on the one hand, they blocked any kind of serious reform, and now they’re turning around and saying, see, the reform is not serious. The tea party people, basically, whether they realized it or not, are just shields for the big banks, because their only argument is that, you know, we’ve got to get rid of the Federal Reserve; let’s let the private markets do what they want. But it’s the private markets, the private banks, that got us into this problem in the first place—of course, with the help of the Fed and some of the regulators. But it was the bankers that got us into this problem in the first place. It’s private finance which is at the core of the problem. We need publicly organized, publicly controlled finance to play a bigger role, a public option. So, yes, I think in the upcoming elections people should go around to every candidate who’s running, and saying, do you support a public option? Do you support the idea that we should take these institutions who we gave public money to and force them to start doing public purposes, for example keeping homeowners in their homes? It’s now been predicted that a million homeowners are going to be thrown out of their homes in the next year. Citicorp, Bank of America, all of the financial institutions that are partially owned by the public and who got public bailout money should write down these mortgages to keep people in their homes. That has to be, I think, the key point in the election, using these public financial institutions for public purposes.

JAY: Thanks very much for joining us, Gerry.

EPSTEIN: Thank you.

JAY: And thank you for joining us on The Real News Network.

End of Transcript

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Gerald Epstein is co-director of the Political Economy Research Institute and Professor of Economics at UMass Amherst.