Story Transcript

PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I’m Paul Jay. And joining us again from Hadlyme, Connecticut, is Jane D’Arista. She’s a member of the SAFER group, which is a group of economists that have been lobbying for a long time for financial reform. And she’s also a research associate with the PERI institute in Amherst, Massachusetts. Thanks for joining us again, Jane.

JANE D’ARISTA, RESEARCH ASSOCIATE, PERI: Thank you very much for having me.

JAY: So if this finance reform bill really isn’t going to deal with too-big-to-fail, and if most of what the finance sector was doing that got us into this crisis they can still do, even though the legislation seems to have some brakes on it, but not enough structural brakes, and perhaps too dependent on regulators that can be leaned on, and a Congress can be leaned on about who gets to be regulators—. As we know right now there’s a big fight [inaudible] the Consumer Protection Agency, whether Elizabeth Warren is going to be appointed the head of it, because people think she’s got some backbone. But even if she gets appointed now, who comes next? So given all of that, to people watching this, what should they be demanding as a real solution, more structural solution? And let me ask just one possible route and see what you think of it. When we were talking about health-care reform, President Obama made the argument quite strongly early on in the health-care debate that it needed a public option to be able to regulate the private sector. Unless people had a public option to go to, you couldn’t really enforce regulation in the private sector. Why isn’t that true for the finance sector as well?

D’ARISTA: We lost the public option in health care, and we lost the public option, if you will, also in financial reform. The public option, I would say, by analogy, would have been really forcing derivatives into separate institutions, smaller institutions, and totally getting them out of the banks themselves, so that there is no possibility that that federal guarantee that we give to banks through deposit insurance and access to the Federal Reserve could ever be used in the derivatives markets. We didn’t do that. What in the end, unfortunately, the legislation, which was so strong as introduced by Senator Lincoln, chairman of the Agriculture Committee, she would have pushed them out of the banks. And the compromise, disastrously, was to say, oh, no, the banks get to keep the business of dealing in interest-rate and foreign-exchange swaps. Unfortunately, some of us have the memory of an almost collapse of the financial system in the ’70s from foreign exchange swaps, and also perhaps an almost collapse in interest rate swaps in the late 1990s with long-term capital management. So—and besides, these are the two biggest parts of the derivatives business. So the banks do not have to have separate subsidiaries. They get to continue their business, very lucrative, very large. A carve-out also for end-users there. So what has been moved off, and the one positive thing to say here, is commodities. Very important, in the sense that commodities, we have seen the problem; we saw the oil price increase in 2008, and more importantly to the rest of the world, the rise in food prices that so disastrously affected developing countries and poor populations around the world. So that could be a positive part of that. So the trade-off is we gained a little bit. Hopefully, going forward we’ll realize that prophylactic that we were looking for that some people said let’s reintroduce Glass-Steagall, let’s get banking back to be banking. That’s what Senator Lincoln said, and many others as well. Didn’t happen. They’re still in the games. They’re still playing proprietary trading games through derivatives. And the proprietary trading provisions were good. They got added in the end, and they were fairly strong. Unfortunately, they will get defined by the regulators, and they could be weakened there. The other problem is that the banks won also the ability to continue to have a finger in hedge funds and private equity funds. Again, these are unregulated entities. They don’t belong in banking. That should be out of the banking structure. So those structural issues haven’t been solved, and they are very important. And if we have another crisis, it’s going to be a structural problem that will bring it on.

JAY: What do you make of the argument that if these banks are surviving because of public money, if it hadn’t been for this infusion of money directly from the Treasury or from the Fed, there wouldn’t—most of these banks would have been down, including Goldman? If they survive based on public money, then, number one, why shouldn’t there be some real public-interest mandate enforced on them as long as they’re using public money? And the second thing is, why not some of these banks that only exist because of public money actually be taken over, and next time Wall Street says, you know, we’re in crisis, come bail us out or we won’t be able to loan you any more money, be able to say, well, go, go, you took the risk, you fall, we have public institutions that can keep credit flowing. Is that not a practical possibility?

D’ARISTA: Well, the second, I think, is the ideal possibility. We’re halfway there. We have a resolution provision here that says let them fail, and we’re not going to bail them out. And I think that might hold. It will present problems, and you may have situations in which the fall in asset values will affect the system as a whole. Again, as I’m saying, they’re not thinking systemically; they’re thinking about individual institutions. But at the same time, that’s better than it might be if we didn’t have that provision in the legislation. So, hopefully, going forward we’ll be in a situation where people will see the value. Of course, you’re absolutely right: at the moment, to this day, the banks, the major banks, and many of the regional banks as well, are being totally supported by the Federal Reserve, and TARP money for some of the smaller banks. The big ones have paid it back, but the smaller ones are still out there and missing payments, as Elizabeth Warren just recently reported. So they’re not out of the woods. The whole system is not out of the woods. And if the Fed were to decide to reduce its balance sheet ’cause it’s worried about inflation or some such thing as that in a period where the threat of deflation is so real, nevertheless they might decide to do that, in which case, of course, you take away that prop from the system and it’s back in deep water.

JAY: Thanks very much for joining us, Jane.

D’ARISTA: Thank you very much for having me.

JAY: And thank you for joining us on The Real News Network. And don’t forget the Donate button, which is up here or down there or wherever you see it, because we also have a Real News fiscal crisis and we need your help.

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Jane D'Arista

Jane D'Arista is a research associate with the Political Economy Research Institute (PERI), University of Massachusetts, Amherst where she also co-founded an Economists' Committee for Financial Reform called SAFER (Stable, Accountable, Efficient & Fair Reform) and gave testimony to Congress on financial reform. Jane served as a staff economist for the Banking and Commerce Committees of the U.S. House of Representatives, as a principal analyst in the international division of the Congressional Budget Office. Representing Americans for Financial Reform, Jane has currently given Congressional testimony at financial services hearings. Jane has lectured at the Boston University School of Law, the University of Massachusetts at Amherst, the University of Utah and the New School University and writes and lectures internationally. Her publications include The Evolution of U.S. Finance, a two-volume history of U.S. monetary policy and financial regulation.