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Thomas Ferguson: A few small useful measures, but the bill strengthens the Fed and is weak on big issues

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. And now joining us from Boston, where he says it’s altogether too hot—but then it’s altogether too hot in Washington, too—is Tom Ferguson. He teaches at the University of Massachusetts Boston. He’s a senior fellow at the Roosevelt Institute. Thanks for joining us, Tom.

THOMAS FERGUSON, POLITICAL SCIENTIST AND AUTHOR: Thanks, I guess. I mean, it’s really hot up here.

JAY: So the question is—the new finance reform bill that’s passed the House is going to be voted on in the Senate soon. Does it actually put any heat on Wall Street? We were told we were at the precipice of the Apocalypse. We were told we needed serious reform to stop another meltdown. So what in fact is this bill?

FERGUSON: Well, look, I have to tell you, this whole business reminds me of the old Bob Hope line, you know, where he said you could fool some of the people all of the time and all the people some of the time, but you can’t fool all the people all of the time, and that’s why we have a two-party system. I mean, basically, you know, the Republicans opposed this bill completely. They voted just essentially, virtually to a person, against it in the House and are threatening to do that in the Senate. And the Democrats then brought in a bill that was somewhat critical of some Wall Street practices, hyped it as the greatest legislative achievement since—I mean, I think the president actually compared it to Glass-Steagall, the original one back in 1933. You know, this is sort of crazy. I mean, the hype here—this thing is not worth the hype. It makes some marginal changes, but it does not attack any of the fundamental problems that got us into this sort of disastrous financial crisis back in 2008. The too-big-to-fail problem is, you know, not even tackled. In fact, almost everybody who’s examined the bill seriously ends up concluding that it’s going to in effect lock in the positions of the largest banks. These folks are flourishing trumpets and pushing forward a couple of elderly mice. That’s what you’ve got here.

JAY: Alright. Let’s start; let’s go through a few of the major things concretely. So what did they do on supposedly too-big-to-fail? ‘Cause that was supposed to be the objective.

FERGUSON: Well, in the end they didn’t do very much of anything. They created a new council of the regulators, who are precisely the people who failed in, you know, the years before 2008, and gave the Fed sort preeminent position in it (which failed totally), told them, well, if you see something really developing that’s bad, do something about it. You know, if you’ve got a lot of confidence in those folks, maybe we’ll find that deeply moving. You know, I don’t, and I think that’s pretty pathetic. More to the point, they didn’t tackle the derivatives problem. Now, people [inaudible] a lot of ordinary folks just sort of sit there and say, “Who cares about derivatives? I’ve never bought one.” Although, you know, a lot of folks have sort of caught on that they’ve been harmed by them a lot—you know, we’re paying off all the folks who had contracts with AIG, for example, and you know, that’s a good reason for people to sort of get interested in derivatives. But, basically, after a lot of noise, in the end they let the big banks keep about, probably, 80 percent of the derivatives business they’ve got. They forced some of them onto exchanges, which means they all have to eventually post prices. And there’ll be somebody besides the banks themselves standing behind them if they fail. But there’s clearly going to be a large amount of derivatives business that’s not going to be done through the clearinghouses, you know, and in the end they didn’t do much about that. You say, why do I care about that? Well, basically it’s like this. If you’re trying to buy a derivatives contract and you’re some small industrial firm that wants to lay off a risk somewhere or something, do you want to buy it, you know, just around with folks who may not be there? Or do you want to buy it with one of the three or four largest banks who you know will be there because they’re too big to fail? The derivatives business powerfully reinforces too-big-to-fail. And in basically not really tackling the derivatives business, they’re leaving at most about 80 percent—the best estimate I’ve seen—with the banks. They have put some—you know, they did force some of it, the derivatives business, out of bank holding, out of the parts of the bank that are covered by federal guarantees. They’ve got to set up a separate subsidiary. Big deal. They just ducked that one. They also don’t do much to sort of break up the links these folks have with each other in any serious fashion. And they didn’t in the end do anything, really, on leverage. The council of regulators has the power to—if they find a systemically threatening firm, they’re supposed to be able to tell that firm, well, you can’t go more than 15 to 1 on a leverage ratio. Well, what about the rest of the place? They should have put some hard and fast requirements in there, as were proposed. They ducked all that stuff. You know, but these guys did—in that sense, the too-big-to-fail problem hasn’t been solved at all. Actually, it hasn’t been tackled. And none of the stuff that a lot of attention was paid—like, the Volcker rule, which has to do with proprietary trading, you know, that didn’t address that problem either. I mean, this one, I’m afraid, too-big-to-fail, is still with us, which means you are very likely sometime—maybe in the not too distant future if things don’t go well in Europe—to see yet another big bank, you know, brought down by some stupid business deal with, say, a bank in Europe.

JAY: Did they do anything about synthetic trading? I mean, so much of this derivative trading became pure gambling—like, the parties on either side of the short and long trade had no ownership at all in what they were doing. And I know there’s a new derivative they want to float now: they’re going to bet on whether movies make money or not. And either side of the bet’s going to have actually no ownership in the movies.

FERGUSON: Paul, I’m planning to launch a derivative of whether The Real News Network makes money. I’m hoping—and I just figure, hey, you know, when everything else goes down—.

JAY: Well, I want to know who bets long on that one. But—.

FERGUSON: That will go up. No, no, no, no, it’ll be like—. Alright. Anyway, the answer is that some of the more ridiculous stuff, especially the so-called below investment grade credit default swaps, they have to get out of and stick in the separately capitalized business. There are other restrictions on that, too. Yeah, that’s—but they kept most of the derivatives stuff for themselves. I mean, the interest rate swaps and foreign exchange swaps they keep. I’m underwhelmed. You know, this too-big-to-fail problem is still there. Now, we might ask: would they do anything for the rest of us? Well, you know, there is a consumer product safety agency that’s to be established. Now, these guys in the end went with the Senate, put it in the Federal Reserve. Now, the Federal Reserve simply hates consumer product safety stuff. You know, we’ve talked about this before. You know, when—I remember the congressional hearing a year or so ago, when right as they were talking about putting in new standards for credit cards, folks asked Bernanke, who was being quizzed by a congressional committee, “You have the authority to put those in right now. You didn’t need new legislation. Would you do it?” and he said no, you know, which tells you plenty about what the Fed likes to—they have sat back for years and let banks rip everybody off. Moreover, they—let’s see. I think it’s since the late ’70s, there’s a provision in the banking laws that tell the Fed they’ve got to do stuff to promote an efficient payment system. Instead, they let the banks tack on any fees they want. They’re, I mean, up to 3 percent, you know, in some cases now. Just you go to Canada, you get hit with a 3 percent charge on the credit card stuff coming back. I mean, the Fed, I think, is never going to take consumer product safety seriously and financial products. Now—.

JAY: Is there anything in this bill that you can say is a sort of victory for the people versus Wall Street? Is there any protections in it that are worthwhile?

FERGUSON: Consumer product safety thing will be there. It’ll presumably have to do something. Now, they nicely exempted auto dealers from it. You know, I’d say that one is a modest victory. If the thing went down, I’m not persuaded that at the moment that that would be all that much of a loss. We might still be better off just starting over. The audit provision, that’s good, even though that was watered down, too—I think it’s a one-time-only deal. But it’s about time they sort of subjected to the Fed to sort of normal administrative checks.

JAY: So if it was up to you—and we know it’s not, but if it was, do you want this thing to pass? Or would it be better to have it go down and start again, and with the public paying more attention, perhaps?

FERGUSON: Well, you know, there’s one big argument for that, and that says the very same Congress that’s been pushing this bill through at a snail’s pace, they actually also created the Angelides Commission, which was supposed to inquire into what happened and why. Now, of course, the curiosity is is that that’s not going to report until after the November elections. And so right from the beginning you knew our folks in some sense who were pushing this bill were not serious. I mean, that is to say, if they learned anything, they weren’t planning to use it in the bill. I guess I’d say you’d probably better take this one, ’cause you’ll probably get a worse bill next time, under another Congress. But I’m deeply sympathetic to Senator Feingold when he said he just could not vote for this bill. Senator Cantwell was saying that, and now that they’re a vote short in the Senate or two, is saying, well, maybe she’ll vote for it. I’m deeply sympathetic to those senators.

JAY: Finally, what does this tell us about the continued relationship between Wall Street, White House, and Congress?

FERGUSON: We’ve now all seen sort of a spate of news stories about how many. The number was simply incredible. Former Congressional staffers had been hired by various Wall Street houses to lobby the current congressional staffers—in other words, the folks who will soon join them in the lobbying ranks. There’s just enormous amounts, record-breaking amounts of funds, in some cases, being tossed into congressional and senatorial campaigns by these firms. And what you’re really getting here, what you’re really getting here is a tremendous illustration of the power of money to block any sensible policymaking. And basically they blocked it. You know, it’s not an accident, despite all the newspaper—most newspapers in the US—though not abroad—have played this up as a fairly big victory for ordinary humans. It sort of echoed President Obama. In fact, what happened on the day the thing actually came out is that bank stocks rose above the rest of the market, and almost everybody that looked at that and who sort of knows how to read that indicator got the exact message, which is these folks know they just dodged a silver bullet. They should have been forced to sort of pay a great deal more and change a great deal more. In the end, we have a tale full of sound and fury, signifying nothing.

JAY: Thanks very much for joining us, Tom.

FERGUSON: Okay. Thanks.

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

End of Transcript

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Thomas Ferguson is Professor of Political Science at the University of Massachusetts, Boston and a Senior Fellow of the Roosevelt Institute. He received his Ph.D. from Princeton University and taught formerly at MIT and the University of Texas, Austin. He is the author or coauthor of several books, including Golden Rule (University of Chicago Press, 1995) and Right Turn (Hill & Wang, 1986). Most of his research focuses on how economics and politics affect institutions and vice versa. His articles have appeared in many scholarly journals, including the Quarterly Journal of Economics, International Organization, International Studies Quarterly, and the Journal of Economic History. He is a long time Contributing Editor to The Nation and a member of the editorial boards of the Journal of the Historical Society and the International Journal of Political Economy.