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Time to Break Up Zombie Bank of America? | | AlterNet
Time to Break Up Zombie Bank of America? | | AlterNet
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14 COMMENTS Time to Break Up Zombie Bank of America?
January 26, 2012 |
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Does Bank of America pose a “grave threat” to America?
That's what Public Citizen is arguing in a new petition to the Federal Reserve Board of Governors and the Financial Stability Oversight Council, calling for the regulators to step in and break up the nation's second-largest bank before it collapses and kicks off another financial meltdown.
Under Section 121 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the government has the power to force a financial institution that poses such a systemic threat to divest assets, limit activities, or otherwise down-size so it's not “too big to fail.” According to Public Citizen's David Arkush, even though many of the big banks became even larger and more threatening after the financial crisis in 2007 and 2008, “Bank of America looks like it is the most systemically dangerous of the large banks and is at the greatest risk of actually failing.”
In a separate letter to Treasury Secretary Tim Geithner, Federal Reserve Chairman Ben Bernanke, and Acting FDIC Chairman Martin Gruenberg, several economists and activist groups including Marshall Auerback, Dean Baker, William K. Black, National People's Action, and New Bottom Line called on the regulators to look into Bank of America as well as other large banks. They wrote:
Recently many questions have been posed regarding the financial condition of Bank of America and several other large and complex financial institutions. If any of these institutions were to deteriorate, it could threaten the U.S. financial system. We urge you to investigate their stability, to analyze potential outcomes in the event of a failure, and to take any actions necessary to ensure systemic stability. The Dodd-Frank Wall Street Reform and Consumer Protection Act charges you with ensuring the stability of the U.S. financial system, and provides you with a broad range of tools to do so.
Bank of America has been in trouble for a while; as I reported in August, lawsuits against the big bank stemming from its purchase of Countrywide, one of the worst culprits in the subprime lending bubble, were the primary source of its financial woes, but hardly the only one. Its stock price plummeted 50 percent in 2011, angry depositors rebelled against a proposed $5 fee on their accounts, and JPMorgan Chase surpassed it as the largest financial institution in the country. It still holds assets, Public Citizen noted in its press release, equal to roughly one-seventh of the entire gross domestic product of the United States.
“Ordinarily what you would expect to say if we have a company that is making bad judgment, buying up Merrill Lynch, buying up Countrywide, making a lot of other bad judgments, you'd go 'well the market will put them out of business',” said Dean Baker of the Center for Economic and Policy Research, on a conference call held by Public Citizen. “That doesn't happen with Bank of America because they're basically operating with too-big-to-fail insurance.”
An attempt in 2010 by Senators Sherrod Brown (D-OH) and Ted Kaufman (D-DE) to insert a provision into the Dodd-Frank reform legislation that would have limited the size of the big banks failed in the Senate. As a result, the only real protection it offers from another systemic crisis touched off by the collapse of another major bank is the ability for regulators to step in if that bank appears to be a “grave threat”. This requires regulators to be aware of the shaky standing of a big bank before it goes from unstable to full-on implosion—because by then, it's probably too late to stop the bleeding.
“If Bank of America were to fail, any attempt at the orderly liquidation process in the Wall Street Reform law might not work, basically because the institution is too large, too complex, and because it has branches in too many foreign countries,” Arkush argued.
Lawrence Baxter, a former Wachovia Bank executive and a professor at Duke Law School, said on the conference call, “This petition is very important as a step in testing whether the machinery provided by the Dodd-Frank act for preventing another meltdown has any substance.”
That's important because in many cases, regulators and the Obama administration have moved to prop up the big banks rather than dismantle them—not only with the defeat of the Brown-Kaufman proposal but other moves by the Fed to help the banks stay afloat any way possible.
Arthur Willmarth, a George Washington University law professor also on Public Citizen's conference call, used as an example a recent move by Bank of America to shift potentially toxic derivatives from one of its subsidiaries to another. Backed up by the Fed, the bank moved the risky financial instruments from its investment banking arm, Merrill Lynch, to its deposit banking arm—which is insured by the taxpayers through the FDIC. That means that if the assets go bad, like so many of the “toxic assets” during the earlier financial crisis did, taxpayers are on the hook for another big bailout. As William K. Black wrote, this move was essentially “transforming (ala Ireland) a private debt into a public debt.”
Economists love to talk about “moral hazard”--the idea that someone will take more risks if they know they are less likely to face the consequences of those risks. But as Salon contributor David Sirota wrote back in 2009, “[A]s evidenced by trillions of dollars in public loans, guarantees and subsidies given to speculators to cover their massive losses, leaders in both political parties have no interest in preventing financial moral hazard — despite stern press releases insisting the contrary. By rewarding rather than punishing Wall Street for losing irresponsibly risky bets and by holding out the promise of similar bailout rewards in the future, politicians have incentivized even more irresponsible risk-taking for years to come.”
As Obama took the stage for his State of the Union speech this week, it was clear that the financial crisis was still on his mind as well as the minds of people around the country, still dealing with the fallout from foreclosures and the disappearance of their wealth. If, as David Dayen at FireDogLake noted, the Administration and regulators want to prove that they're on the side of the people and not the banks, the Public Citizen petition provides them an excellent opportunity to do just that.
Of course, Obama's still planning on accepting his party's nomination for reelection at Charlotte, North Carolina's Bank of America stadium, and he's still counting on cash from the big banks in order to propel him to that reelection. The following year will more likely see him trying to strike a balance between appearing tough on the banks and not actually driving them completely into the arms of his GOP rival, whomever that may be.
Still, the good news, William K. Black argued, is that if regulators choose to act on Public Citizen's petition, “We can deal with [the big banks], we can shrink them to a size they no longer pose a systemic risk, and in doing so we will actually make them more efficient, not less efficient.”
Sarah Jaffe is an associate editor at AlterNet, a rabblerouser and frequent Twitterer. You can follow her at @seasonothebitch.
Selling the 'Supply-Side' Myth
Selling the 'Supply-Side' Myth
By Robert Parry
By Robert Parry
Rep. Newt Gingrich, R-Ga., laughs at a joke told by President Ronald Reagan in Atlanta, Jan. 26, 1984. (photo: Joe Holloway, Jr./AP)
Selling the 'Supply-Side' Myth
28 January 12
It has "worked" almost exclusively for the very rich, yet the former House speaker and the three other Republican presidential hopefuls are urging the country to double-down on this losing gamble, often to the cheers of their audiences — like one Florida woman who said she had lost her job and medical insurance but still applauded the idea of more "free-market" solutions.
Gingrich even boasts of his role in pioneering these theories of massive tax cuts favoring the rich, combined with sharp reductions in the role of government. That approach, once famously mocked by George H.W. Bush as "voodoo economics," was supposed to spur businesses to expand production (the "supply side"), thus creating jobs and boosting revenues from all the commercial activity.
"I worked with Ronald Reagan to develop supply-side economics in the late '70s, along with Jack Kemp and Art Laffer and Jude Wanniski and others," Gingrich declared at a recent town hall event. "We ended up passing it into law in '81. At the time it was very bold. People called it 'voodoo economics.' It had one great virtue: it worked."
But that is not what the historical record really shows.
In 1980, I was working as an Associated Press correspondent covering budget and economic issues on Capitol Hill - and at the time, the "supply-siders" had two key arguments in their favor: first, the economy had stagnated in the 1970s largely due to oil price shocks, inflation and an aging industrial base.
Their second key advantage was that nobody could say for sure what the results of the "supply-side" experiment would be. There was little empirical data to assess how radical tax cuts would play out in the modern economy. One could make common-sense judgments, as George H.W. Bush had done with his "voodoo" remark, but you couldn't see the future.
No More Mystery
Now, however, with three decades of experience with the experiment, the fallacies of "supply-side" economics are no longer a mystery. For instance, a major obstacle to today's economic recovery has been the absence of "demand-side" consumers, not the availability of money to build more productive capacity.
And the reason that there are fewer consumers is that the Great American Middle Class, which the federal government helped build and nourish from the New Deal through the GI Bill to investments in infrastructure and technology in the Sixties and Seventies, has been savaged over the past three decades.
Though many Americans were able to cover up for their declining economic prospects with excessive borrowing for a while, the Wall Street crash of 2008 exposed the hollowing out of the middle class. So today, businesses are sitting on vast sums of cash - some estimates put the amount at about $2 trillion.
And the reasons for this dilemma are now well-known: first, when companies have expanded in recent years, the modern factories have relied on robotics with few humans required; second, the companies put many manufacturing sites offshore so they can exploit cheap labor; and third, the shrinking middle class has meant fewer customers, leaving corporations little motivation to build more factories.
For Americans, this has represented a downward spiral with no end in sight. American workers, whether blue- or white-collar, know that computers and other technological advancements have made many of their old jobs obsolete. And modern communications have allowed even expert service jobs, like computer tech advice, to go to places like India.
While painful to millions of Americans who find their talents treated as surplus, these developments do not by themselves have to be negative. After all, humans have dreamed for centuries about technology freeing them from the grind of tedious work and freeing up society to invest in a higher quality of life, for today's citizens and for posterity.
The problem is that the only practical way for a democratic society to achieve that goal is to have a vibrant government using the tax structure to divert a significant amount of the super-profits from the rich into the public coffers for investments in everything from infrastructure to education to arts and sciences, including research and development for future generations, even possibly Gingrich's "big idea" of a colony on the moon.
In fact, that kind of virtuous cycle was the experience of the United States from the 1930s through the 1970s, with the federal government taxing the top tranches of wealth at up to 90 percent and using those funds to build major electrification projects like the Hoover Dam and the Tennessee Valley Authority, to educate World War II veterans through the GI Bill, to connect the nation through the Interstate Highway system, to launch the Space Program, and to create today's Internet.
Out of those efforts emerged robust economic growth as private corporations took advantage of the nation's modern infrastructure and the technological advancements. Millions of good-paying jobs were created for the world's best-trained work force, giving rise to the Great American Middle Class. The obvious answer was to keep this up, with the government investing in new productive areas, like renewable energy.
Demonizing 'Guv-mint'
Instead, facing economic headwinds in the 1970s, caused in part by rising energy costs, Americans grew anxious about their futures, making them ripe for a new right-wing propaganda campaign demonizing "guv-mint" and telling white men, in particular, that the "free market" was their friend.
Blessed with a talented pitch man named Ronald Reagan, "supply-side" became the new product to sell. After taking office, Reagan pressed for a sharp reduction in the marginal tax rates, slashing the top rates for the wealthy from around 70 percent to 28 percent. Along with the tax cuts, Reagan also initiated an aggressive military buildup.
The results were devastating to the U.S. fiscal position. The federal debt soared, quadrupling during the 12 years of Reagan and Bush Sr. As a percentage of the gross domestic product, federal debt was actually declining in the 1970s, dropping to 26 percent of GDP, before exploding under Reagan, rising to 41 percent by the end of the 1980s. The shared wealth of the country also diverged, with the rich claiming a bigger and bigger piece of the national economic pie.
The nation's debt crisis only began to subside after tax increases were enacted under President George H.W. Bush and President Bill Clinton, with Clinton's tax hike pushing the top marginal rate back up to 39.6 percent. At the time, Gingrich warned that the Clinton tax hike would lead to an economic catastrophe.
The actual result was a booming economy, spurred strongly by the federal government's new "information super-highway," the Internet. The Clinton years also saw low unemployment and a balanced budget by the late 1990s. The debt-to-GDP measure declined from about 43 percent to 33 percent and was on course toward zero within a decade.
Ironically Gingrich also claims credit for that because - as House speaker - he worked with Clinton on some cost-cutting measures, but Clinton credits the 1993 tax increase, which passed without a single Republican vote, as the key factor in the budget turnaround.
After George W. Bush claimed the White House in 2001, "supply-side" dogma was back in vogue. Bush pushed through more tax cuts mostly for the rich, reducing the top marginal rate to 35 percent and creating an even bigger tax break for investors, cutting the capital gains rate to 15 percent. Combined with Bush's two wars and other policies, the surplus soon disappeared and was replaced by another yawning deficit.
Even as most Americans struggled to hold a job and pay their bills, America's super-rich lived a life of unparalleled luxury. With this concentration of money also had come a concentration of power, as right-wing operatives were hired to build a sophisticated media apparatus and think tanks to push - often with populist rhetoric - the policies that were dividing the country along the lines of a pampered one percent and a pressured 99 percent.
Many Americans, especially white men, heard their personal grievances echoed in the angry voices of Rush Limbaugh, Sean Hannity, Michael Savage and Glenn Beck - all well-compensated propagandists for "the one percent."
Lesson Unlearned
Now, looking back over the economic and fiscal history of the past three decades, you might think that few Americans would be fooled again by this sucker bet on "supply-side." But the Tea Partiers and many rank-and-file Republicans seem ready to put what's left of their money back down on the gambling table.
All four remaining Republican hopefuls - Mitt Romney, Rick Santorum, Ron Paul and Gingrich - have proposed lower tax rates especially on the rich with the same enduring but fanciful faith in "supply-side" economics.
Gingrich has gone so far as to advocate eliminating the capital gains tax entirely. It's already down to 15 percent, meaning that many super-rich, from financier Warren Buffett to Mitt Romney, can live off their investments and pay a lower tax rate than what many middle-class Americans pay on their wages and salaries. In a recent Florida debate, Romney noted he would pay virtually no federal income tax under Gingrich's plan.
The Republicans seem to be counting on the parallel propaganda campaign of demonizing "guv-mint." They're pinning their hopes on an ill-informed electorate (especially white men) siding with "the one percent" over their own working- and middle-class interests.
The GOP hopes also may hinge significantly on how determined some whites are to get the country's first black president out of the White House. Historically, demagogic U.S. politicians have had great success in exploiting racial resentments, although these days often with coded language like Gingrich calling Barack Obama "the food-stamp president."
The Right also has worked diligently to create false narratives to convince many Americans that their hatred of a strong federal government links them to the Founders. Many Tea Partiers have bought into the historical lie that the Founders wrote the Constitution to limit the power of the federal government and to promote "states' rights" - the near opposite of what the framers actually were doing.
Led by Virginians Gen. George Washington and James Madison, the Constitutional Convention in 1787 threw out the Articles of Confederation, which had made the states supreme and the federal government a supplicant.
The Constitution reversed that situation, eliminating state "independence" and bestowing national sovereignty onto the federal Republic representing "we the people of the United States." Contrary to the Tea Party's false narrative, the Constitution represented the single biggest assertion of federal power in U.S. history.
When the Tea Partiers dress up in Revolutionary War costumes, they apparently don't know that their notion of a weak central government and state "sovereignty" was anathema to the key framers of the Constitution, especially to Washington who had watched his soldiers suffer under the ineffectual Articles of Confederation.
And, when the Tea Partiers wave their "Don't Tread on Me" flags of a coiled snake, they don't seem to know that the warning was directed at the British Empire and that the banner aimed at fellow Americans was Benjamin Franklin's image of a snake severed into various pieces representing the colonies/states with the admonishment "Join, or Die."
Nevertheless, false narratives and false arguments can be as effective as real ones to a thoroughly misinformed population. Thus, many middle- and working-class Americans still cheer when Newt Gingrich references Ronald Reagan and his "supply-side" economics.
But the failure of Reagan's economic strategy should be obvious to anyone who is not fully deluded by right-wing propaganda. Not only has the national debt skyrocketed over the past three decades, but whatever economic benefits that have been produced have gone overwhelmingly to the wealthy - while the nation as a whole has suffered.
For more on related topics, see Robert Parry's "Lost History," "Secrecy & Privilege" and "Neck Deep," now available in a three-book set for the discount price of only $29. For details, click here.
Robert Parry broke many of the Iran-Contra stories in the 1980s for the Associated Press and Newsweek. His latest book, "Neck Deep: The Disastrous Presidency of George W. Bush," was written with two of his sons, Sam and Nat, and can be ordered at neckdeepbook.com. His two previous books, "Secrecy & Privilege: The Rise of the Bush Dynasty from Watergate to Iraq" and "Lost History: Contras, Cocaine, the Press & 'Project Truth'" are also available there.
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