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Les Leopold

By Les Leopold
Author, “The Looting of America”

As the financial reform bills grind through the congressional conference committee, the largest banks are howling like little brats because they haven’t gotten everything they want, right now! “Gimme!”

Of course the reform package already gives the biggest banks the juiciest goody of all by letting them continue to be “too big to fail.” Life will be good for the top 20 or so financial institutions. They’ll have access to cheaper funds based on implicit government guarantees –since everyone on the planet knows we’ll bail them out the next time they crash. (Hedge fund managers — the top 10 each earned a cool $900,000 an hour in 2009 — are also faring well on Capitol Hill. Senators just stalemated a measure that that would have forced them to pay income taxes like the rest of us instead of pretending their income is capital gains, which is taxed at lower levels. The idea had been to use those extra tax dollars to extend unemployment benefits and aid distressed state and local governments that are now laying off teachers. Let them eat cake.)

But the big banks still aren’t satisfied. Now they’re whining about the possibility that Congress might pass a version of the so-called Volcker Rule, which would prohibit them from engaging in “proprietary trading” — trading for their own accounts — while also receiving federal guarantees for their consumer deposits. From a taxpayer’s point of view, the argument is pretty simple: Why should the government let these bonus-rich banks speculate using taxpayer guarantees as collateral? Why should we underwrite their casinos?

The banks’ response to that question is extremely revealing. Their first defense is to insist that the financial crash wasn’t their fault. (“Honest, I didn’t break the cookie jar!”) The housing bubble did it!, they wail. As the New York Times reports, “the banks assert that the financial crisis of 2008 was a lending-based crisis caused by reckless loans made to unqualified home buyers. It was not, they say, a trading crisis.”

The bankers are hoping to redirect the public’s wrath with this little fabrication, but haven’t quite succeeded. And won’t, unless (until?) they buy up all the media. In truth, the crisis was started and amplified by their own financial engineers who dreamed up a series of fantasy finance instruments like synthetic CDOs. From these, the banks built an upside-down pyramid of bets based on extremely risky assets. The banks claimed these bets were as safe as AAA-rated Treasury notes — but of course they weren’t. (That didn’t stop the rating agencies from gladly joining the banks in this profitable scam.)

The banks’ socially useless new financial instruments multiplied a manageable $300 billion sub-prime mortgage problem into a multi-trillion dollar global disaster. This massive gambling operation directly led to the destruction of more jobs than any time since the Great Depression. Twenty-nine million people are without work or forced into part-time jobs, not because of housing loans by low-income buyers, not because of over-leveraged consumers, but because the biggest banks in the world got too big, too powerful, and way too greedy. And now we’re allowing them to get even bigger and greedier. (For an easy to read account of how calamitous financial gambling actually caused the crash, see The Looting of America.)

The banks’ second defense, believe it or not, is to argue that their financial gambling operations are really safer than making loans. Say what? According to a chief lobbyist for the 19 largest financial companies:

[Making loans] “is arguably the riskiest activity that any financial entity can engage in. It is money out the door that banks hope will be paid back.”

Take a deep breath and think about that one. The biggest banks in the world are telling us they’re scared to make loans? That lending people money so they can start or expand a business or buy a house or car is too risky compared to their high-stakes trading games?

Hmm. Risky for whom? It’s true that under the current rules governing high finance, the bankers can rig the game and win every time. They’re essentially serving as “the house” within a vast global casino. That yields a lot more cash than their traditional job of moving the nation’s savings into productive investments. And as we’ve just seen, if it all comes crashing down around their ears, the tax-paying public will rescue them.

In fact the banks’ gambling games are hugely risky – just not for them. They get all the upside, while the taxpayer underwrites the downside. That’s not theory. It just happened and it’s likely to happen again before long.

Meanwhile, the banks have now admitted the deep, dark truth: They’re no longer focusing on the old-fashioned business of moving savings to productive investments. Their mission now is to dominate the financial industry while making as much money possible.

This narrow focus on speculative gambling is the major reason behind our jobless recovery. The banks aren’t making their capital readily available to the real economy where it is desperately needed. Instead, the banks are back to creating and propagating fantasy financial instruments — the most profitable financial enterprise ever invented. They’re addicted to it, like gambling junkies at the craps table.

The casino they’ve built is quite big and splashy. They’ve got their high-speed trading. They got their customized derivatives. And they’ve got control of the largest financial marketplaces on Earth. It’s certainly a beautiful spread for the big boys, as the field narrows down to a handful of huge banks. They’re amassing trillions in assets and capital…and hundreds of billions in bonuses.

But they won’t be using these riches to invest in something so boring as a business or consumer loan. Instead, they’ll put more money down at the casino, multiplying their returns and their influence over both global finance and our political system. (And maybe they’ll spend a few bucks to ensure that the media rewrite the history of the crash while they’re at it.)

So yes, Congress should make banks separate proprietary trading and risky derivatives businesses from everyday, old-fashioned banking. (Though I expect that any such rules Congress passes will be riddled with holes, leaving the largest banks free to gamble.)

But even if these reforms are reasonably strong and enforced, they attack only a small part of the problem: Too big to fail financial institutions are far too large and far too powerful to coexist with democracy. They pose an immediate threat to middle-class life. The only sensible and safe solution is to bust them into smithereens.

I don’t know how we’ll get there. But if we don’t we may find ourselves permanently ruled by a new financial oligarchy that pulls the strings of economic and political power.

This is not the time to give up. Democracy keeps raising its head, from the striking workers in China to marches in the streets of Europe. What will happen over the next decade in this epic clash with global financiers? That’s up to us.

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Les Leopold is the author of The Looting of America: How Wall Street’s Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It Chelsea Green Publishing, June 2009.

Les Leopold

By Les Leopold
Author, “The Looting of America”

Wake up Congress! The financial reform bill you just passed won’t protect us from economic chaos. Why? Because it fails to burst the mother of all bubbles — Wall Street itself. .

Our outsized financial sector is a clear and present danger to all of us. This gigantic bubble, which bankers and politicians have been pumping up for the past 30 years, now casts a dark shadow over our economy and our political system. It has distorted our distribution of wealth, making a few people obscenely rich while shrinking what’s left of the middle class.

The financial industry bubble started expanding during the 1970s with the push for deregulation. It grew even faster in the 1980s after Reagan and Congress dramatically cut taxes on the super-rich. The wealthy had to do something with their excess money, so they turned to financial gambling. Wall Street grew and grew, rising from about 7 percent of all corporate profits after WWII to more than 30 percent today. Financial executives got exceedingly rich. As Simon Johnson and James Kwak point out in 13 Bankers, “From 1948 until 1979, average compensation in the banking sector was essentially the same as in the private sector overall; then it shot upward…until in 2007 the average bank employee earned twice as much as the average private sector worker.”

As I noted in my book The Looting of America, the ratio of compensation of the top 100 CEOs to the average worker shot up from 45 to 1 in 1970 to a whopping 1,723 in 2006. Did the execs–and the financial execs in particular–get that much smarter than the rest of us?

In a way they did. They got smarter at siphoning off the wealth from our economy while adding little to it. They learned how leverage gigantic financial bonuses for themselves. And when their financial house of cards collapsed in 2008, they figured out how to get Congress to hand over more than $8 trillion in cash, asset guarantees and cheap federal loan facilities, a vast taxpayer-financed bailout. And so, just two years later, the Wall Street bubble is once again inflating–and gobbling up our nation’s wealth.

This week’s chilling Los Angeles Times article on our anemic recovery (“Consumer spending trend is a shaky foundation for economic recovery”) reveals the contours of our bubble economy:

Much of the new spending has come not from America’s broad middle class but from a small slice of affluent people at the top….

What’s more, some analysts calculate that another big chunk of the recent spending spurt has come from an even shakier source — delinquent homeowners who have more cash in their pockets because they’ve stopped making mortgage payments now that their houses are worth less than the loan amounts.

So apparently our economy is being rescued by 1) some of the same “affluent” people who caused the crash in the first place–and then benefited from a bailout financed by middle-class taxpayers; and 2) victims of the housing crash, who are now walking away from their homes with a few dollars in their pockets.

This week we learned that home foreclosures have reached a record high. Maybe we should break out the champagne, since our economy is apparently depending on these folks.

The Wall Street bubble and our pathetic recovery are the result of having forgotten everything we learned during the Great Depression. If we want a strong middle class society, we’ve got to impose steep income taxes on the super-rich and tightly constrain the financial sector. We’re not doing either of these things, and so we’re looking at a future of economic chaos.

It’s obvious why most Congress members choose to ignore the biggest bubble of all. Too many politicians rely on financial industry contributions to win office. Too many want jobs on Wall Street once they leave office. Most just don’t have the guts to take on the financial elites.

So how do we puncture the bubble and save our economy? In theory it’s not very hard. But in practice it will take a mass movement that aims at the right targets.

1. Break up the top twenty banks that are too big too fail. Entities like JP Morgan Chase, CitiGroup and Goldman Sachs are a danger to our democracy. Together these 20 big banks constitute an oligopoly with a stranglehold on our economy. They stifle competition and fix prices, they gamble against their clients, they siphon off our economic wealth. Perhaps most critically, they control economic policy. Today, the question on nearly every politician’s lips is, “How will the markets react?” Is that democracy?

2. Institute a financial transaction tax. You would think watching the Dow drop 1,000 points in a hour might create an “aha” moment for our leaders. If not, all they had to do is read the New York Times piece describing the life and times of high-speed traders. These people account for 40 to 60 percent of the volume in the stock market, making billions of trades each day. How long do they hold what they buy? No more than 11 seconds. No joke.

The big banking houses are into this game. When pressed they insist that high-speed trading is great because it brings “liquidity” into the market. But who really needs this liquidity? Certainly not your average mom and pop trader. Big bankers like fast trading and “liquidity” because it allows them to siphon even more of investors’ money into their pockets. What do we do to stop this vast flow of money to the ultra rich? Put a very small tax on each and every financial trade. The tax could exempt a certain amount so that it targets big bankers and fast traders, not any individual mom and pop traders who are still left in the market. Will it unemploy some day traders? It might. But perhaps our day traders should put their magnificent skills to work in the real economy–by, say, teaching people math and computer science. (Well maybe not, since the Wall Street-caused fiscal crisis is leading to tens of thousands of teacher lay-offs.) A financial transaction tax could generate about $100 billion a year to help fund or stimulate job creation and/or reduce our deficits. Why don’t we hear the deficit hawks screeching about this?

3. Pass a windfall profit tax of 75 percent on Wall Street bonuses and hedge fund incomes (no matter how the money is packaged and laundered). Wouldn’t just about any regular American like this idea? We bailed out Wall Street, and they used the money to pay themselves more than $150 billion in bonuses. And now, we want our money back. Does anyone really think that that the top 25 hedge fund managers who waltzed off with $25 billion last year actually deserve all that money? Can anyone think they’re worth as much as 658,000 entry-level teachers?

4. Raise the marginal tax rate on those earning $3 million or more per year to 70 percent. (This is quite conservative. The rate was 91 percent under the communistic Eisenhower administration.) If anyone has any real evidence, not faith-based theory, that multimillionaires–or our economy–would suffer under such a tax, please let me know. I haven’t seen it. Financial columnists like Andrew Ross Sorkin seem enthralled by the capacity of rich people and their fancy lawyers to circumvent such taxes and fees. Yes, they will find ways around stiff taxes, and yes, they are very clever. But where’s our outrage? Instead of admiring the sly tax evaders who buy congress members and capture regulators, we should be calling them on the carpet. They are not adding to the nation’s wealth, they are looting it.

5. Ban the sale of complex derivatives to all public entities and pension funds and ban public and pension investments in hedge funds. Congress may or may not succeed in passing new rules to curb dangerous derivatives and to bring a bit more transparency and controls to some of these instruments. But it’s a crime against humanity to allow any Wall Street firm to foist complex derivatives on public entities and pension funds.

When I wrote about how predatory bankers were ripping off five Wisconsin school districts, many readers argued that the school officials themselves were to blame –they should have known better. Now Capital News Service is reporting that public entities and pensions funds in at least 16 states are facing losses that may amount to over $25 billion. Wall Street got the fees, and the public got ripped off. Afterwards, we bailed out Wall Street, but not its victims. Just another case of public money being used to pump up the Wall Street bubble. A ban is the easiest way to bust this part of the bubble.
So who’s going to make sure we bust the mother of all bubbles? Nobody but us, the American people. The battle is just beginning. As Bob Kuttner points out (Presidency in Peril), it took at least seven years–and a lot of public pressure–for the New Deal to succeed in reforming the financial industry and taxing the super-rich. We are only in Year 2 of our meltdown. The financial elites are hanging on for now, but the American people are wising up to their scams and are hungry for retribution.

They are also hungry for jobs. And that is the key to our economic conundrum: Consumer spending by the wealthy and by people who have abandoned their mortgages cannot possibly create the 22 million new jobs we need to get near full employment. We need to build a vibrant, sustainable economy with a big middle class–and we can’t do that as long as Wall Street keeps siphoning away our wealth.

Right now the Tea Party is capturing much of people’s frustration and anger. Unfortunately, the Tea Party’s program of cutting taxes and attacking government regulations is a bad joke when it comes to Wall Street. It will only make it easier for the financial sector to inflate itself and further deflate the middle class. If we’re going to save ourselves, our families and our country from the ever expanding Wall Street bubble, the rest of us are going to have to get active and soon.

Pass out the pins.

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Les Leopold is the author of The Looting of America: How Wall Street’s Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It Chelsea Green Publishing, June 2009.

Robert Reich

By Robert Reich
Former U.S. Secretary of Labor, Professor at Berkeley

Why is the Federal Trade Commission threatening Apple with a possible lawsuit for abusing its economic power, but not even raising an eyebrow about the huge and growing economic (and political) muscle of JP Morgan Chase or any of the other four remaining giant banks on Wall Street?

Our future well-being depends more on people like Steve Jobs who invent real products that can improve our lives, than it does on people like Jamie Dimon who invent financial products that do little other than threaten our economy.

Apple’s supposed sin was to tell software developers that if they want to make apps for iPhones and iPads they have to use Apple programming tools. No more outside tools (like Adobe’s Flash format) that can run on rival devices like Google’s Android phones and RIM’s BlackBerrys.

What’s wrong with that? Apple says it’s necessary to maintain quality. If consumers disagree they can buy platforms elsewhere. Apple was the world’s #3 smartphone supplier in 2009, with 16.2 percent of worldwide market share. RIM was #2, with 18.8 percent. Google isn’t exactly a wallflower. These and other firms are innovating like mad, as are tens of thousands of independent developers. If Apple’s decision reduces the number of future apps that can run on its products, Apple will suffer and presumably change its mind.

On the other hand, the four largest U.S. financial institutions are so big and the rest of the economy so dependent on them that if one of them makes a bad decision it can take us all down. Between them they hold more than $7 trillion in assets, over half the size of the entire U.S. economy.

So why is the FTC nosing around Apple and not around Wall Street? Because the Federal Trade Commission Act allows the agency to stop “unfair methods of competition” almost anywhere in the economy except in the financial sector. Banks are explicitly excluded.

Another reason for financial reform.

And how are we doing on that front? Senate Dems and Republicans have just agreed to jettison a $50 billion fund in the financial reform bill that would have been used to wind down operations of a failing bank. Republicans had created a smokescreen by alleging that the fund could be used for more bailouts. They don’t want the public to see the real problem — that the biggest banks are so big that if one or two gets into trouble, the Fed or the Federal Deposit Insurance Company will almost certainly have to bail them out in order to protect the financial system. And this implicit guarantee allows them to make even riskier bets that generate even bigger profits — enabling them to grow even larger.

The only way to make sure no bank is too big to fail is to ensure no bank is too big. The biggest banks should be broken up. Senators Sherrod Brown (D-Ohio) and Ted Kaufman (D-Del) have introduced an amendment that would do exactly that. And a growing number of House members are getting ready to do the same.

Hands off Apple. But cut the big banks down to size.

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Cross-posted from Robert Reich’s Blog

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Robert Reich served as the nation’s 22nd Secretary of Labor and now is a professor of public policy at the University of California at Berkeley. His latest book, “Supercapitalism,” is out in paperback. For copies of his articles, books, and public radio commentaries, go to www.robertreich.org.

The BP oil spill disaster in the Gulf of Mexico and the 2008 collapse of Wall Street may not be identical twins, but they are siblings. Both are the children of unrestrained corporate recklessness — recklessness that was made possible by a fifty-year corporate conservative campaign to prevent government from holding corporations accountable to the public interest.

The recklessness of Wall Street banks cost eight million Americans their jobs, and millions more their pensions. All of those unemployed Americans and under-utilized plants, stores and warehouses cost us trillions of dollars in lost economic output that we will never recover. It cost governments tax dollars that could have been used to educate children, build new roads, find cures for disease. It cost us hundreds of millions in interest to borrow the money we needed to jump-start the economy and provide basic services.

The Goldman Sachs emails published by Senator Levin’s Committee on Investigations brought Wall Street recklessness into clear focus. There was nothing there about the consequences of their actions for the society or economy at large — only how the trader who referred to himself as “Fabulous Fab” could make millions for himself at the expense of anyone who happened to be gullible enough to buy his worthless investments.

The oil company BP — and the entire global oil industry — have been no less reckless in their unquenchable thirst for profits. It doesn’t take a genius to predict that when you start drilling thousands of wells in mile-deep water in the middle of the economically and ecologically critical Gulf Coast, something might go terribly wrong.

Of course we’ve seen what might go wrong up close and personal before. The Exxon Valdez disaster resulted in incalculable loss to the environment, billions in loss to fishermen and the Alaska economy, and billions more for a cleanup that lasted over three years.

The Santa Barbara oil spill despoiled miles of beaches, and for a time put the brakes on some forms of reckless oil exploration.

We don’t yet know the full consequences of the BP Gulf of Mexico oil disaster for the economy or environment — nor do we know the full range of preparations that BP made in the event of a catastrophe. But the proof of the pudding is in the eating. Whatever preparations they made were obviously far from adequate to stop what may become a cataclysmic event.

One thing we do know for sure: left to themselves, giant international corporations will always be reckless in their pursuit of more and more profit.

These international corporations have no loyalty whatsoever to our country or its welfare. They are huge, free-floating international organizations dedicated to only one goal: making as much money as possible for themselves. Remember that BP is British Petroleum. When it comes to Wall Street, its own advertisements remind us that “Citi Corp never sleeps” — it does business in every corner of the globe. The trading group that sank AIG was based in London. And Goldman Sachs makes its billions from deals and trades in every corner of the world. These companies have no loyalty to the people or interests of the United States.

The cultures of these organizations reward short-term profit. They do nothing to punish employees or leaders for global economic or environmental catastrophe.

There is only one brake on this recklessness. That would be us — in the form of our government.

For the last four decades the Conservative Movement and its corporate backers have promoted the notion that the private sector can and should be left alone to do whatever it wants, since only the private sector (meaning international banks and corporations) can create innovation and economic growth. To facilitate this, conservative leader Grover Norquist says that government should be shrunk so much that it could be “drowned in a bathtub.”

After the Great Depression, we created the Security and Exchange Commission to oversee the stock market, the FDIC to guarantee ordinary depositors against bank failures, and passed the Glass-Steagall Act that prevented banks from engaging in reckless speculative activities that would endanger the economy. As a result there was no “credit crisis” in America for over half a century – and also the greatest period of long-term economic growth on record – the period that led to the birth of the American Middle Class. The first major American credit crisis following the Great Depression happened when the Reagan Administration deregulated the Savings and Loan industry.

And then the Big Wall Street Banks, and their conservative and Republican enablers — convinced Congress to “deregulate” Wall Street and repeal the Glass-Steagall Act in the 1990′s and the results are there for everyone to see. Now they are fighting tooth and nail to kill or weaken legislation that would begin, once again to hold Wall Street Banks accountable.

The big oil companies and Republicans have done exactly the same thing when it comes to weakening regulations, allowing oil companies to drill in riskier and riskier environments. Just as importantly, so far they have blocked passage of legislation to develop clean energy that would threaten the profits of Big Oil but would make it unnecessary for our society to risk the Gulf Coast to get our energy from dirty fuels like oil in the first place.

To prevent future economic and environmental disasters, Progressives have to stand up straight and demand strong, forceful action by government to hold big international corporations accountable. Government is not the problem — in this case it is the solution.

And we have to assert once again that government is not some far off entity that orders us around and intrudes into our lives. As President Obama said last weekend in Ann Arbor — in a democratic society, the government is us. Or as Congressman Barney Frank puts it: “Government is the name of the things we choose to do together.”

We know how to use government to rein in the natural recklessness of huge corporations. Take commercial aviation. In spite of some periodic lapses in government oversight, the generally tough regulation of aviation by the FAA has turned commercial aviation into the safest mode of transportation in human history. It is safer to fly somewhere on an airplane than to take a train, drive, horseback ride, bike or even walk there.

In 2009, there were only three commercial aviation accidents classified as serious by the National Transportation Safety Board over the course of 18 million hours flow. The probability of a passenger being killed on a single flight is approximately eight million-to-one. In other words, if a passenger boarded a flight at random once a day, everyday, statistically it would take over 21,000 years before he or she would be killed.

That record of safety is not because people who go into the airline business are any less interested in making money than people who go into the oil business or Wall Street trading. It is because the public demanded strong government regulation of the safety of commercial aviation. That in turn has created a culture inside aviation companies that makes safety a primary value and actually ostracizes reckless behavior.

Left to its own devices the “invisible hand of the market” will not create that kind of culture. It never has, it never will. That is particularly true where the activities of companies are hidden from view of average citizens and consumers. Even the most sophisticated customers on Wall Street didn’t have a clue how to evaluate the risks associated with the collateralized debt obligations being sold by Goldman Sachs. The electricity consumers whose power is made with coal haven’t got an inkling about the working conditions of the miners that dig out that coal. And the everyday consumers of gasoline sure don’t know what kind of risks BP is taking 5000 feet below the surface of the Gulf of Mexico as it drills for oil.

We can’t just sit by and allow these huge private actors to threaten the well-being and future of our society just because they want to be free to make as much money as they can.

On last Sunday’s “This Week” former Bush adviser Matthew Dowd kept repeating the new Republican mantra: “Washington doesn’t work.” Now there is the ultimate in Republican chutzpa. The modern Republican Party has done everything it can to prevent “Washington” from working. It diverted hundreds of billions of government revenue into tax breaks for the wealthiest Americans. It gutted regulations that held Wall Street and the oil companies accountable. It is blocking clean energy legislation that would free us from the stranglehold of Big Oil. It tried, unsuccessfully, to prevent passage of desperately-needed health care reform that would for the first time hold the private insurance companies accountable – companies that have driven American health care costs to the point where they are 50% higher than any other nation.

Ignoring the fact that Republicans have fought on behalf of big mine owners for years to weaken mine safety oversight, Dowd actually had the gall to say that the mine disaster in West Virginia was an example of how “Washington doesn’t work.”

He correctly pointed out that the draconian Arizona anti-immigrant “papers please” law was a response to the failure of Washington to take action to fix the broken immigration system. But he conveniently forgot that it is the Republicans who refuse to allow action to go forward to pass comprehensive immigration reform.

And, of course, he actually argued that the Gulf oil spill was yet another indication that “Washington doesn’t work.” This, from the party of the now-silent cries of “drill, baby, drill.”

The Republicans and their corporate patrons will do everything in their power to get America to forget the iconic symbols of their failures. They will try to convince us that Barack Obama and the Democrats are somehow responsible for the collapse of Wall Street and the Great Recession – even though it all happened on the Republican watch and because of the failure of their policies and the bankruptcy of their economic philosophy.

But Dowd’s audacity needs to remind progressive Democrats that people across America want action. They want Washington to work. And to make Washington work, we need to demand that Congress reassert the power of government to hold mine owners, Wall Street banks, Big Oil — and all of the most powerful international corporations – accountable to the interests of everyday Americans. 

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Mr. Creamer is the author of the book, Stand Up Straight: How Progressives Can Win.  His firm, the Strategic Consulting Group, works with many of the country’s most significant issue campaigns. He was one of the major architects and organizers of the successful campaign to defeat privatization of Social Security. He is a consultant to campaigns to end the war in Iraq, pass universal health care, change America’s budget priorities and enact comprehensive immigration reform. He has also worked on hundreds of electoral campaigns at the local, state and national level. Mr. Creamer is married to Congresswoman Jan Schakowsky from Illinois.

Robert Reich

 By Robert Reich
Former U.S. Secretary of Labor, Professor at Berkeley

Washington’s relationship with Wall Street is growing more schizophrenic by the day. On the one hand, Congress is trying to show how tough it can be on the financial sector by enacting a law ostensibly designed to prevent another near-meltdown and taxpayer-supported bailout. As the midterm election looms, a staggering number of Americans remain unemployed or underemployed, and most Americans blame Wall Street (whose top bankers are raking in almost as much money as they did before the crisis). The lawsuit launched by the Securities and Exchange Commission against Goldman Sachs for alleged fraud only confirms the view held by many that the economic game is rigged.

On the other hand, both parties are going to Wall Street seeking campaign donations to fund critically important television advertising in the months ahead. After all, the Street is where the money is, and TV ads demand huge amounts of it. In recent years, the financial industry has become the second-biggest source of campaign contributions in America — just behind the health care industry.

Even as Congress debates legislation to tame it, Wall Street is conducting a bidding war between the parties for its continued beneficence. More than 60 per cent of the $34m given by the financial industry to fund the 2010 elections has so far gone to Democrats, but since January the Street has switched its allegiance to the Republican camp. In the first quarter of this year, Citigroup, Goldman, JPMorgan Chase and Morgan Stanley donated twice as much to Republicans as to Democrats.

It is hard to bite the hands that feed you, especially when you are competing for food. The finance reform bill emerging from Senate Democrats takes a hard line in many respects – requiring that most derivatives be traded on open exchanges where buyers can see what they are getting and sellers have adequate capital, establishing an agency to protect unwary consumers from predatory lending, and giving the government authority to wind down the activities of banks that get themselves into trouble. Democrats point to these and other features as evidence of their willingness to be strict with the Street, despite their dependence on its generosity.

But the American public has no independent means of judging how tough the bill really is. Most people do not understand the intricacies of finance, and still do not know exactly what Wall Street did to bring the economy to the brink. The dependence of both parties on the financial industry for political support inevitably feeds suspicions that the bill is not nearly tough enough. Why, for example, are so-called “customized” derivatives exempted from the exchanges? Does this not create a big loophole? Why does the bill not limit the size of banks so none can again become “too big to fail”? Why is the Glass-Steagall Act – which once separated commercial from investment banking – not being fully restored? Why does the bill not separate investment banking from the private banking and wealth management activities that got Goldman into trouble?

It does not help that in recent months both parties have held at least three-dozen fundraising events with Wall Street bankers and their lobbyists. Harry Reid, the Democratic Senate majority leader, has trekked to Wall Street cup in hand, while in February and March the National Republican Senatorial Campaign Committee invited financial industry executives to pony up $10,000 each for the chance to confer with Republican senators.

Tight connections between Washington and Wall Street are nothing new, of course, especially when it comes to Goldman. Hank Paulson ran the bank before becoming George W. Bush’s Treasury secretary. Robert Rubin followed the same trajectory under Bill Clinton, then returned to Wall Street to head Citigroup’s executive committee. Dick Gephardt, the former Democratic House leader, lobbies for Goldman. Some 250 former members of Congress are now lobbying on behalf of the financial industry. President Barack Obama himself received nearly $15m from Wall Street during his 2008 campaign, of which almost $1m came from Goldman employees and their families.

But politicians cannot continue to have it both ways. Given the Street’s excesses, Washington’s continued financial dependence on it is eroding trust in government. The distrust has already helped spawn the so-called “Tea Party movement” of disaffected Republicans. Many Democrats and Independents are no less cynical.

If Washington knew what was good for it and the nation, it would sever its financial connections with the Street. Better yet, it would enact legislation seeking to limit the impact of private and corporate money in politics. That goal is made more difficult to achieve by the grotesque recent Supreme Court decision (Citizens United vs. Federal Election Commission) holding that corporations, including financial firms, have the right to spend unlimited amounts on political campaigns. But there are ways around this, such as more generous public funding for candidates that choose not to take private contributions. Hopefully as well, the president will nominate Supreme Court justices who understand the importance of public trust in democratic institutions, and the difference between companies and people.

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Cross-posted from Robert Reich’s Blog

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Robert Reich served as the nation’s 22nd Secretary of Labor and now is a professor of public policy at the University of California at Berkeley. His latest book, “Supercapitalism,” is out in paperback. For copies of his articles, books, and public radio commentaries, go to www.robertreich.org. 

Les Leopold

By Les Leopold
Author, “The Looting of America”

The Jeffersonian anti-federalists feared that a strong national government would lead our fledgling nation back towards monarchy. Instead they wanted government closer to the people where it would better serve their interests rather than interests of the moneyed merchants and traders.

That not good enough for Tea Party and other conservative activists today: They’re against all government, at all levels. They don’t want government to provide much of anything except maybe a vast military industrial complex. But public schools, environmental protection, social services for low and moderate income people? Fugetaboutit!

The Wall Street-led crash has created the perfect climate for this crusade to eviscerate the public sector, especially at the state and local level. It’s ugly and getting uglier.

With 29 million American unemployed or forced into part-time jobs, tax receipts have plummeted more steeply than any time since the Great Depression. State and local governments are slashing their services–at the very moment when people most desperately need them. This is the very definition of a fiscal crisis.

In a saner world it would be obvious to everyone that state and local governments are not to blame for this mess. They didn’t cause the Great Recession–Wall Street did. And if you can’t see that, then you’re enveloped in an ideological cloud so thick that no facts can penetrate. Even Alan Greenspan, the life-long anti-government libertarian, has confessed that under his watch as Fed chair, Wall Street ran wild, touching off a global economic calamity. So let’s not argue about this any more.

State and local governments are far from perfect, of course. More than a few got suckered into Wall Street’s financial engineering schemes. Some foolishly invested their pension funds in toxic assets. Some allowed their debt to pile up, even while balancing their budgets. Many states, if not most, have been letting their super-wealthy residents pay too little at tax time. Even before the Great Recession, middle and lower income residents shouldered a heavier tax burden than the super-rich (who, of course, deduct their state and local taxes from their federal taxes — assuming they pay any taxes at all).

These problems can be addressed without destroying state and local governments. But now that a genuine budgetary crisis has hit 42 out of 50 states, the knives are out. It’s not just about fixing problems. It’s about revenge.

In New Jersey, where I live, we’re watching Governor Chris Christie try to devour the teachers union as if it were a slice of his favorite cheesecake. He’s not worried that his plan to cut the state’s education budget by a whopping $820 million might harm our children. No, he’s loving the crisis because now he can stick it to teachers all over the state. You choose, he tells them: Do you want wage and benefit cuts, or layoffs? And sorry, parents: If your kid’s after-school tutoring program closes, you know who to blame. It’s those greedy teachers. (In our town the teachers union made concessions and 85 teachers still will lose their jobs.)

We’ll feel the awful effects of state and local budget cuts all over the country, in virtually every area of public life. Parks will be closed and privatized. Libraries will cut hours or close altogether. And we’ll all be trained like Pavlov’s dogs to detest government as we wait on longer and longer lines for basic services and have to tangle with stressed out government employees whose jobs have become a living hell. (When you have a lot of time to kill, try getting your New Jersey license renewed.)

When you strip away all the loose talk about getting our fiscal house in order, Governor Christie and many other conservatives see this as a golden opportunity to crush the last bastion of trade unionism in America. Only 7.2 percent of private sector workers were in unions in 2009, according to the Bureau of Labor Statistics. Pretty grim, from a union point of view. But in the public sector, 37.4 percent of workers are unionized — with the teachers leading the way.

Christie’s no dummy. But you don’t have to be a rocket scientist to figure out how to use this financial crisis to gut public sector workers’ wages and benefits. The argument is simple: Why should private sector workers who’ve lost most of their benefits have to pay taxes to support decent healthcare plans and pensions for those lazy public workers? Hey, those teachers even get the whole summer off!

It’s certainly true that private sector workers’ benefits are vanishing before their eyes. In 1991, 88 percent of Fortune 500 workers got medical coverage if they retired before Medicare kicked in. Now it’s 33 percent. In 1998, 68 percent of Fortune 500 workers had pension plans. Now only 42 percent had them. Meanwhile, public workers not only have pensions, they have good pensions: 80 percent still have “defined benefit” retirement plans. (Federal Reserve Bank of Chicago) So at a time when other workers are watching their 401(k) retirements tank (assuming they have any at all), public workers are still slated to get a fixed monthly pension check. How dare they! Better that we all should have next to nothing than have those pampered teachers get more than we do!

It’s a pathetic argument, but it works.

You hate government? You hate unions? Fine. But do you hate yourself as well? As this race to the bottom accelerates, the budget-cutting mania will act as a gigantic anti-stimulus program, sucking jobs out of the public and private sectors. It’s estimated that in 2010 and 2011, the states’ budget shortfalls will total $375 billion. That will just about wash out the positive job impact of the federal stimulus program.

Job loss leads to reduced tax revenues, which leads to more job loss. No wonder most economists predict we’ll suffer through years and years of high unemployment. (And if you think that the private sector is going to pick up the slack as workers’ purchasing power goes down, please pass me whatever you’re imbibing.)

If we could just get over our blinding hatred of unions and public sector workers, we might see that we do in fact have the money we need to rebuild our ramshackle infrastructure, enhance public education and create a new green economy. It’s right there–in the hands of the few. Since 1979 the wealth of the top 1/100th of one percent of all earners increased by 384 percent, while the median earner gained only 12 percent in real wages! (New York Times, ) And yet the effective federal income tax rate for the 400 top taxpayers with the very highest incomes has declined by nearly half over the past two decades–even as their pre-tax incomes have grown five times larger, according to new IRS data. The 400 wealthiest Americans alone have more than $1.3 trillion (not billion) in wealth – just 400 people!

A surcharge on these super-rich individuals could help fund our collapsing public sector. Plus, as a matter of simple justice we should have our Wall Street barons pay reparations for the damage they have done and still are doing. After all, they’ve just walked off with $150 billion in bonuses derived directly from our bailout money.

The moment is right for the Obama administration and the Democratic Congress to make a very simple case: Wall Street crashed our economy and knocked a giant hole in every state budget. Let’s tax Wall Street’s gambling and bonuses to make the states whole. Under Nixon, it was called revenue sharing. Let’s do it again, and avoid a grim future of service cuts and job loss.

Dream on, you say? Maybe. But each of us actually has a choice. We can either sit and watch as our state and local governments are turned into slaughterhouses, or we can work together to compel the financial elites to pay their fair share. Those of us who are ready to tackle our billionaire bailout society need to form a progressive populist alternative to the Tea Party, and fast.

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Les Leopold is the author of The Looting of America: How Wall Street’s Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It Chelsea Green Publishing, June 2009.

Les Leopold

By Les Leopold
Author, “The Looting of America”

Our nation is already deeply in debt. How can we possibly afford to invest in our infrastructure, renewable energy, health care, our schools — and create the millions of jobs that our unemployed desperately need?

We are told that we’re already living well beyond our means — that entitlement programs like Medicare and Social Security will bankrupt us. Forget the solar panels, the smaller classes and the new jobs — we’ve got to cut back on government programs at all levels.

Meanwhile, the super-rich are still having a ball. In his annual shareholder letter, mega-investor Warren Buffett wrote, “We’ve put a lot of money to work during the chaos of the last two years. When it’s raining gold, reach for a bucket, not a thimble.” And Forbes Magazine adds, “Many plutocrats did just that. Indeed, last year’s wealth wasteland has become a billionaire bonanza. Most of the richest people on the planet have seen their fortunes soar in the past year.”

Which brings us back to the federal budget. There are two sides to every ledger: the expenses…and the income. We need to start looking at the income side. With a fairer tax system, we could retrieve some of that money downpour that the elite has been siphoning away from us for decades.

In the 1950s the marginal tax rate on those earning more than $3 million a year (in today’s dollars) was 91 percent. By 1990 it was 28 percent. The IRS says that the top 400 richest tax filers actually paid a rate of just 16 percent in 2007 (the latest numbers we have). Yep, the richest earners — people who took in an average of $343 million each — probably paid a lower rate than you did. Something to consider as you sign your 2009 return.

By the way, those 400 people who do so well on tax day have a combined net worth of nearly $1.37 trillion. (According to Forbes Magazine their wealth has gone up on average by more than 16 percent over the past year — the worst economic year since the Great Depression during which 29 million Americans are without work or forced into part-time jobs. )

How do we even wrap our minds around a number so large? Here’s the example that brings it down to earth for me. If we had progressive taxes that reduced their wealth to a trifling $100 million each, we’d have enough money to set up a trust fund whose interest could provide tuition-free higher education for students at every public college and university in perpetuity. Imagine that. Our kids could actually leave college without carrying tens of thousands of dollars of debt on their backs.

Could those 400 special people be able to get by on just $100 million a year? I think they might.

So why are we so fearful of taxing the super-rich? Here are the arguments I’ve heard.

1. They’ve earned it.
Really? The concept of “earning” is murky when you consider the array of corporate welfare programs we provide. Oil companies have their depletion allowances. Big sugar farmers have their sweet subsidies. The health insurance industry is exempt from anti-trust laws.

One way corporations spend their welfare checks is by providing top management with mind-boggling compensation packages. For instance, in 2009, our financial wizards netted about $150 billion in bonuses – as if in reward for crashing the economy. Were it not for our $10 trillion (not billion) in bailout funds, they would have earned nothing at all. In fact, the financial sector’s reckless gambling has lost us over $6 trillion in wealth. But the execs did quite well, thanks to taxpayer largesse.

You’d think we’d be crying out for a windfall profits tax to reclaim our money. But no.

2. Redistribution of Income is Un-American.
During the 2008 campaign, Joe the Plumber got his 15 minutes of fame when he slammed Obama for daring to utter the phrase “redistribution of income.” Of course, we redistribute income primarily through progressive taxation – having the rich pay a higher rate.

Joe didn’t mention that we already live in a world of massive redistribution. Only it’s from the bottom to the top. We still hear about how poor folks game the system and mooch off our hard earned tax dollars. They go to emergency rooms and don’t pay. They get Medicaid for free. And many don’t pay any taxes at all (mostly because their incomes are so impossibly low). But all of that is chump change compared to the gaming going on at the other end of the economic scale.

Just think of all the scams corporations and the rich are running: ever-rising credit card fees, predatory mortgages, usurious interest rates, check cashing ripoffs, monopoly pricing. They turn income into lower taxed capital gains, find offshore tax shelters, collect subsidies for their runaway shops. And then they netted the big one: Wall Street bailouts. Post-baillout, these too-big-to fail companies are getting even bigger. It all adds up to a major redistribution plan — from the many to the few.

During the post-WWII boom we had one of the fairest income distributions in the world. Not anymore. Today the gap between rich and poor is wider than at any time in U.S. history. Here’s a telling statistic: In 1970 the compensation ratio of the top 100 CEOs compared to the average worker was 45 to one. By 2008 it was 1,071 to one. You think they got that much smarter?

3. If we tax the wealthy, we’ll hinder investment and kill jobs.
This was the justification politicians and pundits used when they started cutting taxes and eliminating regulations in the late 1970s. Tax cuts were supposed to create a robust investment class whose dollars would fuel the new service economy. Since only the wealthy can make such investments, the argument went, we have to make sure they have the money they need to invest. Otherwise, where will all the new jobs come from?

In theory this sounds good. But we tried this experiment, and it didn’t work. When we cut taxes on the super-rich, we got a different kind of investment boom than the politicians and economists had promised. The wealthy literally ran out of investments in factories, equipment and even services. So they flocked to financial investments — which were supposedly safer and more profitable anyway. The super-rich laid their money down in the Wall Street casino, and helped puff up bubble after bubble. Profits in the financial sector soared. In 1960, the sector accounted for about 15 per cent of all corporate profits. By 2008 (before the crash, that is), it was almost 40 percent. The financial sector crased as the direct result of tax cuts for the super-rich and Wall Street deregulation.

4. Government’s too big already. We should be cutting the public sector, not raising taxes to expand it.
Many people (like those in and around the Tea Party) dislike tax scams by the wealthy, but dislike government even more. They’re outraged that public sector workers often have better wages and pensions than people in the private sector. They’ve made attacking public employees the new national blood sport.

With unemployment so high, public sector workers are an easy target. Why should taxpayers, many of whom have no pensions, finance the pensions of public sector workers? Why should we protect public sector jobs when we ourselves are unemployed?

Here’s one reason: Because cutting state and local payrolls would actually add to our economic woes. If we fire public sector workers, they’ll stop paying taxes — which will only add to the tax burden on those people who still have jobs.

Laid off public sector workers — and even those whose wages and benefits have been cut — don’t buy as many goods and services. This drop in demand triggers layoffs in the private sector — and a further slide in tax revenues. In short, public sector cutbacks contribute to an economic death spiral: plummeting tax revenues and ever more cutbacks.

By failing to tax the super-rich, we’re burrowing even deeper into a billionaire bailout society in which the rich keep on gambling away our money, knowing that we will bail them out if they lose. Yes, we need to regulate Wall Street. But we also need to recognize that these gambling addicts have too much money in their pockets. And society needs that money for constructive investments, not for more gambling.

In the end the real fiscal crisis is in our minds. We don’t have to keep fighting over the scraps the wealthy have left us. We can build a new kind of economy, but only if can summon up some courage. Do we have the nerve to tax the super-rich?

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Les Leopold is the author of “The Looting of America: How Wall Street’s Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It,” Chelsea Green Publishing, June 2009.

Dean Baker

By Dean Baker
Co-Director, Center for Economic and Policy Research

Last week, when President Obama was asked about the $9 million bonus for Goldman Sachs CEO Lloyd Blankfein, he described Blankfein as a savvy businessman, adding that Americans don’t begrudge people being rewarded for success. While the White House later qualified Obama’s comment about Blankfein and his fellow bank executives, it’s worth examining more closely some of the ways in which Blankfein and the Goldman gang were “savvy.”

Perhaps the Goldman gang’s best claim to savvy was in buying up hundreds of billions of dollars of mortgages and packaging them into mortgage backed securities, and more complex derivative instruments, and selling them all over the world. Blankfein and Goldman earned tens of billions of dollars on these deals. The great trick was that many of the loans put into these securities were issued by banks filling in phony information so that borrowers could get loans that they would not be able to repay. But this was not Goldman’s concern. They made money on the packaging and the selling of the securities.

In fact, Goldman actually recognized that many of these loans would go bad. So they went to the insurance giant AIG and got them to issue credit default swaps against many of the securities it had created. In effect they were betting that their own securities were garbage. Now that is savvy. (It says something else about the highly paid executives at AIG.)

Goldman doesn’t just confine its savvy to the US economy; it shares it with the rest of the world as well. According to the New York Times it worked closely with the Greek government over the last decade to help it conceal its budget deficit. The trick was to construct complex financial arrangements that appeared on the books as “swaps,” even though they were in fact loans. Greece was adding billions of dollars to its debt, and thanks to the ingenuity of the Goldman crew, no one knew about it until now.

But Goldman’s greatest triumph was to get the government to come to its rescue when the financial sector was melting down in the fall of 2008 as the housing bubble that they had helped to fuel began to collapse. The treasury secretary and former Goldman CEO Henry Paulson rushed to Congress and demanded $700 billion for the banks, no questions asked. He dragged along Federal Reserve Board chairman Ben Bernanke for support, along with Timothy Geithner, then the important head of the New York Federal Reserve Bank and now President Obama’s treasury secretary.

This triumvirate somehow managed to convince Congress that we would have a second Great Depression if it didn’t cough up the money immediately with no conditions. At that point Goldman, Morgan Stanley, Citigroup, and most of the other major banks were staring at bankruptcy. While this cascade of bank failures would have been bad news for the economy, there was no plausible scenario in which it would have led to a second Great Depression.

There was also no reason that Congress could not have put conditions on its money. For example, Congress could have dictated that as a condition of getting the money that bankers would get the same sort of paychecks as other workers, that they would get out of highly speculative activity, that the largest banks would be downsized and that the principle would be written down on bad mortgages. At that point, Congress could have told the bank honchos that they had to run around Wall Street naked with their underpants on their head. The bankers had no choice; their banks would crash and burn without government support.

But the savvy Mr. Blankfein and the other bankers got the money no questions asked. In fact, Goldman even got the government to pick up the bankrupt AIG’s debts. Thanks to the government’s intervention, Goldman got paid every penny on its bets with AIG. This came to $13 billion, enough money to pay for 4 million kid-years of health care under the Children’s Health Insurance Program.

No one should doubt that Blankfein is a very savvy banker. Without his ingenuity Goldman Sachs would likely be out of business, its component divisions being auctioned off to the highest bidder. Instead it is making record profits and paying out record bonuses.

But unlike the successful ballplayers to whom President Obama compared Blankfein, Goldman’s success is inherently parasitic. It comes at the expense of taxpayers and the productive economy. President Obama must decide whether he stands with the Wall Street banks or whether he stands with the workers and businesses who actually produce wealth.

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Dean Baker is author of the new book, “Plunder and Blunder: The Rise and Fall of the Bubble Economy,” PoliPoint Press, LLC. This piece was first published in The Guardian and on  Huffington Post.

Robert Reich

By Robert Reich
Former U.S. Secretary of Labor, Professor at Berkeley

At a conference in London, a Goldman Sachs international adviser, Brian Griffiths, praised inequality. As his company was putting aside $16.7 billion for compensation and benefits in the first nine months of 2009, up 46 percent from a year earlier, Griffiths told us not to worry. “We have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all,” he said.

Eight months ago it looked as if Wall Street was in store for strong financial regulation — oversight of derivative trading, pay linked to long-term performance, much higher capital requirements, an end to conflicts of interest (i.e. credit rating agencies being paid by the very companies whose securities they’re rating), and even resurrection of the Glass-Steagall Act separating commercial from investment banking.

Today, Congress is struggling to produce the tiniest shards of regulation that would at least give the appearance of doing something to rein in the Street.

What happened in the intervening months? Two things. First, America’s attention wandered. We’re now focusing on health care, Letterman’s frolics, and little boys who hide in attics rather than balloons. And, hey, the Dow is up again. The politicians who put off Wall Street regulation for ten months knew that the public would probably lose interest by now.

Second, the banks keep paying off Congress. The big guns on Wall Street increased their political donations last month after increasing their lobbying muscle. Morgan Stanley’s Political Action Committee donated $110,000 in September, for example, of which Democrats got $43,000.

Official Wall Street PAC donations are piddling compared to the tens of millions of dollars that Wall Street executives dole out to candidates on their own (or with a gentle nudge from their firms). Remember — the Street is where the money is. Executives and traders on the Street have become the single biggest sources of money for Democrats as well as Republicans. And with mid-term elections looming next year, you can bet every member of Congress has a glint in his or her eye directed at the Street.

That’s why the President went to Wall Street to raise money Tuesday night, gleaning about $2 million for the effort. He politely asked the crowd to cooperate with reform — “If there are members of the financial industry in the audience today, I would ask that you join us in passing necessary reforms” — but those were hardly fighting words. It’s hard to fight people you’re trying to squeeze money out of.

Which is the essential problem.

Ken Feinberg, the President’s “pay czar” came down hard on executive pay yesterday, for those banks still collecting money under TARP, as well he should. But Feinberg isn’t trying to pass new financial reform legislation, and TARP no longer covers several of the biggest banks with the highest pay and bonuses — although they’re still getting subsidized by the government with low-interest loans.

Wall Street and the Treasury want us to believe that the TARP money will be repaid to taxpayers, but Neil Barofsky, the special inspector general keeping watch over TARP, said yesterday that just 17 percent of the TARP money has been repaid, and “[i]t’s extremely unlikely that taxpayers will see a full return on their investment.” Later he told a reporter that it’s unlikely “we’ll get a lot of our money back at all.”

Brian Griffiths, the Goldman international adviser who told us inequality is good for us, doesn’t know what he’s talking about. America is lurching toward inequality once again, led by the financial industry. The Street is back to where it was in 2007, but most of the rest of us are poorer than we were then — largely due to the meltdown that occurred because Wall Street overreached. The oddity is that we bailed out the Street, including Griffiths and his colleagues, but apparently won’t even be repaid.

And now that Griffiths et al, knows his firm and the other big ones on the Street are too big to fail, he and his colleagues will make even bigger gambles in the future with our money.

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Cross-posted from Robert Reich’s Blog

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Robert Reich served as the nation’s 22nd Secretary of Labor and now is a professor of public policy at the University of California at Berkeley. His latest book, “Supercapitalism,” is out in paperback. For copies of his articles, books, and public radio commentaries, go to www.robertreich.org. 

Dean Baker

By Dean Baker
Co-Director of the Center for Economic and Policy Research

The large number of people who protested against Barack Obama’s health care plan in Washington last week drew an enormous amount of media attention. Clearly some of the leaders are certifiably crazy, questioning whether Obama is an American and likening him to Hitler. But many of the protesters had reasonable concerns about how the plan would affect the quality of care that they and their loved ones receive.

It was also striking how often the protesters complained about a government that was out of control and not responsive to ordinary people. One of the items that often came up in the interviews reported in the media was the bank bailout. Clearly this is an enduring and deeply felt cause of resentment.

It would be very hard to tell these people that their concerns on this topic are misplaced. At a time when tens of millions of people are facing unemployment or underemployment, when millions are at immediate risk of losing their homes, the banks seem to be doing better than ever. Goldman Sachs used its government-guaranteed loans to make risky bets that paid off big time. It now plans to distribute $9bn in bonuses to its executives and top traders at the end of the year. Why shouldn’t the protesters be absolutely furious about an administration that used taxpayer dollars to make some of the richest people in the country even richer?

It would be great if the anger of these protesters could be turned in a productive direction. Instead of trying to prevent the government from extending health care coverage, how about going after the banks that pillaged the country?

The obvious place to start in this effort is the break-up of the “too big to fail” behemoths. It is now pretty much official policy that financial giants like Citigroup, Bank of America and Goldman Sachs will not be allowed to fail. If their bad investment decisions again bring them to the edge of bankruptcy, the federal government will again rush to the rescue, handing out whatever cash and loans are needed to keep the banks afloat.

This status gives these banks a clear edge in credit markets against their smaller competitors. If everyone knows that the government can be counted on to come to the rescue of these banks, then there is less risk in lending them money. Therefore, they pay lower interest rates than if they had to borrow in a free market.

The Obama administration has proposed to correct this inequity by having higher capital requirements and tighter restrictions on risk-taking that will make it undesirable for banks to be too big to fail. In principle, the government could impose restrictions that are sufficiently onerous to offset the advantages of the government safety net, but no one outside of the Obama administration believes this will happen.

The simpler course is to just break them up. We don’t have to turn Citigroup and Bank of America into hundreds of small community banks, just large regional banks that can be safely put through a bankruptcy/resolution process if they mismanage their assets. My guess is that most of people protesting health care reform last weekend would support this idea.

A second issue likely to draw the support of the protesters is the democratization of the Federal Reserve. There is already a left-right coalition in the House of Representatives behind a bill calling for an audit of the Fed.

This is a case where the centrist elites have shown complete contempt for the American public. In fact, Federal Reserve Board chairman Ben Bernanke had the gall to argue against an audit of the Fed, warning that it would lead to increased instability.

Did Bernanke forget that less than a year ago he told Congress that the policies pursued by him and his predecessor had brought the economy to the brink of a complete collapse? How do you get less stable than that? This is the sort of nonsense that shows the contempt that the elites have for the masses on both the left and right.

This suggests a great opportunity for a joint effort by the left and right to democratize the Fed. It is absurd that the US has a central bank that is more accountable to the financial industry than to the public.

A joint effort has enormous potential. It will be hard for the elites to even understand such a joint effort of the left and right against the center. As an example, the New York Times actually asserted that the bill to audit the Fed has “250 Republican” co-sponsors in the House, ignoring the fact that the Republicans are a minority in the 435 seat chamber.

But the ignorance of the elite only increases the probability of success. And, if there is one thing this economic crisis demonstrates, the elite can be very very ignorant.

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This piece first ran on Huffington Post

Read more at: http://www.huffingtonpost.com/dean-baker/the-rally-against-obamaca_b_294247.html