A tremendously hot August that flirted with record highs is almost history and with it the tendentious hope some had for a Summer of Recovery. Au revoir. Boasts that emanated from the White House of an imminent reversal of America’s dismal economic predicament (and Democratic political fortunes) were so predictably wide of the mark that the reluctant acknowledgment of such is almost uncontroversial. One must understand that when a president is this out of his depth, what other recourse is there besides breaking out the Blue Goose to disseminate false hope?

A woeful chasm in this country persists and it sets the Best and the Brightest of our venerable institutions diametrically apart from the economic reality on the ground. This Recovery Summer that decidedly wasn’t brings to mind the “green shoots” we heard a bit about in the spring of 2009. Or perhaps more notoriously, reminds us of how wrong the establishment was in its belated discovery of economic recession 2½ years ago. If their epic wrongness continues unabated, words like “expert” may literally have to undergo semantic change. “A person who commands considerable status despite lack of foresight, special knowledge or self-awareness,” is what Webster’s Fourth may read at the turn of the next century.

Optimistic talk of liberal policy wonks—who else is there left to defend this administration?—is given the lie to by NPR a day ago.

Articles like these make pearl-clutchers out of us all:

[I]n light of the financial crisis and Fannie and Freddie's near-collapse, policy leaders are also rethinking the government's role — and many Americans are starting to question whether homeownership is the only path to the American Dream.

Fannie and Freddie function by buying, bundling and then stamping a government guarantee on mortgages. Then they sell them to investors. It keeps the banks happy because it keeps capital flowing, and it keeps consumers happy because it makes low, fixed-rate mortgages possible.

In a related occurrence, Rep. Barney Frank, chairman of the Financial Services Committee, finally lent his lisp to an astonishing truism: “Not everybody can or should be a homeowner,” the congressman informs us, summoning the authority of a public official oblivious to how tragically late he is.

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by Zach Carter, Media Consortium blogger

Last week, the U.S. Senate rejected a plan that would have broken up the nation’s six largest banks firms into firms that could fail without wreaking havoc on the economy. Even though the defeat reinforces Wall Street’s political dominance, there is still room for a handful of other useful reforms, like banning banks from gambling with taxpayer money and protecting consumers from banker abuses. After looting our houses, banks are now pushing for the ability to bet on movie box-office receipts, and will keep trying to financialize anything they can unless Congress acts.

Wall Street calls the shots

Writing for The Nation, John Nichols details last week’s Capitol Hill damage. Today’s financial oligarchy, in which a handful of bigwig bankers and their lobbyists are able to write regulations and evade rules they don’t like, will still be in place after the Wall Street reform bill is passed. The lesson is clear, as Nichols notes:

Whatever the final form of federal financial services reform legislation, one thing is now certain: The biggest of the big banks will still be calling the shots.

Still worth fighting for

As I emphasize for AlterNet, Congress has made a terrible mistake here, but there is still room for reform. It took President Franklin Delano Roosevelt seven years to enact his New Deal banking laws. It took even longer to reshape public opinion of monopolies when President Theodore Roosevelt took on Corporate America in the early 1900s.

What’s still worth fighting for? We have to curb the derivatives market—the multi-trillion-dollar casino that destroyed AIG. We have to impose a strong version of the Volcker Rule, which would ban banks from engaging in speculative trading for their own accounts. We have to change the way the Federal Reserve does business and force the government’s most secretive bailout engine to operate in the open. And we have to establish a strong, independent Consumer Financial Protection Agency to ensure that the horrific subprime mortgage abuses are not repeated.

As Nomi Prins details for The American Prospect, the current reform bill will not effectively deal with the dangers posed by hedge funds and private equity firms—companies that partnered with banks to blow up the economy through investments in subprime mortgages. That means that whatever happens with the current bill, Congress must again take action next year to rein in other financial sector excesses.

The derivatives casino at the movies

As Nick Baumann demonstrates for Mother Jones, banks are doing everything they can to gobble up other productive elements of the economy. The economy crashed in 2008 in large part because banks had used the derivatives market to place trillions of dollars in speculative bets on the housing market. This wasn’t lending, it was pure gambling: Instead of using poker chips, bankers placed their bets with derivatives. But, as Baumann emphasizes, banks are now looking to expand the sort of thing they can make derivatives gambles with. The latest proposal is to allow banks to bet on the box office success of movies. That’s right, banks would be gambling on movies.

Hollywood may be shallow, but it isn’t stupid. It doesn’t want to see the banking industry repeat its destructive looting of the housing industry on the movie business, and is pushing hard to ban banks from betting on movies. But we can’t count on every industry having a powerful lobby group to counter every assault from the banking system.

Taking stock in schools

Consider the unsettling report by Juan Gonzales of Democracy Now!. Gonzales details how big banks gamed the charter school system to score huge profits while simultaneously saddling taxpayers with massive debts that make teaching kids supremely difficult. By exploiting multiple federal tax credits, banks that invest in charter schools have been able to double their money in seven years—no small feat in the investing world—while schools have seen their rents skyrocket. One school in Albany, N.Y. saw its rent jump from $170,000 to $500,000 in a single year.

About that unemployment rate…

It’s not like public schools are flush with cash right now. The $330,000 increase in rent could pay the salaries of more than a few teachers. As the recession sparked by big bank excess grinds on, even the good news is pretty hard to swallow. As David Moberg emphasizes for Working In These Times, the economy added 290,000 jobs in April, but the unemployment rate actually climbed from 9.7 percent to 9.9 percent in March. That’s because the unemployment rate only counts workers who are actively seeking a job—if you want a job but haven’t found one for so long that you give up, you’re not technically “unemployed.” All of those “new” workers are driving the official figures up.

In other words, it’s still rough out there. And likely to stay rough as state governments try to deal with the lost tax revenue from plunging home values and mass layoffs. Nearly half of all unemployed people in the U.S. have been out of a job for six months or more. And while we’d be much worse off without Obama’s economic stimulus package, that percentage is likely to grow this year, Moberg notes.

This is what unrestrained banking behemoths do. They book big profits and bonuses for themselves, regardless of the consequences for the rest of the economy. Congress absolutely must impose serious financial reform this year. After the November election, breaking up the banks must once again be on the agenda when Congress considers the future fate of hedge funds, private equity firms, Fannie Mae and Freddie Mac. If we don’t rein in Wall Street, banks will continue to wreak havoc on our homes, our jobs and even our schools. Congress must act.

This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.

By Zach Carter, Media Consortium Blogger

Progressives have waited a year for President Barack Obama to roll up his sleeves and fight for serious financial reform. Last week, he finally jumped in the ring, telling weak-kneed Senators to stand up to Wall Street and endorsing a critical ban on risky securities trading.

But while it was good to see Obama start throwing financial punches against the banks, this week he also started throwing them at workers. His recent rhetoric on implementing a spending freeze to reduce the deficit is an economic catastrophe in the making. It indicates that Obama is willing to sacrifice jobs to try and win over Republicans.

A spending freeze would kill jobs

A three-year spending freeze is crazy talk. It’s a right-wing ideologue’s dream that accomplishes nothing and drives millions of people out of work. John McCain campaigned on it during his 2008 presidential run. Our long-term deficit problems are tied to the rising cost of health care. If you want to fix the deficit, fix health care. In the short-term, there is no deficit problem. In fact, the U.S. fiscal position looks very good compared to many European nations.

As Matthew Rothschild notes for The Progressive, a spending freeze would kill any legislation to create jobs. With unemployment at 10%, the economy desperately needs another round of government spending to put people back to work. While the abrupt policy reversal is clearly a political ploy, voters care much more about results than they care about ideology. If Obama actively sabotages the job market to win over conservative deficit-hawks, he’ll be putting his political future in serious jeopardy.

And yet, as Steve Benen notes for The Washington Monthly, Obama’s recent, ramped-up rhetoric against banks still marks a significant change in tone. For most of the year, Obama hasn’t been involved in the financial reform debate at all, letting Treasury Secretary Timothy Geithner capitulate to Wall Street and the politicians it owns. Benen highlights the end of Obama’s speech announcing his new banking rules on Jan. 21. Obama says:

So if these folks want a fight, it’s a fight I’m ready to have. And my resolve is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see soaring profits and obscene bonuses at some of the very firms claiming that they can’t lend more to small business, they can’t keep credit card rates low, they can’t pay a fee to refund taxpayers for the bailout without passing on the cost to shareholders or customers — that’s the claims they’re making. It’s exactly this kind of irresponsibility that makes clear reform is necessary.

Saving the CFPA

Katrina vanden Huevel lays out Obama’s new financial reform agenda in a column for The Nation, praising a new $117 billion tax on the nation’s largest banks, a plan to cap overall bank size, and a proposal to ban high-risk trading by economically essential commercial banks (more on that later).

But vanden Huevel also rightfully denounces recent indications that Senate Banking Committee Chairman Chris Dodd (D-CT) may cave to lobbyist pressure and drop the measure to create a new Consumer Financial Protection Agency (CFPA) from the Senate’s financial reform bill.

The death of the CFPA would be a devastating blow to reform. Existing bank regulatory agencies see their primary job as protecting bank profits, meaning that any time the interests of the U.S. consumer conflict with those of bank balance sheets, the regulators have shafted consumers. Current federal banking regulators not only failed to enforce consumer protection laws, they went so far as to join the bank lobby in suing state regulators who were trying to protect households from predatory lending.

Fortunately, Obama isn’t taking Dodd’s bank lobby-induced cowardice sitting down. At Talking Points Memo, Rachel Slajda highlights a New York Times report that claims Obama met with Dodd and told him that the CFPA is a “non-negotiable.”

Commercial banks are important

There’s a lot to like in Obama’s plan to bar commercial banks from participating in risky securities trading. As I emphasize in a piece for AlterNet, commercial banks form the backbone of the U.S. economy. They’re the institutions that accept your paychecks as deposits and keep businesses moving with loans. They also form the core of the economy’s payments system. Without commercial banks, nobody can pay anybody else for goods and services—the economy literally shuts down.

Nevertheless, in the late 1990s, regulators and lawmakers tore down the walls between commercial banking and riskier, complex securities trading, allowing these critical economic utilities to gamble in the capital markets like high-flying hedge funds. That kind of behavior puts the entire economy in jeopardy, and Obama’s proposal to end such behavior is very urgently needed.

But, as vanden Huevel and I both note, Obama’s cap on bank size is a little too timid. Obama indicated that he wants to prevent big banks from getting bigger going forward. That misses the point.

Bustin’ up “too big to fail”

Financial giants like Citigroup and Bank of America are already much too big and pose an economic threat. That’s why we refer to them as “too big to fail,” and why the government had to devote over $17 trillion to saving them. Obama must cap bank size and break up our behemoth banks into companies that are small enough to fail without wreaking havoc on the economy. A good rule of thumb: 1% of gross domestic product.

Shouting down the bank lobbyists

In Mother Jones, David Corn emphasizes that Obama’s credentials as a serious reformer depend more on his policy maneuvering than on his rhetoric. While it has been extremely promising see Obama finally demanding something serious from the financial giants that taxpayers saved, he’ll have to shout down the bank lobbyists to secure meaningful economic—or political—gains. Corn writes:

If Obama aims to be widely regarded as a warrior for the middle class, he will have to take some mighty swings that cut through the clutter. Proclaiming ‘I am a fighter’ will not be enough. He will have to name his foes (financial institutions, insurance companies, Republicans, and perhaps recalcitrant Democrats) and truly exchange blows.

Obama’s stance on the CFPA alone should be enough to get the lobbyists into a lather, but he’ll have to keep up the fight on multiple fronts if he wants to protect our economy from the Wall Street recklessness that spurred millions of foreclosures and sent the unemployment rate soaring into double digits.

Last week, Obama finally told us he was willing to fight for economic change. Now it looks like he’s going to attack anyone who is looking for a job. Let’s hope he turns it around before it’s too late.

This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.

By: Inoljt, http://thepolitikalblog.wordpress.com/

There is something very fishy with Keynesian economics and the theory that government stimulus best fights recessions.

Before I continue, I should note that I am entirely unqualified to offer this critique of a fundamental economic tenet. I do not have a Ph.D in economics; nor do can I offer any alternative to combating recession. Nevertheless, here are my non-intellectual thoughts on the matter.

The best test of an economic principle (or any principle, for that matter) is in the field - in real life. For example, reality contradicted the economic theory that financial markets are rational in a particularly memorable way. On the other hand, reality supports the principles of supply and demand.

As far as I can tell, the "reality test" for economic stimulus has had quite mixed results. Two stimuli come off the top of my head: Franklin Roosevelt's New Deal and Japan's response to its 1990s housing bubble. The New Deal, while popular and praised to this very day, did not end the Great Depression. Likewise, Japan's stimulus also did not stop its Lost Decade.

Supporters of Keynes, in response, assert that both Roosevelt and Japan needed even more stimulus; both cut back government spending when they should have spent even more.

To me, this argument recalls the saying, "The definition of insanity is doing the same thing over and over again and expecting different results." It's as if a medieval doctor proposes "bleeding" a sick patient. Upon seeing that bloodletting is not working, the doctor concludes that the patient needs even more bloodletting - when in reality the doctor's "cure" is only making the patient sicker.

The analogy is probably exaggerated; after all, WWII government spending did end the Great Depression. As stated before, the "reality test" has not proven one side right.

What is certain is that more test results are upcoming. The general response to the Great Recession has been economic stimulus; we shall see whether or not it works fairly soon. I hope the evidence goes against my suspicions. I fear it will not.

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