That’s right—over 4041 percent of the profits of the entire U.S. corporate sector went to the financial industry. James Kwak, coauthor of42 the Baseline Scenario, a leading blog on economics and public policy, explains why this is a problem: “Remember that financial services are an intermediate product—that is, we don’t eat them, or live in them, or put them on in the morning. They are supposed to enable a more efficient allocation of capital, so that the nonfinancial economy is more productive. But what we saw since the 1980s was the unmooring of the financial sector from the rest of the economy.”
In other words—it’s supposed to serve our economy, not become our economy.
The expansion of the financial industry has come at a significant cost to the rest of us. And those who have paid the highest price are the members—and former members—of America’s middle class. According to New York Times columnist Paul Krugman,43 “A growing body of analysis suggests that an oversized financial industry is hurting the broader economy. Shrinking that oversized industry won’t make Wall Street happy, but what’s bad for Wall Street would be good for America.”
It’s no wonder that Wall Street breathed a deep sigh of relief when the Senate passed the Restoring American Financial Stability Act in May 2010. It was considered mission accomplished for financial reform.
Unfortunately, it was more of a Bush 43 mission accomplished than an Apollo 13 mission accomplished. That’s because the bill passed by the Senate, like Bush’s ship-deck ceremony, was more notable for what it left undone.
First, it didn’t do enough to rein in Wall Street. It didn’t end too-big-to-fail banks, didn’t create a Glass-Steagall-style fire-wall between commercial and investment banking, kept taxpayers on the hook for future bailouts, and left open dangerous loopholes in the regulation of derivatives. In D.C., crafting a bill without loopholes would be like baking bread without yeast. Though you can’t see them, they’re what makes a Washington bill rise.
Despite its name, this bill will not be restoring financial stability to the tens of millions of Americans whose lives have been turned upside down by the economic crisis.
On nearly every front in the real economy—from jobs to consumer spending to foreclosures—we’ve made virtually no progress. While Washington and the media were consumed with the titanic debate over this reform bill, talk of the actual suffering by actual people in the actual economy was virtually a taboo subject, at least judging by how rarely it made the front pages or led the TV news.
But the data points44 are all around us. In a speech, Sandra Pianalto, president of the Cleveland Fed, surveyed the landscape and described an economy facing serious and long-term challenges, partly because of the huge loss of skills that is being suffered by the long-term unemployed. “Research . . . tells us that workers lose valuable skills during long spells of unemployment, and that some jobs simply don’t return,” she said. “Multiply this effect millions of times over, and it has the potential to dampen overall economic productivity for years.”
Her conclusion45: “Many people are now just aiming for ‘financial security’ as their American Dream.” In other words, the core idea of the American Dream—work hard and advance up the ladder—has been gutted. Now the American Dream is try to not fall, or do all you can to slow your rate of decline.
And forget about having enough in the bank to give your kids a leg up on doing better than you’ve done. It’s hard enough just to keep a job until you retire—if that’s even going to be an option. At a D.C. jobs fair46 for older workers in May 2010, more than 3,000 job seekers showed up for the event, entitled “Promoting Yourself at 50+.” Not surprising given that, at the time, the average jobless stint for those unemployed who are fiftyfive and over was around forty-three weeks. (Quick note to struggling politicians out there: want a huge crowd at your campaign rally? Call it a “jobs fair” and you’ll have people lined up around the corner.)
Their children and grandchildren who recently graduated from college aren’t faring any better. According to BusinessWeek,47 the 1.6 million new grads hitting the job market with their expensive degrees are confronting a youth unemployment rate of almost 20 percent—“the highest level since the Labor Department began tracking the data in 1948.”
And many workers who have managed48 to hold on to their jobs are increasingly doing so only by accepting less pay and taking on a higher share of their health-care costs. “My company didn’t eliminate my job, they just eliminated my salary,” said marketing director Mike Cheaure. “I was back at work as a freelancer the next day working at one-fourth of the pay and no benefits.” The experience has made him very familiar with the new reality. “For us, the American Dream is gone,” he said. “Now it’s just getting by.”
Adding insult to injury, a growing number49 of working mothers are having to give up their jobs and rely on welfare because states are cutting back on child-care services that allowed them to keep working. And kids were left scrambling50 to find something to do this past summer when a number of states made deep cuts to summer school programs.
This spring saw a surge in consumer spending that spawned talk of “green shoots.” But it turned out the spending surge was economically imbalanced. As the Los Angeles Times’s Don Lee put it,51 the “little-noticed reality” behind the “encouraging numbers” was that “much of the new spending [had] come not from America’s broad middle class but from a small slice of affluent people at the top.” In fact, according to the Labor Department, the richest 20 percent of American house holds accounted for 40 percent of all spending.
The news in consumer lending has been similarly dismal—especially among the banks that got the most help from taxpayers. According to the Federal Reserve52, from June 2009 to June 2010, the largest banks cut business lending by over $148 billion—yet more evidence of the schism between the Wall Street economy and the real economy. Of course, the two economies aren’t entirely separate—the Wall Street economy is happy to accept massive transfusions of cash from the fading middle class.
This isn’t to say that there were no provisions considered that would help Main Street as part of the Restoring American Financial Stability Act. There were plenty—it’s just that almost all of them were either voted down or taken out and never even put up for a vote. Even something as simple and sensible as putting a cap on credit card interest rates. Senator Sheldon White house’s amendment53 to do just that was voted down 60 to 35. So much for “financial stability.” Though I suppose it depends on whose financial stability you care about—the banks’ or the taxpayers’.
Or how about payday lending54—the largely unregulated advances on a paycheck that can carry interest rates in the triple digits? In Missouri, for example, rates can top 600 percent. Yes, you read that right. Not exactly a recipe for “financial stability.” North Carolina’s Kay Hagan offered an amendment that would have clamped down on the $40 billion industry. It was killed without a vote55.