BANKING REFORM – FACT VS FRAMING FICTION

The House and Senate Republicans are about to wage war against financial regulatory reform. Here’s your chance to know exactly what they are up to and why regulatory reform, if not enacted, will result in another financial meltdown with the results growing substantially more critical with each crisis.

We should have learned our lesson in the financial crisis in the eighties…but, we went right ahead with the notion that if we continued to de-regulate the financial institutions we would all be the better for it. However, the financial institutions saw it a different way. They saw it as their chance to make huge profits for themselves believing you, as an ordinary American citizen, would be happy eating the crumbs off the table. Well…in the end they put us all at risk. And, remember this if you don’t remember anything else…you, the ordinary American citizen, had to bail their sorry asses out. Then, to show their gratitude, they closed their lending window and returned to their overpaid bonuses without a grain of remorse.

Large Wall Street commercial banks and investment banks find it far easier to make a few big loans than a lot of small loans. But, also remember this. If you owe the bank, say, one hundred thousand dollars, they own you…but, if you owe the bank 100 billion dollars you own them. So, you can see who gets the upper hand. However, the fact is, if you originate a lot of small loans that also circulates money to customers who in turn use it to start new business, buy cars, furniture and goods that will pick up the economy. The economy is not and never has been a trickle down process…it’s always been a ground swell process.

Today, Paul Krugman, wrote about the model we should follow if we want stability in the financial markets, and Frank Luntz (a Republican wordsmith) issued a memo to Republicans on how to game the frame game by confusing you with language.

Here’s Luntz argument as written by Sam Stein in the Huffington Post.

“Nine months after he penned a memo laying out the arguments for health care legislation's destruction, Republican message guru Frank Luntz has put together a playbook to help derail financial regulatory reform.
In a 17-page memo titled, "The Language of Financial Reform," Luntz urged opponents of reform to frame the final product as filled with bank bailouts, lobbyist loopholes, and additional layers of complicated government bureaucracy.
"If there is one thing we can all agree on, it's that the bad decisions and harmful policies by Washington bureaucrats that in many ways led to the economic crash must never be repeated," Luntz wrote. "This is your critical advantage. Washington's incompetence is the common ground on which you can build support."

Luntz continued: "Ordinarily, calling for a new government program 'to protect consumers' would be extraordinary popular. But these are not ordinary times. The American people are not just saying 'no.' They are saying 'hell no' to more government agencies, more bureaucrats, and more legislation crafted by special interests."

In Republican circles Luntz's words, which have helped the party score win the message wars over health care and other legislative battles, are often treated as gospel. Already, some of the advice he's offered on regulatory reform has found its way into the political discourse -- with a proposed Consumer Financial Protection Agency seemingly on life support under Republican objections.

In addition to tying regulatory reform to a massive government takeover, Luntz's memo includes several other data points and messaging suggestions as a blue print for the legislation's defeat. Opponents, he writes, would be well served to link the package to the financial industry bailout (which, it should be noted, is fundamentally not part of the legislation). According to accompanying polling data, 52 percent of voters said they would be "much less likely" to vote for their member of Congress if they voted for a financial reform bill that contained a fund to bail out banks and Wall Street.

"Public outrage about the bailout of banks and Wall Street is a simmering time bomb set to go off on Election Day," Luntz wrote. "Frankly, the single best way to kill any legislation is to link it to the Big Bank Bailout."
Another effective strategy to kill the bill, according to Luntz, is to make the case that it was written in secret by lobbyists.

"The American people are tired of add-ons, earmarks, and backroom deals - but they are mad as hell at 'lobbyist loopholes,'" Luntz wrote. "You must put proponents of the legislation on the defense, forcing them to attempt to justify the 'lobbyist loopholes' and exemptions placed in the bill... Highlight the exemptions. Broadcast them. Remind them, 'The legislation is filled with lobbyist loopholes that exclude certain wealthy, powerful industries from regulations.'"

On the specific issue of a Consumer Financial Protection Agency, Luntz argued that opponents should stress the high-cost of creating an additional regulatory body in addition to the damaging effects it will supposedly have on "small business owners" (as opposed to, merely, small businesses).

"Owning a small business is part of the American Dream and Congress should make it easier to be an entrepreneur," wrote Luntz. "But the Financial Reform bill and the creation of the CFPA makes it harder to be a small business owner because it will choke off credit options to small business owners."

These lines or arguments are similar to the ones used by regulatory reform opponents in the past, often with some success. What's telling is that they are being trotted out again in this type of economic environment.

Luntz does seem to acknowledge that the climate makes defeating regulatory reform a bit trickier. At the top of his memo he urges opponents (primarily Republican lawmakers) to "acknowledge the need for reform that ensures this NEVER happens again," He insists that "the status quo is not an option" and that members of Congress, when addressing the crisis, "never forget its impact on your audience." Luntz even advise his audience to promote themselves the agents of change.
But for the sake of winning the debate, he adds, it is vital to insist that such change does not include additional Washington-based regulatory powers.

"Many of the same members of Congress responsible for the legislation that helped create the housing bubble and the Wall Street financial crisis are now attempting to create another new government agency with an unlimited budget and almost unlimited regulatory powers," wrote the GOP wordsith. "I'm sorry to say this but they don't know what they're doing. They have gotten it wrong time and time again..."
"A new agency with new bureaucrats is not change we can believe in," Luntz wrote. "It's not change at all."”

So Luntz argument is founded on the use of words…not the facts or the danger of neglecting to fix what is wrong about the financial regulatory system.

However, Paul Krugman, in his Op-Ed article in the New York Times February 1 issue, notes the success of dealing with the financial crisis in Canada, an economy much like our own, and the success which can be factually measured there.

Mr Krugman writes, “Over the past decade the United States and Canada faced the same global environment. Both were confronted with the same flood of cheap goods and cheap money from Asia. Economists in both countries cheerfully declared that the era of severe recessions was over.

But when things fell apart, the consequences were very different here and there. In the United States, mortgage defaults soared, some major financial institutions collapsed, and others survived only thanks to huge government bailouts. In Canada, none of that happened. What did the Canadians do differently?

It wasn’t interest rate policy. Many commentators have blamed the Federal Reserve for the financial crisis, claiming that the Fed created a disastrous bubble by keeping interest rates too low for too long. But Canadian interest rates have tracked U.S. rates quite closely, so it seems that low rates aren’t enough by themselves to produce a financial crisis.”

Canada’s experience does seem to support the views of people like Elizabeth Warren, the head of the Congressional panel overseeing the bank bailout, who place much of the blame for the crisis on failure to protect consumers from deceptive lending. Canada has an independent Financial Consumer Agency, and it has sharply restricted subprime-type lending.

Above all, Canada’s experience seems to support those who say that the way to keep banking safe is to keep it boring — that is, to limit the extent to which banks can take on risk. The United States used to have a boring banking system, but Reagan-era deregulation made things dangerously interesting. Canada, by contrast, has maintained a happy tedium.

More specifically, Canada has been much stricter about limiting banks’ leverage, the extent to which they can rely on borrowed funds. It has also limited the process of securitization, in which banks package and resell claims on their loans outstanding — a process that was supposed to help banks reduce their risk by spreading it, but has turned out in practice to be a way for banks to make ever-bigger wagers with other people’s money.

There’s no question that in recent years these restrictions meant fewer opportunities for bankers to come up with clever ideas than would have been available if Canada had emulated America’s deregulatory zeal. But that, it turns out, was all to the good.

So what are the chances that the United States will learn from Canada’s success?
Actually, the financial reform bill that the House of Representatives passed in December would significantly Canadianize the U.S. system. It would create an independent Consumer Financial Protection Agency, it would establish limits on leverage, and it would limit securitization by requiring that lenders hold on to some of their loans.

…there’s a good chance that we’ll do nothing, or nothing much, to prevent future banking crises. But it won’t be because we don’t know what to do: we’ve got a clear example of how to keep banking safe sitting right next door.”

Don’t be fooled by conservative strategist whose true loyalty lies to Wall Street’s biggest commercial banks and investment banks. The truth is these folks are lazy. You see…it takes a great deal more effort to make a lot of small loans than it does to make one great big one. But, the small loans to small businesses are the life blood of a democratic capitalistic system. Create more customers and the result is a robust economy for small and large businesses alike. Catering to only wealthy will eventually strangle the life out of rich and poor alike.