Sunday, July 21, 2013

Economic recovery: slow for workers, better for big banks

When it comes to money, Americans live in two different countries.

Most people live in a country where they have jobs or seek work to pay their cost of living and put something away for retirement.  They put their money in banks.

Their country is slowly emerging from the worst economic slowdown in their lifetimes. 
While people in this country are regaining their optimism about the future, they are frustrated and unhappy because progress is so slow and the outlook uncertain.

In past slowdowns, these people have been helped by stepped-up government spending. 
Now, however, the government is shrinking, not only failing to help but in fact contributing to joblessness.

The other country is inhabited by major financial institutions.  While they are the banks where average people keep their money, they are also investors, sometimes taking big risks.

These financial institutions also suffered from the recession.  They bear much of the responsibility for it, because they endangered the deposits entrusted to them when they made unwise and risky investments.

In other words, their investment side endangered their banking side.

But the big banks are back, big time.  Not only have they fully recovered, but they are making record profits and have even begun once again to make massive investment mistakes.

Almost everybody knows the major financial institutions were bailed out by taxpayers.  That’s because they were “too big to fail,” meaning that allowing their collapse could have endangered the savings of millions of people.

And they repaid the bailout money.  But there was supposed to be something else in the deal.  To protect their depositors, they were supposed to be regulated more tightly so they could not again play dangerous financial games.

In 1999, President Bill Clinton and Congress had repealed a law dating from the Great Depression of the 1930s.   That law, called the Glass-Steagall Act, prevented banks taking deposits from getting into the investment business.

After that law was gone, it was easy for the major banks and investment companies to refashion themselves as hybrids, part banks and part investors.

Chase was a bank. J.P. Morgan handled investments. A year after the repeal, they became JP Morgan Chase, the nation’s biggest bank.

After the near collapse of the financial sector, Congress sought to impose some new controls on the major financial institutions. But it faced the strong lobbying effort of those institutions, which somehow had the money to use to block controls.

Paul Volcker, formerly the head of the Federal Reserve, the nation’s central bank, proposed a rule that would revive Glass-Steagall.  A watered-down version made it into the law in 2010, but the big banks have so far prevented the adoption of the rules needed to put it into effect.

Then, Elizabeth Warren, the new U.S. senator from Massachusetts and the former Harvard Law School finance professor, arrived on the scene.

She seems to have the knowledge to identify what’s wrong with the financial system and the nerve to try to fix it.  She has put together a bipartisan group of senators to try to restore Glass-Steagall. 

She sees the same problems as helped bring on the recession: JPMorgan Chase made an unwise investment that almost nobody understands and lost $6.2 billion. The only penalty was that the president’s $23 million pay was cut in half and a couple of people were forced out of the company.

But, in the face of industry lobbying, Warren’s chances of success are slim.  Still, unlike many in Washington who don’t try to set sound policy because of likely defeat, she deserves credit for the effort.

Volcker also wisely got the law to require that big players in the economy change their outside auditors every few years. The auditor’s job is to take an independent look at a company’s finances to inform investors and regulators.

When an auditor wants to hold onto a client, it may find a way to issue favorable reports.  That happened in some companies pre-recession.  That’s one reason the crisis snuck up on us.

A couple of weeks ago, the U.S. House of Representatives voted to repeal that requirement.  Apparently members of both parties were convinced either that the problem did not exist or that the law unduly restricted companies and auditors.

Do the big financial institutions need regulatory relief from government while average people get little help from Washington? 

Between 2007 and the middle of last year, U.S. household income fell by more than seven percent.

JP Morgan Chase just set a new record for profits in the first three months of this year.

Friday, July 12, 2013

Egypt Events Show Drawbacks of Political Purity

In Egypt, the army toppled a democratically elected government.

In a country like the United States, it may be shocking that, no matter what a government’s policies, the vote of a majority of the people should be overturned by force.

President Obama seemed to say that the military coup was acceptable, because of the way the Muslim Brotherhood government was running the country.

“Democracy is about more than elections,” Obama said.

A year ago, the Brotherhood had won elections for the Egyptian presidency and parliament. Based on its religious beliefs, it used its new-found power to change the nature of the country itself.

Obama said earlier that if he wanted government to ban some action, “I cannot simply point to the teachings of my church or evoke God's will. I have to explain why [it] violates some principle that is accessible to people of all faiths, including those with no faith at all.”

That was not the view of the Egyptian government, which seemed to believe that its political victory gave it a blank check to make fundamental changes.

Minority religious groups, including the Coptic Christians and Shia Muslims, and women found their rights were being reduced. President Mohammed Morsi declared himself above the law and rushed through a new constitution imposing the Brotherhood’s theology.

Of course, in a democracy, the majority rules, but there are acknowledged limits on what it can do with the power gained through elections. And a government should not be able to easily change a constitution.

In short, the limit on democracy is that it cannot be used to abolish itself. That’s what seemed to be happening in Egypt.

The American government tried to help Morsi stay in power by urging him to demand less political purity and to include in his government a variety of groups and interests. Morsi refused, apparently believing that his electoral victory constituted all the democracy his country needed.

Should that matter to Americans? In this country, we have repeatedly shown, sometimes under great stress, that our democratic system, with each person having an equal vote and the majority controlling, is remarkably strong.

While that’s certainly true, the American system is experiencing something similar to what happened in Egypt. Parties have become inflexible and unwilling to compromise.

The result of such rigidity was disastrous in Egypt, and it is causing problems here as well.

Formerly, the two major parties could compromise on policy questions. The result reflected mainly, but not exclusively, the views of the majority party.

For example, the Republicans might believe that competition among businesses offers sufficient consumer protection, while Democrats might argue for more regulation. The result could be a compromise law, leaning one way or the other, depending on which party is in the majority.

Now, many Republicans insist they will support only a pure version of their policies. For example, despite a strongly bipartisan Senate vote on immigration policy, the GOP Speaker of the House says his chamber will not even consider the Senate bill, seeking instead a purely Republican alternative.

In an extreme case, Wyoming GOP Sen. Mike Enzi, who has never supported any Obama proposal, is under attack and may be challenged in next year’s party primary simply because he was too polite and not stridently personal enough in his anti-Obama rhetoric.

In Maine, Gov. Paul LePage has attacked the character and intelligence of Democrats who oppose him, apparently because he believes his 2010 electoral victory meant that the Legislature should simply fall in line behind his policies.

Insistence on political purity and the related rejection or condemnation of opponents has produced undesirable results.

The parties are unable to find compromises, at least at the federal level, and policy-making has ground to a halt. There is no federal budget, and gridlock is the usual result of any attempt to pass needed legislation.

The Maine Legislature can still compromise, though the GOP members feel it necessary frequently to support their governor’s vetoes, even if they disagree with him.

And the reputations of both the United States and the State of Maine are tarnished.

Because of the inability of our federal government to function, the United States is losing respect elsewhere.

The loss of respect translates easily into a loss of influence in the world. People abroad may wonder if the United States is even capable of acting, when it is so deadlocked at home.

And when relations between Maine’s Republican governor and Democratic Legislature have reached the low point of name-calling, the sour political atmosphere may make the state look less attractive to out-of-state business.

Friday, July 5, 2013

Supreme Court Uses ‘Catch-22’ in Voting Rulings

You are only allowed to see the doctor if you are sick, but only the doctor can say if you are sick.  So you cannot see the doctor.

That’s a “Catch-22,” named after the famous novel by Joseph Heller in which this logic trap was hilariously and frighteningly described.

The latest Catch-22 has just come from the Supreme Court of the United States. In fact, in its recent decisions on the Voting Rights Act and an Arizona voter registration law, the Court used it twice.

The Voting Rights Act was passed in 1965 to give some teeth to the Fifteenth Amendment, which prohibits efforts to block voting on the basis of race.

Intended mainly to stop former Confederate states from preventing newly freed slaves from voting, it gave Congress the right to pass laws intended to enforce the Amendment.

Little happened for a century, mainly because Southern senators filibustered any proposal.  Then President Lyndon B. Johnson, a Texan, succeeded in getting the Voting Rights Act passed.

One part of that law says the U.S. Justice Department must approve in advance any changes to voting laws in nine Southern states and parts of other states, some in the North. The law contains the standards needed to get an OK.

In 2006, the law was renewed.  A Republican-controlled Congress voted for renewal by 390-33 in the House of Representatives and 98-0 in the Senate.  The bill was signed by President George W. Bush, also a Republican.

But the standards were not updated.  Some discrimination persisted, though it had taken new forms, such as efforts to suppress voting by members of minority groups.

Last month, by a 5-4 vote, the Supreme Court rejected prior approval of voting changes in affected states, finding that the standards that applied in 1965 were no longer needed and that Congress had not come up with new reasons for extending it.

Five justices decided that national policy adopted by an overwhelming majority of Congress, including senators from all of the affected states, should be tossed out because, in their view, it was outdated.

Justice Antonin Scalia had said in effect during the court proceedings that Congress couldn’t resist being politically correct, so it was up to the Supreme Court to make a decision that normally would be left to the legislative branch.

“Whenever a society adopts racial entitlements, it is very difficult to get out of them through the normal political process,” he said later.  Instead, he implied there must be an unusual political process, unusual because the Court is not supposed to be political.

The decision did not go that far. It allowed the prior approval requirement for offending states, provided Congress sets new standards, which would presumably have to be approved by the Court.

Could Congress with a House of Representatives now controlled by strong conservatives adopt any new standards?  Would the Court approve any new standards? 

If the answers are “no,” as many observers believe, then the Court has produced an obvious Catch-22.

The Justice Department may still prosecute efforts to stymie minority voting.  Without prior approval, it may need to be more aggressive.

And rather than assuming the House will block anything, President Obama could propose new standards to see where Congress stands.

Congress recognized that some states were trying to reduce the number of minority voters by placing new obstacles in their way. It created the Election Assistance Commission to prepare a standard form stating what information may required from a person voting in a federal election.

Arizona added its own requirements, making it more difficult for a person to prove citizenship. Oddly enough, one target was Native Americans

The Court, in an opinion written by Scalia, overturned the Arizona requirement, leaving the EAC standards in effect.  If Arizona didn’t like them, it could appeal to the EAC, which it had failed to do.

The problem is that there is no EAC.  Congressional Republicans have blocked the appointment of all four members and, without them, there is no staff.

Because Arizona cannot appeal to the body set by law to handle such matters, the state faces another Catch-22.

However, if it cannot get a favorable EAC decision, the state could appeal the non-decision to court. 

The case could make its way up to the Supreme Court, and the justices – or at least five of them – might act in place of the EAC and overrule or expand the agency’s standards.

In the end, Arizona and other states seeking to make it more difficult for minorities to vote could get their way, thanks to Catch-22.