Next week, the debate over financial reform will begin in earnest when Congress returns from its Easter break. Both political parties are gearing up for a major fight, and the stakes couldn’t be higher. An out-of-control banking sector has cost the economy over 7 million jobs since 2007, and without major reforms, Wall Street could repeat this disaster in just a few years’ time. But thanks to Wall Street’s lobbying might, all of the necessary reforms are currently in jeopardy.

Key Reforms

Writing for The Nation, Christopher Hayes offers a useful primer on financial regulation, highlighting three reforms that are crucial to any bill.

-With no effective regulation of consumer protection issues for years, the existing banking regulators were more focused on preserving bank profitability than on going to bat for ordinary citizens. If banks could make big profits with unfair gimmicks (or even fraud), regulators usually looked the other way. The solution is a strong, independent Consumer Financial Protection Agency (CFPA) charged with nothing but protecting consumers from banker abuses, an agency with the broad authority to both write rules and enforce them.

-We need to rein in the $300 trillion market for derivatives, the complex financial contracts brought down AIG. Unlike ordinary stocks and bonds, derivatives are not traded on exchanges, so nobody really knows what is going on in this tremendous market. When something goes wrong, like with the collapse of Lehman Brothers, nobody can tell who the problem will effect. Without information, markets panic, and the entire financial system can collapse within a matter of days. Fortunately, this problem has a simple solution: require all derivatives to be traded on exchanges.

-Too-big-to-fail is too big to exist. The U.S. has never had banks as large as those that exist today, and their size gives them enormous political clout. It’s part of the reason why regulators didn’t make banks obey consumer protection laws, and why banks have been so effective in derailing reform. It’s been almost two years since the Big Crash, yet we are still wrangling over reform because giant banks deploy giant lobbying teams, and have almost unlimited resources to devote to their lobbying efforts. If we can’t scale back the banks’ power by breaking them up into smaller institutions, it’s unlikely that other reforms will be effective.

As Margaret Dorfman emphasizes for American Forum, a strong CFPA would help protect small businesses, since a huge proportion of them are financed with credit cards and home equity loans (Dorfman is CEO of the U.S. Women’s Chamber of Commerce, an advocacy group for women that should not be confused with the U.S. Chamber of Commerce—a nasty lobbying front for a few hundred high-flying executives). As Dorfman notes, small businesses are where most new jobs come from– if a regulator can ensure that these businesses are not pushed around by abusive banks, they can help repair our jobs.

Unfortunately, all three reforms are in real jeopardy as the bill moves to the Senate floor for a vote, as Simon Johnson notes in his Baseline Scenario blog carried at AlterNet. Senate Banking Committee Chairman Chris Dodd (D-CT) hasn’t included any language on breaking up the banks, he has significantly watered down the CFPA proposal President Obama put forward, and derivatives reform was almost entirely gutted in the House.

What’s at stake

So what’s at stake? For some perspective, consider last week’s jobs report. As Steve Benen notes for The Washington Monthly, the U.S. economy added 160,000 jobs in March, the first significant monthly gain since the start of the recession, and the best jobs report in three years. But while it’s good to see the economy actually adding jobs, at the March rate, it would take more than three-and-a-half years to win back the 7 million jobs lost since 2007.

This jobs disaster was not caused by faceless and unpreventable forces—it was the direct result of a reckless and unregulated banking system. Without major reforms, banks will always have this economic leverage when that recklessness overpowers them: bail us out, or watch your economy collapse.

This is an issue of basic democratic fairness, as Noam Chomsky explains for In These Times. Wall Street has purchased the right to bend public policy to anything that benefits banks—the rest of society is not their concern. The bailouts of 2008 and 2009 make that clear. After wrecking the economy to enrich themselves, bank executives then looted the public coffers with the threat of still further economic havoc.

And the political clout of America’s largest banks insulates them from criticism when they profit from abuses—particularly when those activities don’t spark wider economic crises. As Andy Kroll highlights for Mother Jones, J.P. Morgan Chase is currently making a killing by financing mountaintop removal mining (MTR). MTR is an ecological nightmare—literally a bombing campaign in which entire mountains in Appalachia are destroyed to make way for cheap coal. That’s meant billions in profits for J.P. Morgan, and an environmental catastrophe for the United States.

Obama and Congress have a choice. They can play financial reform for campaign contributions, pushing a watered-down bill that will function as a set of reforms-in-name-only. Alternatively, they can do their jobs, confront a dangerous financial oligarchy head-on, and help build an economy that works for everyone.

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