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Weekly Audit: Reining in the subprime scoundrels

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by Zach Carter, TMC MediaWire Blogger

President Barack Obama is scheduled to unveil his agenda for revamping financial regulation later this week. As the economy struggles though a recession created by the banking industry, it's crucial that Obama and his advisers craft a set of rules ensuring that the financial sector strengthens our economy instead of destroying it.

Various government regulatory agencies are sparring over how the final regulatory structure will be divided. But, as Robert Kuttner notes for The American Prospect, the most important aspects of the plan will not be who regulates what, but how stringently they are required to regulate. The Federal Reserve has had the power to devise consumer protection regulations for years, but has generally decided against writing strong rules to defend borrowers. There is perhaps no area of public policy more critical to the nation's economic stability than consumer protections in banking, especially as the subprime mortgage crisis continues to devastate U.S. households.

Without stronger regulations, the government's rescue programs for the financial sector will be a complete waste, and bailouts will only reward the destructive behavior that created the current recession. And the bailout plans are getting more absurd every week. Writing for Mother Jones, Nomi Prins details the latest bank bailout farce: The false euphoria emanating from the Treasury Department after it decided to allow 10 banks to return the bailout money it received from the public. Or, at least, some of the bailout money.

As Prins explains, the Troubled Asset Relief Program (TARP) accounts for just a tiny fraction of the bank rescue efforts currently orchestrated by the Treasury, the Federal Reserve and the FDIC. When banks accepted TARP money, they agreed to implement a few modest restrictions on executive pay, though none of the other bailouts came with any strings attached. The FDIC, for instance, agreed to guarantee the corporate debt that banks issue to fund their operations without requiring banks to adopt any changes in the way they do business. This government backing has allowed banks to raise several billion dollars in funding at extremely inexpensive rates, at a time when most banks were struggling to raise any money at all. Suddenly, some of the chief beneficiaries of the FDIC program—Goldman Sachs, Morgan Stanley and American Express, to name three—find themselves flush with cash and able to pay back the TARP money, and thus allow their CEOs to escape the executive compensation caps.

As Laura Flanders explains, there is a difference between how "healthy" a bank appears to the U.S. Treasury and what it actually does for ordinary people. The TARP money was supposed to serve a public purpose by freeing up funds that could be lent out into the economy. But the very banks now going off the public payroll have been retroactively jacking up interest rates on credit cards all year and spending millions to lobby against legislation that would prevent foreclosures. Small surprise, then, that the state of the U.S. housing market is as bad as it has ever been.

"The lesson is pretty clear: you cannot stabilize the mortgage market and undercut the working family at the same time, you just can't," Flanders says.

It's not as if the economy has suddenly turned a corner. In addition to all those foreclosures, the unemployment rate is 9.4% at last count and keeps surging higher. But the effects of the recession are not being felt equally among all workers. New America Media (NAM) features a piece by Raechal Leone that highlights the even more severe unemployment rate among blacks in the U.S.—a whopping 14.9%. Those numbers are not expected to get better anytime soon. When economists talk about the recession "ending," they mean that the Gross Domestic Product (GDP), a measurement of the total output of the U.S. economy, will have stopped shrinking. Economists almost universally believe that the unemployment rate will increase well after GDP stops contracting—as many as five years in some predictions.

The Applied Research Center (ARC) has released a report detailing the disparate impact of the recession on minorities, accompanied by a host of constructive policy recommendations. In the financial world, minority borrowers still face a dramatically uneven playing field. Black and Latino borrowers were more much more likely to be steered into an expensive subprime mortgage during the housing bubble than white borrowers were. As Nina Jacinto details for Wiretap, these lending practices have been so pervasive that the NAACP has filed lawsuits against both Wells Fargo and HSBC for systematically targeting black borrowers with expensive supbrime mortgages.

We need to upgrade our anti-discrimination banking regulations to end this systematic predation. Many of the other policies that ARC endorses are not geared specifically toward ending the racial wealth gap, but would alleviate some of the glaring effects of institutional racism. Since people of color are disproportionately relegated to low-paying jobs (or, as Leone noted for NAM, no work at all), policies that make it easier for low-wage workers to organize and demand fair pay, like the Employee Free Choice Act, would help ease this rampant inequality.

The Obama team's regulatory proposal will only mark the beginning of a policy debate that will likely last for months. But make no mistake, serious bank reform is one of the most important steps the government can take to make the economy accountable to ordinary citizens and CEOs alike. Without substantive change in the financial sector, the next meltdown could already be underway.

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