Two critical Wall Street reforms, once declared dead by U.S. megabanks, are suddenly close to Congressional approval. As the House and Senate iron out the differences between their financial overhauls, it now appears that lawmakers are finally willing to ban banks from gambling with taxpayer money by implementing a strong Volcker Rule, and to end taxpayer subsidies for risky derivatives operations.

These reforms will help stabilize the U.S. economy by clamping down on the naked speculation the drove financial markets off a cliff in 2008. But while lawmakers are finally waking up to the economic and political necessity of strong Wall Street reforms, conservatives have blocked key efforts to ease unemployment. President Barack Obama also appears ready to surrender to an assault on Social Security later this year.

Derivative of what?

Lawmakers now have the political momentum to end taxpayer subsidies for the trading of derivatives, as I emphasize for AlterNet. These risky businesses helped sink big banks and jeopardize the broader economy in 2008. These reforms would be a giant step towards reclaiming the U.S. economy for ordinary citizens, and they would fly in the face of opposition from both Wall Street and Treasury Secretary Timothy Geithner.

Derivatives are the infamous financial weapons of mass destruction that brought down AIG and Enron. Many of the biggest scandals arising from the current financial crisis were derivatives operations, from Lehman Brothers’ accounting gimmicks to the SEC’s fraud suit against Goldman Sachs. By allowing traditional commercial banks to sell derivatives, the U.S. government actually subsidizes the entire market, encouraging speculation and ramping up risks across the economy.

Wall Street’s political clout stems from its derivatives machinations and its “proprietary trading,” otherwise known as gambling for their own accounts. Both provide big, easy profits that banks convert to bonuses, lobbying and political contributions.

Ending the subsidies for derivatives, and implementing a strong Volcker Rule to ban outright bank gambling would be the first major blow to Wall Street’s total dominance on economic policy, one with lasting implications for the enforcement of other new regulations, including stronger protections for consumers.

Debtors’ Prisons

Plenty of economic battles will remain after this year’s Congressional contest over Wall Street. As Annie Lowrey emphasizes for The Washington Independent, authorities in several states are actually throwing people in jail for failing to pay off credit cards and other debts. Lowrey highlights a story and study by the Minneapolis Star-Tribune which reveals that, as the recession has deepened, judges have been ramping up arrest warrants for people who don’t pay their debts. In Minnesota alone, 845 people were arrested for being in debt in 2009, up 60 percent from four years ago.

As Lowrey notes, it’s not a crime to be in debt or fail to pay it off. But debt collection agencies have still been able to persuade judges to put borrowers behind bars until they make minimum payments. This is a total abuse of the justice system and a waste of taxpayer dollars.

Sometimes borrowers just can’t pay—that’s the dominant risk involved in banking, and being able to figure out who can pay and who can’t is the job of a banker, not a police officer. Debt collectors, by contrast, purchase debts at a discount, precisely because it is unlikely that borrowers will be able to pony up. If they can’t, that isn’t the business of a criminal court. It’s the risk inherent in a business model based on scavenging.

Slashing Social Security

Other items on the economic policy agenda are looking similarly ominous. As Robert Kuttner emphasizes for The American Prospect, Wall Street tycoon Pete Peterson appears to have found an ally in the Obama administration for his lifelong quest to slash Social Security. The plan is to pull back support for seniors in the name of balanced budgets. These cuts will be totally counterproductive economically, as would the corresponding middle-class tax hike and domestic spending freeze that Peterson is pushing for.

The real fight over Social Security is still a few months away, but as GRITtv’s Laura Flanders notes in an interview with Sen. Bernie Sanders (D-VT), deficit hysteria has already infiltrated contemporary policies. Republicans and conservative Democrats are using the deficit as an excuse to deny people the most basic social services, like unemployment benefits and health care payment assistance for the unemployed.

More on the deficit “problem”

As the editors of The Nation note, there is no short-term U.S. budget deficit problem. Interest rates on U.S. Treasury bonds are at record lows. Anybody who claims to be worried about the deficit is really worried about the longer-term implications, and those longer-term issues have big-picture, long-term solutions.

The single most critical variable in budget calculations in the increasing rate of health care costs, but the bloated defense budget and low tax rates for big corporations and wealthy individuals are also a target. Skimping on unemployment benefits, or refusing federal aid to hire teachers and cops doesn’t help those long-term issues one bit.

Cutting government spending and social services during a recession seriously threatens economic recovery. When everybody is broke, the government is the only reliable source for the spending needed to support growth and employment, and it has to keep spending until things really turn around. Obama’s 2009 stimulus kept the unemployment rate from reaching 12 percent or 13 percent, but it was just too small to really turn the economy around. With unemployment at 10 percent, we need more federal support for jobs, not less.

The recent progress on Wall Street reform shows that Congress finally understands that they need votes more than campaign contributions. Lawmakers who leaves those citizens out to dry by refusing to back a jobs bill or allowing unemployment benefits to expire will be in trouble come November.

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