From THOM HARTMANN
Article with footnotes here
The liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it comes stronger than their democratic state itself. That, in its essence, is fascism — ownership of government by an individual, by a group.
— Franklin D. Roosevelt
I started my first business at the age of 17 with $25. I paid that amount to rent a shelf in a head shop (which sold mostly pipes, bongs, and cigarette papers) across the street from Michigan State University in East Lansing. The shelf had a sign: “The Electronics Joint—leave your stereo or TV here for repair, and we’ll return it fixed within a week. Free estimate of charges before work is done.” The guy who ran the head shop managed the shelf for 10 percent of our revenues plus the $25-per-month shelf rental; within two years the venture had grown to include five employees, and we moved into our own storefront down the street.
As the business grew, however, I didn’t manage it wisely and ended up about $3,000 in debt, which was a lot of money in 1968 for a part-time student and part-time DJ. Ultimately, I had to shut the company down and go to work full-time as a radio DJ.
That didn’t turn out so well either. I got fired when I played two black female artists back-to-back, a violation of station policy at the time, and then refused to promise to never do it again. With my unemployment check, I bought some herbs at a local General Nutrition Center store and started an herbal tea company—Woodley Herber—that grew over the next six years to having 19 employees. One of our products that contained ginseng (which was then hot as an aphrodisiac) was picked up by Larry Flynt to market through his brand-new magazine, Hustler, making him a million bucks and turning a nice profit for my partner and me. Louise and I sold our half of that company to our employees in 1978 to move to New Hampshire and start a community for abused kids.
We wiped out our savings buying land for the children’s village and living for almost five years on a salary of $25 per week.* I still had an American Express Platinum Card, a leftover from the prosperous Woodley Herber days, so in 1983, with a $10,000 (or was it $15,000?) line of credit and some income from writing for a few magazines (I was contributing editor to seven of them that year), Louise and I moved to Atlanta and opened International Wholesale Travel and its retail operation Sprayberry Travel. That turned out to be quite a success. Within three years we’d marketed the company to the front page of the Wall Street Journal and had about $6 million in annual revenues, so we sold the company in 1986 to retire to Germany for a year to do volunteer work for the international relief agency Salem International.
We moved back to Atlanta in 1987 and used about $50,000 we had left from selling the travel company to start an advertising agency, The Newsletter Factory, which quickly grew to generating several million dollars a year in revenue and had about 20 employees. We sold that business to our employees on a seven-year buyout in 1996 and retired to the backwoods of Vermont to write books and enjoy life.
All of this is a way of saying that I am a somewhat typical “serial entrepreneur,” and fortunately we have a lot of them in America. They are generally middle-class people (my dad worked in a tool-and-die shop for 40 years, and my mom was a full-time homemaker with four sons), they generally do not have an inheritance or family money to draw on, and yet they spend their lives pursuing the American Dream.
I have never relied on a member of Congress or a government agency to do me a favor or bend the rules. I have never given campaign contributions to politicians in hopes of getting favors that would help my business. I have never hired a lobbyist to try to amend laws that would serve my financial interest. And this is generally true of all the hundreds of thousands of sole proprietors and partnerships and small businesses across America.
But that is not how big-time corporate America operates. To them making large campaign contributions and spending millions of dollars each year on lobbyists is just another investment that pays off handsomely. Their motto (in behavior, if not in fact) is You’ve got to pay to play.
This flood of corporate money and influence in our government makes for a decidedly uneven playing field for businesses as well as taints and corrupts our government. Unfortunately, the trend is moving in the direction of allowing even more money to encroach into our politics, thanks to the Supreme Court. The absolutely necessary solution here is to bring honesty and transparency to our politics.
Tom DeLay famously (and apparently illegally—as of this writing he’s managed to keep postponing his trial for years) took all sorts of goodies from lobbyists when he was a Republican leader in the House of Representatives, ranging from campaign contributions to a golf trip to St. Andrews in Scotland, the (incredibly expensive) “home” of the sport. His major patron was Jack Abramoff, lobbyist, businessman, head of conservative organizations—and criminal, sentenced to prison for felonies related to defrauding Indian tribes and plying politicians with gifts in exchange for political favors.
DeLay even went beyond just taking money and favors from lobbyists. He famously told lobbying firms on K Street in Washington, D.C., that they shouldn’t even bother to show up at his office looking for favors if they had any Democrats working in their offices. In 2005, DeLay was charged with violations of campaign finance laws and money laundering, while two of his former aides were convicted in the Abramoff scandal.
Similarly, former Republican senator Phil Gramm took a few million dollars over the years (and his wife, on Enron’s board of directors, took somewhere between $900,000 and $2 million) from the financial services and energy industries. And then, while still a senator, he slipped into the must-pass 2000 omnibus spending bill a sweet little feature, the 262-page Commodity Futures Modernization Act of 2000 (CFMA), which came to be known as the “Enron loophole.”
The CFMA allowed Enron to squeeze an estimated $40 billion out of California consumers, creating an energy crisis in the state in 2000 and 2001 and a political crisis for Governor Gray Davis that led to his replacement in 2003 by Republican Arnold Schwarzenegger (nominated for the job after he had a private and largely secret meeting with Enron CEO Ken Lay). It also opened the doors for Wall Street to use the new law to “create” what they called “new financial instruments” like credit default swaps, leading directly to the near-worldwide crash of the banking system in 2008.
After leaving Congress, Gramm followed in the footsteps of more than 100 of his colleagues in the past three decades and became a lobbyist himself in 2002, immediately going to work for UBS, a massive Swiss bank that is the world’s second-largest manager of “wealth assets.” In 2009, UBS was accused of helping American millionaires and billionaires evade taxes. The IRS filed a lawsuit in February 2009 alleging that 52,000 Americans secretly held up to $14.8 billion in accounts at UBS to avoid paying U.S. income taxes.
As the cases of DeLay and Gramm show (and there are hundreds of similar congressional examples), for major corporations and very rich individuals and families, national or international, campaign contributions and lobbying do produce healthy returns. Invest a few million, make a few billion. Putting money into the careers of members of Congress, past or present, it turns out, is among the most consistently lucrative investments in the world.
As I noted in my book Unequal Protection, as of 2009 there were roughly 64 registered lobbyists for every member of Congress—more than 34,750 in total—and 138 of them are former members of Congress. Include state lobbyists, and there are more than 60,000 (because of variations in state laws on what is or isn’t a lobbyist, and who and how they should register, this may well be a significant underestimate: nobody really knows the true number).
Senator Bernie Sanders noted on my radio show during the Senate debates on financial services industry regulation that the banking industry was spending more than $1 million per day on lobbying and had hired more than 250 former members of Congress to lobby their peers, including people who had previously been considered to have highly ethical and spotless reputations like former Democratic presidential candidate Dick Gephardt.
As Jeffrey H. Birnbaum noted in the Washington Post in June 2005, “The number of registered lobbyists in Washington has more than doubled since 2000 to more than 34,750 while the amount that lobbyists charge their new clients has increased by as much as 100 percent. Only a few other businesses have enjoyed greater prosperity in an otherwise fitful economy.” He added that “lobbying firms can’t hire people fast enough” and that salaries started at $300,000 per year. “Big bucks lobbying is luring nearly half of all lawmakers who return to the private sector when they leave Congress,” Birnbaum noted, citing a study by Public Citizen’s Congress Watch. The situation has only gotten worse since then.
From Lobbying to Regulating—Another Way Corporations Control Government
One of the primary goals of lobbyists is to affect legislation—introduce new bills or amendments, slip in key provisions, kill bills, and so on. But just as important is to affect regulations being considered by myriad federal agencies that could have huge financial impacts on the lobbyists’ corporate clients. So when the lobbyists have friends in the White House, as they did with George W. Bush and Dick Cheney, they actually get to take over the regulatory agencies through appointments.
A Rogues’ Gallery
During the Bush Jr. administration, more than a hundred very well paid lobbyists decided to forsake their big incomes for relatively paltry civil service paychecks for a year or two to become the actual regulators of the agencies they used to lobby.
J. Steven Griles, for example, moved from a $585,000-per- year paycheck as a lobbyist for oil and gas interests to become the number two person in the Department of the Interior, right under Interior Secretary Gale Norton, accepting a salary of $150,000 (a pay cut of $435,000 per year). His department then opened 8 million acres of western lands for oil and gas exploration and gave $2 million in no-bid contracts to one of Griles’s former clients – while Griles continued to receive a four-year $284,000-per-year bonus from his former employer.
Griles was also helping Jack Abramoff at the Interior Department (a government prosecutor said Griles was “Abramoff ’s guy at the Interior”); he eventually pleaded guilty to lying to the Senate about his relationship with Abramoff and was sentenced to 10 months in prison and a $30,000 fine.
The Denver Post in 2004 looked into the revolving-door phenomenon in the Bush administration, tallying more than 100 “high-level officials under Bush who helped govern industries they once represented as lobbyists, lawyers or company advocates.” The newspaper reported:
In at least 20 cases, those former industry advocates have helped their agencies write, shape or push for policy shifts that benefit their former industries. They knew which changes to make because they had pushed for them as industry advocates. The president’s political appointees are making or overseeing profound changes affecting drug laws, food policies, land use, clean-air regulations and other key issues.
Government watchdogs call it a disturbing trend, not adequately restrained by existing ethics laws.
Among the cases the article identified were Charles Lambert, a 15-year lobbyist for the meat industry in its effort to block labeling and mad cow disease investigations, who went to work for the U.S. Department of Agriculture (USDA), where he officially determined that mad cow disease wasn’t a threat and shouldn’t be investigated and that meat shouldn’t be labeled with regard to its safety.
Then there was Daniel E. Troy, a lawyer who worked for a lobbying firm representing Pfizer Inc., Eli Lilly & Co., and others in Big Pharma. In 2001 he left the lobbying firm and became the chief counsel for the Food and Drug Administration (FDA). Mysteriously, the main focus of the FDA’s position on regulating the drug companies moved “to discourage frivolous lawsuits, which drive up costs,” making it harder for consumers damaged by prescription drug side effects to sue Troy’s former employers.
The Denver Post story also pointed out the case of Thomas A. Scully, a lobbyist who represented HCA, a huge hospital corporation originally started by Bill Frist’s family. HCA was embroiled in a fraud investigation by the federal Centers for Medicare and Medicaid Services, started by a whistleblower. In 2001 Scully left his job to head the CMS. By coincidence, eight months later, the agency worked out a $250 million settlement—which critics said was far too lenient—that kept the feds from looking further into HCA’s books and kept the Justice Department away. Under pressure from some members of Congress, the settlement was delayed and eventually HCA ended up paying the $250 million plus $631 million in civil penalties. Scully then left the Centers for Medicare and Medicaid Services and went back to work again as a lobbyist for Medicare providers.
Then there was the case of lobbyist Jeffrey Holmstead, who worked at a law firm that represented big utility companies and which had proposed 12 paragraphs of changes in Environmental Protection Agency (EPA) regulations affecting those utilities. Holmstead then went to work for the EPA as a regulator overseeing the air pollution division, and soon thereafter those 12 paragraphs—which would have given a pollution exemption to 168 of 232 western-based power plants—appeared in proposed EPA rules changes. The case was so blatant that 45 U.S. senators—including three Republicans—and 10 states’ attorneys general wrote a letter asking the EPA to void the proposed rule because of “undue industry influence.” Their complaints were largely ignored by the Bush administration.
Lobbying as Big Business
Given how lucrative lobbying is as an investment, it’s become a huge business. In February 2010 the Center for Responsive Politics laid out which industries had invested how much in Congress the previous year. Overall it found that in 2009 the number of registered lobbyists who actively lobbied Congress was 13,694 and the total lobbying spending was a whopping $3.47 billion—a 240 percent increase since 1999.
The report showed that the top federal lobbying spending was carried out in 2009 by the health-care sector ($543.9 million); followed by the finance, insurance, and real estate sector ($465 million); and energy and natural resources ($408.9 million) (see Table 1 below). Among the biggest lobbying clients were the U.S. Chamber of Commerce ($144.5 million), ExxonMobil ($27 million), and the pharmaceutical industry group PhRMA ($26 million) (see Table 2 below).
The most recent example of the toxic and pernicious influence of industry in government (as of this writing) is the BP/ Transocean/Halliburton oil spill in the Gulf of Mexico. Both Norway and Brazil allow companies to engage in deep-water offshore drilling, but both of those countries also require by law that companies put blowout preventer devices on all oil wells that can be remotely activated in the event of a catastrophic failure. When Dick Cheney’s Energy Task Force (comprising Cheney, a few hand-picked bureaucrats, and executives from the fossil fuels industry, meeting in secret behind closed doors) reviewed a suggestion that the United States put into our regulations a similar provision, they dismissed it as “too expensive.” The cost for one of those devices—which would have prevented the BP Gulf spill—is a paltry $500,000 per well.
Rein in Corporate Control of Government
It wasn’t always this way. Consider this old Wisconsin statute, broadly representative of laws virtually every state had up until the rise of the robber barons—railroad magnates and other businessmen who became wealthy using anti-competitive and unfair business practices—in the 1880s:
Political contributions by corporations. No corporation doing business in this state shall pay or contribute, or offer consent or agree to pay or contribute, directly or indirectly, any money, property, free service of its officers or employees or thing of value to any political party, organization, committee or individual for any political purpose whatsoever, or for the purpose of influencing legislation of any kind, or to promote or defeat the candidacy of any person for nomination, appointment or election to any political office. [Italics added for emphasis—it makes a great “out loud” read when you shout the word “any”.]
The penalty for an individual (representing a corporation) violating such a law was not just a fine but a prison term; and if the corporation itself was found to be violating the law, the penalty could even include the corporate death penalty: dissolution of the corporation.
Reflected in that law (and in similar laws across the nation at the time) is a healthy skepticism of corporate interests and motives and an assumption that those interests are often contrary to the larger public interest.
We’ve gone the wrong way since then.
What we have lost is the moral and ethical view of our civic life and replaced it with a story that says that anything is acceptable so long as it is legally permitted. Campaign contributions, lobbyist wining-and-dining, and revolving-door careers—all are seen as legally permissible and that’s that, end of story, even though these unethical and immoral acts interfere with our fundamental democratic process and are therefore really crimes against the public good.
The British Lobbying Sting
While lobbying isn’t explicitly illegal in the United Kingdom, it’s seriously frowned upon, particularly when done by former members of the government. In March 2010 the Sunday Times and Britain’s privately owned Channel 4 TV ran a sting operation on former cabinet ministers and members of Parliament by pretending to be a U.S. lobbying firm. The reporters-lobbyists approached 20 former members of Parliament (MPs) altogether, 13 from the Labour Party and seven Conservatives, and used hidden cameras to record the conversations. The offer was for the former MPs to try to influence their associates and to do so for 3,000 to 5,000 British pounds per day in payment as lobbyists.
Two out of 20 agreed to do so. No money was paid, no work was done, but the politicians simply agreed to work as lobbyists and use their connections to advance the interests of the (fake) American firm.
When the story hit the newspaper and the hidden camera clips were aired, all hell broke loose. The scandal rocked London. “Ex-ministers in ‘Cash for Influence’ Row under Fire” screamed the headline on the BBC’s Web site, noting that other ministers “have condemned ex-cabinet colleagues who were secretly filmed apparently offering to try to influence government policy in return for cash.”
The day after the story hit, the Labour Party suspended three of the cabinet ministers involved in the investigation. The Guardian newspaper reported:
Three former cabinet ministers, Geoff Hoon, Stephen Byers and Patricia Hewitt were suspended from the Parliamentary Labour party last night in an unprecedented crack down on sleaze.
The move was implemented by the party’s chief whip, Nick Brown, and fuelled by backbench revulsion at claims that the trio had been using their ministerial experience to seek profit- able lobbying consultancies.
What’s important to note is the absolute shock expressed by everyone at the basic idea—something we take for granted in America—that politicians would even consider using their connections to make money as lobbyists. The BBC noted in its article that this behavior shocked and horrified even the most senior financial officer in the prime minister’s cabinet. Alistair Darling, the chancellor of the Exchequer (similar to Treasury secretary in the United States), told the BBC:
The best answer when you get a call like that is to put the receiver back down again. It’s obvious….But really, what on earth did they think they were doing?
And equally for a company, you don’t need a lobbyist. If you’ve got something to say, go directly to the government department and make your case. It’s just ridiculous.
So how is it that lobbying is widespread in the developing world (where it’s often referred to as “bribery”) but rare in developed countries—except for the United States? The answer has much to do with the U.S. Supreme Court’s interpretation of the “rights” of corporations and its interpretation of our First Amendment, which forbids the government from limiting “free speech,” particularly interpreted to mean political free speech.
Supreme Court rulings notwithstanding (more on this in chapter 10), this is definitely not what the Founders of this nation or the Framers of the Constitution had in mind. Numerous legislative solutions to corporations’ corrupting politicians with money or influence have been offered over the years, from the Tillman Act of 1907 to the Bipartisan Campaign Reform Act of 2002, commonly known as McCain-Feingold. All have been weakened or even struck down, in whole or in part, by the Supreme Court in its defense of the free-speech rights of very wealthy individuals and corporations.
The most powerful lever that lobbyists have is the campaign contribution, since it costs a member of Congress more than $1 million every two years to get reelected and a senator around $6 million (and far more in the very large states).
So for years now, reform efforts have focused on transparency and limits on campaign contributions and on pushing a system of publicly financing elections to take money out of politics. But all of that has been negated by the Supreme Court, and its latest ruling pretty much puts a nail in the coffin of public financing of campaigns. In 2010 in the Citizens United v. Federal Election Commission case, the Supreme Court ruled that corporations—even foreign corporations—and wealthy individuals can spend unlimited amounts of money to influence elections; they just have to spend it independently of the candidate’s or party’s official campaign.
So now if a candidate wants a few million dollars spent for his campaign, all he has to do is get the commitment (informally, of course) from a corporation that it’ll do it. Assuming the corporation keeps its word, this blows up pretty much every strategy anybody has come up with so far to clean up the elections mess in the United States and will probably lead, over the next few years, to an entirely corporate-controlled and beholden Congress.
Because the Supreme Court (with corporate lawyers like Antonin Scalia and former Monsanto attorney Clarence Thomas, with Thomas’s wife working at the corporate- and rich-guy-funded think tank Heritage Foundation) has completely jumped into bed with corporations with the Citizens United ruling, about the only real solutions to this are either amending the Constitution or changing the composition of the Court (through attrition over time in the hopes of a Democrat in the White House or through impeachment, which is extremely unlikely).
Fix Our Monetary System
But there are other things that we can fix, starting with how we handle our money. Some of this will be helped by having an honest White House and Congress, but other things we can do ourselves right now.
One of the biggest private sectors funneling money into politics these past few years—and causing the revolving door to rotate ever faster—is the financial services industry. As a joint report in late 2009 showed:
Since the beginning of 2009, organizations in the financial services sector—including banks, investment firms, insurance companies and real estate companies—have commissioned 940 former federal employees as federal lobbyists, Public Citizen’s analysis of data provided by the Center for Responsive Politics shows….
So far in 2009, the industry has employed at least 70 former members of Congress, nearly half of the 150 former members who have reported lobbying in 2009. These include former Speaker of the House Dennis Hastert (R-Ill.); former Senate Majority Leader and Republican presidential nominee Bob Dole (R-Kansas); former Senate Majority Leader Trent Lott (R-Miss.); former House Majority Leaders Dick Armey (R-Texas) and Dick Gephardt (D-Mo.); former Appropriations Chairman Bob Livingston (R-La.); and former Ways & Means Chairman Bill Thomas (R-Calif.). Former Rep. Vin Weber (R-Minn.) boasts the most financial sector clients (11) among former members of Congress.
It is no surprise that financial services corporations are extremely interested in influencing government these days. The financial systems of the United States have been as badly corrupted by corporate influence as have most of our politicians.
The Fickle Fed
Perhaps the most important player in our national economy is the Federal Reserve. In reality, the “Fed” is not federal and has no reserves. The Constitution specifies that only the Treasury Department—part of the federal government—has the power to “coin money, [and] regulate the value thereof” and lays out no provision for a separate corporation such as the Fed to produce our money supply.
The Fed was created in 1913 by an act of Congress but is a separate-from-government corporation, owned by its member banks, which are themselves owned by their stockholders. It therefore, arguably, has no constitutional authority to “coin money” for us. To get around the constitutional provision that only the government can mint money, the U.S. Treasury Department still runs the U.S. mints, where our actual coins are produced. If you have dollar coins, or half-dollars, quarters, dimes, nickels, or pennies, you have actual money produced by the U.S. government. But if you have paper money that says “Federal Reserve Note” at the top, it is not produced by the U.S. government but by the corporate- bank-owned Federal Reserve.
The distinction is at once significant and irrelevant in this age of electronic money flying across the Internet.
It’s significant because in all the years since it was created, the Fed has never been audited. When in 2009 and 2010 Congress wanted to know why the Fed was creating trillions of U.S. dollars electronically out of thin air and “loaning” them to foreign central banks (and wanted to know which banks got them), the Fed bluntly told Congress that it wasn’t going to disclose the information. It similarly told members of Congress to take a leap when they asked what banks got Fed help during the Bush Great Crash of 2008. If the Treasury Department controlled our money supply instead, decisions would be more transparent (and subject to Freedom of Information Act lawsuits) and “profits” from handling the money supply would inure to We the People.
It’s arguably irrelevant because dollars—even those “created” by the Fed—are backed by the full faith and credit of the United States. We’re stuck with them.
There are two “solutions” that people knowledgeable about these matters suggest and that seem to make a lot of sense.
The first solution is that the Federal Reserve be nationalized and brought under the purview of the Treasury Department, so the United States goes back to producing and controlling its own money and money supply. “Banking profits” from the Fed could even help support the federal budget.
In this scenario the Fed would simply be purchased—or taken with compensation under provisions of the Fifth Amendment— by the U.S. government from the private banks that own it.
As we work on that change, we can start with the idea of immediately setting up a system to audit the Fed. We have the system in place to conduct such an audit—the Government Accountability Office (GAO), which audits most other federal agencies. Congress could simply require that the GAO audit the Fed, given that the Fed makes loans that amount to more money than our national budget.
The second solution is for each of the 50 states to do what North Dakota did about 90 years ago—create its own state-chartered and state-run bank. Because banks can be enormous profit centers, North Dakota started its own bank to inexpensively loan money to its farmers and small businesses; and when it does so (as it has all these years), all the profits from the interest paid go back into the state’s coffers. This has a lot to do with why that state was among those least affected by the Bush financial crisis that began in 2008.
If every state did this, over time these state-run banks would provide strong competition to corporate banks, running many of them out of business or forcing them to operate more efficiently and to pay their CEOs less. State-run banks could also offer loans to citizens at a lower interest rate than the commercial banks, thus stimulating and stabilizing the states’ local economies.
That afternoon the president changed his mind, deciding to oppose both pieces of legislation, and that night the bill to break up the big banks (which control much of the trading on Wall Street) failed by 66 votes in the 100-member Senate. The bill to audit the Fed, after a meeting at the White House, was hastily rewritten that afternoon to limit the audit to a very narrow scope of the Fed’s activities during the banking crisis of 2008.
Bring Back the STET
One of the biggest problems the United States has grappled with since the great waves of deregulation under Reagan and Clinton has been the bubblelike nature and the incredible velocity of the stock market. There is, however, a way to put a very small amount of sand into the stock market’s gears, to borrow a phrase from economist Dean Baker, who has written on this topic, and thus stabilize both the markets and the economy.
We did it in the United States from 1914 to 1966 (and before that we did it to finance the Spanish-American War and the Civil War), and it’s called the Securities Turnover Excise Tax (STET). For example, if we were to institute a 0.25 percent STET on every stock, swap, derivative, or other trade today, it would produce—in its first year—around $150 billion in revenue. Wall Street would be generating the money to fund its own bailout.
But there are other benefits as well.
As John Maynard Keynes pointed out in 1936 in his seminal economics tome The General Theory of Employment, Interest, and Money, such a securities transaction tax would have the effect of “mitigating the predominance of speculation over enterprise.”
In other words, it would tamp down toxic speculation while encouraging healthy investment. The reason is pretty straightforward: when there’s no cost to trading, the behavior of Wall Street shifts from careful investment to careless gambling. The current system is like a casino where the house never makes any money and nobody’s watching the players on closed-circuit TVs to prevent cheating.
A STET would, for instance, at least dampen if not deter the unethical tactics that are routinely employed these days. Consider one such scenario for a person or bank with lots of money or a huge line of credit: you buy a million shares of a particular stock over a day or two purely with the goal of driving up the stock’s price (because everybody else sees all the buying activity and thinks they should jump onto the bandwagon) so that three days later you can sell all your stock at a profit and get out before its price collapses as the result of the sale.
Investment, on the other hand, is what happens when people buy stock because they believe the company has an underlying value. They’re expecting the value to increase over time because the company has a good product or service and good management. Investment stabilizes markets, makes stock prices reflect real company value, and helps small investors securely build their own personal wealth over time.
Historically, from the founding of our country through the twentieth century, most people invested rather than speculated. When rules limiting speculation were gutted in the first big Republican deregulation binge during the administrations of Warren G. Harding, Calvin Coolidge, and Herbert Hoover (1921 to 1933), it created a speculative fever that caused the housing bubble of the early 1920s only to burst nationally starting in 1927 as housing values began to collapse. That housing collapse, which started in Florida, popped the stock market bubble and produced the Great Crash of 1929. That, in turn, crashed the national housing and stock markets and produced the Republican Great Depression of 1930 to 1942.
As part of the New Deal, Franklin D. Roosevelt put into place a series of rules to discourage speculation and promote investment, including maintaining—and doubling—the STET. Other countries followed our lead, and Australia, Austria, Belgium, Chile, China, France, Germany, Greece, India, Italy, Japan, Malaysia, and the United Kingdom all had or have STETs.
Reinstituting a STET now would generate money, so we wouldn’t have to borrow it on the international market, as the Bush administration borrowed $700 billion (or more) from China, Saudi Arabia, and other countries and investors, adding to our national debt and saddling us with repaying it, with interest, at an actual cost of $1.4 trillion over 20 years.
So let’s go back to what we know works. After Hoover’s bail-out of the banks failed, FDR did a cold reboot of the entire system, putting into place strong rules to prevent speculative abuse. His doubling of the STET tax both produced revenue that more than funded the Securities and Exchange Commission and further prevented a repeat of the speculative bubble of the 1920s.
In the United Kingdom, a major campaign was launched in early 2010 to impose a variation on the STET—a 0.05% tax on interbank activities—that the British campaigners are calling the “Robin Hood Tax.” Actor Ben Kingsley starred in a clever short video promoting the tax as a tiny charge on bankers but a boon for the public, enabling the funding of social programs and helping mitigate climate change.
We’ve done it before. We financed the Spanish-American War and partially financed the Civil War and World Wars I and II with STETs. We stabilized our stock market with a STET from the mid-1930s to 1966, and other nations are doing it today. It’s time to do it again, this time using the STET to stop speculative behavior and so Wall Street can pay for its own bailout.
Don’t Bank On the Banks
Banks should be thought of as public utilities, even if they’re privately run. They exist to take deposits, facilitate commerce, and lend money to businesses and individuals. As such they shouldn’t be in the business of gambling or speculating with other people’s money. From the Glass-Steagall Act of 1933 until its 1999 repeal with the Gramm-Leach-Bliley Act (put forward by Republican senator Phil Gramm—there’s that name again), banks could not get into the business of speculation.
After Phil Gramm’s spectacular little bit of deregulation in 1999, banks went on a consolidation binge (we still weren’t enforcing the Sherman Antitrust Act), with some buying up investment houses and others being bought by investment houses. The result was a speculative frenzy that nearly crashed the entire world banking system—and still may.
Because of this and another 2000 change in the law brought to us by Phil Gramm, it is currently perfectly legal for your bank to engage in what’s called “proprietary trading”—and most all of the big national banks do. Proprietary trading is where the bank takes your deposits and, instead of loaning them out to your neighbors to buy a house or start a business, “invests” that money in the stock market, trading stocks, currencies, credit default swaps, and all manner of other things, minute-by-minute, hour- by-hour, 24 hours a day on superfast and highly sophisticated computer systems.
When the market is going up, your bank shows a huge profit and pays its traders and CEO millions. When the market goes down, your bank declares an emergency and gets bailed out by Congress and the Federal Deposit Insurance Corporation—and continues to pay its traders and CEO millions.
This is, frankly, insane. FDR was right: banks should be banks and nothing else. Nice boring businesses—green eyeshades and flannel suits, banker’s hours, nothing exciting. It’s your money, after all, that they’re holding.
Until the day when the big banks are brought back under control, there are two alternatives.
Local Banks and Credit Unions
The first option is to move your money into local, community-oriented banks. These institutions are typically owned by one or more local people who—sometimes generations ago—set out to make money in the banking business. But because they’re not national and they don’t do bizarre things like proprietary trading or gambling in currency default swaps, they’re generally pretty safe and stable. There’s a movement—strongly publicized in 2010 by Arianna Huffington of the Huffington Post—to get individuals and government agencies to move their money from big banks into local community banks, and billions of dollars (including the accounts of some states and big unions) have been transferred as a result.
But still, even local community banks are for-profit operations. They often imitate the big banks when it comes to fees and interest rates because—just like the big banks—their primary reason for being in business is to make a profit. The upside is that the profit is going to local wealthy people. The downside is that it’s going anywhere other than back to you.
So how can we get banking services—from checking accounts to mortgages to credit cards—without having to deal with a for-profit bank of any size?
The answer is community credit unions, which are depositor-owned financial institutions, run on a nonprofit basis, which do pretty much everything that a bank can do. When you give them your money to open a checking or savings account, you actually become a member of a nonprofit cooperative and can even run for a seat on the credit union’s board of directors.
Breaking Your Bank
Community credit unions are answerable to their communities and usually use the profits from their bank-like operations to support local charities and to reduce the overall cost of the bank-like services they offer their depositors. And, just like banks, the federal government guarantees their deposits.
Community credit unions grew in membership by around 2 percent in 2009, a time when a lot of banks both big and small were shrinking or even collapsing. The Credit Union National Association (the trade association for credit unions) notes that in 2008 credit unions saved their members $9.2 billion that, had it been “earned” by banks (large or small), would instead have gone to banking corporation stockholders and CEOs.
When Louise and I moved from Vermont to Portland, Oregon, the nearest bank branch to our home was owned by one of the six largest banks in the United States. The bank offered reasonable service and hours, but when they took billions in bailout money because of questionable activities that I’d call gambling, and their CEO and other senior executives continued to pay them- selves millions in the face of obvious incompetence, we decided enough was enough.
We looked around Portland and discovered that there were more than 30 community credit unions in the area. While credit unions offer traditional banking services—from checking and savings accounts to credit cards to mortgages and car loans—they are owned by their members—not stockholders or local rich guys.
The idea of cooperative, locally owned, not-for-profit institutions getting into the banking business started in Germany in 1852, and the first U.S. credit union was opened in Manchester, New Hampshire, in 1908. Since then credit unions have spread across the country, and—particularly after the failure of so many savings-and-loan institutions after that industry was deregulated by the Reagan administration—many Americans have moved their money from banks or savings and loans into credit unions.
Louise and I did the same, as did others who are among my readers and radio listeners. Here’s a note I received from a listener in 2010 that’s quite enlightening and reflects in many ways our personal experience:
I found your New Years resolution very inspiring and vowed that I too would take my money out of Bank Against America and put it into a local credit union. I did some research and found that Columbia Credit Union (right down the street from my house, no less) had a really good rating and had been voted “Grand Poobah Of Credit Unions” several years in a row. So I decided to go with that one. I had considered joining years ago when my wife was a member but, as soon as they told me they would have to do a credit check, I backed off. No sense in wasting everyone’s time, I always say. But, as it turns out, they just wanted to be sure I didn’t suck, they didn’t really care if I was a few months overdue on my electric bill.
With that taken care of, I decided to give Bank Against America a couple of weeks to make sure everything had cleared. I went in fully intending to close my account but there was a phantom charge on the account and they couldn’t close it until that cleared. I thought that was odd since I hadn’t used the account in some time. They assured me it would clear the next day and I could find out the nature of the charge and close my account so I took out half of the money in the account and vowed to return the next day. The next day, the charge had cleared but they had no idea what the charge was and, as far as they could tell, there had been no charge, she said looking at me from the corner of her eye. I assumed that, if I tried closing the account, another phantom charge would suddenly appear so I took out all but eight dollars and decided I would let them send me monthly statements for the rest of my life and really get my $8 worth.
Well, two months later, I got a notice that my account was over- drawn, my account that I had not used since the end of January was overdrawn eighty cents. By the time I got to the bank the following Monday, it was overdrawn almost ten dollars. When I confronted the teller with the fact that I had not used the account in months and was told there were no monthly service charges, she agreed to waive the fees that should not have been charged in the first place. She then zeroed out the accounts and closed them for good.
I am now out from under the thumb of Bank Against America and am very happy with my credit union. I don’t get my picture on my card, it doesn’t have a groovy Autism Speaks symbol on it and they don’t have a “Keep The Change” benefit, but I’m also not paying $5 for a money order while the CEOs get billions in bonuses and charge me $35 for going one cent over my balance. Thanks for the inspiration, Thom.
We can all move from the banksters to owning our own deposits, owning our own piece of a credit union. Try it, you’ll like it.