Occupy Wall Street has hit a chord with people, underscoring what many see as the primary problem of the U.S. economy — the dominance of financial interests. A recent poll discovered that 43 percent of people agree with the views of the Occupy Wall Street movement, and only 27 percent disagree. Wall Street symbolizes all global financial institutions and we shouldn’t forget that it was the behavior of these institutions which caused the financial meltdown and economic collapse in the first place. The financial collapse that first engulfed the U.S. economy in 2008 has left in its wake a record number of jobless, increasing poverty rates, and widespread loss of homes.
We are told that we are in a recovery period, with profits expanding rapidly and production beginning to move forward. The financial sector is back on its feet, with Citi Group recently announcing that profits grew 74 percent over the past year. But now, over three years since the crisis began, the term ‘recovery’ feels like a bad joke.
Last week we participated in a teach-in at Occupy Wall Street, in which we linked the problems caused by the financial sector with a broader concern over human rights in the U.S. Economic and social rights include many of the issues that people care about most these days: the right to a job; the right to housing; the right to education; and the right to an adequate standard of living. The human rights framework outlines a range of principles to guide government actions, and has powerful implications for the behavior of the financial sector. At the teach-in, we focused on two human rights principles: (i) the obligation to protect; and (ii) the concept of maximum available resources.
The obligation to protect requires governments to prevent violations of economic and social rights by the actions of third parties. Governments are also obligated to use the ‘maximum available resources’ to realize economic and social rights.
The obligation to protect has important implications for financial regulation. It was the actions of third parties — the financial institutions — which undermined the economic and social rights of people living in the U.S. Fundamental changes in financial regulations over the past 30+ years represent a failure of the U.S. government to take steps to prevent financial institutions from taking actions which put people’s jobs, homes, and economic security in jeopardy. It is not that there was simply deregulation of the U.S economy, in reality there has been a re-regulatory process that has been biased toward the interest of banks rather than workers and families.
The process began back in 1980 with the Depository Institutions Deregulation and Monetary Control Act which removed a number of existing regulations on the banking sector. These reforms eventually fed into the savings and loan debacle in the second half of the 1980s. Rather than learning from this disaster, the government moved forward with more reforms of the same type. The Gramm-Leach Bliley Act (1999) repealed many of the regulatory protections put in place after the Great Depression under the Glass Steagall Act (1933). For example, the Gramm-Leach Bliley Act paved the way for massive consolidation in the financial industry, creating the huge institutions behind the current crisis. When the crisis broke, these consolidated institutions had to be bailed out because, we are told, they are simply too big to fail. The recent Dodd-Frank bill is a step in the right direction in terms of the focus and need for different regulation, and is a break from the recent past. However, while it gives regulators a stronger mandate, it is too early to tell whether the new provisions will be aggressive enough, or effective, enough to prevent another disaster.
The bailouts point towards a second human rights principle, the idea that government should use the maximum available resources to support the realization of economic and social rights. If the bailouts were so essential to the functioning of the U.S. economy, why aren’t more people experiencing the benefits? Some of the bailout programs were ‘on budget’ in the sense that they were funded through the federal budget. The Troubled Asset Relief Program, or TARP, introduced in 2008, was a bailout funded through government spending. However, much of the support to the financial sector did not come from the budget, but instead was orchestrated by the Federal Reserve. With the financial meltdown, the Federal Reserve took unprecedented steps to support the financial sector.
The Federal Reserve (or Fed) is the central bank of the U.S. and therefore plays an important role in regulating and influencing the economy. For example, the Federal Reserve can take steps to try to reduce unemployment. However, the Fed can also adopt policies that primarily benefit the financial sector. It is not the existence of the Fed, a government body, that creates the problems we’re now experiencing — it is the process whereby policy decisions are made and priorities are set. Specifically, the Fed helped out by buying up trillions of dollars of questionable corporate assets that were causing problems. This was part of a more general strategy called ‘quantitative easing’. When the Fed buys up corporate assets, it exchanges these assets for money — in effect, the Fed injects money into the economy through its policy of quantitative easing. This injection of money should help get the economy going again, by encouraging banks to lend, businesses to invest, and people to buy goods and services.
However, few ordinary people have benefited from this strategy. What happened to all that money? The banks are holding on to a large share of it. In the second quarter of 2011 (April to June), U.S. banks were hoarding $1.6 trillion that they held as deposits at the Fed — effectively preventing these resources from having any positive impact on job creation and the broader economy. It is important to see these deposits in an historic context (see graph).
The current $1.6 trillion represents a kind of insurance policy for the banks. If things start going bad again, the banks already have a stockpile of funds that help protect their interests. In addition, they receive interest on this money.
It is important to keep in mind that the Federal Reserve is a government body. When the Fed bails out banks by buying bad assets (and these bad assets were the outcome of the banks’ own decisions — e.g. investing in assets backed by sub-prime mortgages), it takes on these risks on behalf of the American people. Although the U.S. population has taken on these risks, the vast majority of people do not have access to a $1.6 trillion cushion to protect themselves in case the economy heads south again.
This brings us back to the question of maximum available resources. There is a stockpile of $1.6 trillion sitting idle in accounts at the Federal Reserve — the outcome of decisions made by public institutions. This money is not being used to support the right to a job, or the right to hold on to a home. Much more could be done. This money, given to the banks to help jump start the economy, is money that the banks are sitting on. There needs to be concerted effort on the part of the government to fulfill its obligation to protect by making sure there are regulations in place to benefit people rather than banks. In addition, government’s obligation to use its maximum available resources for the facilitation of economic and social rights means that resources need to be allocated for jobs, housing, health care, education, etc.; not to be held by banks.