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Investigations, Money   06.19.2018

Big Win for Banks Could Mean Bigger Recession for You

Democrats and Republicans just made it easier for America's financial institutions to repeat risky mistakes that led to the last economic meltdown. Many in Congress who voted in favor of the plan also happened to get money from those who benefit: the banks.

Soon after the Senate passed a bill in March that would benefit most U.S. banks, the people of Montana started seeing a new commercial on their TVs. The American Bankers Association—pleased with the bill—paid for an ad in support of Sen. Jon Tester, a Montana Democrat, who voted for it.

The ad features three Montanans, identified as “community bankers,” praising Tester for having “put aside politics” to “cut red tape.” Their closing pitch: “That’s leadership. That’s courage. That’s Jon Tester.”

But what some call cutting red tape, others see as shredding smart economic protections for Americans in favor of clearing the way for banks to increase their billions in profits.

Tester and 15 other Democrats joined Senate Republicans to approve, 67-31, the bill: the Economic Growth, Regulatory Relief, and Consumer Protection Act. It eases rules and oversight for all but 13 big U.S. financial institutions that were put into place in 2010 to prevent another money meltdown like the Great Recession.

Proponents say that the 2010 restrictions have been hurting community banks. Critics say relaxing current rules unnecessarily increases America’s risk of another disastrous recession.

How Senators voted—in an effort that was hailed as a win for bipartisanship—depended on their political party and their state. Whether they are running for reelection this year, like Tester, may also have been a factor. Of the 16 Democratic Senators who voted yes, nine are currently campaigning.

The process has generated lavish lobbying expenditures and campaign contributions by the nation’s largest banks and many smaller financial institutions. In the 2018 election cycle so far, commercial banks and credit unions have made a total of $15.9 million in campaign contributions, according to the Center for Responsible Politics’ Open Secrets database.

On May 22, the House approved the Senate bill. President Trump signed it into law on May 24. Whether it will be helpful or harmful is debatable. What is certain: This is all happening at a time when the country is overdue for its next recession. And Congress might have just made it worse.

These U.S. Banks Benefit From New Law

The law relaxes regulations enacted under the Dodd-Frank Wall Street Reform and Consumer Protection Act for 26 banks and other financial institutions with assets between $50 billion and $250 billion. These include powerful multistate banks such as BB&T and SunTrust. That would leave stricter controls by Federal Reserve regulators on only the biggest institutions—in other words, those considered “too big to fail”—with more than $250 billion in assets.

Tester and his Senate allies say that Dodd-Frank has hurt small banks and credit unions. They maintain their new legislation still holds the most powerful on Wall Street accountable, while offering relief to community financial institutions so they can lend more freely and approve more home mortgages. This deregulation, they argue, will actually be a financial win for, as the ABA’s Tester ad proclaims, “ranchers, farmers and families.”

“ABA believes that policymakers must move away from one-size-fits-all regulation to tailored regulation that corresponds to a bank’s charter, business model, geography and risk profile,” the bankers group states on its website. “This policymaking approach avoids the negative economic consequences of burdensome, unsuitable and inefficient bank regulation.”

According to Emily Leite, vice president for government affairs of the Ohio Credit Union League, which represents nearly 300 credit unions and their almost 3 million members in Ohio and which has advocated strongly for Dodd-Frank reform, additional paperwork required by the 2010 regulations has resulted in a one-hour review of loan applications that previously required only 10 or 15 minutes of handling.

What’s in a 45-minute difference? Liberal Democrats, consumer groups and some economists warn that, among other things, a risk of repeating the last meltdown-style recession.

Barney Frank, co-sponsor of the legislation that Republicans have aimed to overthrow since it was passed, is now retired but the congressman has acknowledged that he thinks the $50 billion threshold in Dodd-Frank was too low. However, in March, he said he favors raising that to $125 billion, not $250 billion. That level would still keep some big regional banks under check.

In many ways, this easing of rules is part of a familiar game across the world. In January, economist Jihad Dagher described this pattern in a working paper for the International Monetary Fund: Governments introduce strict regulations following financial crises. Then a few years later, they roll them back, often resulting in renewed economic risks. “History suggests that politics can be the undoing of macro-prudential regulations,” Dagher wrote.

The Congressional Budget Office likewise warned that the probability of a financial crisis “would be slightly greater under the legislation.” A repeat of the earlier financial failures the country saw in 2008 would result in “very large” costs for federal bank insurance funds, CBO warned.

How Banks Wielded Their Influence

Consumer watchdogs and other liberal interest groups caustically referred to the bill as the “Bank Lobbyists Act.”

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“The Senate bill has significant problems and could have been more carefully written,” says Yana Miles, senior legislative counsel for the Center for Responsible Lending, a North Carolina-based group that joined other consumer groups in opposing the measure. “We oppose any effort to use regulatory relief for community banks and credit unions as a vehicle for larger financial institutions to avoid having the regulatory scrutiny and oversight that proved lacking in the buildup to the financial crisis,” the Center wrote in a letter sent to all Senators.

Richer proponents of Dodd-Frank reform preferred to send cash—in a manner that inspired The Intercept in March in a report about the legislation to write “lobbyists have rushed to stuff the trunk of the vehicle full.”

In 2015-2016, the commercial banks contributed nearly $44 million to federal candidates. Last year, they handed over another $14 million. In each campaign cycle, Republicans have received nearly twice as much funds as Democrats. In addition, those big banks last year reported $67 million in lobbying expenditures, according to the Open Secrets database.

The latest campaign finance data have a revealing twist, much like that Tester ad in Montana. The three senators who last year received the largest contributions from the big banks were all Democrats: Heidi Heitkamp of North Dakota, Joe Donnelly of Indiana and Tester. Not coincidentally, all three sit on the Senate Banking, Housing and Urban Affairs Committee, where each was an active supporter of the bill to weaken the banking law. They also all face difficult and expensive reelection contests this November, where those donations from bankers will be useful. They surely don’t want to risk those donations going to opponents. Tester is running for reelection in a state that Donald Trump won by 20 percent in 2016.

Like Republican supporters of the bill, these and other Democrats emphasize that they are responding to the needs of local neighborhood banks. But opponents are less sanguine. “Some of these changes [to Dodd-Frank] might result in a return to the apocalypse,” Miles says.

Whatever the risk assessment, local banks, neighborhood credit unions and powerful international banks with tens of billions of dollars in assets have successfully wielded their influence in Congress to weaken financial regulations.

“An army of bank lobbyists…swear up and down that they are fighting for small banks—banks that aren’t risky and didn’t cause the financial crisis—and they will make up all sorts of false claims about how the banks are struggling under new rules, never mind that banks of all sizes are literally making record-breaking profits. Give me a break,” Sen. Elizabeth Warren of Massachusetts told the Senate in March. (Warren was a leading architect and advocate of the 2010 banking reforms, as a senior aide at the time to President Barack Obama.)

Warren’s skepticism about how much banks need our help got backup on the same day in May that the House approved (with 33 Democrats on board) the Dodd-Frank rollback.

A federal agency, the Federal Deposit Insurance Corporation, reported that U.S. banking overall had seen a 27.5 percent increase in net income from early 2017 to early 2018 (to $56 billion). Further, community banks posted a net income increase of 17.7 percent during that same period.

The banks had two wins to celebrate and very good reason to remain optimistic: Momentum points to more rollbacks to come that will benefit them. They’ll surely continue to spend to weaken Dodd-Frank safeties, including the Consumer Financial Protection Bureau, an agency created through the 2010 legislation. After all, there’s a payoff. Take it from Mick Mulvaney, who’s currently in charge at CFPB. “We had a hierarchy in my office in Congress,” Mulvaney, who was once a U.S. representative for South Carolina, told a room of bankers in an April speech. “If you’re a lobbyist who never gave us money, I didn’t talk to you. If you’re a lobbyist who gave us money, I might talk to you.”

Solutions Database

How All Americans Can Prepare for the Next Recession

By Malcolm Burnley

Experts might not be able to predict the how, when and why of America’s next recession exactly, but that doesn’t mean we can’t try to prepare for the job loss and money stress of an economic downturn. For individuals, saving can be one of the best safeguards—even though that’s not how most people operate. Instead, individuals and governments tend to spend when times are good.

Here are two ways you can help improve your money outlook, along with three government policies that elected officials should be thinking about right now.

You Can Build a Good Credit Score: In 2015, the Consumer Financial Protection Bureau found 45 million Americans—one in five adults—have negligible or zero credit history. These “credit invisibles” (a group disproportionately made up of younger consumers, African-Americans and low-income individuals) are especially vulnerable in a recession. A lack of credit history can be grounds to deny someone employment, electricity, a cell phone or housing.

Jose Quiñonez, founder of the San Francisco nonprofit Mission Asset Fund and a 2016 MacArthur “Genius,” has a way to help more Americans build a good credit report.  The approach could be used in communities across the U.S., rural and urban.

Quiñonez’s method is built on the informal lending that’s already happening outside of banks. Lending circles (also called lending clubs, tandas or sous-sous) are a group of people—say, a dozen neighbors—who commit to contributing a set amount of money each month into a pool. Each month, one member gets to withdraw the cash. If everyone in a club of 12 pays $100 per month, then everyone will receive a $1,200 lump sum once in the rotation.

These zero-interest loans can be a lifeline for individuals who can’t get a bank loan during a recession (or even during a boom), but traditionally the main way to build credit in the U.S. has been by borrowing and paying back bank loans. Quiñonez’s work elevates lending circles to make sure these communities are accounted for. “This informal lending was taking place, but it was not being reported to credit bureaus,” he says.

Mission Asset Fund, which Quiñonez launched in 2007, right on the precipice of the last recession, works with lending clubs and files paperwork with credit bureaus so that members’ participation in a positive lending exchange doesn’t fly under the radar. MAF has helped boost thousands of credit scores by an average of 150 points.

You Can Track Your Cash: For the tech savvy who just aren’t good at saving, go digital. Apps like MoneyFellows and Qapital automate the savings process. For savings 101 help, try the Federal Reserve Bank of Boston’s video games based on popular hits like Farmville and Angry Birds, which have reported success in promoting financial literacy.

Officials Can Help Americans Save: Post-Great Recession recovery may be incomplete and uneven (check your state’s financial health on our map: “See How Ready Your State Is for the Next Recession”), but almost every U.S. state now has a “rainy day” fund in excess of 2007 levels. We can’t say the same for most American households—but what if we could?

Sidecar accounts, or personal rainy day funds, could be a nationally backed tool that allows employees to put aside money through their company payroll, like many already do with a 401(k), to build savings for emergencies.

Recommendations from a 2016 Bipartisan Policy Center report on improving the personal savings of Americans made their way into legislation that passed the Senate and currently sits in the House of Representatives. Shai Akabas, an expert on retirement and personal savings at the Bipartisan Policy Center, expects the so-called Retirement Enhancement and Savings Act to pass later this year. Then it might not be long before we see sidecar accounts appearing in legislation too. He says that there’s momentum in D.C.: “I believe that we could see bipartisan legislation on rainy day accounts introduced this Congress.”

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Officials Can Help Americans Move to Work: Americans aren’t moving like they used to. Migration rates have been steadily declining in the U.S., across all income brackets, for the last 40 years. That means people in the states slowest to recover from the last recession—many in the Rust Belt—are still struggling while jobs go unfilled in other states.

President Trump suggested in late 2017 that more Americans need to not “worry about your house” and instead pick up and resettle closer to where the jobs are. He hasn’t yet offered details, but there are policies that could help. To be sure, though, it’s not easy. A program of government-assisted worker relocation would be inordinately expensive and likely a nonstarter in Washington. The last time something similar was attempted, in the 1960s, President John F. Kennedy (and then President Lyndon B. Johnson) faced fierce backlash from rural areas that stood to lose population on account of a worker-relocation program. Some critics lambasted the program as a type of cultural genocide being carried out on pastoral America.

“To admit that workers have to move and that your community is going to decline, that’s kind of like having a seriously ill relative and the discussion over stopping care,” says Kevin Leicht, a professor at the University of Illinois who studies the history of labor migration. “In Illinois and Iowa, that’s simply not going to be a popular option.” Still, now’s the time, not during a recession, to plan along these lines. “It’s preferable for the government to help people stay in their homes during the recession,” says Leicht. “But when the recovery starts, it’s right about then that this kind of plan needs to be discussed.”

Officials Can Help Americans More With Debt: A more politically feasible route for experimenting with new policy might be through the Federal Reserve. After the last recession, the Fed played a key role in stimulating a moribund economy, which it primarily did by purchasing trillions of dollars of toxic assets—mostly mortgage-backed securities—that belonged to the country’s largest banks, as a means of generating more interbank lending.

To this day, the Fed continues to prop up lending in the housing sector by spending tens of billions per month on mortgage securities. Some economists wonder if the Fed should channel more money to other parts of the economy and not focus too much on the housing sector. “Why is mortgage lending in particular the kind of lending that we have some great social interest in supporting?” asks J.W. Mason, a fellow at the left-leaning Roosevelt Institute.

While homeownership has leveled off almost a decade into the recovery, both household wealth and worker wages remain well below pre-recession levels. Mason argues in a recent report titled “Expanding the Monetary Toolkit” that the Fed could think about expanding what kinds of assets it purchases in future downturns and recoveries to include debt such as auto loans, credit card loans and local government bonds. On a small scale, the Fed experimented with this policy to great success in the last downturn. It might be time for a more robust, longer-term expansion of that test.