Zombie Banks and Elizabeth Warren

http://jubakpicks.com/2010/07/16/bad-news-banks-citigroup-and-bank-of-america-results-show-a-slowing-u-s-economy/?utm_source=Jubak+Picks&utm_medium=email&utm_campaign=15053d154e-RSS_EMAIL_CAMPAIGN

http://www.nytimes.com/2010/07/17/business/17regulate.html?emc=eta1

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"People will not always remember what you said or what you did, but they will always remember how you made them feel." (John C. Maxwell/Parker Palmer)

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The flip side of banks not wanting to loan money (something Fed chairman Ben Bernanke is trying to change because small businesses need loans to grow and create jobs) is businesses not wanting loans. As Jim Jubak points out, yesterday's profit reports from two of the "zombie banks" (Citigroup and Bank of America) showed a decline in loan demand, a big enough decline that their loan portfolios contracted in the quarter: "You don't get shrinking loan demand in a healthy economy. Consumers and businesses are sitting on the cash they have and not borrowing more because they're afraid the U.S. economy is going to slow."

This malaise of "stuckness" (that would be a term we've created to apply to the economy and GDP growth) would probably be what caused Ben Bernanke to conclude this week that the U.S. economy could be in this (slow growth/no growth) rut for the next five years.

On a happier note, there are some areas where zombie bank mediocrity is actually a blessing. The new financial regulation bill is probably not what it set out to be but it was passed by Congress this week and should be signed by the President when he gets back from vacation. While nobody is an expert yet on how that bill will work (especially since the wording in the bill relies heavily on regulatory interpretation), there are some bright spots.

From the outset, the zombie banks spent millions of taxpayer bailout dollars (they claim they didn't because the money came from different "departments" in those institutions) on lobbying to be sure they could "water down" new financial regulations. So, a "bright spot" would be a part of the bill where the zombies failed to water down/eliminate new regulations.

The Consumer Financial Protection Bureau survived the onslaught and is a key part of the new legislation. With an estimated budget of $500 million and broad discretion to write and enforce rules for mortgages, credit cards, student loans and debt collection, this agency can be a force for improvement. Today's Times refers to it as the most important element of the legislation. Experts put its potential influence on a par with the establishment of the Federal Trade Commission in 1915 and the Securities Exchange Commission in 1934.

Elizabeth Warren, a Harvard law professor, bankruptcy expert and Chairwoman of the Congressional TARP Oversight Committee, proposed the new agency and is on the three person short list to run it (if you're reading this, Google her and check out her Berkeley speech on what's happening to Middle America).

On television and in speeches, Ms. Warren continuously emphasizes that 30 years of deregulation has rewarded the financial industry but led to abusive practices and collapses that have hurt ordinary Americans - the same taxpayers who are paying for bank bailouts. Known for her bluntness, she told Congress that TARP may have overpaid for bank shares by at least 30%. This type of public criticism has not endeared her to Treasury secretary Tim Geithner. Treasury officials have denied reports that Mr. Geithner opposes the selection of Ms. Warren (this probably means that he does). We're not sure we care what Geithner thinks since he won't be running the agency, and, just incidentally, wasn't he in charge of the New York Fed when Wall Street was running amok?

While the new bureau will be nominally part of the Fed, the Fed has no power to name, supervise or remove the bureau's employees, or to interfere with the bureau's work. The Fed is required to turn over roughly 10% of its operating expenses to finance the bureau's work.

Lets see if President Obama appoints Elizabeth Warren. If he does, he's made a good decision. Any other decision won't be.