Putting Wall Street to Work for Main Street

Submitted by Mary Bottari on October 3, 2009 - 16:14

Creating SAFE Financial Standards to Put America Back to Work

The Banksters on Wall Street have blown a hole in the economy that could take a decade to repair. In the twenty months from December 2007 (the start of the recession) to August 2009, the nation lost more than 7 million private-sector jobs. The formal unemployment rate is rapidly approaching double digits and many of these lost jobs are being permanently shipped overseas. Americans are losing health care at a rapid clip and the historic stimulus package passed by the Obama administration is beginning to run out of steam. While it is true that the stimulus package was large, the damage to our economy was even larger.

We are in a big hole and it is going to take big ideas to climb out of it.

The key questions going forward are how do we put America back to work? And can we do so in such a way that promotes both our social welfare and financial stability at the same time?

One approach being touted by economists Robert Pollin, Tom Palley, Christian Weller and others would put Wall Street to work for Main Street.

The idea is simple. Institute new rules for financial institutions that require them to maintain a supply of cash as a reserve fund in proportion to the other, riskier assets they hold in their portfolios. Then require them to channel a small share of their total lending into productive economic uses and job creation.

This not only would put capital to work for working Americans, it would also discourage financial market investors from holding an excessive amount of risky assets and create a cushion for investors to draw upon when market downturns occur.

Stable and Fair Economy Standards

Pollin has dubbed the idea "Stable and Fair Economy Standards,” or SAFE financial standards. He explains:

This policy idea has an extensive, if largely neglected, mainstream pedigree. Various versions of this proposal were outlined in the 1970s by economists such as Lester Thurow of MIT and former Federal Reserve Governors Andrew Brimmer and Sherman Maisel. Their interventions were more or less closely linked to unsuccessful efforts by Sen. William Proxmire and Rep. Henry Reuss, then chairs of the Senate and House Banking Committees, respectively, to advance bills establishing procedures for Federal Reserve-directed credit allocation policies. In addition, measures that operate similarly to asset-based reserve requirements have been implemented and have played prominent roles in regulating financial markets.

An example where the same basic principle of an asset reserve requirement has been used to promote social welfare was with the Savings & Loan (S&L) institutions, as they operated in the U.S., from the 1930s-1970s. Under the old Glass-Steagall financial regulatory system created in the 1930s, S&Ls were permitted to only lend money to households to finance the purchase of private homes. This requirement channeled massive pools of credit toward supporting the goal of middle-class home ownership, and everything that goes with that.

Today, the same policy tool can be used to channel credit into sectors of the economy where quality, hard-to-export jobs can be created. For example, credit made available for clean energy investments could be a major engine for high-quality job growth while reducing our reliance on foreign oil and helping with the climate change problem as well.

This is how it would work. Policymakers could require financial institutions to set aside at least five percent of their loan portfolios for clean-energy investments. This would be about $150 billion per year, or one percent of total GDP. If the financial institutions prefer not to participate in the program, they could chose to hold this same percentage of their total assets in cash. (This would be a strong incentive to make credit available for productive use, because cash would generate no interest for them, whereas investing in clean energy would.) However if some institutions chose to hold cash instead, this too would benefit Main Street by adding to the stability and security of the financial system.

Wall Street has driven the economy into the most significant slump since the Great Depression. To get the economy moving again, we need big ideas and big solutions. Direct government spending is important, so are subsidies and incentives. But in addition to these taxpayer supports, it is only fair and just that Wall Street do its share. After all, all we are doing is offering them a way to help rebuild America and make a buck at the same time.

BANKSTER WONK ROOM

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