economic disparity and american democracy: is it time for a new new deal
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Economic Disparity and American Democracy:
Is it time for a new New Deal?
Jacob Vogel
5/2/2012
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Modern Economic Disparity
From 1979 to 2007 inflation adjusted incomes for the top 1% of earners increased
by 224%.1 The top .01% saw their incomes grow by 390%.2During the same period the
incomes of the bottom 90% grew only 5%.3Fewer families moved up the income ladder
in the 1980s than in the 1970s, and even fewer moved up in the 1990s.4 Adjustments to
the tax code made the gap between the after tax income of top earners and the rest of
America greater than the pre-tax gap.5
As a result of decades of policy favoring the
wealthy, income inequality has reached a level not seen since the run-up to the Great
Depression.
6
The progressive tax system, which was set up to ensure that wealthier Americans
carry more of the tax burden, has been under attack.7
Using their political allies in
Washington, the wealthy have been able to shrink the estate tax and roll back taxes paid
by investors and corporations.8 The rest of Americans end up paying for these tax cuts in
the form of reduced governmental services.9The average American is losing because,
unlike the wealthy, they do not have K street lobbyists to fight for their causes.10
It is a dying myth that in America hard work leads to financial success. Higher
Education, while necessary to get ahead for most Americans, is becoming harder to
1See Lawrence Mishel,Data on Income Gains Support 99ers Gripes, ECON.POLY INST. (Oct.19, 2011),
http://www.epi.org/publication/data-income-gains-support-99ers/.2Id.3Id.4 Richard Delgato, The Myth of Upward Mobility, 68 U.PITT.L.REV. 879, 901-902, n.142 (2007).5
John W. Lee, Class Warfare 1988-2005 Over Top Individual Income Tax Rates: Teeter-Totter from Soak-the-Rich to Robin-Hood-in-Reverse, 2 HASTINGS BUS.L.J. 47 (2006).6 Ezra Klein,Inequality Back at Record Highs, WASH.POST, June 11, 2010, available athttp://voices.washingtonpost.com/ezra-klein/2010/06/inequality_back_at_record_high.html.7 Teresa Tritch, Tilting the Tax System in Favor of the Rich, N.Y.TIMES,available athttp://select.nytimes.com/ref/opinion/04talking.main.html?_r=1.8Id.9Id.10Seniboye Tienabeso, Warren Buffet and His Secretary Talk Taxes, ABCNEWS, (Jan. 25, 2012),http://abcnews.go.com/blogs/business/2012/01/warren-buffett-and-his-secretary-talk-taxes/.
http://www.epi.org/publication/data-income-gains-support-99ers/http://www.epi.org/publication/data-income-gains-support-99ers/http://voices.washingtonpost.com/ezra-klein/2010/06/inequality_back_at_record_high.htmlhttp://voices.washingtonpost.com/ezra-klein/2010/06/inequality_back_at_record_high.htmlhttp://select.nytimes.com/ref/opinion/04talking.main.html?_r=1http://select.nytimes.com/ref/opinion/04talking.main.html?_r=1http://abcnews.go.com/blogs/business/2012/01/warren-buffett-and-his-secretary-talk-taxes/http://abcnews.go.com/blogs/business/2012/01/warren-buffett-and-his-secretary-talk-taxes/http://abcnews.go.com/blogs/business/2012/01/warren-buffett-and-his-secretary-talk-taxes/http://select.nytimes.com/ref/opinion/04talking.main.html?_r=1http://voices.washingtonpost.com/ezra-klein/2010/06/inequality_back_at_record_high.htmlhttp://www.epi.org/publication/data-income-gains-support-99ers/ -
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obtain. The cost of going to college increased 439% from 1982-2007 (not adjusted for
inflation).11
Students from lower-income families get smaller grants than more affluent
students, and overall student borrowing has doubled in the last decade alone.12 In recent
years the proportion of students from upper-income families has grown at the most
selective United States (U.S.) colleges.13 Less advantaged students are more likely to
attend a for-profit college.14 For-profit students get the special disadvantage of higher
unemployment rates, lower earnings, and far greater debt burdens than their public or
non-profit student counterparts.15In fact, downward mobility is just as likely for a
majority of middle class Americans.
16
Many students are attempting to buck this trend by achieving advanced degrees.
Between 1983 and 2009 post baccalaureate enrollment increased from 1.6 to 2.9 million
students.17 As enrollment has increased so have the costs, especially for students who
choose to become lawyers. In 1980 obtaining a JD was not particularly expensive
compared to other types of graduate level training and law students graduated with little
or no debt.18 Law Students today borrow heavily and begin their careers with substantial
student loan debt.19
Several recent law school graduates, burdened by massive debt and
bleak job prospects, are suing their respective Alma maters for distorting their post-
11 Tamar Lewin, College May Become Unaffordable for Most in U.S., N.Y.TIMES, Dec. 3, 2008, availableathttp://www.nytimes.com/2008/12/03/education/03college.html.12Id.13 Delgato, supra note 4, at 903.14
David J. Deming et al., The For-Profit Postsecondary School Sector: Nimble Critters or AgilePredators? (NATL BUREAU ECON.RESEARCH, Working Paper No. 17710, 2011), available athttp://www.nber.org/papers/w17710.15Id.16 Delgato, supra note 4, at 901.17 Susan Aud et al., NCES 2010-028, NATL CTR.EDUC.STATISTICS: The Condition ofEducation, at36 (2010).18 N. William Hines, Ten Major Changes in Legal Education Over the Past 25 Years, ASSN AM.L.SCH.,http://www.aals.org/services_newsletter_presAug05.php(last visited April 27, 2012).19Id.
http://www.nytimes.com/2008/12/03/education/03college.htmlhttp://www.nytimes.com/2008/12/03/education/03college.htmlhttp://www.nytimes.com/2008/12/03/education/03college.htmlhttp://www.nber.org/papers/w17710http://www.nber.org/papers/w17710http://www.aals.org/services_newsletter_presAug05.phphttp://www.aals.org/services_newsletter_presAug05.phphttp://www.aals.org/services_newsletter_presAug05.phphttp://www.nber.org/papers/w17710http://www.nytimes.com/2008/12/03/education/03college.html -
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graduation employment and salary statistics.20 In Modern America the barriers to
financial success are higher than ever. When hard work does not pay off it is evidentiary
of the existence of an American caste system.
While it is nearly impossible to climb to the next socio-economic level, the
system is more than willing to let Americans fall. Unemployment serves as a lubricant on
the slide to the bottom of the caste system. In October of 2011 around 14 million
Americans were unemployed.21
Add to that figure the additional 9.3 million Americans
that are considered underemployed and the 2.5 million considered marginally attached
to the labor force and you come up with a total of nearly 26 million Americans who
were, at the very best, underemployed that month.22The problem is not just in the
quantity of jobs, but also in the quality of the jobs available.23
20% of adults in America
have jobs that pay poverty-level wages.24 In fact, most of the new jobs created are in the
low-wage, low-skill service sector.25
Unemployment makes life difficult for families that have savings to rely on, but in
modern America many families are burdened by unprecedented household debt coupled
with inadequate savings.26
Beginning in 2000, mortgage related debt dramatically
accelerated the pace of debt accumulation.27 Prior to that, the growth of real household
20 Patrick G. Lee,Law Grads Sue Over Tuition, WALL ST.J. (Aug. 11, 2011), available athttp://online.wsj.com/article/SB10001424053111904823804576500694179259396.html.21 Ben Baden, The Ranks of the Underemployed Continue to Grow, U.S.NEWS (Oct. 19, 2011), available at
http://money.usnews.com/money/careers/articles/2011/10/19/the-ranks-of-the-underemployed-continue-to-grow .22Id.23Id.24Id.25 Delgato, supra note 4, at 901.26 Reuven Glick & Kevin J. Lansing, (FRBSF 2009-16), FED.RESERVE BANK S.F: U.S. HouseholdDeleveraging and Future Consumption Growth (2009), available athttp://www.frbsf.org/publications/economics/letter/2009/el2009-16.html .27Id.
http://online.wsj.com/article/SB10001424053111904823804576500694179259396.htmlhttp://online.wsj.com/article/SB10001424053111904823804576500694179259396.htmlhttp://money.usnews.com/money/careers/articles/2011/10/19/the-ranks-of-the-underemployed-continue-to-growhttp://money.usnews.com/money/careers/articles/2011/10/19/the-ranks-of-the-underemployed-continue-to-growhttp://www.frbsf.org/publications/economics/letter/2009/el2009-16.htmlhttp://www.frbsf.org/publications/economics/letter/2009/el2009-16.htmlhttp://money.usnews.com/money/careers/articles/2011/10/19/the-ranks-of-the-underemployed-continue-to-growhttp://money.usnews.com/money/careers/articles/2011/10/19/the-ranks-of-the-underemployed-continue-to-growhttp://online.wsj.com/article/SB10001424053111904823804576500694179259396.html -
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debt far outpaced the growth of real disposable income and wealth.28 In 2007 Americans
owed $750 billion in revolving debt, up six-fold over a twenty-year period.29
This debt
increase was fueled by an environment of easy credit tied to higher housing and stock
prices.30
When the housing market crashed many families lost the collateral they assumed
they could rely on in hard times.
With little or no savings, a sea of underwater mortgages, and a shaky job market,
less-fortunate Americans braced for financial ruin. In 2009, 1.41 Million Americans filed
for bankruptcy, up a third from the prior year.31 The surge in bankruptcies was attributed
to foreclosures and job losses.
32
A large number of those were Chapter 7 bankruptcies,
indicating that many Americans chose to walk away from their underwater homes.33 In
2005 an overhaul of federal bankruptcy laws aimed to promote Chapter 13 filings, which
force consumers into debt repayment plans but allow them to keep certain assets. 34The
overhaul failed because many smart Americans realized they would be better off without
the debt and their assets were not worth the headache.
For the broke Americans who decide not to file for bankruptcy protection, the
U.S. debt collection industry is ready to make them pay.35
The number of debt-related
arrest warrants has been on the rise.36Debtors Prisons were outlawed in 1833, but some
28Id.29
Delgato, supra note 4, at 912.30Glick & Lansing, supra note 26.31 Sara Murray & Connor Dougherty, Personal Bankruptcy Filings Rising Fast, WALL ST.J. (Jan. 7, 2010),available athttp://online.wsj.com/article/SB126263231055415303.html.32Id.33Id.34Id.35 Jessica Sliver-Greenberg, Welcome to Debtors Prison, 2011 Edition, WALL ST.J. (Mar. 16, 2011),available athttp://online.wsj.com/article/SB10001424052748704396504576204553811636610.html .36Id.
http://online.wsj.com/article/SB126263231055415303.htmlhttp://online.wsj.com/article/SB126263231055415303.htmlhttp://online.wsj.com/article/SB126263231055415303.htmlhttp://online.wsj.com/article/SB10001424052748704396504576204553811636610.htmlhttp://online.wsj.com/article/SB10001424052748704396504576204553811636610.htmlhttp://online.wsj.com/article/SB10001424052748704396504576204553811636610.htmlhttp://online.wsj.com/article/SB10001424052748704396504576204553811636610.htmlhttp://online.wsj.com/article/SB126263231055415303.html -
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judges are worried that the jump in debt-related arrests is creating a modern day
version.37
More than a third of all U.S. states throw people who cant pay in jail.38
While our system of justice is incarcerating the unfortunate, the modern day
robber-barons are relaxing on their yachts. Federal prosecutions for financial institution
fraud fell to a twenty year low in 2011.39 The decade long trend of reduced financial
institution fraud prosecutions indicates the close relations between DC insiders and the
big banks, especially when coupled with the financial sector misconduct over recent
years.40In the information age Americans are more informed than ever, and it is not a
coincidence that large masses of people are outraged at the inequalities that exist in the
status quo. The Occupy Movement and the Tea Party indicate the power of collective
knowledge can shift the focus of modern political debate, but is there evidence that real
change is coming?
A look into Americas past struggles has convinced me that a progressive shift is
approaching. Lines can be drawn connecting the economic conditions that led to the
American Revolution, the financial panics of the late 19th and early 20th centuries, the
Great Depression, and the Great Recession. The legislative response to the current crisis
will dictate the extent of the changes ahead.
37Id.38Id.39 Alexander Eichler, Federal Prosecution of Financial Fraud Falls to 20-Year Low, New Report Shows,THE HUFFINGTON POST (Nov. 15, 2011),available at http://www.huffingtonpost.com/2011/11/15/financial-fraud-prosecution_n_1095933.html .40Id.
http://www.huffingtonpost.com/2011/11/15/financial-fraud-prosecution_n_1095933.htmlhttp://www.huffingtonpost.com/2011/11/15/financial-fraud-prosecution_n_1095933.htmlhttp://www.huffingtonpost.com/2011/11/15/financial-fraud-prosecution_n_1095933.htmlhttp://www.huffingtonpost.com/2011/11/15/financial-fraud-prosecution_n_1095933.htmlhttp://www.huffingtonpost.com/2011/11/15/financial-fraud-prosecution_n_1095933.html -
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Economic Reasons for the American Revolution
In the decades leading to the American Revolution the colonists were burdened by
economic policies that favored British nationals to the detriment of the colonies. The
Navigation Acts, Scottish Rationalization, Parliaments Western Land Policies, The
Stamp Act, and the Tea Act were among the Patriots leading economic reasons to revolt.
Navigation Acts
Initiated in 1642, Parliament enacted the Navigation Acts in order to reestablish
control and keep other nations out of the colonies.
41
The Navigation Acts forced colonists
to route certain enumerated goods to British ports before their re-exportation to their
final destinations.42
Similarly, enumerated goods bound to the colonies had to be routed
through British ports.43 The acts reserved all commerce between Europe and the colonies
to British citizens (including colonists); this initially benefitted colonial merchants by
reducing competition with the French and Dutch. 44Over time, however, increased
competition between the colonists and the British coupled with an expansion of the laws
intended to protect British industry created hostility.45
Prior to 1776 the country was evenly split between loyalists and patriots.46 The
most predominant leaders of the Revolution were the very people who would gain from
repealing the Navigation Acts: merchants, tobacco planters, and artisans.47
41 Larry Sawyers, The Navigation Acts Revisited, 45ECON.HIST.REV. 262, 262 (1992).42
Id. at 263.43Id.44Id. at 275.45Id.46Id. at 266.47
Id.
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Revolution.58 These factors threatened the livelihood of artisans.59 British goods were
produced at lower wages and with higher productivity, creating a competitive advantage
for the British.60 At the same time the cost of Transporting goods across the Atlantic was
reducing, eroding the only advantage of colonial artisans.61
The non-importation boycotts
stimulated manufacturing for colonial artisans and they wanted to continue the
prosperity.62 The Navigation Acts allowed for an expansion of restrictions on colonial
manufacture and Parliament was known to act to protect British industry without concern
for the colonies.63 For artisans the threat of the status quo under the Navigation Acts was
very real.
64
Scottish Rationalization
Scottish Rationalization, a process that lowered transaction costs in the South,
was widely viewed as an invasion in an economic war.65 Prior to the Scottish invasion
the colonialplanters themselves dominated the regions commerce. 66Planter
indebtedness skyrocketed under the Scottish Rationalization.67 Scottish firms were
successful because they financed their exports to Virginia out of pocket by advancing
58
Id. at 271.59See id. at 276.
60Id. at 276-277.61Id. at 276.62
Id. at 277.63Id.64Id.65 Sawyers, supra note 41, at 274.66Id.67 Egnal & Ernst, supra note 54, at 25.
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the Virginians credit to make up trade deficits.68 The credit allowed the planters to defer
payment for European goods and freed up cash for expansion.69
By the 1760s the Scottish influence on Southern commerce threatened colonial
planters hold on the regions commerce.70
The Scottish merchants were wielding
political power to block legislation harmful to their cause in the Virginia House of
Burgesses.71Southern planters accused the Scottish traders of controlling tobacco prices,
fixing exchange rates, and bribing legislators.72
The Scots also used their influence to
manipulate Virginias monetary policy in their favor.73 During the Economic depression
of 1772 and 1773 planters across the south stood shoulder to shoulder in a movement
directed in large part against the Scottish mercantile community. 74
Parliaments Western Land Policy
Prior to 1763 colonial boundaries stretched from sea to sea.75 After the French
and Indian War the crown altered its position regarding western settlements, a position
that aggravated colonists. 76 In a move to appease Indians for abandoning their French
allies, the crown issued the royal proclamation of 1763, reserving western lands for
Indian hunting grounds.77The king also forbid colonist expansion into the west and
68Id.69Id. at 26.70
Sawyers, supra note 41, at 274. The Scottish Tobacco houses extended credit to southern farmers inexchange for their future tobacco crops. The farmers used the credit to purchase imported goods from theScots and, over time, became greatly indebted to them. Egnal & Ernst, supra note 54, at 25.71 Sawyers, supra note 41, at 274.72See Egnal & Ernst, supra note 54, at 26.73Id..74
Id. at 28.75
B.A.HINSDALE,THEOLDNORTHWEST, 120 (1888).76Id. at 121-123.77Id. at 123.
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required frontiersmen seated upon western lands to abandon them.78Despite great
sacrifice in support of Britain in its war with the French, the colonists were worse off
after winning the war.79
George Washington and other prominent colonists viewed the proclamation as a
mere vehicle to appease the Indians that would be abandoned in a few years.80 Patrick
Henry led a land speculation group in Virginia and he boldly ignored the proclamation.81
In 1770 a group including Benjamin Franklin was denied the opportunity to purchase
2,400,000 acres south of the Ohio River with the purpose to establish a western colony. 82
The denial was included in a report by the Privy Council, who concluded by
recommending the crown immediately issue a new proclamation upholding the
Proclamation of 1763.83
Other land policies further infuriated the colonists. In 1774 the Quebec Act
permanently severed the coastal colonies from the west by expanding the Canadian
province to include all extra-colonial territory north of the Ohio River and west to the
Mississippi River.84The colonists viewed the Quebec Act as an attack against them.85
The British victory over the French in 1763 marked a major shift in the colonies.86
For the first time in history English-speaking people did not live under the fear of French
or Spanish invasion, and the benefit of British protection no longer outweighed the
78
Id.79Id. at 125.80
Id. at 124-125.81 Lawrence Henry Gipson, The American Revolution as an Aftermath of the Great War for the Empire,1754-1763, 65 POL.SCI.Q. 86, 94 (1950).82 Hinsdale, supra note 75, at133.83Id. at 134.84Id. at 141.85Id. at 142.86See generally Gipson, supra note 75, at 86-104.
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burden of British regulation.87At the same point in history Parliament took several
missteps that pushed their once loyal colonies beyond the brink.
The Stamp Act
American Whigs believed that under their constitutional charter they had a right
not to be taxed except by their own consent or the consent of their representatives.88 The
Stamp Act of 1765 challenged an established relationship between Britain and her
colonies by imposing internal taxation.89 The Whigs viewed the drastic imposition as a
breach of contract that could only be legal if both parties consented.
90
The British enacted the Stamp Act to offset some of the costs associated with the
seven-year long French and Indian War.91
The view was that because America greatly
benefitted from the result they should help with the cost.92 The Whigs argued the
colonists bore a great burden during the war and they were only contractually obligated to
submit to British regulation in exchange for protection.93The Whigs also argued that a
sizeable portion of the war debt was incurred fighting the French in Europe, the military
contest was commenced to protect British and not colonial interests, and British, not
colonial citizens were enjoying the spoils of the war.94
Governor Francis Bernard of Massachusetts agreed that his citizens probably
could not bear the added tax after submitting to an amazing burthen of taxes during the
87Id. at 102.88John Phillip Reed, In Our Contracted Sphere: The Constitutional Contract, The Stamp Act Crisis, andthe Coming of the American Revolution, 76 COLUM.L.REV. 21, 22 (1976).89Id. at 46-47.90Id. at 47.91Id. at 34.92
Id.93Id. at 37-40.94Id. at 36.
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war.95 The regulation of colonial trade was worth two million pounds every year; the
colonists thought that amount was enough to pay for British protection.96
Angry mobs
terrified stamp agents into resigning and forced the repeal of the tax.97 If Parliament
had determined to enforce the Stamp Act it might have led to open rebellion and civil
war, ten years before the American Revolution. 98
The Tea Act
When Parliament passed the Tea Act in 1773 the colonists reacted with
unprecedented hostility.
99
Allowing the East India Company to sell tea directly to the
colonies was seen not as a scheme to reduce colonial tea prices, but as another instance
of a British exporter seeking to swell his trade by dealing outside of established
channels.100In Marc Egnal and Joseph A Ernsts 1972 article,An Economic
Interpretation of the American Revolution, the authors stress the contextual importance
of the long-term struggle between the colonial merchants and the empire, but they also
point to the rising involvement of the lower orders of colonial society in
demonstrations against the British.101
The Whig elite initially brought tradesmen, sailors, and laborers into the political
fray during the 1760s.102
The wealthier patriots directed the mobs to attack and
intimidate the stamp distributors and customs officials.103
The lower classes fury can be
95Id. at 37.96Id. at 40.97 Gordon S. Wood,A Note on Mobs in the American Revolution, 23 WM.&MARY Q. 635, 642 (1966).98 Gipson, supra note 81, at 100.99See Egnal & Ernst, supra note 54, at 24.100Id.101Id.102Id. at 28.103Id.
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attributed to the fact that they were among the first encouraged to buy with easy credit
and, subsequently, the first to feel the economic pain during periods of business
contraction.104 The more the lower classes became involved in the struggle the bolder
their demands became.105
This new militancy frightened many of the merchants who
now saw the threat of social upheaval.106
Research into areas such as the confiscation of loyalist estates, the nature of the
new state governments, and so on, has shown that there was no social overturn
accompanying the American Revolution and that what change did come about in the
nature of society was most moderate.
107
Viewed in this light the American Revolution
was not a battle for freedom from tyranny but a fight over economic control. 108
The parallels between the modern economic system and the system in the decades
leading to the American Revolution are striking. High levels of indebtedness, increasing
bankruptcies, legislation favoring one group over the other, disparate access to
legislators, courts that perpetuate unfairness, high barriers to enter lucrative fields, and
increasing poverty seem prevalent both in 1776 and 2012. The solution in 1776 was a
bloody revolt to replace the old boss with a new boss. In 2012 will the angry mob
prevail?
Boom, Bust, and Distrust
Consolidated Economic power has long been a fear of the American people. After
the Revolution several states submitted proposed amendments that directly addressed the
104Id.at 29.105Id.106Id. at 29-30.107Id. at 6.108See id.
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issue. 109New York proposed that the Congress do not grant monopolies.110
Massachusetts, New Hampshire, and Rhode Island proposed that the Congress erect no
company of merchants with exclusive advantages of commerce.111 Economic panics in
the late 19th
and early 20th
century stirred public outrage and lead to the establishment of
greater public safeguards.
The Sherman Antitrust Act of 1890
In the years immediately before the Sherman Act, between 1888 and 1890, there
were few who doubted that the public hated the trusts fervently.
112
The trusts were
accused of creating poverty and dividing the country into two classes, the rich and the
poor.113
It is widely believed that Congress passed the Act in response to the public
outcry.114 Unfortunately, the legislation was not strong enough to prevent the boom and
bust volatility of the free market.
The Panic of 1893
A bank panic is indicative of thepublics distrust of the banking system.115
During panics multiple banks in several regions suffer bank runs, where fearful
depositors rush to withdraw at once.116
During the Panic of 1893, 575 banks closed their
109
William L. Letwin, Congress and the Sherman Antitrust Law:1887-1890, 23 U.CHI.L.REV. 221, 226(1956).110Id.111Id.112Id. at 222.113Id. at 225.114Id. at 222.115 Mark Carlson, Causes of Bank Suspensions in the Panic of 1893, 42 EXPLORATIONS ECON.HIST. 56,61-62 (2005).116Id. at 57.
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doors either permanently or temporarily.117 The flash of money hording causes a ripple
effect in the rest of the economy, exacerbating the effect of the panic.118
The Panic of 1893 was preceded by a slew of banking missteps.119 In the months
prior to the crisis, the gold reserves of the Treasury were nearing the legal limit required
to maintain gold parity. Some contemporary scholars claim that this led to a fear of
depression and that the crisis was really a run on the currency.120The panic was
preceded by a stock market crash and a large increase in the interest rate on call loans.121
The panic resulted in 15,000 business failures in 1893.122
Due to the Panic of 1893, some 20% of the labor force was unemployed.
123
In
May of 1894 armies of unemployed men marched on Washington, D.C.124Known
most notably as Coxeys Army after one of the organizers, the men pressed for public
works projects and articulated the need for a safety net in a commercialized industrial
economy.125 The cause received widespread support in the public and was the first
national protest against unemployment and the first movement to call for the Federal
Government to take action.126
117Id.118Seeid. at 62.119See generally Id.120
Id. at 59.121Id. at 59-60. banks used a substantial amount of the bank deposits they received to provide loans tobrokerage houses involved in the stock and commercial paper/bond markets[t]he loans could be called inat the banks discretion and were therefore referred to as call loans. Id.122Id. at 60.123 Anne Mayhew,Polanyis Double Movement and Veblen on the Army of the Commonweal, 23J.ECON.ISSUES 555-562, 556 (June 1989).124Id.125Id.126Id. at 556-557.
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The Panic of 1907
The Panic of 1907 was different than its predecessors.127
One of the differences is
exemplified in the increased role of the trusts.128Before 1907 the financial distress during
the busts were mostly centered at banks.129
By 1907 the aggregate value of trust
company assetswas nearly the same as that of national banks and much larger than that
of state banks.130 During the Panic of 1907 the contraction of loans and deposits of trust
companies dwarfed those of banks.131
It is important to note the differences between banks and trusts in 1907. Trusts
were regulated less than banks, had fewer restrictions on their activities and choice of
assets, and until 1906 trusts in New York were not required to hold minimum reserves.132
With trusts investors faced higher risk, but there was also a potential for greater
rewards.133 Because trusts took advantage of investment opportunities to which banks
had limited access, trusts had relatively undiversified portfolios.134 In 1906 every sector
of the economy seemed to be growing and Wall Street Oligarchs were amassing
unprecedented wealth and power.135
The increasing role of Bucket Shops also led the way to the Panic of 1907.136
Bucket Shops allowed smaller players to place bets on future stock values; they were
127 Jon Moen & Ellis W. Tallman, The Bank Panic of 1907: The Role of Trust Companies, 52 J.ECON.HIST. 611, 612 (1992).128Id.129Id.130
Id.131Id.132Id. at 614.133Id. at 616.134 Ellis W. Tallman & Jon R. Moen,Lessons from the Panic of 1907, ECON.REV. (May/June 1990),available athttp://www.econseminars.com/Financial%20Panics/_Pre-Subprime%20Crises/Panic%20of%201907_Atlanta%20Fed.pdf135 Brendan Sapien, Financial Weapons of Mass Destruction: From Bucket Shops to Credit Default Swaps,19 S.CAL.INTERDISC.L.J. 411, 417 (2010).136Id.
http://www.econseminars.com/Financial%20Panics/_Pre-Subprime%20Crises/Panic%20of%201907_Atlanta%20Fed.pdfhttp://www.econseminars.com/Financial%20Panics/_Pre-Subprime%20Crises/Panic%20of%201907_Atlanta%20Fed.pdfhttp://www.econseminars.com/Financial%20Panics/_Pre-Subprime%20Crises/Panic%20of%201907_Atlanta%20Fed.pdfhttp://www.econseminars.com/Financial%20Panics/_Pre-Subprime%20Crises/Panic%20of%201907_Atlanta%20Fed.pdfhttp://www.econseminars.com/Financial%20Panics/_Pre-Subprime%20Crises/Panic%20of%201907_Atlanta%20Fed.pdfhttp://www.econseminars.com/Financial%20Panics/_Pre-Subprime%20Crises/Panic%20of%201907_Atlanta%20Fed.pdf -
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more like casinos than the stock market.137In essence, Bucket Shops created a derivatives
market that added to the unfettered speculation [that] contributed to the panic and stock
market crash of 1907.138
The Panic of 1907 also displayed the traditional features of the previous panics.139
There were bank runs, the stock market crashed, interest rates spiked, and credit markets
tightened.140 The panic started when a pair of wealthy financiers failed to corner the
copper market in an attempt to prop up the United Copper Company.141
After the failed
attempt the potential that United Copper could collapse caused a run on the
Knickerbocker Trust Company.
142
When Knickerbocker was forced to close its doors the
panic spread.143The panic subsided after a group of bankers led by J.P. Morgan poured
capital into the failing banks, trusts, brokerage houses, and the New York Stock
Exchange.144
In the wake of the Panic of 1907 Congress enacted the Aldrich-Vreeland Act,
which put an emergency currency scheme in place.145Congress also enacted the Federal
Reserve Act to provide the establishment of Federal Reserve Banks, to furnish elastic
currency, to afford means of rediscounting commercial paper, to establish more effective
supervision of banking, and for other purposes.146 In addition to Federal responses,
137
See Id. at 413.138Id.139 Moen & Tallman, supra note 127, at 616.140Id.141 Sapien, supra note 135, at 419.142Id. at 419-420.143Id. at 420.144Id. at 421.145Idat 422. The currency scheme created a method of issuing currency based on the reserves in banks. Id.146Id.
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several state legislatures passed bills outlawing bucket shops in the years after the
panic.147
The parallels between the financial panics of the late 19th and early 20th century
and the Great Recession are numerous. In both eras people believed that the system was
rigged to create two classes, rich and poor. In both 1907 and 2008 the financial crisis
came to a head after a big player was forced to shut its doors. In the aftermath of 1907
and 2008 selected institutions were saved by a collective while others failed and laborers
remained unemployed. Coxeys Army marched on Washington and paved the way for
todays Occupiers. When bubbles burst tempers flare.
The Great Depression and the New Deal
The greatest economic collapse in Americas history was followed by the greatest
expansion of the Federal government. We will briefly look at the environment that lead to
the financial collapse then focus a majority of our attention on the legislative response to
the issues triggered by the Great Depression and their shortcomings.
1920s Laissez-Faire
In the 1920s there was a widely accepted view that the government should not
regulate business because the markets were self-correcting.148
This pro-business
attitude was coupled with other perks for the wealthy. In 1926 congress reduced the top
marginal tax rate from 40% to 20%, doubled each taxpayers lifetime exemption from the
147Id.148 Steven A. Ramirez, The Law and Macroeconomics of the New Deal at 70, 62 MD.L.REV. 515, 516 n.6.(2003).
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estate tax to $100,000, and repealed the 1924 gift tax. 149 The 1926 legislation also aimed
to defund the Federal government by increasing the state death tax credit to 80%, from
25% of the federal tax due.150In 1929 congress further reduced a variety of tax rates.151
At the same time the roaring 20s created vast wealth disparity.152
Between 1921
and 1928, the number of Americans with annual incomes over $1,000,000 increased from
21 to 511, while the number earning between $500,000 and $1,000,000 annually
increased from 63 to 983.153
The wealth growth was fueled by a highly speculative and
mostly unregulated stock market.154 In 1927 the Federal Reserve, fearing the existence of
a speculative bubble, took a misstep by cutting rates and injecting more liquidity into the
market.155This fueled even more speculation.156In October 1929 the stock market
crashed and ushered in the Great Depression.157
The Great Depression
After the crash the market continued to drop and general economic decline took
hold.158 Demand tightened leading to deflated prices, especially for farm goods and
commodities.159
The country was swept with a tidal wave of bankruptcies.160
Home
149 Jeffrey A. Cooper, Ghosts of 1932: The Lost History of Estate and Gift Taxation, 9 FLA.TAX REV. 875,883 (2010).150Id.151Id. at 892.152
Id. at 885.153Id.154 Ramirez, supra note 148, at 526-527.155Id. at 527.156Id.157 Thomas Ferguson, From Normalcy to New Deal: Industrial Structure, Party Competition, and AmericanPublic Policy in the Great Depression, 38 INTL ORG. 41, 41-42 (1984).158Id. at 42.159See id.160Id.
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lending evaporated.161 Home foreclosures tripled.162Unemployment rose to 25.2% and
30% of the 1929 Gross National Product evaporated by 1933.163
Panic stricken depositors
ran on the banks leading to 5,000 bank failures between 1929 and 1933.164
At the time the money supply was linked to the nations gold reserves.165
The
gold standard created an inelastic money supply, preventing the government from
enacting monetary policy to combat the decline. 166Under the gold standard the country
could increase the money supply only by increasing the physical quantity of gold reserves
or by devaluing the price at which the Federal Reserve stands ready to buy and sell
gold.
167
In 1932 congress increased estate taxes in an attempt to generate additional
revenue and avoid a downgrade of the nations credit rating.168
Congress also enacted a
gift tax to insure wealthy taxpayers could not avoid the estate tax. 169 The Hoover
Administrations response to the crisis was aimed at enhancing business confidence. 170
He believed that government should not coerce, but it should cajole.171
The Great Depression destabilized the nations commitment to capitalism.172
Twenty-thousand poverty stricken World War I veterans occupied Washington D.C. (in
1932) in an attempt to compel the government to pay a bonus before the promised 1945
161 Ramirez, supra note 148, at 525.162Id.163Id. at 524.164
Id. at 525.165Id. at 528.166Id.167 Ben S. Bernanke, The Macroeconomics of the Great Depression: A Comparative Approach, 27 J.MONEY CREDIT &BANKING 1, 5 (Feb., 1995).168 Cooper, supra note 143, at 896-897.169Id. at 879.170 Ramirez, supra note 148, at 526-528.171Id. at 529.172Id. at 525.
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date.173President Hoover declined and unleashed the Army on the men, injuring
thousands and killing three.174
Record numbers of Americans voted for the Socialist Party
and the Communist Party in 1932.175 Radicals like Upton Sinclair, Huey Long, and
Father Charles Coughlin became prominent political figures as the country reacted
against Republican inaction.176 In the 1932 election ninety-seven new Democrats won
seats in the House of Representatives, twelve new Democrats won seats in the Senate,
and Democrat Franklin Delano Roosevelt won the Presidency with 57.4% of the popular
vote.177
FDR and the New Deal
Taking office in 1933, President Franklin Delano Roosevelt (FDR)
implemented a series of emergency relief bills for the unemployed; an Agricultural
Adjustment Act for farmers; a bill to reform the banking structure; a Securities Act to
reform the stock exchange; and the National Industrial Recovery Act, which in effect
legalized cartels in American Industry.178 He also abandoned the gold standard,
promoted American exports, addressed the housing crisis, and investigated J.P. Morgan
& Co.179 Widespread government regulation and stimulatory expenditures had not been
tried before in a market based economy.180
173Id.174Id.175Id. at 526.176Id.177 Roger I. Roots, Government by Permanent Emergency: The Forgotten History of the New DealConstitution, 33SUFFOLK U.L.REV. 259, 260 (2000).178 Ferguson, supra note 157, at 42.179Id.180 Ramirez, supra note 148, at 516-517.
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FDR grounded the New Deal reforms in his powers as Commander-In-Chief and
justified their extra-constitutionality under war powers jurisprudence.181
In essence,
FDR analogized the Depression to a wartime battlefield.182 Not only did the New Deal
reject the laissez faire tradition of American economic policy and legal jurisprudence;
FDRs emergency measures changed the relationship between executive and legislative
authority.183Roosevelts administration played the emergency card at virtually every
opportunity, alleging that the emergency doctrine allowed for virtually limitless action by
the President during a national crisis.184
During the depression there was a large contingent of hard-core unemployed
workers.185 The hard-core unemployed would be out of work or underemployed for years
at a time.186
10% of the labor force was considered hard-core unemployed during the
Great Depression.187 The federal government attacked the unemployment problem on
multiple fronts.188 Several provisions were intended to reduce the labor pool.189 The
Civilian Conservation Corps (CCC) kept young men out, child labor laws removed youth
under sixteen, andMexican Aliens were given one-way transportation back home.190
The National Industrial Recovery Act (NIRA) of 1933 was highly controversial
because it expanded federal responsibility to include the welfare of the economy. 191 The
NIRA gave the president the authority to approve codes of fair competition, which
181 Roots, supra note 177, at 261.182 Id. at 271.183
Id. at 262.184Id. at 272.185 Richard J. Jensen, The Causes and Cures of Unemployment in the Great Depression, 19 J.INTERDISC.HIST. 553, 556 (1989).186Id. at 555-556.187Id.188Id.189Id. at 571.190Id. at 571-572.191 Robert L. Rabin, Federal Regulation in Historical Perspective, 38 STAN.L.REV. 1189, 1243 (1986).
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were federally enforceable standards for each industry.192If the industry failed to act the
president could promulgate a code of his own.193
The codes could cover a wide swath of
business practices including: price levels, wage and hour provisions, and output
restrictions.194
The goal of the NIRA was to address the problem of lagging business
productivity.195. FDR hoped to pump new life into the supply side of the market by
fostering intra-industry cooperation, eliminating price competition, and limiting output.
The NIRA helped the unemployment problem by reducing hours worked.196The heart of
the act was ultimately declared unconstitutional. 197
The Agricultural Adjustment Act (AAA) was another supply-side approach
with the aim of correcting the deflated value of crops.198 The AAA paid farmers if they
agreed to limit the acreage they farmed.199
. Unfortunately the AAA proved most
beneficial to wealthy farmers who needed help the least.200Despite FDRs intentions,
both the NIRA and the AAA failed to achieve the desired results.201
The Emergency Banking Act gave the president the power to take any measure he
found necessary to resolve the banking crisis.202 He demanded all banks take a four-day
holiday, confiscated all privately held gold, and forced banks to produce financial
192Id.193
Id.194Id. at 1244.195See generally, Id. at 1244-1246.196 Jensen, supra note 185, at 571.197 Ramirez, supra note 148, at 535.198 Rabin, supra note 191, at 1247.199Id.200Id. at 1248.201Id.202 Roots, supra note 177, at 267.
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information on demand.203FDR believed that in order to function in a stable manner
modern capitalism required significant regulation, especially in the financial sector.204
The Banking Act of 1933 (otherwise known as the Glass-Steagall Act) created the
modern Fed by definitively vest[ing] monetary policy in the Fed and assur[ing] that the
Fed [is] endowed with a high degree of independence.205 The Glass-Steagall Act also
established the FDIC in order to end panic era bank runs and protect communities from
the shocks associated with bank failures.206
Section 16 of the Glass-Steagall Act prohibits national banks from underwriting,
selling, and dealing in securities.
207
Section 21 prevented anyone engaged in the
securities industry from administering checking or savings accounts.208Prior to the Great
Depression banks were allowed to underwrite securities.209
This caused a conflict of
interests. 210 The rationale for separating securities from commercial banking functions
was to put a check on the opportunistic banks, thus preventing them from duping nave
investors.211 The goal of the law was to increase confidence in the public markets.212
203Id. at 268.204 Ramirez, supra note 148, at 534.205Id. at 540.206Id. at 543.207 Jonathan R. Macey, Special Interest Groups Legislation and the Judicial Function:The Dilemma ofGlass-Steagall, 33 EMORY L.J.1, 4-5 (1984).208Id. at 6.209
Randall S. Kroszner & Raghuram G. Rajan, Organization Structure and Credibility: Evidence fromCommercial Bank Securities Activities Before the Glass-Steagall Act, 39 J.MONETARY ECON. 475, 476(1997).210Id. Since a commercial bank has loans outstanding to firms, it could favor the interests of its ownequity holders in the following manner: if a bank had private bad news about a firm it had lent to, it coulduse its underwriting arm to certify and distribute securities on behalf of the firm to an it could use itsunderwriting arm to certify and distribute securities on behalf of the firm to an unsuspecting public andhave the firm use the proceeds to repay the outstanding bank loan.Id.211Id.212Id.
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The Securities Act of 1933 sought to increase disclosure in order to inspire
investor confidence and, in turn, revive investment.213
Skeptics argued, [a]ll the Act
pretends to do is to require the truth about securities at the time of issue, and to impose
a penalty for failure to tell the truth.214
Under the Securities Act of 1933, a registration
statement must be filed prior to a public offering and a prospectus must be physically
distributed to purchasers.215 Among the required disclosures are certified balance sheets,
certified profit and loss statements for three years, and five years of earnings
statements.216
While the Securities Act of 1933 focused on the special occasion of public
offering, the Securities Exchange Act of 1934s provided a whole new framework of
(continuous) disclosure applicable to a more limited group of issuers.217
The disclosures
under the Securities Exchange Act of 1934 include an annual report (10-K), semiannual
report (9-K) and enumerated monthly reports (8-K).218
The Home Owners Loan Act of 1933 was established to quell the mortgage
crisis.219Mortgages in the 1930s were usually five to ten years in duration, payments
were made on interest only, and rates were 8% or higher.220
When the loan matured the
entire unreduced principle was due, and most homeowners refinanced at that point for
213 Ramirez, supra note 148, at 535.214
William O. Douglas & George E. Bates, The Federal Securities Act of 1933, 43 YALE L.J. 171, 171(1933).215 Milton H. Cohen, Truth In Securities Revisited, 79 HARV.L.REV. 1340, 1344-1345 (1966).216Id. at 1345.217Id. at 1340-1341.218Id. at 1356-1357.219 Peter M. Carrozzo,ANew Deal for the American Mortgage: the Home Owners Loan Corporation, theNational Housing Act and the Birth of the National Mortgage Market, 17 U.MIAMI BUS.L.REV. 1, 4(2008).220Id. at 6.
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another five to ten years.221The Act established the Home Owners Loan Corporation
(HOLC) in order to purchase toxic mortgages form local lenders.222
. The idea was that by
increasing the local lenders liquidity it would enable them to originate more loans and
ease the tight money crisis.223
TheNational Housing Act of 1934 was implemented to stimulate building
without government spending and to improve conditions with respect to home
financing.224
The National Housing Act created the Federal Housing Administration
(FHA) and it aimed to achieve five goals.225First, it promoted home modernization and
insured loans were available for home improvements.
226
Second, it created a sound
mortgage instrument with amortization over a long period of time eliminating the need to
refinance every five to ten years.227
It also established the Home Credit Insurance
Corporation to guarantee a return on lenders investments in the event of foreclosure,
created a national system of real estate appraisal, and for the first time allowed the
creation of a secondary market for mortgage securities. 228
The Works Progress Administration (WPA) directly put millions of
unemployed Americans to workon various schemes ranging from standard public works
construction projects to cultural ventures involving the fine arts.229 The goal of the WPA
221Id.222Id. at 8.223Id. at 9.224Id. at 24.225Id.226Id. at 25.227Id. at 26.228Id. at 26-27.229 Rabin, supra note 191, at 1249.
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was to show government money attacking the Depression mentality and to stimulate
demand by putting money in workers pockets.230
The Social Security Act of 1935 constituted a dramatic step by creating an
unprecedented mass-coverage federal safety net.231
Through the Social Security Act the
federal government was making the statement that Americans will not be forced into
poverty only because they are no longer able to work.232Under the Act Americans were
provided with unemployment insurance, retirement pensions, aid to dependent children,
and other social insurance programs.233 The security provided under the Act helped foster
increased consumer confidence in the years that followed.
234
The Wagner Act (also known as the National Labor Relations Act) (NLRA)
was designed to create a healthy middle class by imposing a mandatory scheme of
collective bargaining.235The NLRA shifted labor conflicts from the streets to hearing
rooms.236 The result of collective bargaining put more money in the hands of cash
strapped laborers, who were likely to spend their extra income and stimulate the
economy.237
The Tennessee Valley Authority Act was a plan to use federal funds and oversight
in order to improve the lives of the Americans living in the impoverished Tennessee
Valley.238
The Act established the Tennessee Valley Authority (TVA) to handle flood
control, to develop the Tennessee River for navigation, and to generate electric power,
230Id. at 1250.231Id.232Seeid. at 1251.233 Ramirez, supra note 148, at 546-547.234Id. at 547-549.235Id. at 549-551.236Id. at 551 n. 265.237Seeid. at 551.238
Id. at 552.
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among other things.239 The Public Works Administration was the first nationwide federal
program dedicated to public works and ultimately led to the Interstate Highway
System.240The Servicemens Readjustment Act of 1944 (the GI Bill) provided WWII
veterans with funds for education, subsidized mortgages for housing, and low interest
business loans.241
To combat the Great Depression, FDR used the federal government in ways never
before conceived. New Deal programs aimed at assisting those hit hardest by the
economic downturn, stabilizing the economic environment, and investing in
infrastructure to foster a turn around.
History repeats itself: the rise of laissez-faire deregulation
Despite its many successes, there are many criticisms of New Deal programs.
The distribution of funds under the New Deal did not go primarily to states with high
unemployment and low incomes.242 The politics of the day ruled as larger grants of funds
were allocated to swing states.243 Black Americans were also treated unequally under the
New Deal because they were poorly organized and weak politically.244
Some critics argue that New Deal programs did not go far enough. For instance,
the G.I. Bill excluded women, veterans of color, and veterans that could not afford to
239Id.240Id. at 554.241Id. at 557.242 John Joseph Wallis,Employment, Politics, and Economic Recovery during the Great Depression, 69REV.ECON.&STAT. 516, 516 (1987).243Id.244 Marc W. Kruman, Quotas for Blacks: The Public Works Administration and the Black ConstructionWorker, 16 LAB.HIST. 37, 37-38 (1975).
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own a home. 245 Conservative critics argue that the New Deal went too far.246 By the
late 1970sthe regulatory system came under close scrutiny by policy institutes and
journals, academic disciplines, and politically influential public officials who all came to
focus on a clear and dominant emerging theme- deregulation.247
It is not a coincidence that the economic scale started to shift heavily in favor of
the wealthiest 1% of Americans at the same time that deregulation became popular
among politicians. The first shots in the class war were fired long before the Regan
revolution or the Occupy Movement. Small government conservatives have focused their
efforts on dismantling New Deal programs since their inception.
Looking at the era before the Great Depression and the one before the Great
Recession and it is obvious: history repeats itself. So, what is the perfect toxic stew for
cooking up macroeconomic chaos? Is it when industries run wild under the guise of self-
regulation? When the income and wealth gaps widen to proportions that dwarf the Grand
Canyon? When the markets are flying on cocaine induced speculation? When the
political promises of the day are to reduce the burden on the most affluent?
Perhaps the most destructive deregulation occurred in 1999 when President
William Jefferson Clinton signed the Gramm-Leach-Bliley Act (GLBA) into law,
repealing the parts of the Glass-Steagall Act that separated the securities business from
commercial banking.248
Further, GLBA expanded the Feds power.249
After the GLBA
245 Florence Wagman Roisman,National Ingratitude: The Egregious Deficiencies of the United StatesHousing Programs for Veterans and the Public Scandal of Veterans Homelessness, 38 IND.L.REV. 103,111 (2005).246See Rabin, supra note 191, at 1316.247
Id.248 James R. Barth, R. Dan Brumbaugh, & James A Wilcox, The Repeal of Glass-Steagall and the Adventof Broad Banking, 14 J.ECON.PERSPECTIVES 191, 191 (2000).
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the Feds Authority grew to include banks, securities firms, and insurance companies.250
With Glass-Steagall out of the way, after eight years under laissez-faire President George
W. Bush, a stock market crash, and a mortgage crisis, President Barack Obama faced the
second worst economic downturn our fragile nation has faced in its history.
The Protest Years
Most Americans believe the Great Recession was partially caused by a lack of
government oversight in the financial industry.251 The Treasury Department listed several
causes including excessive speculation in the housing market, excessive risk taking and
levels of debt at financial institutions, overreliance on private credit rating agencies, risky
unregulated derivatives trading, and financial sector salaries that rewarded risk-taking
without penalties for failure.252 In order to soften the blow of the governments reaction
to the crisis, finance, insurance, and real estate industries spent $223 million lobbying in
the first half of 2009.253
In response to the financial crisis the Federal Reserve Bank exercised extra-
constitutional powers.254
By purchasing $1.25 trillion in toxic mortgage backed
obligations, a power not granted to it by Congress, the Fed violated the U.S. Constitution
249
Chad Emerson, The Illegal Actions of the Federal Reserve: An analysis of how the Nations CentralBank has Acted Outside the Law in Responding to the Current Financial Crisis, 1 WM &MARY BUS.L.REV.109, 120 (2010).250Id.251 Jeff Madrick, They Didnt Regulate Enough and Still Dont, 56 N.Y.REV.BOOKS (2009) available athttp://www.nybooks.com/articles/archives/2009/nov/05/they-didnt-regulate-enough-and-still-dont/?pagination=false .252Id.253Id.254See William Poole,Ending Moral Hazard, 66 FIN.ANALYSTS J. 17-24, 20 (2010).
http://www.nybooks.com/articles/archives/2009/nov/05/they-didnt-regulate-enough-and-still-dont/?pagination=falsehttp://www.nybooks.com/articles/archives/2009/nov/05/they-didnt-regulate-enough-and-still-dont/?pagination=falsehttp://www.nybooks.com/articles/archives/2009/nov/05/they-didnt-regulate-enough-and-still-dont/?pagination=falsehttp://www.nybooks.com/articles/archives/2009/nov/05/they-didnt-regulate-enough-and-still-dont/?pagination=false -
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which requires an act of Congress to appropriate government funds.255 During the same
period the Fed has been reluctant to disclose its activities.256
The appearance of corruption and lack of transparency has fueled a mass uprising.
The right wing Tea Party movement demands a strict adherence to the Constitution.257
Fueled by conspiracy theory, many Tea Partiers believe President Obama and his
predecessors are members of an international network of wealthy elites who undermine
the Constitution for their benefit.258
Most Tea Partiers are new to political activism and
feel they have been awakened by the recession.259 Their goals include the abolition of
the Federal Reserve, the federal income tax, several federal agencies, and to end the
practice of government bailouts of private institutions.260
On the left the leaderless Occupy Movement has risen in the wake of the financial
crisis.261 A majority of Occupiers are unemployed young people. 262It is difficult to
encapsulate what the Occupy Movement stands for.263Some argue that they are against
economic disparity and for reform of financial institutions and American politics.264 The
Declaration of the Occupation of New York City places the blame for the ills of society
on the back of the corporations that control nearly every aspect of our lives.265
255Id.256Id.257 David Barstow, Tea Party Lights Fuse for Rebellion on Right, N.Y.TIMES (Feb. 16, 2010) available athttp://www.nytimes.com/2010/02/16/us/politics/16teaparty.html?pagewanted=all .258Id.259Id.260
Id.261See Brian D. Boydston, What Exactly does the Occupy Movement Want?, THE HUMANIST (Jan.-Feb.,2012) available at http://thehumanist.org/january-february-2012/what-exactly-does-the-occupy-movement-want/.262Id. at 20.263See generallyId.264
Id. at 21.265See generally Unknown,Declaration of the Occupation of New York City, (Sept 29, 2011) available athttp://www.nycga.net/resources/declaration/. We come to you at a time when corporations, which placeprofit over people, self-interest over justice, and oppression over equality, run our governments. Id.
http://www.nytimes.com/2010/02/16/us/politics/16teaparty.html?pagewanted=allhttp://thehumanist.org/january-february-2012/what-exactly-does-the-occupy-movement-want/http://thehumanist.org/january-february-2012/what-exactly-does-the-occupy-movement-want/http://www.nycga.net/resources/declaration/http://www.nycga.net/resources/declaration/http://www.nycga.net/resources/declaration/http://thehumanist.org/january-february-2012/what-exactly-does-the-occupy-movement-want/http://thehumanist.org/january-february-2012/what-exactly-does-the-occupy-movement-want/http://www.nytimes.com/2010/02/16/us/politics/16teaparty.html?pagewanted=all -
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Both Tea Party and the Occupy Movement participants are calling for criminal
prosecutions of white collar crimes that led to the mortgage crisis and financial collapse
of 2008.266 The Obama Administration has responded to these cries by appointing a
prosecutorial group led by New York Attorney General Eric Schneiderman.267
It will
take a long time for this team to build cases because under the Bush Administration the
cops were taken off the beat.268 President Bush loaded agencies with anti-regulatory
officials and reassigned the F.B.I.s white-collar experts to terrorism cases.269
Progressive Legislation under President Obama
President Obama has signed into law some progressive legislation aimed at
correcting the inequalities of the day, but his efforts fall short of the rapid federal
expansion under the New Deal. Will growing populism push the government to fund
more expansive relief? A look at important progressive legislation passed under President
Obama should help us predict the future.
The Lilly Ledbetter Fair Play Act of 2009 was a victory for employees who have
faced discrimination in the workplace.270
The Act lengthens the statute of limitations in
certain discrimination cases.271This strips employers of the Statute of Limitations
266 June Carbone, Why do Dangerous Financial Criminals Roam Free?, ALTERNET (Feb. 4, 2012),
available athttp://www.alternet.org/economy/153997/why_do_dangerous_financial_criminals_roam_free/?page=entire267 Jessica Yellin,New York Attorney General to Lead Risky Mortgages Team, CNN.COM (Jan. 25, 2012),available athttp://www.cnn.com/2012/01/25/politics/sou-risky-mortgages/index.html?iref=allsearch.268 Carbone, supra note 266.269Id.270See generally Robin E. Shea et al., The Impact of the Lilly Ledbetter Fair Pay Act of 2009: anImmediate Look at the Legal, Governmental, and Economic Ramifications of New Legislation Regarding
Equal Pay Based on Gender, ASPATORE SPECIAL REPORT 17 (2009).271Id.
http://www.alternet.org/economy/153997/why_do_dangerous_financial_criminals_roam_free/?page=entirehttp://www.cnn.com/2012/01/25/politics/sou-risky-mortgages/index.html?iref=allsearchhttp://www.cnn.com/2012/01/25/politics/sou-risky-mortgages/index.html?iref=allsearchhttp://www.cnn.com/2012/01/25/politics/sou-risky-mortgages/index.html?iref=allsearchhttp://www.cnn.com/2012/01/25/politics/sou-risky-mortgages/index.html?iref=allsearchhttp://www.alternet.org/economy/153997/why_do_dangerous_financial_criminals_roam_free/?page=entire -
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defense and forces them to prepare to defend themselves over compensation, benefits,
promotion, demotion, and job assignment decisions.272
The American Recovery and Reinvestment Act (ARRA) was a $787 billion
stimulus fund that propped up cash strapped state and local governments, helped states
pay for health care and education expenses, and required states to use the funds
immediately or risk losing them.273 Race to the Top, an education fund under ARRA that
rewarded innovative approaches, circumvented states by including $900 million in funds
for localities.274 The ARRA contained a bypass provision that allowed state legislatures
to overrule governors who choose to reject the funds.
275
This circumvention raised
concerns that the federal government was undermining state sovereignty.276
President Obama signed a bill expanding the State Childrens Health Insurance
Program (SCHIP) in February 2009, reversing President Bushs trend of vetoing similar
expansions.277 The bill provided health care to 11 million children; at the signing
ceremony the President indicated that he planned to cover all Americans.278
The Patient Protection and Affordable Care Act of 2010 (ACA) expanded health
insurance to 32 million of the countrys 55 million uninsured citizens.279
The ACA
prevents insurance companies from rejecting people who have pre-existing conditions,
removes caps on benefits, limits premium increases and the amount insurance companies
spend on non-medical expenses, expands Medicaid to cover more impoverished
272Id.273 Gillian E. Metzger, Federalism Under Obama, 53 WM.&MARY L.REV. 567, 587-589 (2011).274Id. at 590.275Id. at 593.276Id.277 Janet L. Dolgin, Class Competition and American Health Care: Debating the State Childrens HealthInsurance Program, 70 LA.L.REV. 683, 685 (2010).278Id.279 Metzger, supra note 273, at 572.
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Americans, and extends childrens eligibility to be covered by their parents insurance up
to the age of 26.280
The ACA also creates an individual mandate that forces individuals
to buy health insurance.281The mandate is being hotly contested.282The Supreme Court
is considering its constitutionality and may strike down all or part of the law. Ultimately,
to open access to health care for millions of Americans is a progressive victory even if it
proves to be short lived.
The 2009 Car Allowance Rebate System, aka Cash for Clunkers, provided
vouchers of up to $4,500 to individuals who traded in their older, less-efficient motor
vehicles for newer and more fuel efficient replacements.
283
The program directly
increased national fuel efficiency and assisted the battered auto industry.284The program
was the first of its kind and proved highly popular.285
Indirect effects of the program were
increased health and safety by replacing high-polluting older vehicles with new cars with
modern safety and emissions devices.286 Critics of the program note that it
disproportionately benefitted some but not all, it did not help those in the most need, the
program was too expensive, and amounted to corporate welfare by propping up the auto
industry.287
In an attempt to resurrect the American auto industry, the Obama Administration
provided significant financial assistance to General Motors and Chrysler.288
The Treasury
280Id.281
Id. at 573.282See Id.283 Marianne Tyrell & John Dernbach, TheCash For Clunkers Program: A Sustainability Evaluation, 42U.TOL.L.REV. 467, 467 (2011).284Id. at 468.285See generally id. at 467-468.286Id. at 482-483.287See generally, id.288 Steven M. Davidoff, Uncomfortable Embrace: Federal Corporate Ownership in the Midst of theFinancial Crisis, 95 MINN.L.REV. 1733, 1733-1734. (2011).
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Department concluded the cost of liquidating the companies would outweigh the cost of
providing assistance, and that each company would be able to function without
governmental involvement after the restructuring.289In addition to other considerations,
the Treasury Department ensured that jobs would stay in the United States with
provisions in the companys financing documents.290Congress further protected
American jobs by reversing attempts by the companies to close a number of
dealerships.291
The Public-Private Investment Program (P-PIP) was established to inject liquidity
into the markets by using Troubled Asset Relief Program (TARP) capital
292
and capital
from private investors to buy toxic Legacy assets from U.S. financial Institutions.293 P-
PIP used FDIC debt guarantees and Treasury equity co-investment in order to attract
private capital.294
In December 2010 the Tax Relief, Unemployment Insurance Reauthorization, and
Job Creation Act of 2010 was signed into law by President Obama. The tax compromise
package extended Bush era tax cuts along with other forms of tax relief in exchange for a
temporary extension of unemployment insurance.295
The act also included estate tax relief
and tax incentives to invest in machinery and equipment.296
289Id. at 1745.290Id. at 1750.291
Id.292 TARP was signed into law by President George W. Bush on Oct. 3, 2008 and provided $700 billion todirectly inject liquidity into the financial markets. See generally, Campbell L. Harvey, The Financial Crisisof 2008, What Needs to Happen After TARP, SOC.SCI.RESEARCH NETWORK (Oct. 5, 2008), available athttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=1274327.293Public-Private Investment Program (P-PIP) in the Real World, 7 No. 16 PLIPOCKET MBA1(2009).294Id.295Tax Relief, Unemployment Insurance, Reauthorization, Job Creation Act of 2010, 35 CONSTR.CONTRACTS L.REV.41(2011).296Id.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1274327http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1274327http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1274327 -
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In July 2010 President Obama signed the Dodd-Frank Wall Street Reform Act
into law.297
The Act, at 848 pages, falls short of the effectiveness of the 34 page Glass-
Steagall Act.298 Some good did come out of the Act, including increased capital
requirements for large banks and increased regulation of non-bank financial companies.
299 The Act also created the Bureau of Consumer Financial Protection (BCFP), but it is
unproven if the BCFP will be effective because its decisions can be set aside by the
Financial Stability Oversight Council (FSOC), another new entity created under the
Act.300 The FSOC is a multi-agency oversight body created to improve coordination and
led by the Treasury Department.
301
Dodd-Frank does little to close regulatory gaps; in fact it creates more regulatory
organizations instead of consolidating.302
The Volker Rule appears to prohibit banks
from trading on their own behalf or acquiring interest in private equity or hedge funds,
but there are numerous loopholes.303Despite assurances to the contrary, under Dodd-
Frank Too-Big-To-Fail (TBTF) financial institutions will still be able to privatize their
profits and socialize their losses.304Despite public outcry demanding the dismantling of
behemoth institutions, Dodd-Frank does little to even mitigate TBTF.305
297 Arthur E. Wilmarth, Jr., The Dodd-Frank Act: A Flawed and Inadequate Response to the Too-Big-To-
Fail Problem, 89 OR.L.REV. 951, 954 (2011).298Reza Dibadj,Dodd-Frank: Toward First Principles?, 15 CHAP.L.REV. 79, 80 (2011).299 Usha Rodrigues, Corporate Governance in an Age of Separation of Ownership from Control, 95 MINN.L.REV. 1822, 1858 (2011).300 Dibadj, supra note 298, at 85-86.301Id.302See id. at 85-90.303Id. at 98-99.304Id. at 101.305Id.
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President Obama attempted to pass the American Jobs Act, but the bill was
defeated in the Senate.306
The Act would have prohibited discrimination against the
unemployed and provided incentives for employers to hire veterans and the chronically
unemployed.307
Conclusion
It is apparent that the 2012 version of America is ripe for an overhaul. Like in the
period before the American Revolution, one class of politically connected citizens reaps a
vast majority of societys rewards over all others. The field of play is uneven.
Consolidated economic power, greatly feared in the late 1800s, is commonplace in
todays America. In the aftermath of the 2008 economic collapse the oligarchs called for
greater deregulation, an element of all financial collapses including the Panic of 1907 and
the Great Depression. Despite current economic conditions, the wealthy received an
extension of Bush era tax cuts.
The Masters of the Universe are in for a surprise. In the Information Age more
and more of the disenfranchised are enlightened to the cause of their plight. They realize
that hording at the top causes hunger at the bottom. Following a tradition of protest that
began with Coxeys Army, Occupy Wall Street and the Tea Party are proving their
political worth.
The legislation passed under President Obamas watch has not gone far enough to
establish greater equality within our society. Unlike FDR, President Obama has not used
emergency powers to fix the broken system. Unlike FDR, President Obama has not
306 From the Hill, 17 No. 22 QUINLAN,HRCOMPLIANCE L.BULLETIN 9 (Nov. 25, 2011).307Id.
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directly put the chronically unemployed back to work. In fact, under President Obamas
watch economic disparity has continued to grow, the tax code is still riddled with
loopholes for corporations and the wealthy, and banks are allowed to continue to gamble
with their depositors money on the open market with government protection in case of
failure.
President Obama has had some success getting legislation passed that helps the
lower classes, but the help is not enough to close the chasm between the classes that has
grown out of control since the 70s. The angry mobs are growing restless. The ruling
class should take a play out of the Founding Fathers playbook and learn to respect
societys lower ebbs. If not, they will learn to fear them.
America needs a new New Deal. We need government investment that puts the
chronically unemployed back to work. We need works projects that fix our infrastructure
and pave the way for a brighter future. We need to return to a progressive tax system so
we can make college affordable, invest in research and development, and create the next
American Century. We need to break up institutions that are too large to regulate and
fund our regulators to insure that cheating businesses get caught. We need to stiffen
penalties and close gaps that allow the connected to escape responsibility. We need to
prosecute white collar criminals. We need to outlaw special-interest-drafted legislation
and force our politicians to do the job they were hired to do. We need to ensure they have
time to represent their constituents by mandating public financing of elections. We need
to stem the influence of money on our political system. We need a constitutional
amendment that overturns the outrageous decision in Citizens United v. F.E.C.308
308 Citizens United v. F.E.C., 130 S. Ct. 876 (2010).
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There are numerous steps we could take to start to repair this country. The
greatness of FDR can be directly connected to his boldness. He didnt take no for an
answer and when he failed he tried a new approach. President Obama should follow that
example.
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