For Whom the (Trading) Bell Tolls: Reforming Wall St. to Protect Main St.

In the heat of the debate about the need to fundamentally reform the way financial markets operate, both here in America and abroad, one crucially important point risks getting lost: the stakes for the middle class.

Too often, debates like these end up with the regulators on one side and those whom they would regulate on the other. When the debate is focused on obscurities like over-the-counter derivatives and accounting standards, it becomes that much easier for the rest of us to tune out and let the vested interests fight it out among themselves.

But when it comes to reforming our financial system, sitting this one out would be a big mistake. If we get this wrong, the damage will reverberate far beyond Wall Street.

It's all too easy to see why failing to reform our financial system could be so devastating to the middle class. Just look around: the origins of this Great Recession were the unchecked excesses and reckless behavior in the financial industry, as easy money and flimsy underwriting gave rise to a massive housing bubble. When the bubble burst, the financial structure supporting this expansion turned out to be a house of cards, and as that house collapsed, the shock waves were felt not just on Wall Street, but around the world.

So how exactly do these troubles in our financial system affect middle-class families? Lots of ways—and none of them good.

Most immediately, there are tons of middle-class jobs associated with residential housing, from construction to furnishings to real estate, and many of these jobs have been lost. (Employment in residential construction and contracting, for example, is down one million jobs off of its peak). Next, most middle-class homeowners, for whom homes are their most valuable asset, have taken a big hit to their wealth, with home prices down over 30%.  The huge spike in foreclosures—another symptom of the bust—is a major contributing factor here: studies show that when a home is foreclosed, the price of nearby homes can fall as much as 9%.

Then there's the impact of the credit crunch on business activity, on loans, and once again, on jobs. As much as it sometimes seems as if Wall Street and Main Street exist on different planets, they’re intimately connected.  Whether it's a loan for a home, a car, or a college education—or just credit for a small business to keep its shelves stocked—the credit freeze born of the collapse of the housing bubble is a chill that continues to be felt throughout this nation. What starts as a risky derivatives trade in the boardroom of a New York skyscraper can all too easily end up as a distressed conversation around the kitchen table in a middle-class home in Wisconsin.

And there's another crucial piece of fallout from all of this bubble-driven speculation, one that has been particularly damaging to the middle class: financial bubbles are associated with income growth bypassing low- and middle-income families and accumulating at the very top of the income scale. Before the crash, in 2007, the wealthiest 1% of households received 23.5% of all income, the highest share on record going back to the early 1900s. But there was one ominous exception: 1928, the year before the crash that began the Great Depression, when 23.9% of the income went to the top 1%. That bubble didn’t end too well either, as you may have heard.

And while the top was surfing the big wave, the middle class was treading water and the poor were drowning. Despite years of economic growth and solid productivity in the last economic expansion, the median income went nowhere and poverty rose.  Incredibly, according to Census Bureau data, real median household income in 2008 was about $1,000 lower—that's right, I said lower—than it was a decade before.

For all of these reasons, President Obama is proposing the most significant overhaul of the financial system since the 1930s. From the perspective of middle-class families, the reforms we've proposed have a clear mission: to create and enforce common-sense rules of the road that will ensure we're not back here again a few years from now.

For example, the Consumer Financial Protection Agency we've proposed would, if created, enforce fair rules to eliminate the misleading terms, hidden fees, and exploding interest rates that some banks use to pad their profit margins at the expense of ordinary Americans.

This kind of abuse is a big problem for middle-class families. During the housing bubble, banks and mortgage lenders routinely drew families into mortgages they didn’t understand and couldn’t afford. Some of these mortgages looked affordable at first, but their interest rates skyrocketed after a few years; others gave homeowners the option of interest-only payments for the first few years, without mentioning that this "option" had a good chance of leaving the homeowner with an underwater and unaffordable mortgage a few years down the road.

The Consumer Financial Protection Agency would also regulate the practice of charging exorbitant hidden fees on credit and debit cards. For years, rather than seeing genuinely transparent competition on price and service, we’ve seen banks seeking to profit from credit card lines by burying fees in the fine print. For example, banks will make $27 billion this year just from the overdraft fees they charge on debit cards. We want to stop the practice of charging misleading or abusive hidden fees so that consumers know what they’ll be paying and can choose the product that offers the best price and terms.

Another key aspect of reform is to prevent what's come to be known as "systemic risk." One reason we ended up in the mess we're in is that financial institutions around the world became tightly linked, owing huge sums to each other in contracts built on massive amounts of debt and supported largely by the assumption that home prices could defy gravity forever.

Those links meant that the failure of one financial institution could threaten the entire system. President Obama's reform plan puts regulation in place to oversee these linkages and to ensure that the financial system borrows and lends responsibly instead of relying on excessive leverage to take on huge risks in search of huge profits.

Still, even with these safeguards, it's important to be prepared in case we once again find a major financial institution on the brink of collapse. In the aftermath of the Great Depression, we faced a similar problem: when one bank failed, there were runs on other banks, creating a destructive domino effect.  To deal with this problem, Congress created the Federal Deposit Insurance Corporation. And for years, the FDIC has successfully prevented bank runs by efficiently shutting down failed banks while guaranteeing that the customers' deposits (up to $250,000) will be safe even if the bank fails.

But in the case of today’s big "non-bank" financial institutions, like Lehman Brothers or AIG, we don't have these same options. Our reform plan introduces a crucial new function that would let regulators safely shut down troubled financial institutions without endangering the financial system, a function called "resolution authority."  This proposal would help deal with the problem of financial institutions that are "too big to fail" by making sure that regulators can allow any institution to fail, but in a way that incurs minimal costs to taxpayers and doesn’t cripple the system.

The President summed this all up eloquently: "Though they were not the cause of the crisis, American taxpayers through their government took extraordinary action to stabilize the financial industry. They shouldered the burden of the bailout and they are still bearing the burden of the fallout – in lost jobs, lost homes and lost opportunities."

In other words, the debate over financial regulatory reform must not be an isolated debate solely involving regulators and traders. The outcome of these reforms must not be ceded to the lobbyists fighting for the status quo. These are kitchen table, wallet, pocketbook, and lunch-pail issues, directly linked to the prosperity of the middle class.

Every day that stock markets open for trading on Wall Street, they ring the opening bell. Remember this: when it comes to financial regulatory reform, ask not for whom that bell tolls. It tolls for thee.