81st Annual Spring Dinner of the Economic Club of Chicago
Remarks Prepared for Delivery by Senator Richard J. Durbin
Economic Club and “practical economics”
Grace Barry sent me a copy of the Club’s 75th anniversary book. I enjoyed reading the remarks of Mr. Melvin Traylor, president of the First National Bank of Chicago, who spoke at the very first meeting of this distinguished group, back in 1927.
The topic of Mr. Traylor’s remarks was, “[W]hy the hell another club in Chicago?”
This is how he answered his own question: He said that Chicago was filled with clubs of “idealistic critics and dreamers,” and clubs of “hard-boiled, unimaginative, closed-fisted materialists.” …
And, quote, “[s]omewhere between the two, there should be … a place for a little less political thinking and a little less selfish preaching, a place for just some common sense.”
The economy of Chicago itself has been transformed over the 82 years since this Club was founded, from a city of steel mills and stockyards to a center for global finance and commerce.
One thing that has not changed over the last 82 years, however – and thank goodness -- is your adherence to the plain-speaking, clear-thinking values of your founders.
Economic Club of Chicago continues to provide an important forum for
candid, common-sense discussions of the most important economic
questions of the day. And I am honored to have this opportunity to
join in that tradition.
Room 219 and two crises that changed America
Before I address tonight’s topic, I hope you will bear with me while I share a story about my job and a room in the Capitol.
Just off the Senate Chamber and down the tiled corridor is Room 219. It’s close by so it’s frequently used for meetings. It has one of those magnificent views of the Mall.
A few years ago, on a Tuesday morning, I was in that room for a 9 o’clock leadership meeting with Tom Daschle. Everyone was buzzing about reports of a plane crashing into the World Trade Center moments earlier.
Someone turned on a TV for an update and in that instant we saw the second plane hit the South Tower.
We tried to start our meeting, but were interrupted by a news flash of an explosion at the Pentagon.
At that point we looked out the window and we could see thick, black smoke billowing from the Pentagon out across the Mall.
Seconds later, Capitol Police officers rushed in and ordered us to leave Room 219 and evacuate the Capitol.
We all know our nation has never been the same since that day.
Almost seven years exactly after that day, on another Tuesday in September, I was called to an emergency leadership meeting, again in Room 219.
Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson told us that within hours that AIG, the largest insurance company in the world, would fail and its collapse would bring down thousands of contracts they insured.
Chairman Bernanke said that he was moving immediately to lend $85 billion to prop up AIG and avoid a global economic catastrophe.
His statement was met with an awkward – almost stunned – silence.
Finally, one Senator asked the question we were all thinking: Where did the Federal Reserve get $85 billion?
Bernanke answered: Oh, we have some funds.
The next and obvious question: What legal authority do you have to give any money to a private company?
He answered there was a Depression-era law which gave the Fed general authority to do such things as necessary for the good of the economy.
A few days later the same group gathered again. This time, Bernanke and Paulson told us that unless we produced hundreds of billions of dollars quickly, the American economy faced a severe economic crisis which could spread across the world.
Shortly after that request, Congress voted to create the Troubled Assets Relief Program – basically giving the Treasury Secretary a blank check.
Our alternative was to do nothing and hope they were wrong. But the failure of major financial institutions, the growing unemployment rate and record home foreclosures were evidence that we were witnessing an economic challenge of historic proportions.
ECONOMY IN CRISIS
That was nearly seven months ago. Since then, American taxpayers have had to commit not just billions, but trillions of dollars, to prevent our financial system from collapsing and our economy from falling into a depression.
Yet, despite those sacrifices, our economy continues to shed jobs at an alarming rate: 2 million jobs lost just in the last three months. More than 5 million jobs lost since this recession started two years ago. All told, 13 million Americans are now unemployed.
The national jobless rate jumped to 8.1 in February. In Illinois it's 8.6 percent. More than 570,000 people in our state are now out of work. …
In the Chicago area, things are
even tougher; 126,000 people in this area lost jobs last year. The
jobless rate in the Chicago metro area is now 9.2 percent – higher than
New York City.
Many businesses can’t borrow or make payroll
Workers and retirees are seeing their life savings disappearing. Millions of families who two years ago had accumulated wealth in their home equity and in 410(k)s now have neither. American families lost a total of $11 trillion last year – 18 percent of their total wealth.
Average Americans are working harder -- and falling further behind. According to the Federal Reserve, the net worth of the average American household, adjusted for inflation, is lower now than it was in 2001.
While some of the very companies whose recklessness helped cause this crisis receive billions of dollars from taxpayers, millions of hard-working, average Americans are losing their jobs, their health care, and their homes.
Is it any wonder people are angry about the staggering costs of this crisis and the apparent indifference of some corporate leaders at these failed businesses who still want to cash in with their so-called retention bonuses?
Opportunity costs of this crisis
Think about this: We have now allocated $10.5 trillion to fix the damage caused to the financial markets and our economy by this crisis. And we have already spent $2.6 trillion on this crisis. $2.6 trillion.
For an amount less than that, we could eliminate our nation’s entire backlog of infrastructure needs. We could rebuild every crumbling road and bridge … every mile of deteriorating rail line … and every failing dam and levee … and upgrade every overwhelmed water treatment plant in America.
For an amount far less than that, we could ensure that every uninsured man, woman and child in America has basic health coverage for 10 years.
And we still have to do those things. But the costs of this avoidable crisis will make it harder to do them.
Balance, not anger
So people are right to feel angry. But, as we saw following our last great national crisis, there can be a high cost to acting in anger and haste, without sufficient understanding or information.
What we need now is what Mr. Traylor called for 82 years ago: common-sense, practical economics – to restore balance to our markets and solid, sustainable and equitable growth our economy.
President Obama: right leader for these hard times
Thankfully, I believe we have the right leader for these hard times.
In November of 2006 I sat down with my Senate colleague in a vacant meeting room in the Union League Club and told him he should run for President.
He wasn’t sure and told me had to talk it over with Michelle.
Six weeks later I gave him a little nudge. I was the first member of the United States Senate to endorse Barack Obama for President. And for 12 months, I was the only Senator to endorse Barack Obama for President.
It was a political dream come true to be seated on that platform in January when President Obama was sworn in, and to watch him place his hand on the same small Bible Abraham Lincoln had used at his inauguration a century-and-a-half earlier.?
when I look at the enormity of the challenges he has inherited – two
wars, a global recession, the largest budget deficit in history – I
sometimes wonder if I really did him any favors by encouraging him to
But I am grateful every day that he and Michelle decided to give the campaign their all, and the American people decided overwhelmingly to give this new President a chance.
I believe that Barack Obama has the temperament, the intellect, the values, and the rare leadership abilities America needs not only to get through this present crisis, but to lay the foundation for a new American prosperity, with broader economic opportunity and security for all our people.
Historic first two months
Look at what he has achieved already. He’s been President for 78 days, and already he has taken major steps to repair our battered markets and economy.
Economic stimulus plan
Just two weeks after taking office, President Obama signed the most sweeping economic recovery bill in history.
The economic stimulus plan will save or create 3.5 million jobs over the next two years … and give 95 percent of American families an $800 tax cut, starting this month. …
It provides relief for states, workers and families, who are bearing the brunt of this crisis. Four billion dollars in stimulus funds to help our state through its budget crisis; extension of unemployment benefits and health insurance.
And it will enable us to start to rebuild America’s crumbling infrastructure -- investments that will serve this nation for decades.
A job only government can do
Last week, Congress passed our budget resolution. That’s the broad outline for next year’s federal budget.
During that debate, some of our friends in the other party offered amendments to block the President’s proposal. They say we need to cut government spending.
We do have to be concerned about government spending. Over the last eight years, the size of our national debt doubled. …
President Obama inherited a trillion-dollar budget deficit, which he has committed to cutting in half in four years.
We know that government can’t solve every problem. But there are some problems that can’t be solved without strong government leadership, and this recession is one of them.
America’s gross domestic product is about $14 trillion a year. We anticipate that this year, Americans will spend about $1 trillion less than they would ordinarily. That trillion dollars is about 7 or 8 percent of our nation’s economy. With businesses and consumers all cutting back, only government can fill that void right now.
Only government can break the vicious cycle that is crippling our economy, where a lack of spending leads to job losses, which leads to even less spending; where an inability to lend and borrow stops growth, which leads to even less credit.
Financial Stability Plan
And without a free flow of credit, our economy can’t recover – which is why President Obama and Treasury Secretary Geithner have also laid the groundwork for rescuing the banking system and restoring lending.
Their Financial Stability Plan increases the capital available to banks … and seeks out private capital to match the public investments used to clean up “toxic” assets.
It helps small businesses find loans.
And it brings greater transparency and accountability to the use of taxpayer money. That is critical because, as the President has said, repairing and rebuilding our economy is going to take patience and persistence. It’s also going to take the public’s trust.
If the American people think their tax dollars are being misused or wasted, public anger will increase. And the difficult task of fixing the economy will become even harder. For moral as well as practical reasons, that can’t be allowed to happen.
Ending the mortgage crisis
The Financial Stability Plan laid out by the President and Secretary Geithner does something else that is essential: it creates a fair and effective way to end the mortgage crisis.
Remember, this crisis started as a subprime mortgage crisis. Too many bad mortgages were written and used to create too many complex securities, which were then sold to too many unsuspecting investors around the world.
When the inevitable happened and many of those risky mortgages began to fail, the securities lost their value … investors lost their money … panic set in … and the markets froze up.
We tried letting the market solve the foreclosure crisis, but the crisis only deepened.
In February, 14,000 homes in Illinois were in foreclosure; that’s up 62 percent from a year ago.
Median home prices in our state fell nearly 21 percent last year. In Chicago, the drop was nearly 25 percent.
No zip code has been spared. You can find foreclosures in neighborhoods of million-dollar homes. But some neighborhoods are being devastated by this crisis.
Albany Park is on the north side of the city, close to Lincoln Square. Since this mortgage crisis started in 2006, foreclosures in Albany Park have increased 374 percent .
I was recently invited there to meet the residents of the 4400 block of North Kedzie.
In the middle of a community of neat, well-kept family homes was a three-flat, boarded up with plywood, with a “for sale” sign. The building had been vandalized and the plumbing ripped out.
The neighbors suspected that the vacant building had become a haven for gang activities, and they feared for their safety and the safety of their kids.
That one foreclosed property was changing life and property values in what had been a solid neighborhood and the people still living there were watching the cancer of that foreclosed home spread. They were madder than hell.
Zip code 60629
The Chicago Lawn neighborhood – zip code 60629 – is right next to Midway Airport.
You know the neighborhood from flying into and out of the airport: neat and compact blond-brick bungalows with a fair share of above-ground swimming pools in their backyards. Starter homes for a lot of young couples, and a solid neighborhood for working families.
Not long ago, a community group called the Southwest Organizing Project showed me a map of zip code 60629. The map had a red dot for every home in foreclosure as of September last year before the foreclosure fires really started to rage. I counted only five blocks in that entire zip code then that were spared.
But foreclosure is not the end of the story. The New York Times ran a story last week on the latest phase in the foreclosure crisis: “bank walk-aways.”
According to the article, in many cities, “[b]anks are quietly declining to take possession of properties at the end of the foreclosure process – most often because the cost of the ordeal, from legal fees to maintenance – exceeds the diminishing value of the real estate.”
We can’t rely on markets alone to solve catastrophic market failures. The President’s Homeowner Affordability and Stability Plan recognizes that fact.
It will help between 7 and 9 million homeowners stay in their homes by helping them refinance into lower mortgages if their loans are in good standing, or restructure their mortgages if they are in danger of losing their home to foreclosure.
Lenders will receive incentives to restructure mortgages on fair terms. And they will get a better deal than they would get in foreclosure -- without the legal headaches and expenses of foreclosure.
And if lenders still refuse for some reason even to discuss modifying a mortgage, the President’s plan gives homeowners new leverage to negotiate by allowing bankruptcy judges to re-write mortgages on primary residences.
No mortgage could be lowered below the fair market value of a home, so lenders would come out ahead of where they would with a foreclosure.
I’ve been proposing this idea for some time. When I first suggested it, I said we need to do this because we are facing the threat of nearly 2 million foreclosures in two years. People said: Durbin, you’re crazy. That can’t happen. …
That was less than a year-and-a-half ago. Today, Goldman Sachs warns that if we fail to halt this mortgage meltdown, we could see 13 million foreclosures over the next five years. That’s one out of every five mortgages in America. A foreclosure on every block.
Mayor Daley and city officials … Sheriff Tom Dart … Attorney General Lisa Madigan … Treasurer Alexi Giannoulias … and others in our state are all demonstrating real leadership and ingenuity in battling this foreclosure crisis. But they can’t hold back the tide by themselves. We need a national solution to this national crisis.
The Senate is likely to take up an important housing bill, with my proposal in it, later this month. I’m working with the banking industry and advocates for troubled homeowners to improve that bill, and I’m hopeful this balanced, common sense idea will soon become law.
PREVENTING FUTURE CRISES
Administration’s Plan for Comprehensive Reform of Financial Markets
Once we get through this crisis, we can’t simply go back to the way things were before.
AIG Financial Products, the company whose reckless risk-taking and dramatic overleveraging nearly brought down the global finance system, was able to operate as it did in part because it set up shop in London, beyond the reach of US regulators. AIG’s London caper may have escaped the reach of U.S. regulators, but the bailout of the mess they created landed in the laps of U.S. taxpayers.
The government agencies charged with overseeing our financial markets didn’t keep up with changes in the markets and didn’t recognize the new risks.
And a large part of our financial system -- hedge funds, nonbank lenders, over-the-counter derivatives trading, and private equity funds – are not properly overseen by any regulatory agency. None.
As Secretary Geithner said recently in testimony before Congress: “Our system failed in fundamental ways. To address this will require comprehensive reform. Not modest repairs at the margins, but new rules of the game.”
The challenge is to find the right balance. The new rules have to be strong enough to protect the safety, soundness and integrity of our markets – without stifling the American entrepreneurial spirit – the innovation, creativity and prudent risk-taking that have made our economy the envy of the world.
To find that critical balance, President Obama and Secretary Geithner are proposing the creation of a new systemic regulator that would be charged with identifying and preventing systemic risks that could threaten our entire economy.
They are working to eliminate dangerous gaps in the current regulatory structure.
As he did last week at the G-20 meeting in London, President Obama is working to foster international cooperation for similar comprehensive reform measures in other nations – so American companies aren’t hamstrung in the global marketplace.
Financial Product Safety Commission
President Obama has also said we need new rules to protect consumers and investors, and he is right.
Right now, financial service companies are regulated by a crazy quilt of 10 different federal regulators. Each has some nominal responsibility to look out for consumers, but none has consumer protection as its primary focus.
We have a federal agency – the Consumer Product Safety Commission -- that warns us about toxic paint in our kids’ toys. But we don’t have a federal agency that can warn the American public about toxic mortgages and other high-risk credit products.
I have introduced a bill to create a new agency -- the Financial Product Safety Commission -- to evaluate mortgages, credit cards, car loans and other consumer financial products, and weed out the products that are so risky or misleading that they are dangerous.
Companies that offer good products at reasonable rates will have nothing to fear. In fact, they will benefit by not having to compete against unscrupulous companies that make money by misleading customers and trapping them in debt.
Elizabeth Warren, the Harvard law professor who is overseeing implementation of the TARP program, first proposed this idea. She believes that such a watchdog agency could have prevented the economic crisis we’re now in by banning the sale of risky sub-prime mortgages to people who couldn’t afford them and didn’t know what they were getting into.
It ought to be part of the new rules for our financial system, and I am hopeful it will be.
The savings will far exceed the costs. Mattel Toys alone lost more in sales from last year’s toy recalls than the entire annual budget of the Consumer Product Safety Commission. Peanut producers lost more from the recent peanut recall than the entire annual budget of the Food and Drug Administration.
Appropriate government oversight is not only important to consumers, it’s important to business. The Chicago Mercantile Exchange is a global success because it is an honest marketplace, managed by professionals, guided by the rule of law and standards of transparency and accountability guaranteed by our government. Between 1997 and 2007 trading volume increased more than tenfold at CME; staffing levels at the CFTC dropped 21 per cent during that same period and the agency’s technology still lags behind the challenge. A strong CFTC is essential to the reputation and continued success of the CME in a global economy.
REBUILDING A STRONG, SUSTAINABLE AND JUST ECONOMY
President Obama’s first budget
The last point I want to make is this: To quote President Obama, “We must not use the need to confront [financial problems] as an excuse to keep ignoring the long-term threats to our prosperity: the costs of health care and our oil addiction, the education deficit, and our fiscal deficit.”
Even as we dig ourselves out of this current economic crisis and rewrite the rules to prevent the next crisis, we have to plan and invest now in America’s long-term economic strength.
The stimulus plan was a first step. Last week, Congress took the next step, passing a budget resolution that reflects the President’s priorities.
The budget resolution makes the long-term investments -- in health care, education and the environment -- that we must make for long-term economic growth.
The budget choices the President has made and Congress has endorsed will was make our economy stronger, more sustainable, and more just.
It also includes a commitment to reduce the deficit. It will restore balance and responsibility to the federal budget, and sustainable growth and opportunity to our economy.
There is another passage in your 75th anniversary album that caught my attention – besides Melvin Traylor wise definition of “practical economics.”
It was a letter to the Club’s second president from the president of a local printing company. The letter is dated Nov. 17, 1933 – the depths of the Depression.
The Club member wrote that he had recently seen a petition that would be sent to President Roosevelt, quote: “to persuade him to stop spending the vast sums of money for land improvements, power development, and other supposedly relief measures. “
“[The] feeling,” he said, “is that the children, and our children’s children, are the ones who will have to pay through the nose.”
Well, we are the children, and the children’s children, that gentleman was worried about.
We hear his words echoed today by some who oppose the President’s plans to get us safely through this crisis and to invest in America’s long-term prosperity.
When you hear those critics, look at Chicago’s magnificent Lake front, at Grant Park, the Outer Drive, or Midway Airport – all completed under the New Deal. And remember how inspired public investments can yield great benefits for generations.
With President Obama’s leadership, a united America, and the support of leaders like you, I have no doubt that we will weather this crisis. We will write new rules to guard against another crisis like this in the future. And we will leave our children, and our children’s children, an economy and a society that is more prosperous, more sustainable and more just.
Thank you again for inviting me to join you this evening. And now I would be happy to try to answer any questions you may have.
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