tagged w/ Tim Fernholz
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by Zach Carter, Media Consortium blogger
President Barack Obama’s decision to appoint Elizabeth Warren to set up the new Consumer Financial Protection Bureau (CFPB) couldn’t have come at a more critical time.
Over 44 million Americans were living in poverty last year. That’s the highest number on record. The Great Recession is taking a terrible toll on everyone outside the executive class, but policymakers have been reluctant to pursue an economic agenda that improves the lives of ordinary Americans.
The uniqueness of Warren’s new post raises plenty of questions, but it puts a fierce defender of the middle class in office at a time when the middle class most needs help.
So what exactly will Elizabeth Warren do?
As Annie Lowrey emphasizes for The Washington Independent, it’s not entirely clear what Warren’s new job will be or how long she will have it.
Consumer advocates have pushed hard to get Obama to name Warren the first director of the new CFPB. Obama, citing Senate confirmation hurdles, has instead charged Warren with setting up the agency as an adviser to both the Treasury Department and Obama himself. The post allows Warren to get to work setting up the agency, but not the power to start drafting regulations. It’s good to see her get a post on the Obama team, but we do not yet know how influential she will be.
Tim Fernholz sums up the pros and cons of Warren’s appointment in a piece for The American Prospect. There are very real drawbacks to the move. Confirming Warren for a permanent post as director of the CFPB will be harder next year—Democrats are likely to lose Senate seats in November.
It’s not impossible, but if confirmation was Obama’s chief worry, he’s only made it harder on himself by kicking the nomination down the road. This is true for whoever Obama picks—the bank lobby is going to scream about anybody other than a bank lobbyist, and Republicans are filibustering almost everybody Obama nominates to any post, including critical economic policy positions at the Federal Reserve.
Getting to work
But the new role also gets Warren on the economic policy team right away, and allows the agency to begin staffing up under her stewardship, even if it can’t draft regulations until a permanent director has been confirmed. There will finally be a strong voice on Obama’s economic team prioritizing household financial security above all else. That’s very good news.
Whatever the formal powers of Warren’s new post, we can be sure she’ll have a significant impact on policy making. Her current role as chair of the oversight panel for the Wall Street bailout was given almost no power at all by Congress, yet Warren has transformed it into the only real source of economic accountability in Washington, D.C. That’s no easy task, and we can expect similar courage and creativity from her as a member of Obama’s economic team.
What will the CFPB look like?
Warren herself seems to be pleased with the appointment. In a piece for AlterNet, Warren says that she “enthusiastically agreed” to take on the new position, and explains the vision for the CFPB:
“The new consumer bureau is based on a pretty simple idea: People ought to be able to read their credit card and mortgage contracts and know the deal. They shouldn’t learn about an unfair rule or practice only when it bites them — way too late for them to do anything about it. The new law creates a chance to put a tough cop on the beat and provide real accountability and oversight of the consumer credit market.”
Sea change
That sounds common-sense, but it’s exactly opposite to the past three decades of deregulation. Reversing the damage caused by that anti-regulatory fervor has been extremely difficult. The Obama administration needs Warren’s voice now more than ever. In the early days of his presidency, Obama pushed through a stimulus plan that has prevented the middle class from falling completely off the map. But those efforts are expiring, and they haven’t been enough to prevent millions of families from sinking into poverty.
Alarming poverty rate
In a harrowing piece for The Nation, Kai Wright notes that more people are now impoverished than at any time since the government began tracking poverty data. The poverty rate rose to 14.3 percent, with 44 million Americans—roughly one in seven—living in poverty. More than one-third of black and Latino children are growing up impoverished.
So it’s no surprise that income inequality is also at its most severe in decades. As Kevin Drum notes for Mother Jones—for the past thirty years, more and more American wealth has been concentrated among the richest citizens. The richest 1 percent of U.S. earners are raking in 10 percent more of the national income today than they were at the start of the Reagan administration, while the poorest 95 percent have seen their share of the national income decline.
Numbers like these aren’t a fluke—they’re a direct result of policies that put the interests of Wall Street and other powerful corporate players ahead of the well-being of households. Nor were these policies adopted in a vacuum– Wall Street lobbied hard for the right to pillage our pocketbooks, and when it couldn’t rewrite the rules, it simply broke them while bank-friendly regulators looked the other way. Elizabeth Warren can’t fix all of this on her own, and she’ll surely face opposition from some members of Obama’s inner circle. But families couldn’t ask for a better advocate, and her appointment couldn’t come at a better time.
This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.by Zach Carter, Media Consortium blogger
President Barack Obama’s decision to... more
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by Zach Carter, Media Consortium blogger
Over the past decade, Fannie Mae and Freddie Mac transformed themselves into some of the worst-run companies in recent history. But contrary to current talking points, the firms’ failings had almost nothing to do with their programs for low-income borrowers. As policymakers debate what should be done with the mortgage giants, a battle is now beginning in which the very availability of affordable housing for the middle class may be at stake.
A history of affordable housing
As Tim Fernholz emphasizes for The American Prospect, before the U.S. government created Fannie Mae in 1938, mortgages were very pricey 5-year loans, so expensive that only very wealthy Americans could ever hope to own a home. Fannie Mae changed all that by rolling out the 30-year mortgage, which lowered monthly payments for borrowers by providing a government guarantee against losses for banks. It worked.
But as Fernholz notes, without some kind of government involvement in the housing market, home ownership will revert to its pre-Depression status a privilege reserved for elites. Policymakers will have to implement significant changes in the mortgage finance system to ensure stability in the U.S. housing market, but whatever changes may come, a robust role for the government in housing will be essential.
Fannie and Freddie have been justifiably but inaccurately maligned in the aftermath of the mortgage crisis. In recent years, their executives ran the firms like out-of-control hedge funds, lobbied Congress like arrogant Wall Street banks and did nothing beyond the bare minimum required by law to help low-income borrowers. But Fannie and Freddie did not go headlong into subprime mortgages—the primary source of their losses came from loans to relatively high-quality borrowers.
The terrible mortgages that crashed the economy were issued by banking conglomerates and Wall Street megabanks—Fannie and Freddie were almost entirely divorced from that line of business. The problem with Fannie and Freddie was largely structural– investors and managers saw the potential for big profits from taking on loads of risk, but believed (accurately) that the government would eat losses if those risks backfired. So Fannie and Freddie ramped up risk, taking on as many mortgages as they could while keeping as little money as possible on hand to cushion against losses. Eventually the strategy destroyed them.
Fixing the mortgage system
Exactly how the government stays involved in the mortgage market is still open to debate, as Annie Lowrey emphasizes for The Washington Independent. Nearly every member of the private sector who testified at a recent housing forum sponsored by the Treasury Department endorsed some kind of government backing for the housing market. This was a meeting of private-sector bigwigs—no community groups or affordable housing advocates were invited to speak at the meeting. Proposals ranged from scaling back government support for some types of mortgages, to the full nationalization of Fannie Mae and Freddie Mac (Fannie was a nationalized entity for the first 30 years of its existence).
In other words, the government is going to have to keep subsidizing housing, but it will have to find new ways to do it. The old Fannie and Freddie model didn’t work, but the private sector will be unable to get the job done by itself. Private-sector banks and mortgage brokers, after all, were the source of all the predatory loans issued during the subprime crisis, and the source of all of the most offensive loans that drove the economy off a cliff.
Inefficient and often predatory players on Wall Street are still causing problems today. As Ellen Brown highlights for Yes! Magazine, the mortgage system is so bizarre that banks are finding themselves unable to document their right to foreclose on properties—and courts are (fortunately) refusing to let them do it.
It’s a rare situation in which borrowers may actually hold the higher legal ground against powerful corporations. About 62 mortgages are registered through an electronic documentation system called the Mortgage Electronic Registration System (MERS), which helps banks with the foreclosure process. But MERS has repeatedly been unable to show proper documentation assigning a mortgage to a specific bank, and courts are now challenging its right to foreclose on behalf of big banks.
That’s good news, Brown notes, because MERS’ shoddy documentation has made it very difficult for borrowers to figure out who actually owns their loan. If you don’t know who owns your mortgage, it’s impossible to modify it if you find yourself unable to pay it off.
As Shamus Cooke argues for Truthout, even successful innovations like the 30-year mortgage are beginning to look a little outdated in an era of heavy, chronic unemployment. Many people can no longer expect to be gainfully employed for three decades on end. If the government refuses to repair our damaged jobs infrastructure, even simply maintaining the status quo in housing could become impossible.
Deficit reduction is not a cure-all
That brings us to another favorite conservative bogeyman, the federal budget deficit. The deficit and jobs generally stand in direct opposition. Creating jobs costs money, and spending that money expands the deficit. Cutting the deficit, by contrast, means cutting support for jobs.
As Steve Benen emphasizes for The Washington Monthly, conservative lawmakers are still harping on deficit reduction as a cure for everything that ills the nation, when the real solution to our problems is a serious jobs bill.
Even if the deficit were a huge problem, trying to cut important social services in the middle of a deep recession is not a good way to go about solving it. Drastic cuts to government spending in a recession result in lower tax returns for the government, which can often be self-defeating, especially in the face of expanding joblessness. The resulting push for deficit reduction—known in economic circles as an “austerity policy,” is better understood as the active pursuit of economic decline. As economist Robert Johnson notes in a New Deal 2.0 piece carried by AlterNet:
Deterioration of government services is bad enough, but imposing austerity due to lack of trust in a time of high unemployment and slack resources is tragic. It is a means to accelerate the decline of living standards of those who have taken a beating since 2007. Double dip or stagnation is too subtle a distinction. We are amidst an unfolding collective choice to pursue a downward spiral.
The government has taken several dramatic steps to repair the nation’s financial system, but it has done almost nothing to help troubled borrowers and not nearly enough to create jobs. Some of this is due to misguided policies enacted by President Barack Obama, and much of it is due to cynical obstructionism. But we cannot repair the economy without fixing jobs and housing. Both are still in a full-blown crisis, and policymakers should feel an urgent need to deal with them.
This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.by Zach Carter, Media Consortium blogger
Over the past decade, Fannie Mae and... more
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by Zach Carter, Media Consortium blogger
The crazy conservative assault on government spending has become one of the most irrational economic policy debates in recent years.
The Republican Party is trying to maintain the fiction that direct economic relief for millions of working Americans is a fiscally irresponsible splurge, while simultaneously backing hundreds of billions of dollars worth of economically useless tax cuts for the wealthy. The demands are staggering: cut food stamps for the poor, but preserve perks for billionaires.
As Tim Fernholz notes for The American Prospect, serious economists do not believe that President George W. Bush’s tax cuts for the rich are an effective way to stimulate the economy. Rich people don’t spend money, they save it. We need lots of consumer spending to reinvigorate economic growth and put people back to work.
If we want to create jobs, we need to put money in the hands of people who will spend it. At minimum, that means directing aid to the unemployed and providing federal assistance to states, so that local governments don’t lay off hundreds of thousands of teachers and cops. This is not only the decent, humane thing to do when the economy is struggling, it actually helps. Money the government spends to save a teacher’s job goes out into the economy to pay bills and buy products. For states, this also means that basic public infrastructure is preserved—kids learn and the streets stay safe.
Stonewalling aid
But as the editors of The Nation highlight, Republican politicians have made it nearly impossible to get that critical aid out to American families. They’ve demanded strict measures for these benefits, forcing Democrats to cut food stamps—that’s right, food stamps—in order to keep teachers in school and cops on the street.
Millions of families all over the country depend on food stamps. In the middle of the worst recession since the Great Depression, Republican politicians took a stand to take food from the mouths of children—and they did it while supporting a $300 billion a year in handouts for the rich.
There is no immediate budget crisis. The government can borrow money at record low interest rates, meaning that investors don’t believe the federal budget deficit is too big. But if conservatives were really serious about shrinking the deficit, they’d be encouraging economic growth, not backing billionaire giveaways.
Banking on predation
Our perverse economic policy preferences aren’t limited to budget priorities. As Amy Goodman and Juan Gonzalez emphasize in a segment for Democracy Now!, inadequate rules governing bank lending practices were a fundamental cause of the recession, and are actively hampering the economy’s recovery today.
The Community Reinvestment Act of 1977 (CRA) required banks to make good loans to credit-worthy borrowers in the bank’s community. The idea was simple: If a bank wants to benefit from a community’s resources, it has to give something back and help strengthen the local economy.
Conservatives have lashed out at CRA, blaming it for the mortgage crisis, but the truth is that CRA loans had almost nothing to do with the subprime disaster. CRA loans are affordable loans to creditworthy borrowers—the whole point of subprime lending was to charge outrageously high rates to borrowers with poor credit.
In reality, policymakers’ refusal to expand CRA exacerbated the crisis. Only traditional banks are subject to CRA guidelines, and during the past two decades a host of independent mortgage companies have taken over large swaths of the mortgage market. These unregulated firms issued a lot of lousy loans, often working under direct, explicit instructions from bigger banks, who outsourced their lending in order to get around CRA rules and rip off whole neighborhoods.
Lending is critical to moving the economy out of the recession, and CRA provides reliable, proven rules to get banks back in the business of helping our communities and our economy.
Overdrafting the banks
But a host of other banking policies are also making the recession worse. One of the most egregious is the overdraft fee, which, as Annie Lowrey notes for The Washington Independent, scored banks over $38 billion in 2009 alone. To put that in perspective, the entire banking industry earned a combined profit of $12.5 billion last year, which means that the banks are making their money from gotcha fees, not from productive lending.
Banks have spent years charging overdraft fees without telling their customers that they’re subject to such gouging. Lowrey notes that the average fee is $35 on an average charge of $17. But they also have engaged in a backdating scam, rearranging the order of their customers’ purchases in order to charge more overdraft fees. As I explain for AlterNet:
“Say you’ve got $80 in your checking account, and you decide to pay some bills and run some errands. You spend $30 on gas and another $20 on your water bill. Later, you head to the grocery store and spend $81—oops!—on groceries. To reasonable people, it looks like you’re going to get hit with an overdraft fee. That last purchase put you over the line. But instead, the banks reorder your transactions, processing the groceries first. Now you’re below zero, and they can charge additional fees for your gas and water bills. Wells Fargo charged up to $39 per overdraft. This one mistake cost you $117, and nobody even bothered to tell you it was going to happen.”
Fortunately, a federal judge in California just ruled that this backdating scam was grossly illegal, and ordered megabank Wells Fargo to pay back every penny that it swindled from its California customers with the practice since 2004. But Wells Fargo was not alone—every large bank in the United States does the exact same thing, and it’s allowed them to score billions in deceptive profits. A similar ruling in a larger case against all of the big banks could end a transparent outrage, and restore an enormous amount of unfairly seized wealth to citizens all over the country.
We don’t need to be pushing policies that benefit billionaires at the expense of everyone else. The Bush tax cuts are an unnecessary economic waste. Financial policy that puts the interests of a few giant predatory banks above those of the entire citizenry makes no economic sense.
This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.by Zach Carter, Media Consortium blogger
The crazy conservative assault on... more
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by Zach Carter, Media Consortium blogger
Image courtesy of Flickr user Mark Sardella, via Creative Commons LicenseMore than two years after the collapse of Bear Stearns, the House and Senate finally ironed out their differences on Wall Street reform in the wee, small hours of Friday morning. The bill now goes back to both the House and Senate for final approval, but it’s fate in the Senate is uncertain following the defection of Tea Party Sen. Scott Brown (R-MA).
The resulting bill has several things going for it, but largely misses the critical structural lessons of the Great Financial Crash of 2008. As Wall Street continues to score epic profits and grotesque bonuses over the coming months, progressives must be committed to continuing the fight for a fair economy.
Megabanks intact
As Andy Kroll explains for Mother Jones, the bill essentially lets too-big-to-fail banks off the hook. Megabanks like J.P. Morgan Chase and Citigroup will not be broken up into smaller institutions that could fail safely, nor will they be required to exit many of their most reckless business ventures. One of the most promising reforms still on the table as Congress moved on the bill was a plan to ban banks from gambling with taxpayer money—and Congressional leaders sabotaged it at the last minute.
As Tim Ferhnolz notes for The American Prospect, instead of strengthening the bill by negotiating with committed reformists like Sens. Maria Cantwell (D-WA), and Russ Feingold (D-WI), Senate leadership chose to cut a deal with Tea Party favorite Scott Brown (R-MA). Brown’s price? Allowing banks to gamble by running their own proprietary hedge funds. After Senate negotiators gave Brown what he wanted, he suddenly reversed his support for the bill on Saturday morning.
Derailed by in-fighting
Essentially, petty interpersonal spats overwhelmed the push for real reform. Cantwell and Feingold’s objections to the legislation were correct so far as policy substance were concerned, and Cantwell always made clear that her vote could be won by simply closing a huge loophole in the bill. But after the two Democrats voted against the bill for being unnecessarily weak on the Senate floor, Sen. Chris Dodd (D-CT) simply shut them both out of the negotiation process. This would be funny, if it weren’t true.
Brown had already proved his ability to go back on his word with Senate negotiators just a few weeks prior. He was a committed “yes” vote when the bill went to the Senate floor, but unexpectedly reversed his position at the last minute, causing the legislation to fail the first time it came up for a vote. But instead of trying to cut a deal with progressives, Dodd decided to roll the dice again with Brown, and the legislation now finds itself in limbo, with Senate approval uncertain.
A slight improvement
But despite its unnecessary shortcomings, the Wall Street reform bill is still an improvement over the status quo, as I emphasize for AlterNet. We get a stronger set of consumer protections, along with a thorough audit of the Federal Reserve. The Fed served as the government’s principal bailout engine throughout the crisis, pumping $4 trillion into the nation’s financial system with almost no accountability or oversight. Bringing these massive bailout operations into the light should build momentum for broader reforms, but it’s up to engaged citizens to make that a reality.
There are plenty of major policy battles brewing that directly involve the financial industry. As Dean Baker notes for Truthout, the current economic policy agenda is a Wall Street executive’s dream. Lawmakers are seriously considering slashing Social Security while ignoring an unemployment catastrophe and leaving troubled homeowners out in the lurch. These are all catastrophic economic errors in the making.
Foreclosed again
As Annie Lowrey reports for The Washington Independent, Fannie Mae unveiled a new policy last week to punish borrowers who owe more on their mortgages than their home is worth. As home prices have plunged in value over the past three years, huge swaths of borrowers owe their bank hundreds of thousands more than their home is worth. Now many borrowers, realizing that they are pissing away huge amounts of their monthly income to a ruthless bank, are making the perfectly rational decision to walk away from their mortgage.
In cases where borrowers can, in fact, afford to continue making payments, but simply do not want to waste their money, walking away is called a “strategic default,” and there is nothing wrong with it. Both parties knew the terms of the mortgage agreement when it was signed, and a well-paid, professional banker signed off on it. Borrowers are not violating a contract by failing to pay—in a mortgage, the borrower keeps paying the bank, or the bank gets the house. Walking away just means that the bank gets the house.
But, of course, bankers are upset that they didn’t predict the downturn in home prices, even though this is part of their job description, and the reason they get paid big bucks. When borrowers walk away, bankers lose money. So banks putting pressure on the government, Fannie Mae and Freddie Mac to punish borrowers who walk away, and Fannie Mae has acquiesced by agreeing to shut borrowers out of the mortgage market for seven years, and harassing them in court for unpaid mortgage balances.
Your right to rent
As Greg Kaufmann emphasizes for The Nation, there are much better policy alternatives. Instead of slamming borrowers, the government could encourage bankers to write down their total debt burden to whatever their house is currently worth. Bankers don’t want to do that, because it means taking a loss, and when agencies like Fannie Mae are willing to intimidate borrowers to line bankers’ pockets, why should bankers agree to play ball?
According to Kaufmann, one of the best ways to get banks to negotiate seriously with borrowers is to establish a right-to-rent policy. Borrowers who receive a foreclosure notice would get the right to rent their current home at a fair market rate, determined by a court, for up to five years. Bankers don’t want to be landlords, so the provision would force them to negotiate with borrowers in trouble by imposing an unpleasant new duty on the bank. If bankers still didn’t want to negotiate, borrowers would have five years to find a new place to stay. It’s great policy, and legislation to implement it has already been introduced in the House.
The final version of the Wall Street reform bill is worth supporting, but it won’t fix the foreclosure crisis or prevent bankers from taking outrageous risks that put the entire economy in jeopardy. Many key reforms are still necessary, and it’s up to progressives to keep the pressure on lawmakers to make sure they are enacted in the coming months.
This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.by Zach Carter, Media Consortium blogger
Image courtesy of Flickr user Mark... more
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http://www.themediaconsortium.org/2010/06/08/weekly-audit-deficit-reductionselling-out-to-wall-street/
by Zach Carter, Media Consortium blogger
In the fall of 2008, decades of finance-first, bankers-know-best economic policies coalesced to create one of the worst economic crises in history, one that the banks themselves could not survive without staggering levels of government support.
Yet astonishingly, nearly two years after the crash, Wall Street is still setting the economic agenda in Washington. As Congress begins to examine broader economic policy, lawmakers are under heavy Wall Street pressure to reduce the federal budget deficit—even though that could mean deepening the jobs crisis without any substantive economic benefits.
Small-bore reforms
At the same time, the financial reform bill that Congress is on the verge of passing leaves quite a bit to be desired. As the editors of The Nation emphasize, that legislation includes several small-bore fixes to ease the damage caused by Wall Street excess, but almost nothing to actually curb the excesses themselves. The capital markets casinos will largely be left untouched. Congress still has time to improve the bill over the next month as the House and Senate iron out their differences, and many useful reforms remain in play.
Nevertheless, Wall Street’s lobbyists have succeeded in taking the most important reforms off the table. We will not break up the biggest banks this year, nor will we tax reckless financial speculation. We aren’t even banning economically essential banks from participating in risky securities businesses.
Et tu, Buffet?
As Annie Lowrey notes for The Washington Independent, the crisis has even discredited Warren Buffett, one the few financial superstars who previously had a reputation as a “straight-shooter” that invested in responsible enterprises.
Buffett was once a harsh critic of credit rating agencies, the firms who slapped top ratings on toxic mortgage-backed securities and derivatives. But Buffett himself is also a top shareholder in Moody’s, one of the worst ratings agencies. The Financial Crisis Inquiry Commission had to compel Buffett’s testimony at a recent hearing via subpoena after Buffett turned down multiple requests to appear. At the hearing itself, Buffett did everything he could to pass the buck from himself and Moody’s to any other possible target.
Slashing the deficit
Wall Street’s ugly influence on economic policy extends far beyond the realm of bank regulation itself. Right now, financial elites are pushing hard on a right-wing plan to slash the federal budget deficit, and even many moderate Democrats are coming out in support of reduced government spending.
This strategy is a tremendous political blunder, as Steve Benen emphasizes for The Washington Monthly. It’s true that the deficit does not poll very well—but the deficit is only one side of the issue. Cutting the deficit means slashing federal support for jobs—we can help the economy or we can slash the deficit, but we cannot do both at the same time.
Nearly everyone believes that creating jobs should be a top priority for the government, but if politicians only ask questions about the deficit, they won’t hear answers about the economy. The political imperative is clear, as Benen notes:
This really shouldn’t be complicated: invest in more job creation, help struggling states as they keep laying off workers, and make clear to voters that the economy is more important than the deficit. Do this immediately, without apology.
Replacing Social Security with credit cards?
Wall Street loves cutting social services in the name of deficit reduction. Every public good that can be efficiently provided for by the government can also be inefficiently provided by the private sector—replacing public benefits with corporate profits. The bank lobby would like nothing more than to replace Social Security with credit cards for senior citizens. Wall Street doesn’t make a dime on the government’s Social Security payments—but they can make a killing on a privatized market.
Weak job growth=Weak private sector
Lest there be any question about whether or not the government needs to take strong action to strengthen the labor market, take a look at Friday’s jobs report. As Tim Fernholz notes for The American Prospect, this report was the most disappointing piece of economic news in months. While the economy gained 431,000 new jobs during the month, 411,000 of them were temporary hires by the U.S. Census, meaning the private sector is not able to support much new hiring.
There’s a critical lesson there: The only serious engine of job growth in the month of May was the federal government. Absent government hiring, the economy is not improving at all. There is an almost bottomless supply of critical social needs that require work right now, but no private-sector momentum to meet those needs.
The BP oil catastrophe should underscore how important new, green energy is to the U.S. economy—yet U.S. efforts to develop green energy solutions have fallen far behind those of China and other industrial powerhouse nations. Major federal investment into the research and implementation of green energy would be good for our environment and good for our economy.
Don’t let social services suffer
But astoundingly, the advice on the world economy currently coming from top policymakers at the Federal Reserve, the International Monetary Fund and European central banks is echoing the bank lobby line: Slash social programs now, and let the job market fend for itself. As Dean Baker emphasizes for AlterNet, these are the exact same policymakers who missed the housing bubble, made the wrong calls on bank regulation and sent the global economy into freefall.
There has been little change in personnel and no acknowledgment of error at the central banks whose incompetence was responsible for the crisis . . . . their agenda seems to be the same everywhere, cut back retirement benefits, reduce public support for health care, weaken unions and make ordinary workers take pay cuts.
In short, Wall Street and the Wall Street policy agenda remain ascendant, despite economic catastrophe. In the Great Depression, the government actually learned its lesson—we regulated the banks, created Social Security and put millions to work through government hiring programs. That same basic agenda is needed today. Failing to meet it could well mean decades of economic decline.
This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.http://www.themediaconsortium.org/2010/06/08/weekly-audit-deficit-reductionselling-out-... more
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by Zach Carter, Media Consortium blogger
Image courtesy of Flickr user clementine gallot, via Creative Commons LicenseThe job market in its worst state since the Great Depression and is putting tremendous strain on millions of Americans. Without action from Washington, D.C., the unemployment rate will remain elevated for years to come, and almost certainly above 9 percent through the end of 2010. Public esteem for economic policymakers isn’t doing so hot either. There are several simple steps that President Barack Obama and Congress could take to create jobs, but of late, neither have shown much interest in doing so.
Jobs matter
As Tim Fernholz emphasizes for The American Prospect, one of the best opportunities to repair the job market is a piece of legislation authored by Rep. George Miller (D-CA). The bill’s strategy is straightforward: Local governments pinched by the recession can apply for federal funds to ensure that teachers, cops, and other public servants are not laid off in the name of balanced budgets. Local governments that have already let employees go could apply for funding to re-hire them.
The result would be a clear win for the economy. Miller estimates that his bill could create 750,000 jobs, while the Economic Policy Institute expects the bill could create as many as 945,000. It’s also a smart political move—Obama’s political adversaries would no doubt find some way to criticize the move (they invented death panels for health care, after all), but as Fernholz notes, voters care much more about getting back to work than they do about ideological warfare or abstract bloviations about the federal budget deficit.
The deficit vs. jobs
And the federal budget deficit is no excuse for inaction on jobs. In the middle of a recession, providing funding for jobs can ultimately be deficit-reducing. More people working means more people buying goods and services. That means higher tax receipts for the government on a variety of fronts.
The deficit only matters if it is so severe that investors are skittish about lending money to the government. We would see this nervousness in the interest rates on U.S. Treasury bonds—the rate would be very high, as investors demanded a high return for the risk they were taking on. But in fact, interest rates are very low—the interest rate on 30-year bonds is currently just over 4 percent, while it frequently eclipsed 9 percent during the presidency of George H. W. Bush.
War doesn’t improve the economy
But if lawmakers wanted to take action on the deficit, there is no reason why they should do so at the expense of jobs. Congress just approved an additional $60 billion in funding for the war in Afghanistan, while refusing to provide a $28 billion for teachers in the name of deficit reduction. Congress has officially spent $1 trillion on the wars in Afghanistan and Iraq, as Robert Greenwald notes for AlterNet, wars which have done little to improve either U.S. economic or foreign policy goals:
These wars aren’t making us safer. They aren’t worth the cost, and we don’t need them. What people do need are jobs and help when they don’t have enough work or any work at all. But instead of leading on the jobs issue, they’re delaying and dissembling about the cost– while spending trillions on war.
Indeed, the failure of Congress to take action on jobs before its Memorial Day recess means that over one million Americans will stop receiving unemployment benefits within a month’s time.
Tax time
As Art Levine emphasizes for Working In These Times, spending is only half of the budget equation. The other half is revenues, which means taxes. There are all kinds of ways that the government could responsibly raise taxes and use that money to create jobs. One political no-brainer would be requiring hedge fund mangers and private equity kingpins to pay taxes at the same rates as those of other billionaires.
Thanks to a George W. Bush-era tax cut, these Wall Street titans are taxed at rates as low as 15 percent, dramatically lower than the 35 percent tax rate for rich people who make their millions in the form of salary rather than interest on investments. Levine also details a host of jobs initiatives that were ultimately axed in favor of concerns about the deficit.
Tax the speculators
As Sarah Anderson notes for Yes! Magazine, taxing financial speculation itself could help give our economy a double jolt. By taxing risky Wall Street gambling, the government could bring in billions to spend on jobs. If that tax discouraged Wall Street traders from engaging in risky gambling, the lower levels of speculation would help insulate our economy from the kinds of shocks it received in the fall of 2008.
Come November, the top concern at the polling place will correspond closely to the top concerns of consumer pocketbooks. Tough economic times will mean losses for incumbents in both political parties, but the party that does the most to create jobs will do the most to curb its losses. It will also be pursuing responsible public policy, and advancing the well-being of its constituents.
This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.by Zach Carter, Media Consortium blogger
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by Zach Carter, Media Consortium blogger
Congress returns from its April recess this week with financial reform at the top of its to-do list. With millions of Americans still bearing the brunt of the worst recession in 80 years, Congress needs to start protecting our economy from Wall Street excess, and repair the shredded social safety net that has allowed the Great Recession to exact a devastating human cost.
Big banks are an economic parasite
In an excellent multi-part interview with Paul Jay of The Real News, former bank regulator William Black explains how the financial industry has transformed itself into an economic parasite. Black explains that banks are supposed to serve as a sort of economic catalyst—financing productive businesses and fueling economic growth. This was largely how banks operated for several decades after the Great Depression, because regulations had ensured that banks had incentives to do useful things, and barred them from taking crazy risks.
The deregulatory movement of the past thirty years destroyed those incentives, allowing banks to book big profits by essentially devouring other parts of the economy. Instead of fueling productive growth, banks were actively assaulting the broader economy for profit. None of that subprime lending served any economic purpose. Neither do the absurd credit card fees banks charge, or the deceptive overdraft fees they continue to implement.
As Matt Taibbi explains in an interview with Amy Goodman and Juan Gonzales of Democracy Now!, banks didn’t just cannibalize consumers. They also went directly after local governments, bribing public officials to ink debt deals that worked wonderfully for the banks, and terribly for communities. In Jefferson County, Ala., J.P. Morgan Chase helped turn a $250 million sewer project into a $5 billion burden for taxpayers. The deal generated nothing of value for either citizens or the economy, but J.P. Morgan Chase was still able to line the pockets of its shareholders and executives. This kind of behavior was illegal, but the transactions involved were complex financial derivatives, which are not currently subject to regulation. To this day, nobody at J.P. Morgan Chase has been prosecuted for bribery or corruption.
Congress set to avoid tough regulations
There is a clear need for Congress to enact some firm restrictions against risky and predatory bank activities. But at the behest of Treasury Secretary Timothy Geithner, Congress is doing its best to avoid inserting any hard terms in legislative language, instead leaving the specifics to federal regulators to work out. As Tim Fernholz emphasizes for The American Prospect, this is an exercise in futility. Regulators already have the power to impose more stringent rules on nearly every arena of Wall Street business that matters (derivatives are a very noteworthy exception). If they wanted to fix things, they could do it without Congressional help. The trouble is, the financial sector has polluted most of the regulatory agencies, so that many regulators now act more like lobbyists for the banks they regulate, rather than law enforcers. Indeed, as I note for AlterNet, the top bank regulator in the U.S. spent over a decade lobbying for the nation’s largest banks before taking up his current job. If Congress doesn’t establish firm rules, regulators under future administrations would be free to simply undo any measures that the current agencies actually implement.
Megabanks equal mega risks
As Stacy Mitchell illustrates for Yes! Magazine, most of the problems in the financial sector are connected to the size of our banking behemoths. Big banks have enormous power—if they fail, the economy goes off a cliff. As a result, any responsible government wouldn’t allow any of our megabanks to actually fail. But knowing that the government will protect them from any true catastrophes, big banks take bigger risks—if the risk pays off, they get rich, if it backfires, taxpayers will suck it up. That puts the interests of big banks at odds with the public interest, and creates an economy where bankers don’t try to finance useful projects with a safe and steady return, but instead back crazy bets that just might pay off.
You can’t fix that problem with regulations or idle threats of taking down a big bank when it gets itself in trouble—the markets won’t believe it, and the banks will still take risks. The only solution, Mitchell notes, is to break up the banks into smaller institutions that can fail without wreaking havoc on the economy.
Economic inequality weakening the economy
All of this ties into rampant economic inequality in the United States. Since the 1970s, conservatives have waged a constant battle on the social safety net, shredding protections for ordinary people, while empowering corporate executives to take advantage of them. In an illuminating blog post for Mother Jones, Kevin Drum highlights the fact that average income has only rose from about $20 an hour in 1972 to $23 an hour today. This isn’t because workers were slacking off—productivity has increased at roughly five times that rate. In other words, nearly all of the economic gains since the Nixon era have accrued to the wealthy.
When people don’t have access to strong and improving income, they finance things with credit. But if wages never actually improve, that debt becomes a significant burden. When an entire society finds itself overly indebted, people stop buying things, and the economy tanks. The predation in the American financial sector makes this problem even worse.
But political theatrics are even trumping efforts to provide relief to those hit hardest by the recession. Sens. Jim Bunning (R-KY) and Tom Coburn (R-NE) have blocked the extension of unemployment benefits twice in the past month. As Kai Wright emphasizes for ColorLines, that recklessness puts up to 400,000 Americans at risk of losing their unemployment checks. That’s a human tragedy—hundreds of thousands of people will have no way to pay the bills. It’s also bad for business, since those people won’t have any money to buy things that businesses produce. It is, in short, short-sighted economic insanity.
The economy is supposed to work for everybody, not just the rich, not just bankers. For that to happen, politicians have to establish meaningful regulations to make sure finance works for the greater good– and safety nets to make sure that anyone who falls through the cracks doesn’t see her life prospects permanently diminished.
This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.by Zach Carter, Media Consortium blogger
Congress returns from its April recess... more
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