Posts tagged with 'bank'
Weekly Audit: Massive Protest In Wisconsin Shows Walker’s Overreach
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By Lindsay Beyerstein, Media Consortium blogger
About 100,000 people gathered in Madison, Wisconsin to protest Gov. Scott Walker’s new anti-collective bargaining law. The state Senate hurriedly passed the bill without a quorum last Wednesday. Roger Bybee of Working In These Times reports:
The rally featured 50 farmers on tractors roaring around the Capitol to show their support for public workers and union representatives from across the nation, stressing the importance of the Wisconsin struggle. Protesters were addressed by a lineup of fiery speakers including fillmaker Michael Moore, the Texas populist radio broadcaster Jim Hightower, TV host Laura Flanders, the Rev. Jesse Jackson, U.S. Rep. Dennis Kucinich, U.S. Rep. Tammy Baldwin, and The Progressive editor Matt Rothschild, among others.
The bill is law, but the fight is far from over. The Wisconsin Democratic Party says it already has 45% of the signatures it needs to recall 8 Republican state senators. So far, canvassers have collected 56,000 signatures, up from 14,000 last weekend. The surge in signature gathering is another sign that the Walker government’s abrupt push to pass the bill has energized the opposition. (more…)
Weekly Audit: Tax Cuts for the Rich Extended
By Lindsay Beyerstein, Media Consortium Blogger
Congressional Republicans and the White House struck an agreement in principle on Monday night to extend all the Bush tax cuts for 2 more years in exchange for extending unemployment benefits. The GOP agreed to the so-called “Lincoln-Kyl compromise” a partial 2-year extension of the Bush estate tax cuts on estates worth over $5 million. If the deal had not been struck, estate taxes on estates over $5 million would have gone back up from 0% to the pre-cut rate of 55%. Instead, the rate will be 35% for the next 2 years.
The GOP also agreed to a short-term “stimulative” 2 percentage-point cut off the 6.2% payroll tax we all pay on income up to $106,800. The good news is that a payroll tax holiday will provide the most noticeable tax relief to low- and middle-income Americans. The bad news is that payroll taxes fund Social Security, so cutting the tax means starving a program that most directly benefits average people. Social Security is not in crisis yet, but steps like these could push the program into worse financial straights where significant benefit cuts become inevitable. It’s almost as if the GOP, having failed to spark panic about an as-yet non-existent Social Security crisis, is determined to engineer one.
All these gimmes for the rich were the price of a partial extension of unemployment benefits. The stakes couldn’t have been higher. If Congress had failed to act, 2 million people stood to lose their benefits this month and another 7 million would have run out before the end of next year, reports Andy Kroll of Mother Jones.
Meanwhile, unemployment continues to rise. The economy only added 39,000 jobs in November when analysts were expecting about 150,000. “At the beginning, some people just thought it was a printing error,” said reporter Motoko Rich on the New York Times‘ weekly business podcast. The overall unemployment rate climbed to 9.8%.
At ColorLines, Kai Wright argues that the time has come for President Obama to seize the opportunity to debunk conservatives’ bad faith arguments for tax cuts above all else:
At the same time, the anti-government crowd’s political hand—if forced—has never been weaker. A depressingly large number of middle-class and working-class Americans now know all too well what economists have long understood: You get a great deal more economic bang out of keeping lots of people from becoming destitute than you do by helping a few people horde wealth. People remain enraged about the no-strings-attached bank bailout, for instance, because they intuitively understand its ramifications. Wall Street is now enjoying a narrow, taxpayer-financed recovery while unemployment, hunger and poverty all continue climbing through the former middle class.
Extending UI makes sense
Tim Fernholtz of TAPPED tackles some of the bad arguments against extending unemployment insurance. Economist Greg Mankiw claims that extending unemployment insurance is just a surreptitious ploy to redistribute income to the poor from the wealthy. Actually, as Fernholtz points out, the point of a UI safety net is to prevent people, 3 million of them in 2009, from becoming poor in the first place. Poverty is very expensive for society at large. If we can keep the unemployed in their homes, spending their benefits in their communities, we can keep the socially corrosive effects of poverty at bay until the economy improves. The social costs of child poverty alone have been estimated at $500 billion a year, Fernholtz notes. The deeper we allow people to sink into poverty, the more difficult it will be for the economy to rebound. On this view, UI is a shared investment in a well-ordered society, not just a lifeline for jobless families.
Why corporate tax cuts won’t create jobs
Jack Rasmus of Working In These Times explains why tax cuts will not create jobs. Simply put, banks and big companies are sitting on over a trillion dollars. Among the nation’s biggest banks, lending to small and medium size businesses, the engines of job creation, has dwindled over 2009 and 2010. America’s biggest companies are sitting on a hoard of $1.84 trillion dollars, which they are not investing in job-creating projects. The Deficit Commission recommended slashing corporate taxes, ostensibly to spur investment and job creation, which would ultimately generate taxable income to help balance the budget. As Rasmus points out, this wishful thinking is predicated upon the assumption that if only corporations had more money, they would invest it to create jobs. The fact that companies are already sitting on huge piles of cash suggests that shoveling more moolah on the pile won’t change the basic dynamic. Perhaps companies are waiting to invest because they know that consumers aren’t keen to buy goods and services when they are unemployed or fearing job loss.
Economic disobedience
At In These Times, Andrew Oxford interviews sociologist Lisa Dodson about her new book on getting by in the low-wage economy. Her research shows that as economic instability mounts, many Americans are quietly taking matters into their own hands:
To understand how fair-minded people survive in an unfair economy, Dodson interviewed hundreds of low-wage workers and their employers across the country, examining what she terms the “economic disobedience” now pervasive in the low-wage sector. From a supervisor padding paychecks to a grocer sending food home with his employees, these acts of disobedience form the subject of her latest book, The Moral Underground: How Ordinary Americans Subvert an Unfair Economy.
Winner-take all economy
In an interview with Democracy Now!, Yale political science profesor and Jacob Hacker explains why the Deficit Commission has it all wrong when it comes to tax cuts vs. unemployment benefits.
Hacker studies inequality. He has written a book on how the richest Americans cornered an unprecedented share of the country’s wealth for themselves over the past three decades. The richest Americans have never been in a better position to help the country grapple with the deficit. Yet, as Hacker points out, the Deficit Commission wants to balance the budget on the backs of middle- and lower-income Americans by cutting spending on programs that disproportionately benefit working people and readjusting the tax code to make it even more favorable to the rich.
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.
Weekly Audit: Banks Get Big Bucks, Consumers Get Bupkis
by Lindsay Beyerstein, Media Consortium blogger
Last week, the Federal Reserve announced a plan to buy an additional $600 billion worth of Treasury bonds in an attempt to stimulate the economy. On Democracy Now!, economist Michael Hudson argues that the $600 billion T-bill buy will help Wall Street at the expense of ordinary Americans.
The Fed justifies the purchase as an infusion of cash into the U.S. economy. The buy-up will certainly be an infusion of cash into U.S. banks. In effect, the Fed will help the government pay back the banks that lent money to finance deficit spending. The hope is that these banks, suddenly flush with cash, will help the U.S. economy by lending money to finance projects that will create wealth and jobs (i.e. opening factories and hiring more workers).
However, as Hudson points out, there’s no guarantee that the banks are going to use the windfall to build wealth in the U.S. On the contrary, he argues, there’s every reason to suspect that they’ll invest the money overseas in currency speculation deals. Why? Because the Fed has also put massive pressure on Congress to push China into raising its currency by 20%. The banks know this because the House voted overwhelmingly to approve such a threat in September.
If the banks convert their extra billions to Chinese currency, and China raises the value of its currency in response to the threat of an across-the-board U.S. tariff on its imports, then banks that bought Chinese RMB when it was still artificially cheap will reap huge profits overnight. (more…)
Weekly Audit: EFCA Vital for Recovery
It’s official: The U.S. economy has been in a recession for a year and a half and many of the economic troubles worrying progressives in 2007 have yet to be addressed. While the Obama administration has taken steps to relieve some problems, a series of counterproductive bailouts, woefully inadequate labor laws and rampant inequality are still in urgent need of attention.
Severe economic inequality has persisted for decades in the U.S., but the current crisis is bringing things into focus. Unfortunately, while Wall Street excess and the corporate jet-setting of Detroit executives have dominated headlines and garnered plenty of justified outrage, the other side of the inequality coin has been largely neglected. As Katrina vanden Heuvel explains in The Nation, the routine exploitation of day laborers and domestic workers has grown even more pervasive since the recession began. Workers who managed to survive by laboring for predatory wages under abusive conditions now see those wages stolen with increasing regularity, as contractors simply refuse to pay up when the work is done. Huge portions of domestic workers are not only living below the poverty line, but subject to verbal and physical abuse. And as jobs have grown increasingly scarce, vanden Heuvel writes, speaking out against employer mistreatment has become a thoroughly daunting prospect for workers with no savings to help them endure unemployment. For the millions undocumented workers who are not protected by U.S. labor laws, an abusive work situation leaves them without any legal recourse.
Our labor laws desperately need to be revamped. Currently, Capitol Hill’s biggest battle for workers rights is the Employee Free Choice Act (EFCA), which would make it easier for workers to form a union without fear of employer reprisals or intimidation. The corporate executive class is lobbying hard against EFCA by claiming it revokes workers’ rights to a secret ballot in union elections, but the bill would do no such thing. As the law currently stands, employers can force workers who want to unionize to hold an election in order to actually establish a union. EFCA would require that a union be legally recognized as soon as a majority of workers sign cards saying they want to unionize. Union leaders are still elected by a secret ballot, but the election is permitted to take place later on, preventing employers from using the election period to bully their workers out of unionizing at all.
Writing for In These Times, David Moberg illustrates the commonplace peril of employer intimidation under the current organizing process:
“In 2005 [electrician Dan Luevano] and most of his fellow workers at Ries Electric near Denver asked their boss to recognize the Electrical Workers as their union to help resolve problems. The boss called everyone in and threatened to fire them if they voted for a union. Luevano said he would, and the next workday he was fired. Though the National Labor Relations Board reinstated him, his boss isolated him and cut his hours while continuing to violate labor laws by fighting the union.”
Workers and unions have pushed for EFCA for years, but when it comes to the economy, the federal government reacts fastest to problems on Wall Street. In Salon, Andy Kroll outlines the generous subsidies the government has paid to companies that drove themselves into the ground, effectively rewarding the economically destructive behaviors that caused the current crisis, while neglecting the workers whose hours and wages have been slashed as business credit tightens ups.
The bailout isn’t just unfair—it seriously risks delaying economic recovery. If the government refuses to take over failed institutions, wipe out their shareholders and fire their executives, the U.S. economy will likely be burdened with a constantly faltering financial sector for years. The Wall Street CEOs who caused the problem have every incentive to cover up for their mistakes and resort to complex accounting tricks to hide losses. But until those bank losses are recognized, the government will not be able to fill the hole and get credit flowing again. As Robert Kuttner argues in a column for The American Prospect, “We still face a prolonged Great Stagnation, one that could be far worse than necessary because of the administration’s circuitous, Wall Street–friendly approach to reviving the banks.”
Just as bad, whenever the economy actually recovers, executives at the surviving banks will have learned that they can score huge bonuses virtually risk-free by gorging themselves on risky loans and letting taxpayers clean up after them. This sets the stage for another catastrophe. So far, Obama’s decision to extend the bank bailout plan enacted under George W. Bush is the single greatest single blunder of his presidency, and as Kuttner argues, it’s a mistake that jeopardizes both the economy and the political sustainability of progressive ideas.
Beyond Wall Street, the administration has also faltered with it’s handling of General Motors, which finally filed for bankruptcy Monday morning after steadily disintegrating since the 1980s. After pouring in money to keep the ailing car manufacturer afloat, the government watched the company lay off tens of thousands of workers without overhauling its failed business model. Under the bankruptcy arrangement, U.S. taxpayers will emerge with a 60% stake in the company, but rehabilitating the company remains an enormous task. GM’s primary business is making cars that people do not want to buy. Without GM, the U.S. manufacturing sector would all but disappear, but turning the company around will require a huge long-term investment. So far, the government has settled for keeping the company on life support. Kevin Drum puts it succinctly for Mother Jones: “This whole deal just keeps getting worse and worse.”
The U.S. economy broke down for a reason: It was heavily dependent on a booming financial sector and failed to adequately protect or reward the workers who actually built the economy up. Both Congress and Obama have the power to give workers families the same economic leverage that corporate executives currently enjoy. It’s up to progressives to convince them to take action.
This post features links to the best independent, progressive reporting about the economy. Visit StimulusPlan.NewsLadder.net and Economy.NewsLadder.net for complete lists of articles on the economy, or follow us on Twitter. And for the best progressive reporting on critical health and immigration issues, check out Healthcare.NewsLadder.net and Immigration.NewsLadder.net. This is a project of The Media Consortium, a network of 50 leading independent media outlets, and was created by NewsLadder.
Weekly Audit: Bank Execs Looting Consumers, Shareholders and Taxpayers
by Zach Carter, TMC MediaWire Blogger
Some of the largest U.S. banks may be on the ropes these days, but the disparity between the plight of financial executives and ordinary Americans has never been starker. Over the past two decades, the banking system has grown accustomed to scoring massive profits by preying on its own customers, making 2009′s transition to pilfering taxpayer wallets an easy one. After burying the economy under a mountain of unaffordable debt, bank CEOs are now finding ways to subsidize their own paychecks with taxpayer bailout funds.
With over $550 billion in government money already dedicated to shoring up the financial system under the Troubled Asset Relief Program (TARP), it’s easy to wonder just what Wall Street and its highly-compensated executives actually do for the economy. Federal Reserve Chairman Ben Bernanke offered one explanation in a speech last week in Washington, D.C. At its best, Bernanke claimed, Wall Street innovates, creating new financial products that expand access to credit, making it easier to run small businesses and improving living standards for households. Armed with ever-expanding paydays, Wall Street has indeed innovated over the past thirty years, radically altering the economic landscape in the process.
But as Ezra Klein emphasizes for The American Prospect, much of Wall Street’s so-called innovation is sheer gimmickry. Financiers have intentionally designed loan contracts to be mystifying and complex to the ordinary consumer, tricking bank customers into racking up unaffordable levels of debt. From credit cards to credit default swaps, these new products have indeed signaled progress for bank balance sheets, but in many cases, banks have enjoyed outsized profits at the expense of the broader economy.
“Innovations are not always win-win,” Klein emphasizes. “They’re often win-lose.”
Of course, some financial stunts were so convoluted that many of the nation’s most revered financial brands– including AIG, Lehman Brothers, Bear Stearns and Wachovia– crumbled under their complexity. Today, something as simple as mortgage has become a byzantine, hard-to-value security, once Wall Street wizards bundle it together with hundreds of other mortgages and sell it off to dozens of investors. In the below video for American News Project, Lagan Sebert and David Murdock put a human face on Wall Street’s toxic assets, telling the story of Sandra Berrios, a mother of two who was conned into a predatory loan by a deceptive mortgage broker. The broker provided Sandra with documents promising her a 30-year fixed-rate mortgage, but instead sold her an outrageous adjustable-rate mortgage in order to collect a fee from Flagstar Bank, which actually funded the loan.
“We believed the broker . . . but what they were telling us was not the truth,” Berrios says.
Even though Flagstar has received $266 million in government bailout money, the company still refuses to renegotiate Berrios’ loan. While some money from TARP went to healthy banks, but Flagstar was truly desperate for the funding. The company’s stock is trading at around $1.00 per share thanks to fears over its financial stability, and Flagstar recently agreed to be acquired by a private equity company for still less to avoid complete financial ruin. The source of the company’s difficulties? Losses on loans like the one Sandra Berrios is struggling with.
Writing for The Nation, Christopher Hayes highlights a letter from a reader who questions malfeasance on the part of Goldman Sachs, which received $10 billion in taxpayer funds under the Troubled Asset Relief Program. Executives at Goldman recently decided to pay back the government before it paid off the investment from billionaire Warren Buffett, even though Buffett is reaping double the interest rate that the government is receiving from Goldman.
The scenario speaks volumes about just how lousy a deal taxpayers got under the bank bailout. Paying Buffett back first would clearly be the better deal for shareholders of the Wall Street titan, as it would save them years of payments at higher interest rates. But Buffett’s plan does not involve the same restrictions on executive compensation that are included under TARP. By prioritizing the TARP repayment, Goldman’s top brass are screwing their own shareholders to guarantee a bigger payday.
Exorbitant CEO compensation, especially on Wall Street, has played a major role in deepening income inequality in the United States. But even the onset of the worst recession since the Great Depression was cause for little alarm for top executives at American corporations last year, as Laura Flanders explains for GritTV.
“While wages and benefits have been going down for most Americans, more U.S. chief executives got pay raises than had their pay cut in 2008,” Flanders said, noting that “CEO’s weren’t just making more, they were making more while laying their workers off.”
Flanders notes that Citigroup CEO Vikram Pandit slashed 74,000 jobs at his company in 2008, but did not object to paying himself a whopping $38 million salary. The outrage is compounded by the fact that Pandit allowed his company to collapse last year, ultimately tapping taxpayers for multiple bailouts that have reached $45 billion in scope, an amount nearly three times Citigroup’s current stock market value.
The financial system doesn’t have to be a contest between citizens and executives. There is no good reason why responsible regulations cannot be enacted to rein in CEO pay, ban socially destructive lending practices and reduce the influence of banking behemoths on public policy. We’d all be better off with that kind of innovation.
This post features links to the best independent, progressive reporting about the economy. Visit StimulusPlan.NewsLadder.net and Economy.NewsLadder.net for complete lists of articles on the economy, or follow us on Twitter. And for the best progressive reporting on critical health and immigration issues, check out Healthcare.NewsLadder.net and Immigration.NewsLadder.net. This is a project of The Media Consortium, a network of 50 leading independent media outlets, and was created by NewsLadder.
Weekly Audit: Budget Good, Bailout Bad
President Barack Obama rolled out his highly anticipated federal budget proposal on Thursday, and while the plan represents a dramatic departure from the priorities of the Bush administration, its ultimate impact may be crippled by a counterproductive bank bailout.
First, the good news: The budget is awesome.
“Obama would raise taxes on the wealthy to pay for healthcare for the uninsured; cap pollution emissions; put billions more dollars into infrastructure and new technology; … invest in new education programs; and roll back the U.S. troop presence in Iraq,” Mike Madden writes for Salon. “There were proposals to save money by modernizing the healthcare system … and by eliminating federal farm subsidies to the biggest and wealthiest recipients.”
While it’s refreshing to see a set of priorities that put economic stability ahead of entrenched corporate interests, Obama’s call to reduce the federal deficit comes as a bit of a surprise. He has inherited a massive recession and defecit. Over at The American Prospect, Ezra Klein highlights an analysis of spending by Media Consortium alum Brian Beutler. Both bloggers agree that government debt is not a major problem, provided that borrowed funds are used to invest in something meaningful.
“Debt can be good if you expect that spending will offer a greater return than saving,” Klein writes. “And right now, because Treasury bonds are the last safe investment, it’s the cheapest it’s been for the government to borrow money in 50 years.”
Republicans are screaming about the enormous deficit that Obama’s budget requires, but most of that debt was passed down by President George W. Bush. Obama has actually taken cues from Congressional Republicans to find funding for financial shortfalls. Steve Aquino of Mother Jones notes that Obama’s move to raise premiums on Medicare received by wealthy Americans is a longstanding Republican priority. Additionally, Obama’s move to cap the itemized deduction tax subsidy at 28 cents on the dollar would re-establish Reagan-era levels.
But the line items missing from Obama’s budget are just as noteworthy. The Washington Monthly‘s Steve Benen dissects the Republican angst over Obama’s refusal to push for cuts in Social Security benefits. During his speech before Congress last week, Obama breezed right by the alleged Social Security crisis without asking elderly Americans, who have already seen their 401k plans cut in half over the past year, to take further cuts in their retirement income.
That’s a good thing, because as Matthew Rothschild explains for The Progressive, Social Security’s looming implosion is a Republican myth. “Social Security isn’t going bankrupt,” Rothschild writes. “It’s fully funded until 2041, and could remain so for many more years simply by making the wealthiest Americans kick in their share.”
The income limit for Social Security taxes is $105,000 a year, so billionaires pay the same Social Security as those making $105,000 annually. If Social Security ever does run into trouble, it can be easily fixed by charging rich people more for the program.
On to the bad news.
The government bailed out Citigroup and its shareholders for the third time on Friday, converting $25 billion in preferred stock into ordinary, run-of-the-mill, we-own-this-company common stock. But while Citi’s stock market value was hovering around $13 billion at the time, taxpayers only received a 36% stake in return for their largesse.
The Real News has a great interview with economist William Engdahl about the banking lobby’s ability to exercise control over public policy, despite the industry’s self-inflicted collapse. Engdahl argues persuasively that it is time for the government to stop propping up bank shareholders under the hope that “market prices” will magically appear for worthless assets. “Write those assets, those toxic assets, down to zero,” Engdahl says. “Only the state can do that at this point. You don’t find the market price for these things.”
The government has been playing for time for the last 18 months in hopes that the financial crisis could iron itself out. Rather than reward investors who put money into bad companies, Engdahl says Obama needs to wipe out the shareholders of failed banks and kick out the management teams that steered their companies into catastrophe.
Playing for time was the central economic strategy of Henry Paulson’s tenure as Treasury Secretary, but as Lagan Sebert and David Murdoch make clear in the below video for The American News Project, Paulson also managed to slip in major giveaways to big U.S. banks in the process.
The Troubled Asset Relief Program (TARP) allowed the government to inject capital into banks, but Paulson charged them a much lower than market rate of return on the investment. As a result, taxpayers missed out on about $78 billion that they could have expected to receive in interest payments had their money been managed by, say, Warren Buffett instead of Paulson. To put that number in perspective: President Obama’s entire plan to avert foreclosures will cost taxpayers $75 billion.
The U.S. banking system is completely broken and will need an enormous taxpayer commitment to return to any semblance of health. But there are good ways and bad ways to go about doing that. A bailout should be accompanied by control over how a bank is managed.
The banking industry is working very hard to portray TARP as something other than a bailout. When Northern Trust, for example, throws decadent parties after receiving taxpayer funds, its executives justified those lavish expenditures by claiming that their company was not “bailed out,” but merely received capital which it is paying for. The pricing of TARP was so favorable to banks and so disadvantageous for taxpayers that this claim cannot be taken seriously. Northern Trust got a bailout, and even if they pay back their TARP funds ahead of time, the interest they are paying is so far below market rates that the company will still be coming out ahead.
Obama’s budget shows that he knows what it takes to turn the economy around, but his financial policy indicates that he lacks the political will to shake off the banking lobby and do what is necessary to save ordinary Americans from disaster.
This post features links to the best independent, progressive reporting about the economy. Visit StimulusPlan.NewsLadder.net and Economy.NewsLadder.net for complete lists of articles on the economy, or follow us on Twitter. And for the best progressive reporting on critical health and immigration issues, check out Healthcare.NewsLadder.net and Immigration.NewsLadder.net. This is a project of The Media Consortium, a network of 50 leading independent media outlets, and was created by NewsLadder.
Bankruptcy Law is Key to Obama’s Foreclosure Fight
President Barack Obama unveiled his administration’s plan to fight foreclosures on Wednesday. Unfortunately, the most important element of the program will require Congressional action—and the banking and business lobbies are already on the attack.
The Homeowner Affordability and Stability Plan has three chief components:
- Offer financial incentives to persuade loan servicers to modify mortgages
- Allow Fannie Mae and Freddie Mac to refinance more mortgages
- Change bankruptcy laws and give judges the power to reduce the amount borrowers owe on their mortgages.
The financial incentives probably won’t help much, as Kevin Drum writes for Mother Jones. When a bank makes a mortgage, it doesn’t usually hold onto the loan. Instead, the loan is packaged into a security with a other loans and sold to several investors. Another bank collects payments on the mortgage for the security’s investors and acts as a point of contact, or loan servicer, for the borrower. To date, servicers haven’t shown much interest in keeping people in their homes, even though foreclosure is the worst option for all parties involved.
“Loan servicers already have an incentive to rework loans that would otherwise go into default, and for the most part they aren’t doing it,” Drum writes. “Will a couple thousand dollars [of incentives] change their internal calculus?”
The provision aimed at Fannie and Freddie will help some. It’s also a good use of the government’s authority over the companies, which were nationalized last summer. But the key to Obama’s plan is the bankruptcy provision. Until now, every government-enacted plan to reduce foreclosures has relied on incentives to encourage the banking industry to keep people in their homes. As Drum notes, bankruptcy is the stick behind those carrots. Obama is supporting a bill in Congress that would enable bankruptcy judges to reduce the amount a borrower owes to the present value of the home. The beauty here is that investors who own the mortgage securities, not taxpayers, will have to eat the losses. In short, investors will be held responsible for making a poor investment.
“The government is essentially presenting a choice for mortgage lenders: take our deal, which is standardized across the entire industry, or let a bankruptcy judge modify the loan however he or she sees fit,” Tim Fernholz writes for The American Prospect.
The bank lobby has been fighting the bankruptcy law change since the foreclosure crisis began in 2007, and they wasted no time lashing out at Obama’s proposal today. Elana Schor of Talking Points Memo highlights a nasty statement released by the U.S. Chamber of Commerce, one of “Washington’s biggest lobbying groups.” The release not only attacks the Homeowner Affordability and Stability plan, but takes a shot at Treasury Secretary Timothy Geithner as well, saying the policy “should have undergone a stress test to determine if it’s ready to stabilize a major portion of our economy.” Stress tests for the financial viability of banks were a big part of the murky bank bailout plan Geithner rolled out last week.
If Congress fails to pass a bankruptcy law overhaul, the entire plan will fall apart. And the record so far is not very promising—last year’s bill garnered only about half of the votes necessary to override a filibuster in the Senate.
Team Obama deserves credit for taking action on foreclosures, as John Nichols writes for The Nation. The Bush administration spent years vilifying troubled borrowers and then dedicated hundreds of billions of dollars bailing out banks. If Congress can’t pass bankruptcy law reform, the government should simply force banks to modify loans. The strategy would be simple—either keep borrowers in their homes, or return your check from the federal government.
“Ohio Congressman Marcy Kaptur and economist Dean Baker have some smart ideas,” Nichols writes. “They argue that the proper role for the federal government is not to fund mortgage negotiations but to insist that banks—many of which have already collected billions in taxpayer dollars—carry them out.”
This post features links to the best independent, progressive reporting about the economy. Visit StimulusPlan.NewsLadder.net and Economy.NewsLadder.net for complete lists of articles on the economy, or follow us on Twitter. And for the best progressive reporting on critical health and immigration issues, check out Healthcare.NewsLadder.net and Immigration.NewsLadder.net. This is a project of The Media Consortium, a network of 50 leading independent media outlets, and was created by NewsLadder.
Weekly Audit: Geithner’s Terrible, Horrible, No-Good, Very Bad Bailout
In this week’s Audit, we’re examinig Treasury Secretary Timothy Geithner’s thoroughly uninspiring bank bailout plan, which fails on almost every level. What’s more, some of the most insightful (and stinging) critiques of the proposal are coming from progressive media.
Robert Kuttner offers a strong analysis of Geithner’s strategy to salvage the banking industry in The American Prospect, noting that Geithner is explicitly avoiding the simplest and cheapest solution in favor of propping up the current Wall Street regime. The current plan is designed to support a financial architecture that has proven completely ineffective in maintaining the nation’s basic economic functions.
Geithner has thus far refused to nationalize the big, insolvent U.S. banks and give taxpayers ownership authority in exchange for their financial assistance. Instead, the new Treasury Secretary’s proposal devotes $1 trillion to writing insurance policies on bad mortgage assets to encourage private companies to buy those assets from troubled financial firms. This complicated strategy is designed to reduce the amount of money the government will have to pay to save the financial sector by bringing private enterprise into the bailout. However, the sheer convolutedness of the plan makes it much less efficient than temporary nationalization would be. Instead of simply putting a troubled bank’s balance sheet in order, the government now has to make sure hedge funds and private equity companies can profit from the move. The end result? Showering more taxpayer dollars on Wall Street.
As Matthew Rothschild highlights in The Progressive, the government’s current commitments to banks exceed the stock market values of those banks. Citigroup has received over $50 billion in direct capital injections, plus insurance on $300 billion worth of assets, but the company could have been purchased outright for well under $20 billion since October, 2008.
The worst part, Kuttner notes, is Geithner’s seeming determination to rehabilitate the failed loan securitization network, in which loans are packaged into securities and sold to various investors. Loan securitization encouraged excessive risk-taking on Wall Street, spawned millions of predatory mortgages and turned the simple process of buying a home into an absurd game of hot-potato amongst speculators. The loan securitization system needs to be carefully dismantled, not restored. “Geithner, using public funds, hopes to restart the engine of loan securitization,” Kuttner writes. “In effect, he wants to rebuild the very model that caused the crash.”
Nobel Prize-winning economist Joseph Stiglitz argues that much of the resistance to nationalizing the nation’s largest banks is based on a misunderstanding about how the nationalization process works. In an illuminating interview with Talking Points Memo, Stiglitz states that banks fail all the time and are placed into government hands to be disposed of. Lately, a handful of banks have failed every week.
“Banks have failed over and over again in the history of America, in the history of capitalism,” Stiglitz says. “To mention some recent examples, Washington Mutual went into bankruptcy, a number of banks went into bankruptcy . . . . It didn’t lead to a fundamentally systemic problem.”
When this happens, the government either takes the bank over for a short period of time and sells it to another bank, or liquidates the failed bank’s assets. The nationalization solution that progressive economists are pushing is simply the first approach. The nationalized bank is even kept open while its books are put in order, and when its affairs are straightened out, the government sells the company back out into the marketplace. The FDIC has decades of experience with this kind of operation.
Merely patching up the old economic model will not only fail to loosen Wall Street’s grip on the economy, it will also turn a blind eye to the severe ecological challenges we face. As the authors of Right Relationship: Building a Whole Earth Economy, Peter Brown and Geoff Garver, write in a blog for The Huffington Post, unlimited growth and production is nonsensical in the context of finite natural resources. Taking the environmental crisis seriously will mean not only investing in technology to fend off catastrophe, but cultivating a culture that places value on sustainable lifestyles.
Geithner offered a few vague comments about averting foreclosures in his bailout roll-out last Tuesday, but the glacial pace of government-sponsored foreclosure relief may mean that it’s time for more direct action. Last month, Rep. Marcy Kaptur, D-Ohio, called for evicted home-owners to exercise squatter’s rights and refuse to leave their homes.
In the Nation, Nicholas Von Hoffman proposes organizing community groups to take a stand and block banks from repossessing homes. While the current economic crisis looks much like the early days of the Great Depression, those hit hardest by today’s downturn have a few more tools to weild—most notably, the Internet. If the Treasury Department will not save the people from Wall Street, the people can, and should, save themselves.
The situation is already dire. As James Ridgeway writes for Mother Jones, today’s sky-high jobless statistics mask the actual number of people enduring tough times. While the official unemployment rate is at 7.6%, far more people who have given up looking for a new job or are stuck in part-time positions. If those people are included in the metric, the rate soars to 13.9%.
Geithner is scheduled to release more details on his bank bailout on Wednesday. Let’s hope the second time is the charm. Keep your eyes on the Weekly Audit for independent media’s response.
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