Posts tagged with 'financial crisis'
Weekly Audit: The Global Economic Crisis
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By Zach Carter, Media Consortium Blogger
Over the past thirty years, Wall Street has waged a steady war against governments around the globe, convincing policymakers of various ideological stripes that whatever raises profits for bankers and traders will be good for the rest of society. It’s a very simple and appealing portrait of how the world works. Unfortunately, it’s completely wrong.
Profiting from hunger
In an interview with AlterNet’s Terrence McNally, economic luminary Raj Patel explains the connection between widespread global poverty and wild Wall Street profits. Markets are defined by a set of rules—if those rules completely disregard social welfare, then the participants in those markets will ignore them as well. When traders can make a quick buck speculating on the price of rice, they will, even if that speculation drives up the price of a basic necessity and makes people go hungry.
We’ve known this for a long time, but as Patel illustrates, governments have allowed financial bigwigs to rewrite the basic rules of the road so that Wall Street can extract profits from anything—even hunger. That process created several crises in the developing world over the past few decades, and has now ravaged the economies of the United States and Europe. As Patel notes:
By basically gaming the system with regulations — that they authored — which encouraged a certain kind of playing fast and loose with the numbers, it was possible through some creative accounting for huge amounts of systematic risk to be kicked off into the future and ignored. And of course when the catastrophic risk was realized, everyone ran for the hills and started demanding public support.
Financial turmoil in Greece
This political sleight-of-hand is demonstrated by the looming fiscal crisis in Greece. As Richard Parker explains for The Nation, Goldman Sachs colluded with prior Greek administrations to hide the nation’s fiscal situation from both its own citizens and investors (Parker is an adviser to current Greek Prime Minister George Papandreou). Goldman was not interested in fair play—it was interested in making money off of the Greek government in any way it could. If that meant actively sabotaging the market by hiding important information, well, Goldman didn’t care.
First Greece, then …
Now that this budget façade has been stripped away, Goldman and other investors are now profiting from making things very difficult for Greece. As Matthew Yglesias explains for The American Prospect, the rational, profit-maximizing choices of investors are now actively helping to drive Greece into a default that hurts everyone:
When Greece starts looking shaky, the interest rate it needs to pay on its deficit goes up, which makes the country look even shakier. This cycle can push a vulnerable country into a default situation.
Various Greek administrations clearly bear significant responsibility for the situation. Nobody forced them to get in bed with Goldman Sachs, just as nobody forced U.S. administrations to gut our financial regulatory system. But the problem in Greece is not just a problem for a single Mediterranean nation—there is very real risk that the investor “unease” could spread to Portugal, Ireland, Spain, Italy, and by extension the European Union and the global economy. The bonuses at Goldman Sachs and J.P. Morgan Chase this year were not a sign of renewed strength in the global economy.
Community Security Clubs to the rescue
So if Wall Street can’t save us, what can? Our communities could play a significant role, as Andrée Collier Zaleska explains for Yes! Magazine. Zaleska profiles Common Security Clubs in Portland, Boston and Fort Lauderdale to show how people hit hard by the economic downturn are banding together to make ends meet, and organizing for political action.
“[Jared] Gardner, a busy organizer in Portland, launched four CSCs in his church, two of which were comprised almost entirely of unemployed people. By the time his own group had met five times, they were planning tours of local co-housing projects, organizing to fight locally for progressive taxation, and wondering how to bring the rest of their church into the time bank they had created.”
Markets are supposed to serve human needs, not the other way around. But Wall Street isn’t going to give up its stranglehold on the U.S. political process for nothing. While community-driven efforts are a good start, we need much larger actions and reform to restore balance to the global economy.
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: House Bank Bill Fatally Flawed
By Zach Carter, Media Consortium Blogger
Last week, the House of Representatives finally approved a financial regulatory overhaul and President Barack Obama announced a new initiative to address the unemployment crisis. Both are a step in the right direction, but neither offer effective solutions to problems that still plague the U.S. economy.
The House bill doesn’t do away with too-big-to-fail banks and that’s a big problem. As John Nichols explains for The Nation, “the big banks aren’t going to get sidelined—let alone broken up—anytime soon.” Instead of splitting large, risky banks into smaller firms that could fail without wreaking economic havoc, the House bill gives regulators more power, including the ability to bail out a faltering bank with billions of taxpayer dollars. When push comes to shove, regulators are not going to risk letting a major bank fail. They’ll just bail the company out. We all saw what happened when Lehman Brothers collapsed last year.
By imposing a tougher set of rules on banks, it’s conceivable that regulators could prevent some future failures. But as Mary Kane notes for The Washington Independent, Congress carved so many loopholes in the new laws that banks will have little trouble skirting them.
Obama had hoped to create a new Consumer Financial Protection Agency (CFPA) to crack down on predatory lending, but a coalition of bank-friendly Democrats pushed through amendments that significantly weaken it. Obama wanted states to have the power to enforce stronger rules on predatory lending. Under a loophole that Rep. Melissa Bean (D-IL) pressed into the House bill, states are prevented from writing or enforcing rules that limit interest rates charged by credit card companies and payday lenders. That’s a really destructive move, Kane notes, since it was state regulators, not federal regulators, who cracked down on abusive lending over the past decade.
Obama also hoped to require that risky derivatives transactions would be conducted via exchange like ordinary stock trades. Derivatives are the type of trades that brought down AIG. But the House bill exempts a huge portion of transactions from this requirement and changes the definition of “exchange” to include private, unregulated derivatives trades, as Nick Baumann explains for Mother Jones. This is a fatal flaw in the regulatory overhaul. Derivatives are the primary technique that banks use to make themselves too-big-to-fail. Over 95% of the $290 trillion derivatives market is housed at just five banks. These derivatives tie the bank to other financial firms in a complicated web of risk that is impossible for regulators to navigate. If one of those five banks goes down, there’s no way a regulator can predict the consequences.
The only hope for meaningful reform right now rests in the Senate, which is considering a much tougher bill than what the House approved. But the Senate has yet to even conduct mark-up hearings on its legislation and the pressure from the banking lobby is going to be enormous. Progressives have to keep pushing for a better bill if we want to protect our economy from the abuses that brought on the current recession.
And while huge federal bailouts for banking giants like Citigroup and Bank of America have helped the financial sector recover, the broader economy is battling the highest unemployment levels since the early Reagan era. Things are poised to get a lot worse. As Daniela Perdomo emphasizes for AlterNet, a full 3.2 million workers will lose their unemployment benefits by the end of March 2010. Even if the unemployment rate stays where it is—and Perdomo notes that a vast majority of experts think its going to go higher—the impact on ordinary people is going to be even more severe than today’s nightmare.
In a blog post for Working In These Times, Roger Bybee highlights a piece by Harvard University Law School Professor Elizabeth Warren, who emphasizes the hardships faced by ordinary families. The statistics are grim—one-eighth of Americans are on food stamps, one-eighth cannot pay their mortgages and 120,000 families are filing for bankruptcy every month.
We need to take serious steps to get people back to work. Mass unemployment means that consumers don’t spend money, which means that companies don’t sell as much, which makes companies lay off more workers to cut costs. It’s a self-reinforcing cycle. The market can’t fix unemployment without help.
So Obama’s Dec. 8 speech announcing a new job-creation plan was a welcome event. But the concrete aspects of Obama’s plan are not effective. All the tax cuts in the world won’t necessarily put people back to work. Obama did endorse a public jobs plan which involved the government hiring people to improve the nation’s infrastructure and clean up communities ravaged by the economic crisis, but he shied away from any specific numbers.
As David Roberts explains for Grist, Obama’s willingness to sign off on a $23 billion program for environmentally friendly home renovations is a step in the right direction. The plan is being referred to as “cash-for-caulkers” and is modeled on the very successful cash-for-clunkers program. The government will pay people to increase the energy efficiency of their homes, helping people cut down on utility bills and increasing the demand for construction labor and products like new windows and doors. It’s a good idea. But if all we get are tax cuts and $23 billion for greener homes, the jobs bill is not going to assuage the unemployment crisis.
There is no reason to be concerned about the cost of a thorough jobs program. Taxpayers committed trillions of dollars to help the financial sector weather the economic storm. Anybody who is worked up about the prospect of spending money on jobs should read Amitabh Pal’s piece for The Progressive. A modest tax on speculative trades of stock and derivatives could easily raise $150 billion a year to finance a robust jobs program.
At this point in the economic downturn, the government needs to take much stronger steps to rein in Wall Street and create jobs. We know what needs to be done to protect the economy from risky banking and we can afford to fix the unemployment crisis. All we need is the political will.
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: Time to Audit the Fed
By Zach Carter, Media Consortium Blogger
Two key lawmakers on the House Financial Services Committee, Reps. Alan Grayson (D-FL) and Ron Paul (R-TX), are pushing to authorize a full, comprehensive audit of the Federal Reserve. The plan has sparked fury from both the Fed and the corporate banking industry, but the proposal is so appealing that the controversy is almost laughable.
The Federal Reserve is one of the most powerful economic institutions in the world, but most of its operations are conducted in total secrecy. The Fed’s rescue activities have dwarfed the $700 billion Troubled Asset Relief Program, but without any public accounting. Some of these efforts may have been entirely appropriate, but we don’t even know who the Fed is helping. That fact is a major barrier to establishing effective and fair economic policy. (more…)
Weekly Audit: We Need a ‘People’s Bailout’
By Zach Carter, Media Consortium Blogger
The economic free-fall is finally slowing down, although nobody expects the recovery to be very pleasant. Job losses and foreclosures are expected to increase well into next year. But even if our economic system gets back to normal, it’s important to remember that gross inequalities are embedded in the global order. At home, minorities face significant barriers to economic security, while abroad, children in poor countries are denied access to basic nutrition. This is especially disheartening in the wake of the G-20 meeting in Pittsburgh, which demonstrated that the world’s economic leaders are more focused on bailing out banks than eradicating global poverty. (more…)
Weekly Audit: Obama’s Economic Hits and Misses
By Zach Carter, Media Consortium Blogger
Eight months after President Obama was sworn into office, the foreclosure epidemic is even more dire and no laws have been passed to rein in Wall Street. While Obama has helped cushion the nation’s economic fall with a stimulus plan and other proactive measures, much more aggressive action is needed to protect workers and homeowners from reckless financiers.
In an a piece for The Nation, John Nichols dissects Obama’s recent speech on the one-year anniversary of Lehman Brothers’ bankruptcy. Obama praised the Bush administration’s bank bailouts and advocated for regulatory reforms, because after eight months in office, we still haven’t seen any new financial regulations. Quoting a recent New York Times article on the status of the federal budget deficit, Nichols notes:
“It is not programs that care for the children of immigrants or aid to poor countries that emptied the Treasury, and it is not the ‘threat’ of healthcare reform that worries serious economists. The federal government has become ‘the guarantor against risk for investors large and small’ while doing little to restrain CEO greed or to protect the citizens, consumers and communities that have been battered by banksters.”
There are some signs of hope, however. Obama’s decision to appoint Daniel Tarullo, a former assistant to President Bill Clinton on international economic policy, to the Federal Reserve Board of Governors appears to be paying off—though its been sorely underreported in the mainstream press. Salon’s Andrew Leonard highlights a Wall Street Journal story indicating that Tarullo is close to securing major restrictions on bank pay practices. That’s extremely good news: blockbuster bonuses don’t just fuel inequality. Bankers “earn” those paydays by taking on huge levels of risk so their companies can book short-term profits. Banks were literally rewarding their top managers and executives for sabotaging the global economy.
Unfortunately, Obama has also appointed deregulatory crisis-causers to major regulatory positions. The most recent outrage, as David Corn and Daniel Schulman detail for Mother Jones, is Republican Scott O’Malia’s appointment as a Commissioner of the Commodity Futures Trading Commission (CFTC). The CFTC oversees a wide array of important trade activities, including much of the oil and energy market. O’Malia has a history of lobbying against regulation in these very markets. He spent years peddling political influence for an electricity company, Mirant, which has a history of stretching the law to profit at the public’s expense. In 2003, the year after O’Malia left the company, Mirant paid about $500 million to settle charges that it illegally ripped off California citizens during the state’s electricity crisis.
Presidents typically allow very few members on top regulatory panels to come from the opposite political party—the idea is to prevent independent regulatory agencies from becoming political hatchet teams. Unfortunately, Obama’s other appointments have been questionable as well.
Obama appointed Gary Gensler Chairman of the CFTC earlier this year, despite his record as a leading advocate against the regulation of complex financial products called derivatives in the 1990s. Gensler won the battle on blocking derivatives regulation, a move which helped drive the global economy into a massive recession in less than a decade. Much of the problem has to do with their complexity. Many people who traded these products did not understand just how risky they were. And as former Lehman Brothers investment banker Sony Kapoor explains in an interview with Paul Jay of The Real News, this confusing complexity was intentional. By making new financial derivatives hard to understand, major Wall Street brokerages like Lehman and Goldman Sachs were able to overcharge for them.
Some derivatives enabled other destructive economic activities. Credit default swaps provided insurance against losses from loans. If a bank was worried that a loan would not be paid back, they could go to AIG and buy insurance. The bank would pay a modest monthly fee to AIG, and if the loan ever went bust, AIG would pay the bank the full value of the loan. The swaps actually encouraged reckless subprime lending. And while plenty of Wall Streeters failed to recognize the risk associated with derivatives, almost everybody knew that subprime lending was a disaster in the making. But since Wall Streeters didn’t want to give up huge short-term profits associated with subprime lending, credit default swaps allowed them to have their cake and eat it too. Banks could book the outsized profits from subprime lending, but insure themselves against the inevitable losses by going to AIG for insurance. In effect, these crazy derivatives were actually fueling the subprime lending boom.
And the foreclosures spawned by exotic mortgages are nowhere near their peak. Laura Flanders of GRITtv interviews Rosemary Williams and Ann Patterson, two Minneapolis homeowners with adjustable-rate mortgages (ARMs) trying to fight off foreclosure. During the housing boom, banks pushed millions of borrowers into ARMs—loans that start with a low interest that resets higher after a few years—without worrying about whether they could afford the higher payments. Those loans are only beginning to reset now, with the vast majority scheduled to pinch pocketbooks over the next two years.
The government’s support for citizens laid off as a result of the recession has not been generous. Obama fought hard to pass his economic stimulus package immediately after entering office, helping create some jobs and providing a very modest expansion of unemployment benefits to laid-off workers (I do mean modest—it’s an extra $25 per week). But while the stimulus package helped slow the economic plunge, the private sector is not likely to start hiring new workers for years, as Roger Bybee notes for In These Times. The social cost of unemployment, Bybee emphasizes, is absolutely enormous. For every 1% increase in the unemployment rate that is sustained over six years, 47,000 people actually die, while prisons and mental hospitals are flooded with inmates and patients.
Congress would be happy to sweep financial regulation under the rug and pretend the problem has passed. Obama is capable of making good decisions on the economy, but he’ll have to go to the mat for reform if we want any hope of fully recovering from the Bush era.
This post features links to the best independent, progressive reporting about the economy and is free to reprint. 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: One Year After the Crash
by Zach Carter, Media Consortium Blogger
On Thursday, the U.S. Census released new data on the economic straits many American households faced in 2008. The grim report illustrates a nation enduring its highest poverty level in decades, coupled with a significant decline in middle class financial security. But one year after Lehman Brothers filed for the largest bankruptcy in U.S. history, not a single law has been passed to protect ordinary citizens from Wall Street’s excess.
Just how bad was 2008 for the ordinary U.S. household? As Kevin Drum emphasizes for Mother Jones, median household income plunged $1,860 last year. That’s the biggest decline since the Census began tracking incomes in the 1970s. The poverty rate increased from 12.5% to 13.2%, the highest level since 1997, and the total number of people living below the poverty line surged by 1.5 million to 39.8 million. Nearly one-fifth of all children in the United States are now poor. To fit the Census definition of poor, families have to be pretty hard up: A family of four must be living on less than $22,025 to qualify.
The Census data does not include any of the economic damage the U.S. sustained this year. In February 2009 alone, the economy shed a staggering 741,000 jobs. That fallout has hurt the poor more than anyone else, as Andrew Leonard explains for Salon.
“In 2008, the rich got less rich, while the poor got even poorer,” Leonard writes. “Which just goes to show that a falling tide lowers all boats—with one difference: The boats belonging to the rich probably still float, while the poor have smashed into the rocks.”
Lest there be any doubt, President Barack Obama’s economic stimulus package was absolutely critical for the nation’s economic health. The Census believes programs enacted under the stimulus will keep a total of 6.2 million people from falling into poverty, including 2.4 million children. To put that number in perspective, over the entire course of the George W. Bush Presidency, the number of people living below the poverty line climbed by 8.2 million, while the number of children in poverty increased by 2.5 million. Were it not for the stimulus Obama pushed through, the Bush legacy would be 75% worse, and almost 100% worse for children.
What is most alarming about the Census figures is the fact that workers were already treading a difficult path before the financial crisis sent the economy off a cliff. After years of economic “growth,” the median income was lower in 2007 than it was when President Bill Clinton left office. And the majority of people entering poverty during the Bush years did so prior to the great crash of 2008.
Another recent report from Jeannette Wiks-Lim of the Political Economy Research Institute drives this point home. In an interview with Jesse Freeston of The Real News, Wiks-Lim discusses the projected path of decent jobs in the U.S. economy, based on data from 2006, well before the crisis broke out. Wiks-Lim defined a “decent job” defined as one that pays $17 an hour plus health insurance, but found that in 2006, a full 65% of workers in the U.S. were paid below that benchmark. Equally distressing, her study indicates that by 2016, the number of decent jobs will be roughly the same as in 2006. Job-quality stagnation will persist even though the economy is likely to grow over this time period. That growth will be going to those who are already well off, Wiks-Lim says, while ordinary workers will face the same problems.
There are frightening long-term trends in this data. In 1975, average pay for workers outside the managerial class was $18.23 per hour, according to the study. But by 2007, those wages dropped to $17.42 per hour. These wage declines came despite major growth in economic output over those three decades, and despite an 85% increase in worker productivity.
While workers experienced increasing pressure on their pocketbooks, Wall Street gambled away their retirement investments. Lehman Brothers filed for bankruptcy one year ago today, a move which created chaos in the financial sector and heavy damage in the rest of the economy. Things were looking bad for the economy before Wall Street imploded, but the financial crisis made those problems a lot worse. “In a modern society, a credit freeze means instant death to the real economy, since virtually every enterprise, big and small, runs on credit,” Les Leopold explains for In These Times. “When the financial sector froze, it pushed the real economy off a cliff.”
But incredibly, after a year marked by massive financial bailouts, not one new law has been signed to protect our economy—and taxpayers—from Wall Street. Not one. Even the modest plans to rein in executive pay for taxpayer-supported companies have proved toothless. Leopold notes that President Barack Obama’s refusal to crack down on the banks has left both the financial regulatory process and other important progressive plans—like overhauling the broken health care system—in a precarious political state. The largesse we have shown for bailed-out bankers gives conservatives ammunition against other, more productive activities.
“We have a horrific feedback loop where Main Street’s anger is directed as much against the government as it is against Wall Street,” Leopold writes. “In fact, more and more people are turning against the administration because it looks as if it sold out to the banks. … The outrage-turned-anti-government has spilled into the health care debate and now undermines badly needed government intervention into our wasteful health insurance industry. If we roll over on the Wall Street fight, anti-government politicians will ride to power on populist anger. ”
And make no mistake, Wall Street is pushing back as hard as it can against even the most obvious reforms. Writing for The American Prospect, Tim Fernholz details the massive push by the Chamber of Commerce against the creation of a Consumer Financial Protection Agency. The CFPA would do just what its name implies—regulate all financial products that target consumers, and nothing else. It’s a simple and much-needed reform, but Wall Street is spending a lot of money to keep it from happening.
Our entire system of economic value has become inverted, as Wendell Berry argues in an essay for The Progressive. Anything that creates financial profits is considered economically productive, while environmental impacts and social benefits are viewed as economically unimportant. “Only in a financial system, an anti-economy, can it seem to make sense to talk about ‘what the economy needs,’” Berry writes. “In an authentic economy, we would ask what the land, what the people, need.”
The U.S. is frequently referred to as the richest nation in the world. Free-market ideologues and conservative pundits often couch their preferred policies as a defense of U.S. prosperity—there’s even a right-wing astroturf group called “Americans for Prosperity.” But more than 13% of the nation lives in poverty while the government backs paychecks for millionaire bankers. The problem is obvious to everyone, but if we do not demand change, Wall Street will ride the status quo to another economic catastrophe within a few short years.
This post features links to the best independent, progressive reporting about the economy and is free to reprint. 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: Power to the People’s Republic
by Sara Luckow, TMC MediaWire Blogger
In the past few years, the economic relationship between the United States and China has changed dramatically. As Tim Fernholz writes in the American Prospect: “Chastened U.S. officials who once lectured their counterparts in [China] on financial liberalization are now humbled in front of their largest creditor, reduced to offering promises of fiscal responsibility.” It’s a strange state of affairs. Fernholz rightly argues that:
“The common interest of the peoples, rather than the economic elite, ought to be the driving motivation behind the two countries’ interactions. There is no doubt that economic openness has brought wealth to both countries, and the Obama administration is happy to laud the Chinese for bringing millions out of poverty. But in a relationship between “capitalism with American characteristics” and “socialism with Chinese characteristics,” sometimes the people—whether they be workers losing jobs in the United States or the millions of Chinese living without political freedom or prosperity—have interests other than the elites. Today, we’re in an economic crisis, and pragmatism overrides all else. But as recovery continues, the U.S. will require more thought on the strategic track, and perhaps in a few years our discussions with China, as they should be with all our friends, will be more frank.”
But our current economic relationship with China pre-dates President Obama’s “talk first” style of diplomacy. As Robert Scheer of The Nation writes: “Don’t blame any of this on peacenik liberals. The new conciliatory—nay, deferential—tone toward China precedes the Obama administration, having begun in bilateral talks during the last years of the Bush administration as the U.S. economy began its ignominious downfall. It was George W. Bush’s treasury secretary, Henry Paulson, who set the course when the former Goldman Sachs chairman realized how dependent were his Wall Street buddies on Chinese goodwill.”
Strange relations with China aside, things aren’t going so well at home. Rick Wolff, an economist from the New School, says the stimulus package has big problems in a discussion with The Real News. Wolff also notes that we shouldn’t take Wall Street chatter about an economic upswing too seriously. “I think the first thing to remember is the people who are celebrating where we are now are the same people who could not imagine, did not imagine, did not foresee the problem we had last year,” Wolff says.
But what’s going on with our favorite bailout recipients? Talking Points Memo takes on the case of former Federal Pension Guarantor Charles Millard, who exploited his personal ties with employees at BlackRock Capital and Goldman Sachs while choosing firms to manage the Pension Benefit Guaranty Corporation. At this point, both firms “may have run afoul of federal contracting rules in how they courted Millard.”
Goldman Sachs and BlackRock are also on the lookout for the next big economic bubble. Salon reveals that both firms are diversifying their portfolios to include agriculture, in addition to government contracts. “Food is becoming the new oil,” especially since the world’s population is expected to crest nine billion by 2050. And a lot of land is necessary to grow enough food for nine billion people. Phillipe Heilberg, founder of American investment firm Jarch Capital, is hedging his bets on farmland in distressed countries. “Instead of buying stocks, the former banker is now speculating on the political future of South Sudan, which he insists will be an independent country in 10 years, at which point land will be far more expensive than it is today.”
It’s abundantly clear that we can’t rely on the economic elite to represent the people’s interests. Tomorrow’s economic structure must be drastically different if the United States is going to thrive. Put simply, we’re going to have to seriously reevaluate our economic priorities and decide who calls the shots. Here’s hoping that everyday people have a say.
This post features links to the best independent, progressive reporting about the economy and is free to reprint. 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: Unions and Wage Growth Can Fuel Recovery
by Zach Carter, TMC MediaWire blogger
The U.S. economy is in big trouble right now, and the reform process may be missing a key point. When banks ran into severe trouble late last year, the government responded quickly with a massive bailout, but very little has been done to address a major structural flaw that has left our economy so vulnerable: rampant income inequality. In a system based on consumer spending, we have stretched consumers beyond their limit.
Former Labor Secretary Robert Reich argues that we are in for a long period of economic woe over at Talking Points Memo. Consumer spending accounts for about 70% of the U.S. economy, so when consumers go broke, everything shuts down. Ordinary Americans’ wages have been declining for decades, and the collapse of the housing bubble wiped out roughly $14 trillion in household wealth. Simply rebooting in the hopes that our simultaneous assault and dependence on consumer pocketbooks will work again will not be effective.
“This economy can’t get back on track because the track we were on for years—featuring flat or declining median wages, mounting consumer debt, and widening insecurity, not to mention increasing carbon in the atmosphere—simply cannot be sustained,” Reich writes.
Strengthening our labor unions is probably the biggest single step the U.S. can take toward economic stability. And the best way to do that would be passing the Employee Free Choice Act, which would make it much easier for unions to organize by circumventing executive intimidation. Empowered workers can demand fair wages, decent benefits and help build a society that values all labor as an important part of collective existence.
In a profile of AFL-CIO leader David Trumka for The Nation, David Moberg presents a vision of an economy in which policymakers and voters are concerned with how much wealth exists and how that wealth is distributed. Widespread prosperity does not inevitably flow from technological or financial innovation if the resulting gains are diverted to a select few.
“In Trumka’s view, the unionism of the 1930s forged a social compact that made possible the middle class prosperity of the 1950s and 1960s,” Moberg writes. “But since the early 1970s, Wall Street and financial interests have dominated American politics, dismantling the compact and increasing inequality, debt and insecurity as workers struggled to keep up.”
It may be surprising for those of us who don’t work on Wall Street, but there is actually an enormously influential school of thought in Washington, D.C. that believes recessions are actually good for the economy. The reasoning goes something like this: When economies gorge themselves, something has to happen to correct the mistake—to “purge the rottenness from the system,” as Herbert Hoover’s Treasury Secretary Andrew Mellon once said. The idea has some level of intuitive appeal, but as Christopher Hayes writes for The American Prospect, it’s also a complete distortion of how recessions actually work.
“Economic contraction feels quite different to a bond trader and an unskilled worker,” Hayes writes. “A spike in unemployment hits those on the margins of the labor market the hardest, while contractions also usher in deflation, which has a strong tendency to make the rich richer.”
In reality, the government almost never makes the perpetrators of an economic collapse pay serious consequences. When the economy gets into trouble, the government usually takes emergency measures to avert a crisis, and then refuses to adopt reforms that would protect those dealt the most harm. It’s been this way for decades.
Not only have workers been neglected, but billions of their tax dollars have bailed out banks that ran themselves into the ground via predatory loans. But even that bailout money is not being used to help strengthen the broader economy. Writing for The Washington Independent, Mary Kane highlights a host of reports that indicate banks are booting people out of their homes, and then refusing to care for the houses once they’re vacant. When homes are overgrown and infested with all kinds of critters, the value of nearby properties plummets. Banks are hurting completely innocent homeowners whose tax dollars helped bail them out.
We don’t even know the full extent of the favors the government has performed for financial firms. In a video for the American News Project, Lagan Sebert, Harry Hanbury and Mike Fritz detail some of the Federal Reserve’s unprecedented actions during the financial crisis. The Fed has lent out over $1 trillion to banks over the course of the financial crisis without disclosing who received the loans or what kind of collateral the Fed received in return.
Much of what we do know about the Fed’s rescue plans is disquieting, as William Greider, an economics journalist with The Nation, explains in the ANP video. When Bear Stearns collapsed in March 2008, the Federal Reserve Bank of New York negotiated a rescue plan in which JPMorgan would acquire the failed Wall Street icon in exchange for $30 billion in loss protection from the Fed. But JPMorgan would have been one of the hardest hit by a Bear Stearns collapse, and JPMorgan CEO Jamie Dimon sits on the board of directors at the New York Fed.
“Tim Geithner, who was then President of the New York Federal Reserve Bank and is now Treasury Secretary, was negotiating with his own board member,” Greider says.
Going back to labor: Hourly workers will get some much-needed relief later this month, when the federal minimum wage increases from $6.55 to $7.25 an hour, as Doug Ramsey explains for Public News Service of Arizona. While executives like to argue that raising the minimum wage is a job-killer, the fact is that no serious study has ever linked the two phenomena. Interestingly, the wage increase was not a response to the economic crisis. It was one of the first legislative victories for the Democratic Party when it won back majorities in the House and Senate in 2006.
Anybody who lives on less than $7.00 an hour can attest that the added income is a welcome improvement over the status quo. But $7.25 an hour is just $15,000 a year—not nearly enough to save for the future or pay for a serious medical procedure. Our economy is suffering because many, many ordinary people are living paycheck to paycheck. We have to create an economy where work and workers are given their fair value.
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: Radical Inequality Fueled the Wall Street Meltdown
Now that Treasury Secretary Timothy Geithner isn’t going to impose pay restrictions on bailed out Wall Street executives, it’s critical to remember that severe economic inequality was a major factor in the financial meltdown. Our tax code funnels money into the hands of our wealthiest citizens, which means that our financial system protects the interests of the affluent—not the the average citizen. The broad divergence between our core democratic values and the existing U.S. economic structure must become part of the public debate over financial reform.
As Les Leopold notes in a roundtable discussion with GritTV’s Laura Flanders, much of the Wall Street meltdown can be traced to a steady redistribution of wealth to the wealthy dating back to the Reagan years. Poor people, after all, do not have money to invest in the Wall Street speculation machine. By 2007, the financial world accounted for over 40% of U.S. corporate profits, an astounding percentage for a business intended to facilitate the operation of other industries. According to Leopold, we need to find constructive ways to shrink the financial sector, like taxing Wall Street transactions to move money into the real economy or imposing meaningful pay caps on financial jobs.
Pay for citizens who live outside the executive class has been steadily falling for decades. As Chuck Collins and Sam Pizzigati note for AlterNet, weekly wages for average Americans are now below 1970s levels after adjusting for inflation, while CEO payouts have exploded. So far, President Barack Obama has been hesitant to fight economic inequality at either end of the spectrum. Remember the promises he made to curb extravagant CEO pay on Wall Street back when the AIG bonuses were generating outrage back in February? Treasury Secretary Timothy Geithner has already made them irrelevant, eliminating a $500,000/year salary cap.
While we’ve heard quite a bit about how Wall Street excess wreaked havoc for homeowners, relatively little attention has been paid to the plight of renters, who often face personal catastrophe when their landlord is foreclosed on. Under a new law passed by Congress, when a bank or new owner takes control over a foreclosed property, they have to give renters living in the home at least 90 days notice before evicting them. But the law does nothing to address other injustices renters face. If your landlord is foreclosed on, for instance, you can forget about getting your security deposit back, even if the house is in top condition.
Banks also are not required to hire property managers to maintain homes they take over, which means they often let houses deteriorate despite objections from tenants. Writing for The Colorado Independent, Martha White explains that these problems are easy to correct, if Congress actually wanted to: Require landlords to put security deposits in a special account that cannot be raided by creditors in bankruptcy and force banks to hire managers to maintain the properties they foreclose on. The latter policy would also discourage banks from foreclosing in the first place by making ownership of the property more expensive for the bank.
Obama recognizes the need for change, which is why he’s proposed a major overhaul of the government’s Wall Street oversight. But in many ways, his plan identifies the wrong problems and offers the wrong solutions. The Real News features a great video spot with commentary by University of Massachusetts at Amherst Economist Robert Pollin. One of the key reforms involves granting the Federal Reserve broad powers to oversee systemic risk in the economy, but the Fed already has similar authority.
“The problem is, the Fed has already had an enormous amount of regulatory power, they just don’t exercise that power,” Pollin says.
Instead of granting the Fed more power, we should be finding ways to hold its leaders accountable. By subjecting top officials at the Fed to democratic elections, we could help ensure that the top regulatory body in the U.S. answers to the people it is supposed to be protecting.
Other creative new approaches to combating the economic crisis are featured in the most recent issue of Yes!, which is devoted entirely to economic reforms. From tips on investing locally to overhauling our broken monetary system to empowering workers, the issue emphasizes solutions that rely on democratic structures, rather than the corporate status quo (full disclosure: I’ve got an article in there on community banks).
It’s time to put some political firepower behind those ideas. Ordinary people simply have no serious voice in the policy debate surrounding Wall Street. In The Nation, Christopher Hayes describes the banking lobby’s total domination over financial reform proposals.
“On the other major legislative battles—healthcare, climate change, the Employee Free Choice Act—there is an organized, mobilized permanent infrastructure to push lawmakers in a progressive direction,” Hayes writes. “They may be underdogs, but at least it’s a fight.”
Changing the too-big-to-fail financial sector must become a priority. If we defer to the banking lobby or advisers like Larry Summers, who helped create the crisis by backing wildly deregulatory laws during the Clinton years, we can guess what the end result will look like. If we want our economy to answer to us, we have to do something about it. Income inequality and unaccountable regulators were a major part of the financial collapse. Addressing those problems has to be part of the economic solution.
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: Obama’s Regulation Overhaul Comes Up Short
by Zach Carter, TMC MediaWire Blogger
President Barack Obama rolled out his plan to overhaul financial regulation last week. While much of the Obama plan relies on the same regulators and structures that led to the current meltdown, there is one key exception. The establishment of an independent Consumer Financial Protection Agency would give ordinary citizens a seat at the financial policy table for the first time and prevent the abuses in credit card and mortgage lending that have wreaked havoc on households all over the country.
The new agency is the brainchild of Harvard University Law School Professor Elizabeth Warren. As chair of a key oversight panel for the Treasury Department’s bank bailout program, Warren has uncovered major deficiencies in the government’s handling of the plan, including nearly $80 billion in overpayments to bailed-out banks. American News Project features footage of an interview with Warren, who explains why we need a separate agency to regulate on behalf of consumers.
Several bank regulatory agencies, the Federal Reserve, the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision are already charged with writing and enforcing consumer protection rules for credit cards and mortgages, but have generally abandoned these duties to act as cheerleaders for their banks.The current structure’s problems are two-fold. First, the current regulators are funded by fees levied on the very banks they regulate. When there are several different bank regulators, regulators compete to offer the weakest oversight and attract more banks, and, in turn, more funding. The process quickly becomes a race to the bottom. When the subprime mortgage boom was surging in 2003, the OCC, a federal bank regulator, went to court to ensure that the state of Georgia’s tough predatory lending laws could not be enforced.
Second, the regulatory agencies tend to look at the health of the bank, rather than the quality of the loans it makes. If a commercial bank like Citigroup makes a really outrageous predatory loan, then sells that loan to an unregulated investment bank like Goldman Sachs, Citi’s regulator doesn’t particularly care. A new regulatory agency that answers exclusively to consumers rather than banks would be a very meaningful change for the financial system.
The rest of the overhaul is a little frightening. As William Greider explains for The Nation, instead of crafting explicit rules to curb obvious abuses, Obama’s plan relies very heavily on ceding power to the Federal Reserve. Under the new framework, the Fed would both oversee “systemic risk” in the financial architecture and regulate the banks that have become “too big to fail.” This, Greider emphasizes, is a very bad idea. The Fed has repeatedly proven itself to be uninterested in regulating banks. Citi needed $45 billion in direct cash infusions from the U.S. taxpayer and hundreds of billions of dollars in other guarantees to stay afloat, as Nomi Prins writes for Mother Jones. Who was charged with regulating the company and making sure such an outrage never occurred? The Fed.
In a video spot for GritTV, former senior banking regulator William Black argues that it makes little sense to allow banks to become too big to fail at all. Sturdier regulations are better than nothing, but the real solution is to break them up. “Why would we allow banks to be so big that they threaten the global economy?” Black asks.
Going back to Prins in Mother Jones: Elsewhere, the regulatory revamp is simply too vague to be helpful. Regarding derivatives—the financial weapons of mass destruction that destroyed AIG—it’s not clear if Obama wants to regulate the entire industry, or a small, meaningless fraction. Obama’s plan is to require that “standardized” derivatives are traded on exchanges and allow “customized” derivatives to escape investor scrutiny. But the Treasury never explains what the difference is between these “standard” and “custom” products, or how it will make sure banks don’t game the system.
Lest we forget, this crazy finance system brought us the worst economic calamity since the Great Depression. The unemployment rate, by conservative measures, is at 9.4% and rising. You may have noticed the stories about “green shoots” signaling the first inklings of economic recovery circulating through the media. But these signs are only promising, AlterNet’s Joshua Holland explains, if you take them completely out of context and ignore all of the other terrible news. The economy is in great shape … except for the millions of foreclosures that will take place this year, the skyrocketing unemployment rate, the decimated retirement funds, and the mountains of credit card debt weighing down the average U.S. consumer.
Serious consumer protections are nothing to scoff at, especially after watching an outbreak of predatory mortgage lending spawn an economic collapse. It comes as no surprise then, as Tim Fernholz notes for The American Prospect, that the bank lobby is already working to water down the new consumer protection agency’s powers. But even if a regulator for consumers makes the final legislative cut, with so many drastic problems in the current financial regulatory structure, the Obama plan simply does not do what is necessary to fend off another crisis.
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.