Posts tagged with 'financial crisis'
Weekly Audit: We Need a ‘People’s Bailout’
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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.
Weekly Audit: Reining in the Subprime Scoundrels
by Zach Carter, TMC MediaWire Blogger
President Barack Obama is scheduled to unveil his agenda for revamping financial regulation later this week. As the economy struggles though a recession created by the banking industry, it’s crucial that Obama and his advisers craft a set of rules ensuring that the financial sector strengthens our economy instead of destroying it.
Various government regulatory agencies are sparring over how the final regulatory structure will be divided. But, as Robert Kuttner notes for The American Prospect, the most important aspects of the plan will not be who regulates what, but how stringently they are required to regulate. The Federal Reserve has had the power to devise consumer protection regulations for years, but has generally decided against writing strong rules to defend borrowers. There is perhaps no area of public policy more critical to the nation’s economic stability than consumer protections in banking, especially as the subprime mortgage crisis continues to devastate U.S. households.
Without stronger regulations, the government’s rescue programs for the financial sector will be a complete waste, and bailouts will only reward the destructive behavior that created the current recession. And the bailout plans are getting more absurd every week. Writing for Mother Jones, Nomi Prins details the latest bank bailout farce: The false euphoria emanating from the Treasury Department after it decided to allow 10 banks to return the bailout money it received from the public. Or, at least, some of the bailout money.
As Prins explains, the Troubled Asset Relief Program (TARP) accounts for just a tiny fraction of the bank rescue efforts currently orchestrated by the Treasury, the Federal Reserve and the FDIC. When banks accepted TARP money, they agreed to implement a few modest restrictions on executive pay, though none of the other bailouts came with any strings attached. The FDIC, for instance, agreed to guarantee the corporate debt that banks issue to fund their operations without requiring banks to adopt any changes in the way they do business. This government backing has allowed banks to raise several billion dollars in funding at extremely inexpensive rates, at a time when most banks were struggling to raise any money at all. Suddenly, some of the chief beneficiaries of the FDIC program—Goldman Sachs, Morgan Stanley and American Express, to name three—find themselves flush with cash and able to pay back the TARP money, and thus allow their CEOs to escape the executive compensation caps.
As Laura Flanders explains in the below video from GritTV, there is a difference between how “healthy” a bank appears to the U.S. Treasury and what it actually does for ordinary people. The TARP money was supposed to serve a public purpose by freeing up funds that could be lent out into the economy. But the very banks now going off the public payroll have been retroactively jacking up interest rates on credit cards all year and spending millions to lobby against legislation that would prevent foreclosures. Small surprise, then, that the state of the U.S. housing market is as bad as it has ever been.
“The lesson is pretty clear: you cannot stabilize the mortgage market and undercut the working family at the same time, you just can’t,” Flanders says.
It’s not as if the economy has suddenly turned a corner. In addition to all those foreclosures, the unemployment rate is 9.4% at last count and keeps surging higher. But the effects of the recession are not being felt equally among all workers. New America Media (NAM) features a piece by Raechal Leone that highlights the even more severe unemployment rate among blacks in the U.S.—a whopping 14.9%. Those numbers are not expected to get better anytime soon. When economists talk about the recession “ending,” they mean that the Gross Domestic Product (GDP), a measurement of the total output of the U.S. economy, will have stopped shrinking. Economists almost universally believe that the unemployment rate will increase well after GDP stops contracting—as many as five years in some predictions.
The Applied Research Center (ARC) has released a report detailing the disparate impact of the recession on minorities, accompanied by a host of constructive policy recommendations. In the financial world, minority borrowers still face a dramatically uneven playing field. Black and Latino borrowers were more much more likely to be steered into an expensive subprime mortgage during the housing bubble than white borrowers were. As Nina Jacinto details for Wiretap, these lending practices have been so pervasive that the NAACP has filed lawsuits against both Wells Fargo and HSBC for systematically targeting black borrowers with expensive supbrime mortgages.
We need to upgrade our anti-discrimination banking regulations to end this systematic predation. Many of the other policies that ARC endorses are not geared specifically toward ending the racial wealth gap, but would alleviate some of the glaring effects of institutional racism. Since people of color are disproportionately relegated to low-paying jobs (or, as Leone noted for NAM, no work at all), policies that make it easier for low-wage workers to organize and demand fair pay, like the Employee Free Choice Act, would help ease this rampant inequality.
The Obama team’s regulatory proposal will only mark the beginning of a policy debate that will likely last for months. But make no mistake, serious bank reform is one of the most important steps the government can take to make the economy accountable to ordinary citizens and CEOs alike. Without substantive change in the financial sector, the next meltdown could already be underway.
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: Why Accountability Matters
by Zach Carter, Media Consortium MediaWire Blogger
With workers all over the globe trudging through a catastrophic recession, it’s almost a given that governments will be battling the economic slide for a long time. Part of the effort to rebuild must involve new rules and regulations, but meaningful systems for economic accountability will be just as essential. If we do not hold the reckless executives who caused this crisis accountable for their actions, we risk regressing into similar turmoil in the near future.
We all know that times are tough, and almost all of us agree on the cause: A massive Wall Street risk-binge combined with an almost total failure of regulatory oversight. It’s surprising that few meaningful criminal charges have been filed amid what may very well be the worst financial crisis in history. Bernie Madoff will likely spend the rest of his life behind bars, but the subprime mortgage brokers who specialized in predatory loans–and the Wall Street banks that bought them–have yet to face consequences in court.
In The American Prospect, Tim Fernholz details the efforts of some state-level officials to investigate and punish white-collar crime at the nation’s largest financial firms. Much of the problem, Fernholz explains, results from an insane legal landscape at the federal level. Active deregulation of the financial sector, which began in the 1980s, is shielding the irresponsible risk-taking that caused the current crisis from legal penalties.
Despite these obstacles, Massachusetts Attorney General Martha Coakley and other key officials are going after some of the worst offenders, and have successfully taken action against some of the predatory profiteers, including subprime mortgage lender Fremont Investment & Loan and Wall Street icon Goldman Sachs. Coakley secured an injunction against Fremont to prevent the company from foreclosing on its borrowers, and Goldman agreed to modify $50 million in predatory mortgages.
But while Coakley’s investigations may bring some much-needed relief to troubled homeowners, they’re only part of the solution. If executives that approved their companies’ subprime policies go through this crisis unscathed, it will be difficult to deter similar behavior in the future.
Fremont had to be sold off last year at fire-sale prices to avoid bankruptcy, but Goldman has weathered the economic downturn better than many of its Wall Street brethren. Much of the company’s resiliency, however, stems from its ability to secure billions upon billions of dollars of bailout financing from the U.S. government. Over at AlterNet, Jim Hightower blasts Goldman for its multiple avenues of taxpayer support and emphasizes that only the notorious Troubled Asset Relief Program (TARP) comes with any strings attached whatsoever. While Congress attached some very modest restrictions on executive compensation to the TARP bailout, the FDIC and the Federal Reserve have provided big banks with trillions in loans and guarantees completely free of restrictions on how these perks are deployed.
Goldman received $10 billion under TARP, which the company hopes to repay soon to shrug off those CEO pay limits. When the government bailed out AIG, $12 billion of the funds were directed Goldman’s way. But perhaps the greatest and lowest-profile outrage comes in the form of the FDIC’s Temporary Liquidity Guarantee Program. Hightower notes that the FDIC has guaranteed $28 billion of Goldman’s recently issued corporate debt without imposing any restrictions on the Wall Street giant. In short, if Goldman were to default, the government would pay off its investors. This taxpayer guarantee has allowed Goldman and many of its banking peers to secure capital at exceptionally low rates, helping the firms survive during a time when any financing is hard to come by.
Even if Goldman is able to repay its TARP money, the company remains thoroughly dependent on taxpayer assistance. Once the TARP funds are paid off, Goldman will be free to pay its executives whatever it wants—even when that salary is subsidized by American tax dollars. That’s a pretty perverse definition of accountability.
Of course, botched bailouts are not unique to the financial sector. As John Nichols explains in The Nation, the terms of automaker Chrysler’s bankruptcy proceeding include plans to close down manufacturing plants across the Midwest, a strategy that undermines the entire economic justification for bailout: Sparing investors pain in order to save jobs.
“Tens of billions of taxpayer dollars are being poured into Chrysler and General Motors, ostensibly to ‘save’ the U.S. auto industry,” Nichols writes. “Yet, the companies have acknowledged that they plan to use the money to shutter factories, lay-off tens of thousands of factory workers and dramatically downsize dealership networks–at the cost of as many as 100,000 additional jobs.”
Still worse, it appears that both Chrysler executives and officials from the Obama administration mislead Congress on the implications of the bankruptcy. Nichols cites a letter from Rep. Dennis Kucinich, D-Ohio, in which the lawmaker says Congress was told there would be no permanent job losses a result of the Chrysler bankruptcy filing. The very next day, plant closings were announced in Michigan, Missouri, Wisconsin, and Ohio.
Even the economic stimulus package rewarded companies with a history of recklessness. In a piece for Salon, ProPublica journalists Michael Grabell and David Epstein reveal how contractors that have paid substantial fines for violating environmental regulations, federal safety rules and laws against racism have been able to score new business with the federal government. The worst offender? A contractor known as CACI International, which has been awarded three contracts worth $1.5 million under the stimulus package, despite ties to abuses at Abu Ghraib prison in Iraq.
CACI helped hire interrogators at Abu Ghraib, but an Army investigation found that the contractor ended up employing people with “little or no interrogator experience.” Abuses committed by CACI employees included dragging a handcuffed prisoner on the ground, placing a prisoner in an “unauthorized stress position,” dressing a prisoner in women’s underwear and lying to investigators about using dogs in interrogations, according to Grabell and Epstein.
If the government relies on criminals to build the recovery, the public is not going to get the results it needs. But the recovery is only part of the solution to the current economic crisis. If we fail to prosecute executives whose active scheming and criminal negligence brought down the global economy, we are inviting more of the same behavior in the future.
Weekly Audit: Congress Caves to Bank Lobby on Foreclosures
by Zach Carter, TMC MediaWire Blogger
On Thursday, lawmakers bowed to pressure from the bank lobby and killed a crucial piece of anti-foreclosure legislation, poisoning the economy in an effort to keep money flowing to Wall Street. Meanwhile, jobs continue to disappear, retirement accounts are evaporating and families are struggling to cope with economic hardship.
Last week’s turn of events proved that the U.S. Senate remains utterly beholden to the financial predators that created the current mess. You might think that after destroying the economy, bankrupting itself and then going on corporate welfare, the banking industry’s clout on Capitol Hill would have diminished. But you’d be wrong.
The American News Project’s Lagan Sebert recorded a lobbying strategy session at the Mortgage Bankers Association annual meeting in Washington, D.C. This is the lobbying team that torpedoed the anti-foreclosure legislation, which would have given judges the power to revise the terms of unaffordable mortgages in court—a process the bankers refer to as a “cram-down”—and level the playing field for homeowners. As it stands, when borrowers fall behind, banks can use the threat of foreclosure to deny a sustainable long-term loan modification and continue to squeeze them for high monthly payments.
Snippets from the bank lobby meeting seem like some absurd surrealist parody of the U.S. political system, with lobbyists urging other bankers to give money to politicians and claiming credit for holding the economy hostage. “The cram-down vote may come tomorrow, and wouldn’t it be beautiful for it to go down to defeat while we’re up on the Hill,” says an animated David Kittle, Chairman of the Mortgage Bankers Association.
Such bad behavior on Wall Street, of course, has lead to the worst economic downturn since the Great Depression. The unemployment rate currently stands at 8.5% and is likely to go much higher when the Department of Labor makes its monthly report on the job market this Friday. As Emily Steinmetz explains for High Country News, high unemployment levels are much more than a statistic: They mean real hardships for ordinary people. In Arizona, food banks and churches have been overwhelmed by those seeking basic necessities like food and diapers. Steinmetz profiles St. Mary’s Food Bank, which distributed upwards of 19,000 emergency food boxes across the state in September alone. The boxes contain bare-bones items like canned vegetables, jars of peanut butter and bags of rice for families that cannot afford to eat.
In the below video, GRITtv’a Laura Flanders interviews Heather Boushey, senior economist at the Center for American Progress, about how the unemployment crisis is impacting families based on gender. Typically women are much more likely than men to dropout of the labor force when they lose their jobs, but in the current recession, record numbers of men are being laid off.
That’s creating not just a loss of income, since women still face a significant pay gap, but serious schisms when men find themselves unable to perform the role in the family they’re accustomed to playing. It’s also sowing seeds for political unrest: when people find themselves out of a job thanks to structural economic forces beyond their control and facing problems at home as a result of being laid off, it generates a lot of anger.
As University of Texas Economist James Galbraith writes for the Texas Observer, evaluating the economy means examining the links between the lives of ordinary workers and the operation of major institutions like the banking industry and government. When we pretend that there is no public interest in overseeing economically critical firms, when bank regulators hold press conferences in which they literally attack stacks of regulations with a chainsaw, Galbraith says, a resulting calamity for workers and families is predictable.
If this crisis has taught us anything, it is that what Galbraith refers to as “the ritual confidence of public officials and the dry numerical optimism of business economists” simply cannot be trusted without a deeper analysis of the plight of everyday citizens. Powerful people on both Capitol Hill and Wall Street spent the last decade insisting that everything was just fine, when in fact the entire financial system was falling off a cliff.
Writing for Mother Jones, James Ridgeway sketches a brief history of the retirement industry, revealing the steady migration from employer-provided pensions to 401(k) plans outsourced to Wall Street professionals. Ridgeway makes it hard to view the 401(k) industry as anything but a decades-long scam that has been shielded from serious scrutiny by the stock market growth from the early 1980s to 2007. Even the name “401(k)” comes from a covert loophole that was originally designed to help big banks avoid paying taxes.
In 401(k) accounts, workers have their money invested in stocks and bonds picked by a Wall Street fund manager, rather than receive guaranteed benefits from their employer. In return for this precious investment advice, the fund manager takes a bite out of any profits the worker’s 401(k) fund reaps, in some cases as much as 50% of the actual gains. This might not be so egregious if the fund manager made amazing stock picks that garnered huge returns for the worker, but most of these funds underperform index funds. Even high-performing funds are subject to the often arbitrary movement of financial markets. So when, say, stocks take a beating thanks to years of excessive risk-taking on Wall Street, worker accounts are devastated.
This continued influence of the banking establishment in Washington imperils not only our economy but our political legitimacy. When an industry transforms itself into a vehicle for economic destruction, the appropriate response is to crack down on abuse with new rules and regulations. Instead, lawmakers have ignored public cries for accountability and capitulated to the culpable elite, making it increasingly difficult to view Congress as a group of representatives acting for the public good.
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.