Posts tagged with 'mortgage crisis'
Weekly Audit: More Jobs Please
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By Zach Carter, Media Consortium Blogger
One year after President Barack Obama secured passage of his critical economic stimulus package, the U.S. Senate is finally taking anther look at how to create jobs and repair the economy. These issues are more important than ever, but absurd Republican obstructionism and timid Democratic negotiation are once again threatening good public policy.
Not really bipartisan, is it?
As Steve Benen notes for The Washington Monthly, the Senate Finance Committee reached a “bipartisan” agreement to supposedly spur job creation last week. Republicans demanded billions in tax cuts for wealthy people, but kept on caterwauling about the federal budget deficit. In exchange for $80 billion to dedicate to jobs—an extremely modest figure given the state of the labor market—Republicans asked for hundreds of billions in giveaways for the rich. And that’s just to get the bill through the Finance Committee, much less the full Senate. (more…)
Weekly Audit: Dismantling the Wall Street Casino
By Zach Carter, Media Consortium Blogger
Bailout pay czar Ken Feinberg raised a ruckus last week when he announced plans to slash cash payouts to executives at seven companies that have received massive levels of taxpayer support. While better oversight of the bailout barons is helpful, the best way to change Wall Street pay practices is to adopt a set of tough, comprehensive regulations that cover everything from the executive suite to the loan department. As is, many of the executives Feinberg cracked down on will still make millions this year from stocks and other perks, while the very banks that depend the most on bailout money are spending like mad to lobby against reform. (more…)
Weekly Audit: Protect Consumers, Not Wall Street
By Zach Carter, Media Consortium Blogger
The economy is still getting worse. Foreclosures are surging above last year’s epic highs and the unemployment rate marches upwards every month. As the misery grinds on, Wall Street lobbyists and their allies in Congress are pushing hard to distract the public from the real causes of the current global economic crisis. Corporate America is trying to pin the blame for our empty pocketbooks on President Barack Obama and the phantom socialist menace, and cable news pundits are taking the bait. (more…)
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: Depression-Era Inequality, Only Worse
By Zach Carter, TMC MediaWire blogger
A new study by Economist Emmanuel Saez revealed this week that income inequality in the U.S. is more severe today than at any time since World War I, and the current recession is taking its heaviest toll on the worst-off members of our society. As our government rebuilds the financial sector using taxpayers’ money, it’s important to remember that both financiers and the government are responsible to our communities, not just bank shareholders. If we want to strengthen our country’s economic foundation, we need to demand better wages for workers and an end to all kinds of predatory lending.
Saez’s new data on income inequality is, as Paul Krugman put it, “truly amazing.” Saez, who teaches at the University of California at Berkeley, found that the top 0.01% of U.S. earners had 6% of total U.S. wages, more than double the level in 2000. Earners in the top 10%, meanwhile, took home an astonishing 49.7% of all wages. That gap is larger now than during the Great Depression or the Gilded Age of the Roaring ’20s.
“We’re seeing Depression-era inequality again—only now it’s slightly worse,” writes Steve Benen for The Washington Monthly. Benen also notes that this level of inequality is not an inevitable consequence of a market economy: It’s an extreme historical aberration. In the U.S., prosperity for much of the 20th Century was shared. But in 2007, at the economic bubble’s peak, the wealthy simply got wealthier.
In that context, it is beyond absurd that the government is allowing 8-figure bonuses to be doled out by bailed out banks. Writing for Salon, Robert Reich dissects the policy implications of Citigroup’s plans to pay its top executives an average of $10 million this year and award over $100 million to its top trader, a man who literally owns a castle in Germany. Citigroup was one of the most reckless U.S. banks during the housing bubble, a major subprime offender that received $45 billion in direct bailout money, as well as hundreds of billions in federal guarantees. How much is $45 billion? With the median U.S. home price at $174,100, that’s the full market price of over 258,000 foreclosed homes. The company says that $10 million a head is necessary to attract and maintain top “talent,” which Reich notes is a somewhat misleading term, given recent history. The problem is not just that Citigroup and other Wall Street firms are paying tons of money to a few people, it’s that these people are being rewarded for the same kind of activities that got us into this mess to begin with: Risky, highly leveraged securities trading.
“Over the last several years Wall Street has exhibited a truly astonishing lack of talent,” Reich says, noting that, “The Street is back to the same, relentlessly untalented tactics that made it lots of money before the meltdown—which also forced taxpayers to bail it out, caused the world economy to melt down, and tens of millions of people to lose big chunks of their life savings.”
In truth, Reich argues, most large financial firms in the U.S. are much more like public utility companies than private-sector businesses. Even in good times, they depend on government guarantees and other support systems to function. In bad times, we bail them out. Instead of paying financiers tens of millions of dollars to reinforce a flawed system, Reich argues that we should impose rules that result in salaries similar to the public utilities sector, where top earners are generally restricted to 6-figure incomes.
The American Prospect features two pieces emphasizing problems in the current financial sector. Under a law known as the Community Reinvestment Act (CRA), enacted in 1977 we require banks to make loans in communities where they collect deposits. The loans have to be to dependable borrowers and they have to be relatively inexpensive. The law works very well—institutions covered by it made only a tiny fraction of the high-interest subprime loans that brought down the financial sector, as National Community Reinvestment Coalition President John Taylor notes for the Prospect. But CRA only applies to actual banks. You know, the places where you deposit your paychecks. CRA does not apply to subcompanies owned by the same corporation, and it does not apply to giant Wall Street securities firms like Bear Stearns and Goldman Sachs. Taylor says we need to expand CRA to cover these other big players in the financial world.
Why? As Alyssa Katz details in a piece for the Prospect funded by The Nation Institute, many Wall Street firms are bidding on foreclosed properties and selling them at rip-off rates to low-income borrowers.
But as Mary Kane notes for The Washington Independent, banks have also devised several methods of making money without making a loan. By charging tremendous fees on borrowers for minor infractions, banks generate billions of dollars without producing anything of social value. One of the worst forms of abuse, Kane writes, comes in the form of overdraft fees. When you withdraw too much money from your bank account, the bank fronts you the money, and then charges you a fee for this “protection.” The trick is, banks almost never tell you that this has occurred, and often play around with the timing of your charges and deposits to maximize the fees they collect. Banks are on track to collect $38.5 billion in such fees this year alone. The worst part is, the fees come from the poorest customers—rich people don’t overdraw their bank accounts, because they have tons of money.
In the case of credit cards, banks routinely slap borrowers with outrageous fees and interest rate hikes when the borrowers are making payments on time. Over the years, banks have targeted younger and younger credit card customers, as Adam Waxman notes for WireTap. After years of declining wages for all but the wealthiest citizens, consumers have been turning to pricey plastic to finance basic necessities.
Sadly, corporate America does not seem very focused on helping workers establish their financial independence. The Real News talks with Richard Wolff, an economist with the New School who emphasizes that, while worker productivity has jumped in recent months, wages have not made the corresponding increases. Quarterly productivity numbers tend to jump around a lot, but the trend of not compensating workers for improved efficiency has been around for years.
In a consumer-driven economy, major problems can’t be fixed by giving lots of money to a few people, especially if those few people are already rich. To support broad, meaningful economic growth, we need to tailor our policies that empower those on the lower rungs of the economic ladder. And when we bail out giant corporations with taxpayer money, we need to make sure those companies arrange their business to improve the lot of taxpayers.
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: Fixing the Foreclosure Problem
by Zach Carter, TMC MediaWire blogger
The U.S. job market may be showing signs of life, according to a report issued by the Labor Department on Friday. The unemployment rate dropped in July, something no economist expected. Under the most optimistic interpretation, the news indicates that the worst of the recession is finally behind us. But the scenario isn’t really so rosy, as our government has yet to relieve the foreclosure pandemic. Even if unemployment is leveling off, there will be no economic recovery if the the foreclosure problem isn’t fixed.
July’s unemployment rate only fell from 9.5% to 9.4%, and even the most bullish Wall Street economists think the rate will hit double digits by the end of the year. The fact that July’s tiny drop in unemployement counts for good economic news says a lot about how severely the economy has deteriorated over the past year and a half.
But when you dig a little deeper, the numbers get worse. As Tim Fernholz explains for The American Prospect, even though the unemployment rate dropped, the nation’s economy actually shed 247,000 jobs in July. The rate was pushed down because 400,000 people gave up looking for a job in July; as such, they are no longer included in the statistic. So, while we “only” lost 247,000 jobs, we also lost 400,000 workers.
The government also adjusts its job loss figures for seasonal developments. When the Labor Department says we lost 247,000 jobs in July, that isn’t the actual number—it’s the number relative to what the Department considers a normal July. This summer has been unique for the U.S. economy, and especially in the case of the automobile industry. Auto companies usually lay off workers in the summer: The factories close while companies prepare the next year’s models. So many factories were already closed earlier this year that the seasonal shutdowns haven’t really happened this summer. Even though car companies laid people off in July, the government’s seasonally adjusted numbers marked an increase in car manufacturing jobs.
Things get even more complicated when you include the Cash for Clunkers program, which started on July 24. The plan offers people up to $4,500 to trade in their gas guzzlers for more fuel efficient new car. Whether the program helps the environment is somewhat controversial, but there is no doubt that it has created a lot of unusual demand for new cars. As Ed Brayton notes for The Michigan Messenger, the government’s plan to pump an additional $2 billion into the program has analysts predicting a big boost for manufacturers in July and August.
So we don’t really know if the labor market actually improved last month, or if the report is just an exaggeration of statistical anomalies resulting from the recession itself, or even some of the government’s recovery efforts. But as Steve Benen notes for The Washington Monthly, even if the numbers come with a healthy dose of uncertainty, it’s still better to see them come in good than bad. “There hasn’t been encouraging news on the job front in quite a while, and given the severity of the economic crisis, today’s report offers at least some relief,” Benen says. “The job numbers beat expectations, the overall unemployment rate declined, earnings went up, and the manufacturing sector improved.”
But even if unemployment is finally slowing down, the housing market remains awful. Foreclosures are significantly outpacing the administration’s efforts to help troubled borrowers. The Treasury Department released a report last week indicating that only about 9% of the borrowers eligible for relief under the government’s anti-foreclosure plan have actually received any aid—and even here the numbers are juiced to make the program look better. The administration only includes borrowers who are already at least two months behind on their mortgage payments in the group of eligible borrowers, when in fact any borrower in danger of “imminent default” is supposed to be eligible. Much of the problem, as I argue in a piece for Salon, is that the plan relies on private-sector debt collectors to identify distressed homeowners and get them help, something these companies have never been very interested in doing. All in all, just 235,247 borrowers have received assistance under the Obama plan, while foreclosures increased to 1.5 million in the first six months of 2009, with 2.4 million expected for the entire year and 9 million by 2012.
Writing for Mother Jones, Andy Kroll emphasizes that a much better policy option is available than the current tack. Rather than ask the banking industry to voluntarily adopt the administration’s plan without any consequences, we should put “homeowners’ fate in the hands of a neutral arbiter, like a bankruptcy court judge . . . [It] would go a long way toward stemming the tide of foreclosures,” Kroll writes.
Thanks to a bizarre legal loophole, mortgages cannot be modified in a bankruptcy proceeding if the owner actually lives in the house (investment properties, on the other hand, can be written off). In other words, if a predatory loan is driving you bankrupt, a judge can’t do anything about it in bankruptcy court. Congress has tried to change this rule a few times over the past year, but the bank lobby has stymied those efforts. The most recent legislative push failed overcome a Senate filibuster in April, but the political momentum may be changing as foreclosures get increasingly out of hand.
As Mike Lillis notes for The Colorado Independent, Sen. Dick Durbin, D-Ill., plans to bring back the legislation if the banking industry doesn’t get serious about helping borrowers fast. Many of the companies letting borrowers fall into foreclosure received billions of dollars in bailout money over the past year, and some even agreed to help borrowers as a condition for taxpayer support. But reform doesn’t just depend on the banks. Peter Dreier argues in The Nation that citizens need to publicly protest for stronger economic reforms.
Foreclosures are terrible for the economy. They wreak havoc on families’ lives, wipe out personal savings, lower the value of neighboring properties and put more homes on the market, further lowering home prices nationwide. If we cannot stop foreclosures, the economy cannot recover. If job losses are finally moderating, that’s great news. But it would be much better to see job losses stabilize and see the banks we bailed out actually do something to avert foreclosures.
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: 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: Ending the Economic Status Quo
by Zach Carter, TMC MediaWire Blogger
The banking lobby still holds enough sway inside the Beltway to torpedo sensible consumer protection rules, even after releasing a flood of predatory mortgages that kicked off the current economic crisis. On issues ranging from payday loans to subprime mortgages, the banking industry continues to successfully defend itself against new regulations that would protect the consumer. As if that weren’t outrage enough, the finance lobby has also joined other corporate interest groups to fund misinformation campaigns that smear unions and block wage growth.
As Mary Kane explains for The Colorado Independent, the push to rein in predatory mortgage lending appears to be losing steam on Capitol Hill. An extremely complex mortgage reform bill that is conciliatory to the finance lobby passed the House last month, angering consumer advocacy groups. Among the problems: the bill pre-empts many stronger state predatory lending laws and protects the Wall Street investment banks that gorged themselves on mortgage-backed securities.
Consumer protection shortfalls are not limited to messy mortgages. Lagan Sebert and David Murdoch detail the payday loan industry’s continued assault on U.S. consumers for the American News Project. By offering small loans, typically in amounts ranging from a few hundred to a few thousand dollars, payday lenders target consumers who need money for basic necessities, then charge them outrageous interest rates (as in, above 700%).
For years, newspaper editorials have denounced payday lenders for systematically exploiting the most vulnerable members of society, including members of the U.S. military, who are often targeted as a result of their reliable paychecks. The solution to the problem is as simple as the business is repulsive: Capping annual interest rates on all consumer credit products at 36% would make this kind of predation impossible.
Nevertheless, the payday loan industry has been able to escape a regulatory crackdown via an intense and sustained lobbying effort. Senate Banking Committee Chairman Chris Dodd, D-Conn., is now parroting payday lending lobbyists. Since payday loans are supposedly paid back within a matter of weeks, Dodd and the payday lending lobby say that it’s unfair to hold them subject to the same standards as a 30-year mortgage.
The argument is insane. No bank would ever get away with charging a 36% interest rate on a mortgage. Even the most predatory subprime mortgages didn’t have interest rates anywhere near that high. But Sebert and Murdoch go further, highlighting a report from the Center for Responsible Lending which found that payday lenders make 90% of their revenue from borrowers who do not pay their loans off on time. The loans are structured to be so expensive that consumers become trapped into making payments for the long-term, often spending thousands of dollars over multiple years to get out from under an initial loan of just a few hundred dollars.
Dodd has received major campaign contributions from the banking industry, but sometimes the lobbying effort is much more subtle. Several major corporate lobby groups have united under the misleading moniker of “Alliance to Save Main Street Jobs” to finance shoddily researched projects that defend the interests of the executive class in economic policy. An Alliance for Main Street Jobs report written by Anne Layne-Farrar has received quite a bit of attention for its claim that the Employee Free Choice Act (EFCA) would kill 600,000 jobs by making it easier for employees to organize. Several major news outlets have cited the allegation, including Fox News, MSNBC, The Wall Street Journal, and CBS News. As Art Levine reveals for In These Times, however, this research relies on completely meaningless statistical trends and disingenuous research design that render its findings utterly hollow.
Corporate executives are not afraid of EFCA because they think it will kill jobs or disenfranchise workers. They are afraid because it will empower workers to fight for living wages and provide safe working conditions—things that leave less money around for big executive bonuses at the end of the year and give workers a greater say in how companies operate.
In some respects, EFCA also represents the other side of the predatory lending problem. It is important to ban abusive loans, but it is just as important to make sure people are paid fairly for their work to ensure they don’t need to seek out shady credit just to make ends meet.
When so many brewing legislative battles relate to the economy, it’s easy to forget about the programs that have already been enacted. Some of the tax cuts included in the economic stimulus package were aimed at fostering investment in low-income and minority neighborhoods—a worthy goal. But as Michelle Chen notes for ColorLines, the program has some significant flaws. Chen highlights a report from the Government Accountability Office (GAO) which found that minority-owned community development entities are largely being excluded from the program, with approval rates about 67% lower than other applicants. The GAO could find no reasonable explanation for why minorities were not making the cut, especially when some recipients of the tax credits have a history of consumer exploitation. Capital One Bank, for instance, is receiving $90 million of these tax credits, despite its long history of abusive subprime credit card lending.
There have been some successes this year in the push for an economy that answers to workers and consumers. Much of the stimulus bill is designed to make sure important jobs don’t disappear during the recession, and Sen. Dodd’s credit card reform bill passed both chambers of Congress by comfortable margins and included some very strong improvements. But we know what caused the economic crisis: stagnant wages and predatory lending. A true recovery will have to empower workers and protect consumers, both of which will require breaking with the corporate status quo.
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.