Posts tagged with 'Timothy Geithner'
Weekly Audit: Geithner, Bailouts, and the Financial Crisis
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By Zach Carter, Media Consortium Blogger
The AIG bailout is one of the largest redistributions of wealth from ordinary taxpayers to bigwig bankers in history, one in which current Treasury Secretary Timothy Geithner played a key role. Newly uncovered emails reveal that Treasury Secretary Timothy Geithner’s New York Federal Reserve office urged AIG to conceal key information about the bailout from the Securities and Exchange Commission.
If Geithner was involved in those decisions, he could face charges of securities fraud. As John Nichols explains for The Nation, the quality of Geithner’s judgment is no longer in question—we already knew he committed plenty of errors while negotiating the AIG bailout as president of the New York Federal Reserve. The question now is whether Geithner needs to be prosecuted for misleading federal regulators. (more…)
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: 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: Stop Subsidizing Wall Street
Treasury Secretary Timothy Geithner rolled out his new Wall Street bailout plan on Monday and the progressive verdict is already in: This bailout doesn’t look much better than the last one. In fact, Geithner’s latest plan isn’t much different from several other flawed proposals policymakers have floated over the past year. At its core, Geithner’s program is just another attempt buy up “toxic assets” from banks at inflated prices.
If most major U.S. banks accepted current market prices for the bad, mortgage-related assets on their books, they would be insolvent. Geithner is trying to convince Wall Street that the assets are worth a lot more than everyone thinks they are, rather than deal with the fundamental problems of the assets and their owners. The plan unveiled on Monday involves a smorgasbord of guarantees for Wall Street investors, all part of an effort to sweeten the pot and convince them to buy toxic mortgage-related assets from troubled banks. Unfortunately, Geithner’s revisions create new problems without solving key previous dilemmas inherent in the plan.
In a post for Talking Points Memo, Josh Marshall highlights a clip of Nobel Prize-winning economist Joseph Stiglitz rejecting a very similar plan in early February. Marshall asks “Why are we still at this?”
Under older formulations of the toxic asset purchase model, the government would have purchased the assets directly from banks. Since the assets are hard to value, this approach would have carried the risk that the Treasury would pay too much and provide banks with what amounts to a bailout (inflated price = free money + no strings attached). Geithner’s new plan offers incentives that encourage hedge funds and private equity companies to buy toxic assets from banks. But the incentives do nothing to make sure the funds do not pay too much for those assets. Indeed, Geithner’s plan actually encourages the private sector to pay too much. The troubled banks are still likely to be bailed out, thanks to a strong possibility that investors will pony up artificially high prices for their assets. The result is a set of economically irrational subsidies for both banks and Wall Street investment houses.
As Ezra Klein puts it for The American Prospect: “Imagine an art auction. Now imagine an art auction where Sotheby’s loans money to the participants and promises to pay the losses if the paintings fall in value. Think the pricing will be the same? And who would you say is being protected: Sotheby’s or the private investors?”
Still worse, all of those subsidies and guarantees for hedge funds mean that taxpayers are on the hook for much more than our private sector “partners,” since buying up assets that nobody wants to buy is an intrinsically risky plan. In a sane investment world, taxpayers would benefit from a greater share of any gains from the investment. But the Geithner plan actually works the opposite way, as David Corn writes for Mother Jones: “The feds are shouldering much more of the risk burden than the private firms. Yet the feds would not get any greater split of the profits—if they ever materialize.”
The government has intentionally created a gamble in which taxpayers bear the brunt of the blow for any losses, but allows Wall Street investors to enjoy a disproportionately large share of any gains. Subsidizing hedge funds and private equity firms serves no real economic function– they do not make loans that help small businesses or consumers. If we are going to bail out troubled banks, we might as well control how our funds are spent and ensure that the mistakes that created this problem are not repeated: wipe out the shareholders who made bad bets on poorly run companies and kick out the management teams who drove those companies into the ground.
Everyone, of course, is still angry about those AIG bonuses. But excessive executive compensation is not only a problem for companies that have been bailed out, as David Moberg explains for In These Times. Outrageous CEO paychecks distort timelines for executives, encouraging them to take short-term risks at the expense of long-term profitability. This is bad not only for individual companies, but for the entire economy. The current financial crisis is a direct result of executives binging on risky securities to score big paydays without worrying about future damages to their companies’ balance sheets.
It’s also easy to forget that corporations are not merely wealth machines for their top executives—they are supposed to serve a useful economic function and fulfill actual social needs. Moberg argues persuasively that we need new rules for corporate accountability that align the interests of companies with the well-being of our society.
Over at Yes!, David Korten emphasizes the risk that important reforms on Wall Street will fall by the wayside if the government continues to focus on short-term emergency bailout plans instead of serious regulatory changes. It’s past time for regulators to impose new rules on the game. The current financial crisis hit in the summer of 2007. Bear Stearns collapsed over a year ago. If the government had devoted more time to restructuring a broken financial system and less time orchestrating short-term bailouts, policymakers would have a much more effective set of tools to combat the crisis with. The most important lesson we have learned so far is that when a bank is considered too big to fail, it has become too big to exist. If lawmakers do not force over-sized financial behemoths to downsize, the entire economy will be jeopardized again when Wall Street’s next speculative bubble bursts.
At present, however, Geithner seems content to simply blow another bubble with a new set of windfalls for Wall Street. If that sounds like a raw deal for taxpayers, that’s because it is.
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: Progressive Pressure is Repairing the Economy
Progressive media is sounding the alarm on the AIG bonus scandal, demanding that policymakers stop repeating Bush administration mistakes and offering concrete solutions to the dire economic situation those missteps have created.
Former Secretary of Labor Robert Reich describes the bonus insanity in a blog distributed by AlterNet. “Had AIG gone into chapter 11 bankruptcy or been liquidated, as it would have without government aid, no bonuses would ever be paid,” Reich writes, noting that institutions like AIG “are no longer within the capitalist system because they are no longer accountable to the market.” If AIG is not accountable to the Treasury Secretary of the country that owns an 80% stake in AIG, then the company has unlimited access to taxpayer coffers without being accountable to anyone at all.
The government’s first set of actions after it took control of its AIG stake back in September should have been to identify and renegotiate every important contract the company was tied up in. Whether those contracts were guaranteed bonuses with current employees or complex credit default swap transactions with Goldman Sachs, the extraordinary assistance the government had agreed to provide would have been a perfectly legitimate legal justification to demand new contractual terms. In short, the government should have exercised the benefits of ownership—exactly what progressive economists, columnists and bloggers have been demanding since the bailout debate began.
But while the uproar over AIG’s bonuses vindicates progressive calls for more stringent action to rein in the financial predators, President Barack Obama inherited an economy in very real danger of collapse, with the banking crisis is the epicenter of the economic earthquake.
While most economists are warning of the worst recession since the Great Depression, Robert Kuttner reveals for The American Prospect why this one might actually be worse. When the stock market crashed in 1929, the U.S. financial system was still generally healthy. It took another three years for unemployment and general economic malaise to overwhelm the banking world. Today, the banking system is already broken and could get even worse without swift and dramatic action from the Obama administration. The U.S. is not a major international creditor as it was in 1929, but rather the world’s largest debtor, and today far more Americans have their life savings tied up in the value of their home and in the stock market than in the early years of the Depression. Millions of Americans have already seen their nest eggs decimated in the current recession, a process which took years during the Herbert Hoover administration.
Kuttner emphasizes that the situation is not hopeless—it will simply require a bigger set of policy tools than the Bush administration was willing to wield. “All of these economic calamities have solutions, but each is more radical that what’s currently on offer,” Kuttner writes. Temporarily nationalizing big banks has become inevitable if recovery is going to be taken seriously. We’ll also have to get used to very large federal deficits—World War II deficits were nearly triple the deficit we will see this year. If foreign creditors decide to stop footing the bill, the U.S. may need to finance its economic salvation by selling recovery bonds to our own citizens just as we sold war bonds in the 1940s war bonds.
The key is to keep the progressive pressure on high. In an interview with GritTV’s Laura Flanders, Barbara Ehrenreich emphasizes the importance of the current economic situation for the future of progressive ideals. Ehrenreich identifies as a socialist and is most famous for her book Nickel and Dimed about living on poverty-level wages. The fact that we have allowed Wall Street to drain hundreds of billions of dollars in public sector resources should be terrifying, according to Ehrenreich, and even those who do not share her ideological affiliations can see that the current loot-and-let-die arrangement is not only unfair, but not working.
“[Obama] needs a left on the economic issue,” Ehrenreich argues. “We’ve got to make the pressure real.”
The AIG debacle proves her point. Writing for The Washington Monthly, Steve Benen highlights Federal Reserve Chairman Ben Bernanke’s “I feel your pain” moment during Sunday’s 60 Minutes interview in which he voiced outrage over AIG’s destructive behavior. “If Bernanke thinks that’s going to dissipate the public anger, he’s likely to be disappointed,” according to Benen.
And indeed, a handful of commentators including Josh Marshall at Talking Points Memo laid into the government’s bailout engineers over the past couple of weeks for refusing to disclose AIG’s counterparties. The Treasury finally caved on Monday, so despite Geithner’s protests, we now know exactly who AIG paid with its bailout money from 2008, mostly European banks. But as TruthDig’s Ear to the Ground blog notes, even this victory is just a step in the right direction—Treasury is yet to explain how AIG bailout funds have been spent in 2009. Better still, the administration might also stop bestowing taxpayer largesse on Wall Street incorrigibles who, let’s not forget, created the economic problem in the first place.
Political discourse is not the only forum for progressive pressure. To that end, the NAACP has filed class-action lawsuits against subprime behemoths Wells Fargo and HSBC seeking some for discriminatory mortgage lending. As Michelle Chen explains for Colorlines, black Americans routinely pay more for their mortgages than white borrowers with identical qualifications, and are often denied loans entirely based on nothing but the color of their skin.
If you want social justice, this is the economic moment to demand it.
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: The Worst is Yet to Come
Last week’s passage of the economic stimulus bill marked the first major win for progressives on economic policy under President Barack Obama, but the hardest economic battles have yet to come. The fight against entrenched corporate interests and a global order that ignores the needy will likely be as long and arduous as the recession itself.
The stimulus package may be an absolutely essential step for fending off economic catastrophe, but it does nothing to overhaul the deeply flawed structure of our economic system. “In unleashing a flood of deficit spending and avoiding tax increases, the legislation didn’t threaten moneyed interests, didn’t alter the existing economic topography, and therefore didn’t attract the withering hostility from business groups that typically prevents ‘hope’ from becoming ‘change,’” David Sirota writes for Salon.
The Obama team seems to be considering nationalizing big, troubled banks temporarily, a prospect which was politically unthinkable just a few weeks back. Progressives have been pushing nationalization hard and it seems to be working. Several Republican Senators are supporting the idea, as temporary nationalization is already government policy for smaller banks that don’t employ massive lobbying teams.
But getting Obama and Treasury Secretary Timothy Geithner on board is only half the battle. In a piece for The Nation, Thomas Ferguson and Robert Johnson detail how hedge funds and private equity firms hope to capitalize on a big bank nationalization policy by using political clout to score unfairly cheap prices from the government.
“Much of the wind in the sails of this new push comes from private equity firms like KKR, Blackstone, or their political allies, mostly, though not entirely within the Republican Party,” Ferguson and Johnson write.
When the government nationalized troubled banks with the Resolution Trust Corp. under President George H.W. Bush, politically connected investors made out like bandits when the government resold the banks into the private sector. It is important that this corruption not be repeated. We don’t tolerate our politicians doing favors for wealthy constituents, and we shouldn’t allow our financial regulators to do so either.
The current recession has roots in excessive consumer debt—some of it predatory, some of it spawned by consumerism run amok. U.S. economic well-being has depended on destructive and environmentally unsustainable spending habits of its citizens for too long. Writing for In These Times, Terry Allen notes that “our own addiction to consumerism and failure to save tie us to debt and stress.” While consumer spending kept the economy from crashing until last year, it was very bad for individual households.
Over at The American Prospect, Matthew Yglesias discusses the global implications of lower levels of U.S. consumption. As the U.S. consumes less product, there will be major consequences for economies that rely on U.S. demand. Yglesias emphasizes that the current downturn is fully global, unlike every U.S. recession since the Great Depression. Potential solutions will have to involve coordinating policy responses with other countries to ensure that everyone is shouldering the stimulus load—and to help everyone adjust to an era in which U.S. consumers buy less stuff.
As Nomi Prins explains in Mother Jones, Wall Street bankers have always had a knack for bestowing lavish compensation upon themselves. Bonuses are routinely based on ill-conceived criteria that focus on short-term gains and create unnecessary risk. The key reforms, Prins says, do not merely involve capping executive compensation for bailed-out firms, but regulating bonus compensation and imposing heavy taxes on it in both good times and bad.
In recent years, Wall Street has dealt homeowners an absolutely devastating blow with various exotic mortgage schemes, but another major housing crisis is now looming for renters. Despite an overabundance of sprawling suburban developments, U.S. cities are facing a dramatic shortage of affordable rental housing. As hard as the economic crisis is for homeowners, those who rent in urban areas are being hit even harder. Many renters who cannot afford to buy a home under still face housing hardships today.
In the below video for American News Project, Garland McLaurin and Mike Fritz reveal the dire straits currently facing federal affordable housing programs. The Department of Housing and Urban Development, known as HUD, received a significant funding boost under Obama’s economic stimulus package—its $40.4 billion 2009 budget was supplemented by $13.6 billion. But thanks to years of neglect and political cronyism under the Bush administration, HUD housing units have a backlog of at least $22 billion in needed repairs, which severely hinders HUD’s ability to expand operations.
And the number of affordable rental housing units falls well short of what is needed. McLaurin and Fritz highlight Baltimore in their video, a city that has roughly 30,000 subsidized housing spaces, but will require 60,000 more to built in order to meet the city’s needs.
The proliferation of subprime mortgages was one of the chief drivers of the foreclosure epidemic. They seem absurd in retrospect. Lenders charged people with relatively weak credit scores higher interest rates to counter the risk in making loans to people with bad credit. But since credit scores are fairly closely linked to income level, lenders were essentially charging people with less money more than they would have charged an ordinary borrower. Not surprisingly, that business model is now completely destroyed.
But, as Daniel Fireside reveals in Yes! Magazine, there is a more effective way to expand access to homeownership, one that relies on charging—shock!—less for homes. Several U.S. cities now make use of non-profit land trusts to lower the costs of homeownership.
Here’s how it works: The land trust purchases a swath of property and builds housing on it if none already exists. The trust then sells homes to new homeowners, but does not sell the underlying land. The trust negotiates mortgages with banks on behalf of low-income borrowers. By using the land equity as part of the mortgage calculation, the necessary down payment is dramatically reduced. As a result, the home never falls into the hands of real estate speculators and the cost of owning a home falls by around 25%. If borrowers ever run into trouble on their loan, the trust works with them and the bank to fend off foreclosure. Land trusts feature foreclosure rates 30 times—not 30 percent, 30 times—lower than the national average.
Each of these initiatives is absolutely essential and will, unfortunately, involve brutal policy battles. Many people make a lot of money from the status quo. Let’s hope Obama has the political clout to tell corporate opportunists that the times are a-changing.
This post features links to the best independent, progressive reporting about the economy. Visit StimulusPlan.NewsLadder.net and Economy.NewsLadder.net for complete lists of articles on the economy, or follow us on Twitter. And for the best progressive reporting on critical health and immigration issues, check out Healthcare.NewsLadder.net and Immigration.NewsLadder.net. This is a project of The Media Consortium, a network of 50 leading independent media outlets, and was created by NewsLadder.
Bankruptcy Law is Key to Obama’s Foreclosure Fight
President Barack Obama unveiled his administration’s plan to fight foreclosures on Wednesday. Unfortunately, the most important element of the program will require Congressional action—and the banking and business lobbies are already on the attack.
The Homeowner Affordability and Stability Plan has three chief components:
- Offer financial incentives to persuade loan servicers to modify mortgages
- Allow Fannie Mae and Freddie Mac to refinance more mortgages
- Change bankruptcy laws and give judges the power to reduce the amount borrowers owe on their mortgages.
The financial incentives probably won’t help much, as Kevin Drum writes for Mother Jones. When a bank makes a mortgage, it doesn’t usually hold onto the loan. Instead, the loan is packaged into a security with a other loans and sold to several investors. Another bank collects payments on the mortgage for the security’s investors and acts as a point of contact, or loan servicer, for the borrower. To date, servicers haven’t shown much interest in keeping people in their homes, even though foreclosure is the worst option for all parties involved.
“Loan servicers already have an incentive to rework loans that would otherwise go into default, and for the most part they aren’t doing it,” Drum writes. “Will a couple thousand dollars [of incentives] change their internal calculus?”
The provision aimed at Fannie and Freddie will help some. It’s also a good use of the government’s authority over the companies, which were nationalized last summer. But the key to Obama’s plan is the bankruptcy provision. Until now, every government-enacted plan to reduce foreclosures has relied on incentives to encourage the banking industry to keep people in their homes. As Drum notes, bankruptcy is the stick behind those carrots. Obama is supporting a bill in Congress that would enable bankruptcy judges to reduce the amount a borrower owes to the present value of the home. The beauty here is that investors who own the mortgage securities, not taxpayers, will have to eat the losses. In short, investors will be held responsible for making a poor investment.
“The government is essentially presenting a choice for mortgage lenders: take our deal, which is standardized across the entire industry, or let a bankruptcy judge modify the loan however he or she sees fit,” Tim Fernholz writes for The American Prospect.
The bank lobby has been fighting the bankruptcy law change since the foreclosure crisis began in 2007, and they wasted no time lashing out at Obama’s proposal today. Elana Schor of Talking Points Memo highlights a nasty statement released by the U.S. Chamber of Commerce, one of “Washington’s biggest lobbying groups.” The release not only attacks the Homeowner Affordability and Stability plan, but takes a shot at Treasury Secretary Timothy Geithner as well, saying the policy “should have undergone a stress test to determine if it’s ready to stabilize a major portion of our economy.” Stress tests for the financial viability of banks were a big part of the murky bank bailout plan Geithner rolled out last week.
If Congress fails to pass a bankruptcy law overhaul, the entire plan will fall apart. And the record so far is not very promising—last year’s bill garnered only about half of the votes necessary to override a filibuster in the Senate.
Team Obama deserves credit for taking action on foreclosures, as John Nichols writes for The Nation. The Bush administration spent years vilifying troubled borrowers and then dedicated hundreds of billions of dollars bailing out banks. If Congress can’t pass bankruptcy law reform, the government should simply force banks to modify loans. The strategy would be simple—either keep borrowers in their homes, or return your check from the federal government.
“Ohio Congressman Marcy Kaptur and economist Dean Baker have some smart ideas,” Nichols writes. “They argue that the proper role for the federal government is not to fund mortgage negotiations but to insist that banks—many of which have already collected billions in taxpayer dollars—carry them out.”
This post features links to the best independent, progressive reporting about the economy. Visit StimulusPlan.NewsLadder.net and Economy.NewsLadder.net for complete lists of articles on the economy, or follow us on Twitter. And for the best progressive reporting on critical health and immigration issues, check out Healthcare.NewsLadder.net and Immigration.NewsLadder.net. This is a project of The Media Consortium, a network of 50 leading independent media outlets, and was created by NewsLadder.
Weekly Audit: Geithner’s Terrible, Horrible, No-Good, Very Bad Bailout
In this week’s Audit, we’re examinig Treasury Secretary Timothy Geithner’s thoroughly uninspiring bank bailout plan, which fails on almost every level. What’s more, some of the most insightful (and stinging) critiques of the proposal are coming from progressive media.
Robert Kuttner offers a strong analysis of Geithner’s strategy to salvage the banking industry in The American Prospect, noting that Geithner is explicitly avoiding the simplest and cheapest solution in favor of propping up the current Wall Street regime. The current plan is designed to support a financial architecture that has proven completely ineffective in maintaining the nation’s basic economic functions.
Geithner has thus far refused to nationalize the big, insolvent U.S. banks and give taxpayers ownership authority in exchange for their financial assistance. Instead, the new Treasury Secretary’s proposal devotes $1 trillion to writing insurance policies on bad mortgage assets to encourage private companies to buy those assets from troubled financial firms. This complicated strategy is designed to reduce the amount of money the government will have to pay to save the financial sector by bringing private enterprise into the bailout. However, the sheer convolutedness of the plan makes it much less efficient than temporary nationalization would be. Instead of simply putting a troubled bank’s balance sheet in order, the government now has to make sure hedge funds and private equity companies can profit from the move. The end result? Showering more taxpayer dollars on Wall Street.
As Matthew Rothschild highlights in The Progressive, the government’s current commitments to banks exceed the stock market values of those banks. Citigroup has received over $50 billion in direct capital injections, plus insurance on $300 billion worth of assets, but the company could have been purchased outright for well under $20 billion since October, 2008.
The worst part, Kuttner notes, is Geithner’s seeming determination to rehabilitate the failed loan securitization network, in which loans are packaged into securities and sold to various investors. Loan securitization encouraged excessive risk-taking on Wall Street, spawned millions of predatory mortgages and turned the simple process of buying a home into an absurd game of hot-potato amongst speculators. The loan securitization system needs to be carefully dismantled, not restored. “Geithner, using public funds, hopes to restart the engine of loan securitization,” Kuttner writes. “In effect, he wants to rebuild the very model that caused the crash.”
Nobel Prize-winning economist Joseph Stiglitz argues that much of the resistance to nationalizing the nation’s largest banks is based on a misunderstanding about how the nationalization process works. In an illuminating interview with Talking Points Memo, Stiglitz states that banks fail all the time and are placed into government hands to be disposed of. Lately, a handful of banks have failed every week.
“Banks have failed over and over again in the history of America, in the history of capitalism,” Stiglitz says. “To mention some recent examples, Washington Mutual went into bankruptcy, a number of banks went into bankruptcy . . . . It didn’t lead to a fundamentally systemic problem.”
When this happens, the government either takes the bank over for a short period of time and sells it to another bank, or liquidates the failed bank’s assets. The nationalization solution that progressive economists are pushing is simply the first approach. The nationalized bank is even kept open while its books are put in order, and when its affairs are straightened out, the government sells the company back out into the marketplace. The FDIC has decades of experience with this kind of operation.
Merely patching up the old economic model will not only fail to loosen Wall Street’s grip on the economy, it will also turn a blind eye to the severe ecological challenges we face. As the authors of Right Relationship: Building a Whole Earth Economy, Peter Brown and Geoff Garver, write in a blog for The Huffington Post, unlimited growth and production is nonsensical in the context of finite natural resources. Taking the environmental crisis seriously will mean not only investing in technology to fend off catastrophe, but cultivating a culture that places value on sustainable lifestyles.
Geithner offered a few vague comments about averting foreclosures in his bailout roll-out last Tuesday, but the glacial pace of government-sponsored foreclosure relief may mean that it’s time for more direct action. Last month, Rep. Marcy Kaptur, D-Ohio, called for evicted home-owners to exercise squatter’s rights and refuse to leave their homes.
In the Nation, Nicholas Von Hoffman proposes organizing community groups to take a stand and block banks from repossessing homes. While the current economic crisis looks much like the early days of the Great Depression, those hit hardest by today’s downturn have a few more tools to weild—most notably, the Internet. If the Treasury Department will not save the people from Wall Street, the people can, and should, save themselves.
The situation is already dire. As James Ridgeway writes for Mother Jones, today’s sky-high jobless statistics mask the actual number of people enduring tough times. While the official unemployment rate is at 7.6%, far more people who have given up looking for a new job or are stuck in part-time positions. If those people are included in the metric, the rate soars to 13.9%.
Geithner is scheduled to release more details on his bank bailout on Wednesday. Let’s hope the second time is the charm. Keep your eyes on the Weekly Audit for independent media’s response.
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