Senator Baldwin is Asking the SEC Questions About "Disgorge the Cash"

Apr 23, 2015Mike Konczal

A lot of people were surprised last month when the investment giant BlackRock flagged the rise in stock buybacks and dividend payments as a major economic concern. Its CEO argued that the “effects of the short-termist phenomenon are troubling both to those seeking to save for long-term goals such as retirement and for our broader economy,” and that this was being done at the expense of “innovation, skilled work forces or essential capital expenditures necessary to sustain long-term growth.”

They are right to be concerned. The cash handed back to shareholders in the form of buybacks and dividends was 95 percent of corporate profits in 2014, climbing from 88 percent the year before and 72 percent in 2010 and expected to go even higher in the future. These numbers are far above historical norms, but they are the culmination of a long process starting in the 1980s. Private investment remains a weak part of the recovery, and it is necessary to investigate the connection between corporate governance and those decisions.

With that in mind, Senator Tammy Baldwin (D-WI) has sent a letter to the SEC looking for answers on these issues. In particular, she flags whether the SEC’s mission to “foster capital formation and prevent fraud" is jeopardized by short-termism in the market. It will be good to see how the SEC responds, and which other senators and organizations join in with their concerns.

Personally, I’m happy that it quotes J.W. Mason’s work on profits and borrowing shifting from investment in a previous era to cash leaving the firm now. This issue is a major piece of our Financialization Project here at Roosevelt, and we will continue to develop it in the future.

I think there are two additional things of interest. One is that this relationship is becoming more of an interest for academic and popular scrutiny. Recent, high-level research is showing that as a result of short-termist pressures, “public firms invest substantially less and are less responsive to changes in investment opportunities, especially in industries in which stock prices are most sensitive to earnings news” compared to private firms before the Great Recession.

Second, this looks like a centerpiece agenda item for liberals going into 2016. Larry Summers’s Inclusive Prosperity report for the Center for American Progress discusses concerns over short-termism, noting, “it is essential that markets work in the public interest and for the long term rather than focusing only on short-term returns. Corporate governance issues, therefore, remain critical.”

The problem of short-termism was also in Senator Elizabeth Warren’s big speech on the future of the financial reform agenda, in which she noted we need to change the rules of the economy because we “too often reward short-term risk-taking instead of sustained, long-term growth” and allow CEOs to “manipulate prices in the short-term, rather than investing in the long-term health of their companies.”

And it will be central to work from the Roosevelt Institute about inequality coming next month. (Get excited!)

I’m not sure if the right has a response to this issue. One of their core policy goals, removing all taxes on capital, will certainly make the situation worse, as the Bush dividend tax cuts increased dividends payouts without encouraging any real investment or wage growth. If the Republicans want to have real answers about inequality and stagnation, it’s important that they tackle real questions. And short-termism is one of those essential questions.

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A lot of people were surprised last month when the investment giant BlackRock flagged the rise in stock buybacks and dividend payments as a major economic concern. Its CEO argued that the “effects of the short-termist phenomenon are troubling both to those seeking to save for long-term goals such as retirement and for our broader economy,” and that this was being done at the expense of “innovation, skilled work forces or essential capital expenditures necessary to sustain long-term growth.”

They are right to be concerned. The cash handed back to shareholders in the form of buybacks and dividends was 95 percent of corporate profits in 2014, climbing from 88 percent the year before and 72 percent in 2010 and expected to go even higher in the future. These numbers are far above historical norms, but they are the culmination of a long process starting in the 1980s. Private investment remains a weak part of the recovery, and it is necessary to investigate the connection between corporate governance and those decisions.

With that in mind, Senator Tammy Baldwin (D-WI) has sent a letter to the SEC looking for answers on these issues. In particular, she flags whether the SEC’s mission to “foster capital formation and prevent fraud" is jeopardized by short-termism in the market. It will be good to see how the SEC responds, and which other senators and organizations join in with their concerns.

Personally, I’m happy that it quotes J.W. Mason’s work on profits and borrowing shifting from investment in a previous era to cash leaving the firm now. This issue is a major piece of our Financialization Project here at Roosevelt, and we will continue to develop it in the future.

I think there are two additional things of interest. One is that this relationship is becoming more of an interest for academic and popular scrutiny. Recent, high-level research is showing that as a result of short-termist pressures, “public firms invest substantially less and are less responsive to changes in investment opportunities, especially in industries in which stock prices are most sensitive to earnings news” compared to private firms before the Great Recession.

Second, this looks like a centerpiece agenda item for liberals going into 2016. Larry Summers’s Inclusive Prosperity report for the Center for American Progress discusses concerns over short-termism, noting, “it is essential that markets work in the public interest and for the long term rather than focusing only on short-term returns. Corporate governance issues, therefore, remain critical.”

The problem of short-termism was also in Senator Elizabeth Warren’s big speech on the future of the financial reform agenda, in which she noted we need to change the rules of the economy because we “too often reward short-term risk-taking instead of sustained, long-term growth” and allow CEOs to “manipulate prices in the short-term, rather than investing in the long-term health of their companies.”

And it will be central to work from the Roosevelt Institute about inequality coming next month. (Get excited!)

I’m not sure if the right has a response to this issue. One of their core policy goals, removing all taxes on capital, will certainly make the situation worse, as the Bush dividend tax cuts increased dividends payouts without encouraging any real investment or wage growth. If the Republicans want to have real answers about inequality and stagnation, it’s important that they tackle real questions. And short-termism is one of those essential questions.

Follow or contact the Rortybomb blog:
 
  

 

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Denise Cheng: To Prepare for the Future, Lower the Voting Age

Apr 22, 2015Laurie Ignacio

The Next American Economy's video series on “The Good Economy of 2040" continues this week with Denise Cheng from the MIT Center for Civic Media and the San Francisco Mayor’s Office of Civic Innovation.

The Next American Economy's video series on “The Good Economy of 2040" continues this week with Denise Cheng from the MIT Center for Civic Media and the San Francisco Mayor’s Office of Civic Innovation.

Cheng is an advocate of open government initiatives like open data and participatory budget projects. But if she had to pick only one thing to ensure a good economy in the future, she would lower the voting age to 16 “so people are actually getting their civic education while they’re still in high school," ensuring that "they have the best information to make an informed vote.”

Read more about initiatives to lower the voting age to 16:

"Scotland let 16-year-olds vote. The US should try it too.” (Vox)

"Hyattsville becomes second U.S. municipality to lower voting age to 16" (Washington Post)

Denise Cheng is an innovation fellow with the San Francisco Mayor’s Office of Civic Innovation. She has an eclectic background in community building, the future of news, and labor in the peer economy—specifically, worker support around the growing pool of people who depend on piecemeal income. Cheng has spoken, written, and appeared widely in NPR, Harvard Business Review, and Next City, at the New Museum and Personal Democracy Forum, and more about the sharing economy. She received her MSc from MIT and is an affiliate researcher with the Center for Civic Media at MIT Media Lab.

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Online Learning Is No Substitute for Campus Community Engagement

Apr 22, 2015Zach Lipp

“Within 5 years the world's best education will be available online and it will be free,” said George Mason University professor Tyler Cowen in a September 2013 interview. “Arguably that's already the case.”

“Within 5 years the world's best education will be available online and it will be free,” said George Mason University professor Tyler Cowen in a September 2013 interview. “Arguably that's already the case.”

When I heard the claim last summer, I took notice. I was and continue to be an undergraduate with a love for online learning. I have watched dozens of lectures recorded on YouTube, enrolled in an unrealistic number of edX, Udemy, and Coursera courses, and taken a Codecademy track or two. But while I love digital learning, I also love the traditional campus experience, and I do not believe the former alone can suffice.

The public sphere is rife with claims that online education opportunities can subvert the American higher education system. The most recent barrage comes from Kevin Carey’s new book The End of College, which has generated many media reports and reactions. Missing from the debate are the voices of students: not just traditional college students, but digital learners as well. As a representative of both groups, I see the gaps in online learning.

While record numbers of students are attending colleges, they remain a relatively elite set of institutions. The costs of attending college are high and only growing, and student loan debt has expanded dramatically in recent years. Meanwhile, a treasure trove of learning opportunities is available online for free. Some see this as spelling the demise of the college; however, MOOC (Massive Open Online Course) completion rates are alarmingly low.

Yet even if MOOCs had the demographic pull and (at least) the completion rates of American colleges, they would still earn the scorn of academics. Digital course companies and colleges support competing purposes of education. As Harvard College Dean Rakesh Khurana said in his opening address this year, college can be either transactional or transformational. Yes, some students will always approach college as transactional, but a digital education, I believe, is necessarily transactional.

The college experience consists of much more than courses: as I have mentioned before, campuses teem with opportunities for civic engagement. Colleges around the country host speakers, rallies, and student organizations like the Roosevelt Institute | Campus Network, engaging students in communities in ways an Internet connection cannot. Moreover, these communities extend beyond their campuses. By fostering student education and activism, campus organizations foster citizenship.

Colleges are anchored in diverse communities that provide ample learning experiences. My involvement with the Rethinking Communities project , which provides a framework for students to expand and improve their college’s impact in their local communities, leads me to question how to leverage these relationships. My most meaningful lessons took me into the cities beyond my campus. We can learn an immense amount by engaging in our local communities, and there is no opportunity for this type of learning in an exclusively digital college. My experiences tell me digital education falls short of developing and engaging citizens, and as a result, so does the claim that online courses will replace physical ones.

Zach Lipp is a junior at Concordia College and a Rethinking Communities Braintrust member.

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Andrew McAfee: Immigration Reform Is Key to Our Economic Future

Apr 17, 2015Laurie Ignacio

Our series on The Good Economy of 2040 continues with MIT’s Andrew McAfee. To build a better economy over the next 25 years, McAfee says, we’ll need a more open immigration system that welcomes skilled workers. "When the world’s most talented, ambitious, tenacious, capable people want to come here and build their lives and their careers…it absolutely makes no sense to me that we put all these ridiculous Kafkaesque barriers in their way."

Our series on The Good Economy of 2040 continues with MIT’s Andrew McAfee. To build a better economy over the next 25 years, McAfee says, we’ll need a more open immigration system that welcomes skilled workers. "When the world’s most talented, ambitious, tenacious, capable people want to come here and build their lives and their careers…it absolutely makes no sense to me that we put all these ridiculous Kafkaesque barriers in their way."

To read more about skilled immigration, check out the following articles:

Getting a Visa Took Longer Than Building Instagram, Says Immigrant Co-Founder (Bloomberg)

The basics of the US immigration system (Vox)

Andrew McAfee is a principal research scientist at MIT and cofounder of its Initiative on the Digital Economy, where he studies how computer technologies are changing business, the economy, and society. His 2014 book on these topics, The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies (co-authored with Erik Brynjolfsson), has been both a New York Times and Wall Street Journal top ten bestseller. He writes two blogs, academic papers, and articles for publications including Harvard Business Review, The Economist, the Wall Street Journal, and The New York Times. He’s talked about his work on The Charlie Rose Show and 60 Minutes, and at TED and the Aspen Ideas Festival. McAfee was educated at Harvard and MIT.

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Clinton's Executive Pay Comments Show We're Still Too Focused on Fairness

Apr 17, 2015Susan Holmberg

Hillary Clinton surprised many progressives earlier this week with her remarks on a model populist issue. "There’s something wrong when CEOs make 300 times more than the typical worker. There’s something wrong when American workers keep getting more productive…but that productivity is not matched in their paychecks.”

Hillary Clinton surprised many progressives earlier this week with her remarks on a model populist issue. "There’s something wrong when CEOs make 300 times more than the typical worker. There’s something wrong when American workers keep getting more productive…but that productivity is not matched in their paychecks.”

Indeed. From 1978 to 2013, executive compensation at American firms rose 937 percent, compared with a sluggish 10.2 percent growth in worker compensation over the same period. In 2013, the average CEO pay package at S&P 500 Index companies was worth $11.7 million. Numbers for 2014 are just starting to be released, but Microsoft’s Satya Nadella is thus far topping the list at $84 million in mostly stock awards.

Too often the CEO pay debate, which tends to come into focus during our annual rite of corporate proxy season, hinges on a question of ethics. Is paying CEOs excessive amounts fair to workers? No, of course not, as so many fast food workers, whose CEOs make approximately 1,200 times more than they do, rightfully voiced yesterday.

One of the problems, however, with expressing CEO pay as a fairness issue is that it is too often countered with accusations of envy. And this doesn’t get us very far. (Note that Clinton’s language—“there’s something wrong”—plays into the fairness framing.) Our efforts to reform CEO pay would be much stronger if we also talked about how bad the status quo is for our economy and thus our society.

There are two main reasons CEO pay should be a concern to anyone who cares about economic prosperity in the United States, including Hillary Clinton. One reason stems from the total amount CEOs are paid. The other relates to the structure of CEO pay, in particular that the bulk of their compensation comes in the form of stock options and stock grants.

Total Amount of CEO Pay

A handful of high-profile economists—Thomas Piketty, Joseph Stiglitz, and Robert Reich, to name a few—have begun to make the case that a high degree of economic inequality precipitates financial instability because it leads to a decline in consumer demand, which has tremendous spillover effects in terms of investment, job creation, and tax revenue, not to mention social instability.

Research clearly demonstrates that the growth of executive pay is a core driver of America’s rising economic inequality. According to the Economic Policy Institute, “[e]xecutives, and workers in finance, accounted for 58 percent of the expansion of income for the top 1 percent and 67 percent of the increase in income for the top 0.1 percent from 1979 to 2005.” Another calculation by economists Ian Dew-Becker and Robert Gordon finds that the large increase in share of the 99.99th percentile is mostly explained by the incomes of superstars and CEOs.

The Structure of CEO Pay

Several studies show that equity-heavy pay, because it makes executives very wealthy very quickly, distorts CEOs’ incentives, inducing them to take on too much risk. Instead of bearing this risk themselves, they shift it onto the rest of society, as we saw during the financial crisis. This model also encourages executives to behave fraudulently, as in the backdating scandals of a decade ago, and lessens their motivation to invest in their businesses. According to economist William Lazonick, in order to issue stock options to top executives while avoiding the dilution of their stock, corporations often divert funds to stock buybacks rather than spending on research and development, capital investment, increased wages, or new hiring. To top it all off, these pay packages cost taxpayers billions of dollars due to the performance pay tax loophole.

Hillary Clinton’s comments on CEO pay could be a signal that she is willing to adopt at least some of the progressive messaging championed by Senator Elizabeth Warren. We can enhance that message by making better economic arguments for why we need to reform skyrocketing CEO pay.

For more, see my primer on the executive pay debate.

Susan Holmberg is a Fellow and Director of Research at the Roosevelt Institute.

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For U.S. Women, Inequality Takes Many Forms

Apr 14, 2015Ariel Smilowitz

The gender wage gap is a complex problem, and we'll need to address factors like race and region to solve it.

The gender wage gap is a complex problem, and we'll need to address factors like race and region to solve it.

Although we are only a few months into 2015, it has already proven to be a watershed year for women’s rights around the world. On the heels of the International Women’s Day March for Gender Equality, the He for She and Planet 50-50 by 2030 Campaigns, and the twentieth anniversary of the Beijing Declaration and Platform for Action, international advocates and officials alike are coming together to evaluate the progress that has been made over the past several years. This raises the question: what is the current status of women in the United States?

The Institute for Women’s Policy Research (IWPR)—in partnership with a multitude of organizations including the Ford Foundation, the Roosevelt Institute Campus Network, and the Center for American Progress—just released the 2015 edition of its project on the Status of Women in the States, with newly updated data and trend analyses on women’s economic, social, and political progress in the United States. The findings? Although we have indeed experienced progress toward gender equity, it’s likely that we won’t see equal pay for American women within our lifetime. (For more on this topic, see this post by Roosevelt Fellow Andrea Flynn.)

The road to achieving gender equality in the U.S. is quite clearly checkered with significant potholes.

Over the next several weeks, IWPR will be releasing a series of reports that include data on U.S. women’s employment and earnings, poverty and opportunity, work and family, violence and safety, reproductive rights, health and well-being, and political participation. The data and trend analyses found in these reports can be explored by topic and differing demographics (women of color, older women, immigrant women, and Millennials, to name a few), as well as on a national or state level. The first two chapters on employment and earnings and poverty and opportunity have already been released, revealing a number of insights on the state of women within this country. Some highlights:

  • In just about every state in the country, Millennial women are more likely than Millennial men to have a college degree, yet Millennial women also have higher poverty rates and lower earnings than Millennial men.
  • Although more women are receiving high school diplomas and completing college than ever before, a considerable proportion of women either do not graduate high school or finish their education with only a high school diploma.
  • By the time a college-educated woman turns 59, she will have lost almost $800,000 throughout her life due to the gender wage gap.

There are incredibly large disparities throughout different regions of the United States; southern women are the worst off with regard to employment and earnings. Furthermore, the status of women differs notably by race and ethnicity, with Hispanic women having the lowest median annual earnings compared to other women.

In general, women’s economic security is directly linked to their family income, which includes earnings from jobs, but women tend to be concentrated in fields that lead to jobs with relatively low wages. Even women who do go into higher-paying fields still earn less than their male peers. This helps explain why, in 2013, about 14.5 percent of women ages 18 and older had family incomes that placed them below the federal poverty line, compared with 11 percent of men. However, even this estimate does not fully capture the extent of the hardship that women continue to face in the U.S.

What can we conclude from this data? As a recent article in The Washington Post puts it: “When it comes to equal pay, the American woman is stuck in a proverbial waiting room. But the number on her ticket, the length of her stay, largely depends on where she lives and to whom she was born.” In other words, the status of women in this country is incredibly complex, and as a result, there is no simple, one-size-fits-all solution to achieving gender equality.

Gender equality is an intricate mosaic, a picture that cannot be complete without understanding and exploring the dynamic regional, national, and demographic factors at play. As a result, we cannot approach these issues without thoroughly peeling back and exploring each layer. It is necessary for all of us to reassess how we measure, monitor, and evaluate the status of women so that we can effectively determine both the progress that has already been made toward achieving full gender equality and the challenges and obstacles that lie ahead.  

Ariel Smilowitz is a senior at Cornell University and the Northeast Regional Policy Coordinator for the Roosevelt Institute | Campus Network.

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Four Reasons We Still Need Equal Pay Day

Apr 14, 2015Andrea Flynn

Happy Equal Pay Day!

It would certainly be happier if we didn’t need an Equal Pay Day, wouldn’t it?

But it’s 2015 and the wages of U.S. women continue to lag behind those of their male counterparts of equal age, education, and professional experience.

Happy Equal Pay Day!

It would certainly be happier if we didn’t need an Equal Pay Day, wouldn’t it?

But it’s 2015 and the wages of U.S. women continue to lag behind those of their male counterparts of equal age, education, and professional experience. More than 50 years ago President John F. Kennedy signed the Equal Pay Act, which prohibited discrimination “on account of sex in the payment of wages by employers.” At that time, women were paid 59 cents for every dollar paid to their male counterparts. In the half-century that has passed, that gap has shrunk by less than 20 cents; women today make approximately 78 cents for every dollar paid to their male counterparts. For women of color, the injustices are even starker. Black and Latina women are paid only 64 and 56 cents, respectively, for every dollar paid to white, non-Hispanic men, which represents an annual loss of nearly $19,000 for Black women and $23,279 for Latinas.

Conservatives like to scoff at this day. They argue away the gender pay gap by saying the data overstates the problem, and besides, women do things like have babies and step out of the workforce to take care of them, so it makes sense they would be paid less. This (il)logic ignores the fact that many women actually don’t ever step out of the workforce to take care of their children because they simply cannot afford to do so. Indeed, 95 percent of part-time workers and low-wage workers do not have access to paid family leave, and 2-in-5 U.S. workers (nearly 40 million people) are not guaranteed a single paid sick day. The conservative reasoning also suggests that it’s perfectly acceptable for women to be routinely penalized for having and raising their families, even though research shows that paid family leave makes it more likely that women will return to work and get paid at the same wage or higher.

Not only are women today still getting paid less than their male counterparts, but that pay inequity is compounding other circumstances that are driving U.S. families into a spiral of economic insecurity. Wages have been stagnant for roughly five decades. Out-of-pocket health care costs are on the rise. Conservatives are steadfast in their attempts (many of them successful) to dismantle the social safety net, weaken labor protections, and chip away at economic supports for working families. Minimum-wage jobs—two-thirds of which are held by women, including 22 percent by women of color—do not even begin to make middle-class life affordable in this country.

The rationale for equal pay seems obvious to many, but our continued inability to even make progress toward that end—let alone achieve it—is a clear indication that we still need to make the case. So here it goes.

1. It is the right thing to do. Period.

2. Guaranteeing pay equity would improve the lives of women and families.

According to a 2014 report released by the Institute for Women’s Policy Research (IWPR), implementing equal pay would mean an income increase for nearly 60 percent of women in the United States. Two-thirds of single mothers would get a 17 percent raise (equal to more than $6,000 a year), and the poverty rate among these families would drop from 28.7 to 15 percent. The increase in earnings would expand access to health care, food and housing security, and educational opportunities, and would have countless long-term benefits for children, who are especially vulnerable to the pernicious stresses of poverty.

3. Equal pay means a stronger economy.

The IWPR study found that if women were to receive equal pay, the U.S. economy would generate $447.6 billion in additional income—growth equal to 2.9 percent of the 2012 gross domestic product (GDP).

Pay equity would reduce poverty among working women by half and would therefore reduce the need for safety net programs that have become a lifeline for working families that cannot make ends meet. The total increase in women’s earnings as a result of pay equity would be 14 times greater than combined federal and state expenditures on Temporary Assistance to Needy Families (TANF).

4. It’s 2015. If not now, when?

If the gender pay gap continues to shrink at the snail’s pace of the past few decades, it won’t actually close until 2058. 2058! At this rate hover boards and moon vacations will be in vogue before women are paid an equal wage.  

The increased focus on inequality and growing support for progressive economic policies like paid sick and family leave and minimum wage hikes—not to mention an election cycle in which conservatives will need to prove they aren’t actually waging a war on women—provide a window of opportunity to push for equity once and for all.

I, for one, would like this day to be obsolete before another half-century passes by. 

Andrea Flynn is a Fellow at the Roosevelt Institute.

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Predatory Finance Has Hurt Our Universities, But Students Can Fight Back

Apr 13, 2015Dominic RusselRyan Thornton

Our tuition checks shouldn't be going to pay off debts from Wall Street's bad deals.

Our tuition checks shouldn't be going to pay off debts from Wall Street's bad deals.

The last few decades have not been kind to America’s local public institutions. Cities that once built state-of-the-art infrastructure are now struggling to fix potholes in the street. Public schools that were once the best in the world are lagging behind. Even our universities, which used to be gateways to a shot at a better life, are increasingly becoming too expensive for much of the population.

There’s no shortage of explanations for these problems, ranging from globalization to government waste to an aging population. These answers, however, all overlook the role that a growing Wall Street has played in changing the picture for public institutions.

In 1950, the financial sector accounted for about 3 percent of U.S. GDP; it now accounts for more than 6.5 percent. This financialization has given the big banks on Wall Street immense wealth and power, allowing them to extract greater and greater earnings from public and private borrowers. While the financial industry is reaping huge profits, it is individuals, not corporations, who pay an increasingly large share of the taxes that are supposed to support our public institutions. Since 1950, corporate tax contributions have dropped from 32 percent to only 17 percent despite corporations claiming a growing share of GDP. In contrast, individuals now pay 63 percent of taxes, up from 45 percent in 1950.

Our cities and schools—and all public institutions that rely on taxes to provide essential services—have felt the impact of this change. Facing slashed budgets, they have been forced to turn to the financial industry for loans. Undoubtedly, borrowing is necessary for financing extensive long-term capital projects; however, public institutions are increasingly compelled to secure loans for their short-term spending as well. Big banks are more than happy to accept the business of cities and universities desperate for funding, especially when the banks get to write the terms of the deal.

Wall Street’s profits are no longer solely built on interest from traditional “vanilla” loans. Instead, its banks have turned to high-risk, high-cost, and unnecessarily complex deals to further inflate their profits. Take interest rate swaps, for example. Swaps are a financial instrument devised by banks that allows cities and universities—those issuing bonds to finance long-term projects—to “swap” a variable interest rate for an agreed-upon fixed interest rate.

These interest rate swaps were deceptive from the very start. They were sold as protection from changing interest rates, but because exorbitant termination fees made refinancing extremely costly, they were essentially dangerous bets that would have only worked out if interest rates rose. And the deck was stacked against the cities and universities making these bets.

Banks illegally manipulated the London Interbank Offered Rate (LIBOR), which was tied to many deals, and helped precipitate a financial crisis that led to near-zero interest rates that continue today. Because banks had negotiated the swaps contracts so that they would be paying the variable market rates, cities and universities ultimately ended up locked into deals in which they were paying as much as 50 times what the banks were paying—all of which went to Wall Street as profit.

Both of the schools we attend—the University of Michigan and George Mason University—entered into swap deals that have costs them millions. One swap at Michigan even protected banks by allowing them to terminate the deal if variable rates hit just 7 percent, while offering no protection for the university when rates actually sank near zero.

The current imbalance in power need not be the case. Increased transparency surrounding the fees and terms of public finance deals would allow students and taxpayers to oversee the officials and banks who use their money and hold them accountable. When university regents, trustees, or other executives receive or have received compensation from the financial institutions their school does business with (as was the case in a series of University of California swaps), they should immediately recuse themselves from financial decision making to avoid conflicts of interest. Cities, states, and universities can work together to bargain with banks or create public options for bond underwriting and borrowing.

In situations in which our public entities have been targeted by banks, we can organize and pressure our public leaders to regain the money we lost. The city of Detroit was able to reduce its bank payments from $230 million to $85 million by exposing the invalidity of a swap.

Because swaps were often marketed to public institutions as a safe protection from variable interest rates—not as risky bets—it may be possible to pursue legal action to reclaim some of the losses. One avenue to reclaim public funds is the regulatory framework of the Municipal Securities Rulemaking Board, which mandates that municipalities be made fully aware of the risks and possible costs of entering into financial deals.

As students, we feel the impact of Wall Street every time we pay tuition. We put ourselves in thousands of dollars of debt to pay for school, but because most university borrowing is backed by student tuition, this personal debt simply begets institutional debt. All this borrowing means huge profits for the banks that finance debt, much of it coming from hidden fees and inflated payments on long-term deals with our schools.

However, as students we also have the unique opportunity to band together and make our collective voice heard. For a few years our well-being is the primary focus of a massive anchor institution, and our dollars are often the main source of its funding. We can demand better than the status quo by pressuring our schools to reclaim that money from wealthy bankers and put it back into our institutions.

If borrowing from the big banks was on fair terms and intended for long-term capital projects, it wouldn’t be a problem. Unfortunately, instead of using our nation’s wealth to pay for education, increase our human and physical capital, and build our long-run potential for growth, we are using it to increase incomes for the wealthiest bankers.

We've reached a worst-case scenario, but it doesn't have to stay that way. By holding Wall Street accountable for how it plays with tuition and tax dollars, we can bring things back around so that public investment means improving society, not improving Wall Street's balances.

Dominic Russell is a sophomore at the University of Michigan and the Roosevelt Institute | Campus Network's Policy Impact Coordinator for the Midwest. Ryan Thornton is a junior and Campus Network chapter head at George Mason University.

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Dissent Masthead and Also Sign Up For My New Newsletter!

Apr 10, 2015Mike Konczal

Two bits of exciting news this week.

First, I'm starting a biweekly newsletter. It'll have what I'm up to, including all the things I've been writing, collected into one place. It'll also have my favorite stuff I've read, random personal stories, and more. (Blame Google Reader for this I suppose.) Oh, and pictures of my dog too. Given the rate at which I'm writing it's probably more of an every other week update; we'll see how it goes. But for now, sign up!

Second, I'm joining the masthead at Dissent as a contributing editor. Here is the annoucement; I was happy to join even before I knew the excellent people they were bringing on board. Nothing much changes for me, I just get to formalize my relationship with the brilliant team they've built over there and help make it a standard for left thought going forward.

I also have a review of Naomi Murakawa's new book on liberal punishment in the latest issue. This newest issue is excellent, but the piece on the assistant economy by Francesca Mari is one of the most bizarre and enlightening business pieces I've read recently. Also check out Sarah Jaffe on punk rock feminism and the left once it's out from the paywall (or better, subscribe!).

Follow or contact the Rortybomb blog:
 
  

 

Two bits of exciting news this week.

First, I'm starting a biweekly newsletter. It'll have what I'm up to, including all the things I've been writing, collected into one place. It'll also have my favorite stuff I've read, random personal stories, and more. (Blame Google Reader for this I suppose.) Oh, and pictures of my dog too. Given the rate at which I'm writing it's probably more of an every other week update; we'll see how it goes. But for now, sign up!

Second, I'm joining the masthead at Dissent as a contributing editor. Here is the annoucement; I was happy to join even before I knew the excellent people they were bringing on board. Nothing much changes for me, I just get to formalize my relationship with the brilliant team they've built over there and help make it a standard for left thought going forward.

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How the End of GE Capital Also Kills the Core Conservative Talking Point About Dodd-Frank

Apr 10, 2015Mike Konczal

News is breaking that GE Capital will be spinning off most of its financing arm, GE Capital, over the next two years. Details are still unfolding, but, according to the initial coverage, “GE expects that by 2018 more than 90 percent of its earnings will be generated by its high-return industrial businesses, up from 58% in 2014.”

It’s good that our industrial businesses will be focusing more on innovating and services rather than financial shenanigans, but this also tells us two important things about Dodd-Frank: it confirms one of the stories about the Act and disproves the core conservative talking point about what the Act does.

Regulatory Arbitrage

A very influential theory of the financial crisis is that there were financial firms acting just like banks but without the normal safeguards that traditionally went with banks. There was no public source of liquidity or backstops through the FDIC or the Federal Reserve, a public good capable of ending self-fulfilling panics. There was no mechanism to wind down the firms and impose losses outside of the bankruptcy code. There weren’t the normal capital requirements or consumer protections that went with the traditional commercial banking sector.

Though we now call this regulatory arbitrage, at the time it was seen as innovation. GE Capital was explicitly brought up as a poster child for deregulation. You can see it in Bob Litan  and Jonathan Rauch’s 1998 American Finance for the 21st Century, which lamented the “twentieth-century model of financial policy” that, using transportation as an analogy, “set a slow speed limit, specified a few basic models for cars, separated different kinds of cars into different lanes, and demanded that no one leave home without a full tank of gas and a tune-up.” GE Capital was explicitly an example of a firm that could thrive with a regulatory regime that “focuses less on preventing mishaps and more on ensuring that an accident at any one intersection will not paralyze traffic everywhere else.”

This was very apparent in the regulatory space. The fact that GE owned a Utah savings and loan allowed it to be regulated under the leniency of the Office of Thrift Supervision (OTS), so it was able to work in the banking space without the normal rules in place. It was also able to use its high-level industrial credit rating to gamble weaker positions in the financial markets, arbitraging the private-sector regulation of the credit ratings agencies in the process.

How did that work out? First off, there was massive fraud. As Michael Hudson found in a blockbuster report, one executive declared that “fraud pays” and that “it didn’t make sense to slow the gush of loans going through the company’s pipeline, because losses due to fraud were small compared to the money the lender was making from selling huge volumes of loans.” Then there were the bailouts. The government backstopped $139 billion worth of GE Capital’s debts as it was collapsing and essentially had to manipulate the regulatory space to allow it to qualify for traditional banking protections. So much for not paralyzing traffic, and so much for the old rules not being important.

Dodd-Frank looked to normalize these regulations across both the shadow and regular banking sectors. It eliminated the OTS and declared GE Capital a systemically risky firm that has to follow higher capital requirements and prepare for bankruptcy with living wills just like we expect a bank to do, regardless of what kind of legal hijinks it is using to call itself something else. And GE Capital, faced with the prospect of having to play in the same field as everyone else, decided it should go back to trying to bring better things to life rather than making financial weapons of mass destruction. That’s pretty good news, and a process that should be encouraged and continued.

The Collapse of the Conservative Argument

But there’s one ask GE has as it spins off GE Capital, one that actually disproves the core conservative argument on Dodd-Frank. In the coverage, GE Chairman and CEO Jeff Immelt states directly, “GE will work closely with [the regulators at the Financial Stability Oversight Council] to take the actions necessary to de-designate GE Capital as a Systemically Important Financial Institution (SIFI).”

Dodd-Frank designates certain financial institutions, mostly over $50 billion in size, as systemically important. Or as the lingo goes, they get designated SIFI status. Those firms have stronger capital requirements and stronger requirements to be able to declare themselves ready for bankruptcy or FDIC resolution if they fail.

Conservatives, from the beginning, have made this the centerpiece of their story about Dodd-Frank. They argue that SIFI status is a de facto permanent bailout and claim that firms will demand to be designated as SIFIs because it means they will have a favored status. This status gives them easy crony relationships with regulators and allow them to borrow cheaply in the credit markets.

This has become doctrine on the right; I can’t think of a single movement conservative who has said the opposite. Examples of the mantra range from Peter Wallison of AEI writing “[t]he designation of SIFIs is a statement by the government that the designated firms are too big to fail” to Reason’s Nick Gillespie repeating that “everyone agrees [Dodd-Frank] has simply reinscribed too big to fail as explicit law.” (I love an “everyone agrees” without any sourcing.)

It’s also the basis of proposed policy. The Ryan budget cancels out the FDIC’s ability to regulate SIFIs, stating that Dodd-Frank “actually intensifies the problem of too-big-to-fail by giving large, interconnected financial institutions advantages that small firms will not enjoy.”

If that’s the case, GE should be desperate to maintain its SIFI status even though it is spinning off its GE Capital line. After all, being a SIFI means it gets all kinds of favored protections, access, and credit relative to other firms.

But, instead GE is desperate to lose it. This is genuine; ask any financial press reporter or analyst, and they’ll tell you that GE is very sincere when it says it doesn’t want to be designated as risky anymore, and is willing to take appropriate measures to remove the designation.

If that’s the case, what’s left of the GOP argument?

Follow or contact the Rortybomb blog:
 
  

 

News is breaking that GE Capital will be spinning off most of its financing arm, GE Capital, over the next two years. Details are still unfolding, but, according to the initial coverage, “GE expects that by 2018 more than 90 percent of its earnings will be generated by its high-return industrial businesses, up from 58% in 2014.”

It’s good that our industrial businesses will be focusing more on innovating and services rather than financial shenanigans, but this also tells us two important things about Dodd-Frank: it confirms one of the stories about the Act and disproves the core conservative talking point about what the Act does.

Regulatory Arbitrage

A very influential theory of the financial crisis is that there were financial firms acting just like banks but without the normal safeguards that traditionally went with banks. There was no public source of liquidity or backstops through the FDIC or the Federal Reserve, a public good capable of ending self-fulfilling panics. There was no mechanism to wind down the firms and impose losses outside of the bankruptcy code. There weren’t the normal capital requirements or consumer protections that went with the traditional commercial banking sector.

Though we now call this regulatory arbitrage, at the time it was seen as innovation. GE Capital was explicitly brought up as a poster child for deregulation. You can see it in Bob Litan  and Jonathan Rauch’s 1998 American Finance for the 21st Century, which lamented the “twentieth-century model of financial policy” that, using transportation as an analogy, “set a slow speed limit, specified a few basic models for cars, separated different kinds of cars into different lanes, and demanded that no one leave home without a full tank of gas and a tune-up.” GE Capital was explicitly an example of a firm that could thrive with a regulatory regime that “focuses less on preventing mishaps and more on ensuring that an accident at any one intersection will not paralyze traffic everywhere else.”

This was very apparent in the regulatory space. The fact that GE owned a Utah savings and loan allowed it to be regulated under the leniency of the Office of Thrift Supervision (OTS), so it was able to work in the banking space without the normal rules in place. It was also able to use its high-level industrial credit rating to gamble weaker positions in the financial markets, arbitraging the private-sector regulation of the credit ratings agencies in the process.

How did that work out? First off, there was massive fraud. As Michael Hudson found in a blockbuster report, one executive declared that “fraud pays” and that “it didn’t make sense to slow the gush of loans going through the company’s pipeline, because losses due to fraud were small compared to the money the lender was making from selling huge volumes of loans.” Then there were the bailouts. The government backstopped $139 billion worth of GE Capital’s debts as it was collapsing and essentially had to manipulate the regulatory space to allow it to qualify for traditional banking protections. So much for not paralyzing traffic, and so much for the old rules not being important.

Dodd-Frank looked to normalize these regulations across both the shadow and regular banking sectors. It eliminated the OTS and declared GE Capital a systemically risky firm that has to follow higher capital requirements and prepare for bankruptcy with living wills just like we expect a bank to do, regardless of what kind of legal hijinks it is using to call itself something else. And GE Capital, faced with the prospect of having to play in the same field as everyone else, decided it should go back to trying to bring better things to life rather than making financial weapons of mass destruction. That’s pretty good news, and a process that should be encouraged and continued.

The Collapse of the Conservative Argument

But there’s one ask GE has as it spins off GE Capital, one that actually disproves the core conservative argument on Dodd-Frank. In the coverage, GE Chairman and CEO Jeff Immelt states directly, “GE will work closely with [the regulators at the Financial Stability Oversight Council] to take the actions necessary to de-designate GE Capital as a Systemically Important Financial Institution (SIFI).”

Dodd-Frank designates certain financial institutions, mostly over $50 billion in size, as systemically important. Or as the lingo goes, they get designated SIFI status. Those firms have stronger capital requirements and stronger requirements to be able to declare themselves ready for bankruptcy or FDIC resolution if they fail.

Conservatives, from the beginning, have made this the centerpiece of their story about Dodd-Frank. They argue that SIFI status is a de facto permanent bailout and claim that firms will demand to be designated as SIFIs because it means they will have a favored status. This status gives them easy crony relationships with regulators and allow them to borrow cheaply in the credit markets.

This has become doctrine on the right; I can’t think of a single movement conservative who has said the opposite. Examples of the mantra range from Peter Wallison of AEI writing “[t]he designation of SIFIs is a statement by the government that the designated firms are too big to fail” to Reason’s Nick Gillespie repeating that “everyone agrees [Dodd-Frank] has simply reinscribed too big to fail as explicit law.” (I love an “everyone agrees” without any sourcing.)

It’s also the basis of proposed policy. The Ryan budget cancels out the FDIC’s ability to regulate SIFIs, stating that Dodd-Frank “actually intensifies the problem of too-big-to-fail by giving large, interconnected financial institutions advantages that small firms will not enjoy.”

If that’s the case, GE should be desperate to maintain its SIFI status even though it is spinning off its GE Capital line. After all, being a SIFI means it gets all kinds of favored protections, access, and credit relative to other firms.

But, instead GE is desperate to lose it. This is genuine; ask any financial press reporter or analyst, and they’ll tell you that GE is very sincere when it says it doesn’t want to be designated as risky anymore, and is willing to take appropriate measures to remove the designation.

If that’s the case, what’s left of the GOP argument?

Follow or contact the Rortybomb blog:
 
  

 

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