Is the Solution for Jamie Dimon's Next Financial Crisis a Larger US Deficit?

Apr 10, 2015Mike Konczal

In JPMorgan’s latest shareholder newsletter (p. 30-34), Jamie Dimon walks through a narrative of the next financial crisis and why we should be worried about it. But instead of worrying, I think it points to interesting details of what we’ve learned from the last crisis, what we evidently haven’t learned, and where we should go next.

Here’s Matt Levine’s summary. Dimon makes two arguments: First, the new capital requirements, especially the liquidity coverage ratio (LCR) that requires banks to fund themselves with enough liquidity to survive a 30-day crisis, will be procyclical. This means they will bind the financial sector more tightly in a crisis and prevent it from being a backstop. This is made even worse by his second argument, which is that there’s a safe asset shortage. Each individual bank is much safer than before the crisis, but using safe assets to meet the LCR means there will be fewer out there to provide stabilization when a crisis hits.

To use Dimon’s language, “there is a greatly reduced supply of Treasuries to go around – in effect, there may be a shortage of all forms of good collateral” in a crisis. Meanwhile, new capital requirements, especially the LCR, mean that in a crisis banks won’t want to lend, roll over credit, or purchase risky assets, because they would be violating the new capital rules. As such, “it will be harder for banks either as lenders or market-makers to ‘stand against the tide’” and to serve as “the ‘lender of last resort’ to their clients.”

What should we make of the fact that Dimon’s target is the LCR, an important new requirement under constant assault by the banks? Four points jump out.

The first is that the idea that we should weaken capital requirements so banks can be the lender of last resort in a financial crisis is precisely what was disproven during the 2008 panic. One reason people use the term “shadow banking” to describe this system is that it has no actual means of providing liquidity and the backstops necessary to prevent self-fulfilling panics, and that was demonstrated during the recent crisis.

Rather than financial firms heroically standing against the tide of a financial panic, they all immediately ran for shelter, forcing the Federal Reserve to stand up instead and create a de facto lender-of-last-resort facility for shadow banks out of thin air.

It’s good to hear that Dimon feels JPMorgan can still fulfill this function in the next crisis, if only we weakened Basel. But we’ve tried before to let financial firms act as the ultimate backstop to the markets while the government got out of the way, and it was a disaster. Firms like AIG wrote systemic risk insurance they could never pay; even interbank lending collapsed in the crisis.

This is precisely why we need to continue regulating the shadow banking sector and reducing reliance and risks in the wholesale short-term funding markets, and why the Federal Reserve should actually write the rules governing emergency liquidity services instead of ignoring what Congress has demanded of it. No doubt there needs to be a balance, but if anything we are counting too much on the shadow banking sector to be able to take care of itself, not too little.

As a quick, frustrating second point, it’s funny that regulators bent over backwards for the financial industry in addressing these issues with LCR, and yet the industry won’t give an inch in trying to dismantle it. That LCR is meant to adjust in a crisis and that the funds would be available for lending was emphasized when regulators weakened the rule under bank pressure, and it is explicitly stated in the final rule (“the Basel III Revised Liquidity Framework indicates that supervisory actions should not discourage or deter a banking organization from using its HQLA when necessary to meet unforeseen liquidity needs arising from financial stress that exceeds normal business fluctuations”).

If risk-weighting is too procyclical, which requires several logical leaps in Dimon’s arguments, the solution is to adjust those rules while raising the leverage ratio, not to pretend that the financial sector would be a sufficient ultimate backstop. Bank comments on tough rules like LCR are less give-and-take and more take-and-take.

But the third point is more interesting. Beyond whether or not the rules are too procyclical and unnecessarily restrictive in a crisis, there’s Dimon’s claim that there aren’t enough Treasuries to go around. If that’s the case, why don’t we simply make more Treasury debt? If the issue is a shortage of Treasuries needed to keep the financial sector well-capitalized and safe, it’s quite easy for us to make more government debt. And right now, with low interest rates and a desperate need for public investment, strikes me as an excellent time to do just that. Dimon is correct in his implicit idea that the financial markets, with enough financial engineering and private-market backstopping, can produce genuinely safe assets is a complete sham. This is a role for the government.

And for fun, a fourth point from Ben Walsh: Dimon says one of the biggest threats to the financial markets is that there isn’t enough U.S. debt. From January 2011: “Dimon Says Government Deficits, Spending Are New Global Risk.” We are risking a major rise in interest rates in the years following 2011 if we have trillion-dollar deficits, Dimon warned. How did that turn out?

Imagine how much worse shape we’d be in if we’d listened to Dimon.

So just as a friendly reminder: not only would more federal debt issued at incredibly low rates do cool things like rebuild schools, fix bridges, and give money to poor people, it would also serve as an important element of reducing the risks of the next financial crisis. This federal debt seems like a pretty useful thing to have around.

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In JPMorgan’s latest shareholder newsletter (p. 30-34), Jamie Dimon walks through a narrative of the next financial crisis and why we should be worried about it. But instead of worrying, I think it points to interesting details of what we’ve learned from the last crisis, what we evidently haven’t learned, and where we should go next.

Here’s Matt Levine’s summary. Dimon makes two arguments: First, the new capital requirements, especially the liquidity coverage ratio (LCR) that requires banks to fund themselves with enough liquidity to survive a 30-day crisis, will be procyclical. This means they will bind the financial sector more tightly in a crisis and prevent it from being a backstop. This is made even worse by his second argument, which is that there’s a safe asset shortage. Each individual bank is much safer than before the crisis, but using safe assets to meet the LCR means there will be fewer out there to provide stabilization when a crisis hits.

To use Dimon’s language, “there is a greatly reduced supply of Treasuries to go around – in effect, there may be a shortage of all forms of good collateral” in a crisis. Meanwhile, new capital requirements, especially the LCR, mean that in a crisis banks won’t want to lend, roll over credit, or purchase risky assets, because they would be violating the new capital rules. As such, “it will be harder for banks either as lenders or market-makers to ‘stand against the tide’” and to serve as “the ‘lender of last resort’ to their clients.”

What should we make of the fact that Dimon’s target is the LCR, an important new requirement under constant assault by the banks? Four points jump out.

The first is that the idea that we should weaken capital requirements so banks can be the lender of last resort in a financial crisis is precisely what was disproven during the 2008 panic. One reason people use the term “shadow banking” to describe this system is that it has no actual means of providing liquidity and the backstops necessary to prevent self-fulfilling panics, and that was demonstrated during the recent crisis.

Rather than financial firms heroically standing against the tide of a financial panic, they all immediately ran for shelter, forcing the Federal Reserve to stand up instead and create a de facto lender-of-last-resort facility for shadow banks out of thin air.

It’s good to hear that Dimon feels JPMorgan can still fulfill this function in the next crisis, if only we weakened Basel. But we’ve tried before to let financial firms act as the ultimate backstop to the markets while the government got out of the way, and it was a disaster. Firms like AIG wrote systemic risk insurance they could never pay; even interbank lending collapsed in the crisis.

This is precisely why we need to continue regulating the shadow banking sector and reducing reliance and risks in the wholesale short-term funding markets, and why the Federal Reserve should actually write the rules governing emergency liquidity services instead of ignoring what Congress has demanded of it. No doubt there needs to be a balance, but if anything we are counting too much on the shadow banking sector to be able to take care of itself, not too little.

As a quick, frustrating second point, it’s funny that regulators bent over backwards for the financial industry in addressing these issues with LCR, and yet the industry won’t give an inch in trying to dismantle it. That LCR is meant to adjust in a crisis and that the funds would be available for lending was emphasized when regulators weakened the rule under bank pressure, and it is explicitly stated in the final rule (“the Basel III Revised Liquidity Framework indicates that supervisory actions should not discourage or deter a banking organization from using its HQLA when necessary to meet unforeseen liquidity needs arising from financial stress that exceeds normal business fluctuations”).

If risk-weighting is too procyclical, which requires several logical leaps in Dimon’s arguments, the solution is to adjust those rules while raising the leverage ratio, not to pretend that the financial sector would be a sufficient ultimate backstop. Bank comments on tough rules like LCR are less give-and-take and more take-and-take.

But the third point is more interesting. Beyond whether or not the rules are too procyclical and unnecessarily restrictive in a crisis, there’s Dimon’s claim that there aren’t enough Treasuries to go around. If that’s the case, why don’t we simply make more Treasury debt? If the issue is a shortage of Treasuries needed to keep the financial sector well-capitalized and safe, it’s quite easy for us to make more government debt. And right now, with low interest rates and a desperate need for public investment, strikes me as an excellent time to do just that. Dimon is correct in his implicit idea that the financial markets, with enough financial engineering and private-market backstopping, can produce genuinely safe assets is a complete sham. This is a role for the government.

And for fun, a fourth point from Ben Walsh: Dimon says one of the biggest threats to the financial markets is that there isn’t enough U.S. debt. From January 2011: “Dimon Says Government Deficits, Spending Are New Global Risk.” We are risking a major rise in interest rates in the years following 2011 if we have trillion-dollar deficits, Dimon warned. How did that turn out?

Imagine how much worse shape we’d be in if we’d listened to Dimon.

So just as a friendly reminder: not only would more federal debt issued at incredibly low rates do cool things like rebuild schools, fix bridges, and give money to poor people, it would also serve as an important element of reducing the risks of the next financial crisis. This federal debt seems like a pretty useful thing to have around.

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Felicia Wong: To Build a Better Economy, We Must Close the Racial Wealth Gap

Apr 9, 2015Laurie Ignacio

Our ongoing series about the good economy continues with a video featuring Roosevelt President and CEO Felicia Wong. When asked about what she would do to ensure a good economy in 25 years, she says her top priority is closing the racial wealth gap. After examining wealth over generations, she finds that wealth, more than income, is the most important factor that determines whether people can make it to the middle class and succeed.

Our ongoing series about the good economy continues with a video featuring Roosevelt President and CEO Felicia Wong. When asked about what she would do to ensure a good economy in 25 years, she says her top priority is closing the racial wealth gap. After examining wealth over generations, she finds that wealth, more than income, is the most important factor that determines whether people can make it to the middle class and succeed.

To learn more about the racial wealth gap, check out the following articles:

The Racial Wealth Gap Is Three Times Greater Than the Racial Income Gap

Today’s racial wealth gap is wider than in the 1960s

Wealth inequality has widened along racial, ethnic lines since end of Great Recession

Felicia Wong is the President and CEO of the Roosevelt Institute, which seeks to re-imagine the social and economic policies of Franklin and Eleanor Roosevelt for the 21st century. Felicia came to the Institute from the Democracy Alliance, where she led the development and assessment of the organization’s strategic investment portfolio. She holds a Ph.D. in political science from the University of California, Berkeley. Her doctoral dissertation on the role of race and framing in K-12 public education politics received the 2000 American Political Science Association award in Race, Ethnicity, and Politics.

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The Austerity Agenda Was Unopposed in the Chicago Mayoral Election

Apr 9, 2015Saqib Bhatti

Rahm Emanuel's victory shows Chicago's progressive movement still needs to do more to advance a real alternative to austerity economics.

Rahm Emanuel's victory shows Chicago's progressive movement still needs to do more to advance a real alternative to austerity economics.

On Tuesday night, Chicago voters reelected Mayor Rahm Emanuel in a race that was widely perceived as a showdown between the neoliberal and progressive wings of the Democratic Party. However, the election outcome should not be seen as a rejection of a real progressive agenda with alternatives to austerity. Emanuel defeated Jesus “Chuy” Garcia at the ballot box by turning the election into a referendum on Garcia’s financial chops. Even though voters were weary of Emanuel’s “tough medicine” approach to the city’s financial problems, Garcia failed to lay out a fundamentally different view of the problems underpinning the city’s budget and the solutions needed to get the city back on a solid financial footing, and voters opted for the devil they knew over the one they didn’t.

When Moody’s downgrades the credit ratings of a city and its mayor-controlled school and park districts less than six weeks before a mayoral election, as it did with Chicago, it should typically spell disaster for the incumbent. But Emanuel managed to turn it around on Garcia and hammered away at him for not having a concrete plan to fix the city’s financial crisis. It was true—Garcia did not clearly articulate a financial plan to fix the city’s budget and merely hinted that he might have to enact his own set of painful cuts if he were elected. However, this line of attack papered over the fact that the financial problems that the next mayor would have to tackle were inherited from Emanuel.

The Emanuel administration has closed 50 schools and six mental health clinics, slashed the libraries budget, hoarded funds intended for public housing, overseen privatization schemes that increased user costs, and installed red-light and speeding cameras in order to bring in additional revenue. Not only has Emanuel tried to plug budget holes by cutting services working people rely on, but those policies have actually failed to get the city’s finances back on track. After all, the credit rating downgrades came after these policies were enacted. Meanwhile, he has let the city’s corporate elite off the hook by refusing to take actions like cutting tax subsidies to large, profitable companies downtown or filing legal claims against banks that illegally sold predatory financial deals to the city and school district.

Chicagoans’ dissatisfaction with the mayor’s downtown-first approach led to the historic runoff, but Garcia seemed reluctant to put forth proposals that would have forced big downtown corporations to pay their fair share. He held a series of press conferences challenging predatory financial deals and costly gimmicks like toxic interest rate swaps and social impact bonds, and he announced his support for a financial transactions tax on Chicago’s financial exchanges, but these proposals were never part of a coherent strategy to change the terms of the budget conversation in the city.

Garcia’s failure to put forward a strong plan allowed Emanuel to take his greatest weakness—his financial record of making Chicago’s most vulnerable residents pay for tax breaks for his biggest campaign donors and their businesses—and turn it into his greatest strength. Even though Emanuel himself did not put forth any real financial plan either, he was able to slam Garcia for having a weak and insufficient one, and amplified his message with a relentless onslaught of attack ads on TV.

The austerity agenda that marked Emanuel’s first term came to be seen as the only viable framework for fixing the city’s budget woes. Garcia’s plan was not strong and comprehensive enough to pull the public discourse in the other direction, so Emanuel and the monied interests downtown were able to successfully advance a narrative that Chicago had no choice but to enact painful cuts, especially to city workers’ pensions, and that Emanuel was the only candidate willing to make the unpopular decisions necessary to save the city from a Detroit-style bankruptcy. This theoretical framework, pitting teachers against students and city workers against the communities they serve, went large uncontested by Garcia. But under that paradigm, Chicago’s richest 1 percent got a free pass.

Chicagoans need a new paradigm that unites working families across the city behind a financial plan that puts neighborhoods first. This includes taking legal action to recover up to $1.2 billion from toxic swaps. It includes demanding that banks share in the sacrifices that all Chicagoans are being asked to make by reducing fees by 20 percent. It includes hiring in-house investment managers to invest pension fund dollars instead of overpaying private equity firms like Illinois Governor Bruce Rauner’s GTCR Capital and hedge funds like Ken Griffin’s Citadel Investment Group. It includes ending the practice of diverting tax dollars from struggling neighborhoods to subsidize profitable downtown corporations.

The city also needs to work toward longer-term structural solutions to shift the balance of power in Chicago back toward the neighborhoods. This includes enacting a financial transactions tax on speculative trading at the financial exchanges on LaSalle Street and making Chicago’s millionaires pay their fair share by implementing a graduated city income tax. It also means establishing a public bank that is owned by taxpayers, can provide fair banking services to municipalities, and can stimulate local economic development in Chicago’s neighborhoods.

Finally, Chicago also needs to partner with other cities to form a consumers’ union to bargain with Wall Street for substantially lower banking fees. Chicago, Los Angeles, and New York together do nearly $600 billion of business with Wall Street every year. That is more than the GDP of Sweden. If they flexed their muscles, they could change the landscape of municipal finance.

It says a lot about our national economic discourse that in a historic election that revolved around a major city’s finances, neither candidate even began to challenge the assumptions underlying the austerity paradigm. Of course, candidates for elected office rarely define the political discourse in a vacuum, but rather respond to and try to shape the issues that are percolating. In that sense, it is unfair to simply say that Garcia failed to present a compelling alternative to Emanuel’s austerity agenda. The reality is that while Chicago’s progressive movement has grown more sophisticated and organized over the past four years, it has yet to successfully push back on the prevailing narrative advanced by the mainstream press and Chicago’s political and business elite. That narrative holds that what’s good for downtown is also good for the neighborhoods, and that the city cannot afford to upset the wealthy or they will pack up their bags and move to Indiana (yes, Indiana), taking thousands of jobs with them.

If we want to see real change, then we need to change the budget conversation in Chicago and elsewhere in the country. We should not be talking about what cities should cut to make ends meet, but rather about how cities can raise enough money to pay for the quality services that residents need. Only then can we put cities like Chicago on a path toward long-term fiscal sustainability while also paving the way for shared prosperity in working-class communities.

Saqib Bhatti is a Roosevelt Institute Fellow and Director of the ReFund America Project.

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Why Is Lehman Brothers Suing Georgetown from Beyond the Grave?

Apr 9, 2015Alan SmithAditya Pande

The ghost of Lehman Brothers is still haunting colleges and universities around the country, continuing to extract money from institutions even though the financial firm itself is long dead.

The ghost of Lehman Brothers is still haunting colleges and universities around the country, continuing to extract money from institutions even though the financial firm itself is long dead.

When Lehman Brothers Holdings declared bankruptcy in 2008, it was the fourth largest investment bank in the United States. The giant’s collapse was felt in all corners of the global economy, but at least that collapse was thought to be a thing of the past. Now, it turns out that Lehman Brothers lingers on as a bankruptcy group trying to collect debts from the schools it already fleeced in 2008.

In St. Louis, the haunting is public: Lehman is suing St. Louis University because it doesn’t feel the school paid a fair market value (equivalent to the termination fee at a given time) on some interest rate swap derivatives in 2008.

Let’s look at that transaction: the school paid about $25 million in early termination fees on its interest rate swaps.* SLU didn’t necessarily want to bail out of these swaps, even though they were costing the school millions; it had to terminate them because Lehman Brothers, the counterparty to the deals, was going belly up. But in a lawsuit filed in December 2014, Lehman alleges that SLU’s termination payments were short of market value and that Lehman is in fact owed another $17.5 million on these swaps. 

Let's say that again: These swaps triggered in 2008 because of the Lehman bankruptcy. The school had to pay a termination fee because the firm that owned the swaps had effectively ceased to exist. And now that firm is suing the school because it wasn’t adequately compensated for its own failure.

Here’s where the story (and related research by the Roosevelt Institute | Campus Network) gets really interesting: The ghost of Lehman isn’t just in St. Louis. Looking at the financial records of Georgetown University, there appears to be a similar story playing out in private but with even larger stakes.

Georgetown’s financials from 1998 onward are rife with big bond projects, but for now let’s focus specifically on auction rate security (ARS) bonds. These are economic devices where the interest rate paid on the bond is regularly reset through a public auction. The theory was that these auctions would allow the market to drive the interest rates to the lowest possible bidder each period; some even reset every week. These bonds were being marketed (sometimes by Lehman Brothers) as a highly liquid way to get some safe cash.

We’ve since learned that nothing could be further from the truth, as the rate markets for ARS bonds locked up in 2008 and borrowers like Georgetown were stuck paying double-digit interest rates. These bonds were more than simply investments that didn’t pan out; banks that sold the ARS bonds were also propping up the market by bidding on the rates in their own auctions, which created a false impression for buyers that the market was stable. These were bad deals made worse by illegal activity, and universities and municipalities across the country were suckered into them. When the banks eventually stopped keeping the market afloat, most such auctions failed, and the ARS market has been largely frozen since.

Although Georgetown is now almost entirely out of the ARS market and has brought down its variable-rate debt, getting rid of these increasingly expensive ARS bonds appears to have cost the schools millions in fees and even more in borrowing to pay off that debt.  Some of those bonds were underwritten by Lehman; some by other investment banks.

None of this even begins to capture the costs of the swaps, which is where this story started. The ARS bonds were cheap but had highly volatile interest rates. To mitigate these risky fluctuations, Georgetown bought interest rate swaps with Lehman Brothers. But like SLU, Georgetown did not realize it had made a deal with a potentially catastrophic downside. As the economy went into a tailspin in 2008, the Federal Reserve cut interest rates to the bone and has kept them low since; money became available for next to nothing in an attempt to keep banks from freezing up completely. This also served to drive the fair value of interest rate swaps through the roof. The worse the economy got, the more the fair market value of Georgetown’s debt hedges grew. A final insult: As the ARS rates locked up ever higher, the floating index rates that the swaps were indexed to went down, so Georgetown was losing money on every part of every deal.

And finally, finally, Lehman Brothers, which had sold swaps to so many different colleges and universities around the country, went out of business, which resulted in Georgetown having to pay Lehman more than $53 million to terminate the seven swaps it had on May 12, 2009—again, swaps that were meant to hedge against the risky ARS bonds that were also, in some cases, sold by Lehman.

Fast forward to 2012, and a lawsuit from Lehman Brothers appears on Georgetown’s financial documents. This lawsuit is only mentioned in the financial statements and has not yet gone public, so we cannot say with certainty that the story is the same as in St. Louis. However, it appears as if the disparity between the “fair market value” calculation of what the swaps were worth in 2008 and the eventual payment Georgetown made to Lehman is about the same as in the SLU case.

For those keeping score at home, this means that Georgetown was hemorrhaging money to Lehman Brothers in at least four different ways:

  1. ARS bonds marketed by Lehman cost the university $6 million in interest rates and $8.34 million in debt restructuring costs.
  2. Approximately $77.8 million in payments on the seven interest rate swaps terminated in May 2009.
  3. More than $53.4 million in swap termination fees.
  4. Though still unconfirmed, all signs point to a lawsuit from Lehman to recoup what it claims are underpayments on the “market rate” of its swaps.

The full cost is probably even higher, as these calculations do not account for the fees Georgetown paid each time it got into a bond deal, nor for other deals that Lehman did not underwrite. Still, the bill is already north of $140 million, and we’ve only been looking at publicly available records.

It certainly seems as though Georgetown was hard done by in this case, and we plan to continue our research until we can present a full tally of how much Georgetown has lost and is continuing to lose to Wall Street.

Why does this matter? After all, Georgetown is a stable institution—not like Sweet Briar or liberal arts schools, where losses in the hundreds of millions could mean the difference between solvency and closing their doors. Neither is this a public institution, where public tax dollars are being funneled into Lehman’s grave. But even a storied private institution like Georgetown is feeling the pinch of millions of dollars being extracted, and that pinch is being passed on to students.

Tuition and fees will increase 4 percent at Georgetown next year, contributing to a nearly 40 percent increase since 2006 that shows no signs of slowing down. While there are many factors in the rapid rise of education costs borne by America’s students, including the “amenities arms race” and administrative bloat, the massive debt private colleges like Georgetown have accrued and the unbelievably expensive financial engineering that has come with it deserve a lion’s share of the blame. Lehman Brothers, having already managed to scrape more than $140 million from Georgetown’s coffers, is audacious in asking for more from beyond the grave. We must be equally audacious in demanding that Wall Street pay some part of the bill it’s left students since 2008.

Is your college or nonprofit involved in an ongoing lawsuit with Lehman Brothers? Let us know!

*Interest rate swaps are a type of derivative that allows an institution to lock in a loan at a fixed rate by “swapping” its existing variable-rate loan with a bank, an idea that becomes particularly toxic when the market crashes and interest rates plummet like they did post-2008. It’s the equivalent of taking out a mortgage at 5 percent a year and then finding out the next day that mortgages are now available at 1 percent. But, unlike mortgages, swaps cannot be refinanced or even “paid off” at will. To do so, one must pay an expensive termination fee equal to the total amount the bank expects to make over the entire life of the swap. It was a lose/lose proposition for the school once its bet that interest rates would stay high didn’t work out. 

Alan Smith is the Roosevelt Institute | Campus Network's Associate Director of Networked Initiatives.

Aditya Pande is a freshman in the School of Foreign Service at Georgetown University, where he studies international economics.

Thanks to Carrie Sloan and Alexandros Taliadoros for their contributions to this post.

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What Policies Do Young People Want? Let Them Tell You.

Apr 8, 2015Joelle Gamble

As another presidential campaign season heats up, and candidates scrambled to create messaging, structures, and even gimmicks and swag in an attempt to engage young people, I can’t help but think about why we do what we do here at Roosevelt.

As another presidential campaign season heats up, and candidates scrambled to create messaging, structures, and even gimmicks and swag in an attempt to engage young people, I can’t help but think about why we do what we do here at Roosevelt.

Young people on college campuses are often asked to make phone calls, knock on doors, and campaign for existing agendas, but they’re rarely asked about their own policy ideas. Since 2004, we have been working to change that norm. At its core, the Roosevelt Institute | Campus Network seeks to defy the public’s expectations of young people in politics today.

Over the past 10 years, we have built an engaged, community-driven network of students who are committed to using policy to transform their cities and states now and build the foundation for a sustainable future. We believe that broader participation in the policy process will not only improve representation but produce more creative ideas with the potential for real impact.

In this year’s 10 ideas journals, we present some of most promising and innovative ideas from students in our network. With chapters on 120 campuses in 38 states, from Los Angeles, California, to Conway, Arkansas, to New York City, we have the potential to effect policy ideas that transcend the parameters of our current national debate. Our student authors push for practical, community-focused solutions, from using pavement to improve sanitation in Louisville, Kentucky, to creating community benefit agreements for publicly funded stadiums in Lansing, Michigan, to building workforce development programs for agricultural literacy in Athens, Georgia. 

Policy matters most when we take it beyond the page and bring it to the communities and institutions that can turn it into reality. Many of the students in this year’s publication have committed to pressing for impact. They’re connecting with decision-makers in city halls and state capitols, armed with the power of their own ideas. 

The next generation of innovative minds and passionate advocates is here, and it’s changing this country one idea at a time.

Check 'em out!

Joelle Gamble is the National Director of the Roosevelt Institute | Campus Network.

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Tobacco Settlement Funds Should Be Used to Fight Smoking in North Carolina

Mar 31, 2015Emily Cerciello

North Carolina continues to risk the health and economic wellbeing of its residents by refusing to use Master Settlement Agreement funds for tobacco prevention and control.

North Carolina continues to risk the health and economic wellbeing of its residents by refusing to use Master Settlement Agreement funds for tobacco prevention and control.

Over the last 50 years, more than 20 million Americans have died prematurely as a result of smoking or exposure to second-hand smoke. In the same time period, however, societal attitudes towards smoking have shifted from acceptance of its regularity to disapproval of the behavior as a harmful addiction. Driven largely by a growing body of research illuminating the adverse health effects of smoking and the implementation of widespread interventions that discourage tobacco use, the United States has experienced significant declines in the prevalence of smoking since the 1960s. Despite these successes, one in five adults in North Carolina continues to smoke cigarettes regularly, making North Carolina the 14th highest in smoking prevalence nationwide.

Every year, North Carolina receives $140 million in state funds from the 1998 Master Settlement Agreement, which requires tobacco companies to compensate tobacco-producing states for tobacco-related illnesses. These funds were intended to be used for youth tobacco prevention and control, but due to flexibility in the wording of the agreement, North Carolina has been able to send most of this money to a general fund. North Carolina even sent $42 million in settlement funds to tobacco farmers for marketing and equipment improvements. In 2014, North Carolina was the leading tobacco-producing state, followed by Kentucky, Georgia, and Virginia.

In the past, $25 million of this $140 million went to a Health and Wellness Trust Fund that invested in tobacco prevention and cessation programming. In 2012, however, the North Carolina General Assembly (NCGA) abolished the Health and Wellness Trust Fund and spent only $17 million on tobacco prevention. By 2014, this number had dropped to $1.2 million, or just 1.1 percent of the minimum recommended for tobacco prevention programs by the Centers for Disease Control and Prevention (CDC). North Carolina ranks 47th among the states for reaching CDC-recommended funding levels.

The health and economic impacts of this decision to cut state funds are substantial. In North Carolina, tobacco use costs nearly $2.5 billion in total medical costs and $3.3 billion in lost productivity annually. North Carolinians face an annual tax burden of $564 per household for smoking-related state and federal government expenditures.

North Carolina can look to examples from other states to improve its strategy for spending settlement dollars. Oklahoma, which reaches more than 50 percent of CDC-recommended tobacco prevention funding levels annually, amended its constitution in 2000 to create the Tobacco Settlement Endowment Trust (TSET), which receives no less than 75 percent of annual settlement payments. Oklahoma ranks among the worst for smoking behaviors, but has seen significant improvements in adult smoking rates with the percentage of smoke-free households reaching over 75 percent in 2010, up from 55 percent in 2001.

We’ve seen from other states that funding for youth tobacco prevention works. In Florida, where the state is required to spend at least 15 percent of its yearly settlement award on tobacco prevention, the high school smoking rate dropped to just 7.5 percent in 2014 – one of the lowest rates ever reported by any state. North Carolina’s high school smoking rate remained at over 15 percent in 2014.

While using the money as North Carolina does is not illegal, the state should end this poor practice of using settlement money for unrelated projects. North Carolina has the enormous opportunity and responsibility to use settlement funds to reduce the prevalence of smoking and improve the health and economic wellbeing of millions of residents across the state.

Emily Cerciello is the Roosevelt Institute | Campus Network Senior Fellow for Health Care, and a senior at the University of North Carolina at Chapel Hill.

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Mental Health Care Is an Overlooked Need in North Carolina Medicaid Expansion Debates

Mar 27, 2015Emily Cerciello

Medicaid expansion could bring relief to 190,000 uninsured North Carolinians with mental health conditions.

Advocates for Medicaid expansion in North Carolina have the opportunity to add a new and urgent argument to their already robust arsenal – that Medicaid expansion will create a newly affordable option for thousands of individuals with mental health needs who currently cannot afford treatment.

Medicaid expansion could bring relief to 190,000 uninsured North Carolinians with mental health conditions.

Advocates for Medicaid expansion in North Carolina have the opportunity to add a new and urgent argument to their already robust arsenal – that Medicaid expansion will create a newly affordable option for thousands of individuals with mental health needs who currently cannot afford treatment.

The North Carolina Medicaid Expansion Coalition – a collection of progressive groups including Planned Parenthood South Atlantic, the League of Women Voters of North Carolina, and the NAACP, among others – is fervently pushing back against a North Carolina legislature that has repeatedly declined expanding Medicaid to 500,000 would-be-eligible North Carolinians. Debates have focused on the high out-of-pocket prices required of uninsured patients for physical conditions like heart disease, asthma, musculoskeletal problems, or cancer, as well as the millions in federal money being turned away every year that North Carolina decides not to expand. In this high-profile role, coalitions also have the opportunity shed light on the devastating effects of untreated mental illness and the relief that Medicaid expansion could bring to 190,000 uninsured North Carolinians with mental health conditions.

In 2009, 75 percent of individuals with mental health needs in North Carolina were left untreated. Early intervention for mental illness can improve a patient’s physical and emotional wellbeing and can prevent destructive consequences for themselves, their families, and their communities in the future. Medicaid expansion will allow individuals to be secure in their access to primary mental health care and reduce their utilization of the emergency room when they experience an acute episode or when their chronic conditions become too debilitating.

Mental illness disproportionately affects individuals with lower family incomes, the same families who are most impacted by Medicaid expansion. States that have expanded Medicaid have seen pent up demand for mental health care, indicating a high need for mental health care among newly eligible Medicaid beneficiaries.

North Carolina has the capacity to accommodate newly eligible individuals who seek treatment for mental illnesses given that only 11 of North Carolina’s 100 counties are considered to have a shortage of mental health providers. While systems will need to expand to meet the demand from new patients, North Carolina can be an example for turning the challenge of Medicaid expansion into an asset for increased access to health care among its most vulnerable residents.

Advocates for Medicaid expansion in North Carolina have already made great strides in swaying reluctant legislators to consider the issue in 2015. In the most recent election debates, Republican Senator Thom Tillis agreed that the state of North Carolina is trending in a direction that warrants discussions about Medicaid expansion. In January, Governor Pat McCrory met with President Obama and several other Republican state leaders to discuss the adaptability of Health and Human Services waivers to state-developed Medicaid expansion plans. And just last week, thousands of North Carolina residents marched at the ninth annual Historic Thousands on Jones Street (HKonJ) Moral March in Raleigh, hoping to influence legislators to consider Medicaid expansion.

Legislators need to take significant steps to reform mental health care both in North Carolina and across the nation. The North Carolina Medicaid Expansion Coalition, mental health providers and advocacy groups, and others supporters can work together with the legislature to make affordable mental health care a reality for low-income individuals and families. North Carolina cannot wait until the system is perfect to implement changes that can improve the mental health of its residents and the economic wellbeing of the state.

Emily Cerciello is the Roosevelt Institute | Campus Network Senior Fellow for Health Care, and a senior at the University of North Carolina at Chapel Hill.

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While Congress Plays Politics, New York State Must Invest in Young People

Mar 26, 2015Kevin Stump

Last week, the House of Representatives and the U.S. Senate released budget proposals that include a slew of policy changes that would negatively impact young people’s ability to fully participate in the economy.  

Last week, the House of Representatives and the U.S. Senate released budget proposals that include a slew of policy changes that would negatively impact young people’s ability to fully participate in the economy.  

The proposals would, among many other bad ideas, freeze funding on Pell Grants for 10 years and eliminate mandatory funding for the program, leaving it vulnerable to the unstable political culture of Washington, D.C. Both budget proposals would charge students interest on all their loans while they’re still in school, costing the average borrower thousands of dollars more. Each budget also eliminates the Pay As You Earn student loan repayment program, which caps monthly payments based on borrower incomes to make payments more affordable for moderate- and low- income debt holders.

It’s concerning that Congress cares so little about an entire generation of young Americans — the very generation that will have to repair what today’s leaders have broken.

While Congress continues to play politics, states need to make investments so this generation isn’t subject to spiraling economic inequality and missed opportunities. As New York approaches its April 1 budget deadline, the governor and the state legislature need to prioritize policies that will help young people to fully realize their potential and participate in the economy.

As outlined in my critique of Governor Cuomo’s student loan program, New York State must: (1) inject resources into public higher education, (2) roll back tuition hikes, (3) reform the Tuition Assistance Program, and (4) require that economic develop initiatives include some type of student loan relief for employees.

But even those measures won’t be enough by themselves. In order for the state to forge ahead and truly invest in youth, it will also need to do the following:  

  1. Increase the minimum wage. With Millennials making up 71 percent of minimum wage workers, raising the wage would give young people a chance to pay down debt, invest in the economy, and start building their economic future. 
  2. Charge the governor’s 10 Regional Economic Development Councils with developing a serious comprehensive plan to integrate paid apprenticeship and internship programs into the criteria for doing business with the state. To help combat the double-digit unemployment rate for 16–24-year-olds across the country, New York State should take advantage of its economic development projects, like START UP NY and NY SUNY 2020, to (1) provide young people with income and (2) impart the skills necessary to compete in today’s economy.
  3. Pass the NY DREAM Act to give thousands of New York’s undocumented youth access to state financial aid so they too can fully participate in the economy.
  4. Expand Governor Cuomo’s proposal to double the Urban Youth Jobs Program. This will help reward businesses that hire and train inner-city youth. In addition, this will help give New Yorkers ages 16–24 the opportunity to learn professional skills while also getting paid.

Conservatives and progressives are both trying to shift the political pendulum in their direction as they gear up for the 2016 election, which will consequently shape the fabric of our political system for the next decade. But Republicans in Congress, as evidenced by their budget proposals, continue to forget about young people. It is now up to President Obama to reject these failed principles and for states to get serious about enacting the real policy changes we need to give young people a fighting chance.

As Roosevelt Institute | Campus Network National Director Joelle Gamble articulates so well, “the young people who are inheriting the effects of the decisions made at all levels of government today… want to see investments made in a more prosperous future.”

Kevin Stump is the Roosevelt Institute | Campus Network's Leadership Director.

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What John Oliver Can Tell Us about Foreclosure Fraud, Sweat Boxes and the Profit Motive

Mar 26, 2015Mike Konczal

John Oliver dedicated his main segment on last Sunday’s episode to the epidemic of municipal fees. He walks through several stories about tickets and citations that are overpriced and end up being more expensive for poor people because of a series of burdensome fees. This was one of the conclusions of the Justice Department’s report on Ferguson, which argued that “law enforcement practices are shaped by the City’s focus on revenue rather than by public safety needs.”

Oliver had a memorable phrase to describe how this system catches people and won’t let them go: he called it a “f*** barrel,” and started a NSFW hashtag on Twitter to draw attention to it.

But I had actually heard a similar (and safe-for-work) phrase for this years ago: the “sweat box.” Law professor Ronald Mann coined it in 2006 to describe how the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) would affect consumer debt, and it applies to the criminal justice system now. The problems with this system also sound like the problems in mortgage debt servicing, which has been a focus here. It turns out that these issues are generalizable, and they illustrate some of the real dilemmas with privatization and introducing the profit-motive into the public realm.

The Sweat Box

First, the barrel/box. Credit card companies and other creditors really wanted BAPCPA to become law. But why? Mann argued that the act wouldn’t reduce risky borrowing, reduce the number of bankruptcies, or increase the recoveries these companies got in bankruptcy.

But what it would do is make it harder to start a bankruptcy, thanks to a wide variety of delaying tactics. The act did this “by raising filing fees, but also by lengthening the period between permitted filings and by imposing administrative hurdles related to credit counseling, debt relief agencies, and attorney certifications.” This kept distressed debtors in a period where they faced high fees and high interest payments, which would allow the credit card companies to collect additional revenue. Instead of trying to alter bankruptcy on the front or back ends, what it really did was give consumers fewer options and more confusion in the middle. It trapped them in a box (or over a barrel, if you will).

Mortgage Servicing

But this also sounds familiar to those watching the scandals taking place in servicer fraud as the foreclosure crisis unfolded over the past seven years. Servicers are the delegated, third-party managers of debts, particularly mortgage securitizations but also student debt. They sound disturbingly similar to the companies Oliver describes as managing municipal fees.

As Adam Levitin and Tara Twomey have argued, third-party servicing introduces three major agency problems. The first is that servicers are incentivized to pad costs, as costs are their revenues, even at the expense of everyone else. The second is that they will often pursue their own goals and objectives as the expense of other options, especially when they don’t ultimately care about the overall goals of those who hire them. And a third problem is that when problems do occur, they are often incentivized to drag them out rather than resolve them the best way possible.

Among other heart-breaking stories, Oliver walks through the story of Harriet Cleveland, who had unpaid parking tickets with Montgomery, Alabama. Montgomery, however, outsourced the management of this debt to Judicial Correction Services (JCS). JCS followed this script perfectly.

JCS had every reason to increase its fees and keep them at a burdensome rate, as it was to be paid first. It was completely indifferent to public notions of the county that hired it, such as proportional justice or the cost-benefit ratio of incarceration, such that they threw Cleveland in jail once she couldn’t handle the box anymore. And it economically benefited from keeping Cleveland in the sweat box as long as possible, rather than trying to find some way to actually resolve the tickets.

For those watching the mortgage servicing industry during the foreclosure crisis, this is a very similar story. Mortgage servicers can pyramid nuisance fees knowing that, even if the loan goes into foreclosure when the debtor can’t handle the box, they will be paid first. They are ultimately indifferent to the private notion of maximizing the value of the loan for investors, so much so that, compared to traditional banks that hold loans directly, servicers are less likely to do modifications and do them in a way that will work out. And servicers will often refuse to make good modifications that would get the mortgage current, because doing so can reduce the principal that forms the basis of their fees.

The Perils of the Profit Motive

There are three elements to draw out here. The first is that these problems are significantly worse for vulnerable populations, particularly those whose exit options are limited by background economic institutions like backruptcy or legal defense. The second is that many of our favorite buzzword policy goals, be they privatization of public services or the market-mediation of credit, involve piling on more and more of these third-party agents whose interests and powers aren’t necessarily aligned with what those who originally hired them expected. Assuming good faith for a second, privatization of these carceral services by municipalities requires a level of control of third-party agents that even the geniuses on Wall Street haven’t been able to pull off.

But we see the sweat box when it comes to purely public mechanisms too, as we see in Ferguson. So the third takeaway is that this is what happens when the profit motive is introduced in places where it normally doesn’t exist. Introducing the profit motive requires delegation and coordination, and it can often cause far more chaos than whatever efficiencies it is meant to produce. Traditional banking serviced mortgage debts as part of the everyday functions within the firm. Putting that function outside the firm, where the profit-motive was meant to increase efficiency, also created profit-driven incentives to find ways to abuse that gap in accountability.

The same dynamics come into play with the profit motive is reintroduced into the municipal level. Our government ran under the profit motive through the 1800s, and it was a major political struggle to change that. Municipal fees are very much part of the reintroduction of the profit motive into city services. As libertarian scholar and Reason Foundation co-founder Robert Poole wrote in 1980 regarding municipal court costs, “Make the users (i.e., the criminals) pay the costs, wherever possible.” As Sarah Stillman found, this is what an “offender-funded” justice system, one that aims “to shift the financial burden of probation directly onto probationers,” looks like now as for-profit carceral service providers shift their businesses to probation and parole. Catherine Rampell reports this as a total shift away from taxes and towards fees for public revenues, and the data shows it.

This is the model of the state as a business providing services, one in which those who use or abuse its functions should fund it directly. And it’s a system that can’t shake the conflicts inherent whenever the profit motive appear.

Follow or contact the Rortybomb blog:
 
  

 

John Oliver dedicated his main segment on last Sunday’s episode to the epidemic of municipal fees. He walks through several stories about tickets and citations that are overpriced and end up being more expensive for poor people because of a series of burdensome fees. This was one of the conclusions of the Justice Department’s report on Ferguson, which argued that “law enforcement practices are shaped by the City’s focus on revenue rather than by public safety needs.”

Oliver had a memorable phrase to describe how this system catches people and won’t let them go: he called it a “f*** barrel,” and started a NSFW hashtag on Twitter to draw attention to it.

But I had actually heard a similar (and safe-for-work) phrase for this years ago: the “sweat box.” Law professor Ronald Mann coined it in 2006 to describe how the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) would affect consumer debt, and it applies to the criminal justice system now. The problems with this system also sound like the problems in mortgage debt servicing, which has been a focus here. It turns out that these issues are generalizable, and they illustrate some of the real dilemmas with privatization and introducing the profit-motive into the public realm.

The Sweat Box

First, the barrel/box. Credit card companies and other creditors really wanted BAPCPA to become law. But why? Mann argued that the act wouldn’t reduce risky borrowing, reduce the number of bankruptcies, or increase the recoveries these companies got in bankruptcy.

But what it would do is make it harder to start a bankruptcy, thanks to a wide variety of delaying tactics. The act did this “by raising filing fees, but also by lengthening the period between permitted filings and by imposing administrative hurdles related to credit counseling, debt relief agencies, and attorney certifications.” This kept distressed debtors in a period where they faced high fees and high interest payments, which would allow the credit card companies to collect additional revenue. Instead of trying to alter bankruptcy on the front or back ends, what it really did was give consumers fewer options and more confusion in the middle. It trapped them in a box (or over a barrel, if you will).

Mortgage Servicing

But this also sounds familiar to those watching the scandals taking place in servicer fraud as the foreclosure crisis unfolded over the past seven years. Servicers are the delegated, third-party managers of debts, particularly mortgage securitizations but also student debt. They sound disturbingly similar to the companies Oliver describes as managing municipal fees.

As Adam Levitin and Tara Twomey have argued, third-party servicing introduces three major agency problems. The first is that servicers are incentivized to pad costs, as costs are their revenues, even at the expense of everyone else. The second is that they will often pursue their own goals and objectives as the expense of other options, especially when they don’t ultimately care about the overall goals of those who hire them. And a third problem is that when problems do occur, they are often incentivized to drag them out rather than resolve them the best way possible.

Among other heart-breaking stories, Oliver walks through the story of Harriet Cleveland, who had unpaid parking tickets with Montgomery, Alabama. Montgomery, however, outsourced the management of this debt to Judicial Correction Services (JCS). JCS followed this script perfectly.

JCS had every reason to increase its fees and keep them at a burdensome rate, as it was to be paid first. It was completely indifferent to public notions of the county that hired it, such as proportional justice or the cost-benefit ratio of incarceration, such that they threw Cleveland in jail once she couldn’t handle the box anymore. And it economically benefited from keeping Cleveland in the sweat box as long as possible, rather than trying to find some way to actually resolve the tickets.

For those watching the mortgage servicing industry during the foreclosure crisis, this is a very similar story. Mortgage servicers can pyramid nuisance fees knowing that, even if the loan goes into foreclosure when the debtor can’t handle the box, they will be paid first. They are ultimately indifferent to the private notion of maximizing the value of the loan for investors, so much so that, compared to traditional banks that hold loans directly, servicers are less likely to do modifications and do them in a way that will work out. And servicers will often refuse to make good modifications that would get the mortgage current, because doing so can reduce the principal that forms the basis of their fees.

The Perils of the Profit Motive

There are three elements to draw out here. The first is that these problems are significantly worse for vulnerable populations, particularly those whose exit options are limited by background economic institutions like backruptcy or legal defense. The second is that many of our favorite buzzword policy goals, be they privatization of public services or the market-mediation of credit, involve piling on more and more of these third-party agents whose interests and powers aren’t necessarily aligned with what those who originally hired them expected. Assuming good faith for a second, privatization of these carceral services by municipalities requires a level of control of third-party agents that even the geniuses on Wall Street haven’t been able to pull off.

But we see the sweat box when it comes to purely public mechanisms too, as we see in Ferguson. So the third takeaway is that this is what happens when the profit motive is introduced in places where it normally doesn’t exist. Introducing the profit motive requires delegation and coordination, and it can often cause far more chaos than whatever efficiencies it is meant to produce. Traditional banking serviced mortgage debts as part of the everyday functions within the firm. Putting that function outside the firm, where the profit-motive was meant to increase efficiency, also created profit-driven incentives to find ways to abuse that gap in accountability.

The same dynamics come into play with the profit motive is reintroduced into the municipal level. Our government ran under the profit motive through the 1800s, and it was a major political struggle to change that. Municipal fees are very much part of the reintroduction of the profit motive into city services. As libertarian scholar and Reason Foundation co-founder Robert Poole wrote in 1980 regarding municipal court costs, “Make the users (i.e., the criminals) pay the costs, wherever possible.” As Sarah Stillman found, this is what an “offender-funded” justice system, one that aims “to shift the financial burden of probation directly onto probationers,” looks like now as for-profit carceral service providers shift their businesses to probation and parole. Catherine Rampell reports this as a total shift away from taxes and towards fees for public revenues, and the data shows it.

This is the model of the state as a business providing services, one in which those who use or abuse its functions should fund it directly. And it’s a system that can’t shake the conflicts inherent whenever the profit motive appear.

Follow or contact the Rortybomb blog:
 
  

 

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New The Nation: TPP and Bureaucrats

Mar 26, 2015Mike Konczal

Live at The Nation: Free Trade Isn’t about Trade. It’s About Bureaucrats—and Guns. Free trade agreements like the TPP have provisions that are designed less for trade, and more about replacing public bureaucrats with private, corporate ones. I think there's a lot out there about the corporate welfare elements about TPP, which are definitely true, but I think this element of who has the final say over how our economies are regulating is equally important. Check it out!

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Live at The Nation: Free Trade Isn’t about Trade. It’s About Bureaucrats—and Guns. Free trade agreements like the TPP have provisions that are designed less for trade, and more about replacing public bureaucrats with private, corporate ones. I think there's a lot out there about the corporate welfare elements about TPP, which are definitely true, but I think this element of who has the final say over how our economies are regulating is equally important. Check it out!

Follow or contact the Rortybomb blog:
 
  

 

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