Dane Stangler: Changing Demographics and Funding Strategies Will Expand Entrepreneurship

Aug 6, 2014

The Next American Economy project brought together 30 experts from various disciplines to envision tomorrow's economic and political challenges and develop today's solutions. Their assignment: be bold, and leave the conventional wisdom -- and their own opinions -- behind. In today's video, Dane Stangler of the Kauffman Foundation predicts that the entrepreneur class will become more diverse as a younger population makes use of new funding platforms.

The Next American Economy project brought together 30 experts from various disciplines to envision tomorrow's economic and political challenges and develop today's solutions. Their assignment: be bold, and leave the conventional wisdom -- and their own opinions -- behind. In today's video, Dane Stangler of the Kauffman Foundation predicts that the entrepreneur class will become more diverse as a younger population makes use of new funding platforms.

By 2040, demographic trends will drive a flourishing of new kinds of entrepreneurial activities, speculated Dane Stangler, Vice President of Research and Policy at the Kauffman Foundation. We will see a bulge in the 20-40 age demographic -- the key entrepreneurial age. But most importantly, new platforms -- like crowd-funding and re-localized production -- will allow for the diversification of entrepreneurship. For the first time, this will allow Americans from a wide range of backgrounds to build new businesses.  

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Sexual Assault Policies on Campus Need Student Input

Aug 6, 2014Hayley Brundige

It's commendable that colleges are stepping up to change their approach sexual assault, but they should be sure to center students in the process.

It's commendable that colleges are stepping up to change their approach sexual assault, but they should be sure to center students in the process.

Under increasing pressure from the White House, colleges and universities have been making changes in their approach to sexual assault. Following the release of an investigative report, the White House Task Force to Protect Students from Sexual Assault was formed to prevent violence, increase transparency, and share best practices. In May, the U.S. Department of Education released a list of 55 colleges and universities under investigation for potential violations of Title IX, the law that prohibits sex discrimination in education.

The schools under scrutiny mishandled cases and made major violations, and with their reputations now in jeopardy, they’re attempting to correct their mistakes. While pressure from the Obama administration has been the impetus for many positive changes, it is important to make sure schools are acting in the best interests of their students – not just avoiding liability.

Harvard University, one of the 55 schools under investigation, made several changes to their sexual assault policy in July. Under the new policy, a centralized administrative body will investigate sexual assault claims, with expert investigators reporting to the school’s Title IX Coordinator. Harvard also lowered the burden of proof for sexual assault cases, switching to a “preponderance of evidence” standard that favors the testimony of the victim instead of making them provide “clear and convincing evidence” of an assault.

While this is a step in the right direction, some are saying Harvard still hasn’t done enough. Critics point out that Harvard’s new policies fail to include affirmative consent as a requirement, leaving the ambiguous “unwelcome conduct of a sexual nature” standard in place.

At Cornell University, administration recently “revamped” their sexual assault policies, priding themselves on the fact that they acted proactively, instead of waiting for a controversy to force their hand. According to one editorial, however, Cornell students had been advocating for change for years before the “revamp.”

Students are directly affected by any change in sexual assault policy and they have a lot to say about it. According to Alexandra Brodsky, founding co-director of Know Your IX, colleges and universities have plenty of work left to do, like providing amnesty to survivors who were drinking, using drugs, or violating other school codes at the time of the assault; contracting advocates for victims independent of the school; and making expulsion of the perpetrator the preferred action of the college.

Victims of sexual assault “are the ultimate experts,” Brodsky says, “And good policy comes from centering their voices.”

From Our Harvard Can Do Better to Dartmouth Change to the student-produced publication “It Happens Here” at Amherst College, students know what they want and they’re speaking up about it. It is the responsibility of colleges and universities to listen to them.

While the White House’s Not Alone initiative outlined many important elements for sexual assault policies, the report noted, “there is no one approach that suits every school.” And that makes sense. For sexual assault policies at universities and colleges to be effective, they have to reflect the circumstances, students, and resources of the individual school. Not every college will have the budget to hire a full team of investigators like Harvard, but effective solutions can be found for every school.

New policies put in place by colleges should put power into the hands of students, empowering them to prevent sexual assault from happening and to report it if it does. Some schools are already realizing that student input is an important resource.

In 2013, the Council on Sexual Violence Prevention was formed at Cornell University, bringing together students, administration, and faculty to improve the school’s sexual assault prevention and response strategies.

A bipartisan group of U.S. Senators introduced legislation last week that would require colleges and universities to conduct campus climate surveys and publicly release the survey results. These anonymous surveys would help campuses determine what changes in their sexual assault policies need to be made and provide a more accurate look into a crime that is grossly underreported.

Mishandled campus sexual assault cases and recent White House efforts to combat violations have been covered extensively in the news and have garnered national attention. While this snowball effect has spurred colleges to make changes and rethink their policies, we have to make sure this isn’t just a quick fix. School administrations need to work collaboratively to create policies that matter to students and survivors, and will produce long-term change.  

Hayley Brundige is the Roosevelt Institute Communications Intern and a 2014 Summer Academy Fellow. She is the Media Director of the University of Tennessee, Knoxville chapter of the Campus Network.

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Daily Digest - August 5: Basic Needs Shouldn't Need to Be Bought

Aug 5, 2014Rachel Goldfarb

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

The Real Solution to Wealth Inequality (The Nation)

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

The Real Solution to Wealth Inequality (The Nation)

Roosevelt Institute Fellow Mike Konczal and Bryce Covert write that instead of trying to increase individuals' purchasing power, basic needs should just be taken off the market altogether.

Why Is the Economy Still Weak? Blame These Five Sectors (NYT)

Neil Irwin examines the possible causes for the underperformance of several economic sectors based on careful predictions of what their output ought to be in a healthier economy.

The NLRB-McDonald's Ruling Could be the Beginning of a Franchise War (LA Times)

Michael Hiltzik suggests that as the National Labor Relations Board places more responsibility on franchisors like McDonald's, those companies will try to pass costs to their franchisees.

A University President Gave up $90,000 to Give His Minimum Wage Workers a Raise (Vox)

By reducing his own salary, the interim president of Kentucky State University has ensured a raise from $7.25 an hour to $10.25 an hour for the school's lowest-paid workers.

As Congress Adjourns, GOP Declares “Omission Accomplished” (OurFuture.org)

Congress left for summer recess with the GOP having blocked almost everything from passing, but Richard Eskow also calls out the Democrats for failing to give them more progressive proposals to block.

The United States Needs Corporate 'Loyalty Oaths' (The Daily Beast)

"Non-desertion agreements" as requirements for federal contractors would help to ensure companies choose to pay U.S. corporate taxes, writes Jonathan Alter.

New on Next New Deal

Will Syracuse Become New York's Second Economic Capital?

In her video speculation for the Next American Economy project, Amy Liu, Co-Director of the Metropolitan Policy Program at Brookings, predicts cities will step up as drivers of innovation and investment.

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Amy Liu: Will Syracuse Become New York's Second Economic Capital?

Aug 5, 2014

The Next American Economy project brought together 30 experts from various disciplines to envision tomorrow's economic and political challenges and develop today's solutions. Their assignment: be bold, and leave the conventional wisdom -- and their own opinions -- behind. In today's video, Brookings senior fellow Amy Liu posits that municipal goverments will take the lead on innovation and investment.

The Next American Economy project brought together 30 experts from various disciplines to envision tomorrow's economic and political challenges and develop today's solutions. Their assignment: be bold, and leave the conventional wisdom -- and their own opinions -- behind. In today's video, Brookings senior fellow Amy Liu posits that municipal goverments will take the lead on innovation and investment.

By 2040, as predicted, the federal government will be largely incapable of funding effective or innovative policies, speculates Amy Liu, Co-Director of the Metropolitan Policy Program at Brookings. Metropolitan areas will pick up the slack. They will reverse the race-to-the-bottom policies that aimed to offer companies the least explensive place to do business, and will instead focus on providing business with productive employees and critical infrastructure. The biggest problem could be a potential divergence in the success of metropolitan areas and expanding geographic inequality.

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Daily Digest - August 4: The Underappreciated Success of Financial Reform

Aug 4, 2014Rachel Goldfarb

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Obama’s Other Success (NYT)

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Obama’s Other Success (NYT)

Dodd-Frank financial reform is proving more successful than expected, writes Paul Krugman. He cites Roosevelt Institute Fellow Mike Konczal in debunking the claim that the law created permanent bailouts.

The NFL Cheerleaders Should Be Your Fair-Pay Heroes (TNR)

Bryce Covert looks at what's needed to achieve wage growth in today's economy. She talks to Mike Konczal, who suggests that the Fed could help everyone's wages if it focused on unemployment.

Economy Adds 209,000 Jobs in July; Unemployment Rate Edges Up to 6.2 Percent (WaPo)

Ylan Q. Mui breaks down Friday's jobs report, which was generally positive but showed that underemployment (part-timers who want more hours) and long-term unemployment haven't budged.

Relying on Online Listings, Young Americans Struggle to Find Jobs (The Guardian)

Today's system of online job applications isn't making the search any easier, writes Jana Kasperkevic, as job-seekers find that their applications seem to disappear into black holes.

Work and Worth (Robert Reich)

Robert Reich emphasizes the difference between pay and value to society, given that kindergarten teachers and social workers make far less than hedge fund managers.

New on Next New Deal

The Worker-Owned Small Business Revolution

In his video speculation for the Next American Economy project, Gar Alperovitz predicts that as MBAs realize that worker-owned companies achieve higher productivity, the model will grow.

Thinking About the Women in Think Tanks

Bringing more women into the upper echelons of policy work will require engaging younger women in this work, writes Roosevelt Institute Summer Academy Fellow Hannah Zhang.

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Thinking About the Women in Think Tanks

Aug 4, 2014Hannah Zhang

Women are still lagging behind their male counterparts in the policy arena, and changing that requires engaging younger women.

Women are still lagging behind their male counterparts in the policy arena, and changing that requires engaging younger women.

In recent years, several prominent women have replaced their male predecessors in top think tank leadership positions. Last year, Anne-Marie Slaughter replaced Steve Coll as president of the New America Foundation; in 2011, Neera Tanden took over for John Podesta as president of the Center for American Progress. In early 2012, Felicia Wong took over as President and CEO here at the Roosevelt Institute, replacing Andy Rich. While these women leaders are touted as examples of greater female representation in public policy, this is hardly the full picture.

Women are taking on leadership roles in think tank management, but men still dominate the thinking roles, making up the majority of scholars and “Senior Fellows” who influence policy. According to their public rosters, only a quarter of CAP fellows, 19 of 59 Brookings Institution experts, 20 out of 65 fellows at the Council on Foreign Relations, and seven of 33 Heritage Foundation fellows are women. In academia, an incubator of think tank experts, women hold only 24 percent of tenured positions at doctoral-granting institutions, and merely 19 percent of tenured full professor positions.

Perhaps contrary to common assumption, women’s lack of representation in think tanks isn’t due to their lack of academic expertise. In fact, women are quickly edging to surpass men in higher education. The World Economic Forum’s 2013 Gender Gap Report ranked the United States number one for gender equality in educational attainment among more than 130 countries. Last year, 31.4 percent of American women 25 years and over had completed college, compared to 32 percent of men. 27,300 men and 27,600 women received doctoral degrees.

Why does equal education attainment fail to translate into equal representation in policy research institutions?

Possible answers to this question range from women having more family obligations to self-selecting against policy areas like defense and finance. Other potential explanations include difficulty securing mentorship early in their careers and systemic biases.

A related problem is the lack of women in political positions, since many policy wonks rise from the ranks of former politicians and government officials. Less than 20 percent of federal and state legislators are women. They occupy only six of 23 cabinet and cabinet-level positions. If fewer women enter politics, fewer women join think tanks after serving their term.

We may be able to find a better answer in looking at a woman’s career ambitions, where a fundamental gap exists between young men and women’s political ambitions. The School of Public Affairs at American University conducted a survey last year of more than 2,100 college students ages 18 to 25 and found that young women are less likely to be socialized by their parents to consider politics as a career path and less likely to think they will be qualified to run for office.

Yet we need young women more than ever to step up and ensure that the next generation of American policymakers remains committed to full gender equality. According to a recent World Bank Report, women’s participation in government results in greater responsiveness to citizen needs and policies that prioritize families and women. When at least a quarter of a country’s legislators were women, laws discriminating against women were more likely to be repealed.

We cannot change existing structures in governments and think tanks today. Rather, we must invest in women of the future to change the gender gap in political ambition. Currently, a number of programs exist that encourage young women to run for office, develop female graduate students in public policy, or offer brief leadership trainings for college women. However, these programs lack a long-term support network to engage undergraduate women in public policy at the beginning of their careers.

With chapters at 115 colleges and universities, the Roosevelt Institute | Campus Network is well positioned to fill this gap, beginning with the Eleanor Roosevelt Policy Initiative. This summer, the Campus Network is hosting an essay contest on gender equality, selecting six young people to attend the Women and Girls Rising Conference. In September, the winners will engage with prominent activists, officials, and scholars on the past and future of international women’s movements.

Following the conference, these individuals will continue to work with the Campus Network on promoting young women in policy spheres. To move forward with a vision of equality, we must tell young women today that their ideas are vital in creating stable governments and societies of tomorrow.

If you are a current college student or recent graduate, enter the contest here

Hannah Zhang interned for the Roosevelt Institute's Women and Girls Rising initiative as a Summer Academy Fellow this year. She is Campus Network's External Relations Coordinator for the Northeast.

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Gar Alperovitz: The Worker-Owned Small Business Revolution

Aug 4, 2014

The Next American Economy project brought together 30 experts from various disciplines to envision tomorrow's economic and political challenges and develop today's solutions. Their assignment: be bold, and leave the conventional wisdom -- and their own opinions -- behind. In today's video, political economist Gar Alperovitz speculates on what could happen if workers claim power over small businesses.

The Next American Economy project brought together 30 experts from various disciplines to envision tomorrow's economic and political challenges and develop today's solutions. Their assignment: be bold, and leave the conventional wisdom -- and their own opinions -- behind. In today's video, political economist Gar Alperovitz speculates on what could happen if workers claim power over small businesses.

Gar Alperovitz, Professor of Political Economy at the University of Maryland, describes the potential for a future economic revolution: starting in Cleveland, small businesses will democratize ownership. From there, the model will spread to cities across the country. As MBAs begin to understand that productivity in worker-owned companies is higher than in traditional firms, the movement will continue to grow.

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Daily Digest - August 1: Too Big to Fail vs. Too Small to Matter

Aug 1, 2014

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

An In-Depth Look at Campaign Finance Reform (MSNBC)

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

An In-Depth Look at Campaign Finance Reform (MSNBC)

In this extended online segment, Roosevelt Institute Fellow Dorian Warren speaks with Zephyr Teachout about using multiple matching funds as a tool to increase the power of small donors.

Playing the ‘Who’s the Boss?’ Game with Employees (WaPo)

The National Labor Relations Board ruling that McDonald's can be held accountable for franchise labor violations sheds light on the ways employers try to dodge responsibility, writes Catherine Rampell.

  • Roosevelt Take: Roosevelt Institute President and CEO Felicia Wong and Senior Fellow Richard Kirsch commented on the NLRB decision earlier this week.

‘Pension Smoothing’: The Gimmick Both Parties in Congress Love (NYT)

Josh Barro says pension smoothing, which increases revenues by allowing smaller pension contributions, and other gimmicks provide funding on too-short timelines, requiring another hunt for funds soon after.

Feds Say Big Banks Are Still Too Big to Fail (MoJo)

Despite Dodd-Frank's financial regulations, a new Government Accountability Office report says investors still expect bailouts if the largest banks fail, giving those banks advantages over smaller ones, writes Erika Eichelberger.

Hope Springs Eternal, But The Data Is Actually Pretty Mixed About Whether Or Not Recovery Is Accelerating (Working Economics)

Josh Bivens cautions against excitement about GDP and job growth as signs of a speedier recovery. The data isn't actually that strong, and he sees the potential for job growth to slow.

New on Next New Deal

Let's Hope the GAO Report Ends the Too-Big-to-Fail Subsidy Distraction

Roosevelt Institute Fellow Mike Konczal writes that the existence of a too-big-to-fail subsidy isn't as important or potentially destructive as the systemic problems of the financial system.

Education Left Behind

Edyta Obrzut, the Campus Network's NextGen Illinois Research Fellow, examines the challenges facing education policy in Illinois today, and the potential solutions put forward by NextGen caucuses.

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The GAO Can't Distinguish Between a Good and a Bad Liquidation

Aug 1, 2014Mike Konczal

To emphasize a point I made yesterday, we need to think of ending Too Big To Fail (TBTF) as a continuum rather a simple yes-no binary. The process of failing a large financial firm through the Orderly Liquidation Authority (OLA) can go very well, or it could go very poorly. It's important to understand that the recent GAO report, arguing that the TBTF subsidy has largely diminished, is incapable of telling the difference.

What would make for a successful termination of a failed financial firm under OLA? To start, bankruptcy court would be a serious option as a first response. Assuming that didn't work, capital in the firm is structured in such a way that facilitates a successful process. There's sufficient loss-absorbing capital both to take losses and give regulators options in the resolution. There's also sufficient liquidity, both within the firm due to strong new capital requirements and through accountable lender-of-last-resort lending, that prevents a panic from destroying whatever baseline solvency is in the firm. As a result, less public funding is necessary to achieve the goals.

Living wills actually work, and allow the firm to be resolved in a quick and timely manner. The recapitalization is sufficient to repay any public funding without having to assess the financial industry as a whole. There's no problems with international coordination, and the ability of the FDIC to act as a receiver for derivatives contracts is standardized and clear in advance, reducing legal uncertainty.

That's a lot! And it's a story about what could go right or wrong that is becoming more and more prevalent in the reform community [1]. Let's chart it out, along with the opposite happening.

Again, from the point of view of the GAO report, these are identical scenarios. Both would impose credit losses on firms. Thus the GAO's empirical model, scanning and predicting interest rates spreads to imply credit risk, picks up both scenarios the same way. Whether OLA goes smoothly or is a disaster doesn't matter. But from the point of view of taxpayers, those trying to deal with the uncertainty and panic that would come with such a scenario, and the economy as a whole, the bad scenario is a major disaster. And we are nowhere near the point where success can be taken for granted. Tightening the regulations we have is necessary to making the successful scenario more likely, and the apparent lack of a subsidy should not distract us from this.

 

[1] Note the common similarities along these lines in the critical discussion of OLA from across the entire reform spectrum. You can see this story in different forms in Stephen Lubben's "OLA After Single Point of Entry: Has Anything Changed?" for the Unfinished Mission project,  the comment letter from the Systemic Risk Council, Too Big to Fail: The Path to a Solution from the Bipartisan Policy Center, and the "Failing to End Too Big to Fail" report from the Republican Staff of the House Committee on Financial Services.

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To emphasize a point I made yesterday, we need to think of ending Too Big To Fail (TBTF) as a continuum rather a simple yes-no binary. The process of failing a large financial firm through the Orderly Liquidation Authority (OLA) can go very well, or it could go very poorly. It's important to understand that the recent GAO report, arguing that the TBTF subsidy has largely diminished, is incapable of telling the difference.

What would make for a successful termination of a failed financial firm under OLA? To start, bankruptcy court would be a serious option as a first response. Assuming that didn't work, capital in the firm is structured in such a way that facilitates a successful process. There's sufficient loss-absorbing capital both to take losses and give regulators options in the resolution. There's also sufficient liquidity, both within the firm due to strong new capital requirements and through accountable lender-of-last-resort lending, that prevents a panic from destroying whatever baseline solvency is in the firm. As a result, less public funding is necessary to achieve the goals.

Living wills actually work, and allow the firm to be resolved in a quick and timely manner. The recapitalization is sufficient to repay any public funding without having to assess the financial industry as a whole. There's no problems with international coordination, and the ability of the FDIC to act as a receiver for derivatives contracts is standardized and clear in advance, reducing legal uncertainty.

That's a lot! And it's a story about what could go right or wrong that is becoming more and more prevalent in the reform community [1]. Let's chart it out, along with the opposite happening.

Again, from the point of view of the GAO report, these are identical scenarios. Both would impose credit losses on firms. Thus the GAO's empirical model, scanning and predicting interest rates spreads to imply credit risk, picks up both scenarios the same way. Whether OLA goes smoothly or is a disaster doesn't matter. But from the point of view of taxpayers, those trying to deal with the uncertainty and panic that would come with such a scenario, and the economy as a whole, the bad scenario is a major disaster. And we are nowhere near the point where success can be taken for granted. Tightening the regulations we have is necessary to making the successful scenario more likely, and the apparent lack of a subsidy should not distract us from this.

 

[1] Note the common similarities along these lines in the critical discussion of OLA from across the entire reform spectrum. You can see this story in different forms in Stephen Lubben's "OLA After Single Point of Entry: Has Anything Changed?" for the Unfinished Mission project,  the comment letter from the Systemic Risk Council, Too Big to Fail: The Path to a Solution from the Bipartisan Policy Center, and the "Failing to End Too Big to Fail" report from the Republican Staff of the House Committee on Financial Services.

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Let's Hope the GAO Report Ends the Too-Big-to-Fail Subsidy Distraction

Jul 31, 2014Mike Konczal

The GAO just released its long-awaited report on whether Wall Street receives an implicit subsidy for still being seen as Too Big To Fail (TBTF). I'm still working through the report, but the headline conclusion is that "large bank holding companies had lower funding costs than smaller ones during the financial crisis" and that there is "mixed evidence of such advantages in recent years. However, most models suggest that such advantages may have declined or reversed."

For a variety of reasons, whether this subsidy exists has become a major focal point in the discussion about financial reform. The Obama administration wants the headline that TBTF is over, and the President's opponents want to argue that Dodd-Frank has institutionalized bailouts. Hopefully this GAO report puts that "permanent bailouts" talking point to rest.

More generally, however, I find that there are three problems with this emphasis on a possible Wall Street subsidy in the financial reform debate:

The first is that it makes it seem like the bailouts were the only problem with the financial sector. Let's do a thought experiment: imagine that in September 2008, Lehman Brothers went crashing into bankruptcy and...nothing happened. There was no panic in interbank lending or the money market mutual funds. The Federal Reserve didn't do emergency lending, and nobody suggested that Congress pass TARP. There was nothing but crickets out there in the financial press.

Even if that had happened, we'd still have needed a massive overhaul of the financial system. Think of all the other things that went wrong: Wall Street fueled a massive housing bubble that destroyed household wealth and generated bad debts that have choked the economy for half a decade. Neighborhoods were torn apart by more than 6 million foreclosures while bankers laughed all the way to the bank. A hidden derivatives market radically distorted the price of credit risk and led to the creation of instruments designed to rip off investors. Wall Street failed at its main job -- to allocate capital to productive ends in the economy. Instead, it went on a rampage that did serious harm to investors, households, and ultimately our economy. 

TBTF is the most egregious example of the out-of-control financial system, and it's a major problem that needs to be checked. But if emphasized too much, it makes it seem as if the problem is only how much damage a firm can do to the economy when it fails. In fact, the problem is much broader than that, and solving it requires transparency in the derivatives market, consumer protections, accountability in the securities Wall Street makes and sells, a focus on actual business lines, and regulation of shadow banking as a whole, not just last rites for individual firms.

This is important because the second problem is that some will take this report as evidence that reform is just right, or has even gone too far. And scanning the coverage, I see that the commentators who are applauding the GAO's conclusions are often the same people who have said that, for instance, liquidity rules in Dodd-Frank have gone too far, or that the Volcker Rule should be tossed out. This is even as the GAO points to these provisions as necessary reforms.

We can debate whether a subsidy for failing banks exists or how big it is, but the goal of regulation should not be to fine-tune that number. The subsidy is only a symptom of much larger problems with the financial system, and the point of regulation is to build a system that works. 

Finally, the third issue is that emphasizing the subsidy makes us think of ending TBTF as a binary, check-yes-or-no, pass-fail kind of test. Again, there are political reasons for this emphasis, but TBTF isn't a switch that can be flipped on or off. Addressing the problem is an ongoing process that will be carried out through the Orderly Liquidation Authority (OLA), and that process can be either more or less robust.

It's good that the financial markets have confidence in the OLA, but the FDIC is still crafting the living wills and the details of how they will be implemented. Major questions and challenges still remain. For instance, a rule has not yet been written to determine how much unsecured debt firms are required to carry. And conservatives are already floating the idea that a successful OLA would be a "bailout" anyway

The success of an orderly liquidation process will depend on many different factors, but we should think of it not as a binary, but as a continuum -- a continuum on which one end has more capital and slimmer business lines to protect taxpayer dollars and keep the risks contained, and the other end has us crossing our fingers and hoping that the aggregate damage isn't too bad. [UPDATE: See more on this point from me here.]

The GAO report is welcome news. We've made progress on the most outrageous problem with the financial sector. But that doesn't mean the work is done by any means.

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Header image via Thinkstock

The GAO just released its long-awaited report on whether Wall Street receives an implicit subsidy for still being seen as Too Big To Fail (TBTF). I'm still working through the report, but the headline conclusion is that "large bank holding companies had lower funding costs than smaller ones during the financial crisis" and that there is "mixed evidence of such advantages in recent years. However, most models suggest that such advantages may have declined or reversed."

For a variety of reasons, whether this subsidy exists has become a major focal point in the discussion about financial reform. The Obama administration wants the headline that TBTF is over, and the President's opponents want to argue that Dodd-Frank has institutionalized bailouts. Hopefully this GAO report puts that "permanent bailouts" talking point to rest.

More generally, however, I find that there are three problems with this emphasis on a possible Wall Street subsidy in the financial reform debate:

The first is that it makes it seem like the bailouts were the only problem with the financial sector. Let's do a thought experiment: imagine that in September 2008, Lehman Brothers went crashing into bankruptcy and...nothing happened. There was no panic in interbank lending or the money market mutual funds. The Federal Reserve didn't do emergency lending, and nobody suggested that Congress pass TARP. There was nothing but crickets out there in the financial press.

Even if that had happened, we'd still have needed a massive overhaul of the financial system. Think of all the other things that went wrong: Wall Street fueled a massive housing bubble that destroyed household wealth and generated bad debts that have choked the economy for half a decade. Neighborhoods were torn apart by more than 6 million foreclosures while bankers laughed all the way to the bank. A hidden derivatives market radically distorted the price of credit risk and led to the creation of instruments designed to rip off investors. Wall Street failed at its main job -- to allocate capital to productive ends in the economy. Instead, it went on a rampage that did serious harm to investors, households, and ultimately our economy. 

TBTF is the most egregious example of the out-of-control financial system, and it's a major problem that needs to be checked. But if emphasized too much, it makes it seem as if the problem is only how much damage a firm can do to the economy when it fails. In fact, the problem is much broader than that, and solving it requires transparency in the derivatives market, consumer protections, accountability in the securities Wall Street makes and sells, a focus on actual business lines, and regulation of shadow banking as a whole, not just last rites for individual firms.

This is important because the second problem is that some will take this report as evidence that reform is just right, or has even gone too far. And scanning the coverage, I see that the commentators who are applauding the GAO's conclusions are often the same people who have said that, for instance, liquidity rules in Dodd-Frank have gone too far, or that the Volcker Rule should be tossed out. This is even as the GAO points to these provisions as necessary reforms.

We can debate whether a subsidy for failing banks exists or how big it is, but the goal of regulation should not be to fine-tune that number. The subsidy is only a symptom of much larger problems with the financial system, and the point of regulation is to build a system that works. 

Finally, the third issue is that emphasizing the subsidy makes us think of ending TBTF as a binary, check-yes-or-no, pass-fail kind of test. Again, there are political reasons for this emphasis, but TBTF isn't a switch that can be flipped on or off. Addressing the problem is an ongoing process that will be carried out through the Orderly Liquidation Authority (OLA), and that process can be either more or less robust.

It's good that the financial markets have confidence in the OLA, but the FDIC is still crafting the living wills and the details of how they will be implemented. Major questions and challenges still remain. For instance, a rule has not yet been written to determine how much unsecured debt firms are required to carry. And conservatives are already floating the idea that a successful OLA would be a "bailout" anyway

The success of an orderly liquidation process will depend on many different factors, but we should think of it not as a binary, but as a continuum -- a continuum on which one end has more capital and slimmer business lines to protect taxpayer dollars and keep the risks contained, and the other end has us crossing our fingers and hoping that the aggregate damage isn't too bad. [UPDATE: See more on this point from me here.]

The GAO report is welcome news. We've made progress on the most outrageous problem with the financial sector. But that doesn't mean the work is done by any means.

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