What Ken Burns's Documentary on the Roosevelts Can Teach Us About Our Past and Ourselves

Sep 25, 2014David B. Woolner

A historical adviser to the film looks back at how the Roosevelts saved the American free enterprise system.

Ken Burns's superb documentary, The Roosevelts: An Intimate History, is in many ways a celebration of leadership, of the triumph of personal will over adversity, and of the belief in the age-old American story that each of us – no matter how burdened by life’s tragedies – has the capacity to accomplish great things.

A historical adviser to the film looks back at how the Roosevelts saved the American free enterprise system.

Ken Burns's superb documentary, The Roosevelts: An Intimate History, is in many ways a celebration of leadership, of the triumph of personal will over adversity, and of the belief in the age-old American story that each of us – no matter how burdened by life’s tragedies – has the capacity to accomplish great things.

The film also has much to say about the transformative nature of government: the idea, which all three Roosevelts shared, that it was the responsibility of government to serve as the primary guarantor of social and economic justice for all Americans – not just the privileged few at the top. It was this belief that formed the basis of Theodore Roosevelt’s New Nationalism and Franklin D. Roosevelt's New Deal, and this belief that helped inspire Eleanor Roosevelt’s efforts to craft the Universal Declaration of Human Rights that was ratified by the United Nations just three years after its 1945 founding.

What is often overlooked in this story is the role that all three of these remarkable leaders played in helping to preserve the American free enterprise system, of trying to mitigate the worst excesses of capitalism, not only out of a desire to protect the American people from exploitative labor practices or fraudulent financial dealings, but also out of a desire to protect our very way of life during an era when liberal capitalist democracy was under siege in much of the rest of the world. As the late Arthur Schlesinger Jr., once remarked, the twentieth century in many respects can be viewed as a struggle of ideologies, a time in which the anti-democratic forces of fascism and totalitarian communism were on the march, so that by January 1942 at the height of the Second World War, there were only a handful of democracies left on the planet.

In the rhetorically charged atmosphere of the mid 1930s, FDR’s critics alleged that the reforms he instigated under the New Deal were designed to take the country down the path to socialism. But nothing could be further from the truth. Social Security, unemployment insurance, and granting labor the right to organize were all inspired by the desire to provide the average American with a basic degree of economic security within the capitalist system. So too were the many financial reforms that brought us the likes of the Federal Deposit Insurance Corporation and the Securities and Exchange Commission. The same argument could be made about Theodore Roosevelt, whose decision to take on such conglomerates as the Beef Trust or the Northern Securities Rail Company was driven by the desire not to destroy big business but to limit monopoly and restore the cut and thrust of the free market. In short, both men were motivated by the idea that the federal government had a responsibility to make capitalism work for the average American.

Eleanor Roosevelt concurred with these ideas, and in spite of her reputation as a left-leaning reformer, spent much of her considerable energy in the post-1945 world arguing in favor of the World War II monetary and trade reforms that helped launch the globalization of the world’s economy. In her May 21, 1945 "My Day" column, for example, ER spoke out in favor of the 1944 Bretton Woods accords which established the International Monetary Fund and International Bank for Reconstruction and Development, later the World Bank. Here, she argued in favor of the stabilization of currencies, because in the past there had been much speculative trading in this area, which resulted in “economic warfare” that in time brings us to “shooting warfare.” And she had this to say about the establishment of the International Bank for Reconstruction and Development:

Some foolish people will ask: Why do we have to concern ourselves with the development and reconstruction of the ruined countries? The answer is simple. We are the greatest producing country in the world. We need markets not only at home, but abroad, and we cannot have them unless people can start up their industries and national economy again and buy from us. If Europe or Asia falls apart because of starvation or lack of work for their people, chaos will result and World War III will be in the making. In that event, we know that we will have to be a part of it.

Hence, ER insisted that we needed “both the bank and the fund for our own security, as well as for that of the rest of the world.” She then urged her readers to write to their Senators and Congressmen in support of the treaty, for as she so eloquently put it:

Whether you are a farmer or a merchant, whether your business is big or little, you are personally affected by it. Even if you don't sell directly to a foreign country, you are indirectly affected – for the prosperity of the [foreign] country means your prosperity, and we cannot prosper without trade with our neighbors in the world of tomorrow.

As is so often the case, when we look back we see that the challenges of the past are not that different from the challenges we face today. Once again we face a world where the free-market system is in desperate need of reform; a world where income inequality has reached levels not seen since the gilded age; a world where the specter of long-term unemployment and limited opportunity has dimmed the hopes of an entire generation; a world where poverty and a lack of opportunity have given rise to anti-democratic extremists that threaten the very lives and well-being of millions. Yet sadly, and unlike the heady days of the first six decades of the twentieth century, our leaders in Washington seem incapable or unwilling to shape a response to these many challenges befitting the legacy of such great political figures as Theodore, Franklin, and Eleanor Roosevelt.

A great deal of this can be attributed to the irresponsible behavior of many members of Congress, particularly among the members of the extreme right, whose obstructionist policies and rigid anti-government ideology have played a significant part in rendering the 113th Congress one of the least effective and least respected in American history.

But we should also never forget – as Ken Burns and his outstanding script writer Geoffrey Ward have reminded us through this outstanding film – that we too must share part of the blame. For as much as we may admire the leadership of the Roosevelts, none of their accomplishments would have been possible without the support of the American people. Leadership, after all, is a dynamic process that requires the cooperation of the both public figures and the public, and if we are living in an age that seems incapable of producing transformative government, we need to recognize that in a democracy it is the people who bear the final responsibility for their fate.  

Franklin Roosevelt perhaps put it best when he urged the American people to recognize that “government is ourselves and not an alien power over us. The ultimate rulers of our democracy are not a President and Senators and Congressmen and Government officials but the voters of this country.”

David B. Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute. 

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Daily Digest - September 25: Economic Progress Starts With Corporate Reform

Sep 25, 2014Tim Price

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America's Dark Economic Secret: How a Giant Gimmick Has Wages and Jobs Hanging by a Thread (Salon)

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America's Dark Economic Secret: How a Giant Gimmick Has Wages and Jobs Hanging by a Thread (Salon)

Tax-dodging techniques like inversions have turned all corporations into financial firms focused on moving their money around so that the government can't get to it, writes David Dayen.

Germany's Major Export: Economic Optimism (WaPo)

Corporate structures that balance the interests of shareholders and workers may explain why Germans feel better about their economy than other westerners, writes Harold Meyerson.

  • Roosevelt Take: Fellow Susan Holmberg and Mark Schmitt write about why we need to rethink the nature of corporations in Democracy Journal.

The Rich Are Getting Richer, Part the Millionth (MoJo)

The numbers don't lie, writes Kevin Drum: the rich have been soaking up a larger and larger share of economic expansions since the 1950s, including 95 percent of income growth since 2009.

Yes, Tipping Sucks. But You Still Have to Do It. (The Nation)

Pushing companies like Marriott to raise wages is a worthy cause, writes Bryce Covert, but refusing to tip will only hurt low-income workers, many of whom already live in poverty.

17 Numbers That Will Make You Realize Just How Pathetic the Federal Minimum Wage Is (HuffPost)

Claims that raising the minimum wage would destroy the economy sound even more dubious when considering how low it is and how many workers depend on it, notes Nick Wing.

Miss a Payment? Good Luck Moving That Car (NYT)

Michael Corkery and Jessica Silver-Greenberg report on the latest innovation in terrorizing debtors: devices that allow subprime auto lenders to track and remotely disable cars.

New on Next New Deal

Georgia Political Candidates: Where Are Carbon Emissions In Your Election Platform?

A new EPA rule requires Georgia to reduce carbon emissions by 44 percent by 2040, writes Campus Network Senior Fellow Torre LaVelle, but the state's would-be leaders are ignoring the issue.

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Georgia Political Candidates: Where Are Carbon Emissions in Your Election Platform?

Sep 25, 2014Torre LaVelle

None of the candidates for major statewide office in Georgia are talking about carbon emissions or climate change, despite major new policy from the EPA that will make these issues central to their terms in office.

None of the candidates for major statewide office in Georgia are talking about carbon emissions or climate change, despite major new policy from the EPA that will make these issues central to their terms in office.

The Environmental Protection Agency’s groundbreaking new carbon emissions proposal hedges some pretty hefty bets: the new rules require the equivalent of taking two-thirds of all cars and trucks in the U.S. off the road. The proposal will cost the economy more than $7 billion annually, but will lead to public health benefits accruing to more than $55 billion. The heated discussion it has prompted from environmentalists, industry, and lawmakers has centered on the multi-billion dollar question: what is the role of government regulation in addressing climate change?

The EPA rule has assigned each state a separate pollution reduction target, and under the plan, Georgia would need to reduce its carbon dioxide output by 44 percent by the year 2040. Notably absent from the debate, however, are the individuals who will soon be directing the discussion through their policy decisions: the current gubernatorial and Senate candidates. Democratic gubernatorial candidate Jason Carter, endorsed by the Sierra Club in May, has only noted that he wants residents to get credit for progress they've already made in carbon reduction. His “On the Issues” online platform fails to include environmental policy as a broad topic, let alone talk of pollution.

Although Governor Deal may want to distance himself politically from Carter, the candidates are remarkably similar in their lack of talking points on the EPA standards. A spokeswoman for Deal said it was too early for the governor to comment on the emissions proposal back in June, and apparently it's still too early three months later, even as the election approaches in November.

Former Dollar General CEO David Perdue, who beat out Rep. Jack Kingston to win the Georgia GOP Senate nomination, has dismissed the emissions regulations as altogether too burdensome. In June, it was revealed that Perdue has sat on the board of the Wisconsin-based Alliant Energy Corp. since 2001.

Democratic Senate candidate Michelle Nunn has served as the sole light in this matter; although she has offered a ‘wait-and-see’ on the emissions plan until what will go into the state calculations is made clear, she has at least affirmed her support for reducing carbon emissions.

The candidates’ insubstantial weigh-in on how to tackle these rapidly approaching EPA deadlines provides voters with an incomplete policy platform, and one that is myopic in scope. For example, what is to be of Georgia’s Plant Scherer? It’s been identified as the dirtiest power plant in the United States, and under the EPA policy, there will be significant pressure to shut the coal plant down. What would the next steps be for evaluating Georgia’s energy portfolio, and how would the candidates handle claims that the limits will crush jobs and the economy?

By failing to more concretely enter into discussions on how to tackle these EPA deadlines, candidates also lose the ability to capitalize off the new regulations. For example, a comprehensive report released last month ranked the Atlanta-based utilities provider Southern Company 31st among 32 utilities across the U.S. in percentage of sales tied to electricity from renewables. Individuals in the gubernatorial and Senate races should work to address mounting pressure to improve Georgia’s national ranking in energy efficiency and renewables by connecting it to the EPA guidelines, and proposing to tackle the emission standards through increasing emphasis on clean energy infrastructure.

The most critical issue left unaddressed, however, stems from our Georgia candidates' inability to define issues such as carbon emissions within the larger sphere of climate change. Just as the esteemed evolutionary biologist Dobzhansky noted that nothing in biology makes sense except in the light of evolution, nothing in environmental policy really makes sense except without accepting the involvement of climate change. Although both Deal and Carter have campaigned extensively for improved water conservation methods and the protection of Georgia’s coastline, these issues cannot be adequately examined without including factors symptomatic of climate change into the picture, such as sea level rise, the decreasing reliability of water supply networks, threatened coastal infrastructure, and increased risk of drought.

The question that remains is why our Georgia political candidates aren’t talking about the EPA standards in the context of climate change. Perhaps I already know the answer: it is not in the interest of the candidate to do so. Climate change is a loaded, divisive phrase, and an intensive analysis into the Georgia public’s views on the matter has, to date, been overlooked. However, Florida’s open emphasis on climate policy as a major bipartisan issue during the election, as well as the overwhelming amount of public witnesses at the EPA Atlanta hearing prove that the topic is ripe for public discourse and political opportunity. Georgia candidates would do well to remember that these issues are not simply environmental issues, but fundamentally economic and public health issues. For the sake of Georgia voters, candidates should view these issues as mandatory to offering a more complete and expansive view for the future of the great state of Georgia.

Torre Lavelle is the Roosevelt Institute Campus Network Senior Fellow for Energy and the Environment. She is majoring in ecology and environmental economics at the University of Georgia. 

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Daily Digest - September 24: Students on Food Stamps Need Somewhere to Spend Them

Sep 24, 2014Rachel Goldfarb

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On Campus (HuffPost Live)

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On Campus (HuffPost Live)

Caitlyn Becker speaks to Yvonne Montoya, President of the Santa Monica College chapter of the Campus Network, about her chapter's work to get food stamps accepted on campus. Her segment begins at 19:20.

New Deal Liberalism Lives On (WaPo)

Katrina vanden Heuvel, a member of the Roosevelt Institute's Board of Directors, says FDR-style liberalism is alive and well, pointing to leaders like Senator Elizabeth Warren and NYC's Mayor Bill de Blasio.

CEOs Get Paid Too Much, According to Pretty Much Everyone in the World (HBR)

Gretchen Gavett looks at new research on what people think the CEO pay gap should ideally be. Whether respondents felt strongly about CEO pay or not, their ideal ratios were very similar.

Fed Said to Warn Banks on Capital Charges on Leveraged Loans (Bloomberg News)

Craig Torres and Christine Idzelis report on increased Federal Reserve scrutiny of loans that lack stricter requirements that protect lenders. Earlier guidance hasn't slowed lending.

America Out of Whack (NYT)

Thomas Edsall asks a number of economists why, when the U.S. economy is growing so well, we haven't managed to ensure that some of the wealth is distributed to the lower and middle classes.

The Recovery That Left Out Almost Everybody (WSJ)

William Galston says the U.S. economy hasn't actually worked to improve the lives of average families since the end of the Clinton administration.

Now It’s Explicit: Fighting Inflation Is a War to Ensure That Real Wages for the Vast Majority Never Grow (Working Economics)

Josh Bivens looks at the discussion of a yet-unpublished paper from the Dallas Federal Reserve and points out that it essentially advises stopping progress on unemployment to limit inflation.

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Daily Digest - September 23: Even Wall Street Sees Inequality Holds Back the Economy

Sep 23, 2014Rachel Goldfarb

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Why Wall Street Cares About Inequality (WSJ)

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Why Wall Street Cares About Inequality (WSJ)

Major Wall Street institutions like Standard & Poor's and Morgan Stanley have put out reports on income inequality. Pedro Da Costa says it's because these companies see what's holding back the economy.

Treasury Announces Rules to Help Curb Benefits of Inversions (Buzzfeed)

The new rules will change how money transferred from foreign subsidiaries and U.S.-based parent companies is taxed, in order to reduce the advantages of inversion, writes Matthew Zeitlin.

The Politics of Pre-K: How A Program Known to Help Poor Mothers Could Doom Your Candidacy (TAP)

Rachel M. Cohen explains why the gubernatorial candidates in Pennsylvania will only talk about pre-K in terms of education, skipping any mention of working mothers or income inequality.

The GOP's Jobs Bill Will Create Few Jobs, But Plenty of Debt (TNR)

The $590 billion deficit increase from the bill's tax breaks proves to Danny Vinik that the GOP doesn't actually care about the deficit as much as it opposes increased government spending.

What Happens to Families on Housing Assistance When the Assistance Goes Away? (WaPo)

The cost of market-rate housing often erases the benefits of positive life changes that take people off housing assistance, writes Emily Badger, and more gradual assistance reductions are costly.

Those Lazy Jobless (NYT)

Paul Krugman says that John Boehner's repetition of the accusation that the unemployed just don't want to work proves that the "closed information loop of the modern right" is particularly effective.

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Daily Digest - September 22: Minimum Wage Boost Would Trickle Up for All

Sep 22, 2014Rachel Goldfarb

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Pay Pressure (Financial Times)

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Pay Pressure (Financial Times)

In a survey of economists about how to jump-start wage growth, Roosevelt Institute Chief Economist Joseph Stiglitz calls for fiscal stimulus, a minimum wage increase, and tax incentives for labor-intensive investment.

Holder Launches Historic Study on Police Bias (Melissa Harris-Perry)

As Saturday's guest host, Roosevelt Institute Fellow Dorian Warren speaks with the Director of the Center for Policing Equity about the significance of the Attorney General's new plan to reduce bias.

Paul Ryan May Have Found a Trick to Make His Tax Plan Add Up (TNR)

Danny Vinik explains how dynamic scoring will allow Rep. Ryan to claim that his tax reform plan is mathematically possible while remaining revenue-neutral.

Climate Change is War – and Wall Street is Winning (AJAM)

Nathan Schneider writes that corporate influence has been too strong in international discussions of how to fight climate change, and argues that our economic system must shift to save the planet.

Is Obama Going Easy On Banks That Break the Law? (In These Times)

David Sirota looks at the reduction of sanctions on Credit Suisse, and says that this action by the administion suggests that some financial institutions are being treated as above the law.

Why Poor Students Struggle (NYT)

For lower-income college students at elite universities, the academics aren't a problem, writes Vicki Madden, but the social differences between classes make life on campus difficult.

New on Next New Deal

Ken Burns’s New Documentary Reveals the Human Side of the Roosevelts – And Our Deep Connection To Their Legacy

Roosevelt Institute President and CEO Felicia Wong praises The Roosevelts for depicting these giants of progressive policy with a humanity that helps us understand why they pushed for change.

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Ken Burns’s New Documentary Reveals the Human Side of the Roosevelts – And Our Deep Connection To Their Legacy

Sep 19, 2014Felicia Wong

The success of The Roosevelts: An Intimate History highlights the people behind the policies that reshaped America.

The success of The Roosevelts: An Intimate History highlights the people behind the policies that reshaped America.

As the CEO of the Roosevelt Institute, I am reminded almost daily about the very personal connection people feel to Franklin and Eleanor Roosevelt. The extraordinary critical acclaim for the new Ken Burns documentary The Roosevelts: An Intimate History makes it clear just how widespread that feeling is.

But it also prompts me to consider why, in an age when politicians are vilified and Congress’s approval rating hovers around 14 percent, political figures from almost a century ago are being rediscovered and embraced as heroes.

Part of the answer, of course, is the film’s unique portrayal of the Roosevelts. Burns and his writing partner, Geoffrey Ward (also a proud Trustee of the FDR Presidential Library, which we support here at the Roosevelt Institute), have crafted a narrative that combines grand actors on the world stage with a very grounded depiction of the Roosevelts as people with hopes, fears, and demons to overcome. Although the film has received some criticism for focusing too much on personality and glossing over policy, the knowledge that such momentous change was not won effortlessly by remote historical figures but achieved by individuals who faced complex external and internal struggles should serve as a powerful inspiration to everyone working in politics today.

Another part of the answer is that the Roosevelts were, in fact, uniquely bold figures in American history. Franklin and Eleanor combined two things that are notoriously tough to bring together: big ideas and action. They had the ability to get things done, to experiment and tinker and move things around until they worked. Franklin set a north star, grounded in progressive values, for massive reforms to America’s corporations and banks; labor law and protections; and the social safety net. Eleanor’s boldness extended to the world stage, where she was a leader in the creation of the U.N.'s Universal Declaration of Human Rights, and to the most difficult intersections of race and class in mid-century America.

Along the way, they made mistakes – sometimes profound ones. (It is deeply meaningful to me, personally, that Eleanor pressured Franklin strongly to oppose the internment of Japanese Americans.) But when they succeeded, as they often did, they did so in ways that permanently reshaped the country and the world for the better.

In today’s politics, broken promises are accepted with weary resignation, and weak compromises are often viewed as the best we can hope for. Just imagine the popularity of a president today who could lead a program like the Civilian Conservation Corps: enacted only 32 days after FDR’s inauguration, the program ultimately employed 2.5 million young men in more than 4,500 rural camps nationwide, planting 3 billion trees that remain integral to our landscape today. And imagine how much more confidence we would have if we saw in our elected officials FDR’s kind of political leadership, which, over the course of his presidency, drove the design and implementation of hundreds of solutions to deep systemic problems, from Social Security and Glass-Steagall to the Federal Music Project. These big ideas not only worked (mostly), but also persuaded the country to believe that talk would lead to action and action would lead to results.

And finally, I think a big part of the answer, also captured in Burns’s film, lies in what Roosevelt Institute Board Chair Anna Eleanor Roosevelt has called her grandfather’s “journey from patrician to American,” which is often forgotten in lionizing portrayals of FDR. The Roosevelts were born into a very wealthy family, but for his own post-presidency, FDR had envisioned a move to his home in Warm Springs, Georgia, the small rural town where, in the 1920s, he first found some improvement from the polio that afflicted him as a young man. The home he designed for himself in Warm Springs was modest, just six rooms – mostly a big porch. The most powerful man in the world dreamed of a life as a farmer that would allow him to spend time with his neighbors – a refreshing thought at a time when the revolving door between Washington and Wall Street has never spun faster.

Some have called Franklin and Eleanor Roosevelt “traitors to their class.” As arresting a phrase as that is, it is more even more compelling to think about them another way: as examples that even the most privileged can learn and grow through their flaws and truly devote themselves to the common good. At the Roosevelt Institute, where we dedicate our time to the kinds of big, transformative economic and social policies that will further FDR and ER’s legacy today, we also need to pause to remind ourselves that it was the Roosevelts as human beings that made their big ideas come to life.

Felicia Wong is President and CEO of the Roosevelt Institute. Follow her on Twitter @FeliciaWongRI.

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Daily Digest - September 19: This Bus Doesn't Stop for Big Money

Sep 19, 2014Rachel Goldfarb

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Catholic Nuns Take On Dark Money In Politics With Nationwide Bus Tour (ThinkProgress)

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Catholic Nuns Take On Dark Money In Politics With Nationwide Bus Tour (ThinkProgress)

Sister Simone Campbell, the 2013 FDR Four Freedoms Awards laureate for Freedom of Worship, is leading a new Nuns on the Bus tour, this time focused on disenfranchised voters, writes Jack Jenkins.

Tenants Facing Eviction in Era of Skyrocketing Rents Need Legal Assistance (TAP)

Martha Bergmark emphasizes the need to support legal aid programs, noting that legal representation doubles tenants' chances of staying in their homes when fighting eviction.

Workers Deserve to Benefit from Their Productivity, Too (WaPo)

Harold Meyerson says newly proposed legislation from Rep. Chris Van Hollen that ties the performance pay tax deduction to workers' wage increases is necessary to ensure a fair deal for workers.

  • Roosevelt Take: Roosevelt Institute Fellow Susan Holmberg and Campus Network alumna Lydia Austin look at the broader problems with the performance pay provision in the tax code.

Does Silicon Valley Have a Contract-Worker Problem? (NY Mag)

Kevin Roose dives deep into the so-called "1099 Economy," in which start-ups have independent contractors galore, many of whom may legally qualify as employees.

Demonizing the Minimum Wage (New Yorker)

William Finnegan looks at the range of statements against raising the minimum wage, which consistently misrepresent minimum wage workers. They aren't just teenagers with after-school jobs.

New Republican Bill Would Paralyze National Labor Relations Board (In These Times)

Bruce Vail explains why and how the Republicans are aiming to gridlock the National Labor Relations Board, a goal that he says is primarily based in anti-union, anti-worker bias.

Tax Cuts Can Do More Harm Than Good (AJAM)

David Cay Johnston looks at a new report on tax cuts, which shows that short-term economic growth aside, badly structured tax cuts just push costs to the future and can incentivize bad investments.

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Daily Digest - September 18: The Hashtag of Democracy

Sep 18, 2014Rachel Goldfarb

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From #Ferguson to #OfficerFriendly (Bloomberg View)

Roosevelt Institute Fellow Susan Crawford explains what the New York Police Department will need to do in order to make its new social media initiatives successful.

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

From #Ferguson to #OfficerFriendly (Bloomberg View)

Roosevelt Institute Fellow Susan Crawford explains what the New York Police Department will need to do in order to make its new social media initiatives successful.

Census Report Shows Rise in Full-Time Work, Undercutting Claims by Health Reform Opponents (Off the Charts)

Paul N. Van de Water says the Census Bureau report proves that the Affordable Care Act isn't leading to a large increase in part-time work. In fact, part-time work has decreased.

Fed Signals No Hurry to Raise Interest Rates (NYT)

Binyamin Appelbaum reports on the Federal Reserve's latest policy statement, which affirms the necessity of continued stimulus in the form of near-zero short-term interest rates.

What Cutting Jobless Benefits Wrought (U.S. News & World Report)

Pat Garofalo points to the cutting of federal extended unemployment benefits as one of the sources of our continually too-high poverty rate.

The Occupy Movement Takes on Student Debt (New Yorker)

Rolling Jubilee, which buys up debt and cancels it, may be among the Occupy movement's biggest successes, writes Vauhini Vara, but its real hope is for debtors to organize.

Meet the Domestic Worker Organizer Who Won the 'Genius' Grant (Bloomberg Businessweek)

Josh Eidelson profiles Ai-jen Poo, director of the National Domestic Workers Alliance, who plans to use her MacArthur "Genius Grant" to endow an organizing fellowship for domestic workers.

Want to Live in a State with No Income Tax? Make Sure You're Super Rich First (The Guardian)

Siri Srinivas looks at a new report on state-level taxes, which shows that most Americans think fair taxes should be progressive by nature, emphasizing income and property taxes over sales tax.

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Wall Street Swindled Local Governments, Too. Here’s How They Can Get Their Money Back.

Sep 17, 2014Saqib Bhatti

Predatory lenders drove municipal governments and taxpayers into debt with risky interest rate swap deals that may have violated federal regulations.

The story of how Wall Street banks steered unsuspecting homebuyers towards complex mortgages with hidden risks and hidden costs has been well-documented. In fact, the typical sales pitch for adjustable-rate mortgages was premised on the false notion that home values never fall and that borrowers could refinance their loans before interest rates jumped.

Predatory lenders drove municipal governments and taxpayers into debt with risky interest rate swap deals that may have violated federal regulations.

The story of how Wall Street banks steered unsuspecting homebuyers towards complex mortgages with hidden risks and hidden costs has been well-documented. In fact, the typical sales pitch for adjustable-rate mortgages was premised on the false notion that home values never fall and that borrowers could refinance their loans before interest rates jumped.

Less widely understood is the fact that a very similar story played out with cities, states, and other municipal borrowers that were also steered into predatory interest rate swap deals riddled with hidden risks and hidden costs. Banks pitched these deals as a way for municipalities to save money on bond issuances: instead of issuing a traditional bond that had a fixed interest rate, they could take out a cheaper variable-rate bond that had an adjustable interest rate, but use a swap to protect against the risk of interest rate spikes.

Under this structure, municipalities made fixed-rate payments to banks on their swap deals, while the banks gave them back a variable-rate payment that was intended to offset the interest rate that the municipality had to pay its bondholders. The idea was that this would allow borrowers to get a “synthetic fixed rate” on their debt that was cheaper than what they would have to pay on a comparable conventional fixed-rate bond.

However, there were numerous risks embedded in these deals. For example:

  • The variable interest rate that the banks paid to the municipality could fall short of the rate that the municipality owed bondholders, creating a shortfall.
  • These deals contained many termination clauses that would allow the banks to cancel the deals and charge municipalities tens or even hundreds of millions in termination penalties.
  • Rather than rising, interest rates could crater, causing the net payments on the swap deals to skyrocket and leaving the municipalities unable to take advantage of the low-interest environment unless they terminated their swaps and paid hefty termination penalties.

Even though banks tried to downplay or dismiss these risks in order to push interest rate swaps, all of them materialized in the aftermath of the 2008 financial crisis:

  • When interest rates on a type of variable-rate bond known as an auction rate security shot up, the bank payments on the corresponding swaps could not cover those payments, and cities and states across the country were stuck paying double-digit interest rates to bondholders.
  • When Lehman Brothers filed for bankruptcy and defaulted on its swap payments with municipalities, it triggered termination clauses on the bank’s swaps. In an ironic twist, cities and states actually had to pay penalties to Lehman because of the way the termination clauses were written.
  • When the Federal Reserve slashed interest rates in response to the financial crash, it also drove down variable rates on swaps, causing the net payments on the swaps for cities and states to soar and preventing taxpayers from enjoying any of the benefits from the low rate environment.

As a result, municipalities across the country have been hit with large bills to Wall Street at the same time that they are trying to close record budget shortfalls amid the biggest economic downturn in 80 years. The Detroit Water and Sewage Department is shutting off water to families who have missed just a couple of payments on their water bill so that it can pay off more than $500 million in termination penalties on its swaps. The City of Chicago is now paying $72 million a year on its swaps as a result of the low interest rates, even as entire neighborhoods on the south and west sides of the city fall into disrepair. The school district in Chicago is paying another $36 million a year on swaps, while the Board of Education is invoking budget problems to justify the largest mass school closing in national history. In Wisconsin, the state is now paying $25 million a year on its swaps and making catastrophic cuts to state healthcare programs. These are just a few examples of a trend cropping up everywhere in the U.S.

It is no accident that the same communities that were disproportionately targeted for predatory mortgages are also bearing the brunt of these predatory municipal finance deals. Across the country, working class communities of color are disproportionately impacted by cuts to public services, and austerity measures serve to exacerbate the crisis in those communities in particular.

Luckily, there is something that public officials can do to stop the bleeding. Under Rule G-17 of the Municipal Securities Rulemaking Board (MSRB), a federal regulator charged with protecting the interests of municipal borrowers, banks that pitch deals to public officials must “deal fairly” with them. According to the MSRB, this means that they “must not misrepresent or omit the facts, risks, potential benefits, or other material information about municipal securities activities undertaken with the municipal issuer.” In other words, they must not downplay the risks associated with deals like interest rate swaps, and they must not mislead public officials about the likelihood of such risks materializing. The banks must ensure that public officials truly understand the risks of the deals they enter into.

This is a burden that was not met in the typical swap transaction. As a rule, bankers highlighted the upside and minimized the potential downside in pitching these deals. This was in violation of MSRB Rule G-17 and municipalities like Chicago and Detroit have legal recourse to potentially win back hundreds of millions from Wall Street. Cities, states, and other municipal borrowers can pursue these legal claims by filing for arbitration with the Financial Industry Regulatory Authority (FINRA).

The Baldwin County Sewer Service, a privatized utility in Alabama, successfully used a similar legal argument earlier this year to win back its swap payments and get out of its deals without any termination penalties. The total value of the award was approximately $10 million. The potential claims could be many magnitudes higher for cities and states that had significantly greater swap exposure.

However, officials in municipalities with swaps need to act fast, because time may be running out. FINRA has a six-year eligibility period on these claims. Because many of the risks associated with swaps materialized in October 2008, when interest rates plummeted as a result of the federal response to the financial crisis, it is possible that the clock could run out on these claims as early as October 2014. Public officials like Mayor Rahm Emanuel in Chicago and Governor Scott Walker in Wisconsin should act now to potentially recover millions for their constituents before it is too late.

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

Image via Thinkstock

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