Shadow Banking

Jun 7, 2010

dictionary-150[Note: updated on 2.16.2011]

What is shadow banking?

dictionary-150[Note: updated on 2.16.2011]

What is shadow banking?

Shadow banking refers to non-bank lenders that escape the regulatory oversight of many financial institutions. For example, because they don't accept deposits like commercial banks, they are exempt from leverage ratio requirements, which allows them to have high debt levels. They are highly exposed to liquidity risk, because they rely on short-term financing for long-term investments (such as mortgage-backed securities). They also do not have the backing of a central bank as a lender of last resort.

What’s the significance?

These institutions play a large role in providing credit to our financial system and are linked with the economic meltdown. Without strong regulations, many fear that they will lead to yet another catastrophic financial crash.

Who’s talking about it?

The term itself was coined by Paul McCulley of PIMCO when he referred to "the whole alphabet soup of levered up non-bank investment conduits, vehicles, and structures"...Paul Krugman of the New York Times and Ezra Klein of the Washington Post both trace the cause of the economic meltdown to a "run" on shadow banks when credit dried up...The Financial Crisis Inquiry Commission held hearings on shadow banking...Rob Johnson sent a letter to the Financial Stability Oversight Council urging aggressive implementation of reforms on shadow banking...Mike Konczal notes that GE operates a major shadow bank and therefore its executives may not be all about job creation...The shadow banking sector is thought by many to be a strong candidate for causing the next financial meltdown.

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Social Security Act

Aug 10, 2010

dictionary-150[Note: updated on 2.16.2011]

What is the Social Security Act?

dictionary-150[Note: updated on 2.16.2011]

What is the Social Security Act?

The Social Security Act was drafted under FDR's first term, passed Congress as part of the New Deal, and was signed by FDR on August 14, 1935. The Act responded to the pitfalls of old age, poverty, unemployment, and dependent widows and fatherless children by providing benefits to retirees and the unemployed, as well as a lump-sum at death.

What's the significance?

The Act was controversial at the time, with opponents arguing that it would kill jobs. It also excluded many women and minorities from receiving benefits. However, the Act has been modified over time to adapt to a changing society, and is now one of the best-loved programs in America, improving the lives of millions of Americans. In 2009, nearly 51 million Americans will receive $650 billion in Social Security benefits.

The Act has become controversial once again, however, as lawmakers focus on the deficit. Obama has told his Fiscal Commission that everything is on the table for potential cuts, and many worry that Social Security benefits may get the knife. Critics are calling for a reduction in benefits and an increase in the retirement age. Yet Social Security's fiscal outlook remains strong.

Who's talking about it?

Both Republican and Democratic leaders have put raising the retirement age on the table...Fiscal Commission chairman Erskine Bowles said that three quarters of deficit reduction will come from slashing the social safety net...Robert Kuttner, Nancy Altman and others weighed in on ND20's series "Social Security's Fiscal Fitness", which proved the program is both vital and sound...Jeff Madrick points out how unbalanced the Simpson-Bowles report is...Roosevelt historian David Woolner reminds us of Social Security's bipartisan roots and recalls how it was a bold step that took the country forward...In a Working Paper, Tom Ferguson and Rob Johnson prove that Social Security is not the "moby dick" of deficit reduction targets...Randy Wray disputes the fallacies some liberals still promote about the program...Richard Kirsch sees the same process of Americans coming to love this program happening to healh care reform...Bryce Covert notes that young people are already expecting slashed benefits and bleak retirements...Tarsi Dunlop unveils data on how many Americans support and rely on its benefits...Michael Hiltzik points out critics' bogus math while proving that Social Security is in far better shape than they'll admit...Dean Baker says the target of deficit reduction should be Wall Street transactions, where the real money is -- not Social Security...Matt Miller explains that Bowles' spending goals are far too small for our aging country...David Dayen points out that the entire premise of the Fiscal Commission is wrong, which will lead to the wrong conclusions...Heidi Hartmann and Marshall Auerback & Randy Wray debate whether a payroll tax cut endangers the program...Chuck Spinney explains how waging endless wars and slashing the social safety net go hand in hand.

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Super PAC

Apr 11, 2012

dictionary-150What is a Super PAC?

dictionary-150What is a Super PAC?

Super PACs emerged after the controversial Citizens United case in 2010 in which the Supreme Court ruled that corporations, unions, and other organizations could spend unlimited amounts of their general treasury money on independent expenditures. These political groups can accept unlimited amounts of donations from anyone and their purpose is primarily to influence elections. They only spend money on independent expenditures -- political advertisements that specifically cal for the election or defeat of a particular candidate in the form of mailings, radio ads, television ads, billboards, and other media -- but have to disclose their donors. It is illegal for them to coordinate or cooperate with a political candidate that they are either supporting or defeating.

What’s the significance?

While Citizens United allowed corporations and unions to spend money on political expenditures, it wasn’t until two months later that the case Speechnow.org v FEC led to the birth of the Super PAC, a term coined by reporter Eliza Newlin Carney. The court ruled that contributions to independent expenditure-only groups could be unlimited and from any source. Unlike traditional Political Action Committees (PACs) that can only receive donations in the amount of $5,000 or less from individuals or other PACs and not from companies, Super PACs can receive money from wealthy individuals, corporations, unions, and other groups. Also unlike PACs, Super PACs cannot donate money directly to a political candidate.

While Super PACs are not allowed to coordinate with candidates, many critics argue that Congress has not established clear rules on what “coordinating” actually means. They point out that many Super PACs are run by former close political associates of the candidates they support, and that often these candidates will show up at the Super PAC’s fundraising events. While special interest groups are only allowed to donate a certain amount directly to political campaigns, Super PACs are a way for them to get around that limit.

Super PACs have already influenced the 2012 presidential election and particularly the Republican primaries, as these groups have spent more money than the Republican candidates' own political campaigns. Republicans also lead in the amount of money raised for Super PACs. The “Restore our Future” Super PAC supporting Mitt Romney has the highest amount of contributions at over $40 million. Obama has a Super PAC called “Priorities USA Action” that has under a million dollars. While Citizens United has opened the door for corporations to donate unlimited amounts of money, so far most of the money given to Super PACs has come from wealthy donors. According to data from the Center for Responsive Politics, the top 100 Super PAC donors, or 3.7 percent of contributors from 2011-2012, raised 80 percent of the funds. The NJPIRG Law & Policy Center reports that most of the money contributed to Super PACs so far has been from a few wealthy donors and business interests and significant amounts have come from secret sources. This is because some special interest groups who form a 501(c) non-profit (also known as 527 organization) don't have to disclose their donors. The money from these non-profits has often gone to Super PACs.

Who's talking about it?

Roosevelt Institute Senior Fellow Mark Schmitt explains how Super PACs can keep candidates going even though voters don't consider them to be real contenders...Fred Wertheimer argues that we can and should get rid of Super PACs...Katrina vanden Heuvel writes that Super PACs are the real winners in the 2012 Republican primaries and that their existence will taint voters' perceptions of politics...Steven Rosenfeld shows how Super PACs influenced and won in the 2012 Iowa Caucuses.

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TARP

Apr 12, 2009

10174991-tarp-bailouts[Note: updated on 2.16.2011]

10174991-tarp-bailouts[Note: updated on 2.16.2011]

What does TARP mean?

TARP is an acronym for the Troubled Asset Relief Program of the US government to buy assets and equity from financial institutions in order to strengthen its financial sector. It is the largest component of the government’s measures in 2008 to address the subprime mortgage crisis.

What’s the significance?

The effects of the TARP have been widely debated. Some of the questions that have arisen include: Are such funds viewed as windfall by banks? Do they result in changes in lending practices? Government officials overseeing the bailout have acknowledged difficulties in tracking the money and in measuring the bailout's effectiveness. In March, 2009, it was revealed that at least 13 companies who have received some of the $300 billion in TARP funds owe hundreds of millions of dollars in back taxes.

Who’s talking about it?

Rep. John Lewis (D-Ga), chairman of the House Ways and Means Subcommittee on Oversight, calls the delinquent taxes “shameful”…Financial blogger Hale Stewart sees the TARP plan as flawed due the number of politically motivated bailouts…On Portfolio.com, Felix Salman criticizes the Treasury not only for overpaying for bad assets, but doing so without transparency...The TARP oversight panel, one of whose members is Elizabeth Warren, has come out with some scathing reports about the failed programs and misused funds...Mike Konczal makes the argument that Warren's fight for the consumer in her position on the TARP oversight committee makes her the ideal candidate to head the CFPB...Bill Black points out that indictment of Wall Street bankers in the crisis was over a TARP repayment, not over subprime lending practices...Bryce Covert notes that the Congressional Oversight Panel in charge of overseeing TARP has had a few successes in limiting bloated compensation, but they're limited.

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Tea Party

Mar 14, 2011

dictionary-150What is the Tea Party?

dictionary-150What is the Tea Party?

The Tea Party is a conservative movement that began in 2009 to protest government taxation and spending policies. It is disputed which was the first Tea Party protest, but the first official organizations were created after CNBC reporter Rick Santelli went on a rant against the government plan to refinance mortgages and suggested holding tea parties to dump derivatives into the Chicago River.

It now has a caucus in the House and the Senate, although it doesn't have any official leaders. It is rather a loose affiliation of local groups and calls itself grassroots, although many accuse it of astroturfing with donations from powerful conservative backers like the Koch brothers. Some notable names involved with the movement include Sarah Palin, Dick Armey, Michelle Malkin, Jim DeMint, Ron Paul, and Michele Bachmann.

What's the significance?

The Tea Party favors reduced government influence in almost all arenas. Its adherents oppose taxation and support reducing the national debt and the federal deficit, reducing government spending, and strictly originalist interpretations of the Constitution. The Tea Party Patriots have also asked politicians to sign the "Contract from America," which endorses identifying the constitutionality of every new law, balancing the budget, limiting federal spending, reducing taxes, and opposes health care reform, emissions trading, and earmarks.

With overwhelming media attention, the Tea Party has been a strong force in moving politicians further to the right. In the 2010 midterms it primaried Republicans with its own more extreme candidates. Many of the positions they endorse go against the policies of the New Deal, such as government spending on social programs and infrastructure projects.

Who's talking about it?

Thomas Ferguson and Jie Chen wrote a working paper that looked at the real impact of the Tea Party in the Massachusetts election that put Scott Brown in the Senate...In opposition to the Tea Party's attempts to claim the legacy of the Founding Fathers and the founding era, William Hogeland goes back to that time in history and revives its progressive leanings...David Woolner compares today's movement to the American Liberty League during FDR's time...Joe Costello also points out that the original Tea Party fought against a global mega-corporation...Lynn Parramore warns against writing the movement off...She also spoke out against Tea Party-backed policies to re-integrate North Carolina schools...Harvey J. Kaye calls out Tea Partiers who try to rewrite history and reclaim FDR's legacy...Andrew Rich explains how much more progressive policies have to offer anxious Americans than the Tea Party...Wallace Turbeville traces its roots to the emergence of conservative celebrities who aren't bound to any party or company...Richard Kirsch explains the larger picture behind the vehement opposition to health care reform.

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Tennessee Valley Authority

Apr 28, 2009

tva[Note: updated on 2.16.2011]

tva[Note: updated on 2.16.2011]

What is the TVA?

The Tennessee Valley Authority was one of FDR’s most innovative New Deal ideas. The TVA was conceived to provide power production, navigation, flood control, erosion control, fertilizer manufacturing, and general economic development in the hard-hit Tennessee Valley region. Roosevelt asked Congress to create “a corporation clothed with the power of government but possessed of the flexibility and initiative of a private enterprise,” and on May 18, 1933, Congress passed the TVA Act. TVA is a public corporation, managed by a board of three directors who are appointed by the President for nine-year terms and confirmed by the Senate. The Authority has certain functions and duties defined by law within the drainage area of the Tennessee River (about three-quarters of the state of Tennessee).

What’s the significance?

Conservatives tend to criticize the TVA as an example of “big government,” whereas progressives see it as an example of successful public investment and a key New Deal program that transformed a region and helped improve the lives of millions.

Who’s Talking About It?

Roosevelt historian David Woolner sees an opportunity for a modern-day TVA in the smart grid...He also sees the Gulf Coast oil spill and a chance to put regional planning initiatives like the TVA into action...Jon Rynn notes that it was set up as an entire system that had many positive feedback loops, and he same could apply to green energy jobs...E. Wayne Stewart defends the New Deal's power to stop the Great Depression, in part with jobs created by the TVA...Deal Breaker Amity Shlaes blames the Tennesse Valley Authority for “crowd[ing] out private utilities that hoped to light up the South…Writing for Libertarian blog SmallGovTimes.com, Jim Powell blasts the TVA as “America’s biggest monopoly,” pronouncing it a “bureaucratic kingdom” devoid of public or private controls…In the National Review, Conrad Black defends TVA, pointing out that it and other New Deal projects helped  Roosevelt rebuild America “at an historic bargain cost”…On NewProgressiveVoices.com,  Nate Loewentheil and Vera Eidelman praise TVA as permanently transformed an entire region and creating an entire new set of industries.

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Unbanked

Apr 5, 2011

dictionary-150Who are the unbanked?

dictionary-150Who are the unbanked?

The unbanked are those without a bank account or an account at another mainstream financial institution. About 17 million US adults fall in this category. They are often low-income and minority populations who lack the minimum balance required to open a checking and savings account, although many are also illegal immigrants who don't have the necessary documents. Another 21 million, who have checking accounts but often turn to payday loans and other high-cost services, are considered "underbanked." Many are simply turned off by service charges, fees, and other expensive practices used by banks. About a quarter of all US households are either unbanked or underbanked.

What's the significance?

This group often relies on high-cost products such as payday lenders, check cashers, and car-title loans that can have interest rates exceeding 300% annually and quickly rack up fees. They don't have credit histories that would allow them to borrow from mainstream institutions, aren't saving for retirement, and are often excluded from less-expensive forms of electronic payment. Banks are also closing up shop more frequently in low-income areas, exposing the population left behind to alternative products, who move in and target minorities. This problem existed before the recession, most obviously in the subprime mortgage-lending industry, but is now exacerbated.

Who's talking about it?

Catherine Rampell profiles those who fall into this category...A report from National People's Action exposes the huge discrepancy in how people of color are preyed upon by payday lenders...Candice Choi gave up her bank accounts to live as an unbanked person for a month and reports on the whopping fees she racked up...Tim Fernholz analyzes the various initiatives to bring financial products to the unbanked...Adam Levitin notes that while pre-paid debit cards have been effective in filling a need for the unbanked, they're also stacked with predatory practices...The Economist looks at other companies looking to tap into this market...Even before the recession, Anita Hamilton noticed companies were profiting from the unbanked.

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Value Added Tax (VAT)

Jan 4, 2011

dictionary-150[Note: updated on 2.16.2011]

What is a VAT?

dictionary-150[Note: updated on 2.16.2011]

What is a VAT?

A value added tax (VAT) is a consumption tax on the "value added" to a product by a business. While a sales tax occurs once at the time of purchase, a VAT, as well as collections and remittances to the government, happens each time a business in the supply chain buys the product from another business. Businesses can also recover VAT on the products they buy in order to produce further goods to be sold to another business or the final customer, so the tax levied at each stage  is a constant fraction of the value added by a business to its products. Most of the cost of collecting the tax is borne by businesses and there is a stronger incentive for them to collect it than with a sales tax. But as with the sales tax, only the end consumer is taxed.

What's the significance?

As concerns about the US budget deficit rise, many see potential in the revenue that VAT could generate, which could be in the billions. But VAT is thought by some to be a regressive tax, meaning that the poor pay more than the rich, because it falls on consumers of products. Proponents counter that taxing income is too arbitrary and that VAT is proportional, as the wealthy pay more at the same rate that they consume more. Some countries that have implemented VAT have bolstered the progressiveness of the tax by reducing other taxes that fall on the poor. Its effects on different groups can also be altered by which goods are taxed at different rates and where the revenue is spent.

Who's talking about it?

Roosevelt Institute Senior Fellow Bo Cutter calls for VAT as part of an overall economic recovery and reform package...But Roosevelt Institute Senior Fellow Jeff Madrick worries that VAT is regressive and takes more from poor people's pockets...Demos, EPI and The Century Foundation reject including VAT in their alternative to Obama's deficit reduction committee report...Back in April, Obama seemed to leave the possibility of VAT on the table...On the other side of the aisle, Heritage and Big Government worry that VAT just means higher taxes and more government spending...The Senate discussed the possibility of a VAT in a hearing by the budget committee...Some thought that Obama's support for a corporate tax cut may have been to get Republicans on board with a VAT.

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Volcker Rule

Jun 20, 2012

dictionary-150What is the Volcker Rule?

dictionary-150What is the Volcker Rule?

The Volcker Rule is a part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act that prohibits commercial banks from engaging in certain types of investments, in particular private equity and proprietary trading. According to the rule, there must be a separation between banks that lend to consumers and those that engage in various riskier investments by July 21, 2012. This rule was proposed by Paul Volcker, former U.S. Federal Reserve Chairman, in raction to commercial banks' excessive risk-taking activities that contributed to the 2008 financial crisis.

What’s the significance?

A key cause of the 2007-2008 financial crisis and ensuing Great Recession was big banks’ risky trading for their own benefit. Commercial banks are supposed to handle and invest customers’ money in exchange for a commission, but many banks were engaging in excessive private equity investment and proprietary trading for their own benefit. They were risking consumers’ money – deposits that are federally insured – in order to make themselves richer. The burst of the housing bubble and collapse of mortgage-backed securities and other financial assets caused these investments to go bad. The goal of the Volcker Rule, as part of general financial reforms passed in 2010, is to prohibit banks from engaging in such activities, hopefully shielding consumers from bankers’ risk-taking decision and also reducing the moral hazard caused by bankers’ trading with federally-guaranteed deposits. The Volcker Rule was designed to basically reinstate the Glass-Steagall Act, which from 1933-1999 separated investment banks from commercial banks.

Who’s talking about it?

As Senator Tim Johnson (D-S.D.) points out in Politico, losses like those of JPMorgan have “been a wake-up call for many opponents of Wall Street reform,” and reveal the necessity of new regulations such as the Volcker Rule…Roosevelt Institute Fellow Mike Konczal explained on CNN why the Volcker Rule is crucial to keep banks betting with consumers’ money and why proprietary trading needs to be prohibited…Nevertheless Jesse Eisinger wrote in the New York Times that despite the good intentions behind the rule, Volcker is being turned nearly obsolete by powerful bank lobbyists pushing for exemptions in every direction.

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Wagner Act

Jun 20, 2012

dictionary-150What is the Wagner Act?

dictionary-150What is the Wagner Act?

The Wagner Act, or the National Labor Relations Act, was a New Deal reform passed by President Franklin Roosevelt on July 5, 1935. It was instrumental in preventing employers from interfering with workers’ unions and protests in the private sector. The act established the National Labor Relations Board (NLRB) to protect the rights of workers to organize, bargain collectively, and strike.

What’s the significance?

The Wagner Act is arguably the most important piece of legislation to date protecting workers’ and unions’ rights. It involved the federal government in this protection and in arbitrating employer-employee disputes, a key step in preventing unjust treatment of workers.

Its key principles include encouraging collective bargaining and protecting the exercise of freedom of association. It also definied and prohibited five unfair labor practices by employers, including interfering with, restraining, or coercing employees against their rights; interfering with the formation of a labor organization; discriminating against employees to encourage or discourage forming a union; discriminating against employees who file charges or testify; and refusing to bargain collectively with the employees' representative.

Who’s talking about it?

Roosevelt Institute Fellow Dorian Warren describes what a modern-day Wagner Act would look like...Roosevelt Institute David Woolner argues that FDR's championing of labor rights also helped expand the economy...In defending the importance of individuals’ right to work and to unionize and bargain in order to obtain fair wages and conditions, Brian Farmer notes the importance of the Wagner Act in setting this precedent back in 1935…Robert Reich explains the importance of the act, among other New Deal reforms, in giving economic power back to the middle class…Sol Sanders speculates whether despite past government support, unions are currently on the downfall... Brigid O’Farrell reflects on Eleanor Roosevelt’s involvement in passing the reforms so key to American workers.

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