The GOP's Zombie Dodd-Frank Would Lose the Core Logic of Financial Reform

Sep 20, 2012Mike Konczal

Republicans might not repeal Dodd-Frank outright, but they'd eliminate the system of rules that make it work.

Republicans might not repeal Dodd-Frank outright, but they'd eliminate the system of rules that make it work.

It was just announced that Tim Pawlenty will become the head of the bank lobbying group Financial Services Roundtable. The powerful financial lobbying group, which represents groups like JP Morgan and Bank of America among other big financial sector players, appears to be aligning itself more closely with the Republican Party and betting on the idea that Republicans will control at least part of Congress. But what do they want? Earlier in the year, I argued in Washington Monthly that they'd like to repeal the core parts of financial reform.

Recently, Phil Mattingly had an article at Bloomberg Businessweek about how the GOP and Mitt Romney would approach Dodd-Frank. This is with a hat-tip to Reihan Salam who notes that this article "has confirmed something I’ve heard from well-informed insiders" and makes additional arguments [1]. So it seems well-sourced.

Mattingly's argument is that it is unlikely that the Republicans will outright repeal Dodd-Frank. "Instead, President Romney would likely try to give the financial industry something it wants more: a diluted financial reform law that would relax restrictions on some of its most profitable—and riskiest—investments but maintain enough government oversight to give the banks cover."

So what would the Republicans try to dilute and remove? Mattingly:

"Wall Street wants to loosen rules governing the swaps market, which generated $7 billion in revenue in the first quarter of 2012, according to government records. The banks would also get rid of restrictions on bank investment in private equity and hedge funds, pare back the power of the new federal consumer protection agency, and block the Volcker Rule, which bars banks from trading with money from their own accounts, a practice that can put customer deposits at risk. [...]

Wall Street doesn’t oppose everything in the law. Banks support the “resolution authority” that spells out how and when the government can seize and wind down struggling banks before they catastrophically fail."

So they want to go after derivatives rules (swaps), the Volcker Rule and the related law on restrictions on hedge fund investments, and also the CFPB. It's important to understand this isn't like removing random parts of the bill, as strict as they may be, but is instead gutting the core logic of the law. It's the equivalent of Republicans saying they'd keep the Obamacare bill, but stop the exchanges, remove the individual mandate, and lose the ban on pre-existing conditions while getting rid of the means-tested subsidies and Medicaid expansion. We'd understand that all of the parts of this system are interconnected and inseparable; the ban requires everyone to be in the market, which requires subsidies and well-developed markets.

Let's make sure we understand how derivatives, the Volcker Rule, and the CFPB all work together. Imagine that we're car engineers, and we want to design a car and road system so that if the car crashes, it does so as safely as possible. There are four things we can do. We can put airbags and seatbelts in the car and other cars so that when it does crash the damage is limited and controlled. We can design the car with things like a brake override system so that if it hits a rough patch the driver can keep control of it and make it less likely to crash.  We can put some speed limits on the road, as well as clear traffic signals to guide cars from running into each other. And we can have some protection for pedestrians, like cops watching for DUIs or barriers to prevent cars from driving into crowds of people. Easy, right?

Now let's think of Dodd-Frank. There are the legal powers that deploy to resolve a firm if it fails, like an airbag, which are called resolution authority. This allows the FDIC to take down a failed financial firm as if it were a bank, subject to serious rules and restrictions.  And, like requiring certain car features, there are specific policies for large, systemically risky financial firms, like enhanced capital requirements, limits to investments in risky hedge-funds, and the Volcker Rule, which are designed to make it less likely for a firm to crash.

Dodd-Frank also introduces speed limits and rules of the road in the financial sector, designed to make the system as a whole less likely to crash or spiral out of control when a panic does happen. One primary place it does that is through derivatives regulations. And "cops on the beat" is the metaphor for the Consumer Financial Protection Bureau.

So there's Dodd-Frank law to allow a firm to fail, law to make it less likely a financial firm fails, laws to prevent the interconnected financial markets from going into crisis if a firm does fail, and law to gives consumers a representative in dealing with the regulatory field. This is like thinking of Dodd-Frank as a system of deterrance, detection, and resolutiion, a related model we've developed elsewhere.

If Wall Street and the Republicans are looking to seriously gut the Volcker Rule, derivatives, and the CFPB, then they're looking to gut the entire logic of the bill. Interestingly, they are less interested in "resolution authority," the legal process to fail a financial firm. This is evidently no problem with everything else removed, perhaps because they believe congressional bailouts will then happen. This should remind us that resolution authority is strengthened and made more credible by other strong regulations, including things not in Dodd-Frank, like size caps or Glass-Steagall. Preventing these diluations is crucial to building a regulatory system for the financial sector that works in the 21st century.

[1] Reihan notes that banks "also understand that [Dodd-Frank] favors incumbents over new entrants, particularly incumbents with the legal acumen and lobbying resources to shape the emerging regulatory regime. My strong preference, very much in line with conservative and libertarian sensibilities, would be for a financial reform that would aim to facilitate rather than stymie entry."

I'd like to see more on how Dodd-Frank as blocking new firm entry works. While this is a generic complaint of regulations in general, I'm not sure in what ways it applies to Dodd-Frank. Parts of Dodd-Frank actually are designed to scale up with size and risk, e.g. Sec. 171 requires capital requirements to scale with "concentrations in market share for any activity that would substantially disrupt financial markets if the institution is forced to unexpectedly cease the activity," which is not for new entries. The idea is to hold larger and riskier firms to tougher standards and higher capital, which is regulation that scales with size.

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Four Histories of the Right's 47 Percent Theory

Sep 20, 2012Mike Konczal

As you've likely heard, Mitt Romney was recorded at a fundraiser saying that "there are 47 percent who are with [President Obama], who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it [...] These are people who pay no income tax."

As you've likely heard, Mitt Romney was recorded at a fundraiser saying that "there are 47 percent who are with [President Obama], who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it [...] These are people who pay no income tax."

The right is splitting over whether or not the 47 percent argument is worth defending. It's important to understand that, while it is true that 47 percent of households don't pay a federal income tax, the distribution of the tax burden isn't what the 47 percent theory is about. The 47 percent theory is all about grand political battles. My colleague Mark Schmitt has one examination of where this theory comes from hereBrian Beutler also investigates the background of the 47 percent meme, and Kevin Drum does a history of the EITC here.

Digging into different arguments, there are two distinct parts to a good 47 percent theory. The first is who creates and sustains the 47 percent as a political agent. This can't be the bipartisan set of policymakers who wanted to do income support through work requirements as well as expand certain credits, particularly the child credit; it needs to be agents with specific, outside political goals. Those who pay little or no income tax are a coherent group that acts like a special interest or a class. Instead of the young and the old, as well as the working poor moving into and out of the EITC, this group of people is stable enough that it can act as a coherent political class, but it needs to be created and sustained. Who does it?

The second part of a good 47 percent theory is that the consequences need to be terrible because the stakes are so high. Rather than successfully transitioning people out of poverty and into work, the consequences are negative for our country. But how high are those stakes, and what do they represent?

Let's start at the beginning. Where does this meme start?

1. Trickle On Trickle Down: The Lucky Duckies of the Wall Street Journal Editorial Page: Let's look at the Wall Street Journal's opinion page, November 20, 2002, "The Non-Taxpaying Class: Those lucky duckies":

"Who are these lucky duckies? They are the beneficiaries of tax policies that have expanded the personal exemption and standard deduction and targeted certain voter groups by introducing a welter of tax credits for things like child care and education [...] The 1986 tax reform, for example, with its giant increase in the personal exemption and standard deduction, took six to seven million people off the tax rolls [...] This complicated system of progressivity and targeted rewards is creating a nation of two different tax-paying classes: those who pay a lot and those who pay very little. And as fewer and fewer people are responsible for paying more and more of all taxes, the constituency for tax cutting, much less for tax reform, is eroding. Workers who pay little or no taxes can hardly be expected to care about tax relief for everybody else. They are also that much more detached from recognizing the costs of government.

All of which suggests that the last thing the White House should do now is come up with more exemptions, deductions and credits that will shrink the tax-paying population even further."
This argument was developed in future editorals. A few weeks later, in  "Lucky Duckies Again: Look at who won't pay taxes under Bush's plan", the Journal noted that "No doubt the Bush team proposed this tilt toward lower income taxpayers to mute the class-warrior critics, not that we've noticed any lower decibel level."
 
Who? Interestingly enough, this looks like an internal fight among conservatives and Republicans. That's how Krugman read it at the time, and it seems obvious from that last sentence. The Bush tax cuts are going to be across all families, and the editorial is warning that this is the wrong approach. It should focus just on the rich, corporations, and capital income holders. The editorial is clear that they don't want to raise taxes on those who are exempted from the federal income tax; they just fear that these across-the-board tax cuts will knock a lot of people out of the system.
 
This was a correct assertion, as this number skyrocketed after the George W. Bush tax cuts. To whatever extent the Bush team didn't want to do this, they felt boxed in politically. As a top Bush administration official later told Ezra Klein, “Do you think we wanted to include a welfare payment to people who don’t pay taxes and call it a tax cut? No. But that’s what we needed to do to get it done.”
 
Consequences? The editorial warned that this policy would buy them no room with the "class-warrior critics," and that's probably a fair assessment. Repealing the Bush tax cuts has been a consistent goal for Democrats, and their preferred approach is even worse than the Wall Street Journal could have imagined. The Journal just wanted tax cuts on those making over $250,000, and warned about cutting at the bottom end of the spectrum because of the lucky duckies. Now the situation is reversed, and President Obama is looking to keep the tax cuts for those making under $250,000 and repeal the rest.
 
There's the idea that as a policy matter workers will simply not care for cutting taxes or for tax reform more broadly. This is why Romney can say "So our message of low taxes doesn't connect." But this isn't played up in apocalyptic terms. The editorials seemed more concerned that the federal tax code will retain its progressivity under this tax cut, rather than the lucky duckies initating a new culture war. This is in stark opposition to:
 
2. The Battle: Right Wing Think Tanks and the New Culture War: Let's jump forward, and see how the expensive, Washington D.C. think tanks react to President Obama. President Obama is a wonky technocrat, and much of his policy borrows from conservative policy of the 1990s (health care) or bipartisan policy of the 2000s (cap-and-trade) or policy that was new and open to debate (post-crisis financial regulations). The new president of the American Enterprise Institute, Arthur C. Brooks, writes a book called The Battle: How the Fight between Free Enterprise and Big Government Will Shape America's Future. How does he think of the 47 percent? Focusing on "long-term strategies to keep the young in the 30 percent coalition," he writes:
Federal tax policies are ensuring that an increasing number of people in our society will never develop a pocketbook interest in free enterprise. Even as they grow older, develop their careers, and earn more money, many will never pay a dollar in federal income tax because they'll never catch up with an increasingly progressive tax system.
 
To put a modern twist on an old axiom, a man who is not a socialist at 20 has no heart. But a man who is still a socialist at 40 has no head-or pays no taxes. The current trend will increase the percentage of Americans who are permanent net takers from our society, who use more in public resources than they contribute, and for whom a free-enterprise system of entrepreneurship and limited government holds few obvious personal rewards. In a nutshell, the strategy is to make fewer and fewer people pay all the taxes and bear the brunt of paying for a growing government [...] After President Obama's budget stimulus and the proposed tax changes of 2011 [...] this proportion will increast to almost 47 percent. [...]
 
Simply stated, in the future there will be fewer and fewer people with "skin in the game." Nonpayers will outnumber the payers. We will enventually reach a threshold beyond which most Americans have no economic incentive to defend free enterprise because it is so far from their interest to do so. The young sympathizers of socialism today may be the grown-up defenders of socialism tomorrow.
As Mark Schmitt wrote, "this theory that we're headed toward a radical egalitarian state is being developed is the American Enterprise Institute, the oldest of the conservative think tanks and one that, much like Romney, has forsaken the traditional business-minded conservatism of, say, the first President Bush, for hard conservatism in which everything is a grand showdown of incompatible worldviews." And The Battle was the first statement that President Obama was at the vanguard of a new culture war on economic issues. Instead of wanting a government that consumes 25 percent of GDP and has a public welfare state versus one that consumes 19 percent and has a private welfare state, he is the economic equivalent of Robert Mapplethorpe. The right takes this book seriously; the author of the most prominent critical review of the book from the right was canned from his think tank job a month after it came out.
 
Who? The "30 percent" are the ones behind this expansion of people who don't pay federal income taxes, and they'll continue to expand it. Now before you think you wandered into a Wu-Tang song, we should clarify Brooks' definition of the 30 percent and the 70 percent. The 30 percent are a group of people who "reject the free enterprise system culturally." The free enterprise system stands in "stark contrast to European-style social democracy." The 30 percent "twists equality of opportunity into equality of outcome." Any idea that American liberalism stands in contrast to free market laissez-faire and Marxism isn't explored; the 30 percent are entirely the bad guys, waiting to fundamentally change the country. Jonathan Chait wrote an excellent review of the book here,
 
Consequences? The big consequence is that this locks young people into socialism and the intellectual space of the 30 percent coalition, building their power. Having never paid taxes, they and others who benefit will think of government as free. So the 30 percent are then capable of continuing to seize more centralized control of the economy and defeat the cultural forces of free enterprise. The Battle is obsessed with how President Obama won in 2008; one conclusion is that the 30 percent doesn't need to win people over intellectually, but just needs to keep enough people not paying taxes so that they'll form a coherent base, particularly the young. But the 30 percent culture allows Romney to note that those who oppose his message "are dependent upon government [and] believe that they are victims."
 

3. The Hammock. During the Q&A part of this 2011 Paul Ryan speech at Heritage (19m35s), Ryan noted:

I think it's 49 percent of people who don't pay taxes today, though there are other taxes. Here's the danger I think we have. We're coming close to a tipping point in America where we might have a net majority of takers versus makers in society and that could become very dangerous if it sets in as a permanent condition. Because what we'll end up doing is we will convert our safety net system - which is necessary I believe, to help people who can't help themselves, to help people who are down on their luck get back on their feet - we could turn that into a hammock that ends up lulling people into lives of dependency and complacency, which drains them of the incentives and the will to make the most of their lives.

Who? The do-gooders who created the social safety net.  It's too generous, too unconditional and not tied enough to work. In a practical way, it is the safety net itself that is creating this condition. Rather than the correct interpretation that people who are not paying taxes are receiving income support that requires work or various, purposely chosen tax credits, this indicts everything from health care to unemployment insurance (which, by definition, you needed to have worked to receive). This is a smart approach, because while going after the "30 percent" isn't really a political platform, dramatically reducing the social safety net is.

Consequences? It's not clear what "complacency" means in this condition, but dependency means that more and more income will come from the government. As this happens, their ability to take personal responsibility will fall apart. People will be beyond the ability to help themselves, hypnotized as they are by the siren's call of the welfare state. This is why Romney can say "I'll never convince them that they should take personal responsibility and care for their lives."

4. Takers and Public Choice:
 
From Reason Magazine a while ago:
DeMint: Almost half of Americans are getting something from government, and the other half are paying for it. And we're on a track where 60 percent are getting something from government and 40 percent are paying for it. You can't sustain a democracy with that mix.
 
Reason: Because the 60 percent is going to be voting a bigger and bigger share of the 40 percent's money?
 
DeMint: It's hard to win elections when you're talking about limited government if the constituents want more from government. You see that phenomenon on display in Greece. When the country is going down in flames, there are still people in the street, demonstrating for more government benefits. We've got to understand we're in trouble, that we don't have much time. 
Or this from Steve Doocey on Fox and Friends: "Coming up! A controversial question. With 47% of Americans not paying taxes – 47% – should those who don’t pay be allowed to vote?"
 
Who? The 47 percent themselves. As predicted by Public Choice theory, those at the bottom half of the income scale vote into office people willing to take from the top half of the income scale. Since the average is above the median in income, there's always redistribution from the average to the median to be done. Here the intellectuals of the 30 percent, or the welfare state, or GOP strategy are all secondary; the ravages of democracy are the culprit.
 
Consequences? The system eventually collapses into itself, as those at the margin work less and also join in demanding more. DeMint alludes to Greece, where the collapse of the government seems almost to be part of the plan to then take over the state, which is consistent with the right's conspiracy theory of the Cloward-Piven strategy. But this focus on stop-gating the median voter allows for Romney to think "What I have to do is convince the 5 to 10 percent in the center that are independents."

Presumably there are more. What else is missing?

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On the Occupy/Strike Debt "Debt Resistors'" Manual

Sep 14, 2012Mike Konczal

People have been talking a lot about the one-year anniversary of Occupy Wall Street. There is special interest with the movement's turn to organizing around the idea of debt as a "connective thread" for the 99%. The most recent issue of The Nation has two articles on the topic, with Astra Taylor witing "Occupy 2.0: Strike Debt" and David Graeber writing "Can Debt Spark a Revolution?"

People have been talking a lot about the one-year anniversary of Occupy Wall Street. There is special interest with the movement's turn to organizing around the idea of debt as a "connective thread" for the 99%. The most recent issue of The Nation has two articles on the topic, with Astra Taylor witing "Occupy 2.0: Strike Debt" and David Graeber writing "Can Debt Spark a Revolution?"

There's a Strike Debt/Occupy Wall Street group, and they have put out a Debt Resistors' Operations Manual, which is embedded here at the end of this post and available at that link as a pdf. You can pick up a hard copy of the document tomorrow, Saturday, in Washington Square Park from 10:30 a.m. till 7:30 p.m. and at Judson Church from 7:30 p.m. till 9:30 p.m.

Reading it, I agree with Yves Smith's assessment that it "achieves the difficult feat of giving people in various types of debt an overview of their situation, including political issues, and practical suggestions in clear, layperson-friendly language." You should read her review in its entirety, and check it out for yourself. I want to talk a little bit about it from a different angle, noting how each half of the book builds out a new direction for Occupy.
 
Over the summer, Jodi Dean argued that debt would be a difficult connective thread to pull off for a political movement. It's too individualized, too prone to viewing people as failed market agents, too moralized, and it can mimic unhelpful reactionary arguments against the welfare state and the government. I know people involved in organizing homeowners, especially underwater and deliquent homeowners, and I can say that these are all very accurate problems. Beyond that, nobody likes their identity as a struggling debtor. People can take pride in their role as workers, as citizens, and as numerous other things organizers can build on, but debt is a real challenge. The failure part runs deep.
 
So there's a couple of interesting things in the Strike Debt booklet that I think are useful as a political statement. The first half of the book is about the major types of consumer debt -- medical, housing, education, and credit card -- as well as the credit scoring agencies. And the book places runaway consumer debt in the context of larger institutions that are failing to meet the needs of the population.
 
The medical debt chapter calls for universal health care, the student debt chapter calls for free public colleges, and the credit card chapter is titled "The Plastic Safety Net," directly alluding to weakness in income maintence and basic income support. The credit scoring chapter points out how these debts, and your ability to pay them, are tied to your ability to gain access to basic needs like utilities, phone lines, and health care.
 
These are all essential goods for our lives, and we choose the institutions that will deliver them. They can be publicly provided, based in principles of social insurance, decommodification, and access independent of wealth. Or they can be provided in individualized ways, ones that replace social insurance with self-insurance through individualized, large debt loads, while also working to the benefit of private agents.
 
But these are both choices. And this focus on debt is a way of understanding the wrong choices we've made as a society in providing for these goods, and who benefits and who loses from them. People should understand their debts as part of a system's design, rather than its failure. If developed, it could turn into a powerful statement for the commons and for a more progressive and social democratic approach to all of these topics.
 
It also approaches the 1 percent issue in a new way. Instead of a lot of arguments about the just deserts of the richest, the 1 percent and the "financialized" sectors of the economy are those who profit from inserting themselves between social goods and those who desperately need them. The second half of the book focuses not on individual debts but structures that benefit creditors. From municipal debt to the "expensive to be poor" areas of fringe finance to debt collection and bankruptcy, there's a whole series of institutions that work against debtors, the poor, and civic infrastructure.
 
Here the banks aren't just nefarious agents taking too much of the pie; they are the people overcharging the poor to be able to cash a check or otherwise engage in trade. They are the people ignoring the Fair Debt Collection Act, harassing your family on old debts they bought on the cheap. And they are the ones privatizing municipal structures, collecting the gains while socializing the losses. And that's a new way of understanding the 1 percent's power, and how to resist it, and ultimately overcome it in the kind of world we want to build, which is a major step forward.
 
As Astra Taylor wrote in her Nation piece, "As individuals, many of us are in debt because we have to borrow to secure basic social goods—education, healthcare, housing and retirement—that should be publicly provided. Meanwhile, around the world, debt is used to justify cutting these very services, even as the game is further rigged so that the 1 percent continues to profit, raking in money from tax cuts, privatization schemes and interest on municipal and treasury bonds."
 
Will it be enough to spark a genuine political movement? Who knows. But it is a document worth your time, and the issues it brings up will hopefully form a core narrative of all future political struggles.

Occupy Wall Street/Strike Debt: The Debt Resistors' Operations Manual

 

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Should We Stop Referring to Student Loans as "Financial Aid"?

Sep 14, 2012Mike Konczal

Students who take out loans aren't receiving special favors. They're making financial transactions like any other.

Do we make both a conceptual and analytical mistake when we refer to student loans as a form of "financial aid"? Should that term be something to be resisted? Demos' Tamara Draut brought up this point in a conversation recently, and I think it needs to be explored further, because it frames how we speak about student loans.

Students who take out loans aren't receiving special favors. They're making financial transactions like any other.

Do we make both a conceptual and analytical mistake when we refer to student loans as a form of "financial aid"? Should that term be something to be resisted? Demos' Tamara Draut brought up this point in a conversation recently, and I think it needs to be explored further, because it frames how we speak about student loans.

The government records and documents student loans as a form of aid. Here's a list of the "amount of financial aid awarded to full-time, full-year undergraduates, by type and source of aid," and loans are listed right next to grants. When pundits say that "student aid" has exploded over the past decade, and argue that aid is driving increases in tuition, it disguises that the aid that has exploded is a signficant amount of debt for young people.

I've taken out loans and received gifts. When I've signed up for, say, a car loan, I never went "oh you shouldn't have" afterwards, like when I've received a really nice birthday gift. I understood that the creditor wanted to lend me a certain amount of money at a certain rate, and I wanted to borrow it. Full stop. Unless the interest rate charged is purposely manipulated for some reason [1], there's no reason to think of this as aid at all.

Student loans are an economic transaction, the same as if the government contracted out to build a bridge, or hired a person to serve in the military or police force or be a teacher. The money spent here isn't "aid." Hiring someone to build a bridge exchanges labor for cash. Student loans exchange cash now for cash later plus interest. Those student loans would be underprovided without the government, certainly, but in the same way that bridges and law enforcement and other goods would also be underprovided if they weren't done by government.

I think this clarifies some of the issues and responses I'm seeing in the discussion about whether or not higher education is driven by increases in so-called "aid." Megan McArdle wrote in Newsweek, "In a normal market, prices would be constrained by the disposable income available to pay them. But we’ve bypassed those constraints by making subsidized student loans widely available." Let's leave aside the issue that the vision of education constrained by disposable income is Mitt Romney's vision that students should get "‘as much education as they can afford." There's a bigger issue.

I'm not sure what "normal market" means here, but many kinds of markets, perhaps even all of them, aren't constrainted by disposable income. Major, long-term debt fuels all kinds of important purchases, from houses to cars to health care to big-ticket durable goods. Events like retirement or having kids are dictated by longer-term savings decisions. Much of your monthly spending, like your rent or your cell phone, is in a contract that stipulates some future payments must be made regardless of your disposable income. There's a reason economists talk about spending as influenced by lifetime incomes.

Student loans are a way of mitigating a credit constraint, which is different than providing aid. Here it reflects not subsidized demand, but actual demand smoothed over a long time period. That's going to put a lot of demand into play. It shouldn't surprise us that demand is very high when credit constraints are removed. Higher education is one of the most important mechanisms of social and economic mobility we have, and it is also one of the primary ways we have for people to fully develop their talents and capabilities.

If actual demand overwhelms the supply of the system, that's a problem of supply, not demand. And the obvious solution is to increase the supply. Throughout our country's history we've done that in landmark bills that do it through public provisoning paid for by taxation, bills like the Morrill Act and California Master Plan. Now, as that system is left to crumble, we are looking to the private, for-profit sector to fill that gap. I fear that will only exacerbate the cost problems we've seen so far, and the data is looking that way too

But if not as a form of financial "aid," how should we refer to student loans?

[1] There's a narrow, though important, question about whether or not student loans are a "subsidy" because their interest rates are too low or too high. The Department of Education found that (R-10) for ”Direct Loans, the overall weighted average subsidy rate was estimated to be -13.91 percent in FY 2011; that is, the overall program on average was projected to earn about 13.91 percent on each dollar of loans made, thereby providing savings to the Federal Government.” What's a good word for the opposite of a subsidy? Whatever it is, student loans are that. Others argue that there needs to be a higher discount rate used to calculate this, and then you would see a subsidy. Let's assume for this post that the interest rate is seen to be fair by all parties.

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Young woman paying bills image via Shutterstock.com.

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Two Issues with Megan McArdle's Piece on Higher Education

Sep 13, 2012Mike Konczal

Megan McArdle has a new cover story at Newsweek, "Is College a Lousy Investment?"  Is the benefit worth it with rising costs? Several people have addressed the benefit part, particularly Dylan Matthew here and Reihan Salam here.

Megan McArdle has a new cover story at Newsweek, "Is College a Lousy Investment?"  Is the benefit worth it with rising costs? Several people have addressed the benefit part, particularly Dylan Matthew here and Reihan Salam here.

I have a piece about higher education that I'm really excited about coming out in the next few weeks with Aaron Bady for Dissent, so I don't want to spoil it. But for now, I think there are two important things to engage with in McArdle's piece. The costs part is important, because this will likely be the center-right argument going forward, and I think it has problems in an important way. McArdle:

Vedder adds, “I look at the data, and I see college costs rising faster than inflation up to the mid-1980s by 1 percent a year. Now I see them rising 3 to 4 percent a year over inflation. What has happened? The federal government has started dropping money out of airplanes.” Aid has increased, subsidized loans have become available, and “the universities have gotten the money.” Economist Bryan Caplan, who is writing a book about education, agrees: “It’s a giant waste of resources that will continue as long as the subsidies continue.” [...]

In a normal market, prices would be constrained by the disposable income available to pay them. But we’ve bypassed those constraints by making subsidized student loans widely available. No, not only making them available: telling college students that those loans are “good debt” that will enable them to make much more money later.

This is based on something called the Bennett Hypothesis. In the 1980s Education Secretary William Bennett argued that increases in student aid largely just allowed colleges to raise their tuition, capturing all that money. If true, this would be the lowest hanging policy fruit imaginable: save money by not providing aid and lower tuition in the process.

Sadly, there's no evidence for this argument. And I mean "no evidence" not like "there's significant debate" or "reasonable people disagree," but like this has been extensively studied and the general consensus is that it is not true. I spent some time going through this research and couldn't find anything conclusive, and requests from others writing on this haven't been helpful. This could likely be true as it relates to for-profit schools -- there's a study somewhere that indicates this -- which shouldn't suprise us, as for-profits exist to suck up federal subsidies by business design. But it doesn't appear to be true for the vast majority of higher education, and to whatever extent it could be true it isn't a major driver.

 Here's a big post by David L. Warren, president of the National Association of Independent Colleges and Universities, listing all the institutions that have investigated this. Among other studies and experts quoted, here's:

“Regarding the relation between financial aid and tuition, the regression models found no associations between most of the aid packaging variables (federal grants, state grants, and loans) and changes in tuition in either the public or private not-for-profit sectors.”
 
– U.S. Department of Education National Center for Education Statistics, Dec. 2001, Study of College Costs and Prices 1988-89 to 1997-98, Vol. 1
 
“The Commission finds no evidence to suggest any relationship between the availability of Federal grants and the costs or prices in these institutions,” and “has found no conclusive evidence that loans have contributed to rising costs and prices.”
 
– National Comission on the Cost of Higher Education, February 1998, Straight Talk about College Costs & Prices
 
“After the change to the Stafford loan limits beginning in AY 2007-08, the price [of college] … increased at a rate generally consistent with prior years. [...] Overall, [previously conducted] analyses are descriptive and do not necessarily indicate a linkage between increases in the loan limits and changes in tuition or borrowing.”
 
– Government Accountability Office, May 2011, Federal Student Loans: Patterns in Tuition, Enrollment, and Federal Stafford Loan Borrowing Up to the 2007-08 Loan Limit Increase
This is important, because McArdle's argument allows her to make it seem like government action to provide for higher education is largely counterproductive. Rather than examining the decreasing support for higher education, the difficulty of finding "Baumol’s cost disease" in higher education, the growth of a "hybrid" design for our public education sector, the decrease in Pell grants relative to total college costs, the way that the for-profit industry is taking over for public institutions, or the issue of risk-shifting to the individuals and providing services out of fees instead of taxes - rather than it being a choice on how we provide the essential social good of higher education, and who benefits and who loses from those choices - McArdle can imply that if the government tried to make education more affordable it would backfire and just make the problem worse.
 
This becomes even more of a problem with the second issue, the likely transmission mechanism. Just because aid goes up doesn't mean that prices must go up - the increases in food stamps haven't caused an equivalent increase in food prices. In a follow-up post to her article, she alludes to the microeconomic issue at play: "Vedder’s theory is that, as he put it, universities are raising tuition 'because they can'."
 
In economics-speak, that means that the supply of higher education is inelastic relative to price. If that's the case, then the right course of action is for the government to provide more supply at a cheaper price; i.e., free higher education. JW Mason has argued that if supply is inelastic, "each dollar spent on grants to students reduces final tuition costs less than one for one, each dollar spent on subsidies to public institutions reduces tuition costs by more." Think of it as "the public option for higher education" argument, with the same motivations. This is not a new argument. in 1899, the president of Stanford argued that “if the State makes no provision for higher education there is no other agency on which we can depend to supply it.” That seems as relevant now, over 100 years later, as it did back then.
 

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New Article: On Paul Ryan's World of Welfare Capitalism

Sep 13, 2012Mike Konczal

I have a new article at The Nation with Bryce Covert titled How Paul Ryan Would Decimate the New Deal. "Ryan’s vision for reforming the social safety net can be explained in three verbs: he wants to block grant Medicaid, voucherize Medicare and privatize Social Security.

I have a new article at The Nation with Bryce Covert titled How Paul Ryan Would Decimate the New Deal. "Ryan’s vision for reforming the social safety net can be explained in three verbs: he wants to block grant Medicaid, voucherize Medicare and privatize Social Security. Yes, Medicare, Medicaid and Social Security would likely still exist, but those changes would mean a profound difference for the average person who receives government benefits over his or her lifetime."

We walk through how a specific person would encounter these programs as they are administered currently and under Ryan's vision. We then talk about Gøsta Esping-Andersen's idea of "Worlds of Welfare Capitalism" and try to understand what a social-democratic welfare state would look like versus a classically liberal (read: libertarian) welfare state. We use that to formalize Ryan's vision as shredding the remaining social democratic parts of the New Deal and Great Society's welfare state and replacing them with a new, libertarian framework.

I just had my mind blown from encountering Gøsta Esping-Andersen's work about six months ago. So even if you are tired of debates about Paul Ryan's budget from the blogosphere, this might be a helpful way to approach the topic from a new angle. Hope you check check out the new article!

 

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Guest Post at Business Insider: Animated Gifs and Monetary Policy

Sep 11, 2012Mike Konczal

I have a guest post up at Business Insider, which uses animated gifs to explain the current battle over monetary policy in the aftermath of the recent Jackson Hole conference. Hope you check it out.

I have a guest post up at Business Insider, which uses animated gifs to explain the current battle over monetary policy in the aftermath of the recent Jackson Hole conference. Hope you check it out.

It was inspired by a post where Joe Weisenthal responded to an animated gif of a baby throwing money out the window as a metaphor for QE by explaining, in detail, why it was wrong. I pointed out that you can only respond to an animated gif with more animated gifs - and then we realized we needed to corner the market on the no doubt soon to boom monetary policy animated gif industry.

For reference, this Ann Friedman article on animated gifs is a great, and the whatshouldwecallme tumblr is a fun place to check out continuously updated animated gifs.

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The Chicago Teachers Union Strike Viewed From the Local Level

Sep 10, 2012Mike Konczal

As of 10 p.m. last night, the Chicago Teachers Union has gone on strike. Here is a webpage for why they are striking, complete with the one-page explanation and the 46-page one. Here's PCCC's summary.

As of 10 p.m. last night, the Chicago Teachers Union has gone on strike. Here is a webpage for why they are striking, complete with the one-page explanation and the 46-page one. Here's PCCC's summary. Here's a local teacher explaining why he is on strike.

As Bill Barclay at Dissent Magazine noted, there was a special bill passed last year that required 75 percent of teachers to vote -- with absentees counted as no votes! -- to strike. Stand For Children CEO Jonah Edelman said at the Aspen Ideas Festival that “the unions cannot strike in Chicago" because that requirement, only required of teachers, was so restrictive. Turns out that this strike got 90 percent of teachers (and 98 percent if you exclude the absentees).

I reached out to two Chicago journalists and writers - Yana Kunichoff and Micah Uetricht - who are covering the situation locally to get their on-the-ground perspectives. A lightly edited transcript of the interview with each follows. I hope to have more coverage of this very important event in the days to follow.

Mike Konczal: Please introduce yourself.

Yana Kunichoff: My name is Yana Kunichoff. I'm a journalist for Truthout, which is a progressive online news magazine. I've written for a lot of independent media, where my focus has been immigration, investigative issues, and social justice activism. I've been living in Chicago for four years now.
 
Why is a strike happening?
 
YK: There are several layers to why this strike is happening. The shallowest, headline news one is because the Chicago Teachers' Union (CTU) and Chicago Public Schools (CPS) were not able to agree to a contract. A deeper reason is because this is one of the first times that an education public sector union has resisted and pushed back against the privatization and changes that have been happening in the education sector.
 
Looking back at bills passed last year and before, they all narrowed what the teachers' union is allowed to strike over. On paper, the biggest questions are on merit pay and seniority rights. But there are all these other points. Rahm Emanuel said in his press conference after the strike was declared that the two points under debate "are not financial." The two big issues under debate, from Emanuel's point of view, are teacher evaluation and principals having the full ability to hire and fire teachers.
 
What's it like for Democrats in Chicago?
 
YK: I don't know how much I can speak to the battle in the Democratic Party. There's an interesting contradiction that exists in Chicago. If you are a liberal in Chicago you support Obama, but at the same time there's a possibility you support the union. I know people supporting the campaign that support the teachers' union, even though someone associated with the administration is trying to smash it.
 
How is the Chicago community as a whole reacting?
 
YK: Chicago is a pretty divided city, with neighborhoods divided by class. I spent today riding my bike around Latino, working-class neighborhoods -- Pilsen, Little Village, and North and South Lawndale. These are areas that aren't doing well in this economy.
 
I'm seeing a lot of cars honking their horns, and police running their siren while they go by a school picket. The people that have to deal with the daily reality of school cutbacks, or mental health clinic shutdowns, or how'll they get home in winter with less public transit, the people who deal with austerity budgets, are in support of the teachers' strike.
 
Chicago is becoming increasingly gentrified, though, with more people who don't rely so much on public services. I'm not sure what they think of the strikes yet.
 
Most people will get their news from nationally-targeted coverage of the strike. As someone from Chicago, covering it locally, what would you like people to know?
 
YK: The charter system is something that started in Chicago but has since been brought national. These kinds of policies that work against teachers aren't going to stay contained to one city. This trend will continue into other cities and states, especially where unions are weak. So this is where the fight is happening. When you are here on the ground, it feels like a strong line of opposition. Opposition to policies that aren't just national but international - think of places like Greece and the more general fights against austerity happening across Europe here.
The national coverage will watch the specific contract terms, though they'll miss that 10 years from now, the specific, narrow terms will matter less than whether or not a union in an American city will have been successful in pushing back in this way. This is a fight over public resources, public jobs, and the idea of a public that isn't discussed by national media as if it exists. Will there be public schools as we understand them in 10 years?
 
I also spoke with Michah Uetricht separately.
 
Mike Konczal: Please introduce yourself.
 
Micah Uetricht: I'm Micah Uetricht, and I'm an organizer for a group called Arise Chicago as well as a freelance writer. I've been covering the teachers' strike in Chicago from the ground.
 
What is the core of this strike about?
 
MU: Last night, at the conference announcing whether or not the teachers were going to go on strike, several reporters asked CTU President Karen Lewis and Vice President Jesse Sharkey about what the core issues were. Both repeatedly emphasized that there weren't one or two core issues but it was instead about the total package. The package included wages, compensation, and benefits, but also the vision of what school reform looks like. CTU started talking about school reform that actually makes schools work for kids.
 
So there are traditional things that unions go on strike for, like wages and benefits, but also the bigger picture vision of what school reform is going to look like.
 
What's the energy like covering this strike from the streets in Chicago?
 
MU: I've been around a lot of strikes and labor actions, but this is totally like nothing I've seen before. I'm about five miles north of Chicago, and I've been on my bike going from actions to picket lines. Every public school I passed had crowds of 40, 50, 60 teachers. The energy is incredible. People were up at 5 in the morning to picket at their school, and then move to phone bank.  It's a big feat of organizing that CTU has pulled off.
 
How is the Chicago community as a whole reacting?
 
MU: The community support piece of the strike has also been incredible as far as I've seen. There's a lot of support from parents, community members and others. There's a group called Parents for Teachers that has been active, and a very vibrant Chicago Teacher Solidarity Campaign. Both have done an amazing job organizing before and during the strike.  People beyond the usual suspects are getting involved in this fight.
 
The city has worked really hard to try and divide parents against teachers, painting teachers as overpaid and greedy and harming students. So I was expecting to see some hostility from people on the streets, but all morning long I saw no stories of negativity or hostility. I'm looking for signs that average Chicagoans are annoyed or angry, but I haven't seen any yet. People I've talked to haven't seen any yet either.
 
Most people will get their news from nationally-targeted coverage of the strike. As someone from Chicago, covering it locally, what would you like people to know?
 
MU: CTU is very vocal in saying that the Democratic Party in Chicago and Rahm Emanuel are not serving their interests. In Chicago the Democratic Party is the major party, and they are pushing this austerity agenda, and so a lot of the future of whether or not unions are afraid of calling out Democrats will be determined here.
 
This is a fight over public sector workers, and we've seen that a lot over the past several years. We saw it in Wisconsin under Governor Walker, for instance. In that fight, the labor movement and the left in general made some serious missteps, and suffered a pretty crushing defeat with the law and the loss of the recall.
 
In Chicago, I haven't seen anyone say this explicitly, but my sense is that they learned from that fight that you have to be in the streets to win these fights. The CTU is incredibly well organized, especially down at the rank-and-file level. That shows when you are wandering around Chicago today, where 40 or 50 people are on every line and more in the streets. The recent laws that push against public sector unions have forced them to organize the entire organization, keeping their membership involved the whole way, and it is paying off today.
 

Note: This post has had slight edits of the transcript for clarification (4:24pm ET, 9/10/12).

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Romney Will Solve the Crisis with the Exact Same GOP Plan of 2008, 2006, 2004...

Aug 31, 2012Mike Konczal

Romney's five-point plan to adress the specific aspects of our current jobs crisis recycles, nearly word for word, plans from far different economic times.

Romney's five-point plan to adress the specific aspects of our current jobs crisis recycles, nearly word for word, plans from far different economic times.

I've been watching the 2012 Republican National Convention, trying to get a sense of what the conservative diagnosis is for our weak economy and what they'd do in response. Is it the bizarro stimulus of raising interest rates, balancing the budget, and forcing foreclosures? Is there a secret housing plan? Or will it be a program of Reactionary Keynesianism, with an expanded military, massive tax cuts for the rich, and a SuperDuperCommittee to recommend tax expenditures that will go nowhere?

I take these arguments seriously -- I actually really enjoy making maps to help explore them. One argument worth bringing up is the idea that they are just proposing to do the policies they want all the time anyway -- the policies they wanted in 2008, or 2006, or 2004 -- but are pretending there's a reason it would be extra important given our current recession.

So on August 30th, 2012, with unemployment at 8.3 percent and with a serious long-term unemployment problem, Mitt Romney gives the RNC acceptance speech. He outlines a plan to create 12 million jobs in the next four years. As Jared Bernstein pointed out, that's what Moody's says will be created anyway. But forget that. How will Mitt Romney do this? He has a five point plan (numbers in [brackets] here and in the rest of the post are added by me):

And unlike the president, I have a plan to create 12 million new jobs. It has 5 steps.

[1] First, by 2020, North America will be energy independent by taking full advantage of our oil and coal and gas and nuclear and renewables.

[2] Second, we will give our fellow citizens the skills they need for the jobs of today and the careers of tomorrow. When it comes to the school your child will attend, every parent should have a choice, and every child should have a chance.

[3] Third, we will make trade work for America by forging new trade agreements. And when nations cheat in trade, there will be unmistakable consequences.

[4] Fourth, to assure every entrepreneur and every job creator that their investments in America will not vanish as have those in Greece, we will cut the deficit and put America on track to a balanced budget.

[5] And fifth, we will champion SMALL businesses, America’s engine of job growth. That means reducing taxes on business, not raising them. It means simplifying and modernizing the regulations that hurt small business the most. And it means that we must rein in the skyrocketing cost of healthcare by repealing and replacing Obamacare.

So his plan focuses on domestic energy production, school choice, trade agreements, cutting spending, and reducing taxes and regulations. This must be a set of priorities reflecting our terrifying moment of mass unemployment, right?

Let's flash back to September 4th, 2008, at the RNC where John McCain is giving his speech accepting the 2008 Republican presidential nomination. Unemployment is 6.1 percent, though the Great Moderation is coming to an end; within a year it'll be close to 10 percent. Two weeks later, as Lehman Brothers was collapsing, McCain would say "the fundamentals of our economy are strong." What were his recommendations for the economy in that nomination speech?

I know some of you have been left behind in the changing economy, and it often sees that your government hasn't even noticed... That's going to change on my watch...

[3] I will open new markets to our goods and services. My opponent will close them...

[4] I will cut government spending. He will increase it...

[5] We all know that keeping taxes low helps small businesses grow and create new jobs...

[4] Reducing government spending and getting rid of failed programs will let you keep more of your own money to save, spend, and invest as you see fit...

[2] Education -- education is the civil rights issue of this century. Equal access to public education has been gained, but what is the value of access to a failing school? We need to shake up failed school bureaucracies with competition, empower parents with choice...

[1] We'll attack -- we'll attack the problem on every front. We'll produce more energy at home.. Senator Obama thinks we can achieve energy independence without more drilling and without more nuclear power. But Americans know better than that.

It's the same exact agenda. Specifically, the Romney agenda for job creation in 2012 is stuff that John McCain wanted to do anyway in 2008.

Let's go back further. On September 2nd, 2004, George W. Bush is at the RNC, giving his speech accepting the nomination to run for a second term as President of the United States. Unemployment is 5.4 percent. A major housing bubble is kicking into high gear, and the country is debating the aftermath of the invasion of Iraq and the future of the War on Terror. A few months later, people will be talking about a permanent Republican majority. What are some priorities for a second George W. Bush term in creating jobs?

To create more jobs in America, America must be the best place in the world to do business.

[5] To create jobs, my plan will encourage investment and expansion by restraining federal spending, reducing regulation and making the tax relief permanent.

[1] To create jobs, we will make our country less dependent on foreign sources of energy.

[3] To create jobs, we will expand trade and level the playing field to sell American goods and services across the globe.

[5] And we must protect small-business owners and workers from the explosion of frivolous lawsuits that threaten jobs across our country. Another drag on our economy is the current tax code, which is a complicated mess...

[4]  To be fair, there are some things my opponent is for. He's proposed more than $2 trillion in new federal spending so far, and that's a lot, even for a senator from Massachusetts.

It's the same agenda, mentioned back to back almost in the same order. Bush mentioned No Child Left Behind several times, though I'm not sure if that matches up with the school choice of [2] in Romney's economic plan for school choice, so I excluded [2]. It's always time for cutting spending, more oil drilling, free trade, and lower taxes and regulation to fix the economy.

Let's do one last one. January 31st, 2006, George W. Bush is giving his State of the Union address. Unemployment is 4.7 percent. With the economy healthy and growing (in Bush's mind), now is the time to build on the strengths and address the weaknesses of the economy. What does he suggest?

Our economy is healthy and vigorous, and growing faster than other major industrialized nations...

[5] Because America needs more than a temporary expansion, we need more than temporary tax relief. I urge the Congress to act responsibly and make the tax cuts permanent.

[4] Keeping America competitive requires us to be good stewards of tax dollars. Every year of my presidency, we've reduced the growth of nonsecurity discretionary spending. And last year you passed bills that cut this spending.

[3] Keeping America competitive requires us to open more markets for all that Americans make and grow... With open markets and a level playing field, no one can out- produce or out-compete the American worker...

[1] Breakthroughs on this and other new technologies will help us reach another great goal: to replace more than 75 percent of our oil imports from the Middle East by 2025.

Again, President Bush mentions No Child Left Behind, but I'm not sure whether it overlaps with [2].

But the same exact playbook is there in 2006, as it was in 2004 and 2008, and as it is in 2012. Domestic oil production, school choice, trade agreements, cut spending and reduce taxes and regulations -- it's been the conservative answer to times of deep economic stress, times of economic recovery, times of economic worries, and times of economic panic. Which is another way of saying that the Republicans have no plan for how to actually deal with this specific crisis we face.

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George W. Bush image via Shutterstock.com.

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What Could Romney's Secret Housing Plan Look Like?

Aug 24, 2012Mike Konczal

Josh Barro, writing from his new column at Bloomberg, wonders if Mitt Romney has a secret economic plan to fix housing: "But where I think a big improvement from Romney is likely is on housing policy. While Romney has been conspicuously silent on housing, one of his top advisers, Glenn Hubbard, advocates an aggressive plan to restructure mortgages.

Josh Barro, writing from his new column at Bloomberg, wonders if Mitt Romney has a secret economic plan to fix housing: "But where I think a big improvement from Romney is likely is on housing policy. While Romney has been conspicuously silent on housing, one of his top advisers, Glenn Hubbard, advocates an aggressive plan to restructure mortgages. The Hubbard plan would lower mortgage rates and reduce principal for underwater borrowers, both of which would stimulate the economy. That's a tough sell to Republicans in Congress -- but they would be much more open to it under a Republican president than a Democratic one."

As David Dayen noted in a great, comprehensive Salon piece, none of this matters if Congress doesn't extend a special law put into place during the crisis that keeps principal reduction, even reduction from a short sale, from being treated as income, and thus requiring it to be taxed. The law is set to expire on Dec. 31, 2012. Extending it has bipartisan support in the Senate, but none in the House so far. I can't emphasize how much this matters - homeowners would get a giant tax bill under any relief program, making them difficult to do. It isn't clear what Romney would do about this.

It's worth noting that the Hubbard plan is very similar to the ongoing Home Affordable Refinance Program (HARP) in that it uses the GSEs to refinance underwater mortgages. HARP was revamped earlier this year to HARP 2.0, which removed a 125 percent loan-to-value limit and waived certain representations and warranties for lenders. It's still early, but it looks like there is a big increase in the number of underwater mortgages refinancing (FHFA data). Over 40 percent of the HARP refinances in July were from mortgages with an LTV over 125 percent. As will become relevant in this post, their proposal is GSE driven and avoids bankruptcy reform, as "moving mortgage debt into bankruptcy courts could well reduce future credit availability and hamper long-run economic growth and homeownership."
 
(The original Hubbard plan from 2008 featured mandatory principal writedowns for negative equity, with the losses shared equally by the lender and the government. In exchange, the government gets a lien on the home worth 20 percent of any increase in value. This is much different than current HARP policy and constitutes a really bold approach. However, this negative equity and shared appreciation part is entirely missing from the current 2011 version of the proposal. I'm not sure why Hubbard dropped that section; certainly it's not because the housing market has done better than expected.)
 
How can we analyize what potential solutions a Romney presidency could embrace? There's normally one dimension we think of in terms of housing crisis policy, and that is how aggressive we are in dealing with underwater debt and foreclosures. Should we refinance underwater mortgages to create lower monthly payments and take advantage of low interest rates? Should we go further and reduce principal debt, either outright or in exchange for some form of equity claim?
 
But there's another, equally important dimension, and that's the mechanism through which these policies are enacted. What is the vehicle that will be used to execute policy? There are four general cases that can be put into play.
 
The first policy mechanism tries to go through the financial sector and the mortgage servicing system as it currently exists. This takes the market as it is and tries to nudge agents to act a different way with various incentives. The Home Affordable Modification Program (HAMP) program does this by trying to nudge the industry with payments to make modifications that lower interest rates and payments. HAMP was consciously not designed to do principal reductions, though it does have a very small, limited program now. 
 
There's a second policy vehicle driven by the fact that the GSEs are in conservatorship under the FHFA. The FHFA's mission is to "Provide effective supervision, regulation and housing mission oversight of Fannie Mae, Freddie Mac and the Federal Home Loan Banks to promote their safety and soundness, support housing finance and affordable housing, and support a stable and liquid mortgage market," which can support a variety of policy ideas. As mentioned above, HARP is responsible for refinancing GSE loans, and the Hubbard plan focuses on refinancing through the GSEs. Timothy Geithner's recent effort to get the FHFA to support principal reduction through a program called Home Affordable Modification Program Principal Reduction Alternative (HAMP PRA) was recently rejected by FHFA acting director Ed DeMarco. Several progressives responded by calling for DeMarco to be fired.
 
There's a third policy vehicle designed to change the basic legal framework for how bankruptcy works. Bankruptcy law could be modified, even temporarily, to deal with the consequences of the housing bust. The mass modification program (also see here at Slate) proposed by Eric Posner and Luigi Zingales, for instance, worked through bankruptcy law. The failed effort to pass a "cramdown" or lien-stripping amendment was entirely about letting judges write down mortgage debt in bankruptcy.
 
And then there's the fourth mechanism of direct government policy. Here the government actively goes out and purchases and manages mortgages. The New Deal created the Home Owners' Loan Corporation (HOLC) to directly purchase mortgages; we could recreate such a mechanism today. Both John McCain and Hillary Clinton argued for such programs during the 2008 campaign. Senator Merkley's recent plan would do this for refinancing; eminent domain proposals would do this for principal reduction.

Let's grid out those two dimensions:

With this grid in mind, let's re-examine the high-level critique of the Obama administration's housing policy. During the debate over the second round of TARP, the then-incoming Obama administration promised to take action on bankruptcy reform and hinted toward direct government action, or the top two rows in the grid. Larry Summers wrote to Harry Reid promising action on "reforming our bankruptcy laws." Donna Edwards wrote that she "appreciate[d] the personal commitment that Senator Obama" would look "at a program such as one that existed in the 1930s to 1950s to work directly with homeowners."

This did not happen. Timothy Geithner was against direct government action from the beginning, as this letter he wrote to Brad Miller shows. The administration was publicly silent and privately pushed against reforming bankruptcy. The administration also seemed asleep at the wheel when it came to pushing for big action through the GSEs, making no recess appointments and only updating HARP and pushing for principal writedowns this year.

Their main effort was to work through the already existing mortgage framework. This effort has largely been seen as a failure. This isn't surprising, as there are well-documented problems with our current mortgage servicing system. The same problems with Wall Street slicing and dicing mortgages that were present when the housing bubble was inflating are still there now that it has collapsed.

We often don't get second chances in life, but the Obama administration had a second chance at a serious reform of this broken system when news of the scandals surrounding financial fraud started breaking. Though there's still a taskforce out there somewhere, I think it is safe to say the administration wanted to remove these problems rather than take them on directly, which would have opened up a space to reform the current system. They succeeded. This only leaves working through the system.

Maybe your eyes roll when you read the term "neoliberal hegemony," but there's something to the idea that the Obama administration simply felt that the only legimate way to try and deal with the foreclosure crisis was by nudging the incentives of various markets this or that way. The market is the ultimate, efficient arbiter of value, and policy should only seek to adjust some incentives here and there. Measures to intervene directly by the government, or measures to change the way property is regulated through bankruptcy, were ignored right away. Those actions require the government to act as a force in the marketplace directly, or to acknowledge that the economy is created through law and can be adjusted accordingly, both of which are taboo under neoliberal economic ideology.

Working within a system, no matter how aggressive your actions are, means you don't ultimately have to challenge that system. As Harper's wrote back in 2009, in a great essay on President Obama as Hoover, "The common thread running through all of Obama’s major proposals right now is that they are labyrinthine solutions designed mainly to avoid conflict." In a practical sense, for Romney to go bigger than Obama on housing would require either adjusting the bankruptcy code, running a government program that directly intervenes in the marketplace in a big way, or firing DeMarco. In the theoretical sense, it would likely require challenging the reigning paradigm in political economy as well as challenging the current financial system. Are these actions realistic for Romney?

Mike Konczal is a Fellow at the Roosevelt Institute. Follow or contact the Rortybomb blog:

  

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