The Fed Scrambles to Save Banks, Stalls on Unemployment

Nov 28, 2011Mike Konczal

Side-by-side, two worst case scenarios elicit very different reactions from the Federal Reserve.

Side-by-side, two worst case scenarios elicit very different reactions from the Federal Reserve.

I never congratulated Charles Evans, President of the Federal Reserve Bank of Chicago, for dissenting in the most recent FOMC meeting on behalf of the unemployed. ("Voting against the action was Charles L. Evans, who supported additional policy accommodation at this time.") I'm a big fan of the Evans Rule and am surprised inflation doves haven't been more vocal about it. As Goldman Sachs noted, "This was the first 'dovish' dissent since December 2007 (President Rosengren)." Given that unemployment has turned out to be worse than the Fed's projections at any time, it is about time that those who are worried about unemployment inside the Fed start making noise.

These first murmurs instead stand in contrast to the financial bailouts. Bloomberg just released a big story, based on its successful FOIA requests, that uncovered just how aggressive the Federal Reserve was with its emergency lender-of-last-resort powers. Kevin DrumMatthew Yglesias, and Paul Krugman argue that what is really shocking is how total the rescue and backing of the financial sector was while the real economy was left to rot. As Krugman puts it, "The real scandal isn’t so much that those banks got rescued as that the rest of the population didn’t."

Part of why the bailouts were packaged the way they were was because Lehman Brothers' bankruptcy went a lot worse than the Federal Reserve's expectations of how the collapse of a major investment bank would go. When the collapse went far worse than its expectations, it reacted with maximum force.

Is there an equivalent story for unemployment? I'll try to graph this using the FRB's Summary of Economic Projections. From its FAQ: "Economic projections are collected from each member of the Board of Governors and each Federal Reserve Bank president four times a year, in connection with the Federal Open Market Committee's usual two-day meetings (typically held in January, April, June, and November)... The unemployment rate is the average civilian unemployment rate in the fourth quarter of a year."

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Members of the Federal Reserve get together four times a year and project their expectations of unemployment for several years going forward. Below is that data plotted against the unemployment rate. Specifically, it has the average projected unemployment rate across the entire year and takes the average of the core tendencies that are reported as that rate. The actual unemployment is in bold red and projections from each point going forward are in shades of orange (click for larger image):

As you can see, there's no point in which unemployment was projected to be worse than it actually was. Especially in 2009-2010 -- the actual unemployment rate was significantly higher a year or two later. Here's a zoomed in view of the 09-11 range (click for larger image):

If we were to replace the FRB with a group of monkeys armed with darts, one would imagine that they would make at least a few projections above the actual rate of unemployment. It's funny -- the FRB tried to revise how bad unemployment is but doesn't revise it anywhere near enough to lower it to where the economy actually is.

So to recap: Lehman Brothers goes worse than the Federal Reserve's projection and the Fed goes to the most extreme lengths it can find to extend emergency lending. Every single unemployment number turns out to be worse than all of the Federal Reserve's projections, and it finds every excuse to look the other way. Only Charles Evans has the courage to say that we should let inflation go to 3 percent while unemployment is over 7 percent to catch up to trend growth. Amazing.

Mike Konczal is a Fellow at the Roosevelt Institute.

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Eight Reasons Why Extending Unemployment Benefits Will Boost the Economy

Nov 22, 2011Mike Konczal

Unemployment insurance will keep families -- and our economy -- afloat.

Unemployment insurance will keep families -- and our economy -- afloat.

In the aftermath of the super committee's collapse, Democrats are going to have to fight to get unemployment insurance benefits extended. This is one of many "orphan programs" left behind that are set to expire at the end of the year. Since it looks like there is going to be a debate over whether or not to extend the benefits, what can we say with certainty about the costs and benefits of extending unemployment benefits?

1. Even considering the cost, unemployment benefits are a deal. Extending unemployment benefits would cost around $44 billion for one year. (Source: CBO.) Specifically, "CBO estimates...$44.1 billion would stem from the one-year extension of EUC and EB provisions. That extension would allow people who exhaust their regular unemployment compensation during calendar year 2012 to receive up to 53 weeks of EUC, and would make it easier for states to provide up to an additional 20 weeks of benefits under EB (depending on the states’ laws and unemployment rates)." Given that interest rates are so low, and real interest rates are even negative, this is a great value.

2. Without an extension, GDP will decline. The loss of not having that $44 billion pumped into the economy would cause at least a 0.3 percent decline in GDP in 2012. (Source: JPMorgan Chase & Co. chief U.S. economist Michael Feroli.)

3. Given spending multipliers, this will have a ripple effect. Because of a government spending multipler, that 0.3 percent decline is more like 0.5 percent, with a subsequent, significant impact on jobs. (Source: EPI.)

Since we are in a liquidity trap, where monetary policy is made significantly more difficult by a zero lower bound, then there's a multipler to government spending. Unemployment benefits in particular have a good bang-for-the-buck effect. Heidi Shierholz and Lawrence Mishel of EPI argued this with their chart:

4. This is about more than just GDP; it's about keeping people afloat. The stakes go beyond economic aggregates. Unemployment insurance has kept 3.2 million people out of poverty in 2010.This includes nearly a million children. (Source: Census, h/t EPI.)

That's a lot of jobs gained and a lot of misery avoided, with or without a multipler! But those jobs also increase demand. Won't unemployment insurance decrease the supply of labor?

5. The potential increase in unemployment from extending benefits is small. Previous credible estimates of the effects of unemployment insurance in this recession have shown that they "increased the overall unemployment rate 0.4 to 0.8 percentage points," a point where it is still a great tradeoff. (Source: Federal Reserve Bank of San Francisco.)

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One way to estimate this is to take job losers, who are eligible for UI, and measure their duration against quits, who are not eligible for UI. The San Francisco Fed source above does this, and finds the following chart:

Even given these figures, I still think extending benefits is a fantastic idea. For more whether it is a great tradeoff, see this post from last year from WSJ's Kelly Evans and my somewhat critical response.

6. And even those figures may be inflated. These results are found to be exaggerated by a better, more current study, which finds "UI benefit extensions raised the unemployment rate by only about 0.2–0.6 percentage points." (Source: Jesse Rothstein.) This study uses the conceptual method above but goes an extra step to break UI down by state, over time, and with individual characteristics.

Moreover, most studies that find a 2%+ increase in unemployment don't use any of the control techniques mentioned above. (Example: Barro's WSJ editorial.) Indeed, what they all essentially do is look backwards, to data and studies from the 1980s and 1990s, and project those numbers into our current Great Recession. As Rothstein mentions, these studies all "involve extrapolations from pre-recession estimates of the effect of UI durations or from pre-recession unemployment exit rates." As a financial engineer, I respect taking data from inappropriate time periods and blindly projecting them forward without any type of diligence or attention paid to the underlying conditions. But this is not appropriate here, as we haven't had a major crisis like this in the past 30 years.

7. Everyone is having a hard time finding a job. The overall labor market is weak, not just for the long-term unemployed. (Source: This post, from BLS data.)

8. Other considerations make the case for extending benefits.

The biggest counterarguments against extending benefits are concerns about structural unemployment and decreased work effort. The worry about a permanent, "structural" increase from UI extensions is subject to the Lucas critique. As Scott Sumner noted, “the maximum length of unemployment insurance is itself an endogenous variable. If stimulus were to sharply boost aggregate demand it is quite likely that Congress would return the UI limit to 26 weeks, as it has during previous recoveries.”

Rothstein shows that at least half of this "increase" is the result of people staying in the labor force, which is a good thing, or at least a not bad and definitely not related to the major problems. As Heidi Shierholz notes, "less than 0.2 percentage points of the 4.4 percentage point increase in the unemployment rate over the Great Recession was due to an extension-induced reduction in the rate at which workers get a new job, which is the disincentive effect policy makers are actually concerned about. Moreover, even that may be a good thing -- a small UI-induced increase in the time it takes for an unemployed worker to get a new job is an asset of the UI program to the extent that it affords unemployed workers the needed space to find a new job that matches their skills and experience."

Mike Konczal is a Fellow at the Roosevelt Institute.

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A Ticking Time Bomb: The Arab Spring and America's Lost Generation

Nov 14, 2011Mike Konczal

High unemployment pushed young people in the Middle East and North Africa to revolt. Why wouldn't it happen here?

Is it useful to think of the Occupy movement more as a "left" movement or a "youth" movement? To answer that question, it's worth looking into data on the young, particularly as it relates to unemployment.

High unemployment pushed young people in the Middle East and North Africa to revolt. Why wouldn't it happen here?

Is it useful to think of the Occupy movement more as a "left" movement or a "youth" movement? To answer that question, it's worth looking into data on the young, particularly as it relates to unemployment.

To leave the United States for a minute, one way people are trying to understand the Arab Spring is through the lens of massive youth unemployment and inequality. Given how high unemployment has been in these MENA (Middle-East and North African) countries, what else could we expect besides revolution?

For instance, in early February then-IMF chief Dominique Strauss-Kahn told a conference, "this summer I made a speech in Morocco about the question of youth employment including Egypt, Tunisia, saying it is a kind of time bomb" and "such a high level of unemployment, especially youth unemployment, and such a high level of inequality in the country create a social situation that may end in unrest." Here is the "youth unemployment" blog tag at the IMF to give you a sense of what people there have been saying about it. In particular, they point out that it should be a major concern for the MENA and African regions.

Interestingly enough, it was even a concern before the mass protests broke out. Regional IMF officials Ratna Sahay and Alan MacArthur gave a presentation on January 23rd, "Challenges for Egypt in the Post Crisis World," at the Egyptian Center for Economic Studies in Cairo (h/t WSJ). Protests would begin a few days later. Here's a key slide from that presentation:

Part of you may want to immediately start pointing out differences between this country and those. Maybe you are furious at terrible, unresponsive, corrupt governments ignoring the plight of their populations. Maybe you think that if these countries only had neoliberal, "flexible" wage contracts and a leakier safety net like we have in the United States, then unemployment would be much better.

You may then head over to our monthly unemployment numbers and note that American youth unemployment is in the same ballpark as these MENA countries.

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I've taken numbers from the IMF presentation slide above and compared them to the United States' youth unemployment averages from October 2010-October 2011 from the BLS's CPS data:

I can't find what constitutes "youth" for "youth unemployment" in the IMF's definition, and I'm not even sure if it is consistent across the different countries they estimated. As such, I'm including ages 16-19 and ages 16-24, though I believe they are looking at 16-24. For the 16-19 age group, we are at the same level of unemployment as Egypt and well above the region as a whole. At the broader 16-24 range, we are above Syria and Morocco, which both saw large-scale movements in the Arab Spring.

One potential explanation for the high level of youth unemployment in MENA countries is that they have huge demographic issues to deal with -- they have a massive wave of people under 35 years of age to assimilate into their economies. What's our excuse, other than confidence fairy terror spells and a desire to go after public sector workers? And given this, how could we ever say youth unemployment in the United States' Lesser Depression isn't a "time bomb"?

I have to admit I'm a bit hardened to the various charts I'm able to put together from the Bureau of Labor Statistics' data, but this graph of the employment-to-population ratio for 16-24-year-olds going back to 1948 floored me:

Remember that the increase from the 1950s onward reflects women entering the labor force. And notice how it doesn't improve after the early 2000s recession. Every age group has seen a substantial drop in the employment-population ratio, but no other group I've seen comes close to this plummet. For the first time in half a century, a majority of young people aren't working.

Mike Konczal is a Fellow at the Roosevelt Institute.

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A Two-Step Solution to the Student Loan Crisis

Nov 7, 2011Mike Konczal

Let's roll back damaging bankruptcy "reforms" and give Americans the same treatment banks have experienced.

Let's roll back damaging bankruptcy "reforms" and give Americans the same treatment banks have experienced.

Due to legal decisions about how to structure the rules governing student debt, student loans stay forever, are virtually impossible to discharge under hardship, churn fees when they go bad, and creditors can access anything, including Social Security, in their attempts to be repaid. This is significantly more strict than the rules for other kinds of debt. Here's a great way to describe the legal frame we use to treat student loans, from Elizabeth Warren in 2007: "Why should students who are trying to finance an education be treated more harshly than someone who negligently ran over a child or someone who racked up tens of thousands of dollars gambling?"

So what's the solution? There's a short-term and a long-term problem. The long-term problem, in my mind, can only be solved by unapologetically embracing the promise of a "public option": free public universities that are capable of constraining cost inflation. This requires us to also face and resist the corporatization and privatization of our existing public universities.

But that doesn't get us out of the current situation. What can be done? I propose two things:

1. Party Like It's 1989

Instead of being so bold as to ask that people trying to invest in themselves, and ultimately the country, are treated as fairly as someone who negligently ran over a child, I'm just going to suggest we just do a mulligan on the 1990s and 2000s student loan "reforms."

Here's a quick, high-level history of student loans and the bankruptcy code, courtesy of University of Illinois law professor Bob Lawless:

In 1976, Congress first added an exception to the bankruptcy discharge dealing with student loan debt. That exception was continued in the 1978 Bankruptcy Code, and the exception was expressly limited to student loans from a governmental unit or nonprofit institution. Even then a student loan could be discharged if more than five years had passed since the loan first became due (typically after graduation) or if the debtor could show payment of the student loan would cause undue hardship, which is a difficult burden to show.  In 1990, five years was changed to seven years and in 1998 was dropped altogether, leaving undue hardship the only reason a court could discharge a student loan from a governmental unit or nonprofit institution. As part of the 2005 changes to the U.S. bankruptcy law, Congress again amended the student loan discharge exception to allow even loans from for-profit lenders to be excepted from the bankruptcy discharge.

Let's put that in a chart, adding the other issues of Social Security and no statute of limitations I talked about here:

Why not just undo the rules from the 1990s and 2000s? It is hard to see these as anything other than a giant subsidy to private agents. If you look at Sallie Mae's leaked lobbying documentation, you'll find that "[t]he number two item... wasn't increasing federal student loan limits or beating back the loan consolidation companies... It was bankruptcy; specifically, preserving the special status that private student loans gained in the broad changes to bankruptcy laws that Congress enacted in 2005. To Sallie Mae, that provision is the key to its version of 'private credit economics.'" There's little evidence these reforms increased access for anyone and functioned more as an easily captured subsidy.

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We can keep nondischargeability for five years if people are concerned about moral hazard. That concern emanates from the 1970s and stories of doctors declaring bankruptcy the day after they graduated medical school. This will at least stabilize and formalize the system of indenture that is required for people to fully develop their talents and abilities in our country, instead of our system that currently keeps people for life. Let's regraph what it looks like when we go back to 1989:

That looks way better. But how do we deal with the current affordability crisis? Getting unemployment down and incomes up are an obvious solution. Sarah Jaffe suggests mass debt forgiveness, Justin Wolfers disagrees. I have a suggestion that splits the difference.

2. Convert the American People into a Bank

A miraculous thing happened in late September 2008. Goldman Sachs and Morgan Stanley were reborn from investment banks into bank holding companies by a decree of the Federal Reserve. Normally getting a license like this takes a year and a half and requires following extensive regulatory rules. The Federal Reserve did it over a weekend for Goldman, Morgan Stanley, and a host of other financial firms.

This allowed them many banking privileges that helped during the crisis, including access to the discount window, but none of the scrutiny that normally comes with them. As Alan Grayson and others noted, Goldman's CFO bragged that "our model never really changed." They got to escape normal banking regulatory rules during the subsequent time period. These "deathbed conversions" from investment bank to bank holding company were yet another part of the extensive way the bailouts worked beyond TARP, and they were proof that the firms were Too Big To Fail.

Since regular Americans are also in crisis mode and Too Big To Fail, why not symbolically declare regular Americans a bank too? Why not also do a "deathbed conversion" on those who are suffering under the burden of heavy student debts and low incomes and let them immediately refinance all their student loan rates at the current ultra-low discount window rate? Why not mass refinance them into the current low rates the financial sector enjoys? This would give the 99% just a hint of the kind of total government support places like Goldman Sachs have experienced.

We've thrown open the floodgates for the financial sector. Why not for regular Americans? There have been past congressional efforts to lower the interest rate, ones that passed the House, so this is feasible. And it would be the logical conclusion of the crisis we've just lived through, delivering stimulus to the economy and reducing the burden of debts on those trying to rebuild the economy. Open the discount window.

Crisis Economics

For the economics people, this two-step solution helps with the liquidity problem (cheaper refinancing), the solvency problem (bankruptcy), and the balance sheet problem (lower rates, more purchasing power) -- the three problems one needs to deal with in the aftermath of a financial crisis. In terms of monetary policy, those who have been carrying out QE have been begging for policymakers to find ways to get ultra-low rates to the front lines as quickly as possible, most notably in housing policy. As Bernanke said at his latest press conference:

One area where monetary policy has been blunted, the effects have been blunted, has been the mortgage market where very tight credit standards have prevented many people from purchasing or refinancing their homes and therefore the low mortgage rates that we've achieved have not been as effective as we had hoped. So, monetary policy maybe is somewhat less powerful in the current context than it has been in the past but nevertheless it is affecting economic growth and job creation.

That's Fed speak for the fact that the administration dropped the ball on the mortgage market (HARP, especially) and has in turn screwed up its ability to do its jobs in helping the economy. But what is good for housing is also good for student loans. Aggressive monetary policy flowing into student loans would have a similar amplification, which makes targets more credible and gets more money being spent, which makes balance-sheet repair easier and has a general virtuous cycle on demand.

Wins all around. So what are the problems?

Mike Konczal is a Fellow at the Roosevelt Institute.

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What Would a Good Jobs Report Have Looked Like?

Nov 4, 2011Mike Konczal

The same old miserable numbers came out today, nowhere near what we need.

I feel like I'm in the movie Groundhog Day when it comes to the job numbers. I wake up on the first Friday each month to the same story -- subpar job growth, no budging in key indicators, the insanity of the "anti-stimulus" of bleeding government jobs -- and then wake up to it again next month. This month looks like the past dozen: 80,000 jobs were created, while the government sector shed 24,000 jobs.

The same old miserable numbers came out today, nowhere near what we need.

I feel like I'm in the movie Groundhog Day when it comes to the job numbers. I wake up on the first Friday each month to the same story -- subpar job growth, no budging in key indicators, the insanity of the "anti-stimulus" of bleeding government jobs -- and then wake up to it again next month. This month looks like the past dozen: 80,000 jobs were created, while the government sector shed 24,000 jobs.

We need a list of other words because I'm exhausted with describing how disappointing the job numbers are, especially when the results are so obvious given a lack of movement on fiscal and monetary stimulus. So let me instead describe what a good jobs numbers report would have looked like.

First of all, there would have been job growth that gets us back to full employment instead of job growth that is slightly around the rate of population growth. There would be well over 150,000 jobs created a month, ideally above 200,000 -- there's a lot of catching up to do. The key indicator to watch is the employment-population ratio, which is the percentage of the workforce that has a job. As unemployment only indicates the number of people actively searching for a job, and many are dropping out of the labor force and giving up on finding a job, the unemployment rate tells us less and less. And if the population is growing faster than the number of jobs created, we are losing out. The employment-population ratio tells us the actual rate at which we are employing people. It is currently at 58.4 percent, the same it was in January 2011.

A tourniquet would have been applied to the bleeding of public sector jobs. This is the worst time to push government workers into the ranks of the unemployed. With slack capacity, a high number of unemployed people, and negative real interest rates, we can't afford a war against government workers. It's a war in which we've lost 250,000 government jobs since January, with 77,000 in the "local government education" category (in other words, public school teachers).

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But here's President Obama in the 2010 State of the Union giving the wrong message:

Now, I know that some in my own party will argue that we can't address the deficit or freeze government spending when so many are still hurting. And I agree -- which is why this freeze won't take effect until next year -- (laughter) -- when the economy is stronger. That's how budgeting works. (Laughter and applause.) But understand -- understand if we don't take meaningful steps to rein in our debt, it could damage our markets, increase the cost of borrowing, and jeopardize our recovery -– all of which would have an even worse effect on our job growth and family incomes.

Given that 2011 has been a lost year for the economy so far, this kind of deficit hawk aggression was the exact wrong call.

What else would a good report include? Strong gains in wages and hours worked. This is something we'd see more of as the economy returned to full employment, but it is worth keeping an eye on. The lack of these gains is a good sign that there is a ton of slack in the economy -- and that those who have been freaking out about runaway inflation got it exactly wrong.

The duration of unemployment would have come down, and not because people are dropping out of the labor force. We saw a large decline this past month in the duration of unemployment: 40.5 to 39.4 (mean), 22.2 to 20.8 (median). We also saw a large drop in the number of people in the long-term unemployed category. More analysis is needed, but it certainly looks like many of people in this category are simply giving up on finding a job and dropping out of the labor force altogether.

What we really need is a healthy economy. The way we get there is a fiscal stimulus by any means necessary, aggressive monetary policy, and putting the housing market in order. What are the chances we'll see changes on any of these fronts?

Mike Konczal is a Fellow at the Roosevelt Institute.

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Six Rebuttals to the Argument that Congress or Fannie and Freddie Caused the Crisis

Nov 3, 2011Mike Konczal

Here are some counter arguments the next time someone claims the government caused the crash.

Sigh. Mayor Bloomberg:

Here are some counter arguments the next time someone claims the government caused the crash.

Sigh. Mayor Bloomberg:

It was not the banks that created the mortgage crisis. It was, plain and simple, Congress, who forced everybody to go and give mortgages to people who were on the cusp... But they were the ones who pushed Fannie and Freddie to make a bunch of loans that were imprudent, if you will. They were the ones that pushed the banks to loan to everybody.

It seems there are people who can't accept that some markets, particularly financial ones, are disastrous when completely unregulated -- and thus find any far-fetched excuse to blame the government instead. Since this line of argument continues to pop up, how should one respond to the idea that Congress and Fannie Mae/Freddie Mac caused the housing crisis? Here are six facts to back you up:

1. Private markets caused the shady mortgage boom: The first thing to point out is that the both the subprime mortgage boom and the subsequent crash are very much concentrated in the private market, especially the private label securitization channel (PLS) market. The Government-Sponsored Entities (GSEs, or Fannie and Freddie) were not behind them. The fly-by-night lending boom, slicing and dicing mortgage bonds, derivatives and CDOs, and all the other shadiness of the mortgage market in the 2000s were Wall Street creations, and they drove all those risky mortgages.

Here's some data to back that up: "More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions... Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year."

As Center For American Progress's David Min pointed out to me, the timing doesn't work at all: "But from 2002-2005, [GSEs] saw a fairly precipitous drop in market share, going from about 50% to just under 30% of all mortgage originations. Conversely, private label securitization [PLS] shot up from about 10% to about 40% over the same period. This is, to state the obvious, a very radical shift in mortgage originations that overlapped neatly with the origination of the most toxic home loans."

2. The government's affordability mission didn't cause the crisis: The next thing to mention is that the "affordability goals" of the GSEs, as well as the Community Reinvestment Act (CRA), didn't cause the problems. Randy Krozner summarized one of the better studies on this so far, finding that "the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis." The CRA wasn't nearly big enough to cause these problems.

I'd recommend checking out "A Closer Look at Fannie Mae and Freddie Mac: What We Know, What We Think We Know and What We Don't Know" by Jason Thomas and Robert Van Order for more on the GSEs' goals, which, in addition to explaining how their affordability mission is a distraction, argues that subprime loans were only 5 percent of the GSEs' losses. The GSEs also bought the highly rated tranches of mortgage bonds, for which there was already a ton of demand.

3. There is a lot of research to back this up and little against it: This is not exactly an obscure corner of the wonk world -- it is one of the most studied capital markets in the world. What has other research found on this matter? From Min:

Did Fannie and Freddie buy high-risk mortgage-backed securities? Yes. But they did not buy enough of them to be blamed for the mortgage crisis. Highly respected analysts who have looked at these data in much greater detail than Wallison, Pinto, or myself, including the nonpartisan Government Accountability Office, the Harvard Joint Center for Housing Studies, the Financial Crisis Inquiry Commission majority, the Federal Housing Finance Agency, and virtually all academics, including the University of North Carolina, Glaeser et al at Harvard, and the St. Louis Federal Reserve, have all rejected the Wallison/Pinto argument that federal affordable housing policies were responsible for the proliferation of actual high-risk mortgages over the past decade.

The other side has virtually no research conducted that explains their argument, with one exception that I'll cover below.

4. Conservatives sang a different tune before the crash: Conservative think tanks spent the 2000s saying the exact opposite of what they are saying now and the opposite of what Bloomberg said above. They argued that the CRA and the GSEs were getting in the way of getting risky subprime mortgages to risky subprime borrowers.

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My personal favorite is Cato's "Should CRA Stand for 'Community Redundancy Act?'" from 2000 (here's a write-up by James Kwak), which argues a position amplified in its 2003 Handbook for Congress financial deregulation chapter: "by increasing the costs to banks of doing business in distressed communities, the CRA makes banks likely to deny credit to marginal borrowers that would qualify for credit if costs were not so high." Replace "marginal" with Bloomberg's "on the cusp" and you get the same idea.

Bill Black went through what AEI said about the GSEs during the 2000s and it is the same thing -- that they were blocking subprime loans from being made. In the words of Peter Wallison in 2004: "In recent years, study after study has shown that Fannie Mae and Freddie Mac are failing to do even as much as banks and S&Ls in providing financing for affordable housing, including minority and low income housing."

5. Expanding the subprime loan category to say GSEs had more exposure makes no sense: Some argue that the GSEs had huge subprime exposure if you create a new category that supposedly represents the risks of subprime more accurately. This new "high-risk" category is associated with a consultant to AEI named Ed Pinto, and his analysis deliberately blurs the wording on "high-risk" and subprime in much of his writings. David Min broke down the numbers, and I wrote about it here. Here's a graphic from Min's follow-up work, addressing criticism:

min_updated

Even this "high risk" category isn't risky compared to subprime and it looks like the national average. When you divide it by private label, the numbers are even worse. Private label loans "have defaulted at over 6x the rate of GSE loans, as well as the fact that private label securitization is responsible for 42% of all delinquencies despite accounting for only 13% of all outstanding loans (as compared to the GSEs being responsible for 22% of all delinquencies despite accounting for 57% of all outstanding loans)." The issue isn't this fake "high risk" category, it is subprime and private label origination.

The Financial Crisis Inquiry Commission (FCIC) panel looked carefully at this argument and also ended up shredding it. So even those who blame the GSEs can't get the numbers to work when they make up categories.

6. Even some Republicans don't agree with this argument: The three Republicans on the FCIC panel rejected the "blame the GSEs/Congress" approach to explaining the crisis in their minority report. Indeed, they, and most conservatives who know this is a dead end, tend to take a "it's a whole lot of things, hoocoodanode?" approach.

Peter Wallison blamed the GSEs when he served as the fourth Republican on the FCIC panel. What did the other three Republicans make of his argument? Check out these released FCIC emails from the GOP members. They are really fun, because you can see the other Republicans doing damage control and debating whether Wallison and Pinto were on the take for making this argument -- because the argument makes no sense when looking at the data.

There are lots of great quotes: "Re: peter, it seems that if you get pinto on your side, peter can't complain. But is peter thinking idependently [sic] or is he just a parrot for pinto?", "I can't tell re: who is the leader and who is the follower," "Maybe this email is reaching you too late but I think wmt [William M. Thomas] is going to push to find out if pinto is being paid by anyone." And then there's the infamous event where Wallison emailed his fellow GOP member: "It's very important, I think, that what we say in our separate statements not undermine the ability of the new House GOP to modify or repeal Dodd-Frank."

The GSEs had a serious corruption problem and were flawed in design -- Jeff Madrick and Frank Partnoy had a good column about the GSEs in the NYRB recently that you should check out about all this -- but they were not the culprits of the bubble.

Mike Konczal is a Fellow at the Roosevelt Institute.

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Foreclosures, Halloween Costumes, and How the 1% Views the Law

Oct 31, 2011Mike Konczal

Disgusting pictures that have surfaced from a foreclosure mill's Halloween party reveal a deeper theory of whom debt laws should protect.

Disgusting pictures that have surfaced from a foreclosure mill's Halloween party reveal a deeper theory of whom debt laws should protect.

If you haven't already, you should read Joe Nocera's column "What the Costumes Reveal." He includes a slideshow of six photos from a Halloween party last year at the foreclosure mill law firm Steven J. Baum, in which the associates were all dressed as homeless people who were just evicted. Part of the office featured a rundown neighborhood destroyed by mass foreclosures and the sign "Baum Estates" hanging above it. Another picture shows a consumer attorney with her eyes cut out. Baum has recently settled on charges that it was manufacturing and robosigning foreclosure documents for $2 million.

It is easy to dismiss this as a particular kind of awfulness, just jerks run amok. Perhaps they are going through some cognitive dissonance from the misery they are inducing. Maybe they are taking on the roles created by a system of aggressive corner cutting. Maybe. But I think there's a more powerful ideology behind their actions that gets at how the 1% and elites view the rules governing troubled debt in this country and how they should function.

Let's look closely at what the signs say. The "Baum Estates" sign hanging over a rundown shantytown shows that the only concern is the ability to collect, without concern for the community. Parts of the procedures necessary for eviction -- “I was never served," "order to show cause" -- are held in contempt. They convey the idea that consumers have no valid excuses when it comes to bad debt. They vilify consumer advocates. They mock the idea that consumers should have any legal recourse during foreclosure, that banks and creditors need to follow basic rules, and that any concerns other than creditors' (rundown neighborhoods, for example) should get consideration.

This notion that those being foreclosed on should be embarrassed about fighting the action and that they, not the banks, are the ones undermining the system has been voiced elsewhere. From last year, Arnold Kling wrote that:

However, the %&*#^ lawyers for the borrower come in and claim standing to challenge the foreclosure on the grounds that the foreclosure notice was sent by someone who has not properly documented that he is the noteholder. Legally, they may have standing to do this. Morally, they do not. The sensible policy would be for the government to step in and legislate that borrowers have no standing to sue unless they are claiming to have complied with the terms of the note.

People calling out banks for not following the rules are immoral, and the government should step in to make sure that the laws governing debts work to protect the maximum return for creditors. And Mark Calabria, director of financial regulation studies at the Cato Institute, writes that: "The current efforts by states to use technical mistakes by lenders to allow borrowers to remain in homes without paying could ultimately undermine the very concept of a mortgage."

"Technical mistakes." Notice the blame in Calabria's comment. Banks, by not following the trust and REMIC laws that constitute the securitization process, aren't the ones undermining the process in which banks can legally bring foreclosures to court, and thus the concept of a mortgage. The states, and ultimately the homeowners, are undermining it by pointing out that the banks haven't followed the rules. This comment is consistent with the idea that the only reason to have laws is to protect creditors from debtors.

This view of the world has its roots in a theory of how the rules governing debt, especially bankruptcy, should function in this country. A heuristic can be used to understand it -- it's called the creditor's bargain. In this idea, the rules should only exist to the extent that they benefit the creditor's ability to collect money. It's simple: if a law, custom, norm, or rule helps creditors collect when things go wrong, it is a good one. If it takes into account concerns other than creditors' return -- say, destroyed neighborhoods, whether banks follow the rules, etc. -- they are worthless.

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This theory imagines, making a perverse mockery of the egalitarianism of Rawls' theory, that all the 1% and all the creditors were put behind a veil of ignorance where they did not know what kind of 1% and creditor they'd be. Maybe they'd have collateral that was sensitive to the business cycle; maybe they'd be slow to notice trouble and thus slow to collect. Given the wide variety of problems that could occur, and the way debtors could play them off each either, the creditor class bargains on rules that benefit them all according to the rank of their claims. And benefitting creditors is the only thing that the rules of debt should consider.

In this world, debtors probably could challenge the legality of their foreclosures, making sure proper procedure was followed. But that's not what the rules are meant to do. The rules are just there to benefit creditors, not debtors. It is in this world that those Halloween costumes make perfect sense. I love pointing out how passionate libertarians like Calabria have been all for the sanctity of contract when it comes to bankruptcy reforms like "cramdown," but when it comes to the idea that all these mortgages are unsecured debt because of bank-led abuses in the chain of property records, they get angry at debtors, even though they are still holders of contracts. But again, if the law is just there to protect creditors against the difficulty of collecting on debtors, not to provide a level playing field for those with debt, it makes perfect sense.

It also makes perfect sense that creditors and bankers haven't gone to jail, but debtors who took out a liar's loan have gone to jail. It makes sense that elites, like former Peterson Institute CEO David Walker, want to see debtors' prisons on the agenda while no elites talk about jail sentences for the abuses in property law. The law is there to coordinate the best interests of creditors, not provide rules and protection for debtors.

(If you thought classical liberalism/libertarianism was all about how contracts, laws, and markets provide level playing fields and protection from abuses of the powerful -- how they take feudal privileges and melt them into air -- and not about how they reconfigure the government, customs, and laws to be protectors of capital and hierarchy, you need to get a copy of The Reactionary Mind, pronto.)

Guess which law professor, almost 25 years ago, provided the defining critique of the intellectual theory that debt laws and bankruptcy should only narrowly consider the interests of creditors, and has worked to provide a counter theory? That's right, Elizabeth Warren. Every time you hear that the banks are afraid of her folksy wisdom and charming accent, also remember that they are afraid of her ability to demolish legal theory that puts the banks and creditors at the center of the law. She noted that the economic value of bankruptcy is only one part, and that our understanding of bankruptcy should have four goals: "(1) to enhance the value of the failing debtor; (2) to distribute value according to multiple normative principles; (3) to internalize the costs of the business failure to the parties dealing with the debtor; and (4) to create reliance on private monitoring."

Warren also noted that bankruptcy was "an attempt to reckon with a debtor's multiple defaults and to distribute the consequences among a number of different actors. Bankruptcy encompasses a number of competing -- and sometimes conflicting -- values in this distribution." For instance, the costs of a foreclosure to a community are a major externality which should be considered. In the same paper she writes, “bankruptcy policy also takes into account the distributional impact of a business failure on parties who are not creditors and who have no formal legal rights to the assets of the business."

Though the Halloween pictures are disgusting, they are a symptom of a larger view of the way the law should work that is even worse -- one in which debtor's protections are mocked, the rule of law is ignored, and shantytowns proudly display their creditor's name over them. This is the way many elites view the rules when it comes to debt. Thankfully, there is more and more mass opposition to this perversion of the law.

Mike Konczal is a Fellow at the Roosevelt Institute.

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Student Loans: The Debt You Carry for Life

Oct 26, 2011Mike Konczal

Garnishing Social Security to pay off student debt ensures that the economic crisis will haunt today's graduates well into their retirement.

Garnishing Social Security to pay off student debt ensures that the economic crisis will haunt today's graduates well into their retirement.

Put on your monocle and top hat and pretend you are part of the 1% for a minute. Your first task is to write a set of legal codes about the collection of debt in this country, specifically student debt. And you want to be kind of a jerk about it. What's the one thing you could do for student debt that you don't do for any other type of debt, one that would radically shift the relationship between student loan creditors and debtors both practically and symbolically?

How about this, from the Debt Collection Improvement Act of 1996: "Notwithstanding any other provision of law... all payments due to an individual under... the Social Security Act... shall be subject to offset under this section."

What this means is that when it comes to collecting on student loans, the government can take funds from your Social Security check. There are rules to the offset: the first $750 a month can't be touched, and only 15 percent of benefits above that can be taken to pay back student loans. But this is still a radical break in the social contract with no equivalent for private debts.

If you look at the original text of the Social Security Actyou can see that Social Security payments were not "subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law." My man Franklin Delano Roosevelt understood that basic economic freedom, one part of which is freedom from utter poverty in old age, would come under assault from creditors and debt and that it was important to clear a space that provides a baseline of income that clever debt collectors can't get to. Social Security is supposed to be just one leg of a three-legged stool for retirement, the amount necessary to keep poverty at bay, and it is crucial that it is protected.

Yet we are willing to snap this leg off the stool as payment for, of all things, loans people take out to educate themselves. In a dynamic economy, education should be risky -- whole occupations and industries come and go with technology, and what was a wise investment at one point is a bad one later on. But there need to be rules for what happens when these risks go bad. We have removed every last rule on this kind of debt.

According to the Project on Student Debt, the average debt load for graduating seniors in 1996, when this law was passed, was $12,750. Now it is over $23,200. Also note that, post-1991 and upheld by the Supreme Court in 2005 as it regards Social Security payments, student loan collection has no statute of limitations. This is one of the very few kinds of debts without such limitations. As this site puts it, "Creditors and debt collectors have a limited time window in which to sue debtors for nonpayment of credit card bills... In most states, the statute of limitations period on debts is between three and 10 years." But in this case, the Department of Education notes, "[b]y virtue of section 484A(a) of the Higher Education Act, statute of limitations of no kind now limits Department’s or the guaranty agency's ability to file suit, enforce judgments, initiate offsets, or other actions, to collect a defaulted student loan."

It is impossible to discharge bad debts in this system under our normal mechanism for handling bad debts -- bankruptcy. When delinquencies happen -- say when you graduate into a recession that elites refuse to fix -- you get thrown into the fee-churning world of private debt collection. This world was memorably described by law professor Ronald Mann as a "sweat box" of fees and other ways of increasing the total debt owed. With fees churning, there's no date after which creditors can no longer go after your student loan payment, and they can even go after the baseline measure society has created to prevent poverty in old age.

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Now with all this in mind, let's quickly examine the New York Fed's recent release of its Quarterly Report on Consumer Credit, specifically this delinquency data:

Student loan delinquencies look to be slowly increasing over time, while credit cards and mortgages go up and down. On the flip side of this dynamic is the amount of loans being "charged off" by private institutions. These are loans that will never be fully replayed, and a cost-benefit analysis tells the lender that it is no longer worth trying to collect the full amount. These are tough estimates to get, but Karen Dynan of the Brookings Institute has one estimate in her "Household Deleveraging and the Economic Recovery":



As credit card and housing debt become unbearable, there's a point at which they get written down. That point is too high, but because of various laws regarding debt collection that shift the strategy and potential end results between the actors, there's a logic to it. As far as I can tell, there's simply no equivalent chart, or even logic, for student loans. Because of legal choices we've made in how to set up this relationship, it stays forever, is virtually impossible to discharge under hardship, churns fees when it goes bad, and creditors can get to anything, including Social Security, to get it repaid. Meanwhile, we have a Great Depression-like event that is throwing college graduates into a labor market that is far too weak.

It is good to see President Obama, as part of his "We Can't Wait" campaign, pushing to get some fencing around the rules for future student loan debtors through an executive order. According to this press release, the government will accelerate the implementation of laws "to limit loan payments to 10 percent of their discretionary income starting in 2012 [instead of 2014]. In addition, the debt would be forgiven after 20 years instead of 25, as current law allows." However, according to an early analysis of this move, "[b]orrowers with loans from 2007 and earlier will not be eligible. Likewise, borrowers who don’t have at least one loan from 2012 or later, like students who graduated in 2011 or earlier, also won’t be eligible. Borrowers who are already in repayment will not be eligible." So the problem remains for now.

How is this not setting a generation up for complete disaster?

Mike Konczal is a Fellow at the Roosevelt Institute.

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What Would Keynes Do? More Stimulus, More Monetary Policy

Oct 24, 2011Mike Konczal

Keynes's advice to FDR still holds overwhelmingly true for combatting our own crisis.

Keynes's advice to FDR still holds overwhelmingly true for combatting our own crisis.

The Franklin D. Roosevelt President Library and Museum has put scans up of several important documents that highlight FDR's transition from trying to balancing the budget in the Great Depression to, after the crash of 1937, his ability to see that Keynesian deficit spending could help the recovery. The page that has the resources, plus a history, is located here: FDR: From Budget Balancer to Keynesian.

It includes several campaign speeches by Roosevelt as they evolved over the 1930s, and it also includes John Maynard Keynes's 1938 private letter to President Roosevelt. The Keynes letter is great. He is a model of clarity, wit, and seriousness with a towering intellect on all matters economic.

After the fiscal and monetary contraction that brought on the crash of 1937, liberals in the Roosevelt administration weren't sure what to do. Keynes, in his letter, outlined a five step plan including both what had just worked and what to continue doing until the economy healed:

This is how we should judge our current elites and opinion leaders. How well do they understand this game plan for addressing a massive crisis like the one we are in, and under what economic ideology and rationality are they deviating from it? Right now it is a full-time job trying to convince elites that this is the right program for the country, rather than rewriting federal and state law to businesses' liking and focusing obsessively on the deficit. So little has been learned, and what we've learned has been forgotten.

Keynes also noted that getting the housing market straightened out is one of the best ways to handle the Depression. "Housing is by far the best aid to recovery because of the large and continuing scale of potential demand; because of the wide geographical distribution of this demand; and because the sources of its finance are largely independent of the Stock Exchanges." Getting the housing market right is also an uphill battle for our recession and administration.

Keynes Does the Twist

There's a debate within left-liberal economic circles over the relative importance of monetary versus fiscal policy in dealing with the economic downturn. Often you hear that all the stuff Bernanke is doing, from QE to Operation Twist, is a rejection of what Keynes would advise if he was living today.

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Since we are looking at Keynes' letters to President Roosevelt, let's look at his 1933 open letter to FDR, published in the New York Times. Among other recommendations, he advises the new administration to do two things on the domestic front (my bold):

If you were to ask me what I would suggest in concrete terms for the immediate future, I would reply thus... In the field of domestic policy, I put in the forefront, for the reasons given above, a large volume of Loan-expenditures under Government auspices. It is beyond my province to choose particular objects of expenditure. But preference should be given to those which can be made to mature quickly on a large scale, as for example the rehabilitation of the physical condition of the railroads... You can at least feel sure that the country will be better enriched by such projects than by the involuntary idleness of millions.

I put in the second place the maintenance of cheap and abundant credit and in particular the reduction of the long-term rates of interest. The turn of the tide in great Britain is largely attributable to the reduction in the long-term rate of interest which ensued on the success of the conversion of the War Loan. This was deliberately engineered by means of the open-market policy of the Bank of England. I see no reason why you should not reduce the rate of interest on your long-term Government Bonds to 2½ per cent or less with favourable repercussions on the whole bond market, if only the Federal Reserve System would replace its present holdings of short-dated Treasury issues by purchasing long-dated issues in exchange. Such a policy might become effective in the course of a few months, and I attach great importance to it.

His first suggestion constitutes fiscal stimulus. But his second suggestion is urging the Federal Reserve to replace its short-term bonds with long-term bonds to bring down the rates on the long-term bonds -- just like Operation Twist! Equally interesting, instead of naming an amount of Treasuries to buy, like $800 billion or $2 trillion, Keynes says to hit a specific rate. The Federal Reserve can either set a rate or an amount, and we've been doing QE through setting purchase amounts. Maybe this other way that he suggests, having QE set a target for long-term rates, is a better way of doing QE? He's a pretty smart fellow.

Keynes "terrified lest progressives causes...suffer injury"

Going back to the 1938 letter, I find Keynes' conclusion chilling.

In this letter, Keynes is saying that if FDR didn't handle the recovery correctly the whole New Deal would be at risk. Full employment is hard to accomplish, very hard, but it isn't impossible. And the stakes are higher than just the economic recovery -- failure means that progressive governance and polices are both at "risk to their prestige" from a prolonged downturn. Taking the economic downturn "too lightly" puts all of it -- from responsibly combating global warming, to bringing fairness and justice to those working in the shadows of labor market, to making sure everyone has access to insurance against sickness and poverty in old age, to the rest of the liberal governance project -- at risk. And, as we see the years pass by, it is too easy to lose precious time.

Mike Konczal is a Fellow at the Roosevelt Institute.

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How to Make Banks Really Mad: Occupy Foreclosures

Oct 19, 2011Mike Konczal

Could the next step after camping in Zuccotti Park be camping out in homes facing foreclosure?

Could the next step after camping in Zuccotti Park be camping out in homes facing foreclosure?

As people think a bit more critically about what it means to "occupy" contested spaces that blur the public and the private and the boundaries between the 99% and the 1%, and as they also think through what Occupy Wall Street might do next, I would humbly suggest they check out the activism model of Project: No One Leaves. It exists in many places, especially in Massachusetts -- check out this Springfield version of it -- and grows out of activism pioneered by City Life Vida Urbana. It is similar to activism done by the group New Bottom Line and other foreclosure fighters. Here is PBS NewsHour's coverage of the movement.

The major goal of Project: No One Leaves is to mobilize as many resources as possible to protect those going through foreclosure and keep them in their homes as long as possible in order to give them maximum bargaining power against the banks. For those focused on "weapons of the weak," this moment -- with banks and creditors using state power to conduct massive amounts of foreclosures, thus impoverishing poor neighborhoods through a financialized rationality -- is a crucial opportunity for resistance. From the webpage:

Post-Foreclosure Eviction Defense. We mobilize tenants and former homeowners living in recently or about to be foreclosed homes (bank tenants) to stop evictions, protect Springfield’s housing and communities, and mobilize bank tenants to fight back against major lending institutions and banks that are tearing our communities apart.

Their model, a two-step process known as the Sword and the Shield, works:

“The Sword”. Encouraging residents to stay in their homes, and to make their stories public, we organize blockades, vigils and other public actions to exert public pressure on the banks. The sword works together with:

“The Shield”: We inform bank tenants of their rights and work with legal services & progressive lawyers, to use aggressive post-foreclosure eviction defense to get eviction cases dismissed, win large move-out settlements (if it makes sense for that family/person), and force the banks to reconsider foreclosure evictions.

They use public action through blockades, protests, and marches, along with smart legal advice on how to maximize legal resistance to forced removal. Beyond the fact that this is a major space for resistance, it is also a great way to mobilize people. And as JW Mason notes, there is power in having a clear opponent as well as a special type of bargaining power people might not realize they have:

On Oct. 23, the FDR Library presents a free forum on FDR’s foreign policy advisers. Click here to find out how you can join the conversation!

Homeowners who still have title have a lot to lose and are understandably anxious to meet whatever conditions the lender or servicer sets. But once the foreclosure has happened, the homeowner, paradoxically, is in a stronger negotiating position; if they're going to have to leave anyway, they have nothing to lose by dragging the process out, while for the bank, delay and bad publicity can be costly. So the idea is to help people in this situation organize to put pressure -- both in court and through protest or civil disobedience -- on the banks to agree to let them stay on as tenants more or less permanently, at a market rent.

But there's another important thing about No One Leaves: They're angry. The focus isn't just on the legal rights of people facing foreclosure, or their real chance to stay in their homes if they organize and stick together, it's on fighting the banks. There's a very clear sense that this is not just a problem to be solved, but that the banks are the enemy. I was especially struck by one middle-aged guy who'd lost the home he'd lived in for some 20 years to foreclosure. "At this point, I don't even care if I get to stay," he said. "Look, I know I'm probably going to have to leave eventually. I just want to make this as slow, and expensive, and painful, for Bank of America as I can." Everyone in the room cheered.

Slow, expensive and painful indeed -- it's like putting the banks through their own version of HAMP. Some may reply, "But wait, aren't foreclosures healthy for the economy? Mitt Romney thinks so." But according to the latest research using discontinuities across state lines, "estimates suggest that foreclosures were responsible for 15% to 30% of the decline in residential investment from 2007 to 2009 and 20% to 40% of the decline in auto sales over the same period." This research is being debated, but the opposite evidence -- that quicker foreclosures help the macroeconomy -- can't be found there or anywhere else.

So does this fit well with Occupy Wall Street's agenda? Given the rampant fraud and abuses in the current foreclosure chain, from manufacturing documents to "robo-signing" to fee-stacking to everything else, the Obama administration's refusal to support a serious investigation is a major example of the government-financial alliance and two-tier system of justice that those in Occupy Wall Street hate. Occupy Wall Street likes to pick spaces that are legally contestable -- like private-public parks -- and draw attention to real conflicts between those with power and those without. A residence post-foreclosure is one of those spaces.

This type of demand allows Occupy Wall Street to tap into already existing networks of foreclosure fighters, avoiding the risk of looking powerless by relying on Congress to do anything. And ultimately, it gets at the banks in a way occupations normally don't: Banks may or may not feel that they aren't appreciated enough because of these protests, but they'll definitely be mad if someone is disrupting their foreclosure mills through occupation and refusal to leave.

Mike Konczal is a Fellow at the Roosevelt Institute.

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