Attacks on the CFPB are Attacks on the Middle Class

Apr 13, 2011Bryce Covert

Without the work of the Consumer Financial Protection Bureau to put an end to predatory practices, struggling families will find themselves at the mercy of lenders. **Watch Bryce Covert discuss credit cards and consumer debt on CBS Money Watch's Ask The Experts today at 2pm ET.

This week's credit check: A family with two working parents and two young children needs to earn $67,920 a year for economic stability. The median American family saw earnings fall to $47,127 over the past decade.

Without the work of the Consumer Financial Protection Bureau to put an end to predatory practices, struggling families will find themselves at the mercy of lenders. **Watch Bryce Covert discuss credit cards and consumer debt on CBS Money Watch's Ask The Experts today at 2pm ET.

This week's credit check: A family with two working parents and two young children needs to earn $67,920 a year for economic stability. The median American family saw earnings fall to $47,127 over the past decade.

The GOP won lots of concessions in the deal to avert a shutdown late Friday night, but one of them might at first seem surprising: a requirement that the newly created Consumer Financial Protection Bureau be audited annually and studied by the Government Accountability Office. While it might seem weird to tack this on to a budget deal, the agency has become a point of focus for many in the Republican Party. On the Wednesday before the shutdown deal, House Republicans unveiled a host of legislation aimed to weaken it. Among their proposals is replacing the single job of director with a five-member committee, making it easier to overturn and veto its new rules, and preventing it from using its powers until it has a permanent director. All of this is likely to slow down the reforms and regulations that the agency has been tasked with creating in order to ensure a financial marketplace that works for consumers.

The GOP's attacks couldn't come at worse time for middle class Americans. While many studies look at life below the poverty line, a new study tried to figure out how much money is needed to simply attain financial stability. Its findings about how much it costs to meet basic needs without government support are stark:

According to the report, a single worker needs an income of $30,012 a year -- or just above $14 an hour -- to cover basic expenses and save for retirement and emergencies. That is close to three times the 2010 national poverty level of $10,830 for a single person, and nearly twice the federal minimum wage of $7.25 an hour. A single worker with two young children needs an annual income of $57,756, or just over $27 an hour, to attain economic stability, and a family with two working parents and two young children needs to earn $67,920 a year, or about $16 an hour per worker.

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Stack that up against the fact that median real income fell over the past decade for the first time. The median American family saw earnings fall from $52,388 a year in 2000 to $47,127 in 2010. If that family has two young children, it won't be able to meet the standard set by the study for economic stability. It will have to look beyond paychecks to make ends meet.

And when there's not enough cash coming in to pay for the necessities, families have to turn to debt. Americans who carry large debt loads aren't spending on clothes and toys but on necessities: health care, childcare, transportation, higher education, housing, you name it. As explained in "Up To Our Eyeballs," "A typical two-earner family today spends about 80 percent more on housing, 74 percent more on health insurance, and 42 percent more on transportation than did a typical one-earner family in the early 1970s. Many families spend thousands of dollars on childcare, a largely nonexistent expense a generation ago." And they're taking on debt to do so. Two-thirds of all students graduate with student loan debt, compared to just half in 1993, with a total likely to top $1 trillion this year. Total mortgage debt is at $13 trillion, up from $6 trillion in 1999. Families who have to use credit cards to pay for medical expenses owe more than those who don't -- they have an average of $11,623 in credit card debt, versus $7,964 who didn't use it to pay those bills.

This is where the Consumer Financial Protection Bureau and Elizabeth Warren's tireless efforts on behalf of consumers come into play. If Americans are taking on so much more debt in the face of falling wages, they open themselves up to the predatory practices these companies use to keep them mired in debt they can't pay off. But if Warren has her way, lenders will be forced to write agreements in plain language, give notice (and a reason) for raising interest rates and tacking on fees, and offer simple products that help consumers. While more has to be done to support wages that help families find financial stability, undermining this crucial step to make their safety net safer is plain irresponsible.

Bryce Covert is Assistant Editor at New Deal 2.0.

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Constitutional Convention Delegates Had Common Goal: Ending Democratic Finance

Apr 4, 2011William Hogeland

american_colonial_flagEconomic struggles played a huge role in the founding of our country, despite some attempts to revise that history.

american_colonial_flagEconomic struggles played a huge role in the founding of our country, despite some attempts to revise that history.

Edmund Randolph of Virginia kicked off the meeting we now know as the United States constitutional convention by offering his fellow delegates a key inducement to forming a new U.S. government. America lacked "sufficient checks against the democracy," Randolph said. A new government would provide those checks.

Randolph's listeners in Philadelphia in the spring of 1787 knew what he meant by "the democracy." And readers of this series probably will, too. He was talking about the 18th-century American popular finance movement, whose supporters agitated for policies to obstruct concentrated wealth and to give regular folks access to political power and economic equality. Amid depressions and foreclosures, ordinary people had long been rioting -- they called it "regulating" -- to pressure assemblies to restrain the merchant creditors, whose command of scarce gold and silver let them acquire immense wealth by lending at high, even predatory rates to the needier.

Then, with revolution against England, the popular finance movement turned its attention to changing the economic terms of American society. The 1776 Pennsylvania constitution, based in large part on ideas expressed by Thomas Paine in "Common Sense," smashed the ancient property qualification for voting and holding office. In Pennsylvania, new political leaders like the preacher Herman Husband, the weaver William Findley, and the farmer Robert Whitehill entered the assembly and began passing laws shutting down elite banking and requiring government to operate, for the first meaningful time anywhere, on behalf of ordinary people.

Democracy in Pennsylvania sent chills through elites of every kind throughout the newly independent country. Rioting for popular finance was bad enough, but rioting was temporary, spasmodic, and traditional. Debtors wielding legitimate political power to equalize economic life -- that was tantamount to a new kind of tyranny of the mob, hardly what Whig revolutionaries had fought England to gain. Neither Edmund Randolph nor other delegates of the Philadelphia convention, meeting in secret sessions in the Pennsylvania State House, felt any need for subtlety in seeking to suppress the political and economic equality burgeoning everywhere in America among "the democracy."

Present at the Philadelphia convention was the fabulously wealthy Pennsylvania financier and speculator Robert Morris, America's first central banker, no doubt licking his ample chops over the fulfillment, at long last, of his plan to wed nationhood to high finance. Yet it was the planter Randolph, not the financer Morris, who referred to "the plague of paper money," and he meant just what Morris meant. State legislatures' currency emissions and legal-tender laws depreciated the merchants' income from their loans; paper, the people's medium, built debt relief into money itself. Randolph also rued the country's difficulty in paying the investing class its interest on federal bonds. With those bonds, Morris had made private creditors into public creditors as well, swelling the domestic U.S. debt to vast proportions in an effort to connect national purpose to high finance.

Hence the need, Randolph said, for a national government with laws acting on all the people throughout the states. It's no coincidence that he also charged the delegates with repairing the federal government's military weakness. A debtor uprising in western Massachusetts known as Shays' Rebellion had marched on the state armory. That wasn't just a riot. It showed how far ordinary people might go in rejecting regressive taxes and policies giving investors huge paydays with public money. The United States, Randolph said, must be empowered to put down insurrections anywhere in the country.

So Randolph did indeed know what he meant by "the democracy," and his fellow delegates knew too. Why are historians typically so coy about the constitutional convention's financial purposes?

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The fight over those purposes is almost 100 years old. In 1913, the historian Charles Beard published "An Economic Interpretation of the Constitution of the United States." There Beard argued that because delegates of the convention came overwhelmingly from the bond-holding class, the government they put into effect represents less a glorious triumph of republican philosophy than a rearguard action of money elites to assure their own payoffs. Beard's startling contention was that the framers acted at least as much on financial self-interest as on principle.

If that contention remains startling, we can thank an immense effort, carried out over generations, to throw out not only Beard's particular economic interpretation of the convention, but along with it any suggestion that struggles between elites and ordinary Americans over public and private finance played a role in framing our Constitution. It's not surprising that many of the popular founding father biographers routinely avoid the issue. But entire careers in academic history -- major ones, like Edmund Morgan's -- have been largely dedicated to depicting a founding generation acting with perfect intellectual consistency almost entirely on principle. Wherever self-interest did arise, Morgan suggests (in his popular book "The Birth of the Republic" and elsewhere), the nature of the founding mission was such that it enabled even greed to inspire the founders to good. In that kind of history, everyday political struggles over money between ordinary Americans and American elites just don't play.

Beard did err. A pro-Jefferson, anti-Hamilton bent led him to associate self-interest mainly with the high-finance elites; he saw the land-based, state-sovereign philosophy of many planters as tending more naturally toward democracy, and he miscast people like Jefferson and Samuel Adams as Paine-like democrats. Randolph's opening speech at the convention shows a confluence between Virginia planters and Philadelphia financiers on ending democratic finance (men who would never again agree on anything agreed on that!). As the historian Staughton Lynd has wisely suggested, citing Robert Brown in an essay in the anthology "Towards a New Past", had Beard referred less specifically to bondholding, and more generally to property-owning, he would have been standing on firm ground.

But many take Beard's errors as ample cause for heaving big sighs of relief, writing off any mention of founding conflicts over money and finance as "economic determinism," and resting easy in a certainty that, the founders' own words to the contrary, economic struggles played no important role in making us who we are as a people. "No, that's Beard," runs the objection to mentioning founding economic struggles. "Haven't you heard? Beard's been debunked."

Debunking Beard is full of bunk. Beard's leading critic, the historian and right-wing activist Forrest McDonald (he served, for example, as chairman of the Goldwater for President Committee of Rhode Island), rejected Beard's economic analysis in favor of uncritical adoration for the founders' sheer greatness. In his 1958 book "We the People", McDonald purported to dismantle Beard's argument with his own supposedly more accurate economic studies, but in a 1986 article in "The Journal of Economic History," Robert McGuire and Robert Ohsfeldt used what economists call "regression analysis" to show that McDonald set premises and drew conclusions far more tendentious than Beard's. McGuire's recent book "To Form a More Perfect Union" strengthens both the critique of McDonald and the adjustment and rehabilitation of Beard.

To men of the constitutional convention, some of our modern economic analyses might seem strangely redundant. If we know how to read them, the founders often tell us, unabashedly and in their own words, what they were trying to do. McDonald claimed that, Beard to the contrary, a multitude of interests prevailed at the convention, not just one. Well, that's true. What's striking is that despite their well-known mutual antipathies, on a well-known multitude of fateful issues those northerners and southerners, planters and moneymen, slaveholders and manumissionists, city dwellers and countrymen, nationalists and state sovereigntists meeting in Philadelphia in 1787 shared a desire even stronger than their antipathy for one another: stop the American democratic finance movement once and for all.

The fight wasn't over. But the men of the constitutional convention were making no bones about trying to win it.

William Hogeland is the author of the narrative histories Declaration and The Whiskey Rebellion and a collection of essays, Inventing American History. He has spoken on unexpected connections between history and politics at the National Archives, the Kansas City Public Library, and various corporate and organization events. He blogs at http://www.williamhogeland.com.

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Breaking News! The Bankster Offer to the AGs

Mar 31, 2011Matt Stoller

Matt Stoller uncovers a confidential plan by banks to keep themselves off the hook on foreclosures. **You can follow Matt Stoller on Twitter at http://www.twitter.com/matthewstoller

Matt Stoller uncovers a confidential plan by banks to keep themselves off the hook on foreclosures. **You can follow Matt Stoller on Twitter at http://www.twitter.com/matthewstoller

I happened to come upon the bank offer to the Attorney General (attached below), which is a response to the original 27 page "settlement" offer from Iowa Attorney General Tom Miller. The banks are obviously opposed to any real financial responsibility for fixing the foreclosure process and mortgage servicing industry. It will cost them money. This document confirms as much, but it also unwittingly reveals a big fear of the banks.

One of the most important elements from a homeowner's perspective is that the servicers often don't tell them what they owe. This draft addresses the problem, by requiring servicers to tell borrowers every month the "total amount due, allocation of payments, unpaid principal, listing of fees and charges, current escrow balances, and the reason for any payment changes". That sounds good, right? Well, just read the very next part:

Monthly statements as described above are not required with respect to any fixed rate residential mortgage loan as to which the borrower is provided a coupon book.

That's the basic template of their offer -- the bankers lay out a bunch of reasonable requirements, and then give themselves an obvious loophole.

Here's another part of the settlement.

Servicer shall implement processes reasonably designed to ensure that factual assertions made in pleadings, declarations, affidavits, or other sworn statements filed by or on behalf of the Servicer are accurate and complete; and that affidavits and declarations are based on personal knowledge or a review of Servicer's books and records when the affidavit or declaration so states, or in accordance with the evidentiary requirements of applicable state law.

"Processes reasonably designed to ensure that factual assertions made in pleadings, declarations, affidavits, or other sworn statements..."? I'm pretty sure that sworn statements are supposed to be true. Not that there should be a "process designed to ensure that" blah blah blah bureaucracy babble. Sworn statements are just supposed to be truthful statements. Saying things that aren't true in sworn documents and submitting them to the courts, even if you don't do it very often, is problematic.

And finally, this is the big fear of the servicers.

Servicer shall implement processes reasonably designed to ensure that Servicer has properly documented an enforceable interest in the promissory note and mortgage (or deed of trust) under applicable state law, or is otherwise a proper party to the foreclosure action (as a result of agency or other similar status), including appropriate transfer and delivery of endorsed notes (which may be endorsed in blank) and assigned mortgages or deeds of trust at the formation of a residential mortgage-backed security, and lawful endorsement and assignment of the note and mortgage or deed of trust to reflect changes of ownership,  all in accordance with applicable state law.

Someone is worried about the legal theories surrounding the transfers of notes and standing for foreclosures, and wants to ensure that the state Attorneys General don't pursue that line of argument.

See full text of Proposed Deal.

Matt Stoller is a Fellow at the Roosevelt Institute and the former Senior Policy Advisor to Congressman Alan Grayson.

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Comptroller of the Currency Orders National Banks to Cover Up Foreclosure Scandal

Mar 31, 2011Matt Stoller

Acting head John Walsh is standing in the way of information that could help desperate homeowners. **You can follow Matt Stoller on Twitter at http://www.twitter.com/matthewstoller

I was rereading some testimony by Mark Kaufman, the Maryland Commissioner of Financial Regulation, on mortgage servicer behavior. He testified this month before the House Oversight Committee on something quite scandalous.

Acting head John Walsh is standing in the way of information that could help desperate homeowners. **You can follow Matt Stoller on Twitter at http://www.twitter.com/matthewstoller

I was rereading some testimony by Mark Kaufman, the Maryland Commissioner of Financial Regulation, on mortgage servicer behavior. He testified this month before the House Oversight Committee on something quite scandalous.

Together with banking commissioners in four other states, our Office of Financial Regulation joined twelve state Attorneys General in the State Foreclosure Prevention Working Group launched under the leadership of Iowa Attorney General Tom Miller in 2007. This group sought to work collaboratively with the mortgage servicing industry and other parties to identify solutions to the myriad of problems we were seeing in addressing the crisis. The group gathered data submitted voluntarily from the largest subprime servicers and published five reports during 2008 to 2010 providing analysis on foreclosure issues and the servicing response. Unfortunately, this data and the related dialogue fell short of its potential as the Office of the Comptroller of the Currency forbade national banks from providing loss mitigation data to the states.

Subprime servicers were willing to hand over data. But national banks were ordered not to provide data on loss mitigation to investigators. It gets worse. Kaufman notes that in Maryland, loan modifications often led to homeowners paying a higher monthly amount after getting their loan modified. When a homeowner asked for help, they got a higher bill. In essence, this is the financial equivalent of having the fire department try to put out a blazing inferno with gasoline.

The Office of the Comptroller of the Currency measured and publicized only redefault rates on modifications, which were predictably high, while doing nothing to capture the increased payments that our data suggested often lay beneath. It took almost a full year and requests from Congressional representatives including Congressman Cummings before the Comptroller would examine the impact of modifications on the borrower’s underlying payment obligation. Once measured, modification terms began to improve materially and redefaults began to fall.

A redefault is basically the ultimate failure and scam. It means that instead of foreclosing immediately, or modifying a loan so that it was a workable payment structure, the bank strung out the homeowner until they drained all their savings, and then foreclosed.

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Well, it looks a lot like the Office of the Comptroller of the Currency knowingly prevented the release of information that would have led to lower redefault rates.

I think it's pretty obvious that we need a lot more information on what happened before any sort of behavioral change will take place. The OCC is an institution in need of drastic change. The good news it that the Obama White House can make this happen, without Congress. Bill Black noted this last year, when he suggested Obama appoint Jamie Galbraith to head it (this would have to be a recess appointment, but so what).

It would be a positive surprise if the administration fired acting Comptroller John Walsh and brought in someone interested in doing something about the crashing housing market.

Matt Stoller is a Fellow at the Roosevelt Institute and the former Senior Policy Advisor to Congressman Alan Grayson.

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The Economic Policy Behind Intervention in Libya Chases Its Own Tail

Mar 23, 2011Marshall Auerback

Any intentions of boosting the economy will be obliterated by our spending on military actions.

Any intentions of boosting the economy will be obliterated by our spending on military actions.

As my friend Chuck Spinney has noted in an exchange of emails, President Obama's actions in Libya show that he has caved in to the "humanitarian interventionists" in his administration, as well as British/French/American post-colonial and oil interests. The result: yet another war with a Muslim country that has done nothing to us. Additionally, the fact that we are doing nothing to staunch the Saudi/Bahraini/Yemeni crackdowns smacks of hypocrisy and will hurt us even more on the Arab streets.

We seem to have developed a very basic rule of thumb when it comes to these wars of choice: if an insurgency threatens oil supplies directly or indirectly, we move. If it doesn't, we don't. Hence Syria can kill thousands of insurgents (as they did in the early 1980s) and we do nothing. Yemen doesn't have oil facilities; so we do nothing. In Bahrain we have a huge base and unrest has repercussions for the Shiite part of Saudi Arabia where the oil is. We move via the Saudis. In Libya there is oil. Again, we moved.

Gasoline today is where it was in 2008 when both WTI and brent crude oil were at $126 a barrel. Oil prices are at a level that can now impact demand. And not just by squeezing real incomes, but by depressing the sentiment of US consumers who are still lacking confidence from persistently high unemployment, threats of more downsizing, and falling house prices. The FHFA home price index for January with revisions just fell another full percentage point.

In short, we are out of policy levers to help the economy, especially now that we've unilaterally taken the fiscal policy option off the table. All of a sudden War #3 makes sense: We're in Libya to make sure that the oil keeps flowing, because a high oil price depresses what's left of consumer demand. In the meantime, as this nugget from The Hill illustrates, we've quickly blown through the budget "savings" proposed by the GOP, as we're spending about $100 million a day in Libya. And oil prices have continued to rise as a consequence of perceived dangers to oil production facilities brought about by the escalation of this conflict.

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Naturally, the GOP will look for more savings and the focus will invariably shift to "entitlement reform" led by "responsible, bipartisan" Senators, usually Democrats, such as my state's own Michael Bennet. He is being applauded by the mainstream media for his "statesmanlike" actions in his efforts to negotiate a budget package that includes possible changes in taxes, discretionary spending and entitlements such as Medicare and Social Security.

In the meantime, defense is surely off the chopping block. We're using our most sophisticated tomahawk weaponry in this conflict. The new tomahawk apparently is a very sophisticated piece of equipment. It stops over the target; it has an "eye" where it can look the target over,  communicate with the command, and then go after the target. Now the courtiers in the Pentagon can go back to their Congressmen and use this as a sign that the American people are getting value for the money in their defense budget. "Look at how sophisticated this stuff is," they can say. "Look how it's enhancing our ability to win this war while minimizing American casualties. If you implement stringent defense cutbacks, this is precisely the sort of program that will be endangered." A total crock, but it will work, as it always does.

So you can forget about defense cuts. This convenient little episode of military gymnastics has taken the defense budget off the chopping block -- which is yet more proof that the progressives will never make any progress unless they muster the courage to take on the Military-Industrial-Congressional Complex.

So what's on the horizon? More cuts in other areas of the budget for sure. The resultant fiscal contraction, if implemented, will put a halt to any incipient recovery, which the war is ostensibly designed to sustain by helping to reduce oil prices.

Do you ever get the feeling that American policy represents nothing more than a dog chasing its tail?

Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.

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Houses Most Overvalued in Australia and Hong Kong, Most Undervalued in Japan

Mar 15, 2011Edward Harrison

house-in-hands-150Perhaps a tiny bit of good news for Japan as it heads down the road of rebuilding after a massive tragedy: the next housing bubble is building elsewhere.

house-in-hands-150Perhaps a tiny bit of good news for Japan as it heads down the road of rebuilding after a massive tragedy: the next housing bubble is building elsewhere.

A few weeks ago, The Economist put out its quarterly gauge of house price values. Australia just beat out Hong Kong as the most overpriced market in the developed world, with an overvaluation of 56%. Japan was by far the most undervalued market, with an undervaluation of 35%. The only other housing markets that were undervalued, according to The Economist, were Germany (12%) and the U.S. (7%). (This was well before the earthquake and tsunami in Japan, so it is hard to say what impact those events will have on house prices.)

This same report was a good one to look at regarding the housing bubble as it was popping. In June of 2005, The Economist published an article called "In come the waves" that was quite prescient:

Never before have real house prices risen so fast, for so long, in so many countries. Property markets have been frothing from America, Britain and Australia to France, Spain and China. Rising property prices helped to prop up the world economy after the stock market bubble burst in 2000. What if the housing boom now turns to bust?

According to estimates by The Economist, the total value of residential property in developed economies rose by more than $30 trillion over the past five years, to over $70 trillion, an increase equivalent to 100% of those countries' combined GDPs. Not only does this dwarf any previous house-price boom, it is larger than the global stock market bubble in the late 1990s (an increase over five years of 80% of GDP) or America's stock market bubble in the late 1920s (55% of GDP). In other words, it looks like the biggest bubble in history.

-as quoted at Credit Writedowns, June 2008 in Naysayers, the housing bubble was obvious (with Economist 2005 chart for comparison)

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What is The Economist saying now? It's pointing to Hong Kong first and foremost:

[W]hatever those 31,000 agents say, Hong Kong homes are not a good deal, according to our latest global house-price index (see chart). In theory, the price of a home should reflect the value of the services it provides. People who choose to rent their homes buy those services on a monthly basis. Home prices should therefore reflect the rents that tenants pay. Our index calculates the ratio of prices to rents in 20 economies. In Hong Kong, that ratio is now almost 54% above its long-run average -- and it is still rising.

People in Hong Kong often blame buyers from mainland China for pushing up prices. Ironically, mainlanders often blame buyers from Hong Kong for their own property frenzy. At a recent conference at Tsinghua University in Beijing, students complained that their parents had scrimped and saved to send them to university in the city, but now upon graduation they could barely afford to live there.

Prices in China are not that high relative to rents: our index suggests that homes are overvalued by less than 13%. But this is based on the government's 70-cities index, which showed prices rising by only 6.4% in the year to December. That figure seemed implausibly low to many of China's stretched homebuyers, and the Chinese government appears to share their scepticism.

Of the bubble markets where the bubble has popped, the U.S. seems to have corrected the most. Notice that Spain still has massively overvalued house prices according to this measure. Ireland and Britain is also well above the median. Here's the chart:

economist-house-prices-graph

Edward Harrison blogs at Credit Writedowns, where this piece originally appeared.

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James K. Galbraith Testifies on Sensible Tax Reform

Mar 8, 2011

Galbraith demystified tax policy in testimony. Will Congress listen?

Statement by James K. Galbraith, Lloyd M. Bentsen, Jr. Chair in Government/Business Relations and Professor of Government, The University of Texas at Austin, and Senior Scholar, Levy Economics Institute, before the Senate Finance Committee, March 8, 2011, hearing on Principles of Efficient Tax Reform.

Galbraith demystified tax policy in testimony. Will Congress listen?

Statement by James K. Galbraith, Lloyd M. Bentsen, Jr. Chair in Government/Business Relations and Professor of Government, The University of Texas at Austin, and Senior Scholar, Levy Economics Institute, before the Senate Finance Committee, March 8, 2011, hearing on Principles of Efficient Tax Reform.

"Chairman Baucus, Senator Hatch, Members of the Committee, it is an honor for me to appear before you this morning, to discuss the fundamental principles of an efficient tax reform.

1. Taxes and Deficits. Let me begin by noting that the realized budget deficit is an economic outcome, not a policy choice. So long as the economy faces high unemployment, there is no fiscal formula -- no combination of tax increases and spending cuts -- that can make it go away.

Our present very large budget deficits arise for two reasons. First, because of the collapse of private credit, the decline of employment and activity, and therefore the fall of tax revenues in the slump and recession. This is a problem we share with the whole world, as the International Monetary Fund's staff has recently shown. Second, in the (almost unique) case of the United States, part of our budget deficit is due to the global role of the dollar and the use by the rest of the world of Treasury bonds as a reserve asset. That they do so -- "exorbitant privilege" -- is greatly to our advantage.

Neither of these forces can be controlled by cutting spending or raising taxes. One can reduce projected deficits -- for future years -- by raising future tax rates or cutting programmed spending for those years. But this is an artificial and unreliable exercise. The actual realized deficits in the future will depend on economic performance at that time, and it is economic performance that actually matters, not the deficit or the public debt. Thus tax reform -- and spending policy as well, in my view -- should properly focus on economic performance and not on deficits.

On the broader question of deficits, I am attaching for your record a brief statement by Trustees, Directors and Fellows of Economists for Peace and Security, a professional association. It affirms that the US government is not broke, that budget deficits are normal, and that our pressing priorities are related to economic performance. The statement is signed by distinguished economists including Kenneth Arrow, Andrew Brimmer, Robert J. Gordon, and Alan Blinder.

2. Tax Incentives. When economists address tax policy, they often speak of "distortions." The implied claim is that distortions are bad, and should be removed from the tax code as a matter of principle. You will not hear this language from me. To economists, the phrase "tax distortion" generally implies comparison is to a system with a "lump-sum head-tax" -- a poll tax -- because that is the only kind of tax that cannot be reduced by changing behavior. Yet the poll tax is the most regressive and pernicious tax available. In the real world, practically every other tax is plainly superior to that one.

Tax incentives are therefore an inescapable fact of life. The proper question is: which incentives work best, for which worthy objectives? And how best to reconcile the incentives in the tax code with the other function of taxation, namely the regulation of demand? Let me begin with an example.

In the years 1981 through 1984, I served first as Executive Director of the Joint Economic Committee under Chairman Henry Reuss, and then as Deputy Director under Vice Chairman Lee Hamilton. The Senate Democratic Members were Senators Bentsen, Proxmire, Kennedy and Sarbanes. In 1984, in the Joint Economic Report, we endorsed the Bradley-Kemp Tax Reform Bill. That bill later evolved into the famous Tax Reform Act of 1986.

The concept of the Tax Reform Act was to promote simplicity and fairness, without changing the overall burden or incidence, by broad income class, of the income tax. The method was to reduce or eliminate many exemptions and deductions, mainly taken by wealthy people, and then to tax the expanded Adjusted Gross Income at a lower marginal rate. The effect was to redistribute tax burdens mainly within upper-income groups, to the benefit of those who had relatively simple earned incomes (a category that had at one time included Bradley, Kemp, and also President Reagan), and to the detriment of many whose incomes were related to tax-favored activity.

President Reagan deserves full credit for adopting the Bradley-Kemp principles, which he did on the recommendation of his Treasury Department after a year of study, intended to delay consideration of the issue past the 1984 election. During that year, the Treasury tax policy office had conducted among other things an analysis of the Value-Added Tax, and had rejected that alternative for reasons that remain, in my view, valid today. Bradley-Kemp achieved an important improvement in tax fairness.

The Tax Reform Act saved the income tax. But in retrospect it had at least two problematic effects.

The first effect -- and here I speak broadly of the movement toward lower top marginal tax rates from 1978 through 1986 -- was on corporate executive pay. It is probably not accidental that the years after lower marginal income tax rates took hold -- along with lower rates on capital gains -- saw the CEO pay explosion.

Why? In part, because lower marginal rates reduced the cost to companies of raising post-tax executive pay (just as the high marginal rates had deterred big pay packages in the first place). The new rules made it irresistible for those who controlled CEO pay to reward themselves in this way. Crudely put, companies quit building skyscrapers and their chiefs built themselves mansions instead. Many ills of American corporate governance can be traced to this new age of executive self-dealing.

Second, as a political compromise, the TRA disallowed deduction of consumer interest payments except for mortgages. This led to an inexorable rise in the use of homes as collateral for loans that supported consumer, student, vacation and health-care-related spending, and therefore to the depletion of home equity as an element in the financial security of the middle class. As the process unfolded over time, it helped produce the systematic abuse of mortgage lending that became pandemic in the middle years of the last decade and that produced the financial crisis.

On the whole, there is no reason to believe that the TRA improved economic performance. The aftermath of tax reform saw the market crash of 1987 and then the recession of 1989-91, from which the economy recovered only very slowly. There were no significant increases in private savings as a share in income, nor in work effort. Thus, I do not believe that the Tax Reform Act of 1986 should be viewed today as the single ideal for the tax code going forward. In particular, a new tax reform should not make a virtue of low marginal rates. If higher taxes are needed, one of the best ways would be to impose a new rate or rates on the highest incomes. And tax reform should not aim indiscriminately at existing tax preferences for middle class Americans, some of which serve their purposes well.

For example, the Reagan years invented and the late Clinton years saw major expansion of the Earned Income Tax Credit. The EITC stabilizes the incomes of workers in the lowest-paid and hardest jobs, and protects them from unstable employment. It is invisible to employers; therefore it is likely to have little effect on the proffered wage. It is a well-designed and effective program; there is no reason to cut it just to reduce "tax distortions," and also none to cut it for "deficit-reduction."

Equally, the home mortgage interest deduction worked for many decades to promote home ownership in stable communities and neighborhoods. It became pathological only when it became the vehicle for all forms of lending, and when mortgage originators took advantage of the law to create massively abusive and fraudulent mortgage instruments, including exploding ARMS, NINJA loans, liars' loans, no-doc loans, and the rest. The appropriate solution is not to eliminate the tax preference for a standard 15-to-30 year self-amortizing mortgage with a substantial required down payment. It would be more sensible to write the law so that only that type of plain-vanilla, fully-documented mortgage received tax-deductible status.

3. Bad and good incentives: the payroll tax and the estate tax.

The payroll tax was increased sharply in 1983 and is the largest direct tax paid by most working people. It tails off, as a proportion of income, for upper-income Americans on account of the cap on earnings, and the fact that non-wage incomes are not subject to the tax. The high payroll tax rates on working people - yielding revenues which were for many years vastly higher than benefit payments under Social Security - were partly intended to shield Social Security benefits from pressures to cut them when the baby boomers began to retire. But they were also a way to shift the burden of taxes in general onto labor and away from non-labor income.

The payroll tax penalizes job creation. By extension it fosters the gray economy, welfare-dependency and crime. This was not a serious problem in (say) the late 1990s, when strong credit creation propelled us to full employment. It is a major problem today. That is why a payroll tax holiday, with the federal government holding the Social Security Trust Fund harmless, was a good idea when enacted last year. On the employee side payroll tax relief helps increase household disposable income; on the employer side it helps cash flow and to reduce the cost of job creation. There may be more efficient job-creation incentives -- the TJTC comes to mind -- but they are also harder to implement.

In the United States, uniquely among nations, about eight percent of all employment is in the non-profit sector. Why? In substantial part, because for over a century we have given wealthy citizens a strong tax incentive to make philanthropic gifts to universities, hospitals, churches, museums, foundations and other not-for-profit organizations, in advance of the grim reaper. This is partly responsible for our broadly excellent employment performance (compared to Europe) over many years. It is partly responsible for the greatness of our universities and hospitals, and for the vibrancy of our religious life. It integrates wealthy Americans back into their communities, helping to foster and strengthen our democracy. It fosters a broad decentralization of important public activities: for example, higher education policy decisions that in other countries are often vested in a single cabinet ministry, are here made by thousands of independent university administrations.

These benefits and advantages are threatened by the campaign against the estate tax, pushed heavily by one group of wealthy citizens, yet opposed by many other wealthy citizens. History and experience support the second group. There is a very strong incentive-based case for an estate tax with a high tax rate, a high level of exemption, and a one-hundred percent deduction for qualified philanthropic contributions.

4. Simplicity? A frequent stated concern of tax reformers is how best to simplify the code. One proposal before you would reduce the income tax for most filers and to replace it with a value-added tax. An appeal of this proposal is that it would eliminate many income tax returns. But of course, a large number of lower-income filers use the short form. This is not a complicated document, and to eliminate it does not seem to be a pressing priority in itself.

Yet, eliminating the federal income tax for low-income filers would make state government taxation much harder, since state income taxes are keyed to the federal tax. Meanwhile the proposed VAT would force a major restructuring of state sales taxes, which would have to convert to piggy-back on the VAT at variable rates, depending on the amount of income tax that would have to be replaced. This, in turn, would create new location incentives for business, to the disadvantage of high-tax states. These changes would create impressive challenges for states and localities already in the grip of fiscal crisis.

As a rule, let me urge you to work slowly. Any truly radical reform is likely to have far-reaching effects. They should be studied carefully, and by analysts with a wide range of views. Actions in this area should always be cautious and incremental, and claims of great gains over the existing system should always bear a heavy burden of proof. Things are often not so simple as they seem.

5. Growth? Tax reformers often promise that their proposals will favor economic growth. But there is little evidence that this has ever happened in the past. In principle, this should be no surprise. The long-run potential for economic growth depends on the growth rate of our population, the cost of natural resources, technological progress and the rate of business investment. It is very difficult for any tax reform to change these factors materially. Business investment can sometimes be stimulated by tax favors in the short-run, such as the investment tax credit. Sometimes, this is desirable policy. But a one-time increase in investment does not yield a long-term increase in the rate of growth.

Despite the tradition of hype that suffuses this topic, the most any tax law change can reasonably promise is modest improvement in economic conditions in the fairly short run. History also teaches that most of that effect comes from increasing purchasing power when it is too low - that is, from the Keynesian effect and not the supply-side effects. Tax law changes do not supply magic bullets for financial crises, nor for a period of slow technological innovation or rising costs of energy.

6. Should we tax capital, labor -- or rent? Is it a good idea to shift the tax burden from high-income to low-income Americans, in the guise of shifting the tax burden from capital to labor, in order to promote "saving and investment"? In particular, will this create new jobs? History say not: we have been shifting this burden for decades with no appreciable effect on savings, investment or jobs.

And there is also no shortage of capital in our economy. As the economist Mason Gaffney wrote in a paper delivered to the National Tax Association in 1978: "The key to making jobs is changing the use and form of capital we already have. Tax preferences for property income, in their present and proposed forms, bias investors against using capital to make jobs, doing more harm than good."

Economists from Smith to Ricardo to Mill understood that fixed investments, however useful, do not generate many permanent jobs. What creates jobs is the revolving capital that supports payrolls. A tax policy aimed at supporting employment would shift the tax burden away from labor, and off of short-term capital, and place it instead on long-term capital accumulations. If this reduces the investment in fixed capital that is desired for other reasons -- in particular, investment with broad public benefits -- then that sort of investment should be done by public authority, funded by an infrastructure bank.

Thus as a general rule fixed assets -- notably land -- should be taxed more heavily than income. The tax on property is a good tax, provided it is designed to fall as heavily as possible on economic rents. This basic argument, going back to Ricardo, remains sensible, for it aims to not-interfere where there is, in fact, no public purpose to interfere with private decision-taking. Payroll taxes and profits taxes do interfere directly with current business decisions. Taxes effectively aimed at economic rent, including land rent and mineral rents, and at "absentee landlords" as Veblen called them, do not.
An important question is how best to treat the "quasi-rents" due to new technology and thus the incentives for innovation. These are presently held as long-term capital gains and they tend to escape tax to a very large degree, with the consequence that a small number of successful innovators (and patent holders) have become an oligarchy of never-before-equaled wealth.

The incentive for innovation is an important public policy objective. But it does not require the vast prizes presently available. And it does not require that those prizes escape tax indefinitely. A sensible approach is to tax unrealized capital gains after a certain amount of time has elapsed -- perhaps at fates that rise with time -- and again subject to a full charitable deduction. In the final analysis -- that is to say at death -- once again setting the estate tax at a high rate with a high exemption encourages the early transfer of large quasi-rents to independent foundations or other non-profit institutions (universities, hospitals, churches), and into activities consistent with public purpose. I would also favor raising required foundation payout rates, so as to assure that foundations do not last in perpetuity unless they find new donors.

7. Energy and Carbon. I have explained why I do not favor substituting a value-added tax for the income tax. It might however be sensible to replace the payroll tax. In view of the oncoming crises of energy security and climate change, a tax on energy or on carbon would make a good substitute for the payroll tax, especially if it were designed to hold working families harmless, while increasing the incentives for conservation facing companies, retirees, and those with non-labor incomes.

8. Summary. Tax law serves two broad goals: the regulation of effective demand and the pursuit of public purpose. The Tax Reform Act of 1986 was gave us an income tax structure that is viable for the long run. But its purposes are not ours. We face four pressing priorities: to create jobs, to change how we produce and use energy, to restructure our financial sector, and to curtail the pernicious power of a small number of wealthy persons - our new American oligarchs - who have taken undue advantage of past tax reforms. A shift of the tax burden away from labor, onto energy, and onto accumulated wealth - with the philanthropic escape clause - would help give us back a healthier, more egalitarian, and more democratic society in future years.

The statement by my EPS colleagues follows. I thank you again for your time and attention."

FEDERAL SPENDING AND THE RECOVERY: A Statement by Directors, Trustees and Fellows of Economists for Peace and Security, February 28, 2011.

The budget adopted by the House of Representatives on February 19, 2011 does not make economic sense and is likely to do more harm than good. First, the rationale for the measure is based on a false premise. Secondly, the budget cuts being proposed will impede and may end the recovery. If the recovery fails, unemployment will increase and the financial crisis could re-emerge.

The premise that the US government is broke is false. The US government has never defaulted and will not default on any of its financial obligations. Deficit spending is normal for a great industrial nation with a managed currency, and it has been our normal economic condition throughout the past century. History proves, and sensible economic theory confirms, that in recessions, increased federal spending -- not balancing the budget -- is the tried and true way to return to a path of sustained growth and high employment.

Eliminating waste in government spending is desirable. But that is not what the House proposes; indeed the House budget failed to address the largest waste in federal government, namely in the military, and the House failed to remove our most egregious subsidies, such as to oil companies. To adopt a policy of deep budget cuts at this stage of recovery is to surrender to irrational fears in the service of a political, not an economic, agenda.

As economists, as citizens, and as long-time critics of waste in government, we call on the Senate to reject the House proposal and to craft an alternative that places first priority on sustaining economic recovery and on dealing with the country's true economic and social problems, which include unemployment, home foreclosures, the fiscal crisis of states and cities, our infrastructure needs, energy security and climate change."

Clark Abt, Brandeis University and Cambridge College
Kenneth Arrow, Stanford University, Nobel Laureate
Marshall Auerback, Madison Street Partners
Barbara Bergmann, American University and University of Maryland
Linda Bilmes, Harvard University
Stanley Black, University of North Carolina
Alan S. Blinder, Princeton University
Andrew F. Brimmer, Brimmer & Co.
Kate Cell, Principal, Kate Cell Consulting
Lloyd Jeff Dumas, The University of Texas at Arlington
Gary Dymski, University of California, Riverside
James K. Galbraith, The University of Texas at Austin
David Gold, The New School
Robert J. Gordon, Northwestern University
Michael Intriligator, UCLA
Richard F. Kaufman, Bethesda Research Institute
Ann Markusen, University of Minnesota
Richard Parker, Harvard University
Dimitri B. Papadimitriou, The Levy Institute of Bard College
Gustav Ranis, Yale University
Kathleen Stephansen
Lucy Law Webster, Center for War/Peace Studies, New York

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Democratic Finance v. Banking Fraud in Early America

Mar 7, 2011William Hogeland

money-shark-150Ordinary 18th-century Americans fought for fair access to small-scale credit and usable currencies. Big finance fought back.

money-shark-150Ordinary 18th-century Americans fought for fair access to small-scale credit and usable currencies. Big finance fought back.

Calling modern banking "a widespread fraud," Rob Burns wants to push the finance industry out of everyday lending. A candidate for Congress in the fourth district of Illinois, Burns proposes using federally insured savings as a public fund for mortgages, student loans, consumer credit, business bridge loans -- the kind of borrowing engaged in by ordinary Americans, not entrepreneurs. On a different finance reform front, the technology pioneer and culture critic Douglas Rushkoff has been exploring complementary currencies. Rushkoff envisions new monetary units, exchanged via handheld devices, helping to break what he calls "the money monopoly."

Far-reaching ideas for getting money, currency, and credit to flow more democratically through the American economy would probably draw all-purpose condemnations like "socialism!" from the rightists led by Sarah Palin and Michele Bachmann. Liberal high finance experts too might find such proposals dangerously chaotic. But regardless of practicalities and politics, it's useful to recognize that ideas like Burns' and Rushkoff's have deep roots in the American founding period. The Tea Party has done such a successful job of associating anti-government, free-market politics with essential American values -- and historians have been so eager to ignore the economic activism of ordinary, founding-era Americans in favor of assessing and re-assessing the elite founders' republican philosophies -- that it can be startling to confront the democratic theories about popular finance that prevailed in 18th-century America.

And "theories" is the right word. People of the founding period put forth their economic ideas in resolutions, petitions, and actions. In an earlier post in this series, I discussed traditional rioting in the context of struggles between American debtors and creditors. Long before the Stamp Act riots of Revolutionary fame, crowd action -- rowdy, creepy, theatrical, sometimes violent -- played an important role in American social life. Crowds dismissed by the upscale as "the mob" called their movements "regulations." From the North Carolina Regulation of the 1760's to Shays' Rebellion of the 1780's and beyond, American debtors, barred from fair representation in politics, engaged in obstruction, boycott, court closing, jury nullification, building teardown, and physical intimidation. They wanted their legislatures to restrain the power of wealth.

Just like Rushkoff and Burns today, 18th-century popular regulators focused on small-scale credit and readily negotiable currencies. Scarcities of cash gave merchants a monopoly on gold and silver coin, enabling them to dominate small farmers, artisans, and laborers through loan shark-style lending terms: debtors, in constant danger of foreclosure, could effectively become merchants' laborers. Hoping to elude the money monopoly's clutches, people looked to their colonial governments to create "land banks," where small operators could take small loans on reasonable terms. Spent by holders on purchases, land bank notes found their way into circulation, becoming a kind of currency that at times came even into the hands of the landless.

Another thing governments could do: issue paper currency. Government notes represented amounts in metal; their value depended on people's belief that they'd be worth roughly what was printed on them. A commonplace of American history has it that early paper currencies depreciated disastrously, but the reality is far more varied. New England had difficulty making paper finance work, but Pennsylvania successfully alleviated economic crunches using both land banks and its own paper. The trick to encouraging confidence and controlling depreciation was to issue limited amounts of the paper and then to retire it through scheduled taxes, payable in the notes themselves. Depreciation did occur, as it does today. But popular finance activists saw mild depreciation as a natural and democratic effect, benefiting debtors.

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Improvised popular currencies existed, too, complementary in Rushkoff's sense. A craft commodity like whiskey -- not a mere instrument of barter but always exchangeable for gold somewhere down the line -- held value well.

Merchant lenders, however, wanted to be paid in coin. They wanted the gold that, they believed, held perfect value in imperial trade and which ordinary people could rarely come up with. The people countered by pressuring governments to make paper currencies legal tender, forcing merchants to accept paper at face value for payments and principal -- a kind of government program to prevent foreclosure and debt peonage. Lenders forced to take payments worth less, against gold, than when loans were made disdained paper currencies as confiscatory, rotten, mobbish, and vile, "the curse of pulp."

Lenders may actually have contributed to financial crises by recoiling so violently from any hint of depreciation. Yet their philosophy had a certain consistency. American merchants were already calling the English government tyrannical for violating ancient rights to security in property. Now merchants feared that American governments, vulnerable to what they saw as another kind of tyranny, that of the mob, would take property in another way, through legal tender legislation and state enforced devaluation. The debtor class, for its part, had little interest in what merchants defined as the big picture.

So even as the country moved toward climactic conflict with England, a great social battle raged between American merchants and American working people over credit and currency. We've been distracted from that battle's significance by historians' relentless focus on merchants' frustration over Parliament's trade acts. Those acts included currency laws, which restricted paper emissions in the colonies: sometimes American merchants too had advocated issuing paper. But merchants came to hate paper's democratizing, socially equalizing tendencies in American society. By the time American elites began relying on ordinary people for help in opposing England -- especially on the people's facility with organized protest! -- working Americans' desire for economic, social, and political equality was driving the merchants' anxiety to a nearly hysterical pitch.

Our current financial crisis reflects those deep-seated American economic disagreements, wired into events and philosophies that gave birth to our country, were never resolved during that period, and glossed over in certified stories of our origins for more than two centuries. Many people today, of various political persuasions, will want to dismiss thinking like Rushkoff's and Burns', which goes far beyond finance reform and asks fundamental questions about how, and for whose benefit, we want credit and money to work in American society. To our little known 18th-century ancestors, the founding activists for democratic finance, those questions would be among the most important we could be asking.

William Hogeland is the author of the narrative histories Declaration and The Whiskey Rebellion and a collection of essays, Inventing American History. He has spoken on unexpected connections between history and politics at the National Archives, the Kansas City Public Library, and various corporate and organization events. He blogs at http://www.williamhogeland.com.

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Angelo Mozilo, Tea Partier?

Mar 4, 2011Matt Stoller

mozilo3Mozilo's emails expose a political philosophy borrowed from Ronald Reagan. **You can follow Matt Stoller on Twitter at http://www.twitter.com/matthewstoller

mozilo3Mozilo's emails expose a political philosophy borrowed from Ronald Reagan. **You can follow Matt Stoller on Twitter at http://www.twitter.com/matthewstoller

I was combing through the Financial Crisis Inquiry Commission resource materials, and I found an interesting email from former Countrywide CEO Angelo Mozilo to his senior executives. It was written in 2004, and the main subject was the declining credit quality of loans due to heavy competition from mortgage originators.

The last part of the email, though, got very political.

I must admit that the upcoming election has exacerbated my concerns in that a Kerry win could cause a serious disruption in the economy if he is successful in rolling back a substantial portion of the tax breaks initiated by Bush. It is the wage earners $200,000 and over that are the drivers of the economy and that is the group that Kerry has stated that he will attack. This could clearly cause a major bump in the road.

As you know I have no political bias but I would be concerned about any candidate that proposes a massive wealth transfer from the people to the federal government.

I would like you to consider my concerns and let me know your thoughts.

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It's true Mozilo had no political bias in terms of who got favorable lending treatment; lots of Democrats took out low-cost Countrywide "Friends of Angelo" loans. But the rhetoric and politics he uses here are straight up Texas GOP.

The transfer of power from the people to the federal government, and with Obama, we’ve had a giant leap in that direction.

It originates, perhaps not surprisingly, from Ronald Reagan, as quoted by the "second coming of Reagan" and tea party darling Rep. Mike Pence.

The federal government has taken too much tax money from the people, too much authority from the states, and too much liberty with the Constitution.

He and Reagan were both government-haters. Now, Mozilo needn't have worried about the 2004 election, as John Kerry voted to extend the Bush tax cuts last year and probably would have found a way to extend them as President. It is interesting that Mozilo, whose business depended on the income of people in lower and middle income brackets, felt that it was people with incomes of $200k and up who drive the economy.

As for the rest of the email, Mozilo was clearly telling his executives in private something different than he told his investors. Here's what he told his execs.

I fully understand that our residuals have been modeled on a conservative basis but it is only conservative based upon historical performances. But the type of loans currently being originated combined with the unprecedented stretching of all aspects of credit standards could cause a bump in the road that could bring with it catastrophic consequences.

Here's Countrywide's 10K for 2004.

We develop cash flow and prepayment assumptions based on our own empirical data drawn from the historical performance of the loans underlying our other retained interests, which we believe are consistent with assumptions that other major market participants would use in determining the assets’ fair value.

So there you have it. Angelo Mozilo didn't just dump hundreds of millions of dollars of stock when he secretly knew that the loans Countrywide was originating couldn't support the stock valuation. He was also Reagan-esque as he did it.

Matt Stoller is a Fellow at the Roosevelt Institute and the former Senior Policy Advisor to Congressman Alan Grayson.

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Do We Want to be Ruled by Banks or the Law?

Mar 3, 2011

Yves Smith found a nice press release from North Carolina's Guildford County Register of Deeds regarding the continuing criminal fraud of the banks and mortgage industry. The elected county official, Mr. Thigpen, states:

For me the question is clear. Do we want land records in America to be governed by major banking conglomerates on Wall Street or the people and laws of the United States of America?

Yves Smith found a nice press release from North Carolina's Guildford County Register of Deeds regarding the continuing criminal fraud of the banks and mortgage industry. The elected county official, Mr. Thigpen, states:

For me the question is clear. Do we want land records in America to be governed by major banking conglomerates on Wall Street or the people and laws of the United States of America?

That indeed is the question for all of us on many matters -- financial, economic, and political. It is no mistake this question is coming not out of DC or NY, but the true foundation of this republic, the counties. As Jefferson said, "Divide the counties into wards." There America lies your reformation, revitalization, and renewal. The three Rs.

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