More on the Florida Foreclosure Nightmare

Sep 30, 2010Mike Konczal

mike-konczal-2-100Foreclosure cases are running afoul of the law, and underwater homeowners get shafted. **Tune in to NPR's Marketplace tonight to hear Mike talk with David Brancaccio.

mike-konczal-2-100Foreclosure cases are running afoul of the law, and underwater homeowners get shafted. **Tune in to NPR's Marketplace tonight to hear Mike talk with David Brancaccio.

We just discussed the nightmare situation in Florida, which is likely to spin out nationally. Before I tell you more about what I think about the Florida situation, I'll tell you I was raised by a family in law enforcement, and as such, I tend to think people who are arrested are usually guilty.   And I think that the people who are ending up inside the Florida bankruptcy courts are usually going to be people that shouldn't be in their homes.

It's because of the fact that I and others usually believe this to be true that I think due process and trust in the process of our courts is so incredibly important. It's necessary to force the parties at hand to marshal evidence that they swear is true, and to present it to an impartial judge to render judgment after full consideration. This is America, where everyone gets a chance before the court. If this system breaks, the weak and the innocent are the ones who suffer.

So it's because of this background that I feel sick to my stomach learning of a random sampling of foreclosure cases conducted by the Florida Bar News has just found "that 20 percent or more of the cases set for summary judgment had some procedural or paperwork problems."

Think about that. Twenty percent! It's outrageous, and shouldn't stand in a country that values the rule of law.

Why is this happening? Again, keeping with what I know about the law, the criminals courts would simply shut down if everyone had a jury trial. Hence the crucial role of plea-bargaining. (If you want to see the role plea-bargaining plays, you should read Courtroom 302, one of my favorite books, by Chicago Reader journalist Steve Bogira.) There's a plea-bargaining mechanism to be had in these foreclosure trials: remove the deficiency judgments. People want to be able to hand over their homes, but they don't want to spend the next decade hounded by JP Morgan for every last dollar that can be grabbed out of their paycheck. From the Florida Bar (my bracketed numbering):

Another hitch in clearing cases, he said, is [1] sometimes banks put off getting the final judgment so they don’t have to immediately take possession of the property, which makes the banks liable for property taxes and homeowners’ association fees on homes that may take considerable time to resell...

“If we had everyone defending their foreclosure, we’d never get through this.”

She said an unappreciated problem is [2] that many foreclosed homeowners don’t realize they are still liable for deficiency judgments, which is the difference between what they owed on the mortgage and what the bank gets in a foreclosure auction or a short sale. Those who do understand may fight or try to delay foreclosures, which doesn’t help the courts with the backlog. But it also means that once the foreclosure crisis is over, courts could be hit with a wave of deficiency actions.

Zikakis said of many of her clients, “If they could be relieved of the deficiency, they would hand in the keys immediately.”

Two things. First, in number one, notice that a lot of the backlog is the result of banks not wanting to take over properties. Some estimates place an abandoned property at $20,000 a pop, so a bank leaving three properties abandoned in any given place reasonably costs the municipality a teacher's salary.

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The second is even more important: homeowners are still on the hook for the deficiency judgments. If banks said they wouldn't chase homeowners to the ends of the earth, garnishing their wages and disrupting their earnings, many years after a bum investment decision went south -- if they were able to take at least a share in the downside -- there would be a much, much smaller crisis. But because banks are credibly signaling that they will move Heaven and Earth to get every last penny they can out of those who have already been kicked to the curb, those who are about to be kicked out want to have their say in court.

Having mortgage cramdown would have helped alleviate this, FYI. Sure, courts would have gotten more crowded short-term, but it also would have been clearer in the results. And remember, this isn't about poor people wanting to steal a home from someone;  it's about people wanting to make sure they can negotiate their way out of the housing crash that has left them deeply underwater.  The ramifications of the crisis have left people much worse off than their original bad investment would have.  People are willing to negotiate. Are the banks?

When you go back and read Yves Smith's site about a sample judge, it's clear he's moving people as fast as possible into a situation of not wanting to fight, either for their homes or for the their negotiated values. Those who are falsely being evicted or those who have a credible case to fight are being lost in the shuffle. Meanwhile, banks realized that they could cash out big by rushing as much as possible through foreclosure, but that doesn't give homeowners a fair shake, or cause a reasonable negotiation to occur. And that is simply not just.

Start watching this (Naked Capitalism is the clearinghouse of info). The ratings agencies are being put in motion and they are always late to the news. JP Morgan has just fessed up to worries, arguably slowing the foreclosures in the country to a standstill. It's going to get much worse before it gets better.

Mike Konczal is a Fellow at the Roosevelt Institute.

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Why We Should be Mad as Hell About Florida's Foreclosures

Sep 29, 2010Mike Konczal

mike-konczal-2-100We could be giving underwater homeowners a chance. Instead, we're kicking people out of their homes without due process.

mike-konczal-2-100We could be giving underwater homeowners a chance. Instead, we're kicking people out of their homes without due process.

Given that the IMF and others believe a large part of the "structural unemployment" in our country is related to the struggling housing market and underwater/barely-hanging on homeowners, what is to be done? One choice is to allow for options like lien-stripping in bankruptcy courts, resetting mortgages by zip code, etc. Another option is for courts to accelerate foreclosures by ignoring due process, proper documentation and legal process in order to kick people out of their homes and preserve the value of senior tranches of RMBS while giving mortgage servicers a nice kickback.

What option do you think our country is taking?

We should all be very concerned about the foreclosure situation in Florida. If you are a homeowner or potential homeowner, you should find it offensive that people's property rights are being violated in such a flagrant way. If you are an investor, either as "bond vigilante" or someone with a generic 401(k), you should be worried that servicers have gone rogue and the incentive structure to maximize value instead of fees associated with foreclosures has broken down.

And if you care about basic Western liberalism -- the classical kind, with a Lockean understanding of freedom to own property along with freedoms of speech and religion -- you should be pissed off. This is a clear-cut instance of the rich and powerful decimating other people's property rights, rights that are supposed to protect the weak from the strong, in order to preserve their wealth and autonomy. Unless you think property rights are mere placeholders for whatever the financial sector demands, this should be resisted. This should be viewed as a problem an order of magnitude larger than Kelo v. City of New London.

The short problem is that banks are foreclosing without showing clear ownership of the property. In addition, "foreclosure mills" are processing 100,000s of foreclosures a month without doing any of the actual due diligence or legal legwork required for the state to justify the taking of property and putting people on the street. Even worse, many are faking documentation and committing other fraud in the process. The government is allowing this to happen both by not having courts block it from going forward, but also through purchasing the services of these mills. As Barney Frank noted: "Why is Fannie Mae using lawyers that are accused of regularly engaging in fraud to kick people out of their homes?"

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And the worst part is the lack of conversation about this. Thanks to Yves Smith at naked capitalism for following this story from the get-go; her blog has become the place for anyone interested in this topic (that link is a catch-up post). The rest of the media is starting to catch up to where she was weeks ago.  Here's the Washington Post with the story of an individual caught in one of these nets and ProPublica on GMAC's "robo-signers" who sign off on foreclosures without knowing anything about them.

Also Dean Baker just wrote a good summary of the situation for the Guardian:

As a number of news reports have shown in recent weeks, banks have been carrying through foreclosures at a breakneck pace and freely ignoring the legal niceties required under the law, such as demonstrating clear ownership to the property being foreclosed.

The problem is that when mortgages got sliced and diced into various mortgage-backed securities, it became difficult to follow who actually held the title to the home. Often the bank that was servicing the mortgage did not actually have the title and may not even know where the title is. As a result, if a homeowner stopped paying their mortgage, the servicer may not be able to prove they actually have a claim to the property.

If the servicer followed the law on carrying through foreclosures then it would have to go through a costly and time-consuming process of getting its paperwork in order and ensuring that it actually did have possession of the title before going to a judge and getting a judgment that would allow them to take possession of the property. Instead, banks got in the habit of skirting the proper procedures and filling in forms inaccurately and improperly in order to take possession of properties.

And the situation in Florida is worse than most assume. The specially-created courts see it as their purpose to clear out the foreclosures, as Yves Smith covers here (must read). The most obvious takeaway is that homeowners aren't being given the chance to have their documents properly viewed, have the challenges and proper legal hurdles to putting someone on the street vetted by the courts, and instead are being bribed with an additional month of house time if they don't ask too many questions.

And the biggest fear is that the fraud uncovered at GMAC is the tip of the iceberg for what is going on nationwide.   Keep your eye on this situation.

Mike Konczal is a Fellow at the Roosevelt Institute.

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Political Trends and Countertrends

Sep 21, 2010Joe Costello



The television man is crazy says we're juvenile delinquent wrecks
Oh man, I need TV when I have T. Rex?
-- All the Young Dudes

This is one of the most optimistic trends in America over the last several decades:

Selling cars to young adults under 30 is proving to be a real challenge for automakers. Unlike their elders, Generation Yers own fewer cars and don't drive much. They're likely to see autos as a source of pollution, not as a sex or status symbol.

They're more apt to ride mass transit to work and use car sharing services -- pioneered by Zipcar -- for longer trips. And car sharing choices are expanding, with car rental firms moving into the market, making it convenient for young folks to rent with hourly rates and easy insurance. Connect by Hertz, for example, is rolling out its car sharing services in the New York metropolitan area, with plans to eventually expand them to around 40 college campuses nationwide.

Moreover, in survey after survey, Gen Yers say that they believe cars are damaging to the environment. Even hybrid electric vehicles don't seem to be changing young consumers' attitudes much.

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So, maybe the greatest damage done to brand Obama with the youth vote was the saving of GM? What's most interesting is the politics of cars has yet to make it onto any political platform in America. Phew! Nothing defined 20th century America more than the automobile -- political economy, culture, and the politics of technology. Talk about a revolution.

At the same time, the counter-revolution against the rule of law, led by our financial class, is in full force. Yves Smith has been out ahead on the issue of paper related to debt, such as liens. This was all lost in the buying, selling and swapping of debt -- also known as the American economy for the past couple decades. As foreclosures and other debt collections increased in the past couple of years, no one seems to have the related paper, so various industries have expanded their fraudulent activities to simply make things up to file in our various courts of law. I'd suggest following Yves on this very important issue.

Finally, Alternet has good piece on the white underclass, though it should be more accurately called the white part of the American underclass. Of course there is no class in America -- just ask the ruling elite, or the cultural left for that matter. Remember, Marshall McLuhan said old technology becomes art, so we can all soon put a car on the front lawn. Solidarity, brothers and sisters.

Joe Costello was communications director for Jerry Brown’s 1992 presidential campaign and was a senior adviser for Howard Dean’s effort in 2004.

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Elizabeth Warren in Her Own Words

Sep 17, 2010Lynn Parramore

elizabeth-warren-150This is the first installment of "The Influencers," a six-part interview series that ND20 Editor Lynn Parramore is conducting in partnership with

elizabeth-warren-150This is the first installment of "The Influencers," a six-part interview series that ND20 Editor Lynn Parramore is conducting in partnership with In July, she sat down with Elizabeth Warren, pegged to help launch the new Consumer Financial Protection Bureau. **If you haven't seen it, also be sure to read Warren's folksy post on the White House blog about the appointment.

Lynn Parramore: What are some of the values that were instilled in your childhood that you would like to see emphasized now?

Elizabeth Warren: I guess it is a fundamental belief that people are doing the best they can. It is easy when you are successful to think that you did it all by yourself and to forget that you didn't. You got here because a lot of things broke your way. You were lucky enough to be born into a family that could afford to take care of you well. You were lucky enough to be able to have a family that could pay for you to go to school or buy your way out of scrapes. And to people who have had a lot of luck and don't acknowledge that -- the world looks like a total meritocracy, right? I'm on top because I really won, because I am better than everyone else.

I think I grew up with a profound sense of watching people who were good people, who were smart people, who were hardworking people -- God, nobody on this Earth worked harder than my mom and dad -- and they had very little. But they made do with what they had. They had their family, they raised four kids who loved them and four kids who all had our own families that we loved. And so, I guess the only way I can say it is that the value is in knowing that the game doesn't always come out fairly. There is a lot more going on. The material success at the end of the day is only a small part of it. Truly successful lives are about family.

Has your idea of fairness changed in recent years, particularly since the financial crisis?

I have been focused on the issue of fairness for 20 years now, ever since I started doing research on the economics of the middle class. I wanted to believe "work hard, play by the rules" equals success. I knew that my parents struggled, but I wanted to believe it was better now. And what I began to see in my research was that the rules were beginning steadily to work against the middle class. Healthcare, there's an example. It was not the case in the 1970s that a modest medical problem could land a family in bankruptcy. The advances in medical technology are wonderful, but the financial impact has become staggering. Sure, for one segment of society, the people with the gold-plated healthcare, the consequence of a medical problem is nothing more than medical. But for the much larger proportion of Americans, the financial consequences of a medical problem can be devastating. We studied these people in our bankruptcy research, and that's one that I regard as fundamentally unfair, not just in the sense that the Lord deals different cards to different people, and some get sick and some have babies too early. But unfair in the sense that any one of us could be hit, so why is it that we don't take care of each other? Why is it that we aren't more careful to make sure that none of us can be devastated financially by a medical problem? So, yeah, I've been studying the unfairness of how it translates into the economic insecurity of the middle class.

Is the middle class disappearing?

It is more that it is trembling; it is crumbling. Middle class used to be synonymous with secure, with steady, with boring, because middle-class people were people who were pretty much safe from the time they first started work on through retirement and until their deaths, no longer. Now, to be middle class is to worry, is to be insecure, is to face much increased odds of job loss, of a healthcare problem, of a family breakup that can land a family in economic collapse.

We need to get out of debt, yet there are so many forces that conspire against us. What is the way out of that conundrum?

It is a conundrum that has to be approached from two different directions. One direction is from the individual, the borrower, the family. My advice there is to do everything you can to protect yourself, and I have a whole list of things that I would identify. But that by itself will not be enough. There is also the part about the rules of the game, about collective action, about what banks are permitted to do, about what lenders are permitted to do, about how we finance, our healthcare, what housing policy looks like, what education policy looks like, what it costs to educate our children. For those, the appropriate place to go is to the policy forum, to talk to Congress, to talk to the president, to speak to people about how we can change the rules by which we all live. So, the way out of the problem is both on a highly individualized basis and also on a collective basis.

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Are you anti-debt?

No. Debt can be enormously valuable.

An example?

Borrowing money to buy a home - it can be a good investment. Borrowing money to buy a car so that you can get to work. Borrowing money to deal with an emergency, a serious medical problem. Those are all investments in effect in your future. But borrowing money because you can't live on your current salary, assuming you are not under some kind of emergency situation, this is your day-to-day, if you are rolling credit card debt over month to month to month, and this is your real job, this is your real life, you do have a serious problem. Because people have got to bring their expenses and their income into line with each other. And so, that is where I focus on debt particularly with individual families. This is the part you need to see. There is a red light flashing if you're carrying debt for reasons other than investment.

Why do you think you've become a lightning rod in recent years?

I don't know. I have to say I often think that the things I talk about seem fairly obvious. Maybe I am a little plain-spoken about it, but why should that bother people? Let's talk about the content of what I say. If you think I am wrong, tell me so and tell me why, and show me the data, show me the evidence, tell me the reason. Let's have a serious conversation about the content, about what has happened to the incomes of middle-class American families, about what's happened to their expenses on housing, on healthcare, on childcare, on college costs. Let's talk about how the business model of the consumer credit industry has changed. Tell me I am wrong on any of that. Let's have that conversation. But I sometimes have come to think that lightning rod is another way to say, "Let's change the conversation" -- let's make this all about something else. But let's not really talk about the serious issues.

Has our financial system become too complicated for a person with a high school or even a college degree to navigate?

I think complexity has become a strategy. Let me just start with your credit card. In 1980, Bank of America's credit card contract was just a little over 700 words long. That is a little over a page, easy to read. You could tell what the terms were. Today, credit card contracts can run 30 pages or even longer. And much of it is tiny, incomprehensible print. Now, why the changes? Well, part of it is regulation. A large part of it is that a complex document is one where it is a lot easier to hide the tricks and traps. It is a lot easier to fool people. No one realizes until after they've committed $5,000 on their credit card that the interest rate is no longer going to be 3.9 percent, but is going to jump to 28 percent.

In other words, complexity is itself a part of the business model. It is part of what keeps the customer from evaluating the cost and the risk, and it is part of what keeps the customer from comparing product to product, which would drive the prices down. So, from my point of view, complexity really is the enemy. The American people have to be in the conversation; they have every right to understand what their contracts are, they have every right to understand what policies their government is embracing, and if I can be helpful in that, I am glad to do so.

Speaking of complexity, what has surprised you most about working inside of Washington?

It really is an amazing place. I'm thinking that the thing that has surprised me most is how hard it is to have a conversation about substance. And it is too bad because it means that we are not all engaged in the same game of trying to make things better and that often to disagree is to declare mortal enemies rather than to say, "I don't see it the same way, I am seeing these data." And if you can't have that conversation, people can't change their minds.

What part of your work excites you most right now and going forward? What are you most looking forward to?

This is an historic moment. The president has just signed into law the most powerful financial reforms in three generations. And, coming out of that, it will be necessary to build the real apparatus to make markets work again, to make them work for families, to make them work, frankly, whether they like it or not. To make them work for Wall Street, to make them work for financial institutions, ultimately to make them work for the real economy. It is a moment in which there will be great change and I am simultaneously worried about what could go wrong but deeply excited and even optimistic about what could go right.

This post originally appeared on

Lynn Parramore is the editor of New Deal 2.0, Media Fellow at the Roosevelt Institute, and author of Reading the Sphinx, named a "notable scholarly book for 2008" by the Chronicle of Higher Education.

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A Call for the New Possible

Sep 2, 2010Lynn Parramore

lynn-parramore-web-headshot-1William Greider's Come Home, America provides a blueprint for possibility.

lynn-parramore-web-headshot-1William Greider's Come Home, America provides a blueprint for possibility.

There's a lot of talk these days about something called the New Normal. Some of it is justified. Consumer spending, for example, will not be going back to pre-crash levels anytime soon. The heedless mass-consumption society looks to be behind us: don't count on buying that new PlayStation for your kid this Christmas. Or the next one. It's hard to argue that a profound adjustment in the way we think about spending, saving, and credit is happening whether we like it or not. This we must accept.

But sometimes talk of the New Normal sounds like a cover for the Old Status Quo. Experts tell us that we should understand 9.5 percent unemployment as a "structural" feature of the economy. Or they try to convince us that Social Security has to be rolled back because "we can't afford it." Is this a reaction to a new reality? Or is it the kind of thinking that benefits the same old powerful interests that helped drive the country into economic ruin? Like those who want to keep wages depressed, and those who desire to play with our national savings and charge high fees for it.

The Old Status Quo folks tell us that many of us will be jobless for now and insecure when we reach retirement age. "Call us when you get honest work!" wrote Fiscal Responsibility Co-Chairman Alan Simpson to a critic who called into question his views on Social Security and its impact on women. The program, he observed, is a "milk cow with 310 millions tits." This is the kind of attitude that tells us we had better just accept our economic defeat, even as we watch bailed-out financial institutions and corporate chieftains reap record-breaking profits. We should keep our heads down and realize that crumbling roads, second-rate schools, the destruction of nature, and massive economic inequality are just "the way things are". This bleak message, discernible in the rhetoric of politicians, the antilabor strategies of the Federal Reserve, and the inequities of globalization says that the lives of American middle and working class people are in decline and that we have only ourselves to blame. In our current unbalanced economy, large banks, multinational corporations, and wealthy individuals won't have to cope with the consequences of the New Normal. The rest of us will.

Rather than accepting this managing down of our expectations and the effort to make us meek in the face of injustice, maybe we should be thinking a bit more about what is Decidedly Abnormal. Like companies existing solely for profits no matter what burden they place on society. Or government policies that put corporate profits ahead of any other national agenda. If you look at the way things are done in other countries, the state of affairs that seems so natural in America doesn't look quite so normal anymore. In his latest book, Come Home, America, veteran reporter William Greider challenges us to reconsider how we think about some key fundamentals:

"In the reckoning ahead, Americans are going to find themselves rethinking the meaning of ‘onward and upward.' We will be compelled to redefine ‘progress' and ‘plenty.' The core challenge will be to develop a new national culture and economy that yield more from less by producing more human satisfaction from less wasteful excess and destruction, as well as less greed and extremes of wealth."

Greider's book is an essential guide not only to honest conversation about the Decidedly Abnormal, but an inspiring blueprint for the New Possible -- a realm where long-held beliefs that no longer serve us can be discarded.

We have done this as a country before. In the 20th century, we moved from a society which tolerated and legitimized the discrimination of women and minorities to one in which civil rights are recognized for all. My grandmother could not vote when she came of age. My mother was barred from attending most colleges and universities. And yet these women did not keep their heads down and accept the status quo. When my mother graduated from high school, the University of North Carolina at Chapel Hill was closed to women, so she attended the Woman's College in Greensboro. She went on to earn a doctorate in education and became the second female department head at North Carolina State University. Even so, I recall her story of going to the local department store to apply for a credit card. "No problem," said the store manager. "Just have your husband come on down here to sign for you." Unwilling to play along, she told him to keep his application. Later, after the manager's research apparently showed that she earned more money than her husband, Wachovia Bank called to say that she could indeed have a card in her own name. As a result of a hard-won, generations-long struggle against unjust and undemocratic attitudes that were once considered perfectly normal, I did not face the barriers these women who came before me were forced to confront in their daily lives. I reached my 18th birthday with the opportunities of my country open to me in a way that many would have found inconceivable a mere generation before. The struggles and triumphs of my foremothers tell me that if individuals push hard enough and long enough, old beliefs do get left behind. Transformation, we know from so many stories in our nation's history, is entirely possible.

The most insidious of our current beliefs -- one that was dealt a serious blow by the financial crisis -- is a cold-blooded ideology which holds that some people are naturally economic losers, and some are winners. Over the course of a generation, this belief gradually became naturalized to the point that it seemed obvious and ineluctable. We learned to accept an economic system based on short-term gains and deceptions that denied our fundamental human needs and values. As Greider put it, we got used to a growth engine that "actively damages anything it does not itself value." Here is what this growth engine values: wealth accumulation at the top. Here are the things it does not value: justice, equality, morality, beauty, the future, the planet. It tolerates stripped pensions, sick bodies, and polluted oceans. It is not interested in our well-being. Nor even nature itself.

Instead of accepting this regime of false belief -- as false as that which viewed women and minorities as less than human -- Greider encourages us to embark on a journey of self-discovery in which we ask ourselves searching questions about who we are, how we want to live, and what we will tolerate. Rather than keeping our heads down, he urges us to rediscover our self-confidence by coming out of our isolation to talk to one another about what we think and feel and sharing the stories of struggle that have come down to us from our families and our communities. Uninhibited conversation, self-reflection and remembering the past can ignite the spark that will help us to consider turning our national focus from the accumulation of more wealth to the enhancement of human lives; from unfettered growth to sustainable development; from sitting on the sidelines of our democracy to participating in it -- loudly. Greider calls for nothing less that a new conception of progress focused on commonly-shared values about life. In the realm of the New Possible, there are things a child needs much more than new PlayStation. She needs parks to play in, schools to learn in, and bridges that don't fall down. She needs a sense that she can safely explore the world, develop her abilities, make choices and a lead self-directed, fulfilling life.

Greider's investigation of the New Possible calls for restoring public obligations to corporations, confronting wage-depressing forces, and guaranteeing that our essential needs for food, shelter, and security are met. It calls for an economic system with less wasteful destruction and more responsiveness to society at large. And for decentralizing the power of the federal government so that states and communities can foster more social and economic innovation. Most importantly, it calls for strengthening our democracy by promoting citizens' ability to actively shape our social and economic landscape.

Proponents of the Old Status Quo and defenders of the Decidedly Abnormal want us to believe that all this boils down to questions of what we can afford. Champions of the New Possible know that it's more about what we value. How is it that we could afford to rescue banks in crisis and conduct repeated, unnecessary wars? Because we can afford it, or because these are the things powerful interests have insisted that we prioritize? Other countries do not have guaranteed health care, modern high-speed rail systems and affordable childcare because they are richer than we are. They have them because they have different, more human-centered and life-sustaining priorities embedded in their domestic agendas. Powerful interests want us to remain timid and defeated. They do not want us to be self-directed and to demand change, and they block our efforts with every bit of lobbying power and persuasion they have. They usually get to decide. That is not normal.

The Herculean task of transforming the corporate and financial sectors into partners in our human future will not happen quickly, and it will not happen without patient, sustained struggle. We will have to give them incentives for good behavior and penalize them if they continue their Abnormal ways, such as defrauding us, polluting our environment, or keeping wages down even as productivity rises. We will also have to trade our devotion to mass consumption for a commitment to investing in the hospitals, highways and schools we need for a productive economy and livable society. And most of all, we will need to rediscover that what we think and how we act as individuals matters. When the man at the department store tells us we will have to play his game, we have to firmly say "no."

The "good times" as we knew them are not coming back. But if we can summon the energy to construct a new framework for American life, better times may await us. Greider has challenged us to start the conversation. Let's do that. Today.

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Surprise, Surprise! Ben Bernanke Discovers the 'Paradox of Thrift' (Sort Of)

Aug 31, 2010Marshall Auerback

marshall-auerback-100 When consumers are trying to save, the government must step in to create growth.  That's going to require smart and imaginative fiscal policy.

marshall-auerback-100 When consumers are trying to save, the government must step in to create growth.  That's going to require smart and imaginative fiscal policy.

That “central bankers alone cannot solve the world’s economic problems” was the most extraordinary concession to come out of the mouth of Federal Reserve Chairman Ben Bernanke during last Friday’s speech at the Jackson Hole Economic Symposium.

Of course, he’s right, but, rather than acknowledging that fiscal policy is the most effective counter-stabilisation tool available to national governments, Bernanke still trumpets the idea that monetary policy is the only game in town. Despite huge efforts by the Fed to stimulate the private sector via “quantitative easing” and a veritable alphabet soup of lending programs over the past year and a half, consumers remain reluctant to spend, banks remain reluctant to lend, and businesses are hoarding corporate cash rather than reinvesting. The problem is that “unconventional monetary policy measures" have had no impact because all the central bank is doing is changing the term structure of assets on its balance sheet, rather than generating additional spending power in the economy. This is understandable, given the economic backdrop: in a time of over-indebted households and weak aggregate demand, workers are simply losing their jobs, remaining unemployed and loath to spend.

In short, we have what Keynes once described as the “paradox of thrift” in action. Any individual can increase his/her savings by reducing spending on consumption goods. So long as this decision does not affect one’s income—and there is no reason to assume that it would—she ends up with less consumption and more saving. My friend, Randy Wray, gives a good illustration of this phenomenon:

The example I always use involves Mary who usually eats a hamburger at Macdonald’s every day. She decides to forego one hamburger per week, to accumulate savings. Of course, so long as she sticks to her plan, she will add to her savings (and financial wealth) every week. The question is this: what if everyone did the same thing as Mary—would the reduction of the consumption of hamburgers raise aggregate (national) saving (and financial wealth)?

The answer is that it will not. Why not? Because Macdonald’s will not sell as many hamburgers, it will begin to lay-off workers and reduce its orders for bread, meat, catsup, pickles, and so on.

All those workers who lose their jobs will have lower incomes, and will have to reduce their own saving. You can use the notion of the multiplier to show that this process comes to a stop when the lower saving by all those who lost their jobs equals the higher saving of all those who cut their hamburger consumption. At the aggregate level, there is no accumulation of savings (financial wealth).

Of course that is a simple and even silly example. But the underlying explanation is that when we look at the individual’s increase of saving, we can safely ignore any macro effects because they are so small that they have only an infinitely small impact on the economy as a whole.

But if everyone tries to increase saving, we cannot ignore the effects of lower spending on the economy as a whole.

One of Chairman Bernanke’s persistent blind spots in his inability to recognize this basic “fallacy of composition." The President of the European Central Bank, Jean-Claude Trichet, suffers from the same cognitive defect as evidenced by his call to deal promptly with “fiscal imbalances” as “an important precondition for sustaining a durable recovery."

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The non-government sector’s newfound love of thrift is precisely what everybody keeps urging in order to create the foundations of a sustainable economic recovery, but both Bernanke and Trichet fail to realize that if private households and businesses desire a surplus then the government sector has to target a deficit for growth to be maintained. This inability to understand basic sectoral balances leads to the fraudulent idea that the government is “running out of money." It is not. The only shortfall that exists today is political will and imagination. The US government refuses to fill a greater proportion of aggregate demand with public spending or additional tax cuts and so exacerbates the private sector’s uncertainty and its corresponding desire for a higher ex ante savings rate.

For decades, governments have been pressured to run tight fiscal positions which have entrenched persistently high unemployment rates so that the inflation genie would not break out of the bottle. But the evidence continues to mount that the policy of simply keeping interest rates down is a variable instrument with diffuse impacts that creates as many losers as winners. For every borrower who benefits, there is a pensioner, starved of income from the government’s financial assets. In the meantime, unemployment, by any honest measure, remains in double digits.

Ben Bernanke is right: central banks can’t do all of the heavy lifting here. Real recovery is going to require government initiative via fiscal policy, starting with job creation by government. And we will need direct job creation, with government paying the wages and benefits for up to 12 million new jobs. Announce a Job Guarantee program, a national payroll tax holiday, and a per capita revenue sharing program with the states. In regard to our housing crisis, we need massive loan modifications to make mortgages truly affordable for the length of the loan. We also need large scale employment programs that restore households’ capacity to pay; we need to deal with the over-supply of homes and to help people to stay in their houses; and we need swift and cheap bankruptcy procedures that provide a fresh start to the people who cannot afford to keep their houses. Given that the government effectively is the main instrument behind housing finance today, it is in a position to simplify the foreclosure process and stand ready to buy the homes of distressed mortgagors at the lesser of current market value or the value of the mortgage. It can allow the homeowner to lease the home at a fair market rental price, with an option to buy it back after two years at the then-prevailing market rate. This would not only help to deal with the excess supply of homes (and so put a floor under home prices), but also would help to restructure the finances of households while allowing them to remain in their homes.

Taken in sum, all of these measures will allow households to go about the business of actually repairing their balance sheets. Not only do they make economic sense, but they would be politically popular as well, because they are designed to serve the vast majority of Americans who don’t work on Wall Street. Expanding fiscal policy further will provide further support to private saving while continuing to expand aggregate demand and employment growth.

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

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Time to Bring Back the Home Owners Loan Corporation?

Aug 31, 2010David B. Woolner

The New Deal's mortgage relief program offers an effective alternative to the Obama administration's failed strategy.

The New Deal's mortgage relief program offers an effective alternative to the Obama administration's failed strategy.

Continued high unemployment is unfortunately not the only bad piece of economic news that the nation has had to face this summer. It now appears as if the level of home foreclosures will continue at an alarming pace, with many economists now predicting that the number of Americans likely to lose their homes in 2010 will exceed one million -- a figure that would surpass the more than 900,000 homes lost to foreclosure in 2009.

With so many homes at risk, the current housing crisis certainly rivals that which struck the nation in the wake of the 1929 crash, when the housing industry all but collapsed. Indeed by the end of 1933, housing starts had fallen to one tenth of pre-1929 levels, and the number of urban homes that were either in delinquency or in foreclosure was running at a staggering fifty per cent.

The New Deal response to this crisis was immediate and effective. In June of 1933, FDR signed the Homeowners Refinancing Act, which established the Home Owners Loan Corporation (HOLC), a new federal agency whose chief purpose was to refinance existing home mortgages that were in default and at risk of foreclosure. The HOLC also assisted mortgage lenders by providing them with additional capital and by refinancing problematic loans. By the close of 1935, when the program had come to an end, the HOLC had refinanced approximately twenty per cent of all the urban mortgages in the United States -- over one million homes -- and had lent out roughly $3.5 billon (an estimated $750 billion in today's dollars).

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Equally important, the HOLC's strategy of buying out existing mortgages and replacing them with new ones based, not on the typical short-term mortgage agreement of the time (usually a non-amortized loan of seven to ten years terminating with a balloon payment), but rather on the far more affordable amortized mortgage of between twenty-five and thirty years, would eventually become standard practice and help revolutionize the mortgage industry. The HOLC obtained its financing by borrowing from the Treasury and from capital markets, and by the time it had closed its books in the early 1950s, it had turned a small profit.

Given the relatively poor showing to date of the Obama administration's Making Home Affordable Program -- a voluntary effort that pays lenders to modify bad loans -- and the growing fear among some economists that a continuation of the mortgage crisis may drag the US back into recession, perhaps it is time to consider a more direct federal response to the crisis along the lines of a new HOLC. Today's mortgage market is of course much more complex than that of the 1930s, but the essential problem -- keeping struggling families in their homes -- is the same. A new HOLC might be a far more effective and efficient means of providing relief to the millions of Americans in danger of losing their piece of the American dream. It would also help stabilize our fragile economy and might even prevent us from slipping back into a recession. For all of these reasons, providing direct federal assistance to struggling home owners is not just good social policy, it is also sound economic policy that, from the perspective of those families who are but weeks away from losing their most precious financial asset, cannot be implemented soon enough.

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

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Higher Education, Even Higher Costs

Aug 24, 2010Anita Sonawane

mortar-board-and-money-150Student debt numbers continue to soar despite government help.

Is college worth the cost? The answer should be a resounding yes.

mortar-board-and-money-150Student debt numbers continue to soar despite government help.

Is college worth the cost? The answer should be a resounding yes.

According to the U.S. Census Bureau, college graduates earn about $20,000 more than high school graduates per year. They also tend to have better health outcomes and access to professional social networks. Yet the fact remains that attending college is an expensive decision. As young men and women of my generation begin their adult lives, they are saddled with thousands of dollars in debt. Indeed, the Project on Student Debt estimates that average debt levels for graduating seniors in 2008 was $23,200.

Furthermore, Mark Kantrowitz at Finaid.Org confirmed that national student loan debt has recently exceeded that of credit cards based on data from the Federal Reserve. In the wake of a weak economy and record unemployment, cautious consumers are paying off their credit card bills, which has only served to emphasize the trend in high student loan debt. Certainly, the Obama administration has indicated its commitment to affordable higher education. In March, as part of the healthcare overhaul, President Obama signed legislation, which increases the maximum award for Pell grants from $5,550 to $5,975 by 2017. College graduates also have the option of limiting their loan repayments to 10 percent of their discretionary income. If they maintain their payments for 20 years (10 years for those in public service), the balance is forgiven.

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These terms are generous, but they do not address the heart of the problem: the ever-rising costs of education in the U.S. According to College Board, tuition has increased more than six percent at public universities and more than four percent at private, not-for-profit universities just within the last year. In fact, Richard Vedder, director of the Center of College Affordability and Productivity at Ohio University, even argues that federal student loan programs have contributed to the inflation in college tuition. His research has drawn attention to the fact that enrollment figures have stagnated despite increases in federal aid. Mr. Vedder states: "All the talk about increased access, greater affordability and enhanced accountability is just that: talk. The three 'A's make for good rhetorical flourishes, but what is needed for real transformation and rising productivity is attention to the three 'I's-information, incentives, and innovation."

As purchasers of higher education, students must demand that their universities pursue innovative, cost-cutting measures while providing transparency on college pricing. More importantly, we need to empower my generation to make smart decisions about their finances now. We need to claim more "bang for our buck," at least for the meantime.

For my part, I remember the excitement of receiving college acceptances as a 17-year old senior in high school. But I knew the financial burden of attending some of those colleges would have been too great for my family. So I chose to attend the Macaulay Honors College -- a flagship program of the City University of New York -- that provides its students with a full undergraduate tuition scholarship and $7,500 to pursue research and internship opportunities. I was extremely fortunate; some of my peers were not so fortunate. But I remain inspired by the vision that one day, young adults will be able to pursue higher education regardless of their socioeconomic circumstances or the cost of college.

Anita Sonawane majors in economics at the Macaulay Honors College of the City University of New York. She is one of the Lead Policy Strategists for Economic Development at the Roosevelt Campus Network.

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On Still Not Owning a Credit Card

Aug 24, 2010Bryce Covert

Soaring interest rates, loopholes and lame excuses: even after the CARD act, credit cards are risky.

Soaring interest rates, loopholes and lame excuses: even after the CARD act, credit cards are risky.

Sunday marked the final phase of the Credit Card Accountability Responsibility and Disclosure Act of 2009 going into effect. This last stage has good news for consumers: lenders are banned from charging fees larger than the infraction -- if you spend $20 over your max, you can't pay more than $20 in a penalty fee. Issuers can no longer charge you for not using your card. And they can only charge once per each violation. In essence, this final phase is all about the fees.

Earlier phases reign in when and how credit card companies can jack up interest rates. Rates can't be raised on a card in the first year of an account. Companies now have to give their customers 45 days' warning before hiking up a rate, as well as a reason for raising it. They then must reevaluate the newly raised rate every six months, lowering it if the borrower has made six consecutive payments on time. (Although the vagueness of a reevaluation against factors such as market conditions and a consumers' creditworthiness sound ripe for interpretation.)

The new rules have sent credit card lenders scrambling to protect profits -- as good a sign as any that they're likely to have a real effect on the companies they regulate. But the scramble also points to the ways the lenders plan to weasel around them. Before the CARD Act's limits on interest rates hit, lenders quickly sent them soaring. The average interest rate on existing cards is far outpacing the prime rate, and rates are at their highest level in nine years. Says a Wall Street Journal article, "In the second quarter, the average interest rate on existing cards reached 14.7%, up from 13.1% a year earlier, according to research firm Synovate, a unit of Aegis Group PLC. That was the highest level since 2001."

The card companies claim that this move is not just to recoup any hit to profits from the legislation, but also because of "consumers still charging on their credit cards, but being unable to pay," says Lauren Guenveur, the Synovate study director. But as Yves Smith points out, the number of credit card accounts has fallen by over 20% since their peak, and outstanding balances by 6%. Consumers are focusing on paying off debts (as well as being cut off from credit cards). There's no doubt that defaulting consumers have a role to play here, of course. Over 750,000 consumers filed for bankruptcy through June 30 this year, up 15% for the same period in 2009 -- on pace to reach the highest level since the new bankruptcy laws were put in place in 2005. Clearly many people in this recession are unable to pay their balances. But as I showed in my last piece on credit cards, bankruptcy isn't what credit card companies fear -- it's just that they want to prolong the period before filing. They want nothing more than to have lots of customers who can't pay off their balances.

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And as Beverly Blair Harzog of points out, there are still plenty of loopholes in this act. One helps to keep a consumer in the "sweat box": while the act requires issuers to apply payments above the minimum to the higher balances first, they can still put the minimum payment toward balances with lower interest rates. So the higher rate balances don't get the relief of your payment -- the lower rate, less costly accounts do, leaving the others to rack up interest. Other loopholes: interest rates, while they can't be hiked retroactively on old cards or within the first year of an account, can be raised "significantly" in all other circumstances as long as you get that 45 days-ahead notice. While you will now get a notification in the mail if your card has been discontinued, no one is sure just how much notification. Companies can't raise an interest rate on one account because a consumer was late on an unrelated account, but Harzog says she sees some "suspicious" language lingering in cards' Terms & Conditions.

Consumer advocates are counting the CARD Act as a big win, because with more explanation and warning of both fees and rate hikes, there is less room for borrowers to get suckered into traps. And more information will certainly mean a more level playing field. But as Moshe Orenbuch, a banking analyst at Credit Suisse, puts it, "What the industry is doing is taking that cost and spreading it over all customers, as opposed to a smaller number." Interest rate hikes are likely to continue across the board as a response to this legislation. And as the above loopholes prove, there will be holes for the companies to wriggle through -- even if those holes might be smaller than they were before.

Many of the rules in this act highlight practices I can't even believe were once condoned -- like charging someone for not using their card. While that has been abolished, other suspicious practices remain intact. Innovating in order to squeeze through loopholes and find new ways to make profits has come to define credit card company practices in recent years. Why would that change now? Even with the new rules, they'll likely find ways to keep the sweat box full. I'm still skeptical, and I'm still staying away from credit cards as long as I can. Who's with me?

Bryce Covert is Assistant Editor at New Deal 2.0.

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Housing and Bubbles

Aug 20, 2010Joe Costello

skyline-150Where is the real estate wreck heading?

skyline-150Where is the real estate wreck heading?

Well, there was a meeting in DC this and the Treasury Secretary, Wall Street, banks, and MBS bondholders all agreed something should be done with Fannie and Freddie, as long as no one, except maybe homeowners, incurred any losses. Fannie and Freddie represent a lot that's wrong with our government. It became a bipartisan cesspool of corruption, jobbery and incompetence over the past decade, for which every public revelation only led to expressions of surprise by DC officialdom. Most recently Fannie and Freddie became dumping grounds for the worst of the real estate dreck, and that's saying something.

Fannie and Freddie played a role in the housing bubble. The last couple months the housing market, let's leave out the commercial market which is worse, has stalled. All the Fed and Treasury blowing couldn't reflate the bubble, and prices will continue their slow movement down for a very long time. Remember the NASDAQ ten years on is at 40% of its bubble peak, while Japanese real estate, 20 years on, is just over 20% of its peak value, so that leaves at lot downward room for US housing, depending on how big you think the bubble was.

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Most interesting of course is how all the thinking remains quite bubbly. Bill Gross of PIMCo came out and warned last week that without any gov guarantee PIMCO would quit the mortgage market. Mr. Gross' fund sits on $36 billion in MBS, so he has a definite interest. Even more bubbly was Mr. Gross' suggestion yesterday that the US government back refinance of all mortgages currently paying over five percent:

Massive refinancing of the nearly 60% of mortgages backed by the government that are one full percentage point above today's 4.5% mortgage rates would provide quick stimulus "as well as a potential lift of 5-10% in terms of housing prices," he said.

I suppose a chunk of that is now held by PIMCO and the implicit government guarantee would then be explicit, or better you could just get it off your books, plus free money right? I guess that's win-win-win. I didn't hear any idea on what would be done with the 25% of the people underwater in their mortgages. It will be a long long time before real estate in this country heads up, bet on it.

Joe Costello was communications director for Jerry Brown’s 1992 presidential campaign and was a senior adviser for Howard Dean’s effort in 2004.

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