Daily Digest - December 19: It's a Whole New Economic Policy-Making World

Dec 18, 2014Rachel Goldfarb

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Uncharted Interest Rate Territory (U.S. News & World Report)

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

Uncharted Interest Rate Territory (U.S. News & World Report)

Jason Gold points out that since interest rates have been declining for 33 years, none of today's lawmakers know quite what they're in for when the Fed begins to raise rates in 2015.

  • Roosevelt Take: Roosevelt Institute Fellow Mike Konczal says that raising interest rates is not the way to fight "financial instability."

The Greatest Tax Story Ever Told (Bloomberg Businessweek)

Zachary R. Mider shares the story of the very first corporate tax inversion, in which a company incorporates abroad to avoid paying U.S. taxes. The idea was invented by a liberal tax lawyer in 1982.

A Big Safety Net and Strong Job Market Can Coexist. Just Ask Scandinavia. (NYT)

The strong safety net programs in Scandinavian countries, which include far more direct aid, might be more effective at getting people to work than the U.S. tax subsidy model, writes Neil Irwin.

How ALEC Helped Undermine Public Unions (WaPo)

Alex Hertel-Fernandez explains that ALEC's attacks on public sector unions aren't new: ALEC-backed anti-union laws were enacted in some states a decade before the Great Recession.

Pro-Warren Protesters Take Their Fight to Wall Street (MSNBC)

Zachary Roth reports on yesterday's protest at Citigroup's New York City headquarters, where protesters denounced the Citigroup-crafted measure weakening Dodd-Frank in the spending bill.

From the E.R. to the Courtroom: How Nonprofit Hospitals Are Seizing Patients’ Wages (ProPublica)

Paul Kiel and Chris Arnold profile the Missouri hospital that sues the most patients in the state. Nonprofit hospitals are required to offer low-cost charity care, but that isn't particularly regulated.

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Ten Years: Students Moving the Country Forward

Dec 18, 2014Taylor Jo Isenberg

After ten years of engaging young people in the political process, the Roosevelt Institute | Campus Network continues to push for a system that works for all of us.

In an email to peers at Stanford University students on November 4, 2004, a student attempted to turn the tide on the malaise setting in after a disappointing election night for progressives. He captured the sentiment of the moment:

After ten years of engaging young people in the political process, the Roosevelt Institute | Campus Network continues to push for a system that works for all of us.

In an email to peers at Stanford University students on November 4, 2004, a student attempted to turn the tide on the malaise setting in after a disappointing election night for progressives. He captured the sentiment of the moment:

Elections are a great time to shape the future of our country, but democracy is not something that happens every four years. We have a lot of work to do … we need to figure out how to explain what we care about in a coherent and convincing way, we need to develop a leadership network to match the conservatives of the next generation, and we need to keep public officials accountable to the issues that brought us all in.

In a follow-up email, he boiled it down to one simple statement: "I'm seeing a student-run think tank that will reinvigorate mainstream politics with a new generation's ideas."

In one of those rare occurrences that indicate that people might be on to something, others were incubating a similar concept. Two friends at Middlebury and Bates also felt compelled to respond to the political moment, and articulated their initial thoughts on a "think tank that unites college students across America under one political agenda aimed at taking back our democracy." Something similar was taking shape at Yale University.

The rest of the story is Roosevelt lore – the late nights, cross-country recruiting trips, the passionate debates about how best to position the organization to effectively elevate young people as a source for powerful ideas capable of policy change.

Yet what makes this particular story potent is that, ten years later, we celebrate not only that vision, but also today's reality. Thousands of students over the past ten years have worked tirelessly to actualize the initial vision that emerged from a bleak moment in our political history. We’ve published 600+ policy solutions that have been read over half a million times; trained thousands on how to challenge the fundamentals of our social, political, and economic systems; and catapulted young people as civic actors into key debates on the policy challenges of our day. Most importantly, the list of student and chapter successes on the ground is staggering in its breadth and depth of examples where young people have taken active ownership of their communities to bring about solutions with meaningful impact.

As a proud Roosevelter, I think we have much to celebrate. We took a few days last week to elevate our work in Washington, DC – a celebration that included a conversation with Representative Rosa DeLauro and members of Congress on how to look to best practices from Roosevelt’s model to effectively engage a new generation in policy and politics, a discussion on the Campus Network’s next ten years, and presentations at the White House featuring our student’s policy work. And of course, we hosted a party for 190+ alumni and supporters (a rockin’ one, according to keynote speaker Jared Bernstein).

Ten years is also a moment to look towards our future. It’s been a common refrain around our office and with our members that there are some unsettling parallels between the post-election reality ten years ago and the one we face today. Distrust of institutions is on the rise, policy priorities with high public support are thwarted by special interests, and our debate is seriously deprived (with a few exceptions) of a vision for what our country can build towards. We’re still in need of a shake up. The upside? Where things are happening, it’s often led or heavily supported by young people – from the ballot initiatives in the 2014 election to the sustained demand for accountability in our justice system.

It’s no secret that the political establishment is perplexed about young people. The media haphazardly jumps between two narratives, unable to decide if we’re self-absorbed, naïve and complacent in the face of our economic future, or the most civically minded quiet do-gooders since the Greatest Generation. Yet many of the major civic and political organizations are struggling with declining membership numbers. It’s not unheard of for organizations to develop “Millennial engagement strategies” to combat this problem.

We think the answer pretty simple: it’s about institutions and systems embracing the shifts instead of fearing them. From the moment they walk through the door, our members are asked to be a part of building something as equals. They’re given the tools to be the architects – and are instantly connected to a network of peers who support them. In a political system more interested in managing young people than tapping into their ingenuity and energy, Roosevelters come to us because they see the limitations of traditional pathways of engagement. As a result, the Roosevelt Institute | Campus Network has remained a network that evolves and shifts as our students lead the way.

We aren’t, of course, the only ones – there is a vibrant ecosystem of organizations and movements that are also innovating and responding to the changing ways people of all ages are expressing their priorities. We could not be more proud of our alumni who have gone on to lead, participate in, and learn from these efforts.

Our successes also beg the question – what does this mean for the next ten years? How do we continue to amplify our strengths and evolve to reflect the moment, opportunities, and risks? That’s the conversation we’re having next – a conversation we want our alumni and supporters to be a part of. In 2015, the Roosevelt Institute will introduce our Alumni Network, which will focus on how to strengthen the Roosevelt community and its potential to influence social and economic priorities. If we are to respond to the call for an economic and democratic system that works for this century, it is going to take all of us.

It is now a Campus Network tradition to close any major convening or retreat with a passage from Jean Edward Smith’s FDR. It narrates President Franklin D. Roosevelt accepting the nomination at the 1936 Democratic National Convention. It’s a famous speech, most notably for his “This generation of Americans has a rendezvous with destiny” quote. We start reading a little earlier – Smith sets the stage, with the country emerging from the worst of the Great Depression. Roosevelt walks to the platform on the arm of his son James. Smith details a powerful moment, where the President sees the poet Edwin Markham, author of Man with a Hoe, reaches out to greet him, and stumbles and falls. People rush to snap his braces back into place. He then proceeds to give the speech, which puts forward uncompromising and substantive statements on political and economic equality. It’s resolute, forceful, and clear – there are wrongs we must right, power that needs to be rebalanced, problems to be solved by the people.

I hope that our members take two things away from the passage. First, that every individual can’t do it alone. Second, that it is possible to stand for something that upsets the current balance of power – and to see the country move forward as a result. It’s a valuable reminder today, when all seems hopeless in the face of stagnation and entrenchment.

As we look to the next ten years, that’s the question Roosevelters will continue to ask, and will eventually answer. What do we stand for, and how will we move this country forward?

Taylor Jo Isenberg is the Vice President of Networks at the Roosevelt Institute.

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Daily Digest - December 18: Can Subprime Lending Really Be Safe?

Dec 18, 2014Rachel Goldfarb

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

The Return of Subprime Lending (AJAM)

Matt Birkbeck says a new wave of subprime mortgages appear to be following much stricter rules and have far less usurious interest rates, but regulators are still watching closely.

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

The Return of Subprime Lending (AJAM)

Matt Birkbeck says a new wave of subprime mortgages appear to be following much stricter rules and have far less usurious interest rates, but regulators are still watching closely.

Paid Maternity Leave Is Good for Business (WSJ)

Susan Wojcicki says that the United States is behind the rest of the world in not offering paid maternity leave to all mothers, and that such a policy makes good sense socially and economically.

Federal Reserve Says It Will Be ‘Patient’ on Interest Rate Timing (NYT)

Binyamin Appelbaum reports on the latest comments from Federal Reserve Chair Janet Yellen about when the Fed will start raising interest rates. The process won't begin before April.

Fired Walmart Worker Says She Had to Choose Between a Paycheck and a Child (The Guardian)

Lauren Gambino and Jessica Glenza profile one former Walmart employee who was still asked to work with dangerous chemicals after her doctor said they would endanger her pregnancy.

What Was the Job? (Pacific Standard)

Kyle Chayka says the gig economy brought with it a massive reinterpretation of what it means to have a job, leaving behind a disenfranchised workforce without any of the benefits it once enjoyed.

New on Next New Deal

Ten Years: Students Moving the Country Forward

Roosevelt Institute Vice President of Networks Taylor Jo Isenberg reflects on the Campus Network's tenth anniversary, and how Roosevelters can continuing pushing for a better country for all of us.

Two Contradictory Arguments That Dodd-Frank is Crony Capitalism

Roosevelt Institute Fellow Mike Konczal compares two mutually exclusive conservative analyses of what crony capitalism means and how to fix it, which suggest this isn't a useful concept in policy debates.

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Two Contradictory Arguments That Dodd-Frank is Crony Capitalism

Dec 17, 2014Mike Konczal

I’m pretty convinced that the term “crony capitalism,” as deployed by the right, is useless as a political or analytical tool. I keep a close eye on how conservatives talk about financial reform, and according to the right, Dodd-Frank is crony capitalism. Oh noes! But what does that mean, and how can we stop it? Here’s a fascinating case in point: two AEI scholars with different publications argue that we need to stop Dodd-Frank from enabling crony capitalism, and then proceed to describe two opposite, mutually exclusive sets of problems and solutions.

First, a good test question: The Federal Reserve recently required that the largest firms have a greater capital surcharge than had been originally proposed. Is that cronyism?

Here’s one story, from James Pethokoukis in ”Fighting the Crony Capitalist Alliance”: “our highly concentrated and interconnected, Too Big to Fail financial system [...] gives a competitive edge to megabanks.” How is that? Regulators create incentives for big banks to take on risks “such as investing in mortgage-backed securities and complex derivatives.” Banks are the size they are, and do the activities that they do, because of the actions of regulators.

So how do we combat this problem? According to Pethokoukis, we should “substantially raise the capital requirements for Too Big To Fail banks” to limit risk. Even more, “such capital requirements might well nudge the biggest banks into shrinking themselves or breaking up.”

Here’s another story, from Tim Carney’s “Anti-Cronyism Agenda for the 114th Congress”: Dodd-Frank is cronyism because “[e]xcessive regulation is often the most effective crony capitalism.” What’s worse is that Dodd-Frank designates the biggest firms as Systemically Important Financial Institutions (SIFIs), meaning that they pose a systemic risk to the economy. Those firms are put under more regulation, but it’s obviously a cover for a permanent set of protections.

So what should we do? According to Carney’s agenda, Congress should “open banking up to more competition by repealing regulations that give large incumbent banks advantages over smaller ones.” Well, which regulations are those? “Congress should repeal its authority to designate large financial firms as SIFIs.”

Note that though these are from the same institution and carry the same banner of fighting “cronyism,” these agendas are the exact opposite of each other. For Pethokoukis, the important goal is identifying the largest and riskiest institutions and putting aggressive regulations on them, with capital requirements set high enough that they could fundamentally shrink those banks. For Carney, it’s important that we do not identify any firm as too large that it is risky for the economy, and thus increase their capital requirements, since doing so just encourages cronyism -- indeed, it is the logical conclusion of cronyism. Don’t regulate the largest firms with more attention or care; just don’t do anything to them.

In the Pethokoukis version, the financial sector poses a real threat to the stability of the economy, and as such special efforts should be made to prevent failure and handle failure when it does occur. His answer is, essentially, to do more. In the Carney version, there’s no real danger outside the government’s interference, or at least not a danger that is worth a policy solution. His answer is to do nothing, except repeal what regulation already exists.

And, crucially, for Pethokoukis, the recent increase in capital surcharges for SIFIs are a good idea; for Carney, they enshrine the problem by working through the SIFI framework, and are a bad idea. How can a policy agenda be built around such a “cronyism” framework?

There are other problems with “cronyism” as described here. Pethokoukis blames cronyism for the concentration in the financial sector in the last few decades. However the previous argument had been that the size and geographic restrictions that prevented this concentration before the 1990s are the real cronyism. Dodd-Frank blocks a single financial firm from having liabilities in excess of 10 percent of all liabilities, benefitting smaller firms at the expense of larger ones. Is that cronyism or the opposite? Cronyism can’t just be “things turned out in a terrible way when left to the markets.”

As Rich Yeselson notes in a fantastic essay on New Left historians in the recent issue of Democracy, the Gabriel Kolko-inspired stories about how regulations evolves (stories that influence Carney) are monomaniacally mono-causal. So just quoting CEOs’ statements to the press about Dodd-Frank constitutes analysis, as the regulations must obviously flow from elite desires through their captured lackeys in the state.

But Dodd-Frank is more complicated than that - look at the effort to stop the CFPB from starting, or the epic battles both between and within regulators, the state and consumers over derivatives. Carney’s top-down inescapable vision of how reform works leaves no room for the contingency of actual efforts to fix a broken system. In turn, this leaves us with no way to actually critique what Dodd-Frank does. Worse, it conflates fighting “cronyism” with an agenda of laissez-faire economics, liberty of contract, and hard money, sneaking in a three-legged stool of reactionary thought through our concerns about fairness.

Actual cronyism is a real problem, but I’ve seen no evidence that it adds up to a systemic criticism of our economy as a whole. Instead, we need a language of accountability, benefit and power in how markets are structured. Without this, we’ll have no working compass for reform.

Follow or contact the Rortybomb blog:
 
  

 

I’m pretty convinced that the term “crony capitalism,” as deployed by the right, is useless as a political or analytical tool. I keep a close eye on how conservatives talk about financial reform, and according to the right, Dodd-Frank is crony capitalism. Oh noes! But what does that mean, and how can we stop it? Here’s a fascinating case in point: two AEI scholars with different publications argue that we need to stop Dodd-Frank from enabling crony capitalism, and then proceed to describe two opposite, mutually exclusive sets of problems and solutions.

First, a good test question: The Federal Reserve recently required that the largest firms have a greater capital surcharge than had been originally proposed. Is that cronyism?

Here’s one story, from James Pethokoukis in ”Fighting the Crony Capitalist Alliance”: “our highly concentrated and interconnected, Too Big to Fail financial system [...] gives a competitive edge to megabanks.” How is that? Regulators create incentives for big banks to take on risks “such as investing in mortgage-backed securities and complex derivatives.” Banks are the size they are, and do the activities that they do, because of the actions of regulators.

So how do we combat this problem? According to Pethokoukis, we should “substantially raise the capital requirements for Too Big To Fail banks” to limit risk. Even more, “such capital requirements might well nudge the biggest banks into shrinking themselves or breaking up.”

Here’s another story, from Tim Carney’s “Anti-Cronyism Agenda for the 114th Congress”: Dodd-Frank is cronyism because “[e]xcessive regulation is often the most effective crony capitalism.” What’s worse is that Dodd-Frank designates the biggest firms as Systemically Important Financial Institutions (SIFIs), meaning that they pose a systemic risk to the economy. Those firms are put under more regulation, but it’s obviously a cover for a permanent set of protections.

So what should we do? According to Carney’s agenda, Congress should “open banking up to more competition by repealing regulations that give large incumbent banks advantages over smaller ones.” Well, which regulations are those? “Congress should repeal its authority to designate large financial firms as SIFIs.”

Note that though these are from the same institution and carry the same banner of fighting “cronyism,” these agendas are the exact opposite of each other. For Pethokoukis, the important goal is identifying the largest and riskiest institutions and putting aggressive regulations on them, with capital requirements set high enough that they could fundamentally shrink those banks. For Carney, it’s important that we do not identify any firm as too large that it is risky for the economy, and thus increase their capital requirements, since doing so just encourages cronyism -- indeed, it is the logical conclusion of cronyism. Don’t regulate the largest firms with more attention or care; just don’t do anything to them.

In the Pethokoukis version, the financial sector poses a real threat to the stability of the economy, and as such special efforts should be made to prevent failure and handle failure when it does occur. His answer is, essentially, to do more. In the Carney version, there’s no real danger outside the government’s interference, or at least not a danger that is worth a policy solution. His answer is to do nothing, except repeal what regulation already exists.

And, crucially, for Pethokoukis, the recent increase in capital surcharges for SIFIs are a good idea; for Carney, they enshrine the problem by working through the SIFI framework, and are a bad idea. How can a policy agenda be built around such a “cronyism” framework?

There are other problems with “cronyism” as described here. Pethokoukis blames cronyism for the concentration in the financial sector in the last few decades. However the previous argument had been that the size and geographic restrictions that prevented this concentration before the 1990s are the real cronyism. Dodd-Frank blocks a single financial firm from having liabilities in excess of 10 percent of all liabilities, benefitting smaller firms at the expense of larger ones. Is that cronyism or the opposite? Cronyism can’t just be “things turned out in a terrible way when left to the markets.”

As Rich Yeselson notes in a fantastic essay on New Left historians in the recent issue of Democracy, the Gabriel Kolko-inspired stories about how regulations evolves (stories that influence Carney) are monomaniacally mono-causal. So just quoting CEOs’ statements to the press about Dodd-Frank constitutes analysis, as the regulations must obviously flow from elite desires through their captured lackeys in the state.

But Dodd-Frank is more complicated than that - look at the effort to stop the CFPB from starting, or the epic battles both between and within regulators, the state and consumers over derivatives. Carney’s top-down inescapable vision of how reform works leaves no room for the contingency of actual efforts to fix a broken system. In turn, this leaves us with no way to actually critique what Dodd-Frank does. Worse, it conflates fighting “cronyism” with an agenda of laissez-faire economics, liberty of contract, and hard money, sneaking in a three-legged stool of reactionary thought through our concerns about fairness.

Actual cronyism is a real problem, but I’ve seen no evidence that it adds up to a systemic criticism of our economy as a whole. Instead, we need a language of accountability, benefit and power in how markets are structured. Without this, we’ll have no working compass for reform.

Follow or contact the Rortybomb blog:
 
  

 

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Daily Digest - December 17: Who Takes the Biggest Share of the Sharing Economy?

Dec 17, 2014Rachel Goldfarb

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

The Bloomberg Advantage: Konczal on Uber (Bloomberg)

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

The Bloomberg Advantage: Konczal on Uber (Bloomberg)

Roosevelt Institute Fellow Mike Konczal says that since most of the capital in Uber is in the cars, it's hard to justify the software developers getting such a large chunk of profits.

Senate Democrats Tell the SEC to Get Moving on CEO Pay Rule (HuffPo)

The public comment period for the CEO pay ratio rule expired a year ago, and some Senate Democrats are tired of waiting for it to be implemented, reports Zach Carter.

  • Roosevelt Take: Roosevelt Institute Fellow Susan Holmberg explains the CEO pay debate in this recent primer.

Unions Sue to Stop Chicago Pension Overhaul (Chicago Sun-Times)

Fran Spielman explains why a dozen retirees and their four unions are suing the city: they say the changes are against the state constitution, which guarantees government pensions.

Some Investors Still Heart Big Banks, No Matter What Elizabeth Warren Says (The Guardian)

Suzanne McGee considers why some investors are putting their money with the big banks, despite the continued question of whether regulators will try to break them up.

Are the Democrats Allowing Social Security to Twist in the Wind? (LA Times)

Failing to vote on a Social Security commissioner is just another examples of Democrats' failure to provide this essential program with strong enough support, writes Michael Hiltzik.

The Great Budget Sellout of 2014: Do We Even Have a Second Party? (TAP)

Robert Kuttner characterizes the new spending bill as proof that our two major parties are fundamentally the same: willing to gut Dodd-Frank, defund the EPA, and cut Pell grants.

The U.S. Middle Class Has Faced a Huge “Inequality Tax” in Recent Decades (EPI)

Josh Bivens shows how U.S. middle-class income could have grown if it had matched the average growth rate over that time, as occurred following World War II.

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Daily Digest - December 16: Inequality Hurts our Children Most

Dec 16, 2014Rachel Goldfarb

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

Inequality and the American Child (Project Syndicate)

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

Inequality and the American Child (Project Syndicate)

Roosevelt Institute Chief Economist Joseph Stiglitz says the impact of economic inequality in the U.S. is even stronger on its children, who could be protected through the right policy changes.

Taxpayers Could be Liable Again for Bank Blunders (CBS News)

Erik Sherman speaks to Roosevelt Institute Fellow Mike Konczal about the modification to Dodd-Frank built into the spending bill. Mike says the changes come straight from the banks.

Progressives Just Lost a Fight on the Budget. So Why Are They So Happy? (TAP)

Paul Waldman suggests that GOP control of Congress is liberating to the more progressive Democrats, because they no longer have to compromise to pass Democratic legislation.

The Year in Inequality: Racial Disparity Can No Longer Be Ignored (AJAM)

Ned Resnikoff says solving American economic inequality will prove impossible without acknowledging the racial disparities brought on largely by inheritance and homeownership.

Economic Recovery Spreads to the Middle Class (NYT)

Nelson D. Schwartz says the U.S. economy is showing its very first signs of the wage gains that will be needed for the economic recovery to reach the middle class.

Even With a GOP Congress, Obama Could Still Defend American Workers. Here’s How. (In These Times)

David Moberg puts together a list of ten items that the president could accomplish using the Department of Labor, in particular by strongly enforcing the Fair Labor Standards Act.

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Daily Digest - December 15: An Uber That Really Is Sharing

Dec 15, 2014Rachel Goldfarb

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

Socialize Uber (The Nation)

Roosevelt Institute Fellow Mike Konczal and Bryce Covert present a way to transform Uber into a company that would truly be part of a "sharing economy": make it a worker cooperative.

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

Socialize Uber (The Nation)

Roosevelt Institute Fellow Mike Konczal and Bryce Covert present a way to transform Uber into a company that would truly be part of a "sharing economy": make it a worker cooperative.

My Talk to the Roosevelt Institute Campus Network (On The Economy)

Jared Bernstein gave the keynote at the Campus Network's 10th anniversary party. He's published his talk, which was on the need to combine head and heart in economic policy-making.

Wall Street’s Revenge (NYT)

Paul Krugman says that Wall Street has so heavily funded the Republican party in order to get back on Democrats for Dodd-Frank financial reform, and this spending bill is only the first step.

  • Roosevelt Take: Roosevelt Institute Senior Fellow Richard Kirsch and Fellow Mike Konczal each wrote about the rollback of Dodd-Frank in the cromnibus last week.

Pension Bill Seen as Model for Further Cuts (WSJ)

John D. McKinnon says some on the left worry that the pension-cutting measure in the spending bill could create precedent for even more pension cuts, possibly even to Social Security.

Obama's Left-Side Headache (Bloomberg Politics)

Margaret Talev and Michael C. Binder suggest that one of the biggest challenges the president will face from the incoming Congress will be from progressives like Senator Warren.

The Devalued American Worker (WaPo)

Jim Tankersley explains how the past three recessions, by breaking previous patterns of post-recession job growth, have cut middle-skill jobs and lowered wages for many.

Thanks to Labor Board Ruling, You Can Now Use Company Email to Organize a Union (In These Times)

Overriding a 2007 decision, the National Labor Relations Board has decided that email functions more like the water cooler than as high-cost company equipment, reports Moshe Z. Marvit.

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The Budget Fight Was the First Skirmish in the War for the Soul of the Democratic Party

Dec 12, 2014Richard Kirsch

Democrats had the leverage to nix a deal that opens the door to more Wall Street bailouts, but they caved in to Republican blackmail.

Progressives lost the battle over the budget last night because President Obama and a minority of Democrats took the side of Wall Street. It is the first of many losses we will see in the next two years as Republicans relentlessly pursue their corporate agenda. The bigger question is whether progressives will lose the war in the Democratic Party.

Democrats had the leverage to nix a deal that opens the door to more Wall Street bailouts, but they caved in to Republican blackmail.

Progressives lost the battle over the budget last night because President Obama and a minority of Democrats took the side of Wall Street. It is the first of many losses we will see in the next two years as Republicans relentlessly pursue their corporate agenda. The bigger question is whether progressives will lose the war in the Democratic Party.

Blowing up this budget deal should have been easy for Democrats. They were handed a perfect message: the Republicans are willing to shut down the government so they can bail out Wall Street the next time it wrecks the economy.

Democratic votes were needed because a group of 67 right-wing Republicans opposed the bill on the grounds that it did not go far enough in opposing the president’s executive order on immigration. The Republican split gave Democrats the leverage to demand that the bank bail-out provision be stripped from the bill.

But with President Obama twisting enough Democratic arms (57 in total) to give in to the Wall Street-engineered Republican blackmail, that powerful, winning message was diluted.

Democratic negotiators also agreed to the deal to repeal a provision of the Dodd-Frank law that prevents government bailouts of banks who engage in a form of risky trading. Their argument was “Republicans made us do it; it’s the best we could do.” But of course, with all the Wall Street money going to Democrats, that’s a convenient excuse. They can turn around and wink at the lobbyists who deliver Wall Street campaign contributions, playing a game in which the dupes are the American people.

The bailout of banks and Wall Street speculators remains deeply and broadly unpopular. It is an issue that generates anger among grassroots activists on the left and the right. For Americans who see Wall Street billionaires getting richer by gaming the system while families struggle to meet the basics, there could be no clearer contrast.

Progressive Democrats fought back. In a rapid-fire display of the energy and nimbleness of progressive organizations and champions in Congress, the deal was quickly exposed.

Senator Elizabeth Warren laid it out clearly on the Senate floor: “We put this rule in place because people of all political persuasions were disgusted at the idea of future bailouts… Republicans in the House of Representatives are threatening to shut down the government if they don’t get a chance to repeal it.”

In the House, progressive Democrats joined the call. California Rep. Maxine Waters, the senior Democrat on the House Financial Services Committee, said, “We don't like lobbying that is being done by the president or anybody else that would allow us to support a bill that ... would give a big gift to Wall Street and the bankers who caused this country to almost go into a depression.”

The vigorous pushback from progressive groups and their allies in Congress convinced Minority Leader Nancy Pelosi to break with the White House. Pelosi said that they were being “blackmailed” to vote for the bill, which she called “a moral hazard.” Still, Pelosi did not use her considerable powers of persuasion to get fellow Democrats to vote no.

For the next two years we will see Republicans do everything they can to deliver for corporate America at the expense of the American people. The only question is whether Democrats will enable them. Will President Obama continue to make compromise after compromise? Will Democrats in the Senate use the filibuster to block the Republican attack on working families? Will enough Democrats in the House keep coming to the rescue of a divided Republican Party?

We will see the same fight in the Democratic primary for president. Will Hillary Clinton break from the Wall Street wing of the party with which she aligned as a senator from New York? Will her challengers make the same sharp contrast that Senator Warren did, when she began her speech on the Senate floor by asking, “Who does Congress work for? Does it work for the millionaires, the billionaires, the giant companies with their armies of lobbyists or lawyers? Or does it work for all the people?”

As I wrote after the election last month, Democrats who used a populist economic message – who named the corporate villains and declared that “we all do better when we all do better” – won. Democrats who ran to the mushy middle lost.

But this is not just a fight for the soul of the Democratic Party, it’s a fight for our very democracy. As Justice Louis Brandeis said almost a century ago, “We may have a democracy or we may have great wealth concentrated in the hands of a few, but we cannot have both.”

Americans are yearning for champions who stand up for them. If we have any hope of changing the direction of our economy from enriching the rich at the expense of the rest of us and of recapturing our democracy from the CEO campaign contributors and Wall Street bag men, it will be because progressive forces and elected champions stand up not just to Republicans but to President Obama and any Democrat who takes the side of Wall Street against America’s working families.

It is clear that progressives and the American people will lose battle after battle in Congress over the next two years. The real question is whether we will lose the war. 

Richard Kirsch is a Senior Fellow at the Roosevelt Institute, a Senior Adviser to USAction, and the author of Fighting for Our Health. He was National Campaign Manager of Health Care for America Now during the legislative battle to pass reform.

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The Bipartisan Policy Center Gets It Wrong: The Lincoln Amendment is Critical to Financial Reform

Dec 11, 2014Mike KonczalAlexis GoldsteinCaitlin Kline

A wide variety of people, ranging from Senators Elizabeth Warren and David Vitter to Representative Maxine Waters and FDIC’s Thomas Hoenig, are trying to stop a last-minute attempt to remove an important piece of financial reform. They are all speaking up against a move to repeal the Lincoln Amendment using language written by Citigroup in the year-end budget process.

Given the wide variety of people against it, it’s interesting how few people are for it. One of the few institutions that has defended it is the Bipartisan Policy Center (BPC), whose Financial Regulatory Reform Initiative released a statement saying:

“The Consolidated and Further Continuing Appropriations Act is consistent with BPC’s recommendations to repeal the Lincoln Amendment and to substantially increase funding for the SEC and CFTC.”

These recommendations they cite date back to a 2013 paper, “Better Path Forward on the Volcker Rule and the Lincoln Amendment,” that included arguments against pushing out swaps.

What’s their case, and does it hold up under scrutiny? We argue it does not. It misreads the purpose and scope of the Volcker Rule, disregards their own analysis on how financial reform should proceed, misses recent developments in the derivatives market, and ignores the issue of what an implicit government support means for exotic derivatives.

As a reminder, the Lincoln Amendment pushing out swaps (which we’ll refer to as 716) insists that the largest banks hold their exotic, customized, and non-cleared derivatives outside of their FDIC-insured entities in separately capitalized subsidiaries. 716 exempted most standardized derivatives, including interest rate and foreign exchange swaps, as well as cleared credit default swaps (CDS). This provision only applies to the odd and dangerous stuff.

So what are BPC's arguments?

716 and Volcker Accomplish Different Goals

Their core argument is that 716 is redundant, and therefore unnecessary, because of the Volcker Rule.  As they put it,“[L]ike the Volcker Rule, the Lincoln Amendment was intended to separate certain securities-related activities from traditional banking activities.” BPC further argues that with a “proper implementation of the Volcker Rule… the rationale for the Lincoln Amendment may no longer apply.”

This is not the case. The Volcker Rule is about risky activities, and focuses on eliminating the gambling risks associated with proprietary trading and exposure to certain types of investment funds. 716, on the other hand, is about risky products, and aims to reduce risk to the Deposit Insurance Fund (DIF) by utilizing separately capitalized entities for the riskiest derivatives.

While there is some overlap between the two, there are significant gaps. For instance, exemptions in the Volcker Rule allow some of the riskiest trades to be done within FDIC-insured entities -- things like making markets in bespoke, exotic, uncleared credit default swaps. Indeed, walking away from the financial crisis with an attitude that uncleared credit default swaps are no big issue is quite troubling. This puts the Deposit Insurance Fund at risk. 

716 complements Volcker by forcing the riskiest and most non-vanilla derivatives and CDS into a separately capitalized entity, something Volcker doesn’t do by itself. This helps protect the DIF in case a firm gets into trouble market-making bespoke trades that can’t be perfectly hedged – a Volcker-compliant activity. 

The Final Volcker Rule Isn’t Fully Implemented

Shockingly, BPC is violating its own analysis with this recommendation. In the 2013 paper, BPC “recommends a wait-and-see approach regarding the Lincoln Amendment until more experience can be gained from the Volcker Rule.” Only then, if the full implementation of the Volcker Rule is working well, could the Lincoln Amendment “be repealed without any negative effect.”

It is disturbing that the BPC supports this removal of the Lincoln Amendment before the Volcker Rule is fully implemented in mid-2015, and even before we've had time to see how it impacts the financial markets. It’s not even clear how they are judging whether the Volcker Rule is working the way they want, given that the data and metrics they rely on so heavily have only just begun to be reported to regulators, and are non-public.

Shoving a bank-written addition into a budget bill, not unlike the CFMA of 2000 which helped create the crisis, is the exact opposite of a “wait-and-see approach.”

Pushout Doesn’t Harm Bank Resolution

Another argument made against 716 was that it would complicate the ability of regulators to deal with a bank failure. BPC points out that regulators are empowered to grant a temporary stay to derivatives, preventing derivative creditors from grabbing collateral while others wait two days, as they did with Lehman Brothers. (Under bankruptcy, derivatives are exempt from this temporary stay, which can complicate and accelerate bankruptcy.)

Part of the argument is true: Dodd-Frank did grant the FDIC new powers under the Orderly Liquidation Authority, which allows them to force a 24-hour stay on derivatives (overriding the exemption), but this only applies to banks under FDIC purview.

BPC argued that the largest banks should be allowed to keep derivatives inside the FDIC accounts, so that they could utilize the FDIC’s OLA power. BPC writes that the 716 “subsidiaries would not enjoy the temporary stay on the unwinding of contracts that applies to banks under FDIC resolution procedures. Rapid termination of such contracts in the event of a bank failure would have a disruptive impact on financial markets."

But this argument is much less valid than it was when it was written, precisely because regulators are anticipating this problem. Eighteen of the major banks and the International Swaps and Derivatives Association (ISDA) agreed in October that they’d contractually apply temporary stays to derivatives. With wide agreement among the banks to apply temporary stays anyway, the proper course of action is to work through this process of standardizing derivatives for automatic stays across the financial sector, rather than trying to use taxpayer funds to backstop them.

Apart from the BPC arguments, we wish to raise an additional point:  

Should Policy Allow Firms to Capitalize on Market-Perceived Subsidies?

Keeping derivatives in FDIC-insured entities lowers their costs: creditors charge lower rates, as FDIC accounts are seen as having the backing of the federal government. And these FDIC accounts typically have higher credit ratings, which is why, in 2011, Bank of America moved derivatives from its Merrill Lynch subsidiary, which had just suffered a downgrade, into its FDIC-insured subsidiary, much to the chagrin of the FDIC.

As Peter Eavis writes in The New York Times, this directly helps Citigroup, who lobbied for and wrote the change, as they own a lot of CDS: “With some $3 trillion of exposure, the bank is one of biggest default swap dealers in the United States. Those swaps right now live inside an entity called Citibank N.A. that enjoys federal deposit insurance. Nearly $2 trillion of those swaps are based on companies or other entities with a junk credit rating.”

And as Eavis points out, it’s very likely that a huge portion of Citigroup’s CDS are uncleared, as very few CDS overall are cleared: “Only about 10 percent of such swaps are centrally cleared, according to official surveys.”

Banks keeping derivatives in the FDIC accounts lower their cost of doing business, due to the market perception of an implicit government support. It should not be the role of policy to artificially lower the cost of bank borrowing, and as such we find the case for removing the Lincoln Amendment to be unconvincing.

Mike Konczal is a Fellow at the Roosevelt Institute.

Alexis Goldstein is a former Wall Street professional, who now serves as the Communications Director at Other98.org.

Caitlin Kline is a derivatives specialist at Better Markets.

Follow or contact the Rortybomb blog:
 
  

 

A wide variety of people, ranging from Senators Elizabeth Warren and David Vitter to Representative Maxine Waters and FDIC’s Thomas Hoenig, are trying to stop a last-minute attempt to remove an important piece of financial reform. They are all speaking up against a move to repeal the Lincoln Amendment using language written by Citigroup in the year-end budget process.

Given the wide variety of people against it, it’s interesting how few people are for it. One of the few institutions that has defended it is the Bipartisan Policy Center (BPC), whose Financial Regulatory Reform Initiative released a statement saying:

“The Consolidated and Further Continuing Appropriations Act is consistent with BPC’s recommendations to repeal the Lincoln Amendment and to substantially increase funding for the SEC and CFTC.”

These recommendations they cite date back to a 2013 paper, “Better Path Forward on the Volcker Rule and the Lincoln Amendment,” that included arguments against pushing out swaps.

What’s their case, and does it hold up under scrutiny? We argue it does not. It misreads the purpose and scope of the Volcker Rule, disregards their own analysis on how financial reform should proceed, misses recent developments in the derivatives market, and ignores the issue of what an implicit government support means for exotic derivatives.

As a reminder, the Lincoln Amendment pushing out swaps (which we’ll refer to as 716) insists that the largest banks hold their exotic, customized, and non-cleared derivatives outside of their FDIC-insured entities in separately capitalized subsidiaries. 716 exempted most standardized derivatives, including interest rate and foreign exchange swaps, as well as cleared credit default swaps (CDS). This provision only applies to the odd and dangerous stuff.

So what are BPC's arguments?

716 and Volcker Accomplish Different Goals

Their core argument is that 716 is redundant, and therefore unnecessary, because of the Volcker Rule.  As they put it,“[L]ike the Volcker Rule, the Lincoln Amendment was intended to separate certain securities-related activities from traditional banking activities.” BPC further argues that with a “proper implementation of the Volcker Rule… the rationale for the Lincoln Amendment may no longer apply.”

This is not the case. The Volcker Rule is about risky activities, and focuses on eliminating the gambling risks associated with proprietary trading and exposure to certain types of investment funds. 716, on the other hand, is about risky products, and aims to reduce risk to the Deposit Insurance Fund (DIF) by utilizing separately capitalized entities for the riskiest derivatives.

While there is some overlap between the two, there are significant gaps. For instance, exemptions in the Volcker Rule allow some of the riskiest trades to be done within FDIC-insured entities -- things like making markets in bespoke, exotic, uncleared credit default swaps. Indeed, walking away from the financial crisis with an attitude that uncleared credit default swaps are no big issue is quite troubling. This puts the Deposit Insurance Fund at risk. 

716 complements Volcker by forcing the riskiest and most non-vanilla derivatives and CDS into a separately capitalized entity, something Volcker doesn’t do by itself. This helps protect the DIF in case a firm gets into trouble market-making bespoke trades that can’t be perfectly hedged – a Volcker-compliant activity. 

The Final Volcker Rule Isn’t Fully Implemented

Shockingly, BPC is violating its own analysis with this recommendation. In the 2013 paper, BPC “recommends a wait-and-see approach regarding the Lincoln Amendment until more experience can be gained from the Volcker Rule.” Only then, if the full implementation of the Volcker Rule is working well, could the Lincoln Amendment “be repealed without any negative effect.”

It is disturbing that the BPC supports this removal of the Lincoln Amendment before the Volcker Rule is fully implemented in mid-2015, and even before we've had time to see how it impacts the financial markets. It’s not even clear how they are judging whether the Volcker Rule is working the way they want, given that the data and metrics they rely on so heavily have only just begun to be reported to regulators, and are non-public.

Shoving a bank-written addition into a budget bill, not unlike the CFMA of 2000 which helped create the crisis, is the exact opposite of a “wait-and-see approach.”

Pushout Doesn’t Harm Bank Resolution

Another argument made against 716 was that it would complicate the ability of regulators to deal with a bank failure. BPC points out that regulators are empowered to grant a temporary stay to derivatives, preventing derivative creditors from grabbing collateral while others wait two days, as they did with Lehman Brothers. (Under bankruptcy, derivatives are exempt from this temporary stay, which can complicate and accelerate bankruptcy.)

Part of the argument is true: Dodd-Frank did grant the FDIC new powers under the Orderly Liquidation Authority, which allows them to force a 24-hour stay on derivatives (overriding the exemption), but this only applies to banks under FDIC purview.

BPC argued that the largest banks should be allowed to keep derivatives inside the FDIC accounts, so that they could utilize the FDIC’s OLA power. BPC writes that the 716 “subsidiaries would not enjoy the temporary stay on the unwinding of contracts that applies to banks under FDIC resolution procedures. Rapid termination of such contracts in the event of a bank failure would have a disruptive impact on financial markets."

But this argument is much less valid than it was when it was written, precisely because regulators are anticipating this problem. Eighteen of the major banks and the International Swaps and Derivatives Association (ISDA) agreed in October that they’d contractually apply temporary stays to derivatives. With wide agreement among the banks to apply temporary stays anyway, the proper course of action is to work through this process of standardizing derivatives for automatic stays across the financial sector, rather than trying to use taxpayer funds to backstop them.

Apart from the BPC arguments, we wish to raise an additional point:  

Should Policy Allow Firms to Capitalize on Market-Perceived Subsidies?

Keeping derivatives in FDIC-insured entities lowers their costs: creditors charge lower rates, as FDIC accounts are seen as having the backing of the federal government. And these FDIC accounts typically have higher credit ratings, which is why, in 2011, Bank of America moved derivatives from its Merrill Lynch subsidiary, which had just suffered a downgrade, into its FDIC-insured subsidiary, much to the chagrin of the FDIC.

As Peter Eavis writes in The New York Times, this directly helps Citigroup, who lobbied for and wrote the change, as they own a lot of CDS: “With some $3 trillion of exposure, the bank is one of biggest default swap dealers in the United States. Those swaps right now live inside an entity called Citibank N.A. that enjoys federal deposit insurance. Nearly $2 trillion of those swaps are based on companies or other entities with a junk credit rating.”

And as Eavis points out, it’s very likely that a huge portion of Citigroup’s CDS are uncleared, as very few CDS overall are cleared: “Only about 10 percent of such swaps are centrally cleared, according to official surveys.”

Banks keeping derivatives in the FDIC accounts lower their cost of doing business, due to the market perception of an implicit government support. It should not be the role of policy to artificially lower the cost of bank borrowing, and as such we find the case for removing the Lincoln Amendment to be unconvincing.

Mike Konczal is a Fellow at the Roosevelt Institute.

Alexis Goldstein is a former Wall Street professional, who now serves as the Communications Director at Other98.org.

Caitlin Kline is a derivatives specialist at Better Markets.

Follow or contact the Rortybomb blog:
 
  

 

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Daily Digest - December 11: We Don't Need Weakened Financial Regulations in the Spending Bill

Dec 11, 2014Rachel Goldfarb

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Democrats Revolt Against 'Wall Street Giveaway' In Deal To Prevent Government Shutdown (HuffPo)

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Democrats Revolt Against 'Wall Street Giveaway' In Deal To Prevent Government Shutdown (HuffPo)

Zach Carter and Sabrina Siddiqui quote Roosevelt Institute Chief Economist Joseph Stiglitz on why a provision that will bring risky derivative trades under FDIC protection is a disaster.

Warren Leads Liberal Democrats’ Rebellion Over Provisions in $1 Trillion Spending Bill (WaPo)

Senator Warren is calling on House Democrats to withhold support of the spending bill unless this derivatives provision is removed, report Lori Montgomery and Sean Sullivan.

Congress' Backroom Pension-Cutting Deal is Even Worse Than Expected (LA Times)

Michael Hiltzik details the pension-cutting measure attached to the omnibus spending bill, which he says has far fewer protections for older retirees than originally implied.

The Wall Street Takeover of Charity (ProPublica)

Donor-advised charitable funds, which are run by financial firms, aren't increasing charitable giving as much as they're making money for the firms, writes Jesse Eisinger.

Walmart Illegally Punished Workers, Judge Rules (NYT)

Steven Greenhouse reports on a National Labor Relations Board decision in California, which found that Walmart managers had illegally intimidated workers for supporting unionizing efforts.

The Economic Threat to Cities Isn't Gentrification; It's the Opposite (Vox)

With gentrification comes a higher concentration of poverty, writes Danielle Kurtzleben, and increased economic segregation comes with less economic mobility.

New on Next New Deal

The Financial Regulation Congress Is Quietly Trying to Destroy in the Budget

Roosevelt Institute Fellow Mike Konczal explains why Section 716 of Dodd-Frank was implemented in the first place, and why weakening it today would put the economy and taxpayers at risk.

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