Why Atlas Shrugged

Nov 18, 2011Bruce Judson

ayn-randAyn Rand's Objectivism glorified wealth-creators over moochers, but Wall Street traders might be surprised to learn which category they're in.

ayn-randAyn Rand's Objectivism glorified wealth-creators over moochers, but Wall Street traders might be surprised to learn which category they're in.

As the dysfunctional nature of our economy becomes increasingly apparent, the media is appropriately focusing on whether the ideas of economic thinkers from earlier eras can help to solve today's problems. Recently, NPR devoted a segment to the thinking of Ayn Rand.

The NPR segment quoted from an extensive television interview with her conducted by Mike Wallace in 1959, now available on YouTube.  As the segment noted, Rand is a hero to many Washington  politicians who advocate free markets. In the Wallace interview, Rand said, "I am opposed to all forms of control. I am for an absolute, laissez-faire, free, unregulated economy."

The Washington establishment has, in fact, misinterpreted what Rand valued and what she would advocate today.

At this moment, what's relevant to our nation is not  the laissez-faire policies Ayn Rand advocated in the late 1950s as an outgrowth of the philosophical system she called "Objectivism," but what the philosophy itself considered important, how these principles should be applied to our modern economy, and whether we believe implementing these ideas would aid the economy.

The central statement Rand stressed repeatedly in her interview with Wallace is that entrepreneurs and businessmen are the producers who create the goods and services that make our economy run. They deserve their wealth, are her heroes, and no one including the government has the right to take their property. As NPR notes, "In Atlas Shrugged, which Rand considered her masterpiece, the wealthy corporate producers are the engines of the American economy." In this fictional tale, the economy starts to stagnate when these producers go into hiding, leaving behind what she calls "the moochers."

In effect, an important aspect of Rand's philosophy supports the central tenet of a functioning capitalist economy: Those who create the greatest societal wealth should be the most highly compensated.

This is a fundamental notion in any capitalist economy. It underlies one aspect of the American Dream and also explains the historic admiration of the American people for rich people. In general (and before the Occupy Wall Street movement), the prevailing ethos in America has been that rich people deserve their wealth because they have created societal value for all of us. Indeed, I suspect the vast majority of the American people do not begrudge the wealth earned by successful, risk-taking innovators like Michael Dell, Jeff Bezos, the late Steve Jobs, or Ross Perot.

This leads to the conclusion that Rand's philosophy is only anti-regulation because it is ultra-supportive of the capitalist ideal: The people who create the most societal wealth should receive the benefits of this contribution.

From this perspective, Rand's philosophy points out that real capitalism is no longer enforced in America; not because of welfare programs, taxes, the social safety net, or government regulations, but for a very different reason: The highest paid people in America today create no real wealth for the society.

The financial industry, comprised of traders, hedge funds who exploit arbitrage opportunities, and "quants" who develop mathematical models to take advantage of minute inefficiencies in trading markets (for stocks, derivative securities of all types, commodities, and more) are now earning seemingly inestimable sums. Hedge fund owners earn billions of dollars annually while traders who earn less than several million dollars a year are not, by Wall Street standards, real successes. Yet they are all gambling in "a heads I win, tails you lose" game. The outcome of all their efforts are high profits, but little, if any, new societal wealth.

Real societal wealth is anything that enhances the lives of those in our society, starting with basics such as food, shelter and medicine, but also including almost any property a person can own or anything a person can experience, such as entertainment or greater convenience. Real wealth can be eaten, used, shared. or experienced.

Profits cannot be eaten and they do not provide shelter. As a consequence, it's essential to recognize that the creation of profits is often confused with the creation of real societal wealth. They are different. Profits are an accounting proxy we use for indicating whether wealth is created. But like all proxies, this one sometimes falls short. With regard to the financial industry, this proxy has failed the nation spectacularly.

The current issue of Foreign Affairs describes how a Wall Street firm spent $300 million to construct a fiber-optic cable connecting the Chicago Mercantile Exchange and the New York Stock Exchange to shave "three milliseconds off high-speed, high-volume automated trades-a big competitive advantage." And huge sums are now being spent to use technology to earn these profits. High frequency (i.e. computer-driven) trading is now estimated to account for 75 percent of all buying and selling of U.S. equities. Does any of this add to our societal wealth?

Some economists openly wonder whether our financial services sector actually destroys, instead of creating, societal wealth. In December 2008, Paul Krugman wrote in The New York Times (emphasis added):

The financial services industry has claimed an ever-growing share of the nation's income over the past generation, making the people who run the industry incredibly rich. Yet, at this point, it looks as if much of the industry has been destroying value, not creating it. And it's not just a matter of money: the vast riches achieved by those who managed other people's money have had a corrupting effect on our society as a whole....

We're talking about a lot of money here. In recent years the finance sector accounted for 8 percent of America's G.D.P., up from less than 5 percent a generation earlier. If that extra 3 percent was money for nothing - and it probably was - we're talking about $400 billion a year in waste, fraud and abuse.

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By 2009, Krugman noted that this view was now widely shared.

Yes, many financial economists have concluded that high speed trading and hedge fund arbitrage add to the efficiency of these markets. But I wonder if they have quantified the value to our society of these benefits and compared them to the very real costs. As far as I know, they have not. It's my understanding that they have only looked at the isolated impact of these activities on markets -- not their overall impact on our society.

This system, with the highest rewards going to those who create nothing, is antithetical to a capitalist economy. We have turned the underlying premise behind our entire economic system on its head. Now, those who create little, if any, societal wealth receive the most wealth in return.

Moreover, the wealth now inappropriately channeled to Wall Street is harming our society in a myriad of ways: First, money inevitably leads to political power through donations, lobbying, access, and more. Inevitably, trading-related money is now further distorting our capitalist economy by influencing legislation for its own anti-capitalist benefits.

Second, in a society where success is often defined by income (for better or worse) the talent the nation desperately needs to create real wealth is instead sucked up by the financial system and dedicated to arbitrage and other zero-sum activities.

Third, the speculative investments of hedge funds and other trading entities can have a dangerous destabilizing impact on markets and the prices of essential commodities (such as food and energy), and create systematic risk for the economy as a whole. In February of this year, Bloomberg highlighted a federal government report that found that "[h]edge funds and insurers might threaten U.S. economic stability in a time of crisis."

Fourth, it's likely that billions of dollars of our nation's limited resources are spent each year on infrastructure with no real societal value, all of which could instead be spent for productive uses.

Fifth, pay scales throughout the society are thrown out of whack as other elites start to question whether they should be earning similar amounts.

Finally, the notion that all profits are good -- whether they create real societal wealth or not -- is consistently reinforced through the highly publicized example of Wall Street earnings and applied with the same harmful effects in other industries throughout the nation.

Ayn Rand would, I believe, argue that this absolute failure to enforce capitalist principles is exactly what she most feared: The emergence of a powerful group that produces nothing, yet manages to takes a large share of the societal wealth created by others. In her view, this inevitably leads a society to implode and self-destruct.

Yes, Rand did not believe in altruism or any type of social safety net, and I am not addressing this aspect of her "Objectivist" philosophy here. But it is worth noting that she opposed these programs for the same reason I am certain she would be horrified by the current channeling of wealth to financial firms: She believed that they were allocating the benefits of production away from the rightful beneficiaries. Whether we agree or not with these assertions, they are irrelevant to this discussion.

I do, however, feel comfortable asserting that if she returned today, Rand would consider eliminating the transfer of un-earned wealth to the financial sector to be a far greater and far more urgent priority than addressing her beliefs related to the social safety net.

Unless we address the destructive effects caused by making speculators and traders the highest earning class in our capitalist society, the economy will remain dysfunctional.  In effect, the nightmare that Rand's philosophy anticipated for our economy is increasingly real, but because of the financial industry, not the social safety net or taxes.

Here's a final thought: In Rand's Atlas Shrugged, the industrialists who create the real wealth of the society start to disappear as they go into hiding. The trains that make the society work, both literally and metaphorically, stop.

So I have developed what we can call the Ayn Rand test of value: If securities traders and quants at investment firms and hedge funds started to disappear in large numbers tomorrow, would the trains that comprise our economy and society run better or worse?

Bruce Judson is Entrepreneur-in-Residence at the Yale Entrepreneurial Institute and a former Senior Faculty Fellow at the Yale School of Management.

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Employers and Banks Bilk Workers with Payroll Cards

Nov 16, 2011Bryce Covert

A new trend has emerged in which low-wage employers pay their workers with unregulated, high-fee prepaid debit cards.

A new trend has emerged in which low-wage employers pay their workers with unregulated, high-fee prepaid debit cards.

While Bank of America backed down in the face of public outrage against charging customers $5 for using a debit card, there's been a focus lately on the fact that big banks still charge customers for using cards -- it's just that the cards are prepaid debit cards, and the money loaded onto them is from government benefits. Janelle Ross at the Huffington Post had two hard-hitting exposes on how banks are profiting from the distribution of unemployment benefits. I followed up to point out that they also make a killing off of distributing food stamps, even more so because they make money off of both fees from customers and payments from governments for taking the work off of their hands.

Felix Salmon points out that this trend shouldn't have to be negative. Checks, he says quite vehemently, are outdated. "They're expensive, insecure, anachronistic, and dangerously reliant on the less-than-stellar delivery record of the US Postal Service," he writes. Checks are "a technology which deserves to be killed off with extreme prejudice."

Missing from the discussion of unemployment benefits and food stamps is the fact that low-wage employers are now turning to the same idea. But perhaps it would seem on its surface that employers who are similarly doling out money -- this time, salaries and wages -- without the use of paper would be a win for everyone. Wal-Mart, one of the most gargantuan of low-wage employers, announced last year that its payrolls would be distributed completely paper-free. For employees with traditional bank accounts, that means they can simply get their checks through direct deposit. But for the 17 million unbanked Americans, that won't be possible. The solution for them is the payroll card, which is basically a prepaid debit card with wages loaded onto it. According to a company spokesperson, about half of its 1.4 million employees use direct deposit. That leaves the other half, about 700,000, with no option except payroll cards. Wal-Mart isn't alone in this practice. The FDIC estimates that these cards were used to distribute $15.9 billion in wages in 2007; that number is expected to reach $60 billion by 2014. One group estimates that there will be over 17.5 million cards in use this year alone. Where Wal-Mart goes, the industry will follow.

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And some will win out from this arrangement. Trees stand to benefit from the approximately 200,000 pounds of paper no longer required to process Wal-Mart's paychecks, saving 3,116 of them from being chopped down. Because of this, the company also stands to save substantial money. By eliminating 18 million paper paychecks per year (with the conservative estimate that each check costs the company $2), it will net $36 million in savings from no longer cutting the checks -- which doesn't factor in saved resources from labor and distribution.

But will the employees benefit? True, cards can be more convenient, and Wal-Mart is so generous as to allow them to load paychecks from other jobs onto the cards. But as the Consumers Union and National Consumer Law Center have pointed out, "the employer's benefit could be the employee's burden if the cards have high and numerous fees, offer payday-loan type credit features or are simply too complicated or difficult for employees to use." Just as with regular prepaid debit cards, which are almost completely unregulated and come with a host of fees, workers can face charges for ATM transactions, point-of-sale purchases, not using the card, replacing the card, overdraft transactions, live customer service, reloading the card, or getting funds by check. The Consumers Union and NCLC offer some helpful ways to protect workers, including providing written disclosure of terms and conditions (like these fees) before issuing cards, giving employees the chance to opt out of the cards, and keeping the cards from offering payday-lending type features. But while many states have enacted regulations on payroll cards, they aren't uniform, and some still have no regulations at all.

While employers benefit from the use of these cards to the possible detriment of their workers, the other players that make money from this arrangement are the banks and servicers who facilitate the cards. The banks are set to lose $14 billion this year due to new laws tamping down on how much they can charge merchants for debit swipe fees. But those rules won't apply to transactions with prepaid debit cards, whether they be for unemployment benefits, food stamps, or wages. Ross spoke with an industry analyst, who estimates that banks are aiming to recoup 30 to 50 percent of what they're losing from swipe fees through other fees such as these. But as Ross reports, "Banking experts say the real money lies in the fees the bank collects for a range of services," and it's not hard to see why when they have open season to charge consumers for anything. The potential convenience of a card is endangered by the possibility of wages being whittled away by fees.

Bryce Cover is Editor of New Deal 2.0.

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Move Your Money. But Be Careful Where It Goes.

Nov 10, 2011Bryce Covert

A word of warning to those fleeing big banks and bringing their money to nonbank lenders.

A word of warning to those fleeing big banks and bringing their money to nonbank lenders.

This past Saturday was "Bank Transfer Day," in which 40,000 frustrated customers joined the 650,000 who had already switched their money out of bank accounts with the Too Big To Fail behemoths to smaller community banks. The preliminary results are encouraging: on that day alone, customers deposited $90 million with credit unions and had moved $4.5 billion in the weeks leading up to it.

It's easy to understand frustration with these banks. It wasn't too long ago that Bank of America and a handful of others were threatening to charge customers for using debit cards, even though profits from consumers are helping keep some of these banks afloat. Bank fees can add up, particularly for lower income people who may not be able to keep minimum balances, use direct deposit, avoid overdraft fees, and otherwise stay away from banking fees.

But that frustration may be leading some into the arms of even more pernicious institutions: those that serve the unbanked. Before Move Your Money, about a quarter of American families, or 60 million people, were already considered unbanked or underbanked, meaning that they have little to no relationship with traditional banks. But someone has to fill that hole. Those who step in see a real business opportunity, as the ranks of the unbanked are growing.

The traditional stand-ins are payday lenders, check cashers, and prepaid debit card companies. The first problem with these institutions is that they avoid the scrutiny and regulation that is supposed to reign in traditional banks (although the CFPB stands to change all of that). On top of that (and likely because of it), they come with extremely high interest rates and hidden or unexpected fees. For example, payday loans can come with interest rates that exceed 450 percent when annualized. That doesn't include fees, which can include an upfront $45 -- no small price for those with stretched budgets. Check cashers often skim between 2 and 4 percent of each check's value. That could add up to $40,000 over a customer's working life.

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Prepaid debit cards are a burgeoning market in and of themselves. It's expected that Americans will load $37 billion onto prepaid cards this year, and by 2013 that number is expected to reach $672 billion. This could mean killer profits for those offering the cards. But an AARP study found that they "may actually be an expensive alternative to traditional banking sources" due to monthly costs and other fees. Consumers can be hit with fees for using ATMs, calling customer service, activating an account, or simply not using the card.

All of these loosely regulated institutions have been making tidy profits from the gap between traditional banks and mattress stashing. Now new entrants are getting into the game, showing the perceived business potential in offering these products. The New York Times reported this week that Wal-Mart has slowly been building up an offering of financial services. More than 1,000 locations across the country let customers cash checks, pay bills, wire money, or load cash onto prepaid debit cards. As with everything else it sells, it's found a way to offer things on the cheap: it offers cards that normally cost $4.95 to buy and $5.95 a month to maintain for $3 for each fee. It only charges 1 percent to cash checks under $300 and a flat rate of $3 per check for checks from $300 to $1,000. But these fees can still add up.

Beyond being swindled by fees and interest rates, banking with nonbank institutions supports businesses that are likely no better than the large banks. Taking money out of Bank of America and bringing it to Wal-Mart is no way to free yourself of the corporate world. And shady nonbank lenders that escape regulatory scrutiny don't need to be bolstered with our business.

So yes, move your money. Just be careful where you put it.

Bryce Covert is Editor of New Deal 2.0.

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Pre-Occupied with Fairness: The Moral Crisis of Modern Capitalism

Nov 9, 2011John Paul Rollert

occupy-journalThere's no good explanation for why Wall Street continues to suck up vast amounts of money except that there is a flaw in the system itself.

occupy-journalThere's no good explanation for why Wall Street continues to suck up vast amounts of money except that there is a flaw in the system itself.

The Occupy Wall Street protesters were not immune to the news of Steve Jobs's passing. "A ripple of shock went through our crowd," Thorin Caristo, a leader of the movement's web outreach, told the Associated Press. He later called for a moment of silence from the stubborn assembly at Zuccotti Park, and the 99% paid tribute to an exceptional member of the other club.

The gesture failed to move some. National Review's Daniel Foster envisioned "viscera of a thousand heads exploding from the sheer force of cognitive dissonance," while conservative columnist Michelle Malkin said that the protesters honoring Jobs's life and work "without a trace of irony" provided the "teachable moment of the week." The lesson, it seems, is that one cannot critique capitalism without also rejecting every single capitalist, a conclusion that is not only logically flawed but one that was famously rejected by William F. Buckley, Jr., the ideological avatar of the modern conservative movement and a founder of the National Review.

In a column written just a few years before his death, Buckley condemned what he called the "institutional embarrassments" of capitalism, CEOs whose enormous compensation packages defy the gravitational pull of poor stock performance. Buckley was no equalitarian, and he drew a contrast between the "executive plunder" reaped by certain CEOs and the allowances that may be made for the likes of a Thomas Edison. Were such a person alive today, he said, "it would be unwise to cavil at any arrangement whatever made by a company seeking his services exclusively."

Unwise, but more importantly, unwarranted, for at the heart of Buckley's argument is an appeal to fairness. It does not seem unreasonable that a Thomas Edison, or a Steve Jobs, be paid a lot more than the rest of us. But when it comes to people who not only fail to create value, but actually supervise its destruction, it seems outrageous that they should make more over a long lunch than most people make in an entire year. Or, as Buckley puts it, "What is going on is phony. It is shoddy, it is contemptible, and it is philosophically blasphemous."

To be clear, were he still with us today, Bill Buckley would not be occupying Wall Street. His aim was to save capitalism from itself, and he would likely chide the protesters for trying to save us from capitalism. Still, the sense of moral outrage that infuses his column -- aptly titled "Capitalism's Boil" -- is not altogether different from that expressed by the weather-weary demonstrators. Doubtless, there are some who want to uproot capitalism altogether and replace it with some other system for distributing scarce goods, but one suspects that most who have turned out are simply looking to air the familiar grievances of the financial crisis (joblessness, soaring poverty, crushing debt) and shame those on Wall Street who cashed in on a crisis they helped create.

The same may be said with even greater confidence for the support the movement is enjoying across the country. It is not the case that a nation of closet communists has finally found a voice; rather, the protesters have come to embody a common sense that something is wrong with American capitalism -- that the system simply isn't working. In this respect, the focus on Wall Street is both apt and overbroad. Overbroad because, if you brush the complex instruments that precipitated the financial crisis, you won't find the fingerprints of every banker on Wall Street. Apt because the success of the financial sector as a whole not only defies the experience of the last few years, but the story of the American middle class for over three decades.

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Paul Krugman has famously called this period The Great Divergence. "We're no longer a middle-class society, in which the benefits of economic growth are widely shared," he said in the inaugural post of his New York Times blog. "Between 1979 and 2005 the real income of the median household rose only 13 percent, but the income of the richest 0.1% of Americans rose 296 percent." During the same period, the percentage of the nation's wealth held by the top 1% grew from 20.5% in 1979 to 33.8% in 2007. These trends have helped to set the U.S. apart from other developed countries in terms of wealth inequality. According to the C.I.A World Fact book, the U.S. currently ranks 39th in unequal wealth distribution, edging out Cameroon and Iran but just behind Bulgaria and Jamaica. By contrast, the UK comes in at 91st place, with Canada 102nd and Germany 126th.

The financial sector doesn't tell the whole story of growing inequality, but it certainly plays a central role. As Simon Johnson described its meteoric rise in a 2009 essay for The Atlantic:

From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

The inequality within the financial sector is more striking still, with the most successful managing directors taking home enough to buy and sell a brace of lowly associates. Again, the numbers speak for themselves: In 1986, the highest paid CEO on Wall Street was John Gutfreund of Salomon Brothers, who made $3.1 million. In 2007, the CEO of Goldman Sachs, Lloyd Blankfein, made just short of $68 million.

To be sure, Americans have always had a high tolerance for economic inequality, particularly compared with their European peers. The quintessential American tale is still the rags to riches story, and for Democrats and Republicans alike, 'class warfare' is an accusation to be rebutted, not an open call to arms. Indeed, as the unlikely tribute to Steve Jobs attests, even for those who are willing to roundly object to the growing gap between the very rich and the rest of us, the problem is not inequality per se, but giving a satisfactory account for it. As Bill Buckley well understood, economic systems have to give a moral account of who wins, who loses, and why, particularly insofar as those systems are shaped by democratic choices. It is not hard to give a compelling account for why someone like Steve Jobs grows far richer than the rest of us -- his success tends to vindicate capitalism, not undermine it -- but the same may not be said for the financial sector in general. The problem isn't that the average banker doesn't work hard (the hours are grueling) nor that his work isn't essential to helping maintain a modern, civilized society (it is); the problem is that the same may be said for an ER nurse or a sixth grade teacher, and it isn't immediately clear why one should make 10 times as much as the other.

Buckley said of the CEO pay packages he so despised that "extortions of that size tell us, really, that the market system is not working," meaning that the free market, left to its own devices, does not allow for such gross distortions. This is certainly the account conservatives prefer when they try to explain Wall Street's inordinate success. According to them, anti-competitive regulations, cheap money from the Fed, and the cozy relationship between the big banks and Washington have allowed the financial sector to prosper not because of capitalism, but despite it.

To liberals, this sounds ridiculous. After 30 years of lower taxes, freer trade, weaker unions, and a general trend toward deregulation, the idea that growing inequality and Wall Street's exceptional success somehow defy the natural tendencies of capitalism is an astonishing exercise in wishful thinking. The forces of the free market alone may not explain these trends, but they seem hardly at odds.

Increasingly, the Occupy Wall Street movement has been faulted for not taking explicit sides in this dispute, but like Buckley in his column, the aim of their protests is not policy prescription, but moral persuasion. When your house is on fire, you don't stand around wondering whether faulty wiring or an arsonist is to blame. You raise a hue and cry until your neighbors fill the street.

John Paul Rollert is a doctoral student at the Committee on Social Thought at the University of Chicago. His essay, "Does the Top Really Support the Bottom? - Adam Smith and the Problem of the Commercial Pyramid," was recently published by The Business and Society Review.

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How to Prevent a Housing Recovery: Accept a 46-State Mortgage Fraud Settlement

Nov 8, 2011Bruce Judson

home-foreclosure-documentThe settlement will do nothing to help fix the bruised housing market and may in fact have damaging consequences.

home-foreclosure-documentThe settlement will do nothing to help fix the bruised housing market and may in fact have damaging consequences.

There are two fundamental values that are essential to any working capitalist economy: accountability and the rule of law. The reported outlines of the  proposed settlement of the robo-mortgage scandal (no official details have been released) by 46 state attorneys general working together shows how far we have diverged from the basic principles of egalitarian capitalism.

This proposed settlement has no place in a capitalist economy. First, a successful housing recovery is essential to the ultimate recovery of the economy. So the implications of any settlement that potentially hurts the housing market are extraordinarily significant for the health of the nation. Second, it is based on principles that are unrecognizable in a nation built on capitalism and hence accountability and the rule of law.

Bank officials have testified in investigations of the robo-mortgage scandal that they submitted up to 10,000 false affidavits per month. Such testimony is effectively an admission of criminal guilt. These people admitted that, on behalf of their firms, they broke numerous criminal laws, most likely including conspiracy, fraud, and misleading the court.

The banks have attempted to deflect their misdeeds by suggesting that these illegal acts did not harm anyone. The laws were related to process only. The answer to such claims is that they are irrelevant. The banks are acknowledging that they perpetrated victimless crimes on a massive scale. And, each year, I suspect thousands of American citizens go to jail for perpetrating victimless crimes on a far lesser scale.

Moreover, these illegal acts demonstrate disrespect for the mortgage process. This same disrespect for appropriate processes, although not proven to be similarly criminal, is a large part of how our current mortgage mess was created in the first place. The banks ignored many basic underwriting rules in a rush to profit from extending as many mortgages as possible.

At this moment, I suspect the individual state attorneys general have the power, through civil suits and penalties combined with criminal prosecutions, to destroy the banking institutions that are guilty of this illegal behavior. This is, perhaps, the ultimate bargaining leverage, and it should only be given up in return for a settlement that will clearly heal the housing market.

Here are the several reasons why the proposed 46-state settlement is such a disastrous policy:

1. There is no overriding public interest in a settlement of the type proposed at this time. No one believes this settlement will fix the housing market. The state attorneys general are giving up leverage (which exists only through the banks' malfeasance) in return for what are minimal penalties to these giant financial institutions. As I previously pointed out, large monetary settlements have increasingly become a simple "cost of doing business" for financial institutions that break the rules.

To date, the Obama administration has attempted a seemingly endless number of programs designed to prevent foreclosures and heal the housing market. Each has been introduced with great fanfare and as an innovation that will not suffer from the failures of the previous program. Each has then failed.

I fervently hope that the latest program proposed by the administration will succeed. Unfortunately, I do not believe it will. My analysis, which is shared by professional housing economists, is that housing prices are headed substantially downward, by 20 percent or more, which will kick off a further weakening of the economy and a self-reinforcing system of foreclosures. This past Sunday, Joe Nocera's column in The New York Times profiled the analysis of Laurie Goodman, which says we should anticipate that a "staggering" 10 million of the existing 55 million mortgages will ultimately default. The country could not be more ill served by a policy that weakens our ability to ultimately end this cycle of destruction.

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2. Since the start of the crisis, my research has indicated that only a radical restructuring of homeowner debt, combined with innovations in housing finance, will end the crisis. Prior to the bailout, Obama had the opportunity to bring banks to the table to negotiate this necessarily extraordinary change. The opportunity was missed. We bailed out the banks, but not homeowners.

Now a second opportunity exists. The state attorneys general have the ultimate leverage to demand a restructuring of the housing market without legislation. Right now we don't know what this should look like or what form it should take. But to give up this opportunity -- until the statute of limitations is exhausted -- would be inexcusable.

3. The banks (and even some government officials) assert that a settlement will spur a recovery of the housing market and the economy. This is absolute nonsense. In the words of MIT's Simon Johnson (emphasis added):

With roughly a quarter of all U.S. households with mortgages owing more on their loans than their homes are worth, it's no surprise that consumption, which accounts for 70 percent of gross domestic product, is restrained.

The consequent lack of demand discourages business investment, which means job creation remains weak. People are afraid of losing their homes and that fear keeps spending down and thus prevents them -- and their neighbors -- from getting jobs.

What can be done to break this vicious circle? One suggestion from some officials... -- and of course many banks -- is to accept a relatively small amount of money to settle the various robo-signing and other mortgage document cases that state attorneys general are pursuing. The claim is that this would put the banks back on their feet and spur lending. This is a complete illusion.

4. State attorneys general working in a coordinated action may sound positive. But in fact, it violates (at least in principle) the notion of federalism and state sovereignty that is a vital part of our constitutional government. The federal government is the place for coordinated national action.

Many of the programs that ultimately formed successful aspects of the New Deal were first developed by FDR as governor of New York. In effect, the states are laboratories for experiments, which can then be expanded in scope through the federal government. At a time when economic uncertainty is so high, we should not abandon the virtue of multiple experiments by individual states.

5. It is by no means clear that this settlement will have a meaningful impact on banks' behavior. This behavior has been so egregious that even The Wall Street Journal has been forced to acknowledge it. The idea of entitlement is anathema to a capitalist system. Yet the more we punish massive rule-breaking with the equivalent of a slap on the wrist, the more we create the impression -- among the general citizenry and the elite -- that we no longer have a fair capitalist society. As a consequence, the settlement has a strong chance of encouraging further misbehavior.

6. My study of the effects of extreme economic inequality, published as It Could Happen Here, demonstrated that as economic inequality grows, political polarization increases and legislatures become paralyzed. Sadly, we are seeing this today.

In contrast, the robo-mortgage scandal provides an opportunity for action by courageous individuals (state prosecutors and attorneys general) that does not depend on a consensus, which almost certainly prevent innovation. These individuals can make a difference in the lives of millions who suffer today -- even as our Congress fails to act. I hope they do not shrink from this awesome responsibility, one that they may not have sought but nonetheless possess.

The New York Times reports that "a handful of state attorneys general became so troubled by the direction this deal was taking that they dropped out of the talks. Officials from Delaware, New York, Massachusetts and Nevada feared that the settlement would preclude further investigations, and would wind up being a gift to the banks." These attorneys general are to be commended, and the other states should follow their example. Hopefully, their stance will not weaken over time.

There is no reason to violate the capitalist ethos, which is built on accountability and the rule of law, by agreeing to a multi-state settlement. This ethos and the accompanying rules of behavior are what made us a great nation. The far wiser policy is to develop an understanding of what actions will heal the housing market and work toward implementing a policy that realizes them.

Bruce Judson is Entrepreneur-in-Residence at the Yale Entrepreneurial Institute and a former Senior Faculty Fellow at the Yale School of Management.

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Rob Johnson on Greece: "Ungovernable Banks Pitted Against Democracy"

Nov 7, 2011

Roosevelt Institute Senior Fellow Rob Johnson got up bright and early to join Chris Hayes and, as Chris put it, "untangle the Grecian mess." Lots of news came out of there recently, but what's really going on? To put it bluntly, Rob says, "They've gone over the waterfall." But American's can't afford to shrug off Greece's troubles as far away from home. "Greek failures affect your front yard" when they start a worldwide financial shock, Rob warns.

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Roosevelt Institute Senior Fellow Rob Johnson got up bright and early to join Chris Hayes and, as Chris put it, "untangle the Grecian mess." Lots of news came out of there recently, but what's really going on? To put it bluntly, Rob says, "They've gone over the waterfall." But American's can't afford to shrug off Greece's troubles as far away from home. "Greek failures affect your front yard" when they start a worldwide financial shock, Rob warns.

Visit msnbc.com for breaking news, world news, and news about the economy

After Prime Minister Papandreou attempted to have the public vote on the austerity measures being demanded in return for a bailout, he's now about to lose his job. Irony isn't dead. "We all have to laugh a little bit," Rob says, "that the place where democracy originated is now terrified of resorting to democracy." Why is everyone so terrified? "What's really going on in Greece in the big picture is fear of the structure of ungovernable banks pitted against democracy," he explains.

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So how do the Greeks find their way out of this mess? Rob sees three paths, and only one of them will work: 1. "You can do inflation, which they can't do," as they don't control their own currency; 2. "You can do austerity... which is a bad endgame because it makes things worse;" and 3. "Restructuring of the debt, and that's where we've got to be but everybody's terrified to do that to the banks." But while that is a dire situation, it also underlines why cries that the U.S. will end up like Greece "is madness," Rob adds. "It doesn't apply."

Watch the full segment to see him also discuss the slightly more positive outcome of the recent G20 meetings and why Move Your Money is channeling so much pent-up frustration.

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A Two-Step Solution to the Student Loan Crisis

Nov 7, 2011Mike Konczal

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

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

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

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

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

1. Party Like It's 1989

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

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

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

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

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

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

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

2. Convert the American People into a Bank

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

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

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

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

Crisis Economics

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

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

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

Wins all around. So what are the problems?

Mike Konczal is a Fellow at the Roosevelt Institute.

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How Banks Take a Big Bite Out of Government Benefits

Nov 2, 2011Bryce Covert

What might look like a win-win for state governments and beneficiaries only serves to harm them -- and send profits to some of the largest banks.

What might look like a win-win for state governments and beneficiaries only serves to harm them -- and send profits to some of the largest banks.

Consumers witnessed a victory this week when Bank of America backed off its threat to institute a $5 fee for using a debit card, following a public outcry that led most of the other big banks to foreswear similar moves. But not everyone has been spared debit card fees. As Janell Ross pointed out at The Huffington Post yesterday, banks are making nice profits from doling out government benefits through prepaid debit cards.

It's obvious that in a sour economy like ours, usage of programs like unemployment benefits, food stamps, and cash assistance will skyrocket. It used to be that most of these programs distributed actual money to beneficiaries. Food stamps were quite literally stamps. These days, however, things have been 'modernized' so that many benefits come through prepaid debit cards administered by banks like JP Morgan, Bank of America, and other behemoths.

So what's the problem? Doesn't this just make it more convenient for users? Isn't plastic easier than cash?

The first problem is that users, who are clearly already strapped for cash if they're turning to government benefits, are finding themselves hit with fees for using the cards. As an example, Ross points to one analysis that California families will pay over $16 million in surcharges to access benefits this year. While there has been a lot of action around limiting swipe fees and much outrage at charging customers to use regular debit cards, prepaid debit cards are a whole other animal. Even consumers using them to access their privately earned money may be charged for buying the cards, swiping the cards, and withdrawing money. And people getting benefits through them aren't any exception: they face charges for withdrawing money too many times, using an out-of-network ATM, drawing more money than is in the account, leaving the card inactive for a certain period of time, and some even charge per purchase.

Secondly, big banks are making a tidy profit by acting as middlemen for what should be publicly provided services. In just three months, from July and September, Ross reports that U.S. Bancorp, which provides unemployment benefit debit cards, made $357 million in revenue in the division that handles the cards. That amount is more than one-fourth of its total revenue. I previously reported that JP Morgan made $5.47 billion in net revenue for most of last year in the division that handles food stamp cards, and it was up two percent is the last three months of the year. The head of the division himself has said, "Volumes have gone through the roof in the last couple of years... This business is a very important business to JPMorgan in terms of its size and scale."

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And while banks only make money off of unemployment benefits by charging fees to use cards, they are paid directly by state governments to administer food stamps. Florida, for example, paid JP Morgan $50 million over the last three years to administer the program. The bank is paid for each case it handles, meaning its profits rise as the rolls of those using food stamps rise (and numbers are really rising -- they were up to 43.6 million Americans in February).

And there is a third, larger problem: it's another iteration of what Suzanne Mettler has nicely termed the "submerged state." The submerged state encompasses government policies that have become more and more skewed toward hidden delivery mechanisms: from student loans subsidized by the government but offered by private banks, to tax incentives and tax breaks to aid people and encourage shared values, to benefits and services that are contracted out to private players. The direct role of the government in all three of these is obscured or completely invisible to the average American.

This is problematic in two ways. The first is that, as pointed out above, hefty profits accrue to the private sector when it can exploit the gap between the government and its beneficiaries. This isn't equally shared across the entire economy, however; most of the profits go to the FIRE sector, which Mettler points out have "outpaced growth in other sectors of the American economy... not from 'market forces' alone but rather from their interplay with the hidden policies that promoted their growth and heaped extra benefits on them." More profits mean more money to spend on lobbying to protect the very policies that allow them to profit off of these services. Rinse, wash, repeat.

It also affects political engagement. Mettler is famous among a certain subset of the blogosphere for a chart showing that majorities of people surveyed who had in fact benefitted from government programs -- many of them belonging to the submerged state -- said they had never "used a government social program." This is the larger danger of allowing the private sector to carry out government programs: "polices of the submerged state obscure the role of the government and exaggerate that of the market, leaving citizens unaware of how power operates, unable to form meaningful opinions, and incapable, therefore, of voicing their views accordingly," Mettler writes. It will only lead to a less engaged, and therefore less democratic, electorate.

Contracting banks out to provide benefits through plastic cards may at first glance seem like a win -- governments are spared the hassle of delivery, beneficiaries are spared the hassle of paying with cash -- but in the end it only benefits the banks.

Bryce Covert is Editor of New Deal 2.0.

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Unequal Justice: Banker Arrests, 0; Protester Arrests, 2,511

Oct 27, 2011Bruce Judson

money-justice-scalesEqual justice is a basic underpinning of a healthy capitalist system. Without prosecutions for the financial crisis, that principle is being eroded.

money-justice-scalesEqual justice is a basic underpinning of a healthy capitalist system. Without prosecutions for the financial crisis, that principle is being eroded.

Since the start of the financial crisis, Americans have wondered why, if laws were broken, none of the occupants of Wall Street or other financial centers have been arrested. Now arrests are starting to happen with growing frequency. To date, an estimated 2,511 people have been arrested on Wall Street and elsewhere for activities related to the crisis. Unfortunately, it's the protesters who account for these arrests. So the tally to date: 2,511 people arrested for disturbing the peace and related activities; no arrests for any of the financiers who broke the law and plunged millions into untold misery.

"Equal justice under the law" is a cornerstone of the American Republic. In statues, Lady Justice is blindfolded to symbolize that justice is blind to the differences between the powerful and the weak, the rich and the poor. Today I fear that Justice's blindfold is in tatters and equal justice under the law has become a myth in the American economic system. Capitalism is not an abstract ideal. It is a set of rules and principles that, over the past two centuries, has combined with democracy to create a great America. Yet without blind, impartial, and equal justice, capitalism simply does not work.

The life-blood of any capitalist economy is the idea that a fair bargain is binding. Indeed, this principal was enunciated in the early days of the Republic in the famous Dartmouth College Case, when the Supreme Court ruled on the sanctity of contracts. A natural corollary of this principle is the notion that it will be enforced by our justice system with equal vigor for all of the parties to the contract.

There are four broad principles associated with criminal law that apply to a capitalist system:

First, stupidity -- no matter how great or how extreme the consequences -- is not a crime. Poor, high-risk decisions that led to the financial crisis are not, in themselves, criminal. Indeed, no economy can thrive if bad decisions carry criminal penalties. Crimes are violations of specific laws.

Second, there are at least two purposes in prosecuting an individual for criminal misconduct: punishment for misbehavior and changing behavior within the larger society. When a crime is prosecuted, it has a deterrent effect. The prosecutor is sending a message to the general public and anyone else contemplating such crimes in the future that this behavior will not be tolerated.

Third, prosecutors have discretion in pursuing a specific individual for an alleged criminal act. I have spoken with a host of prosecutors with regard to the financial crisis, and the most common answer is "these are hard cases to make" and "the budget to prosecute a complex financial crime is extraordinary." As a result, civil settlements, where the banks pay large financial penalties, have come to rule the day. (However, as discussed below, in many instances egregious violations of the laws make these easy cases to make.)

Fourth, as should be obvious, no individual in our society has the right to decide whether a law is irrelevant. Laws are the rules that everyone is expected to follow. This applies to every citizen, no matter how high or how low they stand in our society.

Now let's return to the financial crisis. In simple terms, three types of behavior have been documented: (1) "bad actors" who knew they were probably acting immorally but were not breaking the law, (2) activities that were most likely criminal, but without a trial no one has admitted to criminal behavior, and (3) admissions as testimony in open court of massive violations of the law (the robo-mortgage scandal is one example) with no prosecutions.

The consequences of the second and third type of behavior are inevitably calamitous for a capitalist economy. Business activity relies on the belief that, after the buyer and seller (or borrower and lender) have done all of their due diligence, our society will ensure that those who perpetrate false contracts will be punished. Fraudulent bargains will not be allowed. The alternative is massive uncertainty and a dysfunctional economy. For example, if a business person can't rely on the law to protect his or her rights in a transaction, the individual is not going to enter into new contracts. The net result: less investment, less economic activity, and far less innovation.

The SEC recently announced a $285 million dollar civil settlement with Citigroup. The firm had sold securities to investors and then turned around and shorted these same securities. The bank not only believed the securities would decline in value, but it actually spent its own money to make money off the terrible product it had sold to customers. Suppose I am in the jewelry business and I pretend that I am selling you a diamond that I know is really glass. I strongly suspect I would be guilty of some type of criminal fraud and would probably go to jail. At a fundamental level, I fail to see the difference between the jeweler and Citibank. Both have swindled the customer.

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(Some readers may be thinking about the sophistication of the investors and the many agreements they probably signed disavowing representations by Citigroup. However, the fact of the settlement suggests that improper behavior absolutely occurred -- if not, Citigroup would have fought the settlement. In addition, there is a strong argument that agreements that insulate any economic player from blatant misrepresentations should be void as against public policy.)

In a larger sense, the many financial institutions that have entered into settlements of hundreds of millions of dollars with the government are aware of all of the issues discussed above. My analysis is they have settled for two reasons: they don't want to risk criminal prosecution and they don't want the full details of their behavior to be discussed publicly in open court. And as noted in my earlier article, these settlements have become simply a "cost of doing business" for our increasingly monopolized financial sector and are unlikely to impact its behavior. In discussing the recent Citigroup settlement, The New York Times noted that "The settlement will refund investors with interest and include a $95 million fine -- a relative pittance for a giant like Citigroup. On Monday, the company reported that in the third quarter alone it earned profits of $3.8 billion on revenue of $20.8 billion."

The message to people and entities, large and small, is that they cannot rely on a blind justice system to protect them from unscrupulous transactions. The idea of fair dealing -- which is at the heart of our economy -- is breaking down. This implicit message also erodes the underpinnings of a vibrant capitalist economy. The rich and powerful can violate the law and will receive a slap on the wrist. As a result, the rights of the less powerful entities, which were violated by these elites, will not be protected by our justice system.

Sadly, it gets worse.

It can be argued that it is not absolutely clear that the many civil settlements do in fact reflect violations of criminal law. With limited public records and no prosecution, financial institutions can assert that I lack all of the relevant facts in my discussion above and that the decision by the government to limit enforcement to civil action is proof that no laws were broken. I disagree, but it is arguable. In contrast, there are areas where there is no question the law was massively violated. Financiers have admitted it. The cases are open and shut. Yet no prosecutions have occurred.

Both cases reflect the ultimate destruction of a capitalist economy. They prove that some participants are above the law. The concept of fair dealing collapses.

Moreover, small businesses, which are repeatedly recognized as a key source of new jobs, are the hardest hit in an economy where a bargain is not a bargain and laws are not equally applied. These businesses have the fewest resources to ensure their rights are protected. A new calculus is added to all of their activities: Will they be treated in accordance with the rules that govern our society? If not, how can they possibly risk new activities where their rights and potential profits can evaporate because Justice no longer wears a blindfold?

The consequences of the prosecutorial failure to indict even the most egregious violators of laws associated with the financial crisis are high:

First, it encourages the belief among our financial elites that they are above the law. The dangerous sense of entitlement I referenced in my earlier article is reinforced. A vibrant capitalist economy depends on what an individual accomplishes, not who they are. Financiers can, perhaps rightly, assume that no matter how badly they corrupt our capitalist system they will be spared any meaningful penalties.

Second, I would suggest that if prosecutors sent one banker to jail, they would cause a change in behavior throughout our financial institutions. If prosecutors looked for the person who most obviously violated the law, has already admitted it (so this is an easy case), and sent this perpetrator to jail, the deterrent effect would be high. Instead, the absence of prosecutions effectively validates ongoing criminal misbehavior throughout the financial sector.

Third, as these cases are publicized the public loses faith in our judicial system. Vibrant capitalism depends on the belief that everyone is treated fairly -- and bargains will be fairly enforced.

Finally, capitalism is, in part, based on the Horatio Alger ideal. If I play by the rules, the benefits of my work and innovations will accrue to me. When people lose faith in this ideal, they stop taking the type of risks that create great innovations. Now potential innovators must wonder whether law-breaking financiers will ultimately co-opt the societal wealth they may create. As their confidence in the fairness of the system erodes, so does their willingness to risk creating the new companies, and attendant jobs, the nation so badly needs.

Now let's return to the protesters on Wall Street. Almost 3,000 people have been arrested for activities that caused minimal, if any, injury to our society. At the same time, no financiers have been arrested for blatant legal violations, probably including extensive fraud, which have led millions of people to suffer and have practically brought our great nation to its knees.

There is constant discussion in Washington of economic healing and economic recovery. These can only happen when we return to the primary principles that made us a great nation. One of these paramount principles is that our capitalist economy requires a new blindfold for Lady Justice.

Bruce Judson is Entrepreneur-in-Residence at the Yale Entrepreneurial Institute and a former Senior Faculty Fellow at the Yale School of Management.

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Police are the 99%. Will They Ever Join the Protests?

Oct 25, 2011Bryce Covert

They may never jump the barricades, but after their pay, benefits, and job security has been put on the line, they may say 'enough is enough.'

They may never jump the barricades, but after their pay, benefits, and job security has been put on the line, they may say 'enough is enough.'

You could make an argument that clashes with police turned the media narrative about Occupy Wall Street from a rabble of confused hippies to a force to be reckoned with. Nate Silver at the New York Times ran the numbers and saw significant spikes in coverage after every run-in, most significantly when innocent protesters were hit with pepper spray and when police were said to lead protesters onto the Brooklyn Bridge only to arrest them in droves. Tension between the NYPD -- and police departments in other cities as the protests have spread -- and protesters continues to run high.

Which is why news that police in Albany refused to arrest protesters, even as the mayor urged them to do so, was so extraordinary. This is the first time that the police haven't simply obeyed orders to round up, pen in, and otherwise intimidate peaceful protesters.

Some (admittedly including myself) have been hoping that the police will cross the barricades and join the protests as soldiers in Tahrir Square did. The idea doesn't always seem so far-fetched. After all, policemen are solidly in the 99%. The median annual wage for a police officer is $55,620; the Wall Street Journal's percentage calculator (which, it should be noted, gives a very limited picture, not taking into account geography, family size, etc.) puts that salary in the 59th percentile. Even the 1% of the police force (okay, the top 10 percent, as the Bureau of Labor Statistics doesn't break it down into that much detail) only falls into the 74th percentile at $83,510 a year.

They're also on the frontlines of post-recession state and city budget cuts. A bunch of states, including New York, are pushing their budget crunches onto cities, who in turn are scrambling to find places to slim down. And many have turned to benefits, pay, and jobs for public workers who had nothing to do with causing the budget holes. After New York Governor Andrew Cuomo decided not to restore $302 million in aid to New York City, Mayor Bloomberg has asked city agencies to find $2 billion in cuts. And he's warned before that the NYPD may have to shrink because of the tight budget. "We cannot afford the size [of the] police force, fire department, of any of these agencies if we have a $400 million deficit," he said in April.

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The police force knows that lawmakers have set their sights on it. In fact, when the police in Albany refused to arrest protesters, an official brought this very subject up. "We don't have those resources, and these people were not causing trouble," he said.

This sentiment, of being slimmed down, stretched thin, and now asked to do even more in dealing with the protests, came through when Josh Harkinson of Mother Jones talked to some officers in New York. One officer, Harkinson reports, has

been posted to Occupy Wall Street since Day One, and all the mandatory overtime is wearing him down. "I'm really working hard for this," he says. "I'm getting yelled at, I'm getting cursed out; I'd rather be at home with my family right now." ... [He] has seen his retirement fund cut in half by a declining stock market, from $40,000 to $20,000. He worries that his kids won't be able to afford college or find jobs. And he's frustrated about not being able to talk about it openly.

While policemen are being asked to work harder to curb the protests, their benefits, pay, and even job security are all being put at risk.

This fantasy that I harbor that the police will jump over their own lines and join the Occupiers may never actually come to pass. Allison Kilkenny is very doubtful. "I've just seen cops violently collide with protesters too many times to imagine a world where the folks in blue and activists join hands in a circle and together skip under a rainbow," she writes. And she may very well be right. As she points out, there will always be a cop, like Anthony Bologna, who is unnecessarily vicious, and there will always be a protester who yells slurs at police. But maybe what happened in Albany is the compromise. Given their decreased resources and upped hours, police may simply refuse to enforce unnecessary crackdowns. They were already stretched to the limit because of tight budgets, and now they're being asked to do even more to curb the protests. No wonder the police in Albany felt enough was enough.

Bryce Covert is Editor of New Deal 2.0.

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