From Repayment to Revolution, Fighting Back Against the Banks

Apr 20, 2011Bryce Covert

How some consumers have decided to take matters into their own hands.

This week's credit check: One man paid his debt off in 650,000 pennies. Another woman refused to make any payments on her 30% APR.

How some consumers have decided to take matters into their own hands.

This week's credit check: One man paid his debt off in 650,000 pennies. Another woman refused to make any payments on her 30% APR.

So you're swamped in debt. Maybe you, like 13.5 million Americans, are out of a job. Maybe you're struggling to make ends meet with wages that have stagnated over the past 30 years -- and even fallen in the past ten. Maybe you hit one of the three big causes of financial insecurity: major medical events, divorce, or a job loss. Or maybe you didn't realize your 30-page, indecipherable credit card agreement included terms that would allow your company to hike up your interest rate to over 20% for missing a payment.

Whatever the reason, what can be done about it? Some of the solutions people are turning to range from reasoned to revolutionary.

Back in 2009, Ann Minch, a loyal Bank of America customer of 15 years who was in good standing, got notice from her bank that they would be jacking up her interest rate to 3%. When she called to negotiate, they simply referred her to debt consolidators even though she doesn't have a budget problem. So she started the Debtor's Revolt, refusing to pay her bank a single cent until they brought her rates down -- which they eventually did, accepting her offer of paying a 12.99% APR.

Patrick Rodgers of Philadelphia figured out how to foreclose on his bank. In 2009, his homeowners' insurance provider was forcing him to take out a $1 million policy on his home, so he wrote to his mortgage lender Wells Fargo requesting itemized information on his loan. Over the course of the next year he sent four letters with no response. Meanwhile, his bank insisted on forced-place home insurance that cost $2,400 a year. So he read up on the law and took the bank to court under the Real Estate Settlement Procedures Act, which requires a mortgage company to acknowledge written requests within 20 business days. When the bank still didn't respond to the $1,173 judgment, he won a default judgment and placed a sheriff's levy against the bank's local mortgage office.

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Thirry Chahez, owner of a cake shop in California, was fed up with paying his bill altogether. He decided to give his bank some payback by paying off his $6,500 in credit card debt in pennies. He loaded the crates containing 650,000 pennies into his van and drove them over, only to find out that his pennies weren't good enough for his lender, even after he put them in coin rolls. Eventually, after being bounced from branch to branch with no one interested in accepting his pennies, they were accepted at a branch with a large vault.

The best way to get out from under your bank's thumb is to pay off your balance altogether, even if you're not up for cashing out with pennies. A new startup called ReadyForZero promises to help consumers find the debt-free solution that works for them, be it consolidation, bankruptcy, or just planning out payments. Co-founder and CEO Rod Ebrahimi told me the idea started when his girlfriend had graduated from grad school with $20,000 in credit card debt on top of her student loans and was struggling to make payments. He sat down and looked over her financials and realized she was perfectly capable of paying off her debt herself without a debt management company. That idea has since spread to a service that helps anyone pay down debt on their own -- particularly helpful in an economy where few can make ends meet. The company will look into your financial situation and bring the solutions for paying down debt to you, helping advise on which makes the most sense while automating the process. Its tenants are education and control, but Ebrahimi pointed out, "Education isn't enough. It's so confusing that even if you're looking out for yourself you still don't know the nuances of each option." So you can sign up for this free service that can help make sense of the mess.

But even if you're not ready to part ways with your card just yet, there's one more solution you can consider: the Move Your Money campaign, the brainchild of Arianna Huffington, filmmaker Eugene Jarecki and Roosevelt Institute Senior Fellow Rob Johnson. Rather than giving your fees, interest and other payments to one of the behemoth banks that dragged the economy into crisis and recession, Move Your Money encourages consumers to open up bank accounts with smaller credit unions who don't share the blame. It's one way to at least put your mind at ease.

Bryce Covert is Assistant Editor of New Deal 2.0.

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What Does S&P's Revised Credit Rating Mean for the U.S.?

Apr 18, 2011Marshall Auerback

The ratings agencies' poor track record and flawed logic speaks for itself.

So ratings agency Standard & Poor's revised the U.S. rating outlook to negative from stable after affirming its sovereign rating at 'AAA/A-1+' sovereign credit ratings. Why people give credibility to the organization that gave us "triple AAA rated" subprime toxic garbage is beyond me. And take a look at the history: Debt downgrades had no impact on Japan when Moody's and S&P tried to pull the same stunt with them.

The ratings agencies' poor track record and flawed logic speaks for itself.

So ratings agency Standard & Poor's revised the U.S. rating outlook to negative from stable after affirming its sovereign rating at 'AAA/A-1+' sovereign credit ratings. Why people give credibility to the organization that gave us "triple AAA rated" subprime toxic garbage is beyond me. And take a look at the history: Debt downgrades had no impact on Japan when Moody's and S&P tried to pull the same stunt with them.

In November 1998, the day after the Japanese government announced a large-scale fiscal stimulus to its ailing economy, Moody's Investors Service began the first of a series of downgradings of the Japanese government's yen-denominated bonds, by taking the Aaa (triple A) rating away. The next major Moody's downgrade occurred on September 8, 2000.  Then, in December 2001, Moody's further downgraded the Japan government's yen-denominated bond rating to Aa3 from Aa2. On May 31, 2002, Moody's Investors Service cut Japan's long-term credit rating by a further two grades to A2, or below that given to Botswana, Chile and Hungary. Well, over a decade later and this has had no discernable impact on Japan's ability to borrow at the rate the Bank of Japan sets, NOT the ratings agencies or the "bond market vigilantes".

As economist Bill Mitchell has noted,

"the agencies continually claim that they are providing an indicator of the 'probability that the issuer will default on the security over its life...' So when considering sovereign debt as opposed to corporate debt, the agencies are suggesting that as the public debt to GDP ratio rises, the risk that the government will become insolvent rises. And their logic must be that default follows sovereign insolvency even when the sovereign debt is denominated in the government's own currency. It doesn't take long to realize that this logic is no logic."

Rating sovereign debt according to default risk doesn't really make sense. While Japan's economy was struggling at the time, the default risk on yen-denominated sovereign debt was nil given that the yen is a floating exchange rate.

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The only difference today is a political one. If the U.S. government chooses not to raise its debt ceiling (in itself a wrong-headed, self-imposed limit which constrains the effective use of fiscal policy), then there is a problem. But this is a legal, as opposed to an operational problem.

There are two considerations used by all ratings agencies when determining the credit worthiness of a government. They are ‘ability to pay' and ‘willingness to pay.' The ability of the US to make timely payment of $US is never in question. But willingness to pay is in doubt. Paying is obligated by law, and yet not paying is continuously and openly being discussed as a viable option by the same legislators tasked with making the final decisions. That's what is happening today.

The debt ceiling itself is a foolish idea. Yes, we have a speed limit in cars, but we don't design the automobile to shut down when the car exceeds, say, 65 miles per hour on the highway. If we did, we might have considerably more car pile ups and serious fatalities. But somehow, this is how we conduct our fiscal policy. And now we're paying the price as we continue to underestimate the deflationary impact of global austerity measures. The austerity route, despite a lot of demonstrably flawed arguments floating around, is harmful to our fragile economy, as the current case of the U.K. clearly shows.

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

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Tickle me, Visa. Sesame Street Brings Fiscal Lessons to Tots From Big Finance

Apr 18, 2011Lynn Parramore

There's something rotten on Sesame Street. And it ain't Oscar's garbage can.

"One of the best things about being around preschool-age children," gushes Ron Lieber in the NYT, "is that they are a blank slate awaiting your imprint."

Or perhaps the imprint of Visa, HSBC, and Wells Fargo.

There's something rotten on Sesame Street. And it ain't Oscar's garbage can.

"One of the best things about being around preschool-age children," gushes Ron Lieber in the NYT, "is that they are a blank slate awaiting your imprint."

Or perhaps the imprint of Visa, HSBC, and Wells Fargo.

In an article archly titled, "Too Young for Finance? Think Again", we are informed by Lieber that it's time for America's toddlers to "think hard about money." And why? Well, because irresponsible little people are likely to grow up into spendthrift adults. Bite-sized lessons, outlined in cute storybooks and videos, sound straightforward and wholesome enough: Save. Spend. Earn. All together now!

But who exactly will be teaching Little Jimmy the joys of fiscal responsibility? The very people who brought you the financial crisis.

That's right. The campaign to teach economics to tots comes courtesy of a group called the JumpStart Coalition for Personal Financial Literacy, which describes itself as a D.C.-based "non-profit organization of organizations that share an interest in advancing financial literacy among students in pre-kindergarten through college." Peruse the website, and you will find that the folks behind JumpStart share a very significant interest: Nearly everyone listed is either directly or indirectly involved with Big Finance. We're talking giant banks, mortgage financiers, and credit card companies.

What you will not find on JumpStart's board or list of partners is even the usual ceremonial window dressing of representatives from labor or consumer advocates. There is one person listed associated with the Consumer Federation of America, but this pathetic nod is hardly a counterweight to the entire banking industry. Where is Elizabeth Warren, for example? Not here. Nor is anyone identified with criticism of the banks and financial firms that have bilked consumers, raised fees, and nearly tanked the global economy. Are  preschoolers really supposed to learn about financial responsibility from the Mortgage Federation of America? Obviously, the logic is to start 'em young before they have had any real contact with these paragons of fiscal virtue. And before their brains are properly functioning.

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Lieber begins his article with the #1  lesson that the financial sector has been pushing ever since the meltdown. The crisis really wasn't their fault. It was ours. And that means you, Little Sally, with your greedy, ice-cream coveting ways.  "In the wake of the financial crisis," writes Lieber, must come a "realization that individuals share at least some of the blame for the bubble." What's needed, says Lieber, are "better habits from an earlier age" that will help kids grow up responsibly.

"For Me, For You, For Later" is the title of Sesame Street's package of videos -- offered free at banks around the country! -- that will encourage anklebiters to forgo that ice cream and donate cat food to a local shelter instead.  Very nice. But coming from this gang, perhaps a more appropriate title would be"For Me, For Now, Forever." It could include lessons on How to Indenture Young People Through Student Debt. Or How to Make Families Homeless Through Predatory Mortgage Lending. And the biggest lesson of all, How to Defraud Your Neighbor and Not Go To Jail.

In its crusade for fiscal values, JumpStart Coalition has enlisted Sesame Street to use the popular character Elmo to urge children to create three special jars labeled "Spending", "Saving", and "Sharing" into which they drop their pennies. But it forgot a very important jar. "Stealing". Because that's how many of the firms represented by JumpStart have made much of their money.

So how does Sesame Street, beloved of educated parents everywhere, get into the game of pushing the financial sector's fiscal ABCs? It just so happens that Joan Ganz Cooney, one of the founders of Sesame Street, is married to Blackstone Group billionaire Pete Peterson, the former investment banker and conservative who has been spending quite a lot of his own money to push the destruction of Social Security and Medicare through his Peterson Foundation and convince us all to forget the lessons of Macroeconomics 101 on deficits. Being married, of course, is not a crime. But here's the smoking gun: Muckety.com reveals that Cooney also serves on the board of the Peterson Foundation.

Frankly, this whole thing reeks worse that Oscar's garbage can.

Lynn Parramore is the editor of New Deal 2.0, Media Fellow at the Roosevelt Institute fellow, co-founder of Recessionwire, and the author of Reading the Sphinx.

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On Anniversary of FDR's Death, Remembering Leadership that Faced Down Economic Tyranny

Apr 12, 2011David B. Woolner

On this day one of the most visionary presidents in US history passed away while in office. Roosevelt historian David Woolner honors his legacy, and the legacy of the millions of Americans who grieved at his passing.

On this day one of the most visionary presidents in US history passed away while in office. Roosevelt historian David Woolner honors his legacy, and the legacy of the millions of Americans who grieved at his passing.

In his inaugural address on the 4th of March, 1933, Franklin Roosevelt -- who passed away 66 years ago today -- chastised the forces of wealth and power who, through their greed and avarice, led the United States into the greatest economic crisis of our history, the Great Depression. "Stripped of the lure of profit by which to induce our people to follow their false leadership," he said, "they have resorted to exhortations, pleading tearfully for restored confidence. They only know the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish."

Over the next twelve years FDR would articulate a vision for America that was based on the notion that every American deserved not just political rights, but the right to a measure of social and economic security. It was a theme that he returned to again and again, a theme that led to the banking and financial reforms that gave us the Federal Deposit Insurance Corporation (FDIC) and the Securities and Exchange Commission and which gave us such landmark pieces of legislation as the Social Security Act, the National Labor Relations Act and the Fair Labor Standards Act.

The onset of the Second World War and a conservative backlash against the New Deal in the late 1930s limited FDR's ability to push through further reform legislation during the course of his unprecedented third and forth terms. But his belief in the link between political and economic freedom intensified, and it was during the war that his articulation of his vision for America and the world reached its greatest height. It was in January 1941, for example, that FDR expressed his view that the great sacrifices the democracies were making in their struggle against fascism were necessary so that humanity could one day establish a world based on "four fundamental human freedoms": freedom of speech and expression, freedom of worship, freedom from want, and freedom from fear. FDR reiterated much of this when he joined Winston Churchill in drafting the Atlantic Charter later that year. He backed up his call for a greater measure of global economic security through his support for the creation of such post-war institutions as the United Nations, the International Monetary Fund, and the United Nations Relief and Rehabilitation Administration (which later became the World Bank).

Indeed, near the end of his life, the experiences of depression and war had convinced FDR that "true individual freedom cannot exist without economic security and independence" as "necessitous men are not free men," but the stuff with which "dictatorships are made." Moreover, FDR became convinced that in a complex, modern industrial economy, providing such basic economic security is much more than a mere aspiration. It is a necessity, a right, which can and must be protected. Having reached the conclusion that in our own day "these economic truths have become accepted as self-evident," the President went on to make one of the most important -- and least known -- speeches of his career when he called for the establishment of "a Second Bill of Rights under which a new basis of security and prosperity can be established for all [Americans] -- regardless of station, race, or creed."

With tremendous prescience, President Roosevelt then listed what he considered to be these essential rights, among which were included: the right to a useful and remunerative job; the right to earn enough to provide adequate food, clothing, and recreation; the right of every businessman to trade in an atmosphere of freedom from unfair competition and domination by monopolies; the right to a decent home, adequate medical care and the opportunity to achieve and enjoy good health; the right to adequate protection from the economic fears of old age, sickness, accident and unemployment; and the right to a good education.

As Cass Sunstein has observed in his book "The Second Bill of Rights: FDR's Unfinished Revolution and Why We Need it More than Ever", the Second Bill of Rights sought to protect both opportunity and security and to complete the unfulfilled promise of the American revolution, by making sure -- in an era of fascism -- that every American could enjoy the benefits of liberal, capitalist democracy. At the base of FDR's vision stood his faith in government as an active instrument of social and economic justice; government that was dedicated not to special interests, but to the common good.

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In a world dominated by free-market fundamentalists, the notion of government as an instrument of economic revival and social improvement has almost disappeared from the public consciousness. Yet the problems that FDR sought to address remain with us still -- and in recent years have gotten worse. Today, for example, roughly twenty percent of American children live in poverty, the highest rate among any industrialized nation. We still have approximately 13.5 million people officially unemployed and the unofficial rate is estimated to be much higher. With the new health care reform bill there is some hope that the millions of Americans without health insurance will be covered in the future, but given the current political and legal challenges, this is by no means certain. In the meantime, the costs associated with a higher education continue to climb, as does student debt, which for the first time in American history topped a trillion dollars and now exceeds nation-wide credit card debt.

In Roosevelt's day, GIs returning from fighting overseas could look forward to going to college on the GI Bill (often referred to as "the GI Bill of Rights"), which also provided an array of housing, medical and other benefits. Thanks to the foresightedness of this legislation -- which was the first tangible consequence of FDR's Second Bill of Rights speech -- millions of young men attended college for the first time. In doing so, they not only improved their own lives, they also changed the face of America and drastically improved the productivity of the post-war workforce. All this thanks to a government program designed and dedicated to making higher education affordable for millions of middle and lower-income Americans.

Engaging in serious structural reform and fashioning programs that provide both security and economic opportunity for millions of Americans takes money, vision and leadership. As we struggle past one budget crisis and stumble our way toward the next, it appears that we lack all three of these key ingredients -- and millions continue to suffer because of it. Worse still, a new generation of "self seekers" has once again lured the American public to follow their false leadership, buying into the specious notion that the Great Recession was caused not by reckless bankers and hedge fund managers but by too much government spending. They claim that cutting government expenditures in an economic downturn will lead to more jobs and that the best way to ensure the long-term health of the economy is to shrink government, strip unions of their collective bargaining rights and make the tax cuts on the rich permanent.

Over six decades ago, in the face of a far greater economic crisis, FDR rose the occasion by convincing millions of Americans to follow his vision and to support the transformation of American society through the establishment of the New Deal. Looking back on the causes of the Great Depression, which are remarkably similar to those that cause our current economic crisis, FDR once observed that for too many Americans,

...the political equality we once had won was meaningless in the face of economic inequality. A small group had concentrated into their own hands an almost complete control over other people's property, other people's money, other people's labor -- other people's lives. For too many of us life was no longer free; liberty no longer real; men could no longer follow the pursuit of happiness.

Against economic tyranny such as this, the American citizen could appeal only to the organized power of government. The collapse of 1929 showed up the despotism for what it was. The election of 1932 was the people's mandate to end it.

If we are going to reclaim our mandate to end economic domination by the rich and put our nation back on the path to equality, we are going to need much more than endless calls for tax cuts and an end to government intervention in the economy. We are going to need leaders strong enough to take on the forces of wealth and greed; leaders who will not merely trumpet their ability to cut government spending in a recession, but instead defend the right of government to act directly and decisively to put people to work; leaders dedicated to bringing an end to the increasingly unequal distribution of wealth that has robbed Americans of the purchasing power they need to restore the health of the economy and achieve the same standard of living as their parents. In short, we are going to need leaders with vision, for as FDR said all those years ago, "when there is no vision, the people perish."

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

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Created Equal? Founding Era Tensions on Economic Fairness

Apr 11, 2011William Hogeland

money-justice-scalesIn 1776, rowdy Democrats fought for equality. But their notions didn't suit early elites.
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money-justice-scalesIn 1776, rowdy Democrats fought for equality. But their notions didn't suit early elites.
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"All men are created equal," the Continental Congress famously announced in the document that came to be known as the Declaration of Independence. These are powerful words -- and reflecting on America's founding struggles over money and finance can give the familiar phrase new resonance. For even as Thomas Jefferson was drafting the Declaration in a small, hot room in Philadelphia in the summer of 1776, the democratic popular finance movement was blooming in America. Throughout the country, ordinary people placed all hopes on America declaring independence from England. Equality was indeed their goal. And by this, they meant economic fairness: A newly level playing field where they could compete for prosperity.

Near the room where Jefferson wrote, the most successful of those democratic movements was coming to fruition in Philadelphia's Carpenter's Hall. To the artisans, laborers, mechanics, and militia privates gathered there, declaring independence from England offered an amazing chance for creating a new kind of government, fostering fairness for the less propertied, even the unpropertied; obstructing traditional high-finance privilege; and giving the ordinary people access to representation and economic opportunity. Right down the street from the Pennsylvania State House where the Congress met, supporters of this democratic movement were seizing the moment of crisis with England to bring about an economic revolution in America. And their 1776 Pennsylvania constitution made economic equality into law for the first meaningful time anywhere.

The Constitutional Convention: A Counterrevolution?

By the late 1780s, the economic advances of ordinary Americans were starting to look very successful. So successful, in fact, that in 1787, gentlemen from around the country gathered again in the Pennsylvania State House at what became the U.S. constitutional convention. Their primary goal? To push those advances back. Edmund Randolph of Virginia, who would soon serve as U.S. Attorney General and then as Secretary of State, kicked off the 1787 proceedings in the same room at the State House where the Congress had declared independence. He charged the convention with repairing America's "insufficient checks against the democracy."

By "the democracy," delegates like Randolph meant the popular finance movement that events of 1776 had unleashed. In the 1780s, for example, working people serving in the Pennsylvania assembly had actually gone so far as to shut down a central banking scheme operated for the benefit of America's fat cat lenders. That kind of democracy sent shock waves throughout elite America.

The elite gentlemen who gathered in 1787 agreed on several points. They believed that a national government should have power to take all significant finance and monetary policy away from the states, which they considered wimpily susceptible to democratic finance pressures -- and especially from those like Pennsylvania, which was actually in the hands of "the democracy." They thought that the national government ought to be able to enforce taxes earmarked for the big public investors and put down debtor insurrections with military force. Southern planters and northern bankers, state sovereignty libertarians and nationalist authoritarians, the men of the convention put aside their differences and formed a nation that would end the democratic paper money agitation, small-scale government lending, foreclosure relief, and debtor insurrection that weakened the investing class's stability and prevented efficient consolidation and deployment of the country's wealth.

Their differences lay mainly in how to structure and balance that national government. Those differences were of course deep, and they would go on fighting -- from the Kentucky and Virginia Resolutions to the Civil War to the New Deal to the Civil Rights Movement and beyond -- over what the U.S. Constitution says about the proper role of the federal government.

At the 1787 convention, however, they had a common enemy: economic equality. And they made no bones about their effort to suppress democratic finance.

Given those famous, forthright 1776 words about human equality, it's been easy for some readers and writers of history -- especially progressive ones -- to read the U.S. constitutional convention as a kind of counterrevolution. But despite the Declaration's famous phrase about equality, and despite the elites' blatant push back in 1787 against democratic finance, the 1776 congressmen really never intended to bring about a social, political, or economic revolution within American society. The State House, where the Congress declared independence, was geographically near -- but philosophically far -- from Carpenter's Hall, where popular finance reigned.

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Fuzzy notions that the independence Congress sought included social equality, or that the Constitution contradicts the Declaration, distract us from the real significance of surprising relationships -- strikingly salient for our political and economic struggles today -- between the genteel men of the State House and the rowdy democrats of Carpenter's Hall in the great year of 1776.

Jefferson Didn't Mean "Economically Equal"

To see how men of the Continental Congress differed from men of Carpenter's Hall in thinking about equality, it's important to remember that Jefferson drew the remark "all men are created equal" from 17th-century high-Whig philosophy. In using the expression, Jefferson wasn't suggesting government has a responsibility to foster equality. "Created equal" describes men in a natural state, before governments are instituted in order to, as the Declaration says, secure the unalienable rights with which all men are endowed by their Creator. The Congress was appealing to ideas widely accepted among gentlemen about representative rights, which the 1776 congressmen -- just like the 1787 convention delegates -- would inevitably have believed are held by property owners, not by poor, laboring, and other ordinary people. The last thing the Congress would have announced to the world in the Declaration of Independence is a smashing of the connection between property and rights. Indeed, the Declaration complained about the King precisely for violating property rights.

In that sense, the concerns of the men of the 1789 convention were analogous to those of the men of the 1776 Congress. They feared both what they saw as tyranny by the decadent king and what they saw as tyranny by the unpropertied mob. There was no 1787 counterrevolution in American society because, as far as the 1776 Congress was concerned, there had been no revolution in American society.

Genteel Congressmen and Rowdy Democrats: the Strangest Bedfellows of 1776

It's nevertheless true that at the very moment when Jefferson was drafting a socially conservative Declaration, vigorously democratic and deeply American ideas about equality in money, finance, and rights were coming to life right down the block. A seething, conflicted, secret, and highly creative relationship prevailed in 1776 between some of the gentlemen in the Congress and some of the democrats on the Philadelphia street. Long buried by history, the intensity of that relationship may be glimpsed in the antipathy of Thomas Paine and John Adams (Adams called Paine's "Common Sense" a "crapulous mass"). Antipathy finally came down to a shouting match between the two at Adams' rented Philadelphia rooms, in the spring of 1776, over what Paine saw as Adams' snobbish elitism and what Adams saw as Paine's egalitarian ignorance.

Yet even as they shouted, the men shared a goal: American independence. In fact, they were striving tirelessly together, Paine from the street and Adams in the Congress, to bring independence about by any means necessary. Coordinated in secret by John Adams' second cousin Samuel Adams, the two enemies worked behind the scenes to overturn the elected government of Pennsylvania, which favored reconciling with England and held sway over the middle colony bloc. They schemed to replace it with a new Pennsylvania government favoring independence. The new Pennsylvania government would tip the balance in the Congress, bringing about a resolution for independence on July 2. That government would also break the connection between property and rights and pass laws restraining wealth.

So in Philadelphia in 1776, economic elites and economic democrats worked together, albeit in secret and albeit with animosity, on a great task. The compromises were extreme and painful. To achieve American independence, Adams was willing to turn Pennsylvania over to the economic democracy he scorned as mob rule. And Paine, working for an economic revolution in Pennsylvania (and one day, he hoped, in the whole world), collaborated with the very men whose privilege he hoped to disable. Without that strange bedfellow alliance between elite privilege and democratic uprising, America would not have come into independent existence in July of 1776.

Understanding issues confronting both ordinary and elite Americans in founding era finance, and assessing their continuing impact on our lives today, means moving away from the simplistic "Declaration vs. Constitution" binary, which obscures more revealing founding alliances and arguments over the role of American government in ensuring economic fairness. What do we -- not Jefferson -- mean by "equality"? Pulling our real, and really fraught, founding alliances and arguments out of the shadows, and coming to terms with their hopes, conflicts, and contradictions, might help us start to answer that question.

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

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Mark Schmitt: Ryan Budget the "Grandaddy" of Risk Shifts to Families

Apr 8, 2011

In a recent Bloggingheads discussion with Glenn Loury of Brown University that was featured in the New York Times, Roosevelt Institute Senior Fellow Mark Schmitt had some choice words for Paul Ryan's budget plan. Namely, it will be "a tidal wave, the grandaddy of all shifts" of risk from government onto the backs of individuals and families. But some people are getting out of their risks quite well. "We're all bearing more risk and banks are bearing less and less risk," he notes.

In a recent Bloggingheads discussion with Glenn Loury of Brown University that was featured in the New York Times, Roosevelt Institute Senior Fellow Mark Schmitt had some choice words for Paul Ryan's budget plan. Namely, it will be "a tidal wave, the grandaddy of all shifts" of risk from government onto the backs of individuals and families. But some people are getting out of their risks quite well. "We're all bearing more risk and banks are bearing less and less risk," he notes.

"The genius of well-designed programs," Mark points out, "is they socialize or share the risks that ought to be shared." Think Social Security, Medicare, Medicaid, and a whole host of other components of the social safety net. While he admits that there are "definitely situations where the skin in the game issue really does matter" and can cut down on overtesting and overtreating patients, "it's not a huge portion of the excessive health care costs we have." And the things in the Affordable Care Act that were going to help keep those costs under control "got demagogued as death panels," he points out.

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Long story short: "It's a huge problem and I think that the voucher [for Medicare in Ryan's budget] is an oversimplified way of fixing it."

Check out the full conversation on past shutdowns, Obama's reelection campaign, and how Ryan changed our conversation:

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The Tragedy of Defensive Politics

Apr 8, 2011Jeff Madrick

The challenges the Obama presidency has faced are an opportunity to get mad, not to compromise.

The challenges the Obama presidency has faced are an opportunity to get mad, not to compromise.

A New York Times story today is titled, "On Budget Dispute, Obama Casts Himself as Mediator in Chief." To me this is chilling, if obvious. He has long been the mediator, as if he were a Sunday morning talk show host. The attitude that he must always appear calm, always work toward compromise and avoid at all costs appearing to be a rabble-rouser, is now taking an enormous toll.

Like today's media, he gives equal time to the opposition. Now we have someone representing the anti-gravity point of view, says the allegedly objective talk show host. Tell us, why do you believe gravity is a myth? Obama wants to compromise with the anti-gravity extremists rather than calling them out in a loud and angry voice, calling them what they really are.

Many of his supporters lament that Obama took the presidency in the face of a daunting agenda, from wars to a credit crisis. The truth is something of the opposite. All these were extraordinary opportunities. He could have come down hard on the banks, but he didn't. He could have wound down the war in Afghanistan, but he didn't. He could have closed Guantanamo, as he said he would, but he didn't. And on. He could have won the people's backing for real reform, a new day in America. He didn't even fully stick up for his original Obamacare program.

Has it been all bad? No. He did get the stimulus passed in early 2009. We do have something of a universal health care system, if one full of potential potholes. He has at least avoided a gung-ho American chauvinism about Egypt and Iraq.

But the so-called unprecedented number of hurdles were, as I say, the perfect opportunities to get angry, to tell Americans who was really undermining their dreams and security -- the perfect opportunity to get Americans angry at those who harm them.

Why didn't he get angry over the lightweight and damaging Paul Ryan proposals, which so many in the media called courageous? Why isn't he attacking Republicans hard for even the threat of closing the government?

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He has chosen the mediator path. This has always been his way. But the new element is the election campaign. He is playing defensive politics, and America is suffering badly as a result. Better I compromise than chance alienating some of those in the middle. At least if I lose some major battles I will keep a Republican from winning office.

Years ago, there was a good book published on how to manage investments. It took its lessons from tennis. If you are a club player, you will win if you play defensively. Don't go for winners, just avoid mistakes. That was also the best way, the author insisted, to manage a mutual fund, for example. Slow and steady, defensive, no big ambitions, don't try to beat the market badly. That's now the Obama game plan.

The budget confrontation is not about economics, of course. Budget cuts in the midst of a weak economy are dangerous and potentially tragic. The long-term budget deficit should be addressed when the economy is running strongly. And it should be addressed honestly -- rapidly rising health care costs are the issue.

The confrontation is simply the same old Republican game. Starve the beast. It is all about reducing government, nothing about economic health. It is about ideology, not prosperity. It is bad economics, in fact.

Will lower taxes produce economic growth sufficient to reduce the unemployment rate rapidly? No. It seems people can't get this simple fact in their head. After the Bush tax cuts at the start of the last decade, the U.S. economy grew more slowly than in any other expansion since World War II. If we had better data, it would be probably show that it was slower than any other expansion since the 1870s. This is between the end of the last recession and the beginning of the new one in 2007, when the economy was growing. It does not include the credit crisis debacle and Great Recession, for which Bush deserves plenty of blame.

The creation of jobs was unprecedentedly weak as well. Employment grew far more slowly than in any other expansion, as did industrial production. Even capital investment, despite rising profits, grew more slowly than in all but one previous expansion.

So this budget exercise, and a Paul Ryan budget plan of big tax cuts, is likely a disaster. And whatever you do, don't think this confrontation is purely about economics. It is entirely about cutting the size of government and those awful social programs. Down to the wire, we now know the Republicans' real strategy is to attack abortion and the anti-pollution regulation. It is not even about budget balancing.

Obama is again being outmaneuvered. As a close friend says, Obama is playing checkers, the other guys are playing chess. But the root causes are the insupportable strategy of being calm 24/7, avoiding angry attacks, and ultimately accepting compromise with those who don't believe in gravity. This is not leadership. I yearn for FDR more every day.

Roosevelt Institute Senior Fellow Jeff Madrick is the author of The Case for Big Government.

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The Ryan Plan: The Biggest Risk Shift Ever

Apr 7, 2011Mark Schmitt

It's not just that Ryan slashes spending -- he places the burden of risk on American families' shoulders.

It's not just that Ryan slashes spending -- he places the burden of risk on American families' shoulders.

There are lots of ways to talk about Rep. Paul Ryan's dramatic budget plan, none of them kind. It's a massive cut in benefits to the poor and elderly. It's another giant tax cut to the well-off. It doesn't reduce the national debt at all, according to the Congressional Budget Office. It doesn't just reduce costs in Medicare and Medicaid, it effectively eliminates those vital Great Society programs. Its extreme budget austerity would doom the hesitant economic recovery and condemn the economy to a slower growth path for decades to come.

All those statements are true. But a better way to look at the the Ryan plan is in the context of some of the big shifts in the economy and government programs over the last few decades. Seen this way, it would be yet another step, the biggest yet, in shifting economic risk onto individuals and families.

The political scientist Jacob Hacker's 2006 book, The Great Risk Shift, demonstrated that the biggest trend in the evolution of the social contract over the last three decades has been the shift of risk away from bigger institutions that can handle it (corporations, government) and onto smaller businesses, individuals and families. The disappearance of traditional defined-benefit pensions, and their replacement by 401(k)s, is one good example: Instead of the company bearing the risk for all its employees, with a federal insurance program to back it up, it's all on you to save enough and invest it well. That might work out fine, or it might not.

But pensions aren't the only risk that families now bear. Employment has become shakier, and when people lose their jobs, they're much less likely to be hired back when the recession ends, because the job and perhaps the company are gone for good -- a phenomenon reflected in the record 6.1 million people unemployed for 27 weeks or longer almost two years after the recession officially ended. The housing bubble, when it burst, wiped out the economic security promised by homeownership, while the costs of higher education have forced young people to take an ever-bigger gamble that more schooling would pay off.

The achievement of the New Deal and the Great Society was not primarily in providing benefits to the poor and the old, although that's often how both liberals and conservatives talk about it now. What those programs did best was to reduce risks for individuals by sharing them across society. Whether it was health insurance through Medicare and Medicaid, insurance against poverty in old age through Social Security, federal mortgage insurance that made homeownership possible, or the Federal Deposit Insurance Corporation that enabled people to save for the future with confidence, when government absorbed and shared some of the risks of life, individuals were able to take chances and make the most of their potential.

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Today, though, the only risks we're sharing are the wrong ones: Wealthy investors are protected by real or implicit guarantees such as “too big to fail,” while the risks that should shared, through social insurance, are instead privatized -- that is, pushed down the line onto us as individuals.

The Ryan plan would be one more step, the biggest step yet, in the privatization of risk. It makes no secret about it. The logic of his proposal to turn Medicare into a voucher, with which seniors would purchase private insurance, is that only if individuals bear some of the risks will they be conscious of the costs of health care and apply pressure as consumers to reduce those costs.

There are some health care costs that we can all be smarter about -- particularly preventive care that would reduce costs later in life. But more often, people over 65 (or, under Ryan's proposal, 67) would simply forgo care they need in order to get an insurance plan they can afford.

That is, if any health insurance is available to them at all. Before Medicare, there was no such thing as private health insurance for people over 67, and even with subsidies, health insurers are unlikely to rush to create products for people who are extremely likely to incur major health costs at some point between 67 and the end of their lives. It would be like creating auto insurance just for 16-18 year old boys! Ryan's plan proposes risk-adjusted subsidies that increase with age, but the only way to make a health insurance market work for 80-year-olds is to make the subsidies so generous, and the regulations so strict, that it's hardly private-sector at all.

Similarly, Ryan's plan to convert Medicaid -- the health program that serves mostly poor and near-poor families -- to a block grant to the states is an explicit risk shift. Today the risk of Medicaid costs -- which increase not only with health inflation, but with unemployment -- is shared between the states and the federal government. In some cases, it's a 50-50 split, but in states like Mississippi, the federal government absorbs 75% of the costs. A block grant would put all the risks on the states and their governors -- not their governors today, but their next governor, and the one after that, because the block grants will not adjust to keep up with health costs or economic conditions. With little room to adjust, because of state balanced-budget requirements, the risk will fall on poor working families or on other state programs, such as education.

Like other conservatives, Ryan claims the mantle of “devolution,” which promises shift responsibility down from the big cumbersome federal government to states, cities, and individuals. But the reality is that what he's shifting down is risk, not responsibility. There's one thing the federal government has shown it can do better than any state, family, or business -- absorb and share risk so that we can all move forward with confidence. Instead of thinking of budget plans like Ryan's in terms of who benefits, ask, where do the risks fall? And that question can be a guide to policies that might still reduce federal spending but also free up citizens, their families, and their businesses to live up to their potential.

Mark Schmitt is a Senior Fellow and Director of the Fellows Program at the Roosevelt Institute.

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Nuns Don't Believe Goldman Sachs is Doing God's Work

Apr 6, 2011Lynn Parramore

In god we trustWhy is God's work so expensive?

In god we trustWhy is God's work so expensive?

Goldman Sachs abandoning kittens in lower Manhattan was a pretty sick trick. But it seemed to serve as a metaphor for how many Americans perceive the firm: they leave us to perish while they uncork the champagne. Case in point: it just came out  that Goldman Sachs didn't think it was paying execs quite enough while the rest of America is suffering. So it doubled the pay of CEO Lloyd Blankfein to a dizzying $19 million. On top of that little fortune, he received $27 million from investments in private equity and hedge funds managed by the firm. Party time!

Blankfein says that he's just doing God's work. But nuns disagree. Like us, they are wondering why God's work is so expensive.

The Sisters of Saint Joseph of Boston, Sisters of Notre Dame de Namur, the Sisters of St Francis of Philadelphia and the Benedictine Sisters of Mt Angel -- who all happen to hold investments at the bank - have signed a proposal to review how it doles out the cash to execs following revelations that the top five Goldman fatcats collectively raked in nearly $70 million last year. Never mind that the firm's earnings plunged 38 percent.

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Goldman Sachs has become the emblem of the excesses of the financial sector. Charges of fraud and betting against its own clients have tarnished its reputation -- but they don't seem to dampen its greed.  But the question is, are we so deadened to those excesses that we shrug our shoulders and accept them as normal? If we do this, we are acknowledging our distrust in society's rules and our lack of faith in government to correct imbalances that harm us all. And that's not good for democracy. The famous revolving door between Goldman Sachs and the halls of government slowly breaks down our trust and gives credence to the Reagan-inspired anti-government stance that allowed the financial sector to turn from a servant of the people into a predator. As Roosevelt Institute Senior Fellow Rob Johnson wrote on this blog, "Goldman Sachs' uncontested success blurring the boundaries between market and state is symbolic of a tremendous malfunction in finance, politics and civil society."

Those boundaries need to be reestablished, but when Goldman lobbyists write the rules of financial regulation, they all but disappear. The continued compensation bonanza shows that they don't give a hoot what the public thinks: they are counting on that money to buy them more than yachts. And it will take more than a prayer to stop them.

Lynn Parramore is the editor of New Deal 2.0, Media Fellow at the Roosevelt Institute fellow, co-founder of Recessionwire, and the author of Reading the Sphinx.

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Why is Paul Ryan's Budget Trying to Dismantle Financial Reform?

Apr 6, 2011Mike Konczal

It's not enough to gut programs for low-income Americans. Paul Ryan wants to roll the clock back on Wall Street to 2008.

The budget Paul Ryan released yesterday has huge cuts that are likely to fall on the poorest Americans while offering all kinds of bonuses to the top 1%. Others will be talking about how it eliminates Medicare and Medicaid. I want to talk about how it dismantles one of the few regulations put on Wall Street post-crisis.

Recap: Living Wills

It's not enough to gut programs for low-income Americans. Paul Ryan wants to roll the clock back on Wall Street to 2008.

The budget Paul Ryan released yesterday has huge cuts that are likely to fall on the poorest Americans while offering all kinds of bonuses to the top 1%. Others will be talking about how it eliminates Medicare and Medicaid. I want to talk about how it dismantles one of the few regulations put on Wall Street post-crisis.

Recap: Living Wills

Let's back up with a high-level overview. During the financial crisis of 2008, regulators found that they were lacking the necessary legal powers for unwinding and resolving large financial institutions. We can debate whether they actually lacked these powers, but their argument that they didn't have them was more than enough for them to avoid having to do anything. They also found that when they went to collapsing institutions like Lehman, there was little prep done at the firm by either regulators or staff for what it would mean to unwind itself, so the only option was to send it flying into bankruptcy in the most awkward way or do an extensive bailout. These were the only options.

How to solve this problem? Give regulators the powers they need and then make a very public showing of prepping firms for resolution when they fail. Have records of "living wills" so it is clear that no firm is too big to fail. It's not enough to say, "We'll never bail anyone out again." We need to do a few simple things to make sure a crisis or a failure goes more smoothly. Seems fair, right?

Well a funny thing happened on the way to writing living wills. Wall Street has decided that they can't be bothered and are lobbying against it. From Bloomberg, March 24th, 2011, "Banks, Insurers Resist U.S. ‘Funeral Plan’ Crisis Breakup Rules":

Lobby groups including the American Bankers Association are voicing concern to regulators in a series of comment letters seeking to limit the impact of the new rules. JPMorgan Chase & Co. and New York-based insurer MetLife Inc. have discussed so-called resolution, or the unwinding process, with FDIC officials...

Since November, representatives from companies including JPMorgan, Citigroup Inc., Goldman Sachs Group Inc., Morgan Stanley, Fidelity Investments, BlackRock Inc., Barclays Plc, Credit Suisse Group AG and Deutsche Bank AG have met with Fed or Treasury Department officials to discuss issues related to systemic risk, according to records released by regulators.

A living will is an “enormous burden” that puts banks on a course “that differs dramatically from the way they currently look at their business,” said Mark Tenhundfeld, senior vice president at the American Bankers Association.

So here's a sensible, necessary (but not sufficient) part of taking down a large, failing financial firm. Wall Street hates it because it requires work and it requires them to think of their business as something that could in fact fail. Who can they turn to?

Republican Budget

Cue Paul Ryan and the new Republican budget. Pat Garofalo at Wonkroom finds the following in the new budget:

Although the bill is dubbed “Wall Street Reform,” it actually intensifies the problem of too-big-to-fail by giving large, interconnected financial institutions advantages that small firms will not enjoy. While the authors of Dodd-Frank went to great lengths to denounce bailouts, this law only sustains them.

The Federal Deposit Insurance Corporation (FDIC) now has the authority to access taxpayer dollars in order to bail out the creditors of large, “systemically significant” financial institutions. CBO’s expected cost for this new authority is $26 billion, although CBO Director Douglas Elmendorf recently testified that “the cost of the program will depend on future economic and financial events that are inherently unpredictable.” In other words, another large-scale financial crisis in which creditors are guaranteed to get government bailouts would cost taxpayers much, much more. This budget would end the regime now enshrined into law that paves the way for future bailouts.

Wall Street really likes the status quo. Resolution authority requires a series of actions, from having to make funeral plans to being subject to prompt corrective action, that begin to make it credible to resolve firms and move us away from the status quo.

These are not radical proposals. Here's Squam Lake Working Group on the topic, a group that includes Greg Mankiw, John Cochrane and Frederic Mishkin, a fairly conservative bunch. Their recommendation:

We endorse legislation that would give authorities the necessary powers to effect an orderly resolution. As part of this authority, every large complex financial institution should be required to create its own rapid resolution plans, which would be subject to periodic regulatory scrutiny. These “living wills” would help authorities anticipate and address the difficulties that might arise in a resolution. Required levels of capital should depend in part on what the living wills imply about the time required to close an institution. This will create an incentive for financial institutions to make their organizational and contractual structures simpler and easier to dismantle.

The GOP's budget is far more radical than what people like Greg Mankiw see as the role of regulation for the financial sector. There are problems with resolution authority that need to be addressed, particularly its international components. But the idea that the legal structure of summer 2008 is ideal -- the idea that "let's do it over, but mean it this time" is the strategy -- is horrific.

Remember, Paul Ryan voted for TARP. And now he wants to say "no problems here" and simply set the dial back. What more could Wall Street want -- someone who votes for bailouts in TARP and then fights any and all accountability and reform mechanisms after the fact? In a budget that skews so strongly towards the top 1%, it's telling that it tries to break apart one of the few mechanisms for holding Wall Street accountable post-crisis.

Mike Konczal is a Fellow at the Roosevelt Institute.

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