Tax Day Temptation Full of Tricks and Traps

Apr 6, 2011Bryce Covert

Refund anticipation loans come with whopping fees in return for giving desperate consumers come quick cash.

This week's credit check: Refund anticipation loans cost consumers $606 million in fees and $58 million in additional charges. Taxpayers living in extremely low-income communities are 560% more likely to use these loans.

Refund anticipation loans come with whopping fees in return for giving desperate consumers come quick cash.

This week's credit check: Refund anticipation loans cost consumers $606 million in fees and $58 million in additional charges. Taxpayers living in extremely low-income communities are 560% more likely to use these loans.

With tax day bearing down on us, the temptation to head over to your tax filer and get a refund anticipation loan (RAL) mounts. After all, the ability to get some cash a little earlier could mean food on the table and a roof overhead for many Americans. But it turns out that the money isn't as easy as it might seem. The loans are usually brokered by tax accountants, who charge for the preparation, often take a fee for setting up the loan, and sometimes collect another fee to cash the refund check. As "Up To Our Eyeballs" calculates, "For these combined services, a client might end up paying as much as $800 or $900 on a $2,100 refund." For those counting at home, that's almost half the money the customer is getting from the government. But it gets worse. While refunds tend to come within a matter of weeks, making the cost appear small, if measured in terms of annualized interest they are extremely expensive. The Washington Post notes, "Research showed the cost for a typical refund loan of $1,500 this year is $61.22, which translates into an effective APR of 149 percent."

These loans are pretty widespread -- 7.2 million taxpayers used them in 2009, costing them $606 million in fees and another $58 million in additional charges. But those who use the loans are mostly people struggling to make ends meet. Over 85% of those who applied for a refund loan were considered poor, and they tend to be young single parents living in low-income communities. Of the group who takes out these loans, 64% received the Earned Income Tax Credit, a program for those with low wages that is the only antipoverty program "where the cost of distribution is imposed on the recipients," according to Jean Ann Fox of the Consumer Federation of America. A US Treasury Department report showed that taxpayers living in extremely low-income communities were 560% more likely to use these loans.

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John Hewitt, CEO of one such firm Liberty Tax Service, notes himself, "Many people who live paycheck to paycheck and have no credit certainly need [RALs]." These are the unbanked, the 17 million Americans who have no relationship with a traditional bank. They often have to turn to loans and products that have interest rates exceeding 300% annually. They don't have credit histories that would allow them to borrow from mainstream institutions, aren't saving for retirement, and are often excluded from less-expensive forms of electronic payment. Some of the unbanked can't open up an account because of bad credit or language barriers; some find the fees and minimum balance requirements outweigh the benefits of a checking account. But as banks close up shop in low-income areas, they open the doors wide for "alternative lending" (read: predatory) products such as RALs.

You don't have to take my word that these loans are a bad deal. Just ask Hewitt, the CEO of Liberty Tax Service. "Is it a bad deal? Of course it's a bad deal," he told NBC. "But for some people it's a desperate situation."

Bryce Covert is Assistant Editor at New Deal 2.0.

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Breaking News! The Bankster Offer to the AGs

Mar 31, 2011Matt Stoller

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

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

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

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

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

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

Here's another part of the settlement.

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

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

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

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

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

See full text of Proposed Deal.

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

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Corporate Greed: Out of the Mouths of (Fictional) Babes

Mar 31, 2011

It's nice when a staple of childhood can take on new meaning later in life. Calvin (of Calvin and Hobbes) explains supply and demand: "There's lots of demand!... I demand monstrous profit in my investment... I demand an exorbitant annual salary." But if consumer demand doesn't show up, blame it on the "anti-business types who ruin the economy." Oh also, he'd like a government subsidy.

It's nice when a staple of childhood can take on new meaning later in life. Calvin (of Calvin and Hobbes) explains supply and demand: "There's lots of demand!... I demand monstrous profit in my investment... I demand an exorbitant annual salary." But if consumer demand doesn't show up, blame it on the "anti-business types who ruin the economy." Oh also, he'd like a government subsidy. (Click for a larger image.)

calvin-and-hobbes

Looks like some of our fat cat bankers may have been reading comic strips lately.

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The Financial Sector's Lure is All About Power

Mar 31, 2011Mike Konczal

The brain drain into finance isn't just about money. It's about power and prestige that can't be found anywhere else.

The Kauffman Foundation has a new report out by Paul Kedrosky and Dane Stangler, "The Cannibalization of Entrepreneurship in America: Expanding Financial Sector Depleting Pool of Potential High-Growth Company Founders." It says:

The brain drain into finance isn't just about money. It's about power and prestige that can't be found anywhere else.

The Kauffman Foundation has a new report out by Paul Kedrosky and Dane Stangler, "The Cannibalization of Entrepreneurship in America: Expanding Financial Sector Depleting Pool of Potential High-Growth Company Founders." It says:

The financial services industry used to consider it a point of pride to hire hungry and eager young high school and college graduates, planning to train them on the job in sales, trading, research, and investment banking. While that practice continues, even if in smaller numbers, the difference now is that most of the industry’s profits come from the creation, sales, and trading of complex products, like the collateralized debt obligations (CDOs) that played a central role in the recent financial crisis. These new products require significant financial engineering, often entailing the recruitment of master’s- and doctoral-level new graduates of science, engineering, math, and physics programs. Their talents have made them well-suited to the design of these complex instruments, in return for which they often make starting salaries five times or more what their salaries would have been had they stayed in their own fields and pursued employment with more tangible societal benefits.

Too many of our meritocratic elites are going into finance when they should be going into entrepreneurial and real economy activities. I agree with the whole paper and encourage you to read it. But since I agree with it I'm going to push against it a bit harder because there's two elements of this conversation that are missing that we need to start discussing.

A lot of these discussions pivot on two things: (1) financial elites make a lot of money; they make "five times or more what their salaries would have been had they stayed in their own fields and pursued employment with more tangible societal benefits" and (2) an argument that there are a variety of sectors and this is a matter of sectoral allocation. Too many in finance, not enough in the real economy. There are butchers and bakers, and we have too many bakers when butchers are better for the long-term.

The first suffers from a narrow view of what constitutes the benefits of working in the financial industry and the second from the role of the financial industry in a neoliberalized economy.

Let's bring in C. Wright Mills, specifically his 1951 book "White Collar: The American Middle Classes." In the post-War economy, there were these brand new things like a meritocratic upper-middle-class elite doing intellectually based work. What would they look for in their jobs? (my bold)

In the early nineteenth century, although there are no exact figures, probably four-fifths of the occupied population were self-employed enterprisers: by 1870, only about one-third, and in 1940, only about one-fifth, were still in this old middle class. Many of the remaining four-fifths of the people who now earn a living do so by working for the 2 or 3 percent of the population who now own 40 or 50 percent of the private property in the United States. Among these workers are the members of the new middle class, white-collar people on salary. For them, as for wage-workers, America has become a nation of employees for whom independent property is out of range. Labor markets, not control of property, determine their chances to receive income, exercise power, enjoy prestige, learn and use skills.

Yes, people in finance make a lot more money than those in other sectors, but salary is only one thing meritocrats look for. There's also the ability to exercise power, enjoy prestige, and learn and use skills. (Thanks to John Paul Rollert for the Mills reference. Here he is on what Adam Smith would think of the Wall Street bonuses; great stuff.)

Prestige

Prestige is the obvious thing. Up until the crisis, the idea that financial sector work was one of the glamorous and prestigious fields to be in was so obvious it almost doesn't bear mentioning, but it is incredibly important. It's important right now for the graduating classes, who are swamped in competition for banking spots as yet another step on the meritocratic treadmill. It's important because even if you leave, the resume with a prestigious i-banking spot listed on it will open up all kinds of doors.

And the prestige goes to the self vision of our elite educational institutions. Here's then-President of Harvard Larry Summer's final commencement speech to Harvard's graduating class of 2006. What opportunities are out there for Harvard graduates?

The world that today's Harvard graduates are entering is a profoundly different one than the world administrators like me, the faculty, and all but the most recent alumni of Harvard entered.

It is a world where opportunities have never been greater for those who know how to teach children to read, or those who know how to distribute financial risk; never greater for those who understand the cell and the pixel; never greater for those who can master, and navigate between, legal codes, faith traditions, computer platforms, political viewpoints.

Slicing up bonds just enough to juke the ratings agencies is right up there next to teaching kids to read in the list of boundless opportunities.

It's worth noting that the financial industry suffers hits to their prestige far worse than most others post-TARP. They are still mad about Obama's "fat cat bankers" line. Why? Because the prestige is part of why they are doing this.

Power

Power is equally important, though harder to discuss. The Kauffman paper itself uses a three-part definition of financialization:

a. The growth in and increasing complexity of intermediating activities, very largely of a speculative kind, between savers and the users of capital in the real economy.

b. The increasingly strident assertion of owners’ property rights as transcending all other forms of social accountability for business corporations.

c. Increasing efforts on the government’s part to promote an “equity culture” in the belief that it will enhance the ability of its own nationals to compete internationally.

(This is from Ronald Dore's definition.) They focus on (a) as the necessary mechanism to shift high-human capital value resources away from competing sectors without focusing on (b). If capital owners are the owners of the real economy, working in finance gives you a seat of power in the economy far greater than any other sector. All other forms of social accountability, regulatory, altruistic, whatever, melt into air. The only thing left over is the demands of these financial elites.

This is why I find the "we have too many in finance and not enough in not-finance" argument a bit thin. We need to re-conceptualize it as a "the financial industry is way too powerful and the real economy and workers are too weak, economically and politically" argument. It shouldn't surprise us that the best and brightest gravitate towards power; power is an attractive thing to have over the world's largest economy.

The Specter of Uselessness

I'm also interested in the "learn and use skills" part. Part of the very conscious attraction of consulting jobs for our elite is that it allows them to learn and use skills that aren't tied to the individual fortunes of any one industry, industries that could disappear within a decade in our globalized, insecure world.

Richard Sennett argues that one of the characteristics of a modern, meritocratic order is the "spectre of uselessness." The idea that one's Bildung, the combination of motivation, education, skills, and training, will become useless for the economy haunts meritocrats, leading to a pervasive fear of being left behind. Barbara Ehrenreich's "Fear of Falling" is also excellent on this in the context of the United States' middle class.

There's a case to be made, ironically, that this specter hangs less over the high-stress high-churn world of the financial industry. Since their talents are tied to the elements that bind the global economy -- the allocation of capital -- they won't necessarily become useless in the same way as if they tied their training down to a specific place, be it mechanical engineer, chemistry, or hospitality studies. (I know, tell that to unemployed mortgage bundlers; but we are talking about the elite here.) Any discussion with those working in the financial sector either express a path up or a path out -- and the path out is a safety net that most Americans can't expect.

I think as we look to the post-crisis world, we need to examine the draw of finance as the draw of power, a disproportionate power that our financial elites are able to exercise, and figure out the unfortunate ways we encourage this and ways we can challenge it.

Mike Konczal is a Fellow at the Roosevelt Institute.

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

Mar 31, 2011Matt Stoller

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

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

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

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

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

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

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

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

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

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

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

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

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Josh Rosner Testifies on Dodd-Frank's Unfinished Business

Mar 30, 2011

ND20 blogger Josh Rosner testified before Congress on the financial reform bill's implementation thus far. Although that process has only begun, one thing is clear: there are plenty unintended consequences and loopholes big enough to drive a Goldman Sachs bank truck through. A few of his key points:

- Too Big To Fail Firms are Bigger Than Ever: Although not fully implemented, Dodd-Frank has not reduced the number of systemically risky firms; since the crisis, the largest firms have gotten even larger.

ND20 blogger Josh Rosner testified before Congress on the financial reform bill's implementation thus far. Although that process has only begun, one thing is clear: there are plenty unintended consequences and loopholes big enough to drive a Goldman Sachs bank truck through. A few of his key points:

- Too Big To Fail Firms are Bigger Than Ever: Although not fully implemented, Dodd-Frank has not reduced the number of systemically risky firms; since the crisis, the largest firms have gotten even larger.

- Dodd-Frank's Attempt to Reduce Risk Creates More Risk: The taxpayer safety net will be expanded to more large banks and regulators who failed in the past are the only cops on the beat.

- Our Bankruptcy Code Won't Work: Even though Dodd-Frank is likely to put failing firms into bankruptcy, our current code can't handle them.

- Too Big To Fail Negates the Attempt to Make Banks Hold on to Risk: Dodd-Frank's efforts to stop originators from selling shoddy loans will only result in more systemic risk and more TBTF institutions.

Read his full testimony here: "Has Dodd-Frank Ended Too Big To Fail?"

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The Results Are In: FDR's Inner Thoughts

Mar 25, 2011

Thank you to all who partook in our meme! From welcoming bankers' hatred to reflecting on saving the world to deporting the Koch brothers, here are some of our favorites...and stay tuned for more.

reckless-banker-ur-hatred-welcome

Thank you to all who partook in our meme! From welcoming bankers' hatred to reflecting on saving the world to deporting the Koch brothers, here are some of our favorites...and stay tuned for more.

reckless-banker-ur-hatred-welcome

saved-the-free-world-nbd

i-wanted-the-four-freedoms-for-all-not-just-the-upper-2

secretary-of-state-cordell-hull-defriended

i-got-99-problems-but-workers-rights-financial-reform-and-putting-people-to-work-aint-one

hey-koch-brothers-you-are-formally-deported

dear-bankers-haters-gonna-hate

do-i-have-to-come-back-and-run-for-a-5th-term

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The Federal Reserve’s Wheezy Independence Takes Another Hit

Mar 24, 2011Matt Stoller

The public has lost all trust in its banks and banking institutions after watching them access cheap money while the rest of us flail.

The public has lost all trust in its banks and banking institutions after watching them access cheap money while the rest of us flail.

You might have noted a few days ago that the Supreme Court ruled against Federal Reserve secrecy. The case had to do with a lawsuit by Bloomberg’s Mark Pittman demanding access to emergency loan documents relating to the Fed’s bailout of Bear Stearns. As the case traveled up the court system, major banks joined the Fed’s attempt to shield the information from public scrutiny. Eventually, the Fed dropped the suit, but the banks didn’t give up.

A few days ago, the Supreme Court refused to hear the case, letting a lower court decision in favor of Pittman stand. The Fed will now be releasing Bear Stearns-related emergency lending documents in a few days.

It’s a historic case. You wouldn’t know that, however, by the response from Wall Street.

“I didn’t even know it was happening,” a senior bank executive said by phone this week when asked about concern over the pending release. There are no crisis meetings to discuss how to manage public reaction to release of the information, he said.

This is a far cry from the intense opposition to Fed transparency just last year from both Treasury and Wall Street. The big banks, in the form of one of their trade groups known as the Clearinghouse Association, were crying wolf as late as 2010.

The Clearing House Association believes that disclosure of the identities of, and extent to which, financial institutions borrowed from the Fed Lending Programs likely would cause such institutions substantial competitive harm, and would impair the effectiveness of the Fed Lending Programs.

The “competitive harm” was so “substantial” that a highly political Wall Street executive had no idea that emergency lending information would shortly be released. In fact, the damage will be so severe that no bank has prepared any response whatsoever.

The reality is, while they may have been panicking at the time, executives on Wall Street are not embarrassed to have used the Fed’s balance sheet as a crutch during the crisis. It’s not even an afterthought. Arguments about stigma, competitive harm, and a falling sky were all simply designed to preserve unneeded secrecy. They got their “triple-thick milk shake of socialism," and they liked it.

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During the discussion of Dodd-Frank, Congress deliberated without knowing that the Federal Reserve had extended $9 trillion to various banks, foreign central banks, corporations, and hedge funds, often collateralized by junk. That’s roughly $30,000 of lending for every American. Shouldn’t Congress have known that Harley Davidson and McDonald’s were making payroll with Federal Reserve loans (or perhaps just getting access to cheap working capital unavailable to normal corporations)? That seems like a useful testament to the fragility of our financial system, something to know about before engaging in supposedly wholesale reform.

More to the point, there is now an explicit two-tiered monetary system, where elites can borrow against junk collateral under difficult circumstances, while ordinary people face foreclosure and bankruptcy should they encounter liquidity or solvency problems.

Those with a longer-term perspective, such as former New York Federal Reserve Bank officer John Dearie, are a bit more worried about this dynamic. Dearie, who is now a leader at Wall Street’s elite lobbying group -- the Financial Services Roundtable  -- is gently trying to head off further audits of the Federal Reserve with wheezy pre-crisis talking points.

“Short of broadcasting FOMC meetings on C-SPAN, it’s difficult to imagine how much more transparent the Fed could be. It’s also difficult to understand how intrusive investigation of monetary policy can be consistent with maintaining price stability when academic studies and centuries of experience around the world make clear that a central bank’s relative independence and its effectiveness in fighting inflation are closely linked.”

In other words, what are you so concerned about? The Federal Reserve could not possibly be more transparent. But don’t audit us!

Of course, the claims of transparency are not true. The Federal Open Market Committee sets monetary policy for the nation, but will not release transcripts for its meetings for at least five years. This time lag on even knowing what was said during monetary policy deliberations is clearly an affront to democracy. We still have no idea what Fed officers were thinking  in 2006 as the bubble inflated, in 2007 as credit constricted, or during the crisis itself. (House Oversight Panel Chair Darrell Issa said he’d look into the five year time lag, though I haven’t heard anything since December.)

As emergency lending information is released, one can almost hear the laughter from big banks executives. They won, or so they think. Yet, the reputational damage from the crisis to Wall Street is at this point enormous, both within banks and among the public at large. The specific documents released over Bear Stearns will probably show what we already know -- excessive deference to banking interests.

The situation right now feels depressing. Wall Street mega-banks, and the Federal Reserve officials in charge during the collapse, are more powerful than ever. Ultimately, the consent of the governed does actually matter. Markets do not work when there is effectively no rule of law, or rigged rules. That is what we may be seeing in housing, with cultural shifts away from home buying. The next crisis, and it is coming, will see wholesale reform of the Federal Reserve and the banking system. The public has noticed that the arguments from big banks are both untrue and self-serving, and that the Federal Reserve’s vaunted independence is simply more of the same.

The Fed and the concentrated banking interests took advantage of a deference to authority and a reservoir of trust that the public had in the system. That trust was key to achieving what they needed. But it is now tapped out. And the next time that consent is necessary, it just won’t be there.

**This post originally appeared on Naked Capitalism.

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

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Bretton Woods, the New Deal and the Great Society -- circa 1776

Mar 21, 2011William Hogeland

american_colonial_flagHow a farmer, a weaver, and a backwoods prophet took on the money interest in founding-era politics -- and won.

american_colonial_flagHow a farmer, a weaver, and a backwoods prophet took on the money interest in founding-era politics -- and won.

One of the better-known episodes in American founding finance occurred in 1791, when Alexander Hamilton, the first Treasury Secretary, proposed forming the United States' first central bank. James Madison of Virginia, serving in the House of Representatives, objected. Prefiguring the Republican lawmakers who recently pledged not to introduce legislation without first citing the constitutional provision enabling it, Madison asserted that because the Constitution doesn't grant Congress a specific power to form banks, a national bank would be unconstitutional.

Hamilton famously responded by arguing that if a power to do something is constitutional, then powers necessary to doing it must be constitutional too, even when not enumerated. If Congress determines that exercising its power to do anything "necessary and proper" in the discharge of its duties calls for forming a bank, it can form a bank. Any unconstitutionality, for Hamilton, would require a specific prohibition against banks ("Congress shall make no law...," etc.).

So that's typically how history students and readers get introduced to a key founding moment in American public finance: ideologically, intellectually and legally, in the context of a constitutional dispute between the lions of ratification Hamilton and Madison, two thirds of the "Publius" who authored "The Federalist," now coming at odds in the fledgling republic. Anyone hoping to find anything related to how money and credit might flow to ordinary Americans will be disappointed. Hamilton was arguing for the nationalist finance agenda he'd been pursuing since becoming a young protégé of the financier Robert Morris in the early 1780s. Democratic ideas about popular finance were just what Morris and Hamilton had been trying to quell. With a national government in place at last, central banking would be critical.

And in opposing central banking, Madison was arguing on behalf of security in property, limits on power, representative consent, and a land-based economy. He condemned Hamilton's finance plan as crass, urban, and Yankee: un-republican, that is, to Madison. No democrat, Madison would never have endorsed paper currencies, legal relief for the debtor class, and demands by the less propertied for better access to the franchise -- the program advocated by American populist regulators in their struggle against elite finance. Madison's famous "Federalist No. 10" expresses a genteel revulsion for paper finance and social equality at least as deep as Robert Morris's.

It's therefore been easy for many well-regarded historians -- riveted by great men, perpetually rehearsing the Hamilton-Madison binary -- to dismiss founding-era democratic finance theory and practice. Robert Whitehill? Herman Husband? William Findley? Names rarely conjured. The irony is that to Alexander Hamilton and Robert Morris, those names were anything but obscure. Little-remembered today, they made Morris seethe with exasperation precisely over issues of central banking and public debt. Our founding egalitarians' successes and failures complicate received historical binaries and offer intriguing models for today's struggles over public and private finance.

Robert Whitehill was a farmer, Herman Husband a career activist, William Findley a weaver. All lived in western parts of Pennsylvania, where antipathy prevailed both for big planters tying up land and eastern slicksters tying up money and credit. Whitehill led an early 1770s movement for western independence from Philadelphia, as important to his constituency as American independence from England. Husband had led the North Carolina Regulation in the 1760s, barely escaping hanging; as a fugitive in the Pennsylvania wilderness, he experienced Biblical visions of a democratically ruled America, the New Jerusalem. Findley was a natural pol, anything but visionary: he thrived under Jefferson but exemplifies the rough-and-tumble politics of the Jackson era.

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What the three shared, along with passion for democratic finance, was sudden electability under the new Pennsylvania Constitution, which in 1776 shocked famous founders from John Adams to Hamilton by smashing the old Whig connection between representative rights and property ownership. (Whitehill helped write it.) With the unpropertied voting in Pennsylvania, Husband entered the Pennsylvania assembly in the mighty year of 1776, Whitehill and Findley in the early 1780s. For the first time, democratic finance was no longer a crowd protest but a legislative effort.

Husband really was a prophet. He proposed such things anathema to the creditor class as going off the gold standard and managing a slow, deliberate rate of paper depreciation; imposing taxes on wealth and income; making those taxes progressive; and instituting programs for supporting the elderly after they could no longer work. Prefiguring Bretton Woods, the New Deal, and Great Society by nearly two centuries, Husband became known as "the madman of the Alleghenies."

Whitehill and Findley attacked the bank that Robert Morris had founded in Philadelphia. Its charter belonged to the people of Pennsylvania, they asserted, not Morris, and the bank served no public function, existing only to enrich its founders. They proposed revoking the charter, establishing a land bank for small-scale lending, and issuing legal-tender paper to enable small transactions and debt relief. They wanted the electorate, via representatives in the assembly, to regulate public and private finance on behalf of ordinary working people.

Robert Morris himself was serving in the assembly, so floor debate was intense. His merchant constituents were panicking. Investors everywhere in America relied on the bank for gigantic, poorly secured loans to fund their speculations in the land bubble, the bond rollercoaster, and their own fabulous lifestyles. James Wilson, one of the bank's directors, had personally borrowed more than $250,000 from the bank for the purpose of wild speculation. Wilson too served in the Pennsylvania assembly, and in hopes of saving the charter, he and Morris found themselves forced to duke it out with the low-rent likes of Whitehill and Findley.

In a stunning benchmark legislative victory for popular finance, the Pennsylvania assembly did revoke the bank's charter. When the charter came up in the next session, the assembly refused to reinstate it. The people had won. Rich men far and wide gasped in fear of what a democratic American legislature might achieve. Morris announced that a mob was confiscating his property. But for once there was nothing he could do. In a democratic process of republican government, struggling against an enormously powerful money interest in politics, economic fairness had prevailed. That was 1785.

Skeptics of our early democratic finance point to Pennsylvania's bumpy ride under its 1776 constitution, suggesting that the Whitehills, Husbands, and Findleys turned out to be naive in comparison to men like Morris, Wilson, and Hamilton -- financial sophisticates who could quote the philosopher David Hume and the economist Jacques Necker. Morris was "financier of the Revolution," after all. Wilson was the brilliant lawyer who helped author the U.S. Constitution.

So in judging the relative effectiveness of popular versus elite finance, it's worth considering some outcomes. The sophisticates Morris and Wilson, like many of our best-certified wizards today, persisted in speculating well past the point where rationality would suggest stopping, often in manifestly dubious ventures. The unabashed scale and mounting danger of their adventuring will sound familiar. In a time of widespread economic depression, Morris at one point owned most of western New York and many millions of acres in Pennsylvania and the South. Wilson borrowed at rates of up to 30% to invest, among other things, in what turned out to be the Yazoo land fraud in Georgia.

And inevitably, just as today, it all came crashing down. Wilson was serving on the U.S. Supreme Court when his increasingly desperate throwing of good money after bad finally landed the great legal scholar in debtors prison. Our mighty founding financier Robert Morris? He ended up in debtors prison too. In 1800, the first Bankruptcy Act was passed -- in large part to get Robert Morris out of jail.

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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How We Teach Our Graduates Not to Teach

Mar 17, 2011Bryce Covert

As we strip teachers of pay, benefits, and prestige, we'll lose more and more talent to investment banking.

As we strip teachers of pay, benefits, and prestige, we'll lose more and more talent to investment banking.

A new report came out recently on what the US can learn from the countries that most successfully educate their children. The most important recommendation? "Make a concerted effort to raise the status of the teaching profession." While the U.S. is only second to Luxembourg in OECD countries' spending on education, our money is misdirected, going to areas other than teacher salaries like bus transportation and sports facilities. And as the NYTimes notes, the results are clear:

On average, American teenagers came in 15th in reading and 19th in science. American students placed 27th in math. Only 2 percent of American students scored at the highest proficiency level, compared with 8 percent in Korea and 5 percent in Finland.

This recommendation comes at a time when the teaching profession is experiencing a brutal attack, as Republican governors (see: Scott Walker; also: Chris Christie) demonize them and their unions as vampires sucking state coffers dry and lazy ne'er-do-wells who have luxurious pensions and vacation time. But the degradation of the teaching profession isn't a new phenomenon.

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When I was graduating college not too long ago, I had my heart set on teaching. I loved working with children and I wanted to give something back to my community and feel I was making a difference. What better way than to educate the next generation? But I entered the profession against all advice to the contrary (except from my mother and grandmother, both educators) and with zero help from my college's career services department. In fact, the only career that department seemed to want to service me into was investment banking. Every time I visited to go over my resume or practice interview skills, I had to answer again why I wasn't interested in being an ibanker. And I struggled to justify to myself entering a profession that promised to pay me so little, with the price tag of my student loans looming over me, when I could have gone into one that would have enabled me to pay back my loans in a heartbeat. In the end I persevered, but many of my friends and classmates did not. And who could blame them? With tens of thousands of dollars (or even hundreds of thousands) in student loan debt, the economically smart decision was to head into high-paying professions.

And in fact, they're not alone. A 2007 study by Jesse Rothstein and Cecilia Elena Rouse found that each $10,000 in loan debt reduces the likelihood that a student will take a job in the nonprofit, governmental, or education sectors by about 5-6 percentage points. This effect is heaviest in the education sector: that $10,000 in debt reduces the probability of taking a job in that sector by 3.3%. The authors came to this conclusion: "It appears that college debt affects post-graduation employment decisions: students with more debt are less likely to accept jobs in low-paying industries and accept higher-paying jobs more generally."

President Obama encouraged young people to go into teaching in his State of the Union, but simply imploring students isn't going to do the trick. It's not just about raising pay, either; it's about raising the public's perception of a teacher's job. While some point to summers off and short hours as signs that it's a cushy profession, the reality is quite different. Andreas Schleicher, who prepared the report, says, "The fact is that successful, dedicated teachers in the U.S. work long hours for little pay and, in many cases, insufficient support from their leadership." I can attest to this from personal experience. I was in the classroom well before 8am every day and stayed after 6pm on plenty of occasions -- not to mention the work I did on the weekends to make sure my lessons would run smoothly and engage my students. And I was far from the hardest worker among my colleagues. Not to mention that I worked at a private school that had excellent support, while many public schools have leadership that is stretched too thin and little budget for professional development.

The most important answer to fixing our educational system, which isn't serving our children, is to bring in more quality teachers. But if we continue to strip them of benefits and dignity, there's fact chance of it.

Bryce Covert is Assistant Editor at New Deal 2.0.

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