Subprime on the Subcontinent: The Value of Bold, Persistent Policy Experimentation

Jun 8, 2011Georgia Levenson Keohane

In a three-part series, Roosevelt Institute Fellow Georgia Levenson Keohane explores India's microcredit crisis and what it teaches us about combating poverty. In her final post, Keohane questions the efficacy of microcredit. Does it really transform lives? How do we know?

In a three-part series, Roosevelt Institute Fellow Georgia Levenson Keohane explores India's microcredit crisis and what it teaches us about combating poverty. In her final post, Keohane questions the efficacy of microcredit. Does it really transform lives? How do we know?

Beyond yesterday's question of non-profit versus for-profit, the microcredit crisis in India has emboldened naysayers who question whether either model has proved itself the hoped-for panacea for global poverty. Does microcredit even work, they ask? And how do we know?

This spring, Esther Duflo and Abhijit Banerjee, the highly regarded MIT economists who run the Abdul Latif Jameel Poverty Action Lab (J-Pal), published Poor Economics: a Radical Rethinking of the Way to Fight Global Poverty. In it, they draw on their field research: hundreds of randomized control trials designed to examine which policies and practices (and under what conditions) successfully reduce poverty, and which do not. Duflo and Banerjee's empirical approach is widely credited with transforming the field of international development and the economics discipline more broadly. Moreover, their work on microlending finds "clear evidence that microfinance was working." Because Duflo and Banerjee, like other empiricists, also conclude that micro-lending produced little "radical transformation" in the lives of the poor people they studied, many have been quick to pronounce microcredit's failure.

The value of bold, persistent policy experimentation

Duflo and Banerjee insist otherwise. "The main objective of microfinance seemed to have been achieved," they write. "It was not miraculous, but it was working... In our minds microcredit has earned its rightful place as one of the key instruments in the fight against poverty."

The lessons here about what Franklin D. Roosevelt called "bold, persistent experimentation" are crucial for policy makers the world over. First, the absence of panacea does not amount to program failure. Second, the value of the 'controlled experiment' paradigm lies in its parsing power. These kinds of studies -- akin to the randomized contrail trials (RCT) of medical research --  offer a tool to pinpoint which components make a policy effective, which do not, and which can be improved to enhance service delivery and social benefit. Duflo and Banerjee suggest, for example, that most existing microcredit lending structures (for-profit or not for profit) do not permit the poor to borrow and invest sums large or long-term enough for higher risk and return projects that might actually transform their lives. The experiment indicates that creating access to this kind of credit is the next -- and more complex -- frontier in improving capital markets for the poor.

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A different empirical tact has shown that microcredit works when loans are combined with other products or services, like savings or insurance. In Portfolios of the Poor, researchers Daryl Collins, Jonathan Morduch, Stuart Rutherford, and Orlanda Ruthven examined the financial diaries of the hundreds poor people in India, Bangladesh, and South Africa and determined that credit to build small businesses, though effective, was not enough. Borrowers also benefited from credit for things like doctor's bills, school fees, weddings, and funerals.  Increasingly, microfinance institutions (MFIs) are experimenting with product and service innovations along these lines.

Portfolios of the Poor also describes how Grameen made enormous strides in learning from its own experience. In a series of reforms known as Grameen II, the bank began to offer a broader range of savings and credit accounts, and more flexibility as to when and how its clients could access them. A number of other Grameen inspired organizations continue to learn from these experiments. The Grameen Foundation, for example, promotes poverty reduction through microenterprise and technology, with recent innovations like Mobile Financial Services and Mobile Technology for Community Health (MoTech). Grameen America is adapting Yunus's original microlending archetype to serve the poor and unbanked in New York City.

Though microenterprise in developing countries has been an important testing ground for empirical research, the broader lessons about evaluation and experimentation are applicable across fields and are vital for American policy makers. In recent years, we have witnessed greater adoption of this approach in the U.S. in both the non-profit and public sectors. New York City's Center for Economic Opportunity (CEO), for example, aims to function as a kind of anti-poverty laboratory. Seeded primarily with philanthropic funds, the CEO pilots and evaluates innovative and untested social programs to assess which might be successfully scaled. The CEO has been cited as one of the models for the recent federal efforts in this area, including the new Office of Social Innovation in the White House, and its various funds and activities. In 2009, Peter Orszag, then the Director of the White House Office of Management and Budget, famously called for more rigorous and "evidenced based" evaluation of federally funded programs, advocating a kind of clinical trial methodology. Others have pointed to Duflo and Banerjee's J-PAL at MIT as an action lab template for other areas of public policy, from global climate change to domestic social programs.

Not surprisingly, a strict RCT approach raises a host of implementation concerns related to cost, ethics, and scope, and is not without detractors.  However, the spirit of this kind of inquiry, and the success of its numerous and modified applications, has helped to shift policy makers towards more risk-taking experimentation and exacting evaluation, both essential in the fight against entrenched and persistent poverty in the U.S. and around the world. This, too, will be a focus of my research in the coming months, and the subject of future posts. I welcome your comments.

Georgia Levenson Keohane is a Fellow at the Roosevelt Institute.

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Conversation with Jeff Madrick, Author of Age of Greed (Part Two)

Jun 1, 2011Lynn ParramoreJeff Madrick

jeff-madrick-100In the second part of his interview with ND20 Editor Lynn Parramore, Roosevelt Institute Senior Fellow Jeff Madrick talks about the core message of his new book, 

jeff-madrick-100In the second part of his interview with ND20 Editor Lynn Parramore, Roosevelt Institute Senior Fellow Jeff Madrick talks about the core message of his new book, Age of Greed, and what happens now that our economic myths have been shattered. If you’re in the New York City area and want to learn more, you can catch Jeff's author's talk tomorrow night at Cooper Union. Click here for more information on the event.

LP: If the recent financial crisis disproved the dominant free market/efficient market economic models of the Age of Greed and exposed rampant fraud, deceit, and risky behavior, why are we still so firmly in the grip of faulty economic thinking?

JM: I think we’re still in the grips of it for a couple of reasons. One is the extraordinary power of Wall Street and monied interests and the power of money in campaigns. This is a very serious sphere in the heart of democracy in America. Number two: the reformers, the good guys, are basically only looking to stop the next crisis. In fact, they should be looking to make the financial system work properly again. It didn’t fail only in 2007 and 2008. It failed time and again since the 1970s. Reform has to be directed at that. That’s a much harder issue.

LP: What areas of the financial system are most in need of new policies and practices?

JM: It’s not about Too Big to Fail. It’s about restraining crazy levels of speculation. It’s about seriously restraining compensation that’s based not on productive investments but on shuffling paper. It’s about making individual executives responsible for what they do and subject to losses. Now they are not subject to losses because the shareholders bear the loss. One of the remarkable things about the Age of Greed -- and why I call it that -- is that not only did people make enormous money and were able to pursue their self-interest unchecked, but they reversed the history of American reforms. We learned how to deal with this in the 1930s. We learned the problems. We developed regulations. And not only were some of those regulations reversed in letter, they were basically reversed in spirit.

LP: What lessons of the 1930s did we unlearn in the Age of Greed?

JM: FDIC insurance was the most successful program of the 1930s. But when money-market funds came around, and you and I put our money there without thinking about it. Nobody thought, my God! We better ensure that these money-market funds are okay -- they’re not insured! Well, sure enough, in 2007-8 there was a run on money-market funds. The SEC was created to make sure investment banks, when they raised money through stocks and other relevant securities, disclosed all relevant information. In the 1990s and 2000s, federal regulators stopped forcing disclosure. No one even knew what was in a collaterized debt obligation any longer. In fact, I think you aren’t even allowed to know what was in it unless you were an investor. The SEC was created to make sure that pricing was transparent. Then we had the development of over-the-counter derivative markets where pricing was totally secret, totally subject to the whim of a particular investment bank -- Morgan Stanley, Goldman Sachs, and so forth. Things became obscure, which was the opposite of the spirit of the SEC. So America reversed history in this period.

LP: To get the fundamental restructuring that’s necessary to put us on more sound economic footing, what’s most vitally important for financial regulators do to?

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JM: To concentrate on capital requirements, which is no small thing in a global world. To raise capital requirements significantly in order to restrain speculation. The same with leverage requirements. I believe what would help is a financial transactions tax to diminish over-speculation. But I think what regulators have to begin to come terms with – and it’s not even in the air, certainly not a serious consideration – is to understand that Wall Street is a monopoly. Almost like an electric utility used to be a monopoly. Why is Linked In trading so high? Because Wall Street makes an enormous of money on an Initial Public Offering—5, 6, 7% of that offering. That’s what drove the crazy high-tech fantasies of the late 1990s. Wall Street made absurd levels of compensation. That’s what drove Walter Wriston’s loans to South America. It wasn’t the interest rate spread – you know, “we’ll charge you a certain interest rate and we’re paying a slightly lower interest rate”. It’s that they made 2% of the face amount. 1-2% for every loan they made, which went right to the bottom line. This is monopoly stuff and it violates good economics and it’s justification for the federal government to come in and begin to control the compensation. Now that, in the current environment, is considered radical. And it should not be considered radical.

LP: Some point to the current weak economy and high unemployment rates as evidence that the Keynesian economic model, which favors government intervention, doesn’t work. The argument that things could have been much worse without the stimulus, for example, is easy to dismiss and attack. Are you optimistic about a revival of Keynsianism under these circumstances? Who are its most effective proponents?

JM: The issue is – as is often the case – that the president has not reminded people how effective the stimulus was. Now most economists know this. The right wing denies it. Alan Greenspan continues to do damage by claiming a “lack of confidence” and uncertainty and saying that it’s the budget that has kept people from investing. It is utter nonsense. And it has to be combated at the very top. I've heard Geithner combat it. I don’t think he’s a very effective guy, but at least he tried to combat that and show that those policies work. Unemployment would have gone to 12 and 13% if there had not been these Keynesian policies. The loudest credible voices are obvious. It’s Joe Stiglitz and Paul Krugman. How effective they are, I’m not so sure. But they are right. And right is all you can be, in some senses.

LP: What would you say is the main message of your book?

JM: I hope that the main message of my book is that individuals created this crisis. It was not an act of nature. It was not inevitable. People say, what are you getting so angry about? Just roll with the punches. But this is not just ‘how it is.’ Sure, there’s going to be overspeculation in a free market system occasionally, and some kinds of market contractions, but they don’t have to be catastrophic. There is no inevitability unless government abandons its responsibility.

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Conversation with Jeff Madrick, Author of Age of Greed (Part One)

May 31, 2011Lynn Parramore

jeff-madrick-100 Roosevelt Institute Senior Fellow Jeff Madrick recently sat down with ND20 Editor Lynn Parramore to discuss his latest book, Age of Greed: T

jeff-madrick-100 Roosevelt Institute Senior Fellow Jeff Madrick recently sat down with ND20 Editor Lynn Parramore to discuss his latest book, Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present, which hits stands today. If you're in the New York City area and want to learn more, catch Jeff at Cooper Union on Thursday, June 2nd. Click here for more information on the event.

Lynn Parramore: You called your book Age of Greed, tracing the antecedents and activities of a four-decade period starting in the 1970s. Why did you choose greed as the central theme? Why not "Age of Risk" or "Age of Delusion", for example?

Jeff Madrick: I think greed always exists. It rises and falls with the times. But when it’s unchecked by government, which has been happening since the 1970s, it festers on itself. It becomes outsized and it badly distorts the economy. That is to say, self-interest rises to a level of greed that overwhelms the economic invisible hand. When self-interest turns into greed, people start using the power of business to undermine the way markets should work. What happened in this era was that people worked in their self-interest. They didn’t just take more risk. They were not deluded. Many of them took more risks than they should and merely did it because they made a buck. So greed really drove this decade: money and self-interest in the extreme drove very bad decision-making on Wall Street, which in turn, it’s important to emphasize, deeply harmed the American economy.

LP: Walter Wriston, a name perhaps unknown to many Americans, gives the title to not one but two chapters of your book? Why is this figure pivotal?

JM: My writing career began in the 1970s, so he was a big name to me. I interviewed him several times. Walter Wriston was the pioneer in the effort to deregulate financial markets. He was a talented, very bright man who ran a very powerful bank and had enormous access to the Republicans who took over in 1969 through Richard Nixon’s victory. And he is the one who began unraveling the regulations -- the way controlled commercial banks, which took FDIC-insured savings deposits, could invest their money. In fact, as people read the book, they’ll see that he was a free-market ideologue. He really hated the New Deal. His father, a prominent conservative historian who ultimately was president of Brown University, hated the New Deal. Wriston inherited that from him in my view. But he also used it for his company’s own gain. In the 1970s, Wriston really began to whittle down the famous “Regulation Q”, which controlled the interest rate that could pay savers to attract money. And therefore the banks could get more aggressive about where they lent the money. He also developed an enormous international business. What was remarkable about Wriston -- to the detriment of the American economy to a degree but especially to the third world –- was that he took the petrodollars of the Arab nations. The Arab nations got a lot of dollars when they tripled, quadrupled and again doubled the price of oil. All of that was paid in dollars to them. They had to do something with those dollars. Wriston leaped in to recycle them by making loans to the third world --especially by developing nations. Especially in South America. Government could just as easily have been handled by the I.M.F., the World Bank, or some ad hoc group of governments to oversee the use of that money, and even to make it equity money, not loan money –- investments and productive business. Instead it was lent to countries, and, to some degree, companies that had exported commodities. Wriston heralded how well his loan officers could manage that money and the loans almost all turned bad in the 1980s -- so bad that the banks chose to stop lending to countries in trouble, particularly Mexico in 1982. The Fed and the I.M.F. had to rescue, in effect, the American banks.

LP: Wriston started his career –and remained for some time -- a rather unassuming man who lived in a middle class housing project. But by the end of his career he was living among celebrities and driving fancy sports cars. Does that trajectory reflect a key change in American banking and financial culture?

JM: A good friend of mine told me back in the ‘70s that financiers never became wildly rich in American history. Take J.P. Morgan, the greatest financier in American history. When he died, Andrew Carnegie said, “I didn’t know he had so little money.” In the 1970s that began to change. Financiers became enormously wealthy. Wriston was the leading edge of that, but he wasn’t the man to make by any means the most money. He wanted to make a bank into a growth company, like Xerox or IBM or Johnson & Johnson, which were the great growth companies. Or later, Microsoft, Apple. But should banks have been growth companies? In the meantime, he began to travel in a very powerful world and he began to live the good life. I think it was the beginning of that kind of thing, but others took it to excesses that made him look like a piker.

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LP: That brings me to Ivan Boesky. He’s the first character in the book who really seems to capture the very essence of greed. He’s a bandit with no pretense that he’s working on behalf of anyone else. Was he the beginning of this era’s greed in its purest form?

JM: Ivan had no illusions about what he was doing. Now, I don’t know if that’s as un-admirable as it sounds. Because many of the other guys created a pretense to allow them to seek their self-interest—and, in my view, become excessive, even corrupt. Ivan knew he was corrupt. He intended to be corrupt. Where he was stupid is that he really didn’t even try to seriously cover his tracks.

LP: Was he an outlier? Did this type of behavior become something others wanted to emulate?

JM: He was the leading edge of the culture. Few people were quite as crude as Boesky. They disguised it. They didn’t brag about it that much. But they were very aggressive in their own way and Ivan occasionally talked about that famous line from Adam Smith that greed is healthy. He thought he was emulating Smith. By greed he meant self-interest. But he wasn’t really concerned about those bigger things. He had certain psychological issues, some of which I trace in my book. He needed constant social affirmation. He needed it. In my view, he couldn’t walk into a room anonymously. It just was too much for his shallow and very weak ego. He needed that money and would do anything for it. He was a mobster. He was addicted to money and he would commit financial crimes to get it with no qualms.

LP: You outline how the hatred of government intrusion drove many of the early proponents of the free market model. This seems a great irony, given that financiers who hate government need its cooperation -- its guarantees, its bailouts -- in order to get and stay rich. How do you explain this contradiction?

JM: Self-interest means that you will do anything, even utilize government, to make your money and to retain your place in society. There are many examples of people who think that the rules apply to others but not themselves. Wriston was a classic example of this. It wasn’t only the bad bank loans. In 1970 when Penn Central went bankrupt, his bank made the most commercial paper loans to Penn Central. He was scared to death everything was going to fall apart. He called the Fed – I don’t know if he spoke to the Chairman, Arthur Burns, but the Fed opened its window like it did in 2007. This happened many times with Wriston. He talked this game of free competition, but when he needed to be bailed out, he got bailed out. So it’s an extreme hypocrisy -- not an unusual characteristic of egotistical, ambitious men and women. There are double standards.

LP: Many argue today that government has been captured, or even restructured through the influence of the financial and banking industries. Is this true? If so, how can trust in government – trust in its ability to intervene in crises -- be restored?

JM: There is no explanation for the deregulation and lack of oversight on the part of Washington except that they were snookered, beholden, or saw where their bread was buttered because of the rise of Wall Street and how much money you could make. Something we have to be cautious about: we’re snookered by a simplistic ideology. The people who adopt ideologies and idealism do so often because it favors themselves and their own pocketbooks. The history of this period is a history of the abdication of government authority. Part of it was the result of this rising ideology in the ‘70s. Part of it was because Americans became convinced that big government and some kinds of regulations are problems. A lot of it had to do eventually with the sheer power of business to attract and influence these decision makers.

LP: Could government have done anything to stop greed?

JM: Greed would have remained checked had government been doing what it should be doing. And that’s a tragedy of the age. One point we have to make clear is that the nation did not start wasting its money and losing its precious resources in 2007, 2008 and 2009. The financial community has been ill-serving the nation since the 1970s. I talked about the bad loans Wriston made. There were also all kinds of bad real estate loans made in that period. In the '80s the banks and other financial institutions financed the corporate takeovers – that was billions and billions of dollars. The S&L’s made all kinds of bad loans because they were deregulated. In the early ‘90s banks and securities firms began using derivatives to make tricky loans to companies like Proctor&Gamble and Orange County. In 1994, when the Fed raised interest rates, those financial structures fell apart and Wall Street almost with it. In the late 1990s, Wall Street financed all kinds of high-tech fantasies. There was bad accounting. Outright lies by financial analysts on Wall Street. You could not keep your job and make your fame on Wall Street unless you lied. Accounting fraud and unaccepted accounting practices were rife throughout American in the late 1990s.

LP: So greed is the central problem, but deceit is the handmaiden?

JM: When you sell a product --- Electrolux vacuum cleaners, Avon hand lotions – it would be naïve to think that there isn’t some kind of exaggeration. But Wall Street became imbued with deceit at very high levels of transactions. The cost to the economy – the misallocation of resources – was huge. In the 1970s there were the bad loans in Central America. In the 1980s, the outrageous investments made by S&Ls with federally insured money. In the 1980s again – huge hostile takeovers financed with tax-deductible dollars that were not ameliorated by government. In the 1990s, the high-technology fantasies -- Enron and WorldCom, telecom companies rife with accounting frauds. This amounted to hundreds of billions of dollars of bad investment. Even trillions of dollars. And then, of course, the 2000s – there were the subprime mortgages and other bad mortgages. Trillions, literally.

LP: What have these losses meant to America's economy?

JM: This is all a misallocation of resources in America. When Alan Greenspan said his great mea culpa—“I have this model of the economy and it worked for forty years and then it didn’t work” – that is nonsense. It did not work. There was constant misallocation of losses. He would argue, well, we need those losses in order to have the good. But look what happened to the economy during this period. We had twenty-two or twenty-three years of low-productivity growth. When productivity did start to rise, typical workers benefited from it only for a few short years in the late 1990s. Wages over this period of the Age of Greed have stagnated. They’re actually down for men. They’re up for women but only moderately over time, and women still make significantly less than men do with the same qualifications on average. What kind of economy is that? We haven’t invested in transportation, education, health care advances, energy. The list goes on and on. And who knows how much manufacturing innovation we failed to invest in because of what happened on Wall Street.

**Stay tuned tomorrow for Part Two of this interview and find out what we need to do to change course.

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Foreclosure Fraud 101: How a Recent AG Lawsuit Shows What Went Wrong

May 27, 2011Mike Konczal

From incentives for speed to forging signatures to falsifying documents, all that went wrong with mortgage servicing can be found in one story.

From incentives for speed to forging signatures to falsifying documents, all that went wrong with mortgage servicing can be found in one story.

This month, The American Prospect presents a special report exploring the debate about the architecture of the U.S. housing market. The report, which takes on the fundamental question of the future of Fannie Mae and Freddie Mac, features my favorite people working in this area, among them Alyssa Katz, Marcus Stanley (from Americans for Financial Reform, who critiques HAMP), James Carr from the NCLC, and Dan Immergluck, who calls for a public option for mortgages.

My contribution to the report centers on the current foreclosure fraud crisis and what needs to be done to fix it. A key issue is the problematic nature of the dual nature of the mortgage servicing business. Currently, the business comprises both a high-volume, low-information loan processing business and also a default management business that should be low-volume and high-information, but instead relies on rapid turnover and reckless practices. I note that if the mechanisms for payment and default management in the largest lending market in the largest economy in the history of the world aren't trustworthy, there will be serious consequences. These companies should function as reliable, accountable utilities rather than businesses willing to cut corners, fake documents, and proceed with phantom referrals in order to increase margins by a tiny percentage.

My article was written before the excellent news that individual state attorneys general will be actively investigating these problems, led by New York’s Eric Schneiderman. Now word is coming out that Connecticut and Ohio are focusing on the issues, and that California and Illinois are specifically looking at Lender Processing Services (LPS).

Luckily Yves Smith of Naked Capitalism just posted a class-action lawsuit filing by shareholders against LPS, which is a fantastic read. At 200 pages the lawsuit is long, so I'll summarize the main argument as a way of reintroducing what the AGs want to find out about LPS. The lawsuit is important because many people understandably don't think that foreclosure fraud is a major, systemic issue that cuts to the core of the country's foreclosure system. They tend to see problems as exceptions in a large industry and may not believe that homeowners suffer real damages from this fraud. If there are any consequences to real people, the thinking goes, then they are likely for bond holders and servicing banks, or within different entities that created the securitization in the first place. In this view, the problem is just rich people with lawyers screwing other rich people with lawyers who have the means and incentives to respond. The lawsuit ends up making the case against these ideas.

Problems in Theory

LPS perfectly illustrates the problematic dual business model. The firm started as a technology company designed to provide software and web-based applications to automate payments. In 2008, it added a default management services wing to its business lines.

Default management is difficult to automate, and LPS executives made a series of decisions to further exacerbate this problem in a way that would increase its market domination and revenues. They gave away business free to clients and decided to generate revenue by coordinating a network of attorneys, making money through charging them fees. LPS acted as a filter between clients and attorneys handling defaults, which broke the client-attorney relationship. The firm then created a series of incentives to maximize speed over quality. As Reuters has noted:

Interviews, deposition transcripts and LPS's own records underline that the company keeps its clients happy and maximizes its own fee income by whipping law firms to gallop cases through the courts.

The law firms are on a stopwatch…the LPS Desktop system automatically times how long each firm takes to complete a task. It assigns firms that turn out work the fastest a "green" rating; slower ones "yellow" and "red" for those that take the longest.

In this reckless system, firms that churned and burned court pleadings using low-skilled clerical workers enjoyed green ratings. Those that moved more slowly got unfavorable red designations and kissed business good-bye.

LPS handled more than 50% of the industry’s residential mortgage volume. Their business model was designed to strip the legal work necessary for foreclosure to its bare minimum. LPS didn’t have to fear market pressure from consumers who don’t know if their mortgages will be securitized and certainly have no say in who will be managing payments if they are. And with the default management system working to obscure, cut corners and emphasize speed over reliability or quality, it is up to the legal system to provide a necessary check.

Problems in Practice

Obviously, that business model turned out poorly. Even worse, the attempt to maximize the rate of foreclosures does untold damages to both the system of records and to consumers. The report points out six distinct things LPS was doing wrong.

1) Documentation. In order to begin foreclosure on a home, the foreclosing entity has to show ownership, and during the boom these documents weren't correctly stored or ordered. This isn't a trivial point -- centuries of law have required strict adherence to this matter, and even more so for trust law (whose special tax provisions were necessary for the securitization structure to work). A special wing of LPS called DocX would, according to documents and testimony, recreate missing documents, missing assignments, and even an entire collateral file.

How would they do this?

CW724 explained the process by which documents such as assignments were generated at DocX. Indeed, he explained that Data Entry employees took information from scanned documents on their computer screens and entered it into LPS Desktop software to create assignments of mortgage. These employees entered data such as the loan amount, person’s name, address and a property description. Data Entry employees did not perform any analysis or verify any information; they just pulled information from one screen and entered it into another. CW7 then printed those documents through LPS Desktop and took them into the “Signing Room” at DocX, where a supervisor took the documents and handed them out to signers...

Indeed, LPS executed assignments fraught with deficiencies, including but not limited to: (1) signatures and dates after foreclosures were initiated for mortgages that should have been handed over to trusts; (2) signatures by LPS employees purporting to be officers of lenders that no longer exist; (3) incomplete or non-existent grantees or grantors such as “bogus assignee” or “bad bene”; (4) improper effective assignment dates such as “9/9/9999”; and (5) blank signature lines witnessed and notarized.

Any computer coders should note that the code prints out all 9s for dates when they are improper, yet documents went out that way anyway. This is scary, as these documents are used as proof of the amount, conditions, and terms of the loans.

2) Robosigning. This practice amounts to a document-signing sweatshop. Because LPS managed default services for such a large portion of the industry, it ended up with millions of documents to sign. From the report: "CW7 explained that each person pulled a page off the top of the stack near them, signed that page and moved it to another stack next to them. They did not appear to perform any analysis, review or verification of any details in the documents they were signing. These documents included mortgage or promissory notes, and assignments of mortgages." Given that some of these documents were recreated (i.e. faked), this is a bad sign.

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3) Forgery. Employees at LPS would forge signatures. Check out the variety of signatures from Vice-President Linda Green:


4) Speed. Mirroring the incentives for lawyers, robosigners and document processors within LPS were paid for speed, often with a very high minimum number of signatures required in order to not be fired and with no penalty for errors. So when you add this all up, what kind of problem does it generate?

5) False referrals. The fifth problem, generated by the fourth one I’ve noted, concerns the abuse of important, minute details.

According to CW16, there were serious problems in the automation process that led to “phantom referrals”, when the LPS MSP software system generated “processes” or attorney referrals that did not really exist... While attorneys who were honest would review the file and realize there was not sufficient information to justify the referral, many other attorneys who were not honest or who had organizations with a lot of low-level employees handling the intake “would just file it even though created by error.” CW16 noted that the David J. Stern law firm would make fees wherever they could...

According to CW16, on top of the 20% of files with phantom referrals, approximately another 35% of files had some problems in them. Those problems varied, and included among others, an ARM that had improperly adjusted up, a failure to properly account for a borrower’s principal and interest payments, and a failure to properly attribute payments between pre-petition and post-petition that led the banks to try to collect pre-petition obligations they were not permitted to pursue.

False referrals were coupled with manipulating payments and numbers. This all undermines the sanctity of the court and the foreclosure process, harms consumers, and makes a mockery of the largest lending market in the world.

We don't know the extent of the problems outlined, and it is likely the banks themselves don't know the extent. But we know that the system is broken, and it requires a government response.

Mike Konczal is a Fellow at the Roosevelt Institute.

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Want to Reduce the Federal Debt? End Too Big to Fail

May 26, 2011Zachary Kolodin

too-big-to-fail-license-plate-banker-new-yorkAs the Roosevelt Institute Campus Network releases its progressive, practical Budget for a Millenn

too-big-to-fail-license-plate-banker-new-yorkAs the Roosevelt Institute Campus Network releases its progressive, practical Budget for a Millennial America, those who helped craft it will explain their innovative ideas and tough choices in a series of posts. Zachary Kolodin calls on the US to both rein in Wall Street and expand access to capital.

American politicos have discovered that our national debt is rising but haven't come to grips with how we got here and how to prevent it from happening again. When the Roosevelt Institute Campus Network started preparing its Budget for the Millennial America, we wanted to find solutions that not only dig our way out of a fiscal ditch, but also prevent the U.S. from again stumbling into that hole. This approach embodies the Millennial Generation's desire to build a prosperous future, rather than just get by crisis to crisis.

We identified four key drivers of the debt: rising health care costs, the Bush-era tax cuts, wars of occupation without clear goals, and financial sector instability. What stood out to us about problems in the financial sector was that the Congressional Budget Office doesn't take them into account. Stock market crashes that wipe out trillions in savings and jobs? Not scoreable by the CBO. Unprecedented bailouts costing hundreds of billions of dollars? Not scoreable. So you won't see financial sector reform in most budget hawks' agendas. In fact, Paul Ryan's budget rolls back the reforms in the Dodd-Frank bill. But we all saw what happened in 2008 and 2009 when the Wall Street collapse demanded hundreds of billions of federal dollars, and dragged the rest of the economy down with it. We know that we can't claim a responsible federal budget until we stop promising to bailout the big banks. So we started thinking about how our budget proposal could stabilize the financial system.

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If big banks are too powerful to be effectively regulated by the various agencies in charge of regulating them, then we had to find another way. Our answer was simple: make being "Too Big to Fail" unprofitable. Our budget proposes a 25% financial activities tax on institutions exceeding $200 billion in assets. This tax would affect the top 12 largest banks in the United States, forcing them to split up their activities into new companies. These new companies would pose significantly less risk to the global financial system, since they would no longer be "too big to fail."

Having experienced the fallout of an under-regulated, bubble-chasing financial sector, Millennials are committed to making the Wall Street of the 21st century a vehicle for strengthening America. The "Too Big to Fail" tax is the first step in that journey, but it doesn't stop there.

The Blueprint for the Millennial America, which was the basis for creating the budget, calls for a level playing field for entrepreneurship. One of the foundations is equitable access to capital. Yet, despite its remarkable growth in the past 20 years, U.S. banking has not improved this access. Now that we are devoting 17% of U.S. GDP to banking, can we claim even a single improvement in the allocation of capital?

Moving forward, we recommend new public policy that leverages the expertise of the financial sector to ensure better access to capital for all Americans -- particularly in our rural areas and inner cities. The Intersect Fund, a nonprofit organization started by Roosevelt Campus Network alum Joe Shure that provides microloans to jumpstart social mobility through entrepreneurship, offers a small-scale model for what the financial sector can achieve on a large scale. The Budget for the Millennial America offers the promise of an America in which the financial sector again empowers Americans, rather than causing anxiety over the federal debt. As we work toward that goal, let us not be confined by the 21st century paradigm of concentrated capital. The America we inherit can be one of democratized access to capital.

Zachary Kolodin is the Director of the Future Preparedness Initiative at the Roosevelt Institute.

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HBO's Too Big to Fail: Searching for Heroes in All the Wrong Places

May 24, 2011Tim Price

too-big-to-fail-movieHBO's financial crisis drama struggles to make viewers feel for the Wall Street titans who wrecked the economy.

too-big-to-fail-movieHBO's financial crisis drama struggles to make viewers feel for the Wall Street titans who wrecked the economy.

The most obvious challenge in adapting the story of the 2008 financial crisis to the screen is that there are plenty of Wall Street villains for the audience to jeer at, but no heroes to be found. The creators of HBO’s Too Big to Fail (based on the book by Andrew Ross Sorkin) obviously ran head-first into this problem. In their desperate search for a sympathetic protagonist, they appear to have settled for Treasury Secretary Hank Paulson, portrayed in the film by Academy Award winner William Hurt.

It’s a testament to Hurt’s acting ability that he just about pulls it off, playing Paulson as a tragic man of principle who doesn’t want to bail the banks out, honest, but is constantly beset and betrayed by turncoat bankers, obstinate politicians, and meddling British regulators. Many’s the scene where Paulson is shown weeping softly in front of a bathroom mirror, vomiting with anxiety at the thought of a global financial collapse, or wandering the streets of Manhattan like the male lead in a rom-com during the obligatory post-break-up montage. Contrary to the popular perception of Paulson as a Wall Street crony who exploited taxpayers to bail out his old pals at Goldman Sachs, the film argues that he was a stalwart public servant who did what had to be done with his back against the wall.

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Among the many talented actors sharing the screen with Hurt are Billy Crudup, whose Timothy Geithner comes off as Paulson’s handsome boy sidekick, and Paul Giamatti, who plays Ben Bernanke to quivering, wooly-bearded perfection. What you won’t see during the movie’s one hour and forty-five minute running time is any major character with less than a seven-figure net worth. Oh, they’re around, as in the scene where Geithner runs into some commoners during his morning jog and bums himself out thinking about how ill-prepared they are for the impending economic disaster. But this movie is Wall Street’s story, told almost exclusively from Wall Street’s perspective. As a result, many important details of the crisis and its origins are elided. There is one stand-out scene where Paulson and his staff discuss the insanity of unregulated derivatives and the exploitation of homeowners by subprime lenders, but when asked why there weren’t laws in place to prevent all this, Paulson’s too-pat answer is “Nobody wanted it.”

Ultimately, Too Big to Fail is a highly watchable account of how powerful men with too much money and too little self-awareness brought the world to the brink of financial ruin. But as a historical document, it devotes far too little attention to the conservative push for deregulation that allowed events to spiral so far out of control, or to the impact of the crisis outside the glass towers of Wall Street. Watching it in isolation, one would be forgiven for thinking that 2008 was simply a very stressful year in the life of Hank Paulson rather than the turning point in an ideological battle that has been developing since the days of the New Deal. For a more in-depth look at the origins of the crisis, you should check out Roosevelt Institute Senior Fellow Jeff Madrick's fascinating new book, The Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present, which hits shelves on May 31st.

Tim Price is a Communications Officer at the Roosevelt Institute.

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The Victims of Insider Trading

May 17, 2011Jeff Madrick

He who pays the most money for inside information makes the most money. The rest lose.

Nothing surprises me much more than when I read that trading on insider information is a victimless crime. In the wake of the conviction of hedge fund giant Raj Rajaratnam, the claim has come up time and again. In fact, it is entirely untrue. The victims are all those who sold Raj a stock or other security at a lower price than they might have if they had the same information he had. In other words, the victims are pensioners, mutual fund investors, bank trusts holders, and on.

He who pays the most money for inside information makes the most money. The rest lose.

Nothing surprises me much more than when I read that trading on insider information is a victimless crime. In the wake of the conviction of hedge fund giant Raj Rajaratnam, the claim has come up time and again. In fact, it is entirely untrue. The victims are all those who sold Raj a stock or other security at a lower price than they might have if they had the same information he had. In other words, the victims are pensioners, mutual fund investors, bank trusts holders, and on.

It’s like what happened in the 1800s when some insiders knew the railroad had planned to build a track through a certain territory. They bought land from unsuspecting farmers, ranchers and maybe even the federal government on the cheap. That activity disgusts us. Same with stocks when the fund managers know about good earnings news to be reported the next day or a merger announcement to come.

What the details of the Rajaratnam scandal also shows is that he who pays the most money for inside information also makes the most money. Money begets money, the big get bigger. That’s a pretty good example of what’s happened over the past thirty years in American finance.

Now, when you can leverage that money up -- borrow to the hilt at low rates -- inside information really pays off. Many hedge fund managers don’t make money for the insights but for their sheer chutzpah. Meantime, market integrity is out the window.

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Wall Street’s always had some kind of advantage over the rest of us. The pros could often call someone up at a company to get an edge. But passing on outright inside information -- the kind that will move a stock price one way or the other substantially -- should clearly be illegal.

One of the more interesting facts about hedge funds is that, according to those who measure risk statistically by deriving ‘betas’ and ‘alphas,’ they do better on average than the amount of risk they take suggests they should. Mutual funds on average do not.

Some interpret this as proof of how astute the hedge funds are compared to other investors. The data could also be interpreted another way. That given their size and wealth, they have more information about company strategies and results, takeovers, and the trading patterns of the market. They may even be able to push prices their way and bail out before others catch on. Cornering markets can be against the law. How often does “mini-cornering” -- momentary attempts to buy enough supply to determine a quick price change -- go on? That’s perhaps the main reason why they do better than the risk they take suggests they should.

This is seedy stuff and there is no simple way to prevent it adequately. If such practices are common, it makes good sense for investors who have the money to sign up with hedge funds and get a piece of their unfair advantage.

On the other hand, some hedge funds are totally honest. How can we tell which ones make it on smarts, good instincts and genuine preparation? Only if the government aggressively cleans up the act. Fear of prosecution is perhaps the only effective weapon.

Meantime, good money flows to funds, often unwittingly, who exploit and take advantage—and that only distorts the efficient allocation of capital in America.

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

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The Myth that Banks are Solvent

May 12, 2011Marshall Auerback

If we keep pretending banks are just waiting for regulators to get out of the way, we'll keep implementing the wrong policies.

If we keep pretending banks are just waiting for regulators to get out of the way, we'll keep implementing the wrong policies.

Banks will likely have too much cash by 2019 as a result of the Basel III global banking rules, UBS AG Chief Executive Oswald Grübel said Thursday. "In the next 10 years, at the end of 2019, we will have overly liquid, overcapitalized banks," he said, addressing a business audience at a conference. "However this also means we won't have a lot of growth." Mr. Grübel was discussing changes in the global balance of power and what the possible consequences would be. The CEO has said that investment banking could shift to the U.S. and Asia if stricter capital requirements are enforced in the U.K. and Switzerland. The basic economic tenet, however, remains that "power goes where the money is," he said.

This is consistent with the fallacy that the banks are basically solvent and able and ready to extend credit if only these darn regulators would get out of the way. As James Galbraith has argued, the problem is said to be no more serious than some clogged plumbing. A bit of Draino in the form of government handouts and guarantees should be sufficient to get credit flowing again. Most major banks are not insolvent, this story goes, but rather have a temporary liquidity problem induced by malfunctioning financial markets. Time will allow market mechanisms to restore the true, higher value of "legacy" assets. Once the banks are healthy, the economy will recover.

Nonsense. Private debt loads remain too high, income and employment continue to fall, and delinquencies and foreclosures continue to rise. Assets are overvalued event at current depressed prices. Many financial institutions (probably including most of the big ones) are hopelessly insolvent, holding mountains of toxic waste that will never be worth anything.

So why are we busy implementing policies that simply maintain a credit-based economy? All around the world, policymakers continue to foster the fiction that all we have a temporary illiquidity problem, not a problem of excessive leverage, excessive debt, and a legacy of assets that were vastly overvalued based on economic scenarios that had no chance of coming to fruition. Given the inappropriate premises under which policy makers in the U.S., the U.K., and the euro zone have dealt with the leverage of financial institutions, it's obvious that problems will continue to languish if the administration does not change its course of action. This will heavily constrain the global economy's capacity to recover and will lead to multiple Japanese style "lost decades" around the globe.

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The whole boom of the last 25 years was predicated on financial deregulation, massive fraud, and a huge build up of private debt as a consequence of inadequate fiscal policy to generate full employment and rising incomes. Growth was based on household borrowing and the continuation of negative saving trends (that is, household deficit spending). A good place to start recovery efforts, therefore, would be to change this method of economic growth by promoting employment, rather than capitulating to the siren songs of the bankers whose recklessness got us into this mess.

In a much saner world, we would be in the midst of a government-led investment push, much like the Space Race or the Manhattan Project, to drive new energy technologies forward by scaling up production and innovation, both apt to lower unit cost points. There would also be a concerted effort to establish the new infrastructure required. (After all, highways were constructed in part for national defense purposes, and railroads and canals had their share of public subsidization.) But with the ease of capture so visible, no such effort led by the government could be trusted enough to be supported, especially by a citizenry that has become one of fragmented (and anxious) consumers. Deficit austerians in government fail to understand that a budget deficit is essential for stable economic growth if the contribution of net exports (the difference between exports and imports) is not strong enough to sustain domestic demand while the private domestic sector is trying to save.

We need to put an end to these ridiculous policy responses. We not only require substantially increased supervision and regulation of the financial sector, but must also put a stop to the practices that brought on the crisis in the first place. If left alone to deal with the current problems, market mechanisms will push management and owners of insolvent institutions to ramp up losses and engage in yet more fraudulent accounting, leading to an even bigger crash down the road.

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

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The Poor Get Swiped by Swipe Fees, the Rich Make Bank

May 4, 2011Bryce Covert

Banks are fighting off an amendment to cap interchange fees even though it would curb a wealth transfer from poorest to richest.

This week's credit check: Consumers overall pay up to $48 billion more a year because of swipe fees. Low-income households end up paying $23 because of them while high-income households receive $756 every year.

Banks are fighting off an amendment to cap interchange fees even though it would curb a wealth transfer from poorest to richest.

This week's credit check: Consumers overall pay up to $48 billion more a year because of swipe fees. Low-income households end up paying $23 because of them while high-income households receive $756 every year.

Whenever I bring up the predatory bank practices that keep people stuck in debt, usually the first push back I get is that credit cards can be useful. Cards with rewards are a way to get things in return for spending money; if you open an account with cash back or rewards programs, some people point out, and you pay down your balance every month, you're basically getting something for nothing from your card company (unless of course the account has an annual fee). On the surface this is true, but dig a little deeper and it's not quite that simple. Strictly speaking, the money to finance these goodies comes from merchants big and small who are charged outsized fees every time a card is swiped, fees they have literally no power to negotiate over or change whatsoever. But the reality is that the costs get passed on further to consumers -- all consumers, in a very regressive way.

Zach Carter and Ryan Grim have written a fantastic, long-read article on the battle over swipe fees raging on Capitol Hill. Because this is a little-covered fight, here are the basics: as part of the Dodd-Frank financial reform bill, a cap was to be put on how much a bank can charge a merchant each time it swipes a customer's debit card. (Banks successfully lobbied to keep credit cards out of the picture altogether, so those fees will continue either way.) That charge is called an interchange or swipe fee. Banks used to charge merchants about 44 cents per transaction, but under the new rules that would be capped at 12, costing the big banks about $14 billion in fees per year. (As RJ Eskow points out, compare that profit loss to the $20 billion in bonuses banks gave themselves last year.) But since the date for implementation of this rule has neared (it was supposed to be finalized on April 21 and in effect by July 21), it has been pushed back and is now under heavy attack from -- you guessed it -- Wall Street lobbyists.

One major takeaway from Carter and Grim's article is that the current fight is in many ways between big corporate interests and other big corporate interests -- i.e. the Wal-Marts and Targets vs. the Bank of Americas and Citigroups. But beyond that fight, there's another battle that we think very little about: these fees pit rich against poor.

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Steve Pearlstein explained how we got to a point that card companies can fleece merchants and consumers: "Visa, Mastercard and American Express now account for more than 90 percent of the market. And with that much concentration comes the power to charge higher prices than would be possible in a market with many competitors." Our interchange fees in the US are higher than in any other industrialized country. And those higher prices are passed on to consumers through higher prices on the products that the overcharged merchants sell. These price hikes amount to up to $48 billion more a year that we pay on gas, groceries, entertainment, you name it. The banks claim that they need to charge fees to balance out the risk of lending through credit cards, but since we're only focused on debit cards in this debate -- which don't lend to customers, but merely let them access the money sitting in their own bank accounts -- that point would appear moot. Not to mention that a debit transaction only costs a few pennies. One of the banks' claims is that this cap will kill small banks and credit unions -- which ignores the fact that Dodd-Frank exempted those with less than $10 billion in assets. Not to mention that of the $16 billion in fees, half of that -- $8 billion -- ends up at just 10 banks.

But when these costs get passed on in the form of higher prices for the things we want and need, it turns out that the poor pay up while the rich make off with rewards. Carter and Grim's article points to a February 2010 paper that found that 56% of fees are passed on to consumers, "raising costs for the average household by about $230 a year." That amounts to "two weeks worth of groceries or the monthly heating bill" for a family living below the poverty line. But it gets worse for low-income families. From their article: "[W]hile swipe fees cause higher prices for everyone, affluent consumers get some of that money back in the form of rewards. The result is an effective transfer of wealth from poor shoppers to wealthier consumers." In fact, the Boston Fed has found that, "On average, each cash-using household pays $151 to card-using households and each card-using household receives $1,482 from cash users every year." Some cash holders might be those who refuse to use plastic, but a lot of those are likely to fall into the category of the unbanked. The study further found:

Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low-income to high-income households in general. On average, and after accounting for rewards paid to households by banks, the lowest-income household ($20,000 or less annually) pays $23 and the highest-income household ($150,000 or more annually) receives $756 every year.

As Carter and Grim point out, this fee cap isn't likely to stop banks from issuing debit cards, and there doesn't seem to be any good reason for them to start charging fees left and right to make up for the profit loss. As they quote Senator Dick Durbin, sponsor of the amendment that sought to cap the fees in the first place, as saying, "There is no need for you to threaten your customers with higher fees when you and your bank are already making money hand over fist. And there is no need to make such threats in response to reform that simply tries to spare consumers." It's even less defensible when the fees are so clearly a wealth transfer from the poorest to the richest.

Bryce Covert is Assistant Editor at New Deal 2.0.

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The Rise and Fall of Our Economic Royalists?

May 2, 2011Jon Rynn

fat-cat-150Today's "robber barons" use race as a distraction from real economic problems.

fat-cat-150Today's "robber barons" use race as a distraction from real economic problems.

In a recent column in the NYTimes, Charles Blow sounds like he has taken a page from FDR’s famous “economic royalist” speech. Talking about what he calls “the right’s flimsy fiscal argument," Blow claims that:

It all loses traction as more Americans begin to see the far right for what it truly is: a gang of bandits willing to sacrifice the poor and working classes to further extend the American aristocracy -- shadowy figures who creep through the night, shaking every sock for every nickel and scraping their silver spoons across the bottom of every pot.

At another low point in American economic history, during the 1936 Democratic National Convention, FDR decried the domination of a small economic elite:

For out of this modern civilization economic royalists carved new dynasties. New kingdoms were built upon concentration of control over material things. Through new uses of corporations, banks and securities, new machinery of industry and agriculture, of labor and capital -- all undreamed of by the fathers -- the whole structure of modern life was impressed into this royal service…

It was natural and perhaps human that the privileged princes of these new economic dynasties, thirsting for power, reached out for control over Government itself. They created a new despotism and wrapped it in the robes of legal sanction. In its service new mercenaries sought to regiment the people, their labor, and their property…

For too many of us 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.

There is one big political difference between the world that Roosevelt faced and the one we are witnessing: the South has switched from being constrained by a bigger, and more progressive, Democratic Party, as it was in FDR’s day, to our situation now, in which the Southern conservatives are the dominant force in a Republican Party purged of its more moderate elements. The new economic royalists use this conservative base to pursue their agenda.

The American political party system has always been affected by the conservative political culture of the South. As we acknowledge the 150th anniversary of the Civil War, focus of a fascinating series in the NYTimes, it is useful to recall that what the South was attempting to establish when it seceded to form the confederacy was a state based on racism and the establishment of a permanent economic elite. The NYTimes series puts to rest any lingering doubt that the South was fighting for anything different. In a speech of March 12, 1861, the Vice President of the Confederacy, after describing Thomas Jefferson’s ideas concerning the evil of slavery, declared:

Our new Government is founded upon exactly the opposite ideas; its foundations are laid, its corner-stone rests, upon the great truth that the negro is not equal to the white man; that Slavery, subordination to the superior race, is his natural and moral condition. This, our new Government, is the first, in the history of the world, based upon this great physical, philosophical and moral truth.

Unfortunately, after this “republic” had been eliminated, there was no general land reform -- as occurred in a very beneficial way for the development of South Korea, Japan, and Taiwan after World War II -- and so the same political culture that had flourished before the Civil War remained, bruised but intact.

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Meanwhile, the Republican Party, which had been founded to stop the expansion of slavery outside of the South, had won the Civil War, and so the newly emerging industrial captains -- robber barons, as they were called, turning eventually into the economic royalists of FDR’s speech -- allied with the Republican Party, which eventually became the dominant political party of the economic elite. In a very peculiar turn of events, the party of the cities, the Democratic Party, also remained the party of the Southern “royalists." Thus the “middle party," the Republicans, were flanked to their right by the Southern wing of the Democratic Party and to their left by the Democrat’s Northern wing.

After World War II, the Republicans created their own far-right wing in the form of McCarthyism and anti-Communism. At the same time, the combination of the two contradictory wings in the Democratic Party became unsustainable, particularly since the Civil War was finally ended by the civil rights movement and the Voting Rights acts of the middle 1960s. Lyndon B. Johnson thought that this would lose the South for the Democrats -- and the Republicans complied by pursuing a “Southern Strategy” to capture it. But this may eventually lead to the Republican’s undoing if Charles Blow is correct that the “flimsy” arguments of the current incarnation of the Republican Party could be their self-destruction.

This progressive outcome may be the result of generational change, combined with overreaching against programs for seniors. The major theme of Blow’s piece was not simply the rapaciousness of our new economic royalty, but that race in America has been used to distract much of the white electorate from real issues of power and wealth. Exhibit A is the Trumped-up “debate” about Obama’s birth certificate (pun intended). It may be that younger Americans, less permeated with racist ideas, will reject these distractions. In addition, by alienating seniors, many of whom may have retained some old-time racist attitudes, the Republicans may have, thankfully, lost some of the advantages of their implicitly racist arguments.

According to my calculations, the 112th Congress has 94 Republicans in the House from the South out of 242 total Republicans in the House, and there are 16 Southern Senators out of 47 Republicans. This means that instead of being a large minority within a majority liberal party, the Southern conservatives are a large minority, indeed the backbone, of the conservative party -- and this pulls the entire Republican Party far to the right. It can no longer even hold on to its moderates.

Since, as Charles Blow points out, a rather large majority of the American public is center and center-left, and certainly not far right, then the far right is “losing traction," in Blow’s words. There are several implications:

First, the progressive potential of the Voting Rights Act, and of an undercurrent of progressive politics that has existed in the South since at least the Populist movement, must be encouraged, so that the conservative political culture of the South is challenged.

Second, probably the best way to expunge the last traces of the old extremist Southern political culture is to put forward a political agenda that can excite and unify progressive forces -- for example, by advocating a jobs-centered program.

Third, we need to understand that race has always been used to divide Americans, and that now is the time to unite them around the job of rebuilding the country.

Finally, by pursuing these goals, we can create a political culture and program that will cut the base of support for the economic royalists, both inside and outside of the South.

We should bear in mind Roosevelt’s words from 1936:

Better the occasional faults of a Government that lives in a spirit of charity than the consistent omissions of a Government frozen in the ice of its own indifference. There is a mysterious cycle in human events. To some generations much is given. Of other generations much is expected. This generation of Americans has a rendezvous with destiny.

Jon Rynn is the author of the book Manufacturing Green Prosperity: The power to rebuild the American middle class, available from Praeger Press. He holds a Ph.D. in political science and is a Visiting Scholar at the CUNY Institute for Urban Systems.

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