The CFPB Stands Up to Banks' Overblown Financial Firepower

Sep 7, 2011Bryce Covert

Republicans claim that allowing Richard Cordray to head the CFPB imbues him with too much power, ignoring the immense influence on the other side of the equation.

This week's credit check: The 10 Republicans blocking Richard Cordray's nomination have received over $31 million in campaign cash from the financial sector. The median American family saw yearly earnings fall $5,261 over the past decade.

Republicans claim that allowing Richard Cordray to head the CFPB imbues him with too much power, ignoring the immense influence on the other side of the equation.

This week's credit check: The 10 Republicans blocking Richard Cordray's nomination have received over $31 million in campaign cash from the financial sector. The median American family saw yearly earnings fall $5,261 over the past decade.

The least remarkable part of yesterday's Senate Banking Committee hearing on Richard Cordray, President Obama's nominee to head the new Consumer Financial Protection Bureau (CFPB), was Cordray's testimony itself. In fact, Republicans made it clear that his credentials are not what's up for debate. Sen. Bob Corker (R-TN) called a recent meeting with him "pleasant" and Sen. Richard Shelby (R-AL) said he has a "good background." Rather, they want to debate whether his post should exist at all. Their reasoning? That having one person in charge of this new watchdog will imbue Cordray with far too much power. As Shelby put it, "No one person should have so much unfettered power over the American people."

But what of the power of the opposition, the banks themselves, who stand to have new oversight and regulation from someone on the side of the average consumer? If we're going to talk about power imbalances, we might want to look at what the financial sector can marshal against the American people. Elizabeth Warren herself, the originator of the idea for the CFPB, estimates that it will police a $3 trillion consumer financial services industry. And Wall Street, along with its other corporate counterparts, is doing pretty well compared to the rest of us. Corporate profits have taken in 88 percent of the raise in national income since the recovery began, while household incomes only took in 1 percent.

It's not just profits banks wield in this fight, however. That money can easily turn into lobbying and campaign contributions. As Ari Berman reported in June, "According to the Center for Responsive Politics, 156 groups -- the vast majority representing corporate interests -- lobbied the government about the CFPB in the second half of 2010 and the first quarter of 2011. The list ranged from JPMorgan Chase to McDonald's." The Chamber of Commerce even has an entire division devoted to fighting Dodd-Frank, and it spent $17 million on federal lobbying in the first quarter of this year with a dozen lobbyists focused on just the CFPB.

Sign up to have the Daily Digest, a witty take on the morning’s key headlines, delivered straight to your inbox.

Individual Republican Senators are also getting lavish gifts from the financial sector while opposing its newest regulator. The 10 Republican members of the Senate Banking Committee, who signed a letter to Obama in May demanding debilitating changes to the CFPB before any candidate can be confirmed, have received over $31 million in campaign cash from the financial sector during their time in Congress. Meanwhile, Sen. Shelby himself has taken $6.2 million from the financial sector, including about $1 million from commercial banks. His top career donors include JP Morgan ($140,771), Citigroup ($109,199), and Goldman Sachs ($67.600).

Compare all that financial firepower to what's going on for everyday Americans. A new report from the Pew Charitable Trusts shows that nearly one in three Americans who grew up middle-class has fallen out of that group. It's not hard to see why so many people are moving down the ladder when wages have been heading in the same direction. While the financial sector is bringing in $3 trillion, the median American family saw yearly earnings fall $5,261 over the past decade, from $52,388 in 2000 to $47,127 in 2010.

Things are even worse for low-income families. Over the past 10 years, the percentage of children living in poverty has soared, increasing by 18 percent, or 2.4 million more, from 2000-2009. These children and their families are set to fall on even harder times, as states slash vital services to balance their budgets. They face the loss of unemployment benefits, income tax credits, and cash assistance, among other safety net supports.

Those who find themselves in such financial hardship have one place to turn when they can't make ends meet: debt. Credit card companies already employ a variety of tactics to entice middle-class families into debt and keep them there. But those tactics will be under strict scrutiny if the CFPB has its full powers. Low-income families often find themselves prey to unregulated non-banks like payday lenders and check cashers, but those will also come under the supervision of the Bureau.

The CFPB isn't taking on dictatorial powers. It's standing up to the formidable forces preying upon struggling American consumers.

Bryce Covert is Assistant Editor at New Deal 2.0.

Share This

What’s “Perfect” About Perfect Competition? A Prosperous Economy Needs Innovators

Sep 1, 2011William Lazonick

workers-200In the latest installment of his “Breaking Through the Jobless Recovery” series, economist William Lazonick explains why pushing big corporations to transform their products is just what our economy needs.

workers-200In the latest installment of his “Breaking Through the Jobless Recovery” series, economist William Lazonick explains why pushing big corporations to transform their products is just what our economy needs.

To claim that something is "perfect" is to say that it cannot be done better. With the start of another academic year, hundreds of thousands of college students who take introductory microeconomics courses will learn from their professors that the best possible allocation of society's resources occurs when "perfect competition" characterizes the organization of industry.

It is a well worked out theory that has been around for over a century. Unfortunately, the theory of perfect competition is nonsensical when applied to an economy such as the United States, dominated as it is by large corporations. The theory of perfect competition enables economists to ignore the conditions under which, through innovation, business enterprises grow large and often come to dominate their industries. As a result, these economists lack a theory of how government policy should respond when the top executives of the large corporations, upon which we rely for our prosperity, fail to invest in innovation and job creation in the United States.

The theory of perfect competition can be found in any conventional economics textbook. In a nutshell, households, who work and consume, maximize "utility" (their satisfaction) in supplying paid labor services and capital (their savings) on input markets as well as in demanding goods and services on output markets. Firms, which buy inputs to produce outputs, maximize profits on the basis of cost structures -- a combination of technologies and input prices -- available to all firms that want to participate in the industry. "Perfect competition" is achieved when, in a particular industry, all firms have exactly the same cost structures and there are a sufficiently large number of these identical firms so that the output decision of any one firm has no discernible impact on the price at which its product is sold.

The basic problem with the theory of perfect competition is that as consumers and workers, not to mention as taxpayers, we want some firms in an industry to transform technologies to generate higher quality, lower cost products than their competitors. We do not want firms to maximize profits subject to given technological conditions. Firms that can achieve these technological transformations are innovative enterprises that drive a society's economic growth.

By creating new sources of value (embodied in higher quality, lower cost products), the innovative enterprise makes it possible (but by no means inevitable) that, simultaneously, all participants in the economy can share in the gains of innovation. Employees may get higher pay and better work conditions, creditors more secure paper, shareholders higher dividends and stock prices, governments more tax revenues, and the innovative firm a stronger balance sheet, even as consumers get higher quality, lower cost products. Indeed, from this perspective, a key issue for economic analysis is the relation between the generation of innovation and the distribution of its gains among participants in the economy.

There are countless examples of innovative enterprise in the history of the U.S. economy. Think of, to mention only a few prominent ones, General Electric's innovations in electrical power systems and light bulbs in the first decades of the 20th century, General Motors' closed car in the 1920s, Du Pont's nylon in the 1930s, Boeing and Douglas in the modern aircraft in the 1930s, RCA in television in the 1940s and 1950s, IBM in computers in the 1950s and 1960s, Intel in microprocessors in the 1970s and 1980s, Cisco Systems in Internet routers in the 1990s, Amazon in electronic retailing in the late 1990s and 2000s, Google in Internet search engines in the 2000s, and Apple in digital devices in the 2000s.

Today, many of these companies remain substantial resource allocators in the U.S. economy. They are innovative enterprises, not "perfect" competitors. To be sure, there are always small firms in the economy, but through innovation the best among them can quickly become very large. For a few well-known examples, Cisco Systems, founded in 1984, grew from 254 employees in 1990 to 34,000 in 2000; Amazon, founded in 1995, had 33,700 employees in 2010; while Google, founded in 1998, had 24,400 employees in 2010.

More generally, large corporations, some dating back to the 19th century, dominate the economy. In 2010, the top 500 U.S. corporations by revenues had combined sales of $10.8 trillion, profits of $702 billion, and employment of 24.9 million people worldwide. That's a per company average of $21.6 billion in sales, $1.4 billion in profits, and almost 50,000 employees. The operation and performance of these corporations, not "perfect competition," need to be at the center of economic analysis.

It’s free! Sign up to have the Daily Digest, a witty take on the morning’s key headlines, delivered straight to your inbox.

That large corporations dominate the US economy is hardly news (except perhaps to the economics professors who write the conventional microeconomics texts). In 1977, business historian Alfred D. Chandler Jr. published a Pulitzer Prize-winning book, aptly entitled The Visible Hand, in which he documented that already by the beginning of the 1920s, the "managerial revolution in American business" was complete. The innovative investment strategies of these corporations drove the consumer durable boom of the 1920s. At the same time, sectors such as textiles, coal mining, and agriculture that were characterized by large numbers of perpetually small firms were known as "sick industries" precisely because of the inability of a few firms to set themselves apart from the rest through innovation.

Today, in my view, the greatest economic policy challenge is how to keep major business corporations innovative. Once they have become successful, the executives who run these mammoth companies may choose to allocate resources in ways that live off the past rather than invest for the future. Indeed, justified by the free market ideology of "maximizing shareholder value," in the United States we reward top executives with unindexed stock options that give them strong personal incentives to do massive stock buybacks to jack up their companies' stock prices even as they eschew investments in innovation.

Here's an example that has recently been in the news. Hewlett-Packard (HP), the world's largest information technology company and an icon of  U.S. business, announced that it intends to exit the personal computer industry, including the rapidly expanding smartphone and tablet segments. HP's top executives deem that the investments required to compete with the likes of Apple pose too great a burden on HP's cash flow. But that's because HP's executives decided to squander $11 billion on stock buybacks in 2010 and another $7.3 billion in the first half of 2011. During the same 18 months, HP spent only $4.6 billion on R&D, just 25 percent of what it forked out to manipulate its stock price through buybacks. Over the past decade, HP has wasted 118 percent of its net income on buybacks. HP was once a great technology company, but in the 2000s it expended only 4.2 percent of sales on R&D, compared with 7.6 percent in the 1990s and 10.5 percent in the 1980s. In 2010, HP's R&D as a percent of sales was a meager 2.3 percent, the lowest in the company's 62-year history.

What determines whether a company invests for the future or lives off the past? Our college students won't find any answers to this crucial question in the conventional economics textbooks. In a world of "perfect competition," there is no room for innovative enterprise. By the same token, the textbooks make the pretense of analyzing "big business" through the theory of monopoly, put forth as the proof of the superiority of perfect competition. The argument is that compared with perfect competition, a firm that has a monopoly restricts output and raises prices to consumers.

To get this result, however, it is assumed that the monopolist firm maximizes profits subject to the same cost functions as perfectly competitive firms. This comparison entails an amazing leap of illogic, ironic for an academic profession that claims to be rigorously scientific: If it is possible for perfectly competitive firms to exist, how did the monopolist get to be a monopolist?

In contrast, in the theory of innovative enterprise a firm can become dominant by transforming its cost structures, gaining competitive advantage over firms that do not. In the process, the innovating firm generally contributes to an expansion of industry output and a reduction of product prices -- just the opposite of what the textbook theory of monopoly predicts.

That the illogical argument of the superiority of "perfect" competition has been ensconced in the microeconomics textbooks for over six decades attests to the failure of orthodox economists to come to grips with an economy dominated by large corporations. Applied to such an economy -- and the United States has been one for over a century -- perfect competition is perfect nonsense.

What then accounts for the persistence of the theory of perfect competition as a linchpin of economics erudition? In brief, there are two mutually reinforcing explanations for what I have called "the myth of the market economy": the ignorance among economists about how the actual economy functions and the ideology that "free markets" can solve all our economic problems. It is about time that we got rid of both.

William Lazonick is director of the UMass Center for Industrial Competitiveness and president of The Academic-Industry Research Network. His book, Sustainable Prosperity in the New Economy? Business Organization and High-Tech Employment in the United States (Upjohn Institute 2009) was awarded the 2010 Schumpeter Prize.

Share This

Rob Johnson: American Dream Can't be Restored with Sky-high Inequality

Aug 30, 2011

At a recent event at the Hammer Forum, Roosevelt Institute Senior Fellow Rob Johnson joined Andy Stern to answer the question: Can we restore the American Dream? In his presentation, Rob pointed out that we can't simply return to our past, particularly given how much has changed in the aftermath of the financial crisis. "The challenges are not just simply going back," he points out, "but drawing on the best traditions of our past to create a new vision."

At a recent event at the Hammer Forum, Roosevelt Institute Senior Fellow Rob Johnson joined Andy Stern to answer the question: Can we restore the American Dream? In his presentation, Rob pointed out that we can't simply return to our past, particularly given how much has changed in the aftermath of the financial crisis. "The challenges are not just simply going back," he points out, "but drawing on the best traditions of our past to create a new vision."

So what's changed since the boom times of the American Dream? For one thing, the financial system sucks up about 40 percent of corporate profits. "The servant of finance, which is supposed to serve the economy and the economy and markets are supposed to serve social goals, has become the master," Rob says. Another is our staggering income inequality. Between 1917 and 1978, 70 percent of GDP growth went to the bottom 90 percent of our society. Now that equation has all but reversed. Over the past 30 years, the bottom 90 percent has seen its income growth decline, while "one percent of the population is getting two-thirds of the gains," Rob points out.

It’s free! Sign up to have the Daily Digest, a witty take on the morning’s key headlines, delivered straight to your inbox.

This inequality comes with high costs. Rob points to a study that shows a correlation between high levels of income inequality with such tragedies as higher mental illness, obesity, high school dropout, incarceration, infant mortality, and homicide rates, while public trust declines. Unequal societies are also far less likely to foster social mobility. And the U.S. isn't just slouching along with other unequal nations, but is a real outlier toward bad outcomes, Rob points out.

Yet in the face of all of this, the government continues to be in Wall Street's pocket, enforcing an austerity agenda even with soaring unemployment rates. So Rob has some sympathy with some of the Tea Party's motivations. "They look at the government as an insurance agency for the rich and the powerful with the premiums paid by them," he says. "Can you imagine belonging to a golf club where you paid dues but only the rich and powerful got to play the course?" DC should take a hard look at FDR's Second Bill of Rights, particularly given our high levels of unemployment. Otherwise, we have a big problem on our hands.

Share This

Reptilian Cotillion: Financiers Party While Economy Plunges

Aug 19, 2011Lynn Parramore

A full moon rises over the Hamptons as the crocs come out to play.

While the world economy trembles and their fellow Americans face blown-up 401Ks, foreclosure threats, and fruitless job searches, financiers are embracing our current feed-the-rich/screw-the-rest mentality with renewed zest.

A full moon rises over the Hamptons as the crocs come out to play.

While the world economy trembles and their fellow Americans face blown-up 401Ks, foreclosure threats, and fruitless job searches, financiers are embracing our current feed-the-rich/screw-the-rest mentality with renewed zest.

The NYT reports that last Saturday night, in the fabled NYC frolicking ground of Southampton, billionaire financier Leon D. Black threw himself a jaw-droppingly expensive 60th birthday bash. Two hundred well-heeled guests reclined on cushions Satyricon-style nibbling seared fois gras as Sir Elton John -- earning a cool million bucks  -- sang 'Crocodile Rock.' Joining this Reptilian Cotillion were Martha Stewart and fashion designer Vera Wang, who partied alongside some of Wall Street's most notorious denizens, including junk-bond pioneer Michael Milken, Blackstone's buyout king Stephen A. Schwarzman (who became a symbol of greed when he threw his own $3 million b-day bash back in bubblicious 2007), and Lloyd "God's Work" Blankfein of Goldman Sachs.

It’s free! Sign up to have the Daily Digest, a witty take on the morning’s key headlines, delivered straight to your inbox.

Mayor Bloomberg was among the revelers, as was NY Senator Charles Schumer, who must have been feeling grateful for his host's generous political contributions as he soaked in the expansive view of moonlit Schinnecock Bay.

A fellow like Leon Black needs all the influential friends he can get because, like other private equity tycoons, he enjoys a ridiculously low 15% tax rate on "carried interest" (the share of profits that hedge fund managers get as part of their stratospheric compensation). Chances are the persons who, say, cook for Mr. Black or landscape his yard pay something more like 35% in taxes for the money they earn doing actual work.

In fact, if we got rid of this George W. Bush giveaway, we'd have $21 billion over the next decade. That's enough money to pay a million jobless Americans $20,000 for a year's work doing productive things like rebuilding schools or repairing bridges. That would be a lot more helpful to our country than proliferating casinos, which is Black's line of work. His Apollo Global Management manages $72 billion in assets, including the largest gambling operation on Earth, Caesars Entertainment. He's also into plastics.

Black, incidentally, is the 160th richest person in the United States. He is also the son of Eli M. Black, once head of the United Brands Company, whose career presents a tragic tale that we would do well to learn from a time of unchecked excess.

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

**Follow Lynn Parramore on Twitter at http://www.twitter.com/lynnparramore

Share This

Getting What You Pay For: Super Committee's Super-Close Ties to Banking & Finance

Aug 16, 2011Lynn Parramore

Quelle surprise! Bankers and financiers will be sitting pretty when the “Super Committee” decides where spending gets slashed over the next decade.

This just in: The folks at Maplight have released some disturbing numbers on who has been the most generous to the 12 members of the newly-formed Joint Select Committee on Deficit Reduction, fondly known as the "Super Committee."

Quelle surprise! Bankers and financiers will be sitting pretty when the “Super Committee” decides where spending gets slashed over the next decade.

This just in: The folks at Maplight have released some disturbing numbers on who has been the most generous to the 12 members of the newly-formed Joint Select Committee on Deficit Reduction, fondly known as the "Super Committee."

To recap, the Committee was formed by the last-minute debt ceiling increase deal reached by Congress and the Prez earlier this month. It's comprised of the following senators: Pat Toomey (R-Pa.),  Jon Kyl (R-Ariz.),  Rob Portman (R-Ohio),  Patty Murray (D-Wash.),  John Kerry (D-Mass.), and Max Baucus (D-Mont.) and Reps.  Jeb Hensarling (R-Texas),  Fred Upton (R-Mich.),  Dave Camp (R-Mich.),  Chris Van Hollen (D-Md.), Xavier Becerra (D-Calif.), and  Jim Clyburn (D-S.C.).

Maplight reports that the 10 biggest organization contributors (this includes PACs and Employees) to Super Committee Members are...

Club for Growth $990,066

Microsoft Corp. $810,100

University of California $629,495

Goldman Sachs $592,684

EMILY's List $586,835

Citigroup Inc. $561,081

JPMorgan Chase & Co. $494,316

Bank of America $349,566

Skadden, Arps, et al. $347,356

General Electric $340,935

Hmm. Club for Growth, the biggest spender, is a rabid anti-tax and anti-government group boasting 9,000 members and dominated by Wall Street financiers and executives. And then we naturally find the big banks --the Goldmans, the Citigroups -- filling out the list. Guess how these folks feel about paying their fair share in taxes? The 6 Republicans on the Committee have sworn to block any tax increases, even on the banks that helped bring on the 2008 crash that caused this freaking deficit in the first place! But obviously their feelings take precedence over those of the American public, a quarter of whom are out of a job, underwater with the mortgage, or in foreclosure.

As Roosevelt Institute Senior Fellow Thomas Ferguson pointed out yesterday on this blog:

Congress is listening primarily to those who contribute political money, not the public. As a political slogan “No new taxes” was around long before the Tea Party. It is the mantra not of the public, but of a huge swath of super-rich Americans.

That's why when it comes time for action, squeezing pennies from seniors and sick people and socking it to working Americans will be on the table. Raising revenues from fatcats whose taxes are lower than they've been since Hoover was in office will not.

That's democracy in America, 21st-century style.

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

**Follow Lynn Parramore on Twitter at http://www.twitter.com/lynnparramore

Share This

How S&P’s Downgrade Could Deal a Blow to Consumers

Aug 10, 2011Bryce Covert

If interest rates rise across the board, credit card users will feel some of the heaviest effects.

This week's credit check: Banks borrow money at .75% interest. The average credit card interest rate is almost 15%.

If interest rates rise across the board, credit card users will feel some of the heaviest effects.

This week's credit check: Banks borrow money at .75% interest. The average credit card interest rate is almost 15%.

After months of brinkmanship and showmanship over raising the debt ceiling, the deed was finally done at the eleventh hour. Unfortunately, S&P still wasn't convinced. Citing the broken politics on display as Republicans held the debt ceiling hostage, it downgraded the U.S.'s debt to AA+ from AAA for the first time ever.

So far, not much has seemed to change. The markets reacted by jumping out of stocks and buying up Treasuries, keeping their interest rate low, even though those Treasuries were the very things downgraded. Many were also bracing for a rise in the prime rate, but so far no dramatic changes seem to have taken place. The prime rate is the rate banks give to their most creditworthy customers and against which rates for the rest of us are set, which is in turn based off of the fed funds rate, set by the Federal Reserve -- the interest rate that banks pay to borrow money from each other. Banks are currently borrowing their money for next to nothing (.75%) and charging the most creditworthy customers (usually large corporations) 3.25%. For credit card borrowers, the average interest rate is currently about 15%. (Pretty easy to see how much it rises the further down the food chain you go.) But so far interest rates are falling after the downgrade. The rate for a 30-year fixed mortgage is down to 4.39%. And there was more good news out of the Fed's very pessimistic report yesterday: it's planning to keep the target federal funds rate close to zero, as it has been, which helps keep the prime rate low.

But all of this could change if the downgrade leads to higher interest rates on Treasuries, which is a pretty logical reaction to S&P declaring them riskier investments. If the U.S. ends up having to pay more interest on its debt, interest rates are likely to rise across the board, and that could push up the prime rate. If that rate goes up, credit card rates are almost sure to skyrocket. Some are predicting that this is the way things will go. "Eventually the downgrade will catch up with Uncle Sam, and consumers and businesses will also pay higher rates," Greg McBride, senior financial analyst for Bankrate.com, told the Washington Post.

It’s free! Sign up to have the Daily Digest, a witty take on the morning’s key headlines, delivered straight to your inbox.

And as Beverly Blair Harzog noted, the CARD Act is unlikely to be helpful in shielding borrowers from interest rate hikes. She writes:

Even if you've had your card less than a year, when your rate is tied to an index, such as the prime rate, your bank doesn't even have to send you a 45-day advance notice.

But what if you've had your card for more than a year? Your interest rate is fair game... The industry gets spooked easily whenever anything threatens revenue. It's possible that banks will raise interest rates even higher than the increase associated with the prime rate.

Oh, you'll get the highly-touted 45 days' notice, but your new, higher rate will be applied to purchases on the 15th day after the notice is mailed to you. You get 45 days before you have to begin paying the new rate.

The silver lining is for savers, not borrowers. If interest rates rise for Treasuries, banks will have to offer higher interest rates for products like CDs and savings accounts to compete. Otherwise, consumers can simply move their money to Treasuries to get a nice return. And Americans are working hard to move from borrowing to saving. We spent more paying down credit card debts than buying things in 2009 and 2010 -- by $72 billion.

But with wages and income falling after the recession, it will be more difficult to make that switch. Instead, as consumers most need to fall back on credit cards to struggle through tough times, they may find themselves paying even more to do so. All because our political parties are so dysfunctional that they inspire little confidence in anyone.

Bryce Covert is Assistant Editor at New Deal 2.0.

Share This

Higher Profits and Lower Wages are No Mistake

Jul 27, 2011Bryce Covert

Businesses have found ways to squeeze workers and boost the bottom line.

This week's credit check: Profit margins for the S&P 500 have increased by 1.3% from 2000-2007. 53% of workers recently reported taking on new roles, while only 7% got a bonus or a raise.

Businesses have found ways to squeeze workers and boost the bottom line.

This week's credit check: Profit margins for the S&P 500 have increased by 1.3% from 2000-2007. 53% of workers recently reported taking on new roles, while only 7% got a bonus or a raise.

I recently pointed out that the so-called recovery is mostly a corporate recovery, while the average American is actually faring worse in terms of income. It turns out that this is no accident. Corporate profits are up, in many cases, because wages are down.

In its July 11 edition of its Eyes On The Market investor report, JP Morgan reports that profit margins for the S&P 500 have increased by 1.3% from 2000-2007. This is a level "not seen in decades." How has this amazing feat been accomplished? The report puts it plainly: "reductions in wages and benefits explain the majority of the net improvement in margins." And as Zaid Jilani notes at ThinkProgress, "[T]he JP Morgan report explains this behavior taking place between 2000 and 2007, meaning that it began long before the Great Recession." He also points out that this section ends with the statement, "US labor compensation is now at a 50-year low relative to both company sales and US GDP." USA! USA!

It’s free! Sign up to have the Daily Digest, a witty take on the morning’s key headlines, delivered straight to your inbox.

Another way companies are squeezing workers to boost profits? The Great American Speedup. Catherine Rampell reports in the NYTimes that hours worked have outpaced household income for traditional families. So even though median wages for two-parent families have grown 23% since 1975, the hours they worked over the course of a year have grown by 26%. This is part of the trend Mother Jones spotted just this month: Americans overall are working harder without getting more pay. The article reports, "Americans now put in an average of 122 more hours per year than Brits, and 378 hours (nearly 10 weeks!) more than Germans." Meanwhile, the Wall Street Journal picked up on a recent Spherion Staffing survey that showed workers taking on more tasks during the recession without anything in return. In the survey, 53% of workers reported taking on new roles, while only 7% said they got a bonus or a raise. Even if this practice began before the recession, the dismal job market isn't giving workers any leverage to protest when companies drop more work into their laps with no compensation.

It comes as no shock, then, that the IMF's annual assessment of the US economy highlighted how difficult the recovery has been for consumers. On the one hand, it notes, "Financial conditions have improved, particularly for large firms that face favorable bond financing terms... On the bright side, exports and the performance of businesses and the financial sector have improved significantly." But on the other, "Housing and labor markets have been the weakest links," and "the current recovery has been held back by significant adverse feedback loops between housing, consumption, and employment." In other words, Wall Street's humming along while consumers struggle through.

Despite all of these odds, Americans are trying desperately to get away from credit card debt. Although credit cards have acted as a safety net for families with stagnating wages, in the wake of the credit bubble burst we're paying more toward our bills than new purchases. A new report out today from TransUnion finds that consumers have spent $72 billion more from 2009-2010 on paying down their credit card debt than buying stuff. Compare that to the fact that between 2004 and 2008, we were spending $2.1 billion more on purchases than on bill payments. This is good news, but these efforts are going to be for naught if wages and employment don't rise. With income barely coming in, consumers will have no where to turn but debt.

Bryce Covert is Assistant Editor at New Deal 2.0.

Share This

On Dodd-Frank Anniversary, Waters Still Murky on Clearinghouses

Jul 21, 2011Mike Konczal

too-big-to-fail-license-plate-banker-new-yorkOne year after the passage of Dodd-Frank, Roosevelt Institute Fellow Mike Konczal invited experts and those on the front lines to weigh in on what's happened so far and what's to come on financi

too-big-to-fail-license-plate-banker-new-yorkOne year after the passage of Dodd-Frank, Roosevelt Institute Fellow Mike Konczal invited experts and those on the front lines to weigh in on what's happened so far and what's to come on financial regulation.  He caught up with Wallace Turbeville, a derivatives specialist for Better Markets, Inc. Formerly a Vice President of Goldman, Sachs & Co., he contributed the chapter on derivatives (pdf) for the Roosevelt Institute’s The Future of Financial Reform conference.

Better Markets’ goal is to promote the public interest in the domestic and global capital and commodity markets, with an initial primary focus on the processes to implement Dodd-Frank. You can see the over 50 comment letters they have submitted to the Dodd-Frank process at their webpage.

Mike Konczal: You have written extensively on clearinghouses.  How goes the battle to expand and regulate clearinghouses and exchanges?

Wallace Turbeville: There is no doubt that the use of clearing and exchanges is set to massively increase.  The timing is important and details about rules of the road for these entities work need to be decided as quickly as possible.  Open and fair access is critical to make Dodd-Frank work.  There are some important rules relating to this subject that are yet to be finalized.  Risk management and transparency will be improved; but it is yet to be decided whether excessive market power will be curbed.

MK: There's been a social democratic level of solidarity among financial firms fighting regulations over the past three years.  Derivatives strike me as a place where some firms could really cross paths with others, and demand stronger regulations to balance the playing field.  Is anything like that dynamic happening?

WT: The financial sector is by no means monolithic on all points.  A number of mid-market firms (buy-side, dealers and others) are seriously concerned about open access to trading infrastructure and clearing. Just this week, the CFTC proposed rules that address some of those concerns  by requiring more documentation and information for clearing of swaps, rejecting an industry plan that would continue to keep the market closed. .  This development is important since the concentration of market power is even greater now than in 2008.  But the power of the largest players cannot be denied and they are tremendously effective in making themselves heard, just take a look at the CFTC website and see how many meetings they have had with staff and regulators:

It’s free! Sign up to have the Daily Digest, a witty take on the morning’s key headlines, delivered straight to your inbox.

MK: Describe the atmosphere of rule-writing and drafting regulatory rules.  It's a difficult process for outsiders to understand.

WT: The regulators are genuinely committed to an open process.  In addition to written comments, a series of roundtables have been useful to broaden discussion of the practical implications of the rule-writing process.  The reality is that the vast majority of input is from the industry because of resources and sheer numbers.  One need only look at the published list of meetings at the CFTC and SEC, which only disclose subject matter, not substance.  But the drafters are open to input and Better Markets and other non-industry groups and we have already made an important impact on the few final rules adopted to date by the CFTC.  We continue to hope that quantity of input by powerful interests does not overcome the public's interest to ensure we will not suffer another crisis.

MK: What, from your point of view, are the battles you think are going to go well, and which are the ones you are most worried about losing?

WT: For most issues, the outcomes are uncertain until the final rules are rolled out. Position limit rules to curtail excessive speculation in commodity markets are an important concern. Congress mandated them in Dodd-Frank against strong opposition from big banks that sell commodities as an alternative investment, but instead create incredible volatility to these markets and don't deliver stellar returns for investors. Regulators are still combing through market data on that issue.

Another major issue is the process of how and who collects transaction data, especially the ability that regulators will have to analyze the data to monitor and understand markets given that the agencies are severely underfunded. It may well end up tightly controlled by industry-dominated players. In terms of rules relating to risk measurement, reporting, and management the regulators have done some excellent work and, while not perfect, the regulations promise to provide much better systems to control risks.

MK: High-level, but others have been worried about the relative power of the financial sector in the country.  People worry about "financializaton" from the point of view of entrepreneurship, relative focus and power of economic sectors, a focus at the top instead of the bottom, short-term-ism, etc.

WT: These issues are at the heart of financial reform.  The implementation of Dodd-Frank promises to provide some pushback.  However, it will take years to determine how effective it will be.  The continued focus on these issues by academics and others who are able to analyze the markets will be critically important because it will help enforcement of the final rules. This will be a process which does not end with the adoption of the final rules.

MK: A decade from now, how will Dodd-Frank have changed the political economy of the country?  Is it way too early to tell, or is it just not relevant to how Dodd-Frank is working?

WT: Dodd-Frank will have made an positive impact, but it is very difficult to speculate on precise effects.  Much will depend on the ability of the regulatory structure, both in the United States and internationally, to adapt.  Technological development means that the markets will constantly change and that asymmetries can be exploited and grow.  (High-frequency trading is not an isolated phenomenon, but part of a much broader process and is a major concern going forward.)  Additionally, absent a major event, international financial markets and economies will become even more interconnected.   We need to ensure that reform does not end with Dodd-Frank but continues because we know the other side is constantly looking for loopholes to exploit.

Share This

A Year of Winning for Wall Street Since the Passage of Dodd-Frank

Jul 21, 2011Mike Konczal

too-big-to-fail-license-plate-banker-new-yorkOne year after the passage of Dodd-Frank, Roosevelt Institute Fellow Mike Konczal invited experts and those on the front lines to weigh in on what's happened so far and what's to come on financial

too-big-to-fail-license-plate-banker-new-yorkOne year after the passage of Dodd-Frank, Roosevelt Institute Fellow Mike Konczal invited experts and those on the front lines to weigh in on what's happened so far and what's to come on financial regulation. He caught up with Roosevelt Senior Fellow Robert Johnson, who served as Chief Economist of the US Senate Banking Committee under the leadership of Chairman William Proxmire and before that Senior Economist of the U.S. Senate Budget Committee under the leadership of Chairman Pete Domenici.

MK: It's been one year since the Dodd-Frank Act passed. There are dozens of articles saying it's going terribly, dozens saying we don't know how it's playing out, and even a handful saying progress is being made. How has the past year gone for financial reform and Wall Street?

RJ: For Wall Street, it has gone swimmingly. They have the process tied in knots and at the same time can complain about the muddle to further weaken government. For the rest of us, a weak bill is getting diminished further. It is the fate of money/lobby-driven political machinations to make everyone disenchanted with government.

MK: Bringing the over-the-counter derivatives market to the light is a major part of reform. How is that battle going?

RJ: As Bob Dylan would say, "It's not dark yet but its gettin' there."

MK: Worst case scenario: We wake up in November 2012 to President Bachman and a Republican controlled House and Senate. Alternatively, the GOP just takes the Senate. Will enough of the muscle of Dodd-Frank be put into place so that it holds, or will a lot of it be able to be compromised quickly under any future Republican administration?

RJ: It will be compromised and weakened regardless of whether Democrats or Republicans hold power.

It’s free! Sign up to have the Daily Digest, a witty take on the morning’s key headlines, delivered straight to your inbox.

MK: What international reforms are necessary?

RJ: Cross-border bankruptcy harmonization, huge amounts of data collection, and sharing in real time across regulatory jurisdictions.

MK: Is the financial sector changing in response to the crisis and the implementation of the Act?

RJ: They are whining more. They are acting more burdened by regulation. They are doing whatever they please as they did before the bill.

MK: A decade from now, how will Dodd-Frank have changed the political economy of the country? Is it way too early to tell, or is it just not relevant to how Dodd-Frank is working?

RJ: It will have been a reflection of how powerful the financial sector was. Finance is too strong in politics, bailouts, and corporate governance imperatives. They are like a tax that descends upon society, collected for the bonus pool and used to defray the losses from past carelessness. The social contract between the financial sector and society is a pendulum rocked very far to one side. This tepid set of reforms in the aftermath of a colossal crisis will underscore how far the power of finance dominates our political economy. Inside Job indeed!

Share This

Dodd-Frank Can't Be the End of the Story

Jul 21, 2011Mike Konczal

too-big-to-fail-license-plate-banker-new-yorkOne year after the passage of Dodd-Frank, Roosevelt Institute Fellow Mike Konczal invited experts and those on the front lines to weigh in on what’s happened so far and what’s to come on financial r

too-big-to-fail-license-plate-banker-new-yorkOne year after the passage of Dodd-Frank, Roosevelt Institute Fellow Mike Konczal invited experts and those on the front lines to weigh in on what’s happened so far and what’s to come on financial regulation. Konczal checked in with Marcus Stanley, legislative director of Americans for Financial Reform. AFR is a coalition of more than 250 national, state and local consumer, labor, investor, civil rights, community, small business, and senior citizen organizations that have come together to spearhead a campaign for real financial reform and the best possible implementation of Dodd-Frank. Stanley and AFR have been at the front lines of the Dodd-Frank battles over the past year.

Mike Konczal: It's been one year since the Dodd-Frank Act has passed. There are dozen of articles saying it's going awful, dozens saying we don't know, and even a handful saying progress is being made. How has the past year gone for financial reform and Wall Street?

Marcus Stanley: Progress is being made. We can all make a list of things we believe should have been in Dodd-Frank and weren't. But there are important pieces that are there. Among the two most significant are the new Consumer Financial Protection Bureau and the new framework for derivatives regulation. Both of those efforts have made solid progress over the past year in the face of heavy opposition. The goal of that opposition is to erode the clear gains we did make in Dodd-Frank.

Some regulators are moving ahead in good faith - not perfectly, but in good faith - on writing rules. Examples are the CFTC and SEC on derivatives regulation. Others are resisting the changes they are required by law to make. The OCC yesterday put out a final rule on preemption that essentially defied Dodd-Frank reforms and restated their existing practice of sweeping overrides of state action to deal with abusive lending.

After 30 plus years of relentless deregulation, Dodd Frank's passage was just the first step in what will be a long fight. Pressing for effective implementation is part of that fight. It took almost a decade after the 1929 crash before all the key pieces of Depression-era financial legislation were passed and implemented. We are still in the middle of the battle.

MK: The first stop on financial reform is dealing with Too Big To Fail financial firms. How is making them less prone to collapse and more manageable to resolve when they do coming along?

MS: This is the area where many of us were most disappointed in the underlying Dodd-Frank statute. The bailouts of 2008 created an overwhelming perception that the largest and most important financial firms had an implicit government guarantee. The Congressional actions in the Dodd-Frank Act were not strong enough to reverse that perception. The financial sector today is even more dominated by the big banks than it was before, and the largest firms still have an unfair advantage in the market due to the belief that government will support them.

That said, over the past year we're seen some genuine progress in dealing with some of the risks that make failure -- and demands for public support in case of failure - more likely. One is the area of controlling excessive bank borrowing through capital regulation. Capital regulation alone won't be enough to address systemic risk. But there's no question capital charges get banks' attention, and there's no doubt that the new Basel III capital framework approved by regulators this year creates a substantial boost in capital charges for some of the riskiest activities we saw prior to the crisis. The combination of Basel III and the implementation of the Collins Amendment will also create a firm maximum borrowing (leverage) limit for banks. The limits on bank credit exposures to other systemically important institutions - limits that include credit exposures through derivatives and off balance sheet instruments -- will also help address the "too interconnected to fail" problem related to excessive borrowing within a small circle of big banks. These limits will work to restrain some of the worst excesses we saw before the crisis involving short-term and off balance sheet borrowing. Derivatives regulation should also make the system safer and more transparent. As far as we can tell regulators are taking steps to enforce these limits, including for example by significantly increasing the number of on-site examiners at major banks.

Regulators are moving unacceptably slowly in other areas. Making sure that all large financial institutions -- including non-banks -- have regulatory oversight was a key reform goal. (One way that relying on capital charges can go wrong is that banks can arbitrage the system by routing their transactions through unregulated non-banks). But industry players are lobbying mightily to be exempt from designation. The new Financial Stability Oversight Council (FSOC) hasn't designated even a single non-bank financial entity for oversight yet, even the largest and most obvious ones. Indeed, the FSOC in general has gotten off to a slow start. The Council and its associated research arm (the Office of Financial Research, or OFR) were supposed to be the "central brain" of the regulatory system, and the answer to the fragmentation in financial oversight that contributed to regulatory failures before the crisis. We have not seen much action that matters from the FSOC thus far, and the Office of Financial Research does not yet have a director and has only hired minimal staff so far. It's hard to see how regulators will stay ahead of a constantly evolving financial system unless they coordinate their efforts and their information centrally. Open engagement with the public on these issues is also crucial.

In general, regulators have not been as aggressive as they could be in using the full powers granted to them under Dodd-Frank in controlling bank behavior. To take just one example that has gotten relatively little attention, Section 956 of the Act instructs regulators to ban pay and bonus practices that lead to excessive risk taking. The rule regulators have proposed to implement this provision took a step in the right direction by requiring the largest banks to defer full payment of executive compensation for up to three years. That's a valuable step in avoiding the kind of situation we saw with Bear Stearns and Lehmann, whose top executives walked away with $2.4 billion free and clear in the years before their firms collapsed. But the rule mandates that only one sixth of top executive compensation would be deferred for the full three year period. As the AFR comment to the regulators stated, when you consider the massive pay levels on Wall Street, that's not enough of a disincentive to risk taking. While AFR is asking regulators to do more, even the modest step they did propose is being vociferously opposed by industry. Over 70 percent of industry comments on this rule ask for some or all of their top executives to be exempted from any pay deferral whatsoever!

Beyond pay levels, there are many additional areas where Dodd-Frank gives regulators powers that could make a big difference if they're implemented boldly. These range from the Volcker Rule ban on proprietary trading to the FSOC authority to break up the largest banks if they pose a systemic risk. Such powers could be major levers for change. It would be a dramatic change from past behavior for regulators to be truly bold in using these powers. We are not expecting it to happen on its own. We do see it as a place to keep working and pushing. What can we do to make these opportunities matter?

MK: Related, bring new types of transparency and accountability to the derivatives market was a major push. How is progress there?

MS: Progress is pretty good, against a lot of pushback from industry. Regulators have actually laid out a comprehensive and fairly good set of rules on derivatives regulations, which should significantly improve the transparency and stability of the market and the financial system more generally.

These rules represent a real and a large improvement compared to the unregulated markets we have today. But there are potential problems and weaknesses. There is reason to be concerned that the few big dealers who currently dominate the derivatives markets would be permitted to have excessive control of key areas of the derivatives infrastructure, like clearinghouses or data repositories. This could permit them to gain unfair advantages over other market participants. The Justice Department's Antitrust division has weighed in strongly on this issue. Another danger is that if regulators don't police it carefully, the so-called "end user exemption" could be expanded into a significant loophole. Finally, one of the most obvious issues here is the sweeping exemption from derivatives regulation that the Treasury Department has granted to the multi-trillion foreign exchange swaps market.

It’s free! Sign up to have the Daily Digest, a witty take on the morning’s key headlines, delivered straight to your inbox.

It's true that the derivatives rules will go into effect a little later than the one-year timeline in the Dodd-Frank Act. In retrospect that time line may have been slightly too ambitious. It's understandable if it takes a few extra months to roll out something as important as the new regulatory framework for several hundred trillion dollars in currently unregulated derivatives trades. Any delay should be limited, though, and we should see the first major rules put into effect starting around the end of this year. One area where we are seeing unacceptable delays, though, is in the enforcement of limits on speculation in our commodities markets. Dodd-Frank mandated that such limits begin to be put in place six months ago. However, the CFTC has not acted, and the rule they have proposed to limit speculation is in any case not strong enough to genuinely restrain commodity market speculation.

The threat we're most worried about in the derivatives area is the funding for the regulators who will enforce derivatives rules, which is under serious attack in Congress. The House has proposed to fund the Commodity Futures Trading Commission at just $177 million, 12 percent less than its current funding level and over 40 percent below the minimum funding required for the CFTC to implement its new derivatives responsibilities. (The CFTC will expand its oversight to $280 trillion in interest rate swaps, a seven-fold increase in the size of the market it supervises). The House-proposed funding for the Securities and Exchange Commission (SEC) is 20 percent below the level needed to implement Dodd-Frank. By way of comparison, JP Morgan Chase, which is among other things a major derivatives dealer, spends $4.6 billion annually just on information technology. That's more than three times as much as the proposed funding for both the CFTC and SEC put together.

MK: What's going to happen with the Consumer Financial Protection Bureau without a confirmed Director this week?

MS: There is a great deal the Bureau can do without a director. And some of the things it can't do it might take a little longer to get to in any case, so not having a Director may not really hold them back. But not having a Director also limits its authority in ways that matter. The key distinction is between authority that is being transferred from other agencies and under existing laws, and new authority. Without a Director the Bureau cannot supervise non banks - like payday lenders, for example. And it cannot write rules under its new ‘unfair, deceptive, and abusive' practices authority.

Preventing the appointment of Director is also of course an effort to undermine the Bureau's authority beyond the specific power it is denied -- the 44 Senators who have said they will not consider any director unless the bureaus authority and effectiveness are diminished are presumably trying both to limit its ability to defend consumer interests in the long run by making these changes, and to make it harder for the Bureau to take aggressive action now because it does not have a head, and because it is under constant hostile scrutiny.

Meanwhile, the work of putting the bureau together has been going well. The agency has done a lot of its key hiring and system building, invested in building relationships with the public, consumers, and industry, got a sterling report from the Inspector General on its planning and implementation activities, and has started work on key projects in a thoughtful way that is winning good reviews from both industry and consumer advocates.

Some of the key actions already under way at the Bureau include the design of new transparent mortgage disclosure forms, so unscrupulous brokers won't be able to conceal the kinds of "tricks and traps" that led consumers into exploitative mortgages in the past. . They are about to start supervising the big banks for compliance with consumer laws. The Bureau also has the first module of a public complaint system -- focused on credit cards, with additional products to follow - up and running as of today. They have started the process of defining the larger non-bank financial market actors they will supervise, and they are developing a research capacity that can really look at the consumer financial marketplace to identify and understand emerging problems. The more you think about the details the more you realize what a difference doing all this right can make.

MK: Describe the atmosphere of rule-writing and drafting regulatory rules. It's a difficult process for outsiders to understand.

MS: We are outsiders ourselves of course. We're trying to create a public interest voice into a process that is overwhelmingly dominated by industry. From 2008 to 2010, the financial industry spent an incredible $1.4 billion on lobbying to influence the process in Washington. In 2011, the lobbying is just as intense, and the spending is at almost the same pace as it was during the Dodd-Frank fight in 2010. But a lot of it has switched from Congress to the regulatory agencies. More than 90 percent of the groups appearing in agency meeting logs are banks, hedge funds, or other financial industry companies. One of the things industry's money buys is the advantage of the "revolving door" -- over 240 former government insiders are working as financial industry lobbyists now.

At the same time, although we're outgunned on money and the sheer number of lobbyists and lawyers, it does matter that we represent the public interest. Many regulators know it's wrong to listen exclusively to financial firms with money at stake, so they do seek out a public interest perspective. And it matters that the public is with us. AFR and other public interest groups commissioned a poll this week that found that huge majorities of voters favored tougher financial regulation -- 77 percent wanted tougher rules and enforcement for Wall Street banks. And the support was bipartisan; 70 percent of Republicans supported it too. Over 70 percent of voters supported the Dodd-Frank reforms specifically. The challenge is to take the clear public desire for real reform and mobilize it against the money and influence of Wall Street.

The regulatory process is an interesting mix of extremely open and very closed. It's open because anyone can read the proposed rules and comment on them, and the regulators have to at least acknowledge your arguments. I should add that "anyone" most definitely includes the readers of this blog. Americans for Financial Reform welcomes input and assistance in our regulatory comments, especially from those readers who have deep knowledge of technical financial issues -- please feel free to contact us if you'd like to participate in our work.

But the process is also closed because the regulators have almost complete control over the final rule and it can be very difficult to understand exactly the considerations that drove their decision. There are also two extra complexities in financial regulations that make the process trickier to navigate than in other areas of regulation. The first is that many of the most important rules in Dodd-Frank are joint rules. They can be written jointly by as many as five major financial regulatory agencies (the OCC, FDIC, Federal Reserve, SEC, and CFTC) -- for example, the Volcker Rule is written by all five of these agencies plus the Treasury Department. In practice, this ‘rulemaking by committee' can mean that the most conservative agency exercises a kind of veto power, and it makes it even more difficult to understand the motivations at work from outside. It's yet another cost of the fragmented financial regulatory system we have.

The second complexity is that financial regulations often leave enormous discretion to the bank examiners and the regulated banks. The complexity of financial institutions is such that regulators often just prescribe very general risk management principles, which are then implemented in countless detailed interactions between examiners and the institutions they oversee. Since these interactions are confidential it's not easy to tell what actually happens when ideas that sound good are actually implemented. This makes financial regulations more difficult to police and comment on from outside than, for example, an environmental regulation that sets permissible levels of specified pollutant.

MK: High-level, but other have been worried about the relative power of the financial sector in the country. People worry about "financializaton" from the point of view of entrepreneurship, relative focus and power of economic sectors, a focus at the top instead of the bottom, short-term-ism, etc. A decade from now, how will Dodd-Frank have changed the political economy of the country? Is it way too early to tell, or is it just not relevant to how Dodd-Frank is working?

MS: This is an extremely relevant question for the long run. As we said to start, Dodd-Frank is the first step in a long process of reform. And key to that process will be combating the excessive influence of finance in our economy. Even before the financial crisis, the diversion of private sector investment into a speculative housing bubble and the replacement of wage growth by unsustainable debt as a source of family income were obvious economic problems.

If it is implemented well, Dodd Frank has the promise of restricting the worst speculative excesses, lessening the market advantage of systemically significant financial institutions and protecting families from having their income drained by exploitative and abusive financial contracts. These can all address the diversion of money and talent into finance. The greater Dodd-Frank oversight could also bring to light more information that will help us understand better what else we need to do.

But several decades of deregulation have created a vicious cycle in which growth of the financial sector feeds greater profits and power for Wall Street, which in turn creates more political influence. We have been struck by how often non financial businesses who we contact for assistance in our work say that they are afraid to speak out publicly against the influence of their bankers, even when it would be in their interest to do so. The same can be true of small community banks when their interests conflict with the major Wall Street institutions.

Dodd Frank can't be end of the story. We'll need more financial reform, and we'll still need to put financial reform into the context of a much broader economic agenda.

Share This

Pages