The Tragedy of Defensive Politics

Apr 8, 2011Jeff Madrick

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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The Ryan Plan: The Biggest Risk Shift Ever

Apr 7, 2011Mark Schmitt

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Apr 6, 2011Lynn Parramore

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

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

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

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

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

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

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

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

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

Apr 6, 2011Mike Konczal

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

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

Recap: Living Wills

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

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

Recap: Living Wills

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

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

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

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

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

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

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

Republican Budget

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

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

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

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

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

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

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

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

Mike Konczal is a Fellow at the Roosevelt Institute.

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Tax Day Temptation Full of Tricks and Traps

Apr 6, 2011Bryce Covert

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

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

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

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

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

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

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

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

Bryce Covert is Assistant Editor at New Deal 2.0.

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Breaking News! The Bankster Offer to the AGs

Mar 31, 2011Matt Stoller

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

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

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

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

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

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

Here's another part of the settlement.

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

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

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

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

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

See full text of Proposed Deal.

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

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

Mar 31, 2011

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

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

calvin-and-hobbes

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

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The Financial Sector's Lure is All About Power

Mar 31, 2011Mike Konczal

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

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

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

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

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

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

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

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

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

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

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

Prestige

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

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

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

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

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

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

Power

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

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

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

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

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

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

The Specter of Uselessness

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

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

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

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

Mike Konczal is a Fellow at the Roosevelt Institute.

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

Mar 31, 2011Matt Stoller

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

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

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

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

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

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

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

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

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

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

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

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

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Josh Rosner Testifies on Dodd-Frank's Unfinished Business

Mar 30, 2011

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

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

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

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

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

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

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

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

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