Troops Fighting Wars Abroad, Fighting Banks at Home

Jul 13, 2011Bryce Covert

Protecting service members from predatory lending at home is the least we can do to thank them for protecting our interests overseas.

This week's credit check: Most service members make less than $31,000 a year. Payday lending can cost military families over $80 million in fees each year.

Protecting service members from predatory lending at home is the least we can do to thank them for protecting our interests overseas.

This week's credit check: Most service members make less than $31,000 a year. Payday lending can cost military families over $80 million in fees each year.

Our military takes good care of its troops. As Nicholas Kristof pointed out in a recent column, it gives them access to excellent health care, provides superb child care to enlisted parents, and invests in service members' education. "[I]t does more to provide equal opportunity to working-class families -- especially to blacks -- than just about any social program," he says. "It has been an escalator of social mobility in American society because it invests in soldiers and gives them skills and opportunities." Those risking their lives in the line of duty deserve such treatment. They also deserve support once they return home.

But that's not what awaits them. Instead, they often find themselves victim to predatory lending. Service members, in fact, rate financial stresses as second only to work and career.

The most egregious case surfaced earlier this year when it was revealed that JP Morgan Chase and Bank of America had violated the Servicemembers Civil Relief Act by improperly foreclosing on almost 50 active duty military families. Under the SCRA, active duty troops are protected from suits such as foreclosure so that they don't have to worry about financial troubles at home while serving their country. On top of this, it was revealed that JP Morgan overcharged 4,000 military families on their mortgages. Troops can have their mortgage interest rates lowered to 6% under the SCRA, but Marine Capt. Jonathan Rowles brought to light the fact that his family was being overcharged at rates above 9 or 10 percent and then hounded by debt collectors for the extra amount they didn't owe, up to $15,000.

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But these aren't the only abuses they face. A 2006 report by the Department of Defense found, "Predatory lending practices are prevalent and target military personnel, either through proximity and prevalence around military installations, or through the use of affinity marketing techniques, particularly on-line," including payday loans, car title loans, tax refund anticipation loans, and rent-to-own operations. The report describes how military personnel are perfect targets for predatory lenders, who make loans based on income but not on the long-term ability to pay. In fact, 48% of enlisted service members are under 25, making them less experienced and less likely to have savings; they are away from any family that might be able to help out with financial troubles; they're paid regularly and aren't likely to lose their jobs; they're geographically concentrated; and there's even a military policy explicitly stating that they must pay their debts. On top of this, their pay isn't very high: most make less than $31,000 a year. It may be little wonder, then, that in 2005 active-duty military personnel were three times more likely than civilians to take out a payday loan. In fact, payday lending cost military families over $80 million in fees each year.

There is some good news for our troops. In 2006, the John Warner National Defense Authorization Act was passed, making it illegal for lenders to charge military members and their families interest rates above 36%, among other helpful provisions. The Justice Department settled with a JP Morgan unit and Bank of America for $22 million over the wrongful mortgage charges and foreclosures to provide relief to more than 170 active-duty personnel. And the new cop on the beat, the Consumer Financial Protection Bureau, just announced an agreement with the Judge Advocate Generals of all military branches "to provide stronger protections for service members and their families in connection with consumer financial products and services." Protecting our troops from predatory lending is almost literally the least we can do to thank them as they come home.

Bryce Covert is Assistant Editor at New Deal 2.0.

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Impact of Job Numbers Goes Far Beyond the Jobless

Jul 12, 2011Jeff Madrick

 

The high rate of joblessness suggests a deep malaise in America that begs for strong leadership.

A New York Times article on Sunday by the fine journalist Catherine Rampell suggested that a reason the jobs crisis in America (my phrase) is not getting sufficient attention is that the unemployment rate, even if a very high 9.2 percent, still means that nearly 91 percent are employed.

 

The high rate of joblessness suggests a deep malaise in America that begs for strong leadership.

A New York Times article on Sunday by the fine journalist Catherine Rampell suggested that a reason the jobs crisis in America (my phrase) is not getting sufficient attention is that the unemployment rate, even if a very high 9.2 percent, still means that nearly 91 percent are employed.

But we need to take a moment to clarify what high unemployment really means, and how broad its implications are. It is an indicator of overall economic weakness, not merely a number about those without jobs. And as such, it suggests that much is seriously wrong. It does not mean that 14 million are hurting people and the other 125 million are not.

First of all, we of course know that millions are looking for jobs and have given up or have taken part-time jobs when they want full-time jobs. That adds another 7 or 8 percent to the unemployed or underemployed. We are now are getting to the point where one out of six workers or so is having employment disappointments. We also know many have been unemployed for a very long time -- a record number, in fact.

Second, these people have relatives and friends who increasingly realize they may also get the axe. Their families, not only themselves, suffer.

Third, when you lose a job you now usually lose your health coverage -- or have to pay up big time to retain it. That adds to the misery.

In fact, far more people than 9.2 percent are upset by the high unemployment rate. About a quarter say in surveys it is our number one problem.

But high unemployment also implies little or no wage growth for most employees. There are two theories about this. One is the classical theory that when labor markets are loose, there is more supply and the price will not rise readily -- that is, the wage. The other is a little more Marxian in orientation. When people are losing their jobs, they get scared -- and they don't ask for a raise, they work more hours if asked, and on.

Since mid-2009, when the recovery technically began, there has been almost no increase in wages and salaries. But profits have soared by hundreds of billions of dollars.

That's almost never been the case before. Indeed, the relationship between job creation and GDP growth seems to have changed some time ago. Many people, including Nobel laureate Michael Spence, hardly known as a progressive economist, worry that something is deeply wrong -- and a lot of it may be about globalization.

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But when you consider that salaries and wages have risen slowly, stagnated, or fallen for almost all workers except those at the top for forty years, the American economic condition gets pretty frightening.

I think the unemployment rate suggests there is growing malaise in the nation. More and more people are pessimistic. Are Americans giving up on the future?

And yet both political parties talk far more about budget deficits than jobs. Obama has fallen into one of the great political traps of all time. On average, the media follow meekly behind. Yet Americans have long fallen for the deficit scare, back in the 1930s and even before that. That is an issue worthy of more discussion.

I wrote a few weeks ago on New Deal 2.0 that Obama should sound the jobs alarm. Leadership matters in America. That is the problem. Right now, we don't have it. Leaders have to tell Americans the economy is weak and the deficit is necessary right now.

But in sum, a high unemployment rate does not merely mean that 14 million Americans, and they alone, are suffering. It suggests far broader pain and suffering. And disappointment may turn to anger before we know it. The Tea Party is the first manifestation of this. What's next?

Roosevelt Institute Senior Fellow Jeff Madrick is the author of Age of Greed.

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Tom Ferguson and Rob Johnson Explain Why the Tea Party Became the Big Banks' Best Friend

Jul 12, 2011

money-question-150A year after the passage of Dodd-Frank, why is the Tea Party serving the big banks to thwart it?

It was anger at the bank bailouts that spawned the Tea Party, but now this same movement is becoming the big banks' best friend. What's up with that?

money-question-150A year after the passage of Dodd-Frank, why is the Tea Party serving the big banks to thwart it?

It was anger at the bank bailouts that spawned the Tea Party, but now this same movement is becoming the big banks' best friend. What's up with that?

Recently, our friend Robert Scheer of Truthdig reminded us that the same gigantic banks that caused the economic meltdown enjoy record-breaking profits while doing zilch for the American economy, which continues to stall and sputter. How do they get away with it? Scheer notes that the Wizards of Wall Street have turned away from Obama and are going to the Tea Party for support. And they're getting it.

In a trend that is doubtless making Lloyd Blankfein weep for joy, Tea Party-backed Republicans in Congress are furiously trying to block financial reform and the critical regulations that would prevent reckless speculation and another, possibly worse, economic meltdown. They appear determined to slash the budgets of the Securities and Exchange Commission and Commodity Futures Trading Commission. Scheer notes that the CFTC is run by former Goldman Sachs partner Gary Gensler, one of the Obama "regulators" who has specialized in thwarting proper supervision of the out-of-control derivatives market.

I asked my colleagues at the Roosevelt Institute to help me understand what the heck is going on:

From Roosevelt Institute Senior Fellow Thomas Ferguson, Professor of Political Science at U Mass, Boston:

Alas, this story is all too familiar. In the midst of a giant economic downturn, a new government comes to power. It talks boldly, but acts tepidly. Its massive policy failure discredits the idea that public authority can act effectively at all. At that point a desperate population starts looking around for saviors. In the absence of any plausible progressive alternative, many turn back to primal roots or sacred texts -- in the case of the Tea Party, the Constitution. But in a money-driven political system, cash is still king. Leaders of the "populist" uprising soon find they can do good and do well at the same time by striking deals with elements of big business that have political demands of their own.

So the deadly circle begins to close. Big sections of the population cheer on measures that insiders recognize are designed to wreck them.

There is a bright side: This process doesn't have to end as it did in Weimar or the French Third Republic. Who now recalls that Herbert Hoover's "activism" in the Great Depression was once hailed as epochal? But when the Great Engineer failed to jump start recovery and capitulated to bankers' demands for austerity, he was supplanted by Franklin Roosevelt and the New Deal. But anyone can also see the sticking point now: In 2008, the population threw out the Republicans. In 2010, it tossed out the Democrats. So who does it eject in 2012?

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From Roosevelt Institute Senior Fellow Robert Johnson:

We live in a country where the experience of decline has gone from suspected to obvious. The energy that is built up by the pain is not going to go away. In that painful state the search for culprits and blame is inevitable. The storytelling, through technique and repetition, need not bear any resemblance to the truth when the blame is affixed. Unless strong leaders stand up repeatedly to counter the false narratives, scapegoats will be determined by power, not truth.

Unfortunately, strong leaders do not arise when public officials are imprisoned by the need for money in order to survive in office. As trust deteriorates anyone who espouses a vision of "the public good" is treated like a romantic fool. Pretend rituals of statesmanship abound, i.e., deficit commissions that impose hardship on vulnerable. Elites stand around and scratch their head about why people are so angry and join the Tea Party. Why are elites confused by this? There is no where else for people to go. It reminds me of the lyric in the Leonard Cohen song "Everybody Knows", a song that may as well be the anthem for our time.

Everybody knows that the dice are loaded
Everybody rolls with their fingers crossed
Everybody knows that the war is over
Everybody knows the good guys lost

Everybody knows the fight was fixed
The poor stay poor, the rich get rich
That's how it goes
Everybody knows

Everybody knows that the boat is leaking
Everybody knows that the captain lied
Everybody got this broken feeling
Like their father or their dog just died

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Amar Bhide: Get Rid of Our "Pathological" Finance System

Jul 8, 2011

At a recent breakfast event for the Next American Economy, Roosevelt Institute Senior Fellow Bo Cutter invited Amir Bhide to discuss the reasons he thinks our economic system is malfunctioning. Bhide notes that GDP has skyrocketed in just the past two centuries. Why? Much of it is due to innovation. But while the U.S. is one of the top innovators in the world, "we have a great innovation system in spite of the financial sector, not because of the financial sector," he adds. We need to move from the "pathological" finance we have now to good finance.

At a recent breakfast event for the Next American Economy, Roosevelt Institute Senior Fellow Bo Cutter invited Amir Bhide to discuss the reasons he thinks our economic system is malfunctioning. Bhide notes that GDP has skyrocketed in just the past two centuries. Why? Much of it is due to innovation. But while the U.S. is one of the top innovators in the world, "we have a great innovation system in spite of the financial sector, not because of the financial sector," he adds. We need to move from the "pathological" finance we have now to good finance.

So what is "good" finance? A system that mirrors the real economy, he says, by having decentralized judgment, relying on dialogue and relationships, and requiring real responsibility. "Technological innovation does not require financial innovation," he notes. It needs lending that's based on financiers who have actual conversations with borrowers (what a concept).

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But instead of this kind of system, we have what Bhide calls "pathological" finance -- and it doesn't take a stretch of the imagination to call a system that crashed the global economy just that. Our system has "replaced decentralization with a high degree of centralization and concentration, we have eliminated judgement-based finance and replaced it with mechanistic models, we have gotten rid of dialogue and relationships, and as a necessary consequence of this massive centralization we have eliminated almost virtually responsibility for bad outcomes," he explains.

It's time to hit the reset button and start again.

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How Stock Buybacks Strangle Innovation and Job Creation

Jun 30, 2011William Lazonick

jobless-man-150Conventional wisdom says that the job crisis stems from a mismatch in the labor market or lack of business confidence.

jobless-man-150Conventional wisdom says that the job crisis stems from a mismatch in the labor market or lack of business confidence. But in his special ND20 series, "Breaking Through the Jobless Recovery", economist William Lazonick points the finger at stock manipulation.

Where have all the good jobs gone? As I outlined last week, the disappearing act of decently-paid and stable "middle class" employment opportunities in the US economy over the last three decades is the result of the triple-whammy of plant closings ("rationalization"), the end of career employment with one company ("marketization), and offshoring ("globalization").

In a world of rapid technological change and global development, our economy, with its heritage of capabilities for knowledge creation by government, academia, and business, should have been able to replace these lost jobs with even better ones. Through a combination of business and government investment, a "knowledge economy" can generate plenty of opportunities for educated and experienced workers, and many US corporations have been and remain world leaders in innovation.

And yet the jobs aren't here. Because increasingly, over the past three decades, the executives who run major US business corporations have become far more concerned with allocating corporate resources to boost their companies' stock prices than to invest in innovation in the United States.

The main instrument for boosting stock prices is the stock buyback (or stock repurchase).  With the prior approval of the company board for a program of buybacks of, say, $10 billion, over, say, four years, executives can then do open market repurchases at their discretion.  Stock buybacks can be very useful for meeting the quarterly earnings-per-share targets so closely watched by Wall Street analysts. Buybacks can also help to offset a stock-price decline from bad news such as a failed product. Or they may be used to counter short sales by stock-market speculators, as was done by Wall Street banks just prior to the 2008 financial meltdown.

In other words, buybacks can be used to manipulate the stock market.

In the United States, stock buybacks are huge. From 2000 through 2009 S&P 500 companies -- which account for about 75 percent of the market capitalization of all US publicly-listed corporations -- spent more than $2.5 trillion on stock buybacks, equal to 58 percent of their net income. In addition, these companies distributed dividends equal to 41 percent of net income over the decade, bringing the total payout ratio (buybacks plus dividends) to 99 percent. The average buybacks per S&P 500 company more than quadrupled from less than $300 million in 2003 to over $1.2 billion in 2007, before falling to around $700 million in 2008 and $300 million in 2009. Average buybacks rebounded to $600 million in 2010, however. And they're on pace to total at least $700 million per company in 2011, or $350 billion for the S&P 500 as a whole.

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Executives like to say that buybacks are financial investments that signal confidence in the future of their company as measured by its stock-price performance. In fact, however, companies that do buybacks never sell the shares at higher prices to cash in on these investments. To do so would be to signal to the market that its stock price had peaked, something that no executive would ever do. But at the same time, these same executives use the stock boosts from buybacks to enrich themselves by exercising their very ample stock options and immediately selling the acquired stock to lock in the gains. And guess what? The gains from exercising stock options represent the most important component of outsized executive pay.

In short, as US business corporations have profited from the trends of rationalization, marketization, and globalization, top executives have used those profits to engage in a massive manipulation of their stock prices at the expense of job creation and innovation. From this perspective, the primary cause of the current jobless recovery is neither a mismatch in the labor market nor a lack of business confidence -- two conventional arguments for explaining the sluggishness of reemployment operating, respectively, on the supply-side and the demand-side of the labor market.

The "mismatch" argument is that the skills that workers possess do not match the skills that employers need. But this argument does not explain how, for the vast majority of workers, a "match" is made. The prime reason why the US economy gets a match between the capabilities of labor supplied and labor demanded is because business corporations invest in the capabilities of the types of workers whom they require. From this perspective, a so-called mismatch results from a failure of business corporations to make these investments in the training -- both formal and on-the-job -- of the US labor force. On top of that, as globalization continues, already-educated and trained US workers undergo permanent job loss in their areas of specialization. Valuable human capital quickly atrophies. The decline of middle-class jobs stems from the changed employment practices of US business corporations, exacerbated by their financialized behavior that leads them to favor buybacks over job creation.

It is this financialized corporate behavior, not a lack of business confidence, that stands in the way of a renewal of high-quality employment opportunities in the US economy.  Highly profitable US corporations are currently sitting on almost $1 trillion in cash, even after a sharp rebound in stock repurchases in 2010 and the first quarter of 2011. Rather than manifesting a lack of business confidence, these cash hoards reflect a desire by corporate executives to have funds available for stock repurchases in the years ahead as companies compete through an escalation of repurchases to boost their stock prices as was the case in 2003 to 2007.

The globalization of the labor force for educated and experienced workers is here to stay. But, for the sake of sustainable prosperity, the financialized business corporation has to go. In the absence of a change in corporate financial behavior, the future of the US economy is more booms, busts, and jobless recoveries, with each boom more speculative, each bust more devastating, and each recovery more jobless than the one before.

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.

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The CFPB is a Win for the Unbanked

Jun 29, 2011Bryce Covert

Low-income communities that turn to nontraditional banking products stand to see outrageous fees and interest rates reined in.

This week's credit check: 17 million Americans are unbanked. Using nonbank products can lead to over $1,100 in fees a year.

Low-income communities that turn to nontraditional banking products stand to see outrageous fees and interest rates reined in.

This week's credit check: 17 million Americans are unbanked. Using nonbank products can lead to over $1,100 in fees a year.

As part of its mandate, the Consumer Financial Protection Bureau will begin policing both the big banks and the shadowy world of nonbanks. That latter category will include firms like payday lenders, debt collectors, and check cashers that have gone without much oversight. The Bureau just announced that it plans to oversee six new areas -- debt collection, consumer reporting, consumer credit, money transmitting and check cashing, prepaid cards, and debt relief services -- and will be cracking down on a host of other predatory products.

This is fantastic news for all consumers. I've previously written about the aggressive debt collection agency tactics that have been ramped up in the aftermath of the financial crisis, including putting people in jail. Consumer reporting -- companies in charge of credit reports -- aren't much better. Not only do many reports contain errors, it's very difficult to correct them. Both have escaped intense scrutiny, but that's about to change.

A crackdown in nonbank lending will particularly benefit lower income people and the unbanked. About 17 million Americans are considered unbanked, meaning they don't have a bank account or a relationship with another mainstream institution. Another 21 million are "underbanked" -- they have checking accounts but still often turn to nonbank services like payday lenders and check cashers. Some of these people are turned off by mainstream banking products, but many just can't afford the service charges and fees. Yet others find that their neighborhood offers few other options.

Payday lenders are one of the most expensive products marketed to the unbanked. They target people with paychecks, but unemployment checks also count -- so business is soaring. They work as a short-term loan to be paid back when the borrower gets that check. And part of why it's such a lucrative business is that the interest rates can be outrageous. When annualized, they can reach 450%. That figure doesn't even include the fees, which can be an upright hit of $45. With such a shoddy deal, you would think that these products are used as a one-time solution. But as Brad Tuttle reports, consumers often get stuck in a "vicious cycle":

First, the customer borrows to cover a financial shortfall. He pays off that loan soon after receiving a paycheck, but in the course of paying off the loan and its substantial interest, that puts the customer in a tough spot the month after the initial loan. So how does he pay the bills? By taking out another payday loan. Lather, rinse, repeat. If a borrower is late paying back a payday loan, fees kick in, making that loan harder to pay off-and increasing the chances of another financial shortfall down the line.

Check cashers may not be quite as outrageous as payday lenders, but they're not much better. The New York Times reports, "Most cashers pocket between 2 and 4 percent of each check's value, which a recent Brookings Institution study calculated could add up to $40,000 in fees over a customer's working life."

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These lenders aren't equal opportunity predators, either. They tend to target low-income people and communities of color. In fact, "[i]n these communities of color payday lenders are three times as concentrated as compared to other neighborhoods," according to a report by National People's Action. This trend is being exacerbated in the recession, as traditional banks close up shop in these areas to open their doors in wealthier ones. The New York Times reports:

In low-income areas, where the median household income was below $25,000, and in moderate-income areas, where the medium household income was between $25,000 and $50,000, the number of branches declined by 396 between 2008 and 2010. In neighborhoods where household income was above $100,000, by contrast, 82 branches were added during the same period.

As Mark T. Williams, a former bank examiner for the Federal Reserve, observes, "When a branch gets pulled out of a low- or moderate-income neighborhood, it's not as if those needs go away." They get filled by payday lenders and check cashers, who can then reap fees and interest off of these underserved communities.

Prepaid debit cards are another nonbank product that these communities can tap into, and they can be cheaper to use than payday lenders. While they're being marketed to young tweens -- a card with the faces of the Kardashian sisters was set to go to market until Connecticut AG Richard Blumenthal threatened to put the kibosh on it -- and those who have a distaste for credit cards, they're also seen as a way to get money to underserved communities, particularly the poor and the unbanked. An expected $37 billion will be loaded onto prepaid cards this year, and the total market is expected to double in size in the next three years, with an $672 billion loaded onto these cards by 2013. But as Adam Levitin notes, "prepaid debit products are often as predatory in their pricing as check-cashing outlets."

In search of evidence of that claim, Candice Choi, a reporter for the AP, spent a month without her bank and ended up racking up $93 in fees total, including $4.95 to buy a prepaid debit card upfront and $1 per swipe of the card, which would work out to $1,100 a year "just to spend my own money," as she puts it. The fees charged by these cards vary wildly, in part because there's been no oversight of the industry. A consumer can be charged for activities ranging from account activation and cash withdrawal to simply not using the card. Lack of oversight also means that they usually aren't under federal protections, including fraud and FDIC insurance. And last but not least, not only do fees vary widely, but their disclosure does as well. A report from AARP warns, "The lack of clear and concise disclosure of all fees associated with a [prepaid debit card] can result in consumers incurring fees that will rapidly drain their account balance."

For too long these industries have existed like vampires: sticking to the shadows and living off other people's welfare. But the Consumer Financial Protection Bureau is promising to shine some much needed sunlight on their activities. That will be a big win for all consumers -- and particularly for the unbanked.

Bryce Covert is Assistant Editor at New Deal 2.0.

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Trojan Horse Rescue in Greece

Jun 21, 2011Marshall Auerback

EU elites are casting Greece into the modern day equivalent of a debtors' jail with their 'rescue package'.

In spite of all of the predictions to the contrary by the European Central Bank (ECB), the IMF and a host of "theoclassical" economists (who continue to disparage the utility of discretionary fiscal policy), the Greek economy continues to contract. Things will get worse, even if the new Greek government survives its vote of no-confidence, and takes the latest poisoned chalice from the ECB.

EU elites are casting Greece into the modern day equivalent of a debtors' jail with their 'rescue package'.

In spite of all of the predictions to the contrary by the European Central Bank (ECB), the IMF and a host of "theoclassical" economists (who continue to disparage the utility of discretionary fiscal policy), the Greek economy continues to contract. Things will get worse, even if the new Greek government survives its vote of no-confidence, and takes the latest poisoned chalice from the ECB.

In truth, this latest "rescue package" is nothing more than a fiscal Trojan horse, which will do nothing but further undermine the sovereignty of Greece, much as Odysseus's wooden horse ultimately destroyed Troy. Why? Because the austerity conditionality attached to the latest bailout undermines spending and is almost certain to increase the very deficits that Greece is seeking to reduce. These are new conditions imposed on a monetary union which, at is core, is fundamentally illiberal and anti-democratic.

In an ideal world, all euro zone governments would exit from the euro and restore their respective national currency sovereignty, float that currency and then take political responsibility for the subsequent fiscal actions. That is what I thought democracy was about and it is certainly the optimal way of organizing a genuine liberal democracy.

By contrast, the European Monetary Union (EMU) has a huge democratic deficit at the heart. It is technocracy pushed to a politically unsustainable limit. What the ECB, EU or IMF is proposing is not in fact a genuine "United States of Europe" liberal democracy, but an unelected bureaucracy to rule without accountability to the people and impose whatever regime the elites deem suitable at any point in time. This would be anti-democratic, which is doubly ironic considering that Greece is going through the charade of signing a national suicide pact in order to sustain the unsustainable).

The most recent labor force data released by Statistics Greece revealed an unemployment rate of 16.2% generally. But among 15-24 year-olds, the unemployment rate is now 42.5%, rising from 29.8% in 2010. For 25-34 year-olds, the unemployment rate is 22.6%. Female unemployment was estimated to be 19.5%. This is the stuff of which revolutions are made.

There is no relief in sight as the EU elites continue to grind the nation into the modern day equivalent of a debtors' jail. They fail to understand that if you savagely cut government spending while private spending is going backwards and the external sector is not picking up the tab, then the economy will tank. Under those conditions, policies that aim to cut the budget deficit will ultimately fail.

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So why persist with this ruinous course of action? Well, let's be honest about what's really happening here. We can first throw out the silly notion that this ‘rescue package' has anything at all to do with the welfare of the Greek people: it's a bank bondholder's bailout, plain and simply. As Bill Black recently noted in New Economic Perspectives,

The EU is not lending money to Ireland, Greece, and Portugal to help those nations' citizens.  The EU is lending those nations money because if they don't those nations and their citizens and corporations will be unable to repay their debts to banks in the core.  That will make public the fact that the core banks are actually insolvent.  When the Germans and French realize that their banks are insolvent the result will be "severe banking crises and a return to recession in the core of the eurozone."  The core, not simply the periphery, will be in crisis. The ECB and the EU's leadership would be happy to throw the periphery under the bus, but the EU core's largest banks are chained to the periphery by their imprudent loans.

To reiterate: this is not a "Greek problem" or a problem of the so-called Mediterranean "profligates".  Jurgen Stark of the ECB tells us that restructuring, whether soft (reprofiling) or hard (default), would be a disaster for the Greek banking system. But the Greek banking system has much less total exposure than the Eurozone, including the ECB itself. The ECB could easily assume the debts, secure genuine pricing transparency, and then impose haircuts on the bond holders. If the resultant price discovery renders these universal banks insolvent, then nationalize them as the Swedes and Norwegians did in the early 1990s, and simply tell the holders of credit default swaps (CDSs) on Greek debt to take a hike. After all, there is no risk of ‘default' once the entity holding this euro-denominated debt is the very entity responsible to credit any bank account it likes to any sum in euros. The ECB, the EU and the national governments of Europe (indeed, virtually the entire world) should simply underwrite all commercial risk banking exposures which deal with real economic activity and by law exclude all other claims from any safety net. That includes remaining "speculative" financial activity in things like CDS contracts which I have long argued should be specifically banned as a financial sector activity.

Of course, that's not happening. Yet again, as was the case with AIG, the CDS tail is wagging the economic dog. And the irony is that this grotesque hardship imposed on regular citizens at the expense of bondholders is all carried out under the cries of "free markets".

The ECB itself notes that:

Legally, both the ECB and the central banks of the euro area countries have the right to issue euro banknotes. In practice, only the national central banks physically issue and withdraw euro banknotes (as well as coins). The ECB does not have a cash office and is not involved in any cash operations. As for euro coins, the legal issuers are the euro area countries ...

The ECB is responsible for overseeing the activities of the national central banks (NCBs) and for initiating further harmonisation of cash services within the euro area, while the NCBs are responsible for the functioning of their national cash-distribution systems. The NCBs put banknotes and coins into circulation via the banking system and, to a lesser extent, via the retail trade. The ECB cannot perform these operations as it does not have its own technical departments (distribution units, banknote processing units, vaults, etc.).

Even though monetary operations are for the ECB are conducted at the level of the national central banks, the "ECB has the exclusive right to authorise the issuance of banknotes within the euro area".

This means, as Professor Bill Mitchell has noted, "it can never run out of euros and always approve the electronic entry of any amount of euros into any account (government or private) that it likes."  Unlike the US government, which still nominally has the status of a functioning democracy, the ECB has the anomalous combined status of central bank/fiscal authority without the political mandate from the people for either role. But it could ensure no member state government becomes insolvent and it could provide the euros at any time to ensure people had a viable job offer. And it's hard to believe that this could be at all inflationary, given prevailing high levels of unemployment and high unused capacity. All the ECB has to do is commit to maintaining aggregate demand and wealth stocks at their previous level and protecting private citizens from the consequences of a major debt default.

As Mitchell notes, "the crisis is a voluntary human folly imposed on the majority by the elites". There is a reason why Europe's technocratic elites and bankers evade their fair share of the cost of the economic crisis that they largely created  while expecting the bottom 90% to pay for the fallout.

Throughout history, sovereign debt defaults tend to be precipitated by decisions of the body politic of the debtor nation who refuse indentured servitude to their creditors. Debt default tends to come from within. Over the past week there has arisen growing opposition in Greece to another round of austerity that will be a condition of any new needed round of bailout financing. This has swung some members of the Greek parliament against more austerity tied to further bailout financing.

Yes, Greece could well "solve" its problems today and the markets might well rally if and when the government wins its no-confidence vote. But everyone now knows a Greek bailout will simply be a case of "kicking the can down the road". The odds of default and future contagion are sky high because the underlying monetary union contains a dangerous design flaw that strips member nations of their power to safely expand their deficits in times of economic crises and continues to place the resultant burden of adjustment on everybody but bank bondholders. This is being exacerbated by a financial sector run amok. As my friend Chris Whalen has noted, "the refusal of the political class to imposes losses on large bank creditors since the collapse of Lehman Brothers and Washington Mutual in 2008 illustrates the extent to which the financialization of the western industrial economies has turned into a gradual coup d'etat by the banks and the global speculators who dominate their client base."

Until the EU, ECB, and IMF grasp this particular, we remain at risk of a major new economic and political crisis.

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

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Mike Konczal on Netroots Nation

Jun 21, 2011Mike Konczal

Our very own Mike Konczal was on the ground at Netroots and lived to tell the tale.

The most interesting thing about Netroots Nation was the shift to state and local politics. One legacy of the Tea Party will be the radicalization of normally ho-hum state legislators. Since the 2010 election, we've seen a wave of attacks from movement conservatives taking over State power apparatuses, and using them to attack public sector workers, reduce the taxes of the rich while reducing services to the working class, privatize as much as they possibly can and attack the reproductive freedoms of women. Wisconsin was one such battle, and the energy that was generated there served as a background for what activists were looking to replicate elsewhere.

Our very own Mike Konczal was on the ground at Netroots and lived to tell the tale.

The most interesting thing about Netroots Nation was the shift to state and local politics. One legacy of the Tea Party will be the radicalization of normally ho-hum state legislators. Since the 2010 election, we've seen a wave of attacks from movement conservatives taking over State power apparatuses, and using them to attack public sector workers, reduce the taxes of the rich while reducing services to the working class, privatize as much as they possibly can and attack the reproductive freedoms of women. Wisconsin was one such battle, and the energy that was generated there served as a background for what activists were looking to replicate elsewhere.

As Wisconsin served as a template of what has worked and what can work in the future, there was a general withdrawal from national politics. The 2012 election didn't seem to be on people's minds and the biggest engagement I saw was on the battle over the budget and its implication for those who aren't in the top-1%. The plight and future of what remains of the fragile middle class was on everyone's minds, and between no jobs, foreclosures and looming safety net cuts, nobody took it for granted that the middle-class was something that needed to be defended.

I was lucky enough to be on two panels. There was a ton of interest in the ongoing foreclosure crisis, and the AFR panel on financial reform had Peggy Mears talk about the activities ACCE is up to in California. We discussed how well local activism could be applicable to other communities, and what pressure points are available for activists at the State and local areas. Brad Miller talked about the process of getting Dodd-Frank passed and Mary Bottari moderated and discussed the latest AFR is working with.

There was also a lot of interest in monetary policy, including what the Fed can do right now to keep growth going and how reform could happen over the Supreme Court. Several audience members wanted to know what kind of takeaway action items we could create on the Federal Reserve, and Tim Fernholz mentioned taking Fed appointments as seriously as we take the nomination for the CFPB or the Supreme Court, Matt Yglesias mentioned a growth target as a way of maintaining accountability over their mission and Kat Aaron emphasized not seeing "the Fed" not as a single body but a collection of units, many of which are more accessible for activists than others. There's still a lot of work to be done in both areas, but these panels were helpful in formalizing where the battle is and where it needs to go.

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Lynn Parramore on CBS MoneyWatch: Government has "Lost Sight" of Job Creation

Jun 20, 2011

You'd be hard pressed to find an American who doesn't know that we're in the midst of a great recession and an unemployment crisis. But if you only listen to what's going on in Capitol Hill, you might miss the memo. ND20 Editor Lynn Parramore joined CBS MoneyWatch to explain how we got where we are -- and what the government should be doing about it. "We have an immediate crisis, but it is not the long-term deficit, it is the fact that people are losing their jobs, they are losing their homes, they are underwater with their mortgages," Lynn says. "We do not hear enough discussion about that in Washington."

You'd be hard pressed to find an American who doesn't know that we're in the midst of a great recession and an unemployment crisis. But if you only listen to what's going on in Capitol Hill, you might miss the memo. ND20 Editor Lynn Parramore joined CBS MoneyWatch to explain how we got where we are -- and what the government should be doing about it. "We have an immediate crisis, but it is not the long-term deficit, it is the fact that people are losing their jobs, they are losing their homes, they are underwater with their mortgages," Lynn says. "We do not hear enough discussion about that in Washington."

Lynn points to the undoing of the FDR-era Glass-Steagall Act, which made it clear that commercial banks which take deposits "don't get to gamble with other people's money," as a major cause of the casino fever that took over Wall Street and led to the financial crash.

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And now government is focused on the deficit -- which is the wrong target. "If we really want to bring the deficit down, we have got to get Americans back to work," Lynn says. "I think we have lost sight of what government can actually do to get us out of a mess like this." How can the government pull it off? By implementing works projects that have the dual benefit of improving the country and creating jobs, like the Hoover Dam. "We can invest in things that will give us a long-term return," she reminds us.

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America for Sale...and Goldman Sachs is Buying

Jun 16, 2011Dylan Ratigan

flag-150Piece by piece, the country's public assets are being sold to big banks and other bidders. Is our government next?

flag-150Piece by piece, the country's public assets are being sold to big banks and other bidders. Is our government next?

In Chicago, it's the sale of parking meters to the sovereign wealth fund of Abu Dhabi. In Indiana, it's the sale of the northern toll road to a Spanish and Australian joint venture. In Wisconsin it's public health and food programs, in California it's libraries. It's water treatment plants, schools, toll roads, airports, and power plants. It's Amtrak. There are revolving doors of corrupt politicians, big banks, and rating agencies. There are conflicts of interest. It's bipartisan.

And it's coming to a city near you -- it may already be there. We're talking about the sale of public assets to private investors. You may have heard of one-off deals, but the time has come to explore the scale and scope of what is a national and organized campaign to shift the way we govern ourselves. In an era of increasingly stretched local and state budgets, privatization of public assets may be so tempting to local politicians that the trend seems unstoppable. Yet, public outrage has stopped and slowed a number of initiatives.

While there are no televised debates around this issue, there is no polling, and there are no elections, who wins it will determine the literal shape of modern America. The Dylan Ratigan show is teaming up with the Huffington Post to do a three part series called "America for Sale", showing the pros and cons, and the politics and economics, of a new and far more privatized government.

On Wall Street, setting up and running "Infrastructure Funds" is big business, with over $140 billion run by such banks as Goldman Sachs, Morgan Stanley, and Australian infrastructure specialist Macquarie. Goldman's 2010 SEC filing should give you some sense of the scope of the campaign. Goldman says it will be involved with "ownership and operation of public services, such as airports, toll roads and shipping ports, as well as power generation facilities, physical commodities and other commodities infrastructure components, both within and outside the United States." While the bank sees increased opportunity in "distressed assets" (ie. Cities and states gone broke because of the financial crisis), the bank also recognizes "reputational concerns with the manner in which these assets are being operated or held."

The funds themselves are clear when communicating with investors about why they are good investments -- a public asset is usually a monopoly. Says Quadrant Real Estate Advisors: "Most assets are monopolistic in nature and have limited competitors, creating the opportunity for stable, long-term investment returns. Investment choices include economic assets and social assets." Quadrant notes that the market size is between $12-20 trillion, roughly the size of the American mortgage market. "Given the market and potential return opportunities, institutional investors should consider infrastructure a strategic investment allocation."

As with mortgage securitizations, the conflicts of interest are intense. Pennsylvania nearly privatized its turnpike, with Morgan Stanley on multiple sides of the deal as both an advisor to the state and a potential bidder. As you'll see, these deals are often profitable because they constrain the public's ability to govern, not because they are creating value. For instance, private infrastructure company Transurban, now attempting to privatize a section of the Beltway around DC, is ready to walk away if local governments insist on an environmental review of the project. Many of them have clauses enshrining their monopolistic positions, preventing states and localities from changing zoning, parking, or transportation options.

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While the trend is worldwide, privatization of public infrastructure only came to America en masse in the 2000s. It is worth discussing, because where it has happened it has sparked deep and intense anger. In Chicago, protests flared as Mayor Richard Daley pushed the privatization deal through. In Wisconsin, recent protests and counter-protests around controversial Governor Scott Walker revolved around, among other issues, the privatization of state medical services. In Ohio, a controversy is swirling around the political proposal to put the turnpike up for sale, while in Indiana, the state toll road has been in private hands since 2006 (upsetting the truckers who are paying much higher tolls).

The political organizing is intense -- on the Republican side, conservative groups are aggressively driving it as a strategy for fiscal prudence. The American Legislative Exchange Council (ALEC), the influential think tank that targets conservative state and local officials, has launched an initiative called "Publicopoly", a play on the board game Monopoly. "Select your game square", says the webpage, and ALEC will help you privatize one of seven sectors: government operations, education, transportation and infrastructure, public safety, environment, health, or telecommunications.

On the Democratic side, the Obama administration has been encouraging Chinese sovereign wealth funds to invest in American infrastructure as a way to bring in foreign capital. It was Chicago Mayor and Democratic icon Richard Daley who attempted to privatize Chicago's Midway Airport, Chicago's Skyway road, and Chicago's Parking Meters. Out of office after 22 years, he is now a paid advisor to the law firm that negotiated the parking meter sale.

Ratings agencies are also in the game, rating up municipalities willing to privatize assets, or even developing potential new profit centers around the trend (see the chapter titled "Significant Debt issuance Expected with the Privatization of Military Housing" from this September 2007 Moody'sreport).

Over the next three days, we will explore what it means to have a government for profit, whether we get better roads when Goldman Sachs determines how much we pay in tolls. As we explore this topic, I hope we as Americans will be able to decide if we truly want to see America for Sale.

*This post originally appeared on Huffington Post.

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