The Federal Reserve’s Wheezy Independence Takes Another Hit

Mar 24, 2011Matt Stoller

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

**This post originally appeared on Naked Capitalism.

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

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

Mar 21, 2011William Hogeland

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

William Hogeland is the author of the narrative histories Declaration and The Whiskey Rebellion and a collection of essays, Inventing American History. He has spoken on unexpected connections between history and politics at the National Archives, the Kansas City Public Library, and various corporate and organization events. He blogs at http://www.williamhogeland.com.

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How We Teach Our Graduates Not to Teach

Mar 17, 2011Bryce Covert

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

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

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

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

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

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

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

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

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

Bryce Covert is Assistant Editor at New Deal 2.0.

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Our First Fat Cat Banker -- and the Financial Scandals of the American Revolution

Mar 14, 2011William Hogeland

fat-cat-150In founding America, as today, it could be hard to tell a finance policy from a finance scandal.

fat-cat-150In founding America, as today, it could be hard to tell a finance policy from a finance scandal.

Robert Morris, our first central banker, was the richest and most influential merchant in founding-era America -- "financier of the American Revolution," as his friend George Washington and later writers dubbed him. Morris did indeed finance the Revolution. As some historians have noted, the Revolution also financed him. More importantly, though, Morris wanted America as a whole to finance the upscale investing class, of which he was chief political exponent. The popular protests for democratic finance that I discussed in numbers two and three in this series add up to a movement against Morris's finance policies and legacy. Understanding them requires knowing Robert Morris.

Some have seen the man as a monster of avarice. Others de-emphasize his manifest corruption in favor of his patriotic contributions. Morris's personal intensity -- he was corpulent, gregarious, high-handed, bright -- and even his profiteering in the Revolution (inextricable, perhaps, from America's winning that war), can distract us from the cogently detailed finance policies that he dedicated to enriching American elites and consolidating American wealth. Morris spent his career waging war on democratic ideas about finance.

He was immensely energetic. Born in Liverpool in 1734, he emigrated as a boy to Maryland and went to work as an apprentice to the august Philadelphia accounting firm of Charles Willing. That firm became Willing & Morris, dominating the American flour business in imperial trade, largely under Morris's aegis. By 1776, Morris owned ships and warehouses and ran his own network of trading partners connecting Philadelphia, New Orleans, the West Indies, and (soon) even the China trade.

Capsule biographies routinely call Morris a signer of the Declaration. While he did resist the Stamp Act and helped supply the Continental Army after Lexington and Concord, Morris joined John Dickinson in the second Continental Congress in opposing declaring American independence -- and like Dickinson, stayed home on July 2, 1776, when the watershed vote was taken. Dickinson, on principle, never signed the Declaration he'd opposed (and he immediately led his militia battalion to New Jersey to fight the British), but Morris was a pragmatist. With independence fait accompli, he placed his signature above the rest of the Pennsylvania delegates'.

Then he went to work. Eschewing a military role, Morris took over the entire civil one, subordinating the Congress to its finance committee, which he chaired, effectively becoming the country's wartime chief executive. He used his cash to supply the army and in the process used public money for his and friends' private ventures. He gave enormous no-bid military contracts to cronies. He became so enamored of the war that in 1782, with peace finally in the air, he proposed to General Washington that he deliberately extend it: he feared losing the wartime unity essential to central government and central finance.

Morris is rightly credited with bailing out the Congress early in the war by persuading leery investors to buy federal bonds, which looked weakly supported. He accomplished that feat by tipping off a circle of friends to a secret French loan he'd arranged, dedicated to paying interest on the bonds -- not in crashing Continental paper, which big-time investors scorned -- but in "bills of exchange" issued by European banking houses, as good as gold. Even better (for the investors): Morris got Congress to take its own bad paper at face value in payment for the bonds. If you knew Morris, you could dump $2000, say, in paper worth only $400 in trade, and pick up a comparatively stable $2000 bond paying 6% interest, tax-free, in the equivalent of hard, cold metal. Sweet!

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So the bonds sold. The blue-chip tier of the founding U.S. debt came to be held almost exclusively by a network led by Morris.

Another plan Morris cooked up late in the war: Congress should call in the vast flurry of small IOU's the army had issued to farmers and artisans in exchange for requisitioned supplies. Those forced loans amounted to a widely scattered face value total of maybe $95 million, which everybody deemed nearly worthless, for how would Congress ever pay on them? Long-shot gamblers were buying fistfuls of the chits at pennies on the dollar when Morris realized that if Congress privately agreed to pay them at face value, speculators would seek them out and buy them from ordinary people ignorant of the deal. The speculators could then exchange the chits in bulk at face value for federal bonds. A nearly incalculable fortune would thus be added to the public debt. The only losers would be the ordinary Americans forced to give up precious goods in exchange for scraps of worthless government paper.

The purpose of all such efforts, and of Morris's central bank itself, was to swell the domestic federal debt to huge proportions. That would make the merchant moneymen -- those creditors who hated popular finance -- into public creditors of the United States, equating American wealth with national purpose. (Morris had read Hume and wanted the U.S. to emulate England's success as a financial power.) His bank existed in part to lend money to the Congress; in part to issue high-denomination paper -- "Mr. Morris's notes" -- for government finance; in part to make risky, barely secured loans to its own founders for speculating in the real estate bubble and the public debt; and in no part to extend small-scale credit to ordinary people.

On the contrary: Morris made clear that he wanted to consolidate, not disseminate, money and credit. He wanted the United States to become a national government, with domestic law enforcement power, precisely in order to shut down land banks; stop state paper, legal-tender laws, and other forms of popular finance; punish activist debtors who, in the absence of access to the franchise, harassed and obstructed creditors; and collect taxes throughout the country from ordinary people, earmarking those taxes for paying reliable interest (untaxed) on the upscale creditors' bonds. He expected a national government to, as he put it, "open the purses of the people."

One way historians look at Morris -- a liberal one, really, because it's meant to be balanced -- is summed up in this mild assertion from the leading historian Edmund Morgan: "... though [Morris] seems to have mingled private gain too closely with public, he kept the United States almost solvent during the remainder of the war." "Solvent" is a funny term in this context, but the real question Morgan avoids has to do with what a "solvent" America would mean to Morris and his supporters. A recent Morris biography by Charles Rappleye, too, presents itself as re-balancing the supposedly too critical work on Morris by, for one, the historian Terry Bouton.

Rappleye and I will never agree (except as to Morris's overlooked importance): where he dismisses Bouton's book "Taming Democracy" as a "a broad-brush polemic," I think Bouton provides the nuanced economics and layered political realism that Rappleye's work (and Morgan's) pointedly avoids. More important, though, are the political and historiographical implications of emphasizing Robert Morris's patriotic efforts over his deliberately regressive economics (which Morris himself never made any bones about).

Glossing over the purposes and results of Morris's policy has the effect, intended or otherwise, of making it easy to ignore the thinking and misconstrue the actions of the democratic 18th-century Americans who so articulately opposed that policy. So next time in this series: some Americans who took Robert Morris on, including the farmer Robert Whitehill, the weaver William Findley, and the preacher Herman Husband. Also: the long and unlikely relationship of Morris and Thomas Paine.

William Hogeland is the author of the narrative histories Declaration and The Whiskey Rebellion and a collection of essays, Inventing American History. He has spoken on unexpected connections between history and politics at the National Archives, the Kansas City Public Library, and various corporate and organization events. He blogs at http://www.williamhogeland.com.

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Teachers vs. Wall Street: Who are the Greedy Ones Now?

Mar 4, 2011

Teachers certainly are greedy, aren't they? They make $50,000 a year with medical and dental benefits (outrageous!), have summers off, and live off of taxpayer money like vampires who love multi-colored construction paper. They could really learn a thing or two from Wall Street -- so it's a good thing Jon Stewart is here to explain it to them:

Teachers certainly are greedy, aren't they? They make $50,000 a year with medical and dental benefits (outrageous!), have summers off, and live off of taxpayer money like vampires who love multi-colored construction paper. They could really learn a thing or two from Wall Street -- so it's a good thing Jon Stewart is here to explain it to them:

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Let's recap: getting $50k a year borders on avarice, but $250k is "close to poverty." Teachers take the summer off, but while bankers made shadowy deals that brought down the global economy they showed up year round. Teachers are paid with tax dollars, unlike those Wall Street firms who got bailed out. And if we cut Wall Street compensation, we'll break contracts and have a huge exodus of talent. We can't afford that, since they did such a good job of not wrecking the economy last time. The same can't possibly be true of teaching, right?

Hats off, Jon Stewart. You nailed it.

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Angelo Mozilo, Tea Partier?

Mar 4, 2011Matt Stoller

mozilo3Mozilo's emails expose a political philosophy borrowed from Ronald Reagan. **You can follow Matt Stoller on Twitter at http://www.twitter.com/matthewstoller

mozilo3Mozilo's emails expose a political philosophy borrowed from Ronald Reagan. **You can follow Matt Stoller on Twitter at http://www.twitter.com/matthewstoller

I was combing through the Financial Crisis Inquiry Commission resource materials, and I found an interesting email from former Countrywide CEO Angelo Mozilo to his senior executives. It was written in 2004, and the main subject was the declining credit quality of loans due to heavy competition from mortgage originators.

The last part of the email, though, got very political.

I must admit that the upcoming election has exacerbated my concerns in that a Kerry win could cause a serious disruption in the economy if he is successful in rolling back a substantial portion of the tax breaks initiated by Bush. It is the wage earners $200,000 and over that are the drivers of the economy and that is the group that Kerry has stated that he will attack. This could clearly cause a major bump in the road.

As you know I have no political bias but I would be concerned about any candidate that proposes a massive wealth transfer from the people to the federal government.

I would like you to consider my concerns and let me know your thoughts.

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It's true Mozilo had no political bias in terms of who got favorable lending treatment; lots of Democrats took out low-cost Countrywide "Friends of Angelo" loans. But the rhetoric and politics he uses here are straight up Texas GOP.

The transfer of power from the people to the federal government, and with Obama, we’ve had a giant leap in that direction.

It originates, perhaps not surprisingly, from Ronald Reagan, as quoted by the "second coming of Reagan" and tea party darling Rep. Mike Pence.

The federal government has taken too much tax money from the people, too much authority from the states, and too much liberty with the Constitution.

He and Reagan were both government-haters. Now, Mozilo needn't have worried about the 2004 election, as John Kerry voted to extend the Bush tax cuts last year and probably would have found a way to extend them as President. It is interesting that Mozilo, whose business depended on the income of people in lower and middle income brackets, felt that it was people with incomes of $200k and up who drive the economy.

As for the rest of the email, Mozilo was clearly telling his executives in private something different than he told his investors. Here's what he told his execs.

I fully understand that our residuals have been modeled on a conservative basis but it is only conservative based upon historical performances. But the type of loans currently being originated combined with the unprecedented stretching of all aspects of credit standards could cause a bump in the road that could bring with it catastrophic consequences.

Here's Countrywide's 10K for 2004.

We develop cash flow and prepayment assumptions based on our own empirical data drawn from the historical performance of the loans underlying our other retained interests, which we believe are consistent with assumptions that other major market participants would use in determining the assets’ fair value.

So there you have it. Angelo Mozilo didn't just dump hundreds of millions of dollars of stock when he secretly knew that the loans Countrywide was originating couldn't support the stock valuation. He was also Reagan-esque as he did it.

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

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Do We Want to be Ruled by Banks or the Law?

Mar 3, 2011

Yves Smith found a nice press release from North Carolina's Guildford County Register of Deeds regarding the continuing criminal fraud of the banks and mortgage industry. The elected county official, Mr. Thigpen, states:

For me the question is clear. Do we want land records in America to be governed by major banking conglomerates on Wall Street or the people and laws of the United States of America?

Yves Smith found a nice press release from North Carolina's Guildford County Register of Deeds regarding the continuing criminal fraud of the banks and mortgage industry. The elected county official, Mr. Thigpen, states:

For me the question is clear. Do we want land records in America to be governed by major banking conglomerates on Wall Street or the people and laws of the United States of America?

That indeed is the question for all of us on many matters -- financial, economic, and political. It is no mistake this question is coming not out of DC or NY, but the true foundation of this republic, the counties. As Jefferson said, "Divide the counties into wards." There America lies your reformation, revitalization, and renewal. The three Rs.

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AG Tom Miller Negotiating in Secret with Banks Over Whether to Put Bankers in Jail

Feb 26, 2011Matt Stoller

home-foreclosure-documentIf NFL fans are demanding negotiations be opened up, why are homeowners kept in the dark? **You can follow Matt Stoller on Twitter at http://www.twitter.com/matthewstoller

Zach Carter wrote a good piece on homeowners' demands of the big banks. National People's Action has coordinated thousands of homeowners in asking for an aggressive settlement with the banks on their handling of foreclosures. Iowa Democratic Attorney General Tom Miller, who is heading the 50-state investigation, is one of their prime targets.

But it's this video that makes it interesting.

home-foreclosure-documentIf NFL fans are demanding negotiations be opened up, why are homeowners kept in the dark? **You can follow Matt Stoller on Twitter at http://www.twitter.com/matthewstoller

Zach Carter wrote a good piece on homeowners' demands of the big banks. National People's Action has coordinated thousands of homeowners in asking for an aggressive settlement with the banks on their handling of foreclosures. Iowa Democratic Attorney General Tom Miller, who is heading the 50-state investigation, is one of their prime targets.

But it's this video that makes it interesting.

Here's the transcript, starting at around :53 into it.

Iowa citizen Mike McCarthy: How close are we to a settlement? And with the settlement, will we have mandatory modifications? Will we have mandatory principal reductions? Will we have restitution for families who were fraudulently kicked out of their home? And also we want to see that these bank officials who were responsible for committing mortgage or foreclosure fraud brought up on criminal charges. I'm gonna ask you again, like I did on December 14. Are we gonna put some people in jail?

Iowa Attorney General Tom Miller: We're really getting close to negotiations. I'm not gonna talk about, I really feel I shouldn't talk about what's gonna be in the agreement, what's not gonna be in the agreement. That's something we have to hammer out with the Justice Department, and the Federal people, and the banks in a negotiating session. So in terms of talking to you or to the press, we're pulling back on specific details.

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Look at what he's saying. Miller has decided that he will keep the public in the dark about the negotiations over how banks will deal with the homeowners they hurt. They can't know when decisions will be made. They can't know if they will have principal reduced. They can't know if they will get loan modifications. They can't know if they will get restitution if they've been illegally kicked out of their homes. Miller will not even speak to criminal prosecutions of bankers over mortgage fraud because he is still negotiating with the criminals over whether to bring charges.

The backstory here is that Miller had exuberantly vowed jail time for bankers to Iowa citizens, before backtracking on his commitment. This level of deception by high officials is now routine when it comes to cracking down on lawbreaking by big banks.

It's not obvious to me why Miller backtracked. I don't think he ever had any intention of charging any bankers with any criminal charges, that's just not how law enforcement works these days. My guess is that he didn't realize that his initial promise to Iowa voters would be taken seriously, and then it blew up in the press. So he decided to stop talking and do the negotiating in secret.

This is not reasonable. If the NFL is being asked to open its books and NFL fans are asking that the negotiations between the players and owners take place in the open, surely the talks over foreclosure fraud can be done with some ability for the public to know what is happening.

Tom Miller may not realize that keeping homeowner victims in the dark while negotiating with the perpetrators is the wrong way to approach criminal activities. But the rest of us do.

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

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Sarah Palin and Michele Bachmann Would Call 18th-Century Philadelphia Freedom Fighters 'Un-American'

Feb 21, 2011William Hogeland

flag-150In a brand new series, "Founding Finance", author William Hogeland challenges Tea Party myths about the early days of our Republic and reveals the rich progressive tradition of Americans fighting for economic justice.

flag-150In a brand new series, "Founding Finance", author William Hogeland challenges Tea Party myths about the early days of our Republic and reveals the rich progressive tradition of Americans fighting for economic justice.

At a recent speech in Iowa, Congresswoman Michele Bachmann induced widespread cringing with her claim that Americans of the founding period, no matter who they were, enjoyed exceptional freedom to pursue their hopes for betterment. Slavery and the U.S. Constitution's three-fifths clause don't qualify as little-known facts, and Bachmann seemed ignorant, too, of women's original exclusion from rights secured by the representative government established in the Constitution. Who knows how she'd evaluate the native population's historic situation.

There's another group that Bachmann might be surprised to learn suffered exclusion from political participation in founding-era America: Most of the free, white male artisans, laborers, and small farmers. That's right, an overwhelming majority of the white men in early America would dissent heartily from the idea that they were free to advance themselves, through work and pluck and luck, regardless of who they were and what they owned. Ordinary, working Americans of the period -- the very type the Tea Party constantly evokes -- were engaged in a ceaseless struggle against the wealthy, well-connected American merchants and landowners who sewed up business and barred the unprivileged from political power.

In that struggle, 18th-century populists came to articulate a radical new idea about the relationship of liberty and equality, anathema to the Tea Party politics of today. Securing true liberty, working Americans of the founding period insisted, requires government to regulate business and finance in the interest of economic fairness. They demanded such things as debt relief, an end to the regressive gold standard, the severing of rights from property, and legal curtailment of mercantile interests. Some wanted progressive taxation; some envisioned a social security program. Their real political ethos directly contradicts current right-wing efforts to cast passive government, unfettered markets, and wholesale tax resistance as the founding values of ordinary America.

Many progressives, too, will find it counterintuitive to contemplate an 18th-century American economic radicalism. Getting a clearer look at the period requires revisiting Philadelphia in 1776 -- but this time walking eastward on Chestnut Street, away from the soaring State House, one day to be called Independence Hall, where the Continental Congress meets, and peeking instead into the smaller but ruggedly beautiful artisan headquarters Carpenter's Hall. Delegates noisily crowding the floor here are writing a constitution for the newly independent Commonwealth of Pennsylvania. In dress, speech, and attitude these men are nothing like the well-heeled members of the fabled Congress up the street. These are small farmers, artisans, and laborers, the ordinary free white men of the period. They boast no well-placed family connections. They lack fancy educations and professions. Almost all of them are new to representative office.

While in some ways the men of Carpenter's Hall might appear to be ancestors of Sarah Palin's "real Americans"-- they hunt, fish, build, farm; they keep and bear arms (and serve in militias); they're political newcomers -- Palin would brand them socialists. They're here to create a radically new kind of government, one that restrains wealth, regulates business, and empowers labor. For the first meaningful time anywhere, their 1776 Pennsylvania Constitution will break the ancient connection between property and the political franchise, writing what we now call progressivism into law. Its legacy will survive in the Square Deal, the New Deal, the Great Society, and those programs' reverberations in the very policies that today's right condemns as categorically un-American.

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Did that radical Pennsylvania constitution gain approval from the better-heeled founders up the street? Hardly. (John Adams on the Pennsylvania document: "Good God!") Did it last? Only until 1790 (it was overturned by upscale forces whose power it had tried to restrict). Do historians give it much credit?  Many do -- but not Samuel Eliot Morison, for example. His suggestion in The Conservative American Revolution that the 1776 Pennsylvania Constitution impressed nobody but French revolutionaries epitomizes the mood of dismissal, at once airy and leery, that many big-name historians, both liberal and conservative, have adopted when considering our earliest radical movements for economic equality. Historians across the political spectrum who prefer American consensus to American conflict have downplayed the long struggle that came to a kind of fruition in 1776 Pennsylvania. So we don't know much about it.

Historical marginalizing of our founding challenges to economic elites damages current political thinking. Modern progressives seeking precedents in history tend to travel backward through the New Deal, come to a screeching halt at the Populist and Progressive movements, squint approvingly back at Jackson, and fail to focus on the horizon where an economically egalitarian American spirit, more truly radical than Jackson's, seethes, neglected. Reclaiming that spirit -- at the very least exploring it -- would have the virtue of denying the Tea Party a monopoly on anything supposedly fundamental about the American founding and American values.

Reclaiming our founding tradition would also give a rest to the endless ideological tug of war over the famous founders. One of the most exciting things about our early popular movement is that it centered -- in a way that Jefferson's and Madison's philosophies of government, as brilliant as they are, didn't -- on just the kinds of real-life economic issues that still confront so many Americans today. Foreclosure epidemics, insider high-finance corruption, predatory lending, recessions and depressions, income disparity, mercantile exploitation of labor . . . ordinary 18th-century Americans applied themselves to these problems with both sophistication and courage.

So in succeeding posts, I'll dig into and expand on the welter of people, ideas, and actions that make the founding era such a surprisingly fertile and compelling one -- sometimes a problematic one too -- for progressive economics and politics today. My guiding theme, especially relevant these days, involves finance. As the historian Terry Bouton shows in his benchmark study Taming Democracy, ordinary 18th-century Americans had a grasp of public and private finance that many otherwise sophisticated people lack today. Further posts in this series will therefore get into 18th-century foreclosure crises and debtor uprisings; the founding bonded national debt; early labor organizing and popular demands on government; the structure and economic intentions of the 1776 Pennsylvania Constitution; the gold standard versus paper and other popular currencies; founding-era real-estate and debt-securitization bubbles; etc. Stay tuned . . .

William Hogeland is the author of the narrative histories Declaration and The Whiskey Rebellion and a collection of essays, Inventing American History. He has spoken on unexpected connections between history and politics at the National Archives, the Kansas City Public Library, and various corporate and organization events. He blogs at http://www.williamhogeland.com.

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Part 2: Regulation, Insurance, Resolution: An FDIC Model for GSEs

Feb 18, 2011David Min

mortgage-crisis-150In a two-part series, experts will tackle fundamental questions left over from the housing bubble crash: What should we do with Fannie Mae and Freddie Mac? How should we reform the market so that it is fair and risk-free?

mortgage-crisis-150In a two-part series, experts will tackle fundamental questions left over from the housing bubble crash: What should we do with Fannie Mae and Freddie Mac? How should we reform the market so that it is fair and risk-free? In the second part, David Min, Associate Director for Financial Markets Policy at the think tank Center for American Progress, argues for keeping the government involved in the housing market by creating an FDIC-inspired backstop. **Read part one here.

1. What went wrong with the GSEs?

Starting in the early 2000s, "private-label securitization," which was essentially unregulated, began to grow astronomically. This growth came primarily at the expense of the GSEs, whose market share dropped by a roughly equivalent amount. In an effort to regain their market share, the GSEs took on more risk, both in terms of the loans they guaranteed and also as far as the securities they acquired for their own account.

As we now know, the extraordinary growth in PLS was based on a fundamental mispricing of risk and structural problems in the process, including shoddy underwriting, misaligned servicing incentives, and bad credit ratings. This led to two distinct sets of problems for the GSEs. First, it created a housing bubble, which disproportionately impacted them, as they are entirely focused on housing finance. Second, the riskier products they acquired or guaranteed in their "race to the bottom" defaulted at rates much higher than expected.

2. What is wrong with simply privatizing the mortgage market?

First, we would be providing an enormous taxpayer-funded windfall to the big financial institutions that caused the financial crisis. Second, we would be effectively punishing many Americans by eliminating the New Deal legacy of broad availability of consumer-friendly mortgages to working- and middle-class households.

As we learned from the Great Depression, banking poses an enormous amount of systemic risk. Exacerbating this risk is the contemporary problem of "too big to fail" banks, which means that effectively, large financial institutions are believed to enjoy an implicit government guarantee on their obligations. It appears that this guarantee is already benefiting them, providing them with significantly lower funding costs than smaller financial institutions.

It is these largest financial institutions that would benefit the most if we adopted either of the Obama administration's privatization proposals. The $5.5 trillion in mortgage financing for the working- and middle-class that is currently provided by the GSEs would need to be replaced by either lenders willing to buy and hold loans on their balance sheet or by private-label securitization. The six largest U.S. financial institutions-Bank of America, Wells Fargo, JP Morgan Chase, Citigroup, Goldman Sachs, and Morgan Stanley-account for over $1.2 trillion in balance sheet-funded mortgage lending, over a third of all such loans. Moreover, these firms, which currently hold about $9.275 trillion in assets, have even greater market power in the investment banking sector, particularly given the consolidation that has occurred in the aftermath of the financial crisis. Thus, they are likely to dominate a private-label mortgage securitization market, when and if this returns to becoming a major financing channel.

If these large financial institutions (and other very large or systemically significant firms) held or guaranteed any significant portion of the $5.5 trillion in mortgage loans currently financed through Fannie and Freddie, it would clearly escalate the problem of "too big to fail", particularly given the importance of residential mortgage debt both for the financial markets and the broader economy.

Privatization would also be bad for consumers. There is limited evidence of what a privatized mortgage market would look like. Since the New Deal, the U.S. government has supported a large segment of the mortgage market either through federal deposit insurance or guarantees on securitization. And there is no developed economy in the world that does not provide significant amounts of government support. (For example, in Canada the government explicitly guarantees up to 70% of outstanding mortgages; in western European countries, governments implicitly guarantee 100% of their mortgage markets.)

The pre-New Deal era illustrates why privatized residential mortgage systems are so rare. Mortgages were only available to higher income and higher wealth borrowers, and even then only on terms that would be considered predatory today: short-term, interest-only, high rates, and high down payments (typically 50%). While this is obviously a very dated example, it is striking that in some important ways, it resembles the current market for commercial real estate finance. As Elizabeth Warren has noted, commercial real estate loans today generally have terms that closely resemble pre-New Deal residential mortgages: short-term, interest-only, high interest rates, and high (often 50%) down payments. And of course these loans are generally reserved for higher wealth borrowers.

All of this points to the same conclusion: privatization would lead to a sharp reduction in mortgage liquidity and a transition away from consumer-friendly products.

3. What does the experience of the jumbo mortgage market tell us about whether a privatized mortgage market can well serve the broader mortgage needs of America?

Nothing. The jumbo market serves higher wealth, higher income Americans, and no one disputes that private capital, absent a guarantee, can provide mortgages to this class of homebuyers as it has always done. It is also clear that since the New Deal, private capital has provided jumbo loans with consumer-friendly terms and prices that are reasonably competitive. But to simply note these facts misses the point.

The questions at issue are these: 1) will private lenders continue to provide affordable and consumer-friendly loans if we get rid of the government-guaranteed portion of the market; and 2) in the absence of a government guarantee, will the private markets make such products broadly available to all Americans (including working- and middle-class households)? As I noted above, the limited historical evidence suggests that the answer to both of these questions is no. This finding is reinforced by our experience in the 2000s, as private non-guaranteed capital exhibited a strong bias towards high cost, predatory products when it gained significant market share. Moreover, it is important to note that the availability of competitively priced jumbo 30-year fixed-rate loans is based in large part on the existence of deep and liquid markets for Fannie and Freddie securities, which allows private securitizers to finance, rate-lock, and hedge their own securities backed by jumbo 30-year fixed-rate loans.

The jumbo market argument also fails to appreciate the important differences between jumbo financing and the rest of the market. Jumbo mortgages are financed either by lenders who originate and hold loans or through private-label securitization. Most all other mortgages are financed by investors in government-guaranteed MBS. These investors include foreign central banks, fixed income investors and regulated financial institutions, which purchase government-guaranteed securities either because of investment objectives or regulatory incentives. The attraction is that they have essentially no credit risk, don't require due diligence, and are very liquid.

In the absence of a government guarantee, these investors would be looking at securities that carry significant credit risk, require high levels of independent due diligence, and are highly illiquid (particularly after the PLS debacle of the last decade)-in other words, exactly the opposite of their preferences. It seems implausible that these investors would purchase such securities in the amounts necessary to make up the $5.5 trillion in mortgage financing currently provided by the GSEs.

4. Will there be 30-year fixed-rate mortgages in the future? What are the consequences of this?

Under privatization proposals, 30-year fixed-rate mortgages would clearly not be widely available. Some advocates of privatization dispute this claim, primarily based on their availability in the jumbo markets. As I noted in the previous section, that argument is flawed, even more so when it comes to this particular product. The long 30-year duration gives significant interest rate and liquidity risk to lenders. As a result, banks and thrifts have dedicated an increasingly small amount of their balance sheet lending to 30-year mortgages since the high interest rate increases of the late 1970s and 80s. And as explained above, there is likely to be a lack of investor capital for this product from securitization.

Only one other country in the world, Denmark, provides broadly available 30-year fixed-rate mortgages, and the Danish government implicitly guarantees 100% of the market (most recently evidenced in a series of sweeping bailouts, including a blanket guarantee for its entire banking system.)

But why should we want the 30-year fixed-rate mortgage? I have made the argument more thoroughly in a brief I wrote last year, but here are two reasons. First, it provides borrowers with cost certainty in housing, the largest single monthly expense for most families. This is increasingly important in a world where working households are taking on greater amounts of risk and uncertainty. Its value is at its highest during periods of housing market distress-when interest rates are rising and the availability of refinancing options has decreased. Given the high near- to medium-term likelihood of interest rate and house price volatility, this cost certainty will be ever more important to household stability. Second, the 30-year FRM places interest rate risk and others with parties that are better suited to handle them-sophisticated investors who can plan for, capitalize against, and sometimes hedge against them.

5. What does your plan do to fix the problems?

Our plan tries to essentially keep the significant benefits created by the New Deal while reining in systemic risk and protecting the taxpayer from loss. In addition to specific measures designed to encourage mortgage liquidity to underserved communities and borrowers, including for rental housing, what we have essentially proposed is a replication of the FDIC model of regulation, insurance, and resolution around an explicit, very limited government guarantee for certain conforming MBS. We would require firms that receive this guarantee to put up significant amounts of capital (somewhere between 4-9 times the levels currently put up by the GSEs), which would stand against non-catastrophic credit losses. Should these amounts be insufficient, and the CMI effectively insolvent, resolution authority would be exercised and a Catastrophic Risk Insurance Fund, modeled after the FDIC's Deposit Insurance Fund and funded by assessments on the industry, would step in to make timely payment of interest and principal to guaranteed MBS investors.

To be clear, under our proposal investors in government-guaranteed MBS would first be paid from the underlying mortgages that collaterize the MBS. If these were insufficient, they would be paid by the CMI's assets. Only if the CMI's assets were insufficient and it had to be taken over by regulators would the industry-funded Catastrophic Risk Insurance Fund be tapped. And only if this Fund, which would have the ability to tax the industry on a going forward basis to make up shortfalls, went insolvent would taxpayers be on the hook for a single dollar. We think these various firewalls against taxpayer loss, coupled with strong regulatory oversight, are sufficient to ensure that such a loss never occurs.

Conversely, if we privatized the mortgage finance system and handed it over to the largest financial institutions, there would be no protections against taxpayer losses.

6. What happens if we misprice the fee or let regulation go lax?

First, the private sector hasn't shown itself to be particularly good at pricing risk either, as evidenced most recently in the PLS debacle, and we've seen that its losses in today's "too big to fail" era can cause taxpayer losses.

Second, the government doesn't need to price risk perfectly, but to ensure it doesn't underprice risk (and expose taxpayers to losses). Moreover, in the event that a CMI failure caused the Fund level to dip excessively low, it would have the ability to levy prospective fees on surviving CMIs to replenish itself.

Finally, it is worth noting that the government actually has successfully provided similar forms of catastrophic risk insurance in the past, including with the FDIC, the Federal Housing Administration, and the Terrorism Risk Insurance program.

David Min is Associate Director for Financial Markets Policy at the think tank Center for American Progress.

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