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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When Will Obama Sound the Alarm About Jobs?

Jun 9, 2011Jeff Madrick

Poor economic data has spread to the stock market. Maybe this will finally serve as a wake-up call.

Poor economic data has spread to the stock market. Maybe this will finally serve as a wake-up call.

The sudden weakening of the economic recovery is now undermining even the stock market. As usual, however, Wall Street is worried about profits and a possible double dip recession. But what the press and the Obama administration have not adequately taken up is how poor job and wage growth have been, even given the rate of GDP growth. And without more jobs and rising wages, we can forget a strong economy in the future.

It is time to make the record clear, especially as Austan Goolsbee leaves his post as Obama's chief economist. Goolsbee has spoken about the lack of family income growth being the biggest problem America faces. But there has been no passion in this White House about what is an alarming jobs performance. There has been some job growth in recent months -- until May, that is. But overall, the performance is abysmal and simply frightening.

That job growth, like GDP growth, would continue at a satisfactory rate was a wish and prayer for the administration. The inflation mongers, usually Republicans, have been still worse. The dominance of austerity economics in Washington will be seen as a historical folly of the first order. Cutting federal spending now is simply wacky.

Economist Andrew Sum and his group at Northeastern have done a close-up analysis of job and wage data. There has never been an economic recovery since World War II nearly as bad as this one.

Yes, there has been GDP growth, but it has almost all gone to profits, not pay. By most measures, there are still fewer jobs today than there were at the bottom of the recession. Just as disturbing, there has been no increase in wages. There are many measures of wages and salaries, but Sum and his group found that average hourly earnings of all private sector wage and salary workers were unchanged over the seven-quarter recovery. The typical or median full-time worker lost ground over this period. Hours worked grew only slightly.

And as we all know, unemployment remains very high at 9.1 percent. Underemployment -- those unable to find full-time work when they want it -- has about doubled, growing from 4 million to 8 million American workers.

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For the first time in more than sixty years, aggregate wages and salaries adjusted for inflation did not rise after seven quarters of recovery. What did rise was corporate profits -- and sharply. Here's the stunner, as Sum calculates: Pre-tax corporate profits in 2010 dollars rose by $464 billion and real wage and salaries in 2010 dollars fell by $22 billion.

Job growth out of the 1990-1991 recession was also slow. But not like this. Profits have never been as large a share of the growth of GDP.

This should fire up any Democratic administration. But at a recent presentation at the Harvard Club in NYC, Tim Geithner recently boasted about how much better the American economy recovered than did Europe's. That's only true if you don't look at jobs. And what is an economy ultimately, but jobs?

This disconnect between GDP growth and jobs is the economic issue of our time. Some of the jobs have been off-shored. Much of the slow job growth is due to companies' refusal to hire new workers because demand is so uncertain (not due to increased regulations). New technologies have a part to play. But it is hard to escape the fact that increasingly, corporations are in a battle with workers to minimize labor costs. Productivity growth is now the result of "efficiencies," not innovation. "Efficiencies" is now a euphemism for disregard -- and sometimes contempt -- for workers.

Those of us who took an economics course or two were taught to admire productivity growth. I remember fully believing that increases in productivity were usually accompanied by increases in the nation's standard of living. This was the capitalist defense of labor-saving machinery -- the industrial revolution. Throughout history it often worked, with some substantial help from progressive government programs that started in the late 1800s.

The relationship no longer holds, and government is nowhere to be found. We need more stimulus, an outright jobs creating program, tax incentives to keep jobs here, serious infrastructure and manufacturing investment by the government, and perhaps a reconsideration of free trade policies. As far as I can see, Washington just thinks we will blithely grow our way out of this.

Stock prices went up rapidly in this expansion along with profits. Maybe that's what makes Washington complacent on the jobs issue and turns its focus to budget balancing. As for the press, big finance also dominates their thinking. Now stock prices have been falling. This may prove the only wake-up call Washington can't ignore.

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

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

Jun 8, 2011Georgia Levenson Keohane

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

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

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

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

The value of bold, persistent policy experimentation

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

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

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

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

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

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

Georgia Levenson Keohane is a Fellow at the Roosevelt Institute.

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

Jun 1, 2011Lynn ParramoreJeff Madrick

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

May 31, 2011Lynn Parramore

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

LP: Could government have done anything to stop greed?

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

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

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

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

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

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

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

May 27, 2011Mike Konczal

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

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

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

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

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

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

Problems in Theory

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

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

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

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

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

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

Problems in Practice

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

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

How would they do this?

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

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

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

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

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

linda-green

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

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

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

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

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

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

Mike Konczal is a Fellow at the Roosevelt Institute.

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

May 26, 2011Zachary Kolodin

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

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

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

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

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

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

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

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

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

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

May 24, 2011Tim Price

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

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

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

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

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

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

Tim Price is a Communications Officer at the Roosevelt Institute.

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The Victims of Insider Trading

May 17, 2011Jeff Madrick

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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