Immelt's Appointment is No Win for Job Creation

Jan 21, 2011Mike Konczal

Far from being a job producer, GE mostly operates as a shadow bank that profits off of pure financialization.

Joe Klein says of Volcker's replacement:

Far from being a job producer, GE mostly operates as a shadow bank that profits off of pure financialization.

Joe Klein says of Volcker's replacement:

Gotta admit I'm not too pleased by the departure of Paul Volcker from Barack Obama's circle of advisers. He was one of the few, along with Elizabeth Warren, in the current administration who had a proper perspective on the outrageous behavior that the financial community considers business as usual. And while the appointment of his replacement Jeffrey Immelt, of General Electric, signals a desire to snuggle up to the business community -- at least Immelt comes from the manufacturing sector. He has experience actually making products, a skill notably lacking among every one of Obama's other economic advisers.

Again, I'll repeat: the important distinction here is between the business community, which should be encouraged to create more jobs, and the financial community, which should be shamed for its casino-gaming shenanigans and kept away from the inner circles of economic policy-making.

Um, no. Firstly, the idea that we have 15 million unemployed people because of our weakened competitiveness is just wrong and lacks any real substantial evidence. But the idea that GE can, as Joe Klein puts it, point a way forward from a financialized economy is also wrong. Two points:

1. As Raj Date cleverly put it, to understand the bailouts, you need to understand "the Killer G's": Goldman Sachs, GMAC, and GE Capital.

GE Capital, the major subsidiary of GE, is a major shadow bank. It used GE's high-quality credit rating to become a major player in the capital markets, much in the same way AIG FP used the boring insurance industry's high credit rating. GE Capital was the single largest issuer of commercial paper going into the financial crisis.

GE Capital received major bailouts during the crisis, including having the FDIC guarantee more than $50 billion dollars of unsecured debt. To put that in perspective, only about $24 billion of GE Capital's funding comes through deposits, allowing a shadow bank with massive unsecured debt obligations and only a small depository base to be carried through the financial panic. Both graphs from Date:

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2. Next I want to point out the book "Financialization and Strategy: Narrative and Numbers" (by Froud, Sukhdev, Leaver, Williams), which does an extensive case study of General Electric and the financialization of the manufacturing business model from 1980 onwards:

Our analysis of the undisclosed business model is relatively straightforward and focuses on seven principles of GE’s cost recovery under Welch:

1 run the industrial business for earnings;

2 add industrial services to cover hollowing out of the industrial base;

3 buy and sell companies through acquisition and divestment to achieve returns and growth objectives;

4 rely on large-scale acquisition to prevent like-for-like comparisons and to increase opacity and the power of narrative;

5 grow the financial-services business up to the limit of the company’s credit rating;

6 accept the balance-sheet costs in terms of return on capital but focus on managing return on equity and cost of capital;

7 add financial engineering to smooth earnings and manage growth...

The story of GE Capital is a story of upward mobility, as GE has found growth of sales revenue by moving beyond captive finance into many other lines of financial business. GE has sold financial services since the 1930s, starting with domestic credit for refrigerators, a classic form of captive finance. Up to the late 1970s, GE was arguably not so different from other US corporates, such as GM or Westinghouse, with a financial-services division whose central activity was captive finance. However, through the 1980s and 1990s, GE Capital greatly expanded and increased its offering in everything from LBO finance to store cards. GE has stayed away from retail banking and, after its problems with Kidder Peabody, moved out of securities dealing. But, in general, its expansion has been as a general supplier of consumer and commercial financial services, while also developing niche areas, such as mortgage insurance. The company’s expansion into financial services is neatly summarized by Fortune: ‘GE Capital pours wealth into the corporate coffers by doing just about everything you can do with money except print it’ (21 February 1994). Hence, GECS overtook General Motors Acceptance Corp. (GMAC) in terms of total assets in 1993 and was twice as large by 1997 (Forbes, 21 April 1997)...

In all this, the GE Capital board was engaged in high-stakes risk management where misjudgments about a class of business would have undermined GE’s financial record. By way of contrast, Westinghouse, GE’s conglomerate rival, had its finance arm liquidated by the parent company after losing almost $1 billion in bad property loans in 1990 (The Economist, 30 April 1994). GE Capital’s expertise in making acquisitions is acknowledged by S&P as one of the factors that supports its triple-A rating: ‘GECC (GE Capital Corp.) tends to be a very savvy buyer, understanding the various business risks and pricing the acquisition appropriately’ (S&P 2002: 2).

If the expansion of GE Capital rested on judgment and controls, it also reflected the structural advantage of the triple-A credit rating, which effectively made the financial business (as user of the credit rating) dependent on the industrial business (as credit-rating generator), and this in turn set limits on how much GE could expand without risking reclassification by credit-rating agencies. GE Industrial may be a low-growth business but it has high margins, is consistently profitable over the cycle and has funded almost all of the dividends that GE Consolidated has paid out, as well as providing the funds for acquisitions and repayment of debt. This solid industrial base is the basis for GE’s triple-A credit rating, which allows GE Capital to borrow cheaply the large sums of money that it lends on to consumers and commercial customers...

If there's demand, I can dig into the huge debate in the analyst community about what was going on with GE and earnings management, a worry that hit an explosive moment post-Enron and Worldcom during the Sarbanes-Oxley debates.

GE has been at the forefront of blurring a "financial services"-centric model of business onto the remains of a hollowed-out manufacturing base, one kept in a minimal state just strong enough to qualify for high credit scoring. Marcy Wheeler has written about how that manufacturing part of the company is driven by outsourcing.

All in all, not especially a big win for the Jobs and Competitiveness.

Mike Konczal is a Fellow at the Roosevelt Institute.

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How Banks and Servicers Play Hide the Ball

Jan 21, 2011Thomas A. Cox

home-foreclosure-documentForeclosure industry lawyers use every trick in the bag to block the revelation of important documents.**This is the second part of a three-part series.

home-foreclosure-documentForeclosure industry lawyers use every trick in the bag to block the revelation of important documents.**This is the second part of a three-part series. Read part 1 here.

Logic suggests that in foreclosure, the homeowner should be able to know who owns his loan. In the rare circumstance where the homeowner wants to pay off the loan rather than lose his or her house, he needs to know who is entitled to receive that payment so that the wrong party is not paid and so that he is protected against any other party ever claiming a right to payment. Where a homeowner cannot actually pay off his loan, he still has a real interest in knowing who claims ownership of it because only that party can respond to requests to work out a rational loan modification.

Logic does not control the foreclosure industry's practices.

Variation Number 1: MERS hides the ball

In the first variation of this tactic, homeowners must face a massive concealment scheme set up in 1995 by the foreclosure industry in the form of Mortgage Electronic Registration Systems, Inc. ("MERS"). Before MERS came along, every mortgage was recorded in a registry of deeds for the county where a mortgaged home is located. When that mortgage was assigned, it was recorded in the registry. Thus, if a homeowner ever had any doubt as to who owned his mortgage, he had only to check his nearby registry to find that information. MERS unilaterally changed the rules of the game (with no permission sought from state legislatures). Under the new regime, while an original mortgage is still filed in the local registry of deeds, subsequent assignments of that mortgage are not recorded there. Instead, information about them is simply entered into the MERS electronic recording system. Any homeowner can check the records of his local registry of deeds, but no homeowner is permitted to access MERS. Thus, it took away a sure way to identify the owners of mortgage loans.

After an outcry against MERS over its concealment of the identity of mortgage owners in its inaccessible system, it claims to have met those complaints by setting up a web site where homeowners can look up this information. The problem is, the website will not reveal the name of the owner of any mortgage unless the owner voluntarily allows MERS to disclose that information. My experience with look-ups on the website is that it repeatedly reports that the owner of the mortgage has not voluntarily agreed to disclose its identity.

Even when a mortgage owner does  allow its identity to be disclosed, there is a high likelihood that the information will be inaccurate. I am working on a case right now involving a Deutsche Bank trust created in 2006. Deutsche Bank claims that it has owned my client's loan since 2006, but until July of 2009 the loan originator, not Deutsche Bank, was shown on the MERS system as the owner.

Use of the MERS website to look up mortgage ownership information is basically a waste of time for homeowners and their lawyers. I am working on another case right now where there were major errors at the inception of the loan that give our client the right to rescind it under the Truth in Lending Act. We know that the lender is out of business and that some other entity owns the loan, but we do not know who that is. The MERS website does not disclose the identity of the owner of this loan. Under TILA, the rescission letter must be sent to the owner, so we have to file a request with the servicer for that information. Experience tells us that the servicer may or may not respond and that if it does, the response may or may not be accurate. In any event, a lot of lawyer time will be wasted in seeking out information as to the identity of the owner of the loan, information that should be (and in pre-MERS days was) immediately available.

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Variation Number 2: Fannie and Freddie hide the ball

Fannie Mae and Freddie Mac are also major players in the concealment game. In their agreements with the major loan servicers, they require that the servicers foreclose in their own names. In judicial foreclosure states, such as Maine, where I work, we see this repeatedly even though Maine law permits only the real owners of to be the foreclosing parties. To further this subterfuge, Fannie and Freddie will actually endorse and deliver mortgage notes to the servicers to hold temporarily while the servicers foreclose under the guise of being the true owners. The same problem arises here as with the MERS concealment game -- if we, as lawyers representing homeowners, do not know who the true owner is, we do not have the ability to properly represent our clients as we try to resolve that loan.

I have been unable to determine any legal benefit of this subterfuge to Fannie and Freddie. Rather, I suspect that this game relates to political issues. Fannie and Freddie do not want to let the country, our political leadership, and the regulatory agencies see just how tremendous their roles are in the current waive of foreclosures. I suspect that they fear the public and political backlash that might develop if the true scope of their roles in the foreclosure process were revealed.

The problems created by the concealment game are real. I ran into this problem a couple of months ago in a foreclosure action brought by GMAC Mortgage, LLC. Maine law requires the foreclosing plaintiff to file a certification showing that it owns the loan and including proof of that ownership in the form of note endorsements and mortgage assignments. In this case, there was a "Certification of Mortgagee" signed by none other that GMAC's notorious "limited signing officer" Jeffrey Stephan. He certified directly that GMAC Mortgage owned the loan in issue. I attended a mediation session with my client on this case, devoting about five hours of legal time to the effort, while my client took a day off from his hourly pay job to attend. It turned out that Fannie Mae owns this loan. Thus, my client and I went into the mediation without knowing that only Fannie Mae HAMP loan modification programs would be up for negotiation. Because of GMAC's participation in the concealment game, my time and that of my client were wasted, as was the time of the court appointed mediator.

The practical effect of all of this obfuscation is that the foreclosure defense process becomes unduly expensive for homeowners paying for representation, and the very limited resources of legal services and volunteer lawyers are wasted on searches for basic loan ownership information that should never have been hidden in the first place. By playing this game on such a massive scale, the foreclosure industry depletes the resources that the opposition might use in productive tasks, such as pursing loan modifications.

Variation Number 3: obstructing homeowners' discovery efforts

As foreclosure defense lawyers, we know hide the ball variations 1 and 2 well, so we try to compensate by pursing appropriate pre-trial discovery to dig out the true identity of the owners of the loans. Without fail, every single request for the production of documents that we file is met by massive and frivolous objections by counsel representing foreclosure plaintiffs. Even a simple demand for producing the original note and all endorsements is met by an objection that the request is "overly broad" and "unduly burdensome," even though the original note must be produced at trial if the plaintiff is to prevail.

When we ask for information as to the existence of endorsements to the note, we are met with an objection stating that the information is "irrelevant." The servicers and their lawyers know that judges hate pre-trial discovery disputes and are not likely to impose sanctions for their abusive conduct. Servicers seem willing to take the few sanctions orders that we do obtain knowing that, it the vast majority of cases, their obstructive tactics will go unpunished.

When we demand that the servicers produce the pooling and servicing agreements that evidence their claimed right to act on behalf of the loan owners, they refuse to do so, claiming that the agreements are confidential trade secrets. They make this claim even though copies of these agreements appear on the SEC Edgar website as public records. When confronted with this reality, they fall back on their claims that the documents are irrelevant or that it is unduly burdensome to produce them.

This kind of conduct should be sufficient for a court to simply dismiss the foreclosure outright, but our rules and case law do not allow for such dismissals until the violations become even more egregious. Foreclosure industry lawyers know and take advantage of that fact.

Thomas Cox is a retired bank lawyer in Portland, Maine who serves as the Volunteer Program Coordinator for the Maine Attorney’s Saving Homes (MASH) program. He represents homeowners in foreclosure and assists and consults with other volunteer lawyers in providing pro bono legal services to these Maine homeowners.

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Homeowners Get Screwed, Lawyers Get Played, Banks Make Profit: Where's the Outrage?

Jan 20, 2011Thomas A. Cox

house-in-hands-150The foreclosure industry is playing the system while homeowners suffer. **Stay tuned for the rest of this three-part series.

house-in-hands-150The foreclosure industry is playing the system while homeowners suffer. **Stay tuned for the rest of this three-part series.

Two recent reports, read together, should spark outrage in the country at large and among our political leadership. But no one seems to care anymore. JPMorgan Chase, the country's third largest mortgage lender, confessed that it has overcharged over 4,000 active duty troops on their mortgages and improperly foreclosed upon 14 military families. Only three days before that, reports came out that JPMorgan had just experienced a 47% jump in profits for the previous quarter and 2010 profits reached a record level of $17.4 billion.

The story of the violations of the Servicemembers Civil Relief Act was forced into the open by a Marine fighter pilot. He kept all of his payments current, but due solely to the fault of JPMorgan Chase, his mortgage was placed into default status. His wife reports collection calls (sometimes three a day) coming on Saturdays, Sundays, holidays and even at 3:00 in the morning. It took over two years and the hiring of a lawyer to get JPMorgan to back off and finally admit that he had fully paid his mortgage obligations on time. Certainly no member of the military should have to endure this kind of treatment. But, beyond this, no American homeowner should have to endure those kinds of collection tactics from America's second largest bank. Where is the outrage over these kinds of heavy-handed and abusive tactics?

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The Foreclosure Game

The situation described above fits within a pattern of abuse of American homeowners by JPMorgan Chase and the other major loan servicers that I have experienced in my work as a lawyer representing homeowners in foreclosure. They treat the foreclosure process like a game, seeking to win at any cost without regard to the harm inflicted upon homeowners. Strategic decisions are made, odds of specific outcomes are calculated and bets based upon those odds are placed. Ways to skirt the rules are studied and ignored when referees (judges) are not watching, weak opponents are trampled, cheap shots are taken at opposing parties, and major efforts are made to wear out the opposition as the game winds on. Since the foreclosure industry's pockets are deep, it is more than willing to outspend the opposition to gain an upper hand when it will help win the game.

Lawyers who have the experience and knowledge required to represent homeowners in foreclosure cases are in very short supply. The work does not pay well, if at all, it is very time consuming, and the level of knowledge necessary to do the work well is very high. I have been focusing on this work on a full-time basis for almost three years now. To be competent, I have to be familiar with the Truth in Lending Act ("TILA") and its related Regulation Z, the Homeowner Equity Protection Act ("HOEPA"), the Real Estate Settlement Procedures Act ("RESPA"), the Maine Consumer Credit Code, the Maine Unfair Trade Practices Act, the United States Bankruptcy Code, the Maine Civil Action Foreclosure Statute, the Maine and Federal Rules of Civil Procedure, the constantly changing HAMP loan modification guidelines, and the separate and distinct guidelines of Fannie, Freddie, FHA, VA, and Rural Development, each of which has its own variations on HAMP. In addition, I have to keep current on developing foreclosure case law all over the country on a daily basis. The number of us willing and able do this work is extremely limited when measured against the needs of homeowners for legal assistance -- I hear that fewer than 5% of homeowners looking for legal help are able to obtain it.

Perhaps the largest frustration for me in this work is to experience on a daily basis the games that the servicers play in the foreclosure process. I am constantly frustrated by how much of my time is spent in dealing with the servicers' antics, thus reducing the number of homeowners that I and my colleagues are able to help. What will follow is a two-part explanation of the game playing that we experience in our dealings with the mortgage loan servicers and their lawyers.

Thomas Cox is a retired bank lawyer in Portland, Maine who serves as the Volunteer Program Coordinator for the Maine Attorney’s Saving Homes (MASH) program. He represents homeowners in foreclosure and assists and consults with other volunteer lawyers in providing pro bono legal services to these Maine homeowners.

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Mike Konczal on Countdown: Beware Foreclosure Solutions that Bailout the Banks

Jan 18, 2011

Want some good news? Don't look to the housing market. Roosevelt Institute Fellow Mike Konczal went on Countdown to explain to guest host Chris Hayes the dangers our economy still faces from the foreclosure crisis:

Visit msnbc.com for breaking news, world news, and news about the economy

Want some good news? Don't look to the housing market. Roosevelt Institute Fellow Mike Konczal went on Countdown to explain to guest host Chris Hayes the dangers our economy still faces from the foreclosure crisis:

Visit msnbc.com for breaking news, world news, and news about the economy

Homes are being repossessed so quickly that there's no one to buy them, and Mike points out that they're being put into a "phantom zone" on banks' balance sheets. This is likely going to decimate housing prices further, putting homeowners more underwater. It's also going to ravage state and municipality budget sheets, which means "they're going to lay off teachers to help cover for these losses," Mike says. That's like fighting a fire with lighter fluid.

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People have long been hoping this problem will just disappear, so it's good to see someone doing something about it, Mike says -- Third Way has written an open letter to Congress urging action. But it's not the solution we need. "It leaves Wall Street still in the diver's seat," he says. "The way that [banks] deal with debt, called the servicing industry, is completely unregulated, has huge conflicts of interest where Wall Street profits when people go into foreclosure, and both investors and borrowers lose." He adds, "It's very important to think of this as a bank bailout."

But not all is hopeless. We do have a solution just waiting to be used -- our bankruptcy courts, which can modify loans and tackle the problem. "Bankruptcy courts are one of our best institutions in the country and an institution uniquely situated to handle foreclosures," Mike says.

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Wall Street Isn't Paid Enough

Jan 14, 2011Bryce Covert

Sky-high bonuses send a clear message about where our values lie.

Sky-high bonuses send a clear message about where our values lie.

A Bloomberg article from yesterday compared some numbers that should serve as a stark wake-up call: traders and investment bankers (read: people on Wall Street) make more in this country than neurosurgeons, cancer researchers, engineers, and four-star generals. That's right, folks -- if you go into the noble profession of trying to eradicate one of the most pernicious diseases, you can't expect to get paid nearly as much as someone trading derivatives of oil prices. I also suspect that General Patraeus feels his sacrifice to our country and his four-star status should earn him more than someone on the floor of the stock exchange. But of course you can't look to the banking industry for some humility in recognition of their sky-high checks. "The bottom line is all the people in investment banking understand that they work harder and are under more stress," Jeanne Branthover, a managing director at Wall Street recruitment firm Boyden Global Executive Search, told Bloomberg. "Many don't think they're paid enough." What a terrible life that must be! If only they could afford to buy yachts and go relax in the Caribbean.

But the outrage doesn't end there. Compare the estimated $2 million in pay that an M&A banker with 10 years of experience can expect to the $80,970 per year the average teacher in the top 10% will get. (Median teachers will be paid between $47,100 and $51,180 per year.) What's the value a dedicated teacher adds to our society? Educated children, who can expect higher incomes, greater productivity, and a better chance at coming up with the new ideas that take our country forward. Not to mention the harder-to-calculate benefits of children who learn to share, make friends, abide by social norms, and understand their role as citizens. What's the value that we get from a derivatives trader? It's still unclear.

Not to mention that those truly suffering right now (as opposed to the stressed out bankers who demand more zeroes on their bonus checks), i.e. the unemployed, when lucky enough to find a job are now landing ones that have dismal pay. Sixty percent of new jobs last year were in temp work, leisure and hospitality, and retail. Leisure pays an average hourly wage of $13.14 and retail will get you $11.84, while temp packagers only get $8.62.

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All of this sends a signal to young people as we live through this great recession. As I've mentioned before, we face some serious financial insecurities, greater than what many of our parents had to face when they were growing up. This means many of us will be calculating when we choose what to study in college and where to aim our career goals. Should I become a cancer researcher or a banker? The pricetag comes into play. Add to this the debt students are asked to take on at every step of their education, and the prospect of being awarded $2 million for two years in an MBA program versus $571,000 for 2-3 years in medical school and 6-8 years in residency that neurosurgeons must go through seems pretty enticing. Primary care doctors, which we desperately need more of, can expect to earn $186,044 per year for about the same amount of school and residency it takes to get into surgery. No wonder, then, that the smart calculate that they're better off going into specialties when looking at their student loan bills. The even smarter skip medicine and head straight to lower Manhattan.

Compensation is a way of valuing an employee. As the bankers rightly point out, harder work should usually lead to higher pay. So should the value put back into society. Bankers work hard, and we need them to facilitate lending and make the gears of the economy run smoothly. But does that value outrank the work a neurosurgeon does to save someone's life, like Dr. Rhee's miraculous work that led to Rep. Giffords opening her eyes two days ago? Should a banker make 20 times what a cancer researcher does? Our compensation scales are out of whack.

Bryce Covert is Assistant Editor at New Deal 2.0.

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Plus ca Change...Rooseveltians React to Obama's New Economic Adviser

Jan 7, 2011

What does Obama's choice of Gene Sperling as his new top economic adviser mean? Roosevelt Institute fellows and ND20 friends weigh in.

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

What does Obama's choice of Gene Sperling as his new top economic adviser mean? Roosevelt Institute fellows and ND20 friends weigh in.

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

Before he joined Treasury as Geithner's "Counselor," Sperling "earned" almost $900,000 advising Goldman Sachs on its philanthropic ventures, plus almost half a million dollars more from the Philadelphia Stock Exchange. Never mind the fees and honoraria he picked up from all the other financial luminaries. The key point is that payments on this scale to such political figures do not represent normal market rates for real services. He took in more from Goldman alone than many full time lobbyists earn in a year. What the White House really just announced are the names of the financial monsters with gold-plated access to the highest levels of economic policy making. That is, the winners of a rigged, money-driven lottery, and the people paying are going to be the rest of the citizenry. It's enough to drive one to drink a giant pot of tea.

Bo Cutter, Senior Fellow at the Roosevelt Institute and served as leader of Obama’s OMB transition team:

Gene Sperling is a very able man, whether or not he is a good choice as Chair of The National Economic Council is a different question. My own view is that both the President and the nation require a fundamentally different economic policy. Gene is certainly capable of delivering that policy but is he temperamentally ready to lead in developing it, and has President Obama asked for it?

Marshall Auerback, Senior Fellow at the Roosevelt Institute:

President Obama has spoken of Reagan as a transformational president, and he was quite dismissive of the Clinton Administration during the 2008 primaries. Yet with the appointment of yet another Clintonista, Gene Sperling, one would be hard-pressed to find any differentiating factor between the Clinton and Obama presidencies. Arguably, the current administration is even worse, since Clinton at least had a few progressive voices such as Robert Reich in his Cabinet. True, Clinton faced relatively minor problems while Obama is neck-deep in recession and must deal with stagnant income growth. The difference in conditions allowed the former president to reshape his administration by positioning and spin doctoring, which provided the illusion of success. But Obama can only succeed by altering outcomes. Americans want jobs, lower unemployment, economic growth, a reduced deficit and an end to the recession. They will not be assuaged or appeased by nice speeches or perceived moves to the center via "triangulation".

Edward Harrison, Founder of Credit Writedowns and New Deal 2.0 Contributor:

The Gene Sperling pick is very much in line with what I expected now that the Obama Administration has moved into re-election mode. Beside making the technical recovery stick, above all, the administration wants to present a more pro-incumbent business face. The Sperling announcement allows them to do so without being perceived on the left as completely submitting to Wall Street. There is nothing objectionable about Gene Sperling's positions on issues of substance for the Democratic base. However, in my view, the Sperling appointment is another indication of the revolving door between Wall Street and politics. Sperling is yet another Clinton appointee who left for big money on Wall Street only to re-appear in the Obama Administration. How do the French put it? Plus ça change, plus c'est la même chose.

Lynn Parramore, Editor of New Deal 2.0 and Media Fellow at the Roosevelt Institute:

Welcome to another episode of 'As the Revolving Door Turns', a depressing soap opera that has become a signature of the Obama administration. Sperling is yet another example of an adviser with close ties to Wall Street formed by chains of big money. He is also a known deficit hawk -- just the sort of discredited economic thinking we should be leaving behind as the nation continues to suffer. This sounds like good news for Wall Street; bad news for the American people.

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Bill Daley Can Build Bridges

Jan 7, 2011Bo Cutter

I believe Bill Daley is a wonderful choice as White House Chief of Staff. I know him well and believe he has all of the right skills: he is very smart; he is a real manager; he has been a cabinet member; he has the gravitas and experience to tell the president what he has to know, rather than what he wants to hear; he has as good a network as anyone in America; he is action- and decision-oriented; and his heart is in the right place.

Shaping the future with today’s choices.

I believe Bill Daley is a wonderful choice as White House Chief of Staff. I know him well and believe he has all of the right skills: he is very smart; he is a real manager; he has been a cabinet member; he has the gravitas and experience to tell the president what he has to know, rather than what he wants to hear; he has as good a network as anyone in America; he is action- and decision-oriented; and his heart is in the right place.

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Progressives' initial reaction may be skeptical. I would urge people to cut Bill Daley a break. Yes, he most recently comes from a banking background -- it happens to be just about the only major American bank that managed itself well during the financial debacle. Yes, he comes from a business background. I'm obviously a bit conflicted on this point because so do I. But I think "Main Street" is a natural ally for a large number of progressive issues, and I know that the Obama-business relationship is poisonous right now. Bill Daley can build bridges here that the Obama Administration badly needs to have built.

Roosevelt Institute Senior Fellow Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team.

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ND20 Alert: Eric Alterman's 'Kabuki Democracy' Will Be Released Jan. 11

Jan 6, 2011

alert-button-150Eric Alterman's widely-discussed essay in The Nation on the systemic obstacles to progressive governing has been expanded into a book that will appear on shelves next Tuesday, Jan. 11.

alert-button-150Eric Alterman's widely-discussed essay in The Nation on the systemic obstacles to progressive governing has been expanded into a book that will appear on shelves next Tuesday, Jan. 11. In the essay, Eric outlined in gory detail how the American economy has been captured by international banking and corporate interests determined to squeeze as much money out of ordinary folks as they can, and how liberals face daunting odds in confronting them. Eric will be discussing his new volume, Kabuki Democracy: The System vs. Barack Obama, at Manhattan's Barnes and Noble on 82nd Street and Broadway at 7pm the night of the release. Fans of his historically-grounded work and provocative style can also catch him Jan. 11 on The Brian Lehrer Show on WNYC, Hardball on MSNBC, and ParkerSpizer on CNN.

After that he'll be touring the country, touching down in Seattle, Portland, San Francisco, Capitola and Washington, D.C.

Click here for complete tour schedule.

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Don't Let the New Financial Elite Become the Ruling Class

Jan 6, 2011Mike Konczal

Their beliefs spell certain doom for the American middle class.

Their beliefs spell certain doom for the American middle class.

There's been a series of back-and-forths about the rumored shortlist for the National Economic Council spots and their ties to Wall Street. Brad Delong notes that he himself has been a Rubinite for 18 years and that "you want to draw your White House staff from successful managers...and that there are only three groups of successful managers who are Democrats: Hollywood studio executives and their ilk, people who have made careers in government and academia, and executives who have worked for traditionally-Jewish investment banks. If you want managers in a Democratic administration, that's where they have to come from. " Felix Salmon responds here and here.

DeLong's point seems to restate the issue, which is: why is there such an overlap between Wall Street and the Democratic Party, and what consequences does that have? Finance is a big sector, and Democrats could pick from any number of places within it (or elsewhere), yet they go for the large investment banks.

I'd point out a few consequences. The first is that as Tim Duy wrote in a must-read post, "What I find curious is that DeLong neglects to mention what I believe was a central element of the Rubin agenda, and an element that was in fact the most disastrous in the long run -- the strong Dollar policy." More:

The strong Dollar policy takes shape in 1995. At that point, Rubin made it clear that the rest of the world was free to manipulate the value of the US Dollar to pursue their own mercantilist interests. This should have been more obvious at the time given that China was last named a currency manipulator in 1994, but the immensity of that decision was lost as the tech boom engulfed America.

Moreover, Rubin adds insult to injury in the Asian Financial Crisis, by using the IMF as a club to enact far reaching reforms on nations seeking aid. The lesson learned -- never, ever run a current account deficit. Accumulating massive reserves is the absolute only way to guarantee you can always tell the nice men from the IMF and the US Treasury to get off your front porch.

It's also very likely that the Rubinites in the administration are the ones pushing for deficit reduction as we come out of the worst downtown since the Great Depression. They are also likely emphasizing the "structural" nature of unemployment, particularly generated by the believed uncertainty of the budget deficit. Rubin himself has pushed in these directions recently. These two claims are disastrous for the Democrats, and the worry from many on the outside, myself included, is that these are the voices most strongly heard on economic policy.

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A larger problem, though, is that the mentality of the new financial elite could take over policy and ideological thinking within the party supposedly working for the interests of working people. From Chrystia Freeland's fantastic new Atlantic Monthly article The Rise of the New Global Elite:

The good news — and the bad news — for America is that the nation’s own super-elite is rapidly adjusting to this more global perspective. The U.S.-based CEO of one of the world’s largest hedge funds told me that his firm’s investment committee often discusses the question of who wins and who loses in today’s economy. In a recent internal debate, he said, one of his senior colleagues had argued that the hollowing-out of the American middle class didn’t really matter. “His point was that if the transformation of the world economy lifts four people in China and India out of poverty and into the middle class, and meanwhile means one American drops out of the middle class, that’s not such a bad trade,” the CEO recalled.

I heard a similar sentiment from the Taiwanese-born, 30-something CFO of a U.S. Internet company. A gentle, unpretentious man who went from public school to Harvard, he’s nonetheless not terribly sympathetic to the complaints of the American middle class. “We demand a higher paycheck than the rest of the world,” he told me. “So if you’re going to demand 10 times the paycheck, you need to deliver 10 times the value. It sounds harsh, but maybe people in the middle class need to decide to take a pay cut.”...

When I asked one of Wall Street’s most successful investment-bank CEOs if he felt guilty for his firm’s role in creating the financial crisis, he told me with evident sincerity that he did not. The real culprit, he explained, was his feckless cousin, who owned three cars and a home he could not afford. One of America’s top hedge-fund managers made a near-identical case to me — though this time the offenders were his in-laws and their subprime mortgage. And a private-equity baron who divides his time between New York and Palm Beach pinned blame for the collapse on a favorite golf caddy in Arizona, who had bought three condos as investment properties at the height of the bubble.

It is this not-our-fault mentality that accounts for the plutocrats’ profound sense of victimization in the Obama era... Yet many of America’s financial giants consider themselves under siege from the Obama administration — in some cases almost literally. Last summer, for example, Blackstone’s Schwarzman caused an uproar when he said an Obama proposal to raise taxes on private-equity-firm compensation — by treating “carried interest” as ordinary income — was “like when Hitler invaded Poland in 1939.”...

A Wall Street investor who is a passionate Democrat recounted to me his bitter exchange with a Democratic leader in Congress who is involved in the tax-reform effort. “Screw you,” he told the lawmaker. “Even if you change the legislation, the government won’t get a single penny more from me in taxes. I’ll put my money into my foundation and spend it on good causes. My money isn’t going to be wasted in your deficit sinkhole.”

He is not alone in his fury. In a much-quoted newsletter to investors last summer, the hedge-fund manager — and 2008 Obama fund-raiser — Dan Loeb fumed, “So long as our leaders tell us that we must trust them to regulate and redistribute our way back to prosperity, we will not break out of this economic quagmire.” Two other former Obama backers on Wall Street — both claim to have been on Rahm Emanuel’s speed-dial list — told me that the president is “anti-business”; one went so far as to worry that Obama is “a socialist.”

Instead of soul-searching for why the financial crisis happened, they incriminate middle-class Americans. Instead of looking at the latest research finding that securitization and Wall Street intermediation increased the supply of credit, and supply always finds its demand, they blame average Americans for demanding too much credit.

And the most worrisome thing is that the obvious solutions for where we are -- a short period of higher inflation, massive credit writedowns, and a larger government deficit paid for with higher taxes on the rich and the largest banks -- are all things this new financial elite hate. And the current debates about "structural unemployment" or a lack of interest in jobs covers for this elite's obvious belief -- that the American middle-class was an anomaly of history, an artifact of the Cold War and the post-WWII era. They believe that Americans are going to have to take a massive cut in wages in order to recover. This was the argument in the age of Keynes, and it is the argument now. No wonder the Democratic party looks paralyzed from the outside.

Mike Konczal is a Fellow at the Roosevelt Institute.

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Drinking Austerity Kool-Aid in 2011

Jan 4, 2011Marshall Auerback

What’s coming in 2011?  We asked thought leaders to share their perspectives on the biggest challenges for the year ahead, along with the changes they’d like to see and the hopes they cherish. Marshall Auerback explains how misguided attempts to reduce the deficit kill jobs, squeeze the working and middle classes, and inflate crude oil prices. And a corrupt political system doesn't help.

The beginning of the year always seems a good time to lay out some broader themes which could develop throughout the year, good and bad, so here goes:

What’s coming in 2011?  We asked thought leaders to share their perspectives on the biggest challenges for the year ahead, along with the changes they’d like to see and the hopes they cherish. Marshall Auerback explains how misguided attempts to reduce the deficit kill jobs, squeeze the working and middle classes, and inflate crude oil prices. And a corrupt political system doesn't help.

The beginning of the year always seems a good time to lay out some broader themes which could develop throughout the year, good and bad, so here goes:

The good news is that the US budget deficit still looks to be large enough to support modest top line growth and sustain and stabilize incomes, even if it's not large enough to bring the jobs we need. As I've argued many times in the past, higher government deficits facilitate private sector deleveraging and continuously add to incomes and savings. It is no coincidence that the financial burdens of households and corporations have continued to fall (and savings rates risen) as government deficits have increased.

Unfortunately, the new Congress appears bent on misguided deficit reduction. By next week, the House of Representatives will have a deficit hysteric majority, with many pledged to a balanced budget amendment. And the world seems to be leaning towards fiscal tightening pretty much everywhere. The unemployment benefits program has been extended, but benefits still expire after 99 weeks, and less in many states. Net state spending continues to decline as state and local governments continue to reduce their deficits.

It is true that state tax collections are up quite nicely these days. But even with the recent improvement many states' total monthly collections are just getting back to 2007/2008 levels, so they are not in the position to ramp up spending. The commentators who are crowing about the current increase in revenues do not understand the historical significance of the extreme weakness we have seen for two full years. As Philippa Dunne (co-author of the excellent Liscio Report) has pointed out to me, sales taxes began to show signs of trouble in early 2007. Catch-up in the funding of unfunded pension liabilities will also continue to be a drag on demand.

Clearly, much of the emotion surrounding government deficit spending could be rectified if we simply viewed the deficits for what they really are. The budget balance is the difference between total revenue and total outlays. At the federal government level, if total revenue is greater than outlays, the budget is in surplus and vice versa. It is a simple matter of accounting with no theory involved. That's it. In other words, without any discretionary policy changes, the budget balance will vary over the course of the business cycle. When the economy is weak, tax revenue falls and welfare payments rise, so the budget balance moves towards deficit (or an increasing deficit). When the economy is stronger, tax revenue rises and welfare payments fall and the budget balance becomes increasingly positive. Automatic stabilizers attenuate the amplitude in the business cycle by expanding the budget in a recession and contracting it in a boom (see this for further explanation).

To judge from statements on both the left AND the right, it is clear that very few politicians get this basic accounting point, which increases the odds that these social programs will continue to come under attack in 2011. This has already occurred in the UK over the past few months. There, a Tory-led coalition government has completely drunk the deficit reduction "Kool-Aid". Instead of the public sector providing employment leadership at a time when the private sector is not yet ready to expand jobs growth, David Cameron's administration has been cutting jobs and forcing unemployment up (see the UK's Labour Market Statistics). As the austerity drive deepens, the deflationary impact of these job cuts will undermine private sector employment growth. Not that this will stop the cuts from happening here in the US. This sort of economic vandalism has now metamorphosed into "responsible fiscal action", if one is to believe the vast majority of the "experts" in the mainstream commentariat.

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The attacks on public sector unions reflect another flank in this ruthless pincer movement on middle and working class Americans, as this NYTimes article illustrates. It is fascinating to see how the public narrative in the media has gradually shifted over the past year from Wall Street's sociopathic practices (which were directly responsible for the creation of the crisis) to the alleged greed of public employee unions and their pension benefits, many of which were the product of agreed wage negotiation packages in which unions were receiving these pension benefits in lieu of increased wage benefits. During 2008, we were told that the government's hands were tied and that sanctity of contracts had to be honored. This was when the Federal Reserve authorized 100% payouts to the likes of Goldman Sachs on AIG's credit default swaps (in effect allowing the Fed to act as an extra budgetary vehicle of the Treasury, which is a violation of the Constitution and shows how patently false the Fed's claims of independence are). But I don't seem to recall many Wall Street types going on about the sanctity of contracts when agreements with the UAW were reworked to save GM or now when public employee union pension benefits are under attack. The argument seems to be that the states are suffering from a genuine solvency crisis in which everybody has to make sacrifices, including the "greedy" unions. So why should big financial firms, which would otherwise have been toast but for the munificence of the suffering American taxpayer, be any different? If the attacks outlined in the NYTimes piece reflect a broader trend this year, then it has ominous implications for the country as a whole.

Another worry related to the potential diminution of spending power is the troublesome rise in crude prices. Net demand is not up appreciably, and Saudi production remains relatively low. Peak oil dynamics could well be at work here. In a broader sense, what Paul Krugman describes -- "we're living in a finite world, in which the rapid growth of emerging economies is placing pressure on limited supplies of raw materials, pushing up their prices" -- could well prove accurate. Which, in the absence of countervailing support to incomes via fiscal policy or increased private sector activity that increases jobs, means cuts in other areas of discretionary spending. Hardly a healthy trend in a world still constrained by inadequate demand. Crude prices are already up enough to be a substantial tax on US consumers that has probably more than offset whatever aggregate demand might have been added by the latest tax package.

A federal pay freeze has been proposed. The Fed's zero rate policy and its continuation of "quantitative easing" both serve to reduce net interest income earned by the economy.

Bank regulators continue to impose policies that work against small bank lending, whose wholesale funding costs are substantially higher than their "too big to fail" counterparts. The Dodd-Frank "financial reform" entrenches the dominance of the systemically dangerous institutions at the expense of the 6,000 or so other banks that engage in classic loan intermediation activity -- the sort of thing we want our banks to be doing.

Overseas, the euro zone looks set to muddle through with very weak domestic demand. The periodic disruptions to the credit markets have hitherto been mitigated by repeated European Central Bank bond buying of the national debts in the secondary markets, but at the cost of further fiscal austerity being imposed on the periphery countries.

What about the emerging world, which has hitherto been held out as the major repository of global growth? Does China slow as a result of fighting inflation? Or Brazil? Maybe India as well?

Finally, there is the odious problem of political corruption, which manifests itself in many forms, but most recently through the cynical revolving door policy between Wall Street and government. Peter Orszag's move to Citi after spending months launching broadsides against Social Security from his perch at OMB and then the NYTimes goes beyond cynicism. Nobody expects a former government official to live like a monk after spending time in public service. But the idea that someone would help plan, advocate, and carry out an economic policy that played such a crucial role in the survival of a financial institution and then, less than two years after his administration took office, would take a job that (a) exemplifies the growing disparities the administration says it's trying to correct and (b) unavoidably call on knowledge and contacts he developed while serving at OMB is sickening in the extreme. That his successor also comes from Citi simply perpetuates the incredulity. All this, under an ostensibly "progressive" Democratic administration.

The revolving door between Wall Street and Washington calls attention to the rotten heart at the core of the American polity today -- what James Galbraith has felicitously termed "the predator state". The state has become too weak and therefore remains another instrument of corporate predation. The revolving door policy (eagerly embraced by this president, much like his predecessors) perpetuates the problem because it enhances the dominance of the so-called "FIRE" (finance, insurance, real estate) sector of the economy. The FIRE sector simply acts as a parasite on the production and consumption core, extracting financial and rent charges that are not technologically or economically necessary costs. Its revenue takes the form of what classical economists called "economic rent," a broad category that includes interest, monopoly super-profits (price gouging) and land rent, as well as "capital" gains. Its ethos consists largely of denuding the state of any provision of public goods, privatizing the public domain and erecting tollbooths to charge access fees for basic necessities such as health insurance, land sites, home ownership, the communication spectrum (cable and phone rights), patent medicine, water and electricity, and other public utilities, including the use of credit cards or the credit needed to get by. It's a zero-sum economic activity. One party's gain (that of Wall Street usually) is another's loss. It looks like we'll have much more of the same as we enter into 2011.

"Happy" New Year everybody.

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

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