The CFPB is a Win for the Unbanked

Jun 29, 2011Bryce Covert

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Bryce Covert is Assistant Editor at New Deal 2.0.

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Trojan Horse Rescue in Greece

Jun 21, 2011Marshall Auerback

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

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

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

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

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

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

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

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

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

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

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

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

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

The ECB itself notes that:

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

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

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

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

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

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

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

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

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

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Mike Konczal on Netroots Nation

Jun 21, 2011Mike Konczal

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

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

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

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

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

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

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

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

Jun 20, 2011

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

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

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

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

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America for Sale...and Goldman Sachs is Buying

Jun 16, 2011Dylan Ratigan

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

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

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

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

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

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

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

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

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

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

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

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

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

*This post originally appeared on Huffington Post.

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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:


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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