Visualizing the Nonsense of Fiscal Austerity

Sep 29, 2010

In a new short video, Mark Blyth breaks down the "nonsense" of fiscal austerity, now all the rage in governments across the globe. Austerity, while claiming to be virtuous, really "involves a question of equity: who pays and who doesn't," Blyth explains. "Like a unicorn with a magic bag of salt, it's a nice idea," he says, but in reality it's baloney. Here's why:

In a new short video, Mark Blyth breaks down the "nonsense" of fiscal austerity, now all the rage in governments across the globe. Austerity, while claiming to be virtuous, really "involves a question of equity: who pays and who doesn't," Blyth explains. "Like a unicorn with a magic bag of salt, it's a nice idea," he says, but in reality it's baloney. Here's why:

Before the crisis, everyone took on debt. Those at the bottom 40% of income distribution took it on to pay the bills, because after all they hadn't seen a real wage increase since 1979, Blyth points out. The banks, on the other hand, levered up, which is like "going double or nothing in blackjack," he says. They pushed in all those blackjack chips -- but each was just an IOU, and when the whole thing crashed they became Too Big To Fail.

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So the problem is debt, but not the way fiscal conservatives want you to think. Everyone, from corporate treasurers to single moms, will use any cash they have to pay down debt -- not to spend. So public consumption -- i.e. government spending -- takes the place of private consumption. "All of these pieces are connected," Blyth says. "If the public sector cleans its balance sheet at the same time as the private sector, then the whole economy craters."

"Austerity: the pain after the party," Blyth mimics. "But here's the kicker: the hangover of austerity is not going to be felt the same across income distribution." In fact, a cycle perpetuates wherein those with the lowest income keep bearing the brunt for those with the highest.

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Will It Work and How Will We Know? The Future of FinReg

Sep 28, 2010Mike Konczal

mike-konczal-2-100Mike Konczal and the Roosevelt Institute to discuss the second act of the Dodd-Frank Act.

Next Monday, October 4th, I'll be holding a conference for the Roosevelt Institute titled "Will It Work and How Will We Know? The Future of Financial Reform Conference."

mike-konczal-2-100Mike Konczal and the Roosevelt Institute to discuss the second act of the Dodd-Frank Act.

Next Monday, October 4th, I'll be holding a conference for the Roosevelt Institute titled "Will It Work and How Will We Know? The Future of Financial Reform Conference."

Here at the Roosevelt Institute, we've fought for financial reform over the past year with events including our Make Markets Be Markets project. We've worked to increase the sophistication of the discussion surrounding specific issues. We've also pushed for the role of regulation in creating rules of the road necessary for a healthy financial system that works to build the real economy. The first round of that battle is over with the passage of the Dodd–Frank Wall Street Reform and Consumer Protection Act. It's time for phase two.

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Most other policy initiatives have some sort of conceptual metrics associated with them -- "bending the cost curve" for health care, "jobs saved/created" for the stimulus and test scores for No Child Left Behind. Bundled with the goalposts of a metric is an idea of how the policy should work, as the metrics can't really be separated from creating what it is going to measure. So we need to figure out what bending the cost curve of financial reform is: what are ways to know if the policy implementation is going well or poorly? How can we tell if we are closer or further away from a functioning financial market?

We are gathering some of the best minds of financial reform to discuss this. Here is the current schedule, with a panel focus on Too Big To Fail, as well as a focus on the financial markets broadly construed from derivatives to consumer lending.

It's a small venue at capacity, but it will all be online shortly after the conference. We'll be putting out a booklet of white papers by the authors outlining their ideas about what went wrong, how the Dodd-Frank financial reform bill is meant to remedy it and what it would look like to get to a healthy functioning market, which will also be put online. We'll also be running excerpts and opinions by our participants here and at New Deal 2.0 To start, here is Wally Turbeville on derivatives. I hope you check it all out.

Mike Konczal is a Fellow at the Roosevelt Institute.

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Hamptons Institute: Soros, Warren and Greenberger on FinReg

Sep 27, 2010

You may know that over the summer, the Roosevelt Institute partnered with Guild Hall to put on the Hamptons Institute, a gathering of prominent thought leaders in politics, economics, media, and the arts. In case you missed out on the event, full footage of the panels is now online.

You may know that over the summer, the Roosevelt Institute partnered with Guild Hall to put on the Hamptons Institute, a gathering of prominent thought leaders in politics, economics, media, and the arts. In case you missed out on the event, full footage of the panels is now online.

The first panel featured ND20 contributors George Soros, Elizabeth Warren, and Michael Greenberger. Moderator Joe Nocera asked each to reflect on the victories or challenges embodied in the financial reform bill, which had just passed the Senate. In the above video, Soros sums up his feelings: "I think it's good to have it done. But it doesn't really address the problems of the system." Warren, whose work helped create the Consumer Financial Protection Bureau (which she is now helping to get started), echoed the sentiment by saying, "I'm pleased," then adding: "It's not perfect." Both agreed that the most important -- and what Soros deemed "urgent" -- piece of the legislation was the new bureau.

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Michael Greenberger felt the same about the CFPB. But he was perhaps the most optimistic about the entire bill:

While he gave it a "B minus," he added, "I view the B minus as a midterm grade." The battle for meaningful reform continues -- but we now have the tools to fight it.

The event went on to tackle issues such as Europe's economy, building a new Green economy, and investing in the arts and in culture. You can find the rest of the video footage here.

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Report from the Frontlines: Mission Not Accomplished on Derivatives Reform

Sep 27, 2010Wallace Turbeville

stockmarket-1500001FinReg passed. But now the battle rages over how to implement meaningful reform.

stockmarket-1500001FinReg passed. But now the battle rages over how to implement meaningful reform.

It is now obvious that when President Bush made his victory speech on the aircraft carrier in front of the now-famous "Mission Accomplished" banner, he was a bit premature in his assessments.

We should not make the same miscalculation with financial reform. Dozens of fights over these reforms, large and small, continue in Washington, New York and elsewhere. The struggle has moved from the halls of congress to the bureaucracies. At issue is the implementation of 850 pages of legislation concerning financial systems and practices that are difficult for even the most experienced financiers to understand, subjects which are far less appealing to the media. The SEC and the CFTC (Commodity Futures Trading Commission), which are jointly responsible for regulation, understand that their task is enormous and that their resources are stretched.

My interest is primarily in the area of derivatives, and this piece is intended as a "report from the front" in that theatre of conflict. The early stages of the process involve: roundtables hosted by the regulatory agencies; private meetings with industry and public interest groups (in which the attendees and subjects addressed are disclosed, but not the content of the discussions); and comment letters filed with the regulatory agencies. The vast majority of input has come from the financial industry. Proponents of regulation are at an enormous disadvantage. Their resources are meager and their access to information and expertise is minimal compared to the institutions and the businesses that serve them. However, the proponents remain passionate, and they are bolstered by the obvious intent of the legislation.

Several of the issues under discussion get at the core components of the Dodd-Frank Act. One is the transfer of risk-laden derivatives portfolios from the poorly-managed and murky world of bi-lateral contracts into clearinghouses, where the management of risks is monitored and transparent. Another is public availability of trading data, which allows regulators and participants in the marketplace access on equal footing with the dominant trading houses.

Clearing

The banks and clearinghouses have asserted from day one that not every type of derivative contract can be cleared. Before the passage of Dodd-Frank, much of the discussion of clearing limitations concerned "bespoke" transactions, suggesting one-off, complicated arrangements with multiple terms, unsuitable to the standardized world of clearing. The discussion has shifted to a separate and more troubling issue. The new focus is on standardized contracts that involve risks that are difficult or impossible for clearinghouses to measure. The principle role of clearing is the statistical measurement of predicted price moves and the management of the credit risk associated with those moves. Margin to collateralize the risk is required to offset the risk. If the risk cannot be measured, the adequacy of margin is uncertain, calling into question the integrity of the clearinghouse.

There is tension between Dodd-Frank's intention to move positions into the clearing environment and the need for a secure clearing system. The debate is over how to determine the scope of clearable contracts and use available techniques to maximize the categories of contracts that will be cleared.

Proponents of reform are generally skeptical of the clearinghouses on this issue. Until relatively recently, clearinghouses were owned by the trading firms and operated for their benefit. Clearinghouse profitability is based on volumetric fees, and the banks represent the vast majority of volume. The clearinghouses and banks have freely admitted that financial institutions are both heavily involved and influential in the process of determining the types of contracts that are cleared. Bank involvement is essential, they say, because of their expertise and their ultimate exposure if things go wrong.

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This assertion is deeply ironic and raises some concerns:

• If a transaction's risk cannot be measured adequately to permit prudent collateralization, why should the system allow a financial institution to trade it?

• In the go-go era of derivatives trading, clearinghouses competed to clear products (and increase revenues and share prices) by pushing the envelope of statistical risk metrics. The new emphasis on prudence is startling.

• Clearinghouses are supposed to be experts in measuring derivatives risk. While banks might be a good source of information on a new contract, the clearinghouses must make the decisions. They exist to manage risk, not to further the interests of the clearing members. In reality, this distinction is still blurred for many senior managers of clearinghouses.

• Financial institutions are at risk if a clearinghouse fails; but, recalling the autumn of 2008, so is the public.

Much of the discussion has revolved around share ownership limitation and corporate governance. These are valid concerns. Perhaps a more important focus is the risk committees at clearinghouses. Clearinghouse managers and clearing members (that is to say, the banks) run the core business through these committees. They control the central issues, including the types of contracts that can be cleared. Regulatory or public interest participation in these committees would be an effective way to legitimize the process.

If it is accepted that the risk of certain categories of derivatives cannot be measured adequately to permit conventional clearing, the discussion moves on to techniques that depart from conventional clearing practices to enable more transactions. Three methods, which are not mutually exclusive, have been suggested by proponents:

• Statistical projections used in clearing are based on historic price movements. The idea is to cover some large percentage, often 99%, of historic price moves with margin. There is no reason that margin should be limited to historic movements. If margin collateral exceeded the largest historic movements, more transactions could be cleared.

• Reference prices in problem contracts can often be disaggregated into components: one that is easily cleared and one that is not. This is because of the real-world characteristics of the commodity or financial instrument that is the subject of the contract. Consider a difficult natural gas delivery point that is physically sourced from a readily clearable delivery point. The disaggregated price risk of the clearable point could be cleared, leaving only the stub price differential as a problem contract. Thereby, more risk is cleared.

• The obstacle to clearing problem contracts is unacceptable risk for the clearinghouse. Requiring the clearinghouses to run separate clearing pools in which this risk is limited or eliminated allows the broadest scope of clearing. This is far better than the alternative -- leaving these transactions in the bi-lateral world.

Market Information

A central tenet of Dodd-Frank is that the derivatives trading market should be transparent. All price data should be available to market participants and regulatory authorities. The Act establishes the superstructure, mandating data repositories and (for the most part) "real time" public disclosure.

The quantity of data poses challenges, but these are largely mechanical. The significant issues revolve around the form of data disclosure. The data must be useful to individual market participants in their daily activities if the system is to provide meaningful transparency. The presentation must be uniform and accessible in a way that can integrated into the screen environments used by traders.

The Roundtable discussions concluded unanimously that a data aggregator was essential. This function is not contemplated by Dodd-Frank, but it is required to make the policy work. The discussion also recognized that the aggregator must be independent of influence and that industry ownership and volumetric fee revenue should be avoided. The concepts of a "public utility" and a "common carrier" were used to describe it.

The data assembled by the aggregator will offer a tremendous opportunity for  regulatory authorities to meaningfully monitor the derivatives markets. As an example, consider compliance with the Volcker Rule. It is naïve to believe that there is a bright red line between proprietary trading and banks' other market activities. The aggregator's data base can be analyzed using systems designed to detect activities that might not be in compliance. In addition, the data will represent the comprehensive portfolio of the reporting firms, allowing the regulators to monitor and analyze credit risk and appropriate position limits.

The optimal organizational structure for the aggregator would allow it to service the needs of the regulators, while providing the mandated market transparency in a useful way. This suggests an independent non-profit or limited profit organization, with substantial regulatory involvement, capable of developing analytical systems to benefit the public's interest.

Wallace C. Turbeville is the former CEO of VMAC LLC and a former Vice President of Goldman, Sachs & Co.

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Guest Post from Yves Smith: Goldman Sachs' Glass Ceiling Remains Intact

Sep 23, 2010Yves Smith

gender-equality-150Without serious structural changes, Wall Street will continue to look like a country club.

gender-equality-150Without serious structural changes, Wall Street will continue to look like a country club.

Three women filed a sex discrimination suit against Goldman seeking class action status. It has gotten some attention in the press and on the Web for not the best reasons, namely, the complaint recounts in some detail how one of the plaintiffs, Christina Chen-Oster, a convertible bonds sales rep, had had a colleague force himself on her after a business-related group outing to a strip club. When she reported it some time after the fact (the perp had asked her to keep it secret), she was increasingly ostracized and marginalized.

While the salacious allegations are a vivid reminder of the sort of indignities that women can experience even in ostensibly well-run firms, they are the most obnoxious and disheartening example of the second-class status that women typically occupy in male-dominated fields. The fact is that Goldman has had long-standing problems with women, and the lawsuit's charges are far more damaging and potentially costly than the commentary indicates.

I joined Goldman in its corporate finance department nearly 30 years ago. Goldman had just been sued for sex discrimination, and the firm seemed eager to counter its reputation as the worst place for women on Wall Street. But it wasn't clear to me that things had changed so much as the worst extremes were addressed. For instance, a highly respected Vice President had propositioned every woman in the department. He was finally hauled before the Management Committee and told to cut it out. I arrived at the firm to learn that there was a betting pool on whether he would revert to his old form with me. While he didn't, a partner in the firm did make advances. When he eventually backed off, the fallback was to give me a checklist of the sort of woman he wanted to date and ask me to set him up with suitable candidates.

Fast forward, and while the firm now has policies on dating, the area where the rubber really hits the road, pay and promotion, appears to be as retrograde as ever. Some of this may result from the shift at Goldman from having a substantial investment banking business to one where traders, the most macho and individualistic players, are now dominant.

Make no mistake: the charges in the suit are serious. It seeks class action status, and gender discrimination suits with similar allegations have won class certification (the process is that the plaintiffs do limited discovery to prove they meet the four criteria for class certification). That means that should the plaintiffs prevail, every woman at the firm in a to-be-determined target time period would be considered in arriving at damages.

The central charge is a classic pay act claim, that women are paid less for doing the same work as the boys. There are multiple mechanisms by which this occurs, in addition to allegations of simply lower compensation for comparable performance. Women are also set up to do less well: the best assignments and territories go to men (the suit gives examples of plum territories and clients being stripped from women and assigned to male colleagues); are asked to do clerical work and training far more than men; and receive less informal mentoring.

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The suit describes how business unit managers have unlimited discretion on pay and promotion of their subordinates. This may not seem unusual, but according to the plaintiffs, a lot of "human capital management" procedures are easily and often gamed. For instance, the firm has "360 degree" reviews, but the boss picks who gets to review a particular subordinate, which can be used to stack the deck, and when he gets back the ratings, he can still rank his troops as he sees fit. Perhaps most important, pay is compounded. If one person is paid 10% less than other people in their unit, their next year pay is set as a percent increase over prior year pay. So a one-year setback, whether justified or not, will lead to widening differentials over time.

There is every reason to believe this suit will be costly to Goldman, yet have perilously little long-term impact. One of the two firms representing the plaintiffs, Lieff Cabraser, is a class action heavyweight. Goldman is likely to be advised to settle the suit quickly. It does not want Lieff Cabraster doing a lot of discovery. Lieff Cabraster will probably go to the class certification stage (that's when the numbers will start to get large) and see if Goldman initiates settlement talks.

Assuming this plays out according to the normal script, all affected women will get checks. Those who remain, even if the firm agrees to modify some of its pay and promotion practices to manager discretion, are unlikely to see much change. Big dealer firms delegate substantial authority to producers; a Wal-Mart, with its highly codified managerial processes, is in a far better position to curb abuses than a firm where managers operate what amount to franchises in a larger corporate umbrella.

There's nevertheless a tendency to see people like the plaintiffs in this suit as sore losers, when the reality is far more complex. Unfortunately, legal remedies can reinforce the idea that minorities and women can’t succeed on their own and need quotas or other measures to assure they are represented in sufficient numbers. By implication, diversity is in conflict with merit-based policies. As transgendered scientist Ben Barres has pointed out, citing research, “When it comes to bias, it seems that the desire to believe in a meritocracy is so powerful that until a person has experienced sufficient career-harming bias themselves, they simply do not believe it exists.” And examples are widespread in other fields. For example, a 1997 Nature paper by Christine Wenneras and Agnes Wold, “Nepotism and Gender Bias in Peer-Review,” determined that women seeking research grants need to be 2.5 times more productive than men to receive the same competence score. In 1999, MIT published the results of a five-year, data-driven study that found that female faculty members in its School of Science experienced pervasive discrimination, which operated through “a pattern of powerful but unrecognized assumptions and attitudes that work systematically against female faculty even in the light of obvious good will.”

It isn't widely recognized outside the human resources field, but performance appraisal systems have been criticized for over 100 years as being unable to live up to their objectives. Thus, the typical defense against the failure to achieve diversity, that the company was in fact hiring and promoting based on achievement, is hollow. These systems not only are subjective (inherent to most ratings) but also often lead to capricious, even unfair results.

The idea that Goldman, and Wall Street generally, which for decades have had their pick of top business and law school graduates, can't find women of the same caliber as men simply doesn't pass the common sense test. But “diversity” has the effect of shifting attention away from the fact that companies may be inbred. Conservatism and a common preference to hire in your own image leads many firms to stick with their tried-and true profile, which in most cases is Caucasian and male. Sadly, the C level and boards at most large companies still look more like country clubs than the US as a whole, and that's still not likely to change soon.

Yves Smith is the founding editor of Naked Capitalism. She is a former employee of Goldman Sachs.

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Rooseveltians React to Summers' Exit

Sep 23, 2010

By now we all know that Lawrence H. Summers, head of the Obama administration's National Economic Council, will leave Washington for his old stomping ground of Harvard at the end of the year. The NEC chief funnels economic info to the Oval office, and is the leading voice in the president's ear for recovery policy. What does the exit mean for the administration's economic course? Roosevelt Institute fellows and New Deal 2.0 contributors give their two cents:

By now we all know that Lawrence H. Summers, head of the Obama administration's National Economic Council, will leave Washington for his old stomping ground of Harvard at the end of the year. The NEC chief funnels economic info to the Oval office, and is the leading voice in the president's ear for recovery policy. What does the exit mean for the administration's economic course? Roosevelt Institute fellows and New Deal 2.0 contributors give their two cents:

From Marshall Auerback, Senior Fellow at the Roosevelt Institute:

Shift from "money manager capitalism?" "It is probably too late for the administration to mitigate the likely electoral carnage anticipated in November's mid-terms, even with the Summers announcement. The reality is that the President has never really been able to reclaim credibly the "change" mantle after hiring Robert Rubin retreads, such as Larry Summers and Tim Geithner, both of whom were so inextricably linked with the financial bubble's rise in the 1990s. Under the guidance of both players, policy has consistently served the interests of Wall Street, as opposed to implementing programs that would directly sustain employment and restore states' finances. To make matters worse, both Summers and Geithner have been unduly preoccupied with "paying for" additional spending through tax hikes or spending cuts elsewhere, even as they extended trillions of dollars in guarantees to the financial sector. This perceived double-standard has both discredited fiscal activism as a legitimate policy tool, as well as engendering a populist backlash manifested in the rise of the Tea Party. Although Summers' departure is welcome, given that Treasury Secretary Geithner will likely remain as the vicar of economic policy, it's hard to envisage that this resignation is anything more than a cosmetic gesture designed to soothe the base. That said, the resignation does provide a scintilla of hope that the President will finally shift away from today's disastrous course of "money manager capitalism" which has heavily constrained the capacity of the non-financial part of the US economy to recover and may lead to a Japanese-style lost decade if not changed."

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From Josh Rosner, New Deal 2.0 contributor:

End to Kick-the-Can Policies? "While I can't question Summers intent or interest in being part of the solution to this economic crisis his departure, on the eve of a double dip, demonstrates what some of us have known for a while. Yes, the government needed to act, but the kick-the-can policies of the Obama administration have mired us more deeply in a structural morass. Hopefully the President will replace Summers and Geithner with a team that recognizes that sweeping problems under the rug undermines confidence in our economy and markets and doom us to a long contraction driven by a weak banking system. It's time to address the troubled assets that remain on our banks balance sheets so they can be healthy enough to lend and have confidence that they will again lend."

From Mike Konczal, Fellow at the Roosevelt Institute:

Opportunity for Progressive Voices: "Where does Obama go with the NEC director from here? This opening would be an excellent opportunity for progressive and alternative voices to be heard within the Obama economic team. For better or worse, the initial team was designed to have insight into the current way the financial sector works. The financial crisis is now over, and the financial reform bill passed. The issue facing the country on the economic front will be a period of high joblessness and anemic growth for years. With Congress becoming deadlocked this next year, someone who can think of bold and aggressive short-term solutions while also visioning the arguments for a broad-based prosperity over the next decade is essential. As Steve Clemons noted, Obama wanted a team of rivals but ended up with a team of Rubins. Now is the exact time to break this."

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Hamptons Institute: Restoring the Integrity of U.S. Financial Markets

Sep 22, 2010

This summer, the Roosevelt Institute partnered with Guild Hall to stage the Hamptons Institute, a gathering of today's most prominent thought leaders in politics, economics, media, and the arts. If you missed out on the landmark event, you're in luck: Guild Hall has posted a series of video highlights, which you can find here.

This summer, the Roosevelt Institute partnered with Guild Hall to stage the Hamptons Institute, a gathering of today's most prominent thought leaders in politics, economics, media, and the arts. If you missed out on the landmark event, you're in luck: Guild Hall has posted a series of video highlights, which you can find here.

In the video above, Roosevelt Institute President Andrew Rich explains that this modern-day brain trust was designed to emulate FDR, who "brought people with diverse points of view to debate ideas in front of him and in the administration in order for him to figure out the way forward for this country and for the world."

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That intellectual firepower is certainly on display in the panel entitled "Restoring the Integrity of U.S. Financial Markets." Moderated by the New York Times' Joe Nocera, it features George Soros, Elizabeth Warren, and Michael Greenberger debating the merits of finreg, the origins of the financial crisis, and the future of the global economy. While all three panelists express disappointment with the Dodd-Frank Bill and frustration with the Obama administration's economic approach, Warren promises that the new consumer protection agency will "take a very broken consumer credit market, one that has really transformed itself over the last 15 years or so into a market that's designed around tricks and traps," and create "a more level playing field for consumers." Let's hope she can make it happen.

Click here to watch the videos.

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FDR: The Unlikely Anti-establishment President

Sep 17, 2010David B. Woolner

Roosevelt historian David Woolner shines a light on today’s issues with lessons from the past.

Roosevelt historian David Woolner shines a light on today’s issues with lessons from the past.

What swept Franklin Roosevelt to victory in 1932 was not merely his charm and popular appeal. It was also the deep-seated anger and frustration most Americans felt over the US economy. It had been flung into disaster by the greed and avarice of the largely unregulated banking and financial sector and by the reckless, speculative behavior of a well-heeled corporate elite. Since the early 1920s, that elite had accumulated a seemingly ever-increasing share of the nation's wealth, so that by 1929 the top one percent of the population possessed as much money as the bottom 42 percent.

From the day he took office, FDR identified this fundamental inequity as the crux of the problem that faced the nation. Consider, for example, these words, taken from his first inaugural. After reassuring the American people that their distress came from "no failure of substance" and that thanks to the bounty of this great land "plenty is at our doorstep," he observed that the crucial problem was that the generous use of the nation's wealth "languishes in the very sight of supply." Why? Because, as FDR put it:

the rulers of the exchange of mankind's goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and abdicated.

...Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence. They know only the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish.

The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.

FDR then went on to say that recognition of "the falsity of material wealth as the standard of success goes hand in hand with the abandonment of the false belief that public office and high political position are to be valued only by the standards of pride of place and personal profit."

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In taking on the vested financial and political interests that had largely brought about the collapse of the nation's economy, Roosevelt touched a deep nerve in the American psyche. From this moment on, he was forever identified as the champion of the people, as a leader who was not only hated by the "economic royalists" that had seized control of the country, but as a man who "welcomed their hatred."

The bond that was created by FDR's willingness to acknowledge and even highlight the profound gap between those in his own class and the vast majority of working Americans made him much more than just a populist leader. He also became, somewhat ironically, the pre-eminent anti-establishment president.

Backed by the people, and by his overwhelming electoral victory, which included huge majorities in both houses of Congress, FDR was able to steer through an unprecedented set of reforms that would transform the American government into an active instrument of social and economic justice. The well-known results -- banking and financial reform, Social Security, unemployment insurance, recognition of the rights of labor -- were largely opposed by those in established positions of wealth and power. But in spite of this, FDR was able to persevere, in large part because he never lost the support of the ultimate authority in the country: the American people.

FDR kept their support because he not only understood, but shared the outrage and contempt most Americans felt for those who had brought about the worst economic crisis in our history. As a result, his cause became their cause, and vice versa. Under his leadership, what FDR called the "organized power of government" became the champion of the common man.

David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute.

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Elizabeth Warren in Her Own Words

Sep 17, 2010Lynn Parramore

elizabeth-warren-150This is the first installment of "The Influencers," a six-part interview series that ND20 Editor Lynn Parramore is conducting in partnership with

elizabeth-warren-150This is the first installment of "The Influencers," a six-part interview series that ND20 Editor Lynn Parramore is conducting in partnership with Salon.com. In July, she sat down with Elizabeth Warren, pegged to help launch the new Consumer Financial Protection Bureau. **If you haven't seen it, also be sure to read Warren's folksy post on the White House blog about the appointment.

Lynn Parramore: What are some of the values that were instilled in your childhood that you would like to see emphasized now?

Elizabeth Warren: I guess it is a fundamental belief that people are doing the best they can. It is easy when you are successful to think that you did it all by yourself and to forget that you didn't. You got here because a lot of things broke your way. You were lucky enough to be born into a family that could afford to take care of you well. You were lucky enough to be able to have a family that could pay for you to go to school or buy your way out of scrapes. And to people who have had a lot of luck and don't acknowledge that -- the world looks like a total meritocracy, right? I'm on top because I really won, because I am better than everyone else.

I think I grew up with a profound sense of watching people who were good people, who were smart people, who were hardworking people -- God, nobody on this Earth worked harder than my mom and dad -- and they had very little. But they made do with what they had. They had their family, they raised four kids who loved them and four kids who all had our own families that we loved. And so, I guess the only way I can say it is that the value is in knowing that the game doesn't always come out fairly. There is a lot more going on. The material success at the end of the day is only a small part of it. Truly successful lives are about family.

Has your idea of fairness changed in recent years, particularly since the financial crisis?

I have been focused on the issue of fairness for 20 years now, ever since I started doing research on the economics of the middle class. I wanted to believe "work hard, play by the rules" equals success. I knew that my parents struggled, but I wanted to believe it was better now. And what I began to see in my research was that the rules were beginning steadily to work against the middle class. Healthcare, there's an example. It was not the case in the 1970s that a modest medical problem could land a family in bankruptcy. The advances in medical technology are wonderful, but the financial impact has become staggering. Sure, for one segment of society, the people with the gold-plated healthcare, the consequence of a medical problem is nothing more than medical. But for the much larger proportion of Americans, the financial consequences of a medical problem can be devastating. We studied these people in our bankruptcy research, and that's one that I regard as fundamentally unfair, not just in the sense that the Lord deals different cards to different people, and some get sick and some have babies too early. But unfair in the sense that any one of us could be hit, so why is it that we don't take care of each other? Why is it that we aren't more careful to make sure that none of us can be devastated financially by a medical problem? So, yeah, I've been studying the unfairness of how it translates into the economic insecurity of the middle class.

Is the middle class disappearing?

It is more that it is trembling; it is crumbling. Middle class used to be synonymous with secure, with steady, with boring, because middle-class people were people who were pretty much safe from the time they first started work on through retirement and until their deaths, no longer. Now, to be middle class is to worry, is to be insecure, is to face much increased odds of job loss, of a healthcare problem, of a family breakup that can land a family in economic collapse.

We need to get out of debt, yet there are so many forces that conspire against us. What is the way out of that conundrum?

It is a conundrum that has to be approached from two different directions. One direction is from the individual, the borrower, the family. My advice there is to do everything you can to protect yourself, and I have a whole list of things that I would identify. But that by itself will not be enough. There is also the part about the rules of the game, about collective action, about what banks are permitted to do, about what lenders are permitted to do, about how we finance, our healthcare, what housing policy looks like, what education policy looks like, what it costs to educate our children. For those, the appropriate place to go is to the policy forum, to talk to Congress, to talk to the president, to speak to people about how we can change the rules by which we all live. So, the way out of the problem is both on a highly individualized basis and also on a collective basis.

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Are you anti-debt?

No. Debt can be enormously valuable.

An example?

Borrowing money to buy a home - it can be a good investment. Borrowing money to buy a car so that you can get to work. Borrowing money to deal with an emergency, a serious medical problem. Those are all investments in effect in your future. But borrowing money because you can't live on your current salary, assuming you are not under some kind of emergency situation, this is your day-to-day, if you are rolling credit card debt over month to month to month, and this is your real job, this is your real life, you do have a serious problem. Because people have got to bring their expenses and their income into line with each other. And so, that is where I focus on debt particularly with individual families. This is the part you need to see. There is a red light flashing if you're carrying debt for reasons other than investment.

Why do you think you've become a lightning rod in recent years?

I don't know. I have to say I often think that the things I talk about seem fairly obvious. Maybe I am a little plain-spoken about it, but why should that bother people? Let's talk about the content of what I say. If you think I am wrong, tell me so and tell me why, and show me the data, show me the evidence, tell me the reason. Let's have a serious conversation about the content, about what has happened to the incomes of middle-class American families, about what's happened to their expenses on housing, on healthcare, on childcare, on college costs. Let's talk about how the business model of the consumer credit industry has changed. Tell me I am wrong on any of that. Let's have that conversation. But I sometimes have come to think that lightning rod is another way to say, "Let's change the conversation" -- let's make this all about something else. But let's not really talk about the serious issues.

Has our financial system become too complicated for a person with a high school or even a college degree to navigate?

I think complexity has become a strategy. Let me just start with your credit card. In 1980, Bank of America's credit card contract was just a little over 700 words long. That is a little over a page, easy to read. You could tell what the terms were. Today, credit card contracts can run 30 pages or even longer. And much of it is tiny, incomprehensible print. Now, why the changes? Well, part of it is regulation. A large part of it is that a complex document is one where it is a lot easier to hide the tricks and traps. It is a lot easier to fool people. No one realizes until after they've committed $5,000 on their credit card that the interest rate is no longer going to be 3.9 percent, but is going to jump to 28 percent.

In other words, complexity is itself a part of the business model. It is part of what keeps the customer from evaluating the cost and the risk, and it is part of what keeps the customer from comparing product to product, which would drive the prices down. So, from my point of view, complexity really is the enemy. The American people have to be in the conversation; they have every right to understand what their contracts are, they have every right to understand what policies their government is embracing, and if I can be helpful in that, I am glad to do so.

Speaking of complexity, what has surprised you most about working inside of Washington?

It really is an amazing place. I'm thinking that the thing that has surprised me most is how hard it is to have a conversation about substance. And it is too bad because it means that we are not all engaged in the same game of trying to make things better and that often to disagree is to declare mortal enemies rather than to say, "I don't see it the same way, I am seeing these data." And if you can't have that conversation, people can't change their minds.

What part of your work excites you most right now and going forward? What are you most looking forward to?

This is an historic moment. The president has just signed into law the most powerful financial reforms in three generations. And, coming out of that, it will be necessary to build the real apparatus to make markets work again, to make them work for families, to make them work, frankly, whether they like it or not. To make them work for Wall Street, to make them work for financial institutions, ultimately to make them work for the real economy. It is a moment in which there will be great change and I am simultaneously worried about what could go wrong but deeply excited and even optimistic about what could go right.

This post originally appeared on Salon.com.

Lynn Parramore is the editor of New Deal 2.0, Media Fellow at the Roosevelt Institute, and author of Reading the Sphinx, named a "notable scholarly book for 2008" by the Chronicle of Higher Education.

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The American Dream, Part 2: The Long Road Back to Economic Equality

Sep 15, 2010Wallace Turbeville

need-job-150This is the second in a two-part series examining how the US economy has failed the middle and lower classes and what can be done to fix it. Here, Turbeville explains how short-term thinking short-changes society.

need-job-150This is the second in a two-part series examining how the US economy has failed the middle and lower classes and what can be done to fix it. Here, Turbeville explains how short-term thinking short-changes society.

In my first post, I gave a brief economic history of the US and outlined some facts about our current situation. These included growing disparities among income groups, unemployment persisting for longer periods following recent recessions, US consumption of goods and services from countries that in turn rely on American consumption, asset price bubbles and bursts appearing to be more frequent and extreme, and the stagnation of high school and college graduation rates. All of these things point to a growing inequality and a stagnating economy, and they are interrelated in important ways.

Relationships Among Critical Factors

One side of income disparity -- stagnating middle and lower incomes -- shares much in common with persistent unemployment. Workers were not "all that employed" before the recessions, even though they technically had jobs. Temporary and part-time work, as well as frequent job changes and outsourcing, held down incomes and indicated a more tenuous relationship between employers and these employees. The jobs were convenient for the employers, but not essential. Re-staffing as growth follows recession may be a convenient time to implement foreign outsourcing programs (this has been recently reported in relation to the technology sector). Unreliable and, ultimately, unsustainable jobs did not represent the kind of stable employment that had historically been a feature of the economy.

Raghuram Rajan, in his recent book Fault Lines, observes an internal inconsistency in the American economy. The human capital value (i.e. the valuable qualities of individual workers) of the workforce does not align with the kinds of opportunities available to businesses in the modern economy. In other words, the growth of higher-end businesses that can prosper in the American economy is constrained by the pool of appropriate high school and college graduates -- and graduation rates for both, he notes, have ceased growing. Dr. Rajan's observation is completely consistent with the realities of middle and lower income stagnation and persistent unemployment. The economy may grow in terms of GDP. But it cannot accommodate uniform growth of jobs and incomes, which is an essential element of the American social structure.

The failure of business growth to provide productive employment seems inconsistent with the growth of high-end incomes, the flip side of income disparity. The trajectory of income disparity and the bubble/burst cycle reflect financial institutions and wealthier individuals making short-term and risky decisions. There is an increasing preference for short swing use of capital intended to secure quick profit in lieu of longer-term investments. This behavior, of course, is facilitated by information technology that speeds the implementation of investment decisions. But it is significant that this type of decision-making is particularly rational in an economy that is at risk for a long-term decline.

Behavior focused on the short-term by individual investors and businesses is not evil. In a deregulated economy, it is sensible. This is true even though the short-term behavior may increase the risk of overall economic decline over time. Longer-term interests are uncertain and obscure, while short-term opportunity is more certain and will be lost if not seized immediately. The problems is that excessive short-term behavior is destructive for the collective interests of all businesses and investors. But business decisions are not made collectively. That is the role of the government. The only way to curb this destructive behavior is through sensible regulation.

The cycle of bubbles and bursts is also politically related to income disparity and persistent unemployment. The "irrational exuberance" of the inflating bubbles created a sense of wealth that deflected public attention from stagnating incomes.

The housing and consumer credit bubble is the most significant example. The Clinton administration actively promoted home ownership and access to credit generally by lower-income groups. If you believed the false assumption (shared by the government, the Fed, banks, rating agencies and the public) that residential real estate would forever trend upward, this made sense. Recall that this policy was conceived during the dot-com bubble, when pundits openly speculated that a "paradigm shift" had occurred, promising eventual prosperity for all. Giving lower-income groups a stake in an appreciating asset mitigated the effects of stagnating incomes, soon to be remedied by universal prosperity. Allowing residential real estate appreciation to be cashed out along the way through easy home equity lines and credit card debt made the policy more effective. Asset appreciation could be used for consumption, and people would feel wealthy, even as relative incomes lagged. If mortgage payments became unmanageable, refinancing with more mortgage debt, which relied on higher home values, could be used to increase the wealth effect.

The deregulated financial sector saw this as an opportunity perfectly suited to the growing short-term views of business and investors. Securitization of consumer debt pools was not new, but the increased size and diversity of the pools provided almost boundless opportunities to create tradable products. The expansion of home ownership and credit was supercharged through aggressive and sometimes fraudulent securitization. Using derivatives, the financial sector multiplied the risks to the economy geometrically. The appreciation of residential real estate became a massive bubble.

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However, relying on residential real estate appreciation to mitigate the hardships of stagnating incomes was fatally flawed. Home values are ultimately a function of household incomes. If the trajectory of middle and lower incomes was not reversed, real estate values could not continue to grow. Disaster could be averted only if, before the bubble burst, incomes could be increased to levels consistent with prices. When dot-coms failed to produce a new era of universal prosperity, the government used historically effective economic growth techniques (accommodative monetary policy and tax cuts) to induce business expansion, assuming that incomes would mirror economic growth. But this was a race that could not be won using conventional, indirect methods. The constraint on incomes was not cheap capital for investment; it was structurally-flawed employment. So the core income problems persisted.

The United States has become the consumer of last resort for export-led economies in the developing and developed world. And pre-recession estimates of outsourcing to foreign countries predicted as many as 3.3 million jobs outsourced by 2015. Imported goods and services are produced by foreign workers; and foreign outsourcing similarly reduces US employment opportunities. Each transaction that transfers chunks of the American economy overseas makes sense on its own merits. But unless US exports balance them out in aggregate, incomes of the middle and lower classes suffer. There is no such balance, and the middle and lower classes have absorbed the cost.

What is to be done?

Logically, there are only two ways to rectify this problem: the range of business opportunities can be expanded to efficiently absorb the domestic workforce, given its productive capacity; or the workforce can be conformed to the available opportunities through education and training (see ND20 Exclusive Interview: Josh Rosner's Bold Plan for Reeducating the Unemployed). The first way can be successful in the short term and the second approach promises more stable long-term prosperity.

The inducement of primarily domestic activities like clean energy and infrastructure makes sense, but the industries' long-range impacts are limited. Some methods of expanding the range of business opportunities involve significant dangers. The interaction between American income stagnation and the nation's role as the consumer of export-led economies is dangerously volatile. It is tempting to actively reduce imports through protectionist policies and replace them with domestically-sourced goods and services produced by protected businesses. Precipitous and aggressive trade policy could disrupt a system in which export-driven economies depend on US consumption. For example, China's manipulation of its currency to aid exports cannot be tolerated, but the temptation to retaliate should be resisted. The economy might not be able to withstand the inevitable trade conflict. To avoid damaging conflict, reduction of reliance on US consumption through internal consumption in exporting countries and increasing productivity of American enterprises are preferable. But these are arduous and unreliable processes.

Improving the American workforce through education and training, together with a robust and targeted industrial policy, is a solution that is more in our control. But it is also a long-term and costly project. Decades of neglecting educational achievement and technical training caused the problem. The time and resources required to remedy it will be proportionate to the magnitude of the neglect.

Remedies will evoke ethnic and regional prejudices, since deficient skills are more prevalent among minorities and in inner cities. We must demonstrate that lifting up minorities and urban poor is in the interest of the majority. Worker deficiencies limit the potential of the economy and the well-being of all without regard to accents or skin color. Ignoring the problem is worse for the majority.

At one level, the solution is clear: put more people to work at higher incomes. This means that more people must graduate from high school and college. With intelligent encouragement and direction from the government, businesses will provide them opportunities for work. This is a complex task, but there are some obvious system deficiencies that need attention:

• College must be affordable to anyone who is qualified, no exceptions.

• Assistance for higher education must be tied to graduation. Far too many students give up before graduating.

• High schools must be equipped with physical plants and technology so that they can function properly in a modern society.

• Serious programs aimed at lower-income preschool and elementary school children are critically important. This is because we cannot afford the low productivity of a permanent underclass. It is a practical necessity. Racist attitudes and conservative ideology have nothing to do with it.

• There is no doubt that improving teacher performance is important. However, fixation on this issue is a transparent tactic of conservative ideologues to deflect attention from pragmatically necessary expenditures and government intervention.

• Our approach to criminal justice is simply defeatist. We must move away from ncarcerating enormous numbers of ethnic minorities and permanently burdening their productive potential. Early intervention, before youthful attitudes harden, based on cooperation between schools and community-based organizations, is desperately needed.

• Devising a new role for unions and employers is sensible. Workers' rights are important. But unions can be a vehicle for improvement of the workforce through training and educational assistance to members and their families. Membership would be more attractive if it more effectively offered opportunities for advancement. Collaboration between unions and employers to provide training and further education without loss of income is in the interest of both.

• Business leaders need to be involved to craft a targeted policy to encourage new and expanded enterprises that can employ the people productively. Businesses need to participate, not just absorb subsidies and tax breaks. The government could accomplish much by simply facilitating local organized activity by providing the overall goals and minimal matched funding.

• We must deal with outsourcing. The use of foreign employees, especially in skilled positions, has become a major issue that can no longer be avoided. It is short-term decision making, as discussed above. It works for a single employer in the short run, but the long term damage to the entire economy is great.

• Addressing the immigration issue is unavoidable. A shadow workforce, whose contribution to the community through productivity and taxes is limited, is intolerable. Since we need more productive workers, integration of undocumented workers into the economy is obviously the better approach for the economy.

These challenges and many others will require the willpower of a public at war. We must hope that the nation will be blessed with leadership worthy of wartime challenges.

Wallace C. Turbeville is the former CEO of VMAC LLC and a former Vice President of Goldman, Sachs & Co. He is Visiting Scholar at the Roosevelt Institute.

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