Daily Digest - November 6: Electoral Cycles Aren't Enough for Voter Engagement

Nov 6, 2014Rachel Goldfarb

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

Understanding the Electorate (All In with Chris Hayes)

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

Understanding the Electorate (All In with Chris Hayes)

Roosevelt Institute Fellow Dorian Warren says that political parties need to figure out a way to engage voters outside of the electoral cycle if they're going to increase turnout in the midterms.

Private Equity’s Sunshine Problem (PE Hub)

Chris Witkowsky builds on Roosevelt Institute Fellow Saqib Bhatti's recent letter to the editor in The New York Times, creating a proposal for some private equity fund terms to be made public.

A Big Night For Minimum Wage Increases (FiveThirtyEight)

Ben Casselman says that voters' approval of minimum wage increases and Republicans winning statewide office may seem at odds, but these votes stem from the same economic fears.

Three States Could Have Ended Legal Abortion. Only One Did. (MoJo)

Erika Eichelberger reports on the failed personhood measures in Colorado and North Dakota, as well as Tennessee's successful one, which is expected to lead to extreme anti-choice laws.

Voters in Seattle Just Taxed Themselves to Pay for Preschool for the Poor (WaPo)

Emily Badger looks at one local progressive win from Tuesday's elections. The Seattle proposition will fully subsidize preschool for families earning up to 300 percent of the poverty level.

New on Next New Deal

In Blowout Aftermath, Remember GDP Growth Was Slower in 2013 Than in 2012

Roosevelt Institute Fellow Mike Konczal reminds us that the Great Recession isn't actually over. The data explains why voters, still worried about the economy, are expressing such discontent.

Leadership Wanted: Pushing for More College Attainment? Start in Public Housing.

Roosevelt Institute | Campus Network Leadership Director Kevin Stump argues that public housing creates an opportunity to bring together resources to help needy students where they live.

Share This

Rortybomb on the March: Special Washington Monthly Inequality Issue and The Nation

Nov 4, 2014Mike Konczal

Hey everyone, I have two new pieces out there I hope you check out.

The first is a piece about the financialization of the economy in the latest Washington Monthly. I'm heading up a new project at Roosevelt, more details to come soon, about the financialization of the economy, and this essay is the first product. And I'm happy to have it as part of a special issue on inequality and the economy headed up by the fine people at the Washington Center for Equitable Growth. There's a ton of great stuff in there, including an intro by Heather Boushey, Ann O'Leary on early childhood programs, Alan Blinder on boosting wages, and a conclusion by Joe Stiglitz. It's all really great stuff, and I hope it shows a deeper and wider understanding of an inequality agenda.

The second is the latest The Score column at The Nation, which is a focus on the effect of high tax rates on inequality and structuring markets. It's a writeup of the excellent Saez, Piketty, and Stantcheva Three Elasticies paper, and a continuation of a post here at this blog.

Follow or contact the Rortybomb blog:
 
  

 

Hey everyone, I have two new pieces out there I hope you check out.

The first is a piece about the financialization of the economy in the latest Washington Monthly. I'm heading up a new project at Roosevelt, more details to come soon, about the financialization of the economy, and this essay is the first product. And I'm happy to have it as part of a special issue on inequality and the economy headed up by the fine people at the Washington Center for Equitable Growth. There's a ton of great stuff in there, including an intro by Heather Boushey, Ann O'Leary on early childhood programs, Alan Blinder on boosting wages, and a conclusion by Joe Stiglitz. It's all really great stuff, and I hope it shows a deeper and wider understanding of an inequality agenda.

The second is the latest The Score column at The Nation, which is a focus on the effect of high tax rates on inequality and structuring markets. It's a writeup of the excellent Saez, Piketty, and Stantcheva Three Elasticies paper, and a continuation of a post here at this blog.

Follow or contact the Rortybomb blog:
 
  

 

Share This

Daily Digest - November 4: How the Growth of Finance Shrank the American Dream

Nov 4, 2014Rachel Goldfarb

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

Frenzied Financialization (Washington Monthly)

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

Frenzied Financialization (Washington Monthly)

Roosevelt Institute Fellow Mike Konczal introduces the concept of financialization as a source of inequality, and lays out steps to reduce the financial sector's size and power.

Slow Growth and Inequality Are Political Choices. We Can Choose Otherwise. (Washington Monthly)

In the concluding article for Washington Monthly's special issue on inequality, Roosevelt Institute Chief Economist Joseph Stiglitz presents a policy path to reduce inequality.

  • Roosevelt Take: In his article, Stiglitz references his 2014 white paper, "Reforming Taxation to Promote Growth and Equity," available here.

Why the GOP Won't Touch Obamacare (Politico)

Roosevelt Institute Senior Fellow Richard Kirsch says that it's too late for anything but minor changes to the Affordable Care Act, because people like having health insurance.

The Midterm Minimum-Wage Mandate (WaPo)

Minimum wage ballot measures will be progressives' big win today, predicts Katrina vanden Heuvel, a member of the Roosevelt Institute's Board of Directors. The direct impact on workers matters.

Obamacare Could Have Turned Millions of Uninsured Americans Into Voters (MoJo)

Erika Eichelberger points out that the navigators who help people sign up for insurance on the ACA's exchanges could have been required to train to register voters as well.

New on Next New Deal

Election 2014: Women's Rights in the Balance

Roosevelt Institute Fellow Andrea Flynn's series on the close-call races that will impact women's health and economic security concludes with the Kansas Senate and gubernatorial races.

Guest Post: A Review of Fragile By Design

David Fiderer argues that the book distorts the realities of the financial crisis in a manner that could be dangerous, should it become conservative's central text on the topic.

Share This

Guest Post: A Review of Fragile By Design

Nov 3, 2014Mike Konczal

(With conservatives looking to make big gains Tuesday, it's important to understand how they understand the financial crisis. Luckily we have a guest post by David Fiderer, on a recent book about the crisis. For over 20 years, Fiderer has been a banker covering the energy industry. He is trained as a lawyer and is working on a book about the rating agencies.)

Pundit-Level Arguments Dominating Elite Business Schools Financial Crisis Discussions

by David Fiderer

(With conservatives looking to make big gains Tuesday, it's important to understand how they understand the financial crisis. Luckily we have a guest post by David Fiderer, on a recent book about the crisis. For over 20 years, Fiderer has been a banker covering the energy industry. He is trained as a lawyer and is working on a book about the rating agencies.)

Pundit-Level Arguments Dominating Elite Business Schools Financial Crisis Discussions

by David Fiderer

Fragile By Design: The Political Origins of Banking Crises and Scarce Credit is a tour de force, and not in a good way. The book’s history of U.S. banking is troubling. The narrative covering the period from the Civil War until the 1990s is highly selective and misleading. Worse, the section that covers U.S. banking over the past 25 years is a set of distortions and falsehoods that should be obvious to anyone with a basic knowledge of the recent financial crisis.

Yet the book has been greeted enthusiastically. It was recently considered by the Financial Times and McKinsey for the Business Book of the Year Award, and its thesis about the recent financial crisis has been presented by the authors at events hosted by the World Bank, the Bank of England, the San Francisco Fed, the Atlanta Fed and the SEC. “[I]f you are looking for a rich history of banking over the last couple of centuries and the role played by politics in that evolution there is no better study,” wrote The New York Times reviewer. “It deserves to become a classic.” The book’s false portrayal of the recent crisis, left unchallenged, is likely to be used as a standard reference work for conservatives intent on rewriting history.

The two authors, Prof. Charles Calomiris of Columbia and Prof. Stephen Haber of Stanford, are well known. Calomiris’s 67-page CV cites, among many accomplishments, his stints as a Visiting Research Fellow at the International Monetary Fund and as a Senior Fellow at the Bank of England, as well as his 21-year affiliation with the American Enterprise Institute. Haber, who teaches Political Science at Stanford, is a Senior Fellow at Stanford’s Hoover Institution.

The book’s central argument is that the proximate cause of the financial collapse was the risky lending mandated by Community Reinvestment Act (CRA) and by affordable housing goals set for government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. This familiar narrative, identified as “The Big Lie” by Joe Nocera, Barry Ritholtz, and others, is still deemed valid by a lot of people who should know better. Simply put, loan performance at Fannie and Freddie has always been exponentially superior to that of any other sector in residential mortgages, whereas the loan performance of private label residential mortgage securities has been radically worse than that of other sectors in the mortgage market. Most of the credit losses were tied to private mortgage securities. To state otherwise is a lie.

Calomiris and Haber embrace The Big Lie, and double down by tracing everything to Bill Clinton’s grand strategy of income redistribution as a response to economic inequality or as a sop to community activists at ACORN. Their story is as follows: in the 1990s banks sought government approval for proposed mergers and soon recognized that such approval was subject to certain conditions set by Clinton and his urban activist allies. The banks were compelled to book vast numbers of recklessly imprudent loans extended to the urban poor, by way of the CRA and GSE affordable housing goals.

Once banks started making ultra-risky loans under the CRA, they quickly started making ultra-risky loans to everyone else, because all these crappy loans could be sold to the GSEs, which then foisted them off onto unsuspecting investors who bought GSE mortgage securities. And once the GSEs started financing ultra-risky loans to poor people, they were forced to apply the same ultra-risky credit standards to everyone else. Eventually, the CRA and housing goals created a kind of Animal Farm dystopia, where everyone was equal because everyone’s mortgage was underwritten with the same recklessly imprudent terms.

In short, the GSEs, working in tandem with the banks and the investment banks, created and sold private mortgage securities, CDOs, and credit default swaps to unsuspecting investors. And when home prices stopped rising and the music stopped, the GSEs, the banks, and the investment banks were stuck holding those same private mortgage securities, CDOs, and credit default swaps, which is why many of them became insolvent.

No, I am not distorting Calomiris and Haber’s work.

The Financial Times, reviewing this book, says that “[t]hose on the left…tend to close their ears to this story, filing it under Republican disingenuity.” Sadly for the FT, this crackpot narrative has been debunked many times over. The Federal Reserve Board “found no connection between CRA and the subprime mortgage problems.” A subsequent Fed study found “lender tests indicate that areas disproportionately served by lenders covered by the CRA experienced lower delinquency rates and less risky lending.” Per the Minneapolis Fed: “The available evidence seems to run counter to the contention that the CRA contributed in any substantive way to the current mortgage crisis.” These findings were echoed by the Richmond Fed.

The St. Louis Fed posed a question: “Did Affordable Housing Legislation Contribute to the Subprime Securities Boom?” And the data offered a clear-cut answer: “No… We find no evidence that lenders increased subprime originations or altered pricing around the discrete eligibility cutoffs for the Government Sponsored Enterprises' (GSEs) affordable housing goals or the Community Reinvestment Act.” An earlier Fed study arrived at a substantially similar conclusion, as did nine out of ten members of the FCIC.

How do Calomiris or Haber address and respond to these studies? They don’t, and they aren’t alone. The lack of response to the critics of The Big Lie defines the entire genre. And these aren’t random writers; these are business professors at elite universities and think tanks who reject an empirical analysis framework for engaging their critics. Read Fault Lines by Raghuram Rajan at the University of Chicago. Read Guaranteed To Fail by Profs.Viral Acharya, Stijn Van Nieuwerburgh, Matthew Richardson, and Lawrence J. White, all at NYU. Or, on related topics, read “Rethinking FHA” by Prof. Joseph Gyourko at Wharton, or “Do We Need the 30-Year Fixed-Rate Mortgage?” by Prof. Anthony Sanders of George Mason University and Prof. Michael Lea at San Diego State. None of them compare loan performance of the GSEs, or FHA, or 30-year fixed rate loans, with that of other sectors in the same market.

It’s worth taking a minute to dissect the historical fantasy Calomiris and Haber construct. Their central narrative goes as follows:

Once the basic rules of this game were laid down in the early 1990s, the game unfolded in a predictable manner. Fannie and Freddie were forced to reduce their underwriting standards to accommodate increasing lending mandates to targeted groups. Importantly, those weaker standards were applied to all borrowers: to have done otherwise would have been a tacit admission that a portion of their portfolio was, in fact, high risk, which would have alarmed their shareholders. Many commercial banks, knowing that they could either sell high-risk loans to Fannie and Freddie or convert them into mortgage-backed securities guaranteed by Fannie and Freddie, jumped into the subprime securitization market. [Emphasis in the original.] […]

We cannot emphasize this point strongly enough: when Fannie and Freddie agreed to purchase loans the required only a 3% down payment, no documentation of income or employment, and a far from perfect credit score, they change the risk calculus of millions of American families, not just the urban poor. […]

As a matter of logic, it is conceivable that Fannie and Freddie could have selectively relaxed underwriting standards for targeted groups. As a practical matter, however, doing so would have been very difficult.

This is core to their story: affordability goals weren’t a small portion of GSEs’ loans. They effectively rewrote the entire mortgage market for everyone in the country.

Yet anyone who did a five-minute web search would demolish this notion. This link and this link are but two examples of many public filings that show how the GSEs used different credit standards for different types of borrowers, forgoing the entire logic of the Fragile by Design narrative. The entire premise of affordable housing goals was that the GSEs had the capacity to take on incremental exposures of higher-risk loans as a small counterweight to their huge portfolios of low-risk mortgages. Every business student knows basic portfolio theory.

And as a practical matter, just about every public utility, common carrier, pharmaceutical company, and hospital “effectively discriminates against most Americans by explicitly granting special arrangements to targeted groups.” Consider, for example, the rampant and institutionalized age discrimination seen at movie theater box offices. And yet, everyone who followed the companies knew that the GSEs used more relaxed standards for certain targeted groups.

Some of the authors’ zingers are harder to unpack. Consider the GSE loans they describe above, ones that “required only a 3% down payment, no documentation of income or employment, and a far from perfect credit score,” ones that changed “the risk calculus of millions of American families.”

There is zero evidence that the loans described by Calomiris and Haber ever existed. From 2001 through 2006, GSE originations that had loan-to-value (LTV) ratios of 95 percent or higher and FICO scores of 639 or lower represented between 1 and 2 percent of total originations. According to GSE credit guidelines, those borrowers had characteristics that disallowed any kind of reduced documentation, much less no documentation or employment.

Fannie and Freddie could not, by law, assume the primary credit risk on any mortgage with an LTV in excess of 80 percent. If a loan had an LTV higher than 80 percent, then the first loss was covered by private mortgage insurance. In addition, the GSEs’ policies prevented them from assuming 80 percent credit exposure on high-LTV loans. So, for example, if Fannie booked a loan had an LTV of 97 percent, the minimum insurance coverage would be 35 percent, so that Fannie’s net risk exposure would be no more than 62 percent of the LTV. The data is very clear that homes financed by the GSEs never experienced the steep rise, or drop, in prices that was measured by the Case-Shiller composite (see page 90).

In other words, the amount of low-down-payment loans available in the marketplace was never decided by the GSEs. It was decided by private mortgage insurers, which were not regulated by the federal government.

Business Models: The Difference Between Originate-to-Distribute and Buy-and-Hold

Calomiris and Haber blur commercial banks with non-banks and the GSEs, and they conflate GSE mortgage securities with private label mortgage securities and their progeny, throughout their text. Private label mortgage securities transfer credit risk and interest rate risk from the underwriting bank to the bondholders, whereas GSE mortgage securities do not transfer credit risk, only interest rate risk. All GSE mortgage bonds benefited from unconditional corporate guarantees.

Moreover, the financial meltdown of September 2008 was not triggered by bank failures; it was triggered by the failures of non-banks and by the unforeseen consequences of derivatives. The government had a clear legal path and precedent for dealing with bank failures like Wachovia, Washington Mutual, and IndyMac. But it had no clear path and no precedent for dealing with the imminent collapse of Lehman Brothers and AIG. This uncertainty about the fate of non-banks, which included the non-bank subsidiaries of bank holding companies, rocked the financial markets after Lehman filed for bankruptcy on September 15, 2008.

Remember that time everyone had to suddenly memorize all the financial acronyms? If you read about the financial crisis, you should know about CDOs (collateralized debt obligations); and about CDS (credit default swaps); and the initials MBS, which generally refer to the private label mortgage-backed securitizations, where most credit losses resided. Just one more serving of alphabet soup: CDS collapsed AIG, and CDO collapsed Citigroup, Merrill Lynch, UBS, MBIA and AMAC. Fannie and Freddie had nothing to do with CDOs and CDS.

Fannie and Freddie did hold large amounts of their own securities, but again, it made no difference whether they sold or held them, because their credit risk exposure never changed, and those holdings had nothing to do with regulatory capital. And the GSEs did hold about $225 billion of the most senior tranches of private mortgage securities. Court filings and settlements indicate that most of the losses were caused by fraud.

When the GSEs were taken over by the government in September 2008, Fannie’s serious delinquency rate was 1.36 percent, well below levels seen in the mid-1980s. And Freddie’s serious delinquency rate, 0.93 percent, was lower than the lowest national average ever recorded by the Mortgage Bankers Association. According to the MBA, the nationwide serious delinquency rate as of June 30, 2008 was 4.5 percent. For subprime mortgages it was almost 18 percent. Again, in terms of loan performance, the GSEs were in a class by themselves.

The Premise of The Big Lie

There’s only one reason why The Big Lie seemed so plausible to so many people. The polite word for it is social stereotyping. Affordable housing goals are set for “Central Cities, Rural Areas and Other Underserved Areas.” These goals target “low and moderate income borrowers.” A Financial Times columnist translates this into “the government’s euphemism for ethnic minority neighbourhoods.”

Calomiris and Haber do the same. They scrub away references to anything rural or to moderate-income borrowers. “At the core of this bargain was a coalition of two very unlikely partners: rapidly growing megabanks and activist groups that promoted expansion of risky mortgage lending to poor and intercity borrowers, such as the Association of Community Organizations for Reform Now (ACORN),” they write. They reference ACORN 11 times.

The book’s broader narrative about U.S. banking is framed around an urban/rural divide. Prior to the 1990s, the farmers in rural states were suspicious of nationwide banking that would concentrate economic power in the money centers of the Northeast. (The authors sidestep the impact of the National Banking system and the absence of a central bank until 1913.) Calomiris and Haber contrive another urban/rural divide to explain the CRA and affordable housing goals. This was the core of a “grand bargain” that favored a key constituency of the Democratic Party, the urban poor and urban activists like ACORN, at the expense of Republican constituencies in rural areas.

If you go in for that kind of stuff, then it makes perfect sense that any government program intended to benefit low-income people must corrupt the free marketplace and eventually create a financial disaster. Who needs empirical data to prove that? This kind of fact-free analysis, a staple of cable TV and certain media outlets, has become pervasive. But it has no place in a legitimate business setting or university setting. Determining whether or not a loan’s terms match “the market,” a much more useful debate, involves a very detailed analysis of the borrower and the loan product, which is way beyond the ken of Calomiris and Haber.

There is no evidence that CRA goals ever represented a material hurdle towards attaining regulatory approval of the large bank mergers in the 1990s. Of the 13,500 applications submitted to Fed, only 25 were denied, with eight being denied because of “unsatisfactory consumer protection or community reinvestment issues.” The GSEs, however, were subject to ability-to-repay regulations and other anti-predatory constraints put in place in 2000.

The irony is rich. This private label securitization system was built over decades, and at every step of the expansion of this predatory and abusive lending system conservative economists were there lending support. Calomiris in particular was an active participant, fighting against any prohibition against single premium credit insurance, opposing prohibitions on loans based on housing collateral that disregarded a borrower’s ability to repay, and writing in 1999 that 125 percent LTV lending was no big deal.

After skyrocketing in size and scope before the crisis, the securitization of the housing market is now dead. There’s debate on whether it can ever come back to life. As we discuss what the future of housing finance and the financial sector looks like, there needs to be a real accounting for what has happened in the past. Sadly, a group of elite academics are more dedicated to confusion and playing up innuendo than actual analysis and the truth.

Follow or contact the Rortybomb blog:
 
  

 

Share This

It's Essential the Federal Reserve Discusses Inequality

Oct 28, 2014Mike Konczal

Janet Yellen gave a reasonable speech on inequality last week, and she barely managed to finish it before the right-wing went nuts.

It’s attracted the standard set of overall criticisms, like people asserting that low rates give banks increasingly “wide spreads” on lending -- a claim made with no evidence, and without addressing that spreads might have fallen overall. One notes that Bernanke has also given similar inequality speeches (though the right also went off the deep end when it came to Bernanke), and Jonathan Chait notes how aggressive Greenspan was with discussing controversial policies to crickets on the right.

But I also just saw that Michael Strain has written a column arguing that by even “by focusing on income inequality [Yellen] has waded into politically choppy waters.” Putting the specifics of the speech to the side, it’s simply impossible to talk about the efficacy of monetary policy and full employment during the Great Recession without discussing inequality, or discussing economic issues where inequality is in the background.

Here are five inequality-related issues off the top of my head that are important in monetary policy and full employment. The arguments may or not be convincing (I’m not sure where I stand on some), but to rule these topics entirely out of bounds will just lead to a worse understanding of what the Federal Reserve needs to do.

The Not-Rich. The material conditions of the poorest and everyday Americans are an essential part of any story of inequality. If the poor are doing great, do we really care if the rich are doing even better? Yet in this recession everyday Americans are doing terribly, and it has macroeconomic consequences.

Between the end of the recession in 2009 and 2013, median wages fell an additional 5 percent. One element of monetary policy is changing the relative interest in saving, yet according to recent work by Zucman and Saez, 90 percent of Americans aren’t able to save any money right now. If that is the case, it’s that much harder to make monetary policy work.

Indeed, one effect of committing to low rates in the future is making it more attractive to invest where debt servicing is difficult. For example, through things like subprime auto loans, which are booming (and unregulated under Dodd-Frank because of auto-dealership Republicans). Meanwhile, policy tools that we know flatten low-end inequality between the 10 and 50 percentile -- like the minimum wage, which has fallen in value -- could potentially boost aggregate demand.

Expectations. The most influential theories about how monetary policy can work when we are at the zero lower bound, as we’ve been for the past several years, involve “expectations” of future inflation and wage growth.

One problem with changing people’s expectations of the future is that those expectations are closely linked to their experiences of the past. And if people’s strong expectations of the future are low or zero nominal growth in incomes because everything around them screams inequality, because income growth and inflation rates have been falling for decades, strongly worded statements and press releases from Janet Yellen are going to have less effect.

The Rich. The debate around secular stagnation is ongoing. Here’s the Vox explainer. Larry Summers recently argued that the term emphasizes “the difficulty of maintaining sufficient demand to permit normal levels of output.” Why is this so difficult? “[R]ising inequality, lower capital costs, slowing population growth, foreign reserve accumulation, and greater costs of financial intermediation." There’s no sense in which you can try to understand the persistence of low interest rates and their effect on the recovery without considering growing inequality across the Western world.

Who Does the Economy Work For? To understand how well changes in the interest-sensitive components of investment might work, a major monetary channel, you need to have some idea of how the economy is evolving. And stories about how the economy works now are going to be tied to stories about inequality.

The Roosevelt Institute will have some exciting work by JW Mason on this soon, but if the economy is increasingly built around disgorging the cash to shareholders, we should question how this helps or impedes full output. What if low rates cause, say, the Olive Garden to focus less on building, investing, and hiring, and more on reworking its corporate structure so it can rent its buildings back from another corporate entity? Both are in theory interest-sensitive, but the first brings us closer to full output, and the second merely slices the pie a different way in order to give more to capital owners.

Alternatively, if you believe (dubious) stories about how the economy is experiencing trouble as a result of major shifts brought about by technology and low skills, then we have a different story about inequality and the weak recovery.

Inequality in Political and Market Power. We should also consider the political and economic power of industry, especially the financial sector. Regulations are an important component to keeping worries about financial instability in check, but a powerful financial sector makes regulations useless.

But let’s look at another issue: monetary policy’s influence on underwater mortgage financing, a major demand booster in the wake of a housing collapse. As the Federal Reserve Bank of New York found, the spread between primary and secondary rates increased during the Great Recession, especially into 2012 as HARP was revamped and more aggressive zero-bound policies were adopted. The Fed is, obviously, cautious about claiming pricing power from the banks, but it does look like the market power of finance was able to capture lower rates and keep demand lower than it needed to be. The share of the top 0.1 percent of earners working in finance doubled during the past 30 years, and it’s hard not to see that not being related to displays of market and political power like this.

These ideas haven’t had their tires kicked. This is a blog, after all. (As I noted, I’m not even sure if I find them all convincing.) They need to be modeled, debated, given some empirical handles, and so forth. But they are all stories that need to be addressed, and it’s impossible to do any of that if there’s massive outrage at even the suggestion that inequality matters.

Follow or contact the Rortybomb blog:
 
  

 

Janet Yellen gave a reasonable speech on inequality last week, and she barely managed to finish it before the right-wing went nuts.

It’s attracted the standard set of overall criticisms, like people asserting that low rates give banks increasingly “wide spreads” on lending -- a claim made with no evidence, and without addressing that spreads might have fallen overall. One notes that Bernanke has also given similar inequality speeches (though the right also went off the deep end when it came to Bernanke), and Jonathan Chait notes how aggressive Greenspan was with discussing controversial policies to crickets on the right.

But I also just saw that Michael Strain has written a column arguing that by even “by focusing on income inequality [Yellen] has waded into politically choppy waters.” Putting the specifics of the speech to the side, it’s simply impossible to talk about the efficacy of monetary policy and full employment during the Great Recession without discussing inequality, or discussing economic issues where inequality is in the background.

Here are five inequality-related issues off the top of my head that are important in monetary policy and full employment. The arguments may or not be convincing (I’m not sure where I stand on some), but to rule these topics entirely out of bounds will just lead to a worse understanding of what the Federal Reserve needs to do.

The Not-Rich. The material conditions of the poorest and everyday Americans are an essential part of any story of inequality. If the poor are doing great, do we really care if the rich are doing even better? Yet in this recession everyday Americans are doing terribly, and it has macroeconomic consequences.

Between the end of the recession in 2009 and 2013, median wages fell an additional 5 percent. One element of monetary policy is changing the relative interest in saving, yet according to recent work by Zucman and Saez, 90 percent of Americans aren’t able to save any money right now. If that is the case, it’s that much harder to make monetary policy work.

Indeed, one effect of committing to low rates in the future is making it more attractive to invest where debt servicing is difficult. For example, through things like subprime auto loans, which are booming (and unregulated under Dodd-Frank because of auto-dealership Republicans). Meanwhile, policy tools that we know flatten low-end inequality between the 10 and 50 percentile -- like the minimum wage, which has fallen in value -- could potentially boost aggregate demand.

Expectations. The most influential theories about how monetary policy can work when we are at the zero lower bound, as we’ve been for the past several years, involve “expectations” of future inflation and wage growth.

One problem with changing people’s expectations of the future is that those expectations are closely linked to their experiences of the past. And if people’s strong expectations of the future are low or zero nominal growth in incomes because everything around them screams inequality, because income growth and inflation rates have been falling for decades, strongly worded statements and press releases from Janet Yellen are going to have less effect.

The Rich. The debate around secular stagnation is ongoing. Here’s the Vox explainer. Larry Summers recently argued that the term emphasizes “the difficulty of maintaining sufficient demand to permit normal levels of output.” Why is this so difficult? “[R]ising inequality, lower capital costs, slowing population growth, foreign reserve accumulation, and greater costs of financial intermediation." There’s no sense in which you can try to understand the persistence of low interest rates and their effect on the recovery without considering growing inequality across the Western world.

Who Does the Economy Work For? To understand how well changes in the interest-sensitive components of investment might work, a major monetary channel, you need to have some idea of how the economy is evolving. And stories about how the economy works now are going to be tied to stories about inequality.

The Roosevelt Institute will have some exciting work by JW Mason on this soon, but if the economy is increasingly built around disgorging the cash to shareholders, we should question how this helps or impedes full output. What if low rates cause, say, the Olive Garden to focus less on building, investing, and hiring, and more on reworking its corporate structure so it can rent its buildings back from another corporate entity? Both are in theory interest-sensitive, but the first brings us closer to full output, and the second merely slices the pie a different way in order to give more to capital owners.

Alternatively, if you believe (dubious) stories about how the economy is experiencing trouble as a result of major shifts brought about by technology and low skills, then we have a different story about inequality and the weak recovery.

Inequality in Political and Market Power. We should also consider the political and economic power of industry, especially the financial sector. Regulations are an important component to keeping worries about financial instability in check, but a powerful financial sector makes regulations useless.

But let’s look at another issue: monetary policy’s influence on underwater mortgage financing, a major demand booster in the wake of a housing collapse. As the Federal Reserve Bank of New York found, the spread between primary and secondary rates increased during the Great Recession, especially into 2012 as HARP was revamped and more aggressive zero-bound policies were adopted. The Fed is, obviously, cautious about claiming pricing power from the banks, but it does look like the market power of finance was able to capture lower rates and keep demand lower than it needed to be. The share of the top 0.1 percent of earners working in finance doubled during the past 30 years, and it’s hard not to see that not being related to displays of market and political power like this.

These ideas haven’t had their tires kicked. This is a blog, after all. (As I noted, I’m not even sure if I find them all convincing.) They need to be modeled, debated, given some empirical handles, and so forth. But they are all stories that need to be addressed, and it’s impossible to do any of that if there’s massive outrage at even the suggestion that inequality matters.

Follow or contact the Rortybomb blog:
 
  

 

Share This

Understanding the CEO Pay Debate: A Primer on America's Ongoing C-Suite Conversation

Oct 23, 2014

Download the primer by Susan Holmberg and Michael Umbrecht.

Download the primer by Susan Holmberg and Michael Umbrecht.

The problem of rising CEO pay is an extraordinarily complex and contested issue. This primer on CEO pay serves to unpack this complicated topic by a) explaining the problems with CEO pay, including the harm it imposes on workers, businesses, and society; b) highlights some of the early history of CEO pay, including a handful of the key policies that have shaped it; c) presents the main theories that attempt to explain why CEO pay has risen so dramatically; d) addresses the fallacy of shareholder primacy and introduces the stakeholder model; and e) concludes by highlighting some policy recommendations that are outside of the shareholder primacy framework.

Read: "Understanding the CEO Pay Debate: A Primer on America's Ongoing C-Suite Conversation," by Susan Holmberg and Michael Umbrecht.

Share This

Daily Digest - October 23: A Complex Financial System Begets Complex Regulations

Oct 23, 2014Rachel Goldfarb

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

Dodd-Frank Spawns Software to Comprehend Dodd-Frank (Marketplace)

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

Dodd-Frank Spawns Software to Comprehend Dodd-Frank (Marketplace)

Sabri Ben-Achour speaks to Roosevelt Institute Fellow Mike Konczal and others about the complexity of the Volcker Rule. Mike says the scrutiny of the courts has made some rules clunkier than necessary.

Unions Keep Pushing Emanuel to Challenge Interest Rate Hedges (Crain's Chicago Business)

Roosevelt Institute Senior Fellow Brad Miller has joined the push to convince the Chicago Board of Education to seek legal remedies for some bad financial transactions, writes Greg Hinz.

The Big Bank Backlash Begins (ProPublica)

Jesse Eisinger reports on the banks' take on current regulatory practices, after attending a conference where their lawyers discussed strategies for dealing with tough regulators.

Should the Poor Be Allowed to Vote? (The Atlantic)

Peter Beinart says voter ID laws are part of a long and unfortunate American tradition of distrusting poor people's ability to make reasoned political choices.

America's Middle Class Knows It Faces a Grim Retirement (LA Times)

Michael Hiltzik looks at a scary set of survey results from Wells Fargo, and says that expanding Social Security is the best option to ensure that retirement is possible for the middle class.

The Sharing Economy’s ‘First Strike’: Uber Drivers Turn Off the App (In These Times)

In what some are calling the first labor strike in the sharing economy, Uber drivers in five cities stopped picking up rides yesterday, reports Rebecca Burns.

Can Student Credit Unions Solve the College Affordability Problem? (The Nation)

Helene Barthelemy reports on a Columbia University group's attempt to open a fully student-run credit union on campus, with broad goals that include offering lower rate student loans.

Share This

Daily Digest - October 22: Taking Organized Labor Beyond Collective Bargaining

Oct 22, 2014Rachel Goldfarb

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

The Seeds of a New Labor Movement (TAP)

Harold Meyerson profiles David Rolf of SEIU and his work to push labor organizations beyond collective bargaining to incorporate minimum wage fights and other organizing work.

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

The Seeds of a New Labor Movement (TAP)

Harold Meyerson profiles David Rolf of SEIU and his work to push labor organizations beyond collective bargaining to incorporate minimum wage fights and other organizing work.

  • Roosevelt Take: Roosevelt Institute Senior Fellow Richard Kirsch's report lays out policy ideas for reinvigorating the labor movement.

Holiday Shopping Season Kicks Off With Temp Workers Who Have No Rights (The Guardian)

Siri Srinivas says Amazon's annual hiring of thousands of temp workers to staff its warehouses during the busy holiday season highlights the lack of protections for U.S. workers.

States Ease Laws That Protected Poor Borrowers (NYT)

Michael Corkery reports on recent efforts by the consumer loan lobby to permit higher interest rates on riskier loans. These changes are opposed by many, including military leaders.

America’s Ugly Economic Truth: Why Austerity is Generating Another Slowdown (Salon)

David Dayen says that our economic October surprise, which includes stock market slumps and interest rate drops, is indicative of a larger global problem caused by austerity politics.

Ebola Galvanizes Workers Battling to Join Unions, Improve Safety (Reuters)

For workers exposed to bodily fluids, like those who clean airplane bathrooms, lack of clarity around Ebola safety has kicked union organizers into overdrive, writes Mica Rosenberg.

Republicans Trying to Woo, or at Least Suppress, Minority Vote (NY Mag)

Jonathan Chait looks at the Republican Party's split strategy, which simultaneously attempts to convince minority voters to vote for them while pushing laws that make it more difficult to vote.

Federal Reserve Officials Scold Bankers, Again (Buzzfeed)

Matthew Zeitlin reports on statements by the New York Federal Reserve president at a conference on Monday, where he questioned whether large banks can be managed effectively.

Share This

Daily Digest - October 15: "Fifteen and a Union" Goes Beyond Fast Food

Oct 15, 2014Rachel Goldfarb

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

America’s Fastest-Growing Profession is Joining a Very Public Fight for Higher Wages (WaPo)

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

America’s Fastest-Growing Profession is Joining a Very Public Fight for Higher Wages (WaPo)

Lydia DePillis looks at the differences in home health aides' fight for "15 and a union" when compared to fast food workers. For one, most home health aides are paid by Medicaid.

Gov. Scott Walker on the Minimum Wage: "I Don't Think It Serves a Purpose" (MoJo)

Andy Kroll places the Wisconsin governor's comments in context with his other remarks opposing the minimum wage, and his state's strong support for an increase.

Can Rehabilitating Prisoners Repair Wall Street’s Broken Reputation? (Buzzfeed)

Matthew Zeitlin questions whether financial products that fund social services are more than just a charm offensive meant to make Wall Street look nicer to the public.

Americans Face Post-Foreclosure Hell as Wages Garnished, Assets Seized (Reuters)

An uptick in "deficiency judgements," in which banks go after debt that wasn't covered by a foreclosure sale, is preventing people from moving forward after the Recession, writes Michelle Conlin.

When the Guy Making Your Sandwich Has a Noncompete Clause (NYT)

Neil Irwin says the noncompete clauses for "sandwich artists" at Jimmy John's typify the trend toward practices and procedures that leave low-wage workers even worse off.

Walmart’s Cuts to Worker Compensation Are Self-Defeating (AJAM)

By raising workers' share of insurance premiums, David Cay Johnston says that Walmart and other companies are only ensuring their own customers have less to spend.

The Real World of Reality TV: Worker Exploitation (In These Times)

David Dayen explains the difficult working conditions of the writers and editors who create "unscripted" reality television in light of one staff's recent push for unionization.

Share This

Daily Digest - October 10: Feminists Leading the Charge in Global Development

Oct 10, 2014Rachel Goldfarb

Please note: There will not be a new Daily Digest on Monday, October 13, in observance of Indigenous People's Day. The Daily Digest will return on Tuesday, October 14.

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

Please note: There will not be a new Daily Digest on Monday, October 13, in observance of Indigenous People's Day. The Daily Digest will return on Tuesday, October 14.

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

Connected Feminism Shows A Muscular Commitment To Change - And Civil Rights (Forbes)

Tom Watson reflects on the Women and Girls Rising conference, praising it for demonstrating the power of feminism in the development world today.

Change in Derivatives Doesn’t Resolve Question of Safe Harbors (NYT)

Stephen J. Lubben says that a change in bankruptcy laws so that other investors can be pulled into proceedings when one goes bankrupt doesn't go far enough.

  • Roosevelt Take: Lubben wrote a chapter in An Unfinished Mission, the Roosevelt Institute and Americans for Financial Reform's report on the questions that remain in financial reform post-Dodd-Frank.

After Huge Tax Incentive Package, Boeing Still Ships Jobs out of Washington (WaPo)

Boeing's tax incentive package was the largest any state had ever offered any one company, writes Reid Wilson, but that has not prevented Boeing from relocating a few thousand jobs.

  • Roosevelt Take: Washington's Boeing workers are largely unionized, and Roosevelt Institute Senior Fellow Richard Kirsch praised them for rejecting a contract that harmed newer and younger workers last year.

From Lagging 'Job Creation' to Lower Charity Giving, the Wealthy Give Less Back to Society (The Guardian)

Suzanne McGee questions why the wealthiest Americans give the lowest percentage of their income to charity, when presumably they have enough funds to do more.

Voter ID Laws Cut Turnout By Blacks, Young (HuffPo)

Alan Fram reports on a new study by the Government Accountability Office, which shows steep drops in turnout in states with new voter ID laws.

Supreme Court Blocks Wisconsin's Voter ID Law (USA Today)

With this emergency stay and a related decision by a district court judge in Texas, some of the most restrictive voter ID laws will not be in effect this November, says Richard Wolf.

Share This

Pages