Monthly Archives: January 2013

Wall Street’s Meltdown Really Was Built on a Foundation of Fraud

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When Wall Street melted down, some liberals and lefties said it was because Wall Street was rotten to the core with corruption. I’m usually skeptical of arguments like this — the worst stuff usually isn’t because of corruption, of acts that were illegal, it’s what’s legal that does the real damage. But in the case of Wall Street, I was wrong. As Frontline’s new documentary shows, the crisis was literally built on a foundation of fraud.

At its heart, the Wall Street meltdown was about a housing bubble. Mortgage lenders created lots of home mortgages that were either likely to blow up or were just plain crap, and then these mortgage loans were packaged together and then sold, mostly as pieces of these packages, to investors, who leveraged them to the point where if anything went wrong the investors would go broke.

The key to making it work was getting enough mortgages to package together. No more mortgages, no more new “financial instruments” — and that meant no more big, fat Wall Street fees for packaging, selling, and repackaging them. But mortgage brokers aren’t supposed to be able to give home loans to just anyone. They’ve got to have a reasonable expectation that they’ll get paid back.

And as the housing bubble inflated and housing prices got higher, it got harder and harder to find folks who wanted to buy a house and could afford it. If Mortgage brokers and the financial types who bought their mortgages played by the rules, the highly lucrative game would have to stop early. So, as the Frontline Documentary shows, they cheated.

The mortgage lenders made tons of loans that fraudulently broke their own lending standards. The people at the mortgage lenders who were supposed to check for fraud and abuse were told to ignore it — or the standards were lowered until, say, marking down a waitress as having a salary of $12,000 a month was no longer considered fraud. Over and over in the documentary, we meet whistleblowers who said that more than half of the loans they were auditing were clearly fraudulent.

Without this fraud, the housing bubble would’ve popped years before 2008.

And so it went up the chain of mortgage financial games. Financial firms that bought bundles of loans and packaged them fraudulently asserted that the loans were ok. In turn they got ratings agencies to take packages of loans that were bound to fail and gave them a AAA rating, without which pension funds and certain other investors couldn’t legally purchase them. And everybody got a cut that made committing this fraud very lucrative.

So yeah, when it comes to the Wall Street meltdown, fraud really was at the core. And — unlike the S&L crisis — not a single high level Wall St exec has been jailed for it, Obama has all but guaranteed it’ll happen again.

UPDATE: just to be clear, it’s not that the evidence about what folks did wasn’t out there before the Frontline documentary. The elements of the basic story have been out there for a very long time. Bt what I didn’t get was how much of the behavior wasn’t simply greedily suicidal, it was also pretty clear cut fraud.

For example, it was perfectly legal to make “interest-only” mortgage loans where borrowers only paid the interest and not the principle for the first few years, then had their mortgage jacked up to almost certainly unaffordable levels once they had to start paying off the principle (i.e., the money they had borrowed). For most folks who got one of these loans, they were essentially being given a big stack of money to gamble that the housing bubble would keep going, sending the value of their house skyrocketing fast enough that they could get out of the loan into something more sensible before the principle was due. No sane housing or financial market should legalize this form of gambling, but it was legal.

What the Frontline documentary added to the story — or maybe more accurately, my understanding of the story — was the degree to which fraud was involved. the question the documentary asked was, how come no major Wall St execs have gone to jail? To explain why, they interviewed whistleblower after whistleblower who explained just how much of the behavior they saw was clearly fraudulent.

Good Jobs First Study: How to Stop Corporations from Playing States against Each Other

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Here’s an easy way to cut government waste: stop corporations from playing states against each other. According to a new Good Jobs First study, The Job-Creation Shell Game, too many states are playing expensive bidding games against each other to take jobs that already exist in other states. Some examples:

• In the Kansas City metro area, companies have been getting eight-figure subsidy packages to move from the Missouri side to Kansas, or vice versa.
• In Texas, the “deal-closing” Texas Enterprise Fund as well as a privately financed marketing group called TexasOne are used to brazenly lure companies from many states, including California.
• New Jersey has doubled down on both job piracy and job blackmail payoffs, continuing to lure firms from New York City-many of them Wall Street firms that were likely to come anyway.
• Georgia, which we rename the Poach State, stunned officials in Ohio when it successfully lured the headquarters of NCR from Dayton, where the company had been based for 125 years.
• Tennessee embodies all the policy contradictions. Its largest city, Memphis, is frequently the victim of poaching by bordering Mississippi, yet Tennessee created a whole new subsidy program to lure the North American headquarters of Nissan from southern California.
• The booming Charlotte region has job growth most states would die for. Yet instead of managing their growth, the 16 counties in North Carolina and South Carolina routinely poach jobs from each other, using both state and local subsidies.
• Rhode Island has long pirated jobs from Massachusetts, but when it gave a very large package to lure video game maker 38 Studios, founded by retired Boston Red Sox star Curt Schilling, the deal soon blew up and criminal prosecutions are now under way.
• Huge job blackmail subsidies have left many taxpayers bitter in states such as Illinois and Ohio, and Sears Holding Corp. has continued to shed jobs despite getting a second nine-figure retention deal from Illinois.

What can we do to stop this madness? One simple solution is for more states to opt out of the game. Currently,

four-fifths of the states already refuse to pay for intrastate job relocations. For at least one and sometimes most of their major incentive programs, 40 states disallow subsidies for existing jobs that are merely being moved within their own borders.

To help them move in this direction and help level the playing field, the report also suggests that the feds give them a gentle nudge by

reserving a small portion of its economic development aid for those states that amend their incentive codes to make existing jobs ineligible for subsidies and certify that they no longer engage in raiding.

You could also try to rally conservatives to lead the assault. After all, corporate bidding wars among states are one of the worst kinds of government interventions in the market, so any true small government conservative ought to be dead set against them. I’m sure any day now ALEC will take up the cause…

So What if Inequality Doesn’t Hurt Growth?

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Joe Stieglitz recently argued in the New York Times that our society’s growing inequality has undermined growth. Krugman doesn’t think so.

First, Joe offers a version of the “underconsumption” hypothesis, basically that the rich spend too little of their income. This hypothesis has a long history — but it also has well-known theoretical and empirical problems. But the data doesn’t back up that claim….

So am I saying that you can have full employment based on purchases of yachts, luxury cars, and the services of personal trainers and celebrity chefs? Well, yes. You don’t have to like it, but economics is not a morality play, and I’ve yet to see a macroeconomic argument about why it isn’t possible.

A number of commentators have jumped in on this debate, and some of the liberal folks in the comment peanut gallery have been pretty pissed at Krugman.

I don’t understand why folks are getting so worked up. If the rich hurt growth by grabbing the profits mostly for themselves — aka growing inequality — then it means they’re stupid. If Krugman is right? The rich aren’t stupid, just greedy bastards who’ve gutted the basic contract our economy is founded on, the idea that maybe the rich do better but everybody comes out ahead. How is this a worse position to have to argue?

Unless, of course, you’re a wimp. If you don’t feel comfortable talking about the 1% vs the 99%, if you have this fantasy that somehow we’ll convince the rich that they’re being irrational, then yeah, you’re in a bad spot if Krugman is right.

This kvetchfest reminds me of something organizer Stephen Lerner said about the financial crisis: it wasn’t a real crisis for the super-rich. They got bailed out and one year later were making some of their best profits ever. For the middle class and the poor, it was a crisis, but not for the folks at the top. His point: we are not in this together. They can do just fine while we’re sinking. The only way out is to make it their problem too.

Little Lefty Signs of Hope: Organizing Upgrade, Jacobin

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In the past few years, we’ve seen more signs of hope on the ground in a short period of time than we have had in perhaps the past three decades – the Arab Spring, the Wisconsin uprising, the massive protests in Spain & elsewhere in Europe, Occupy Wall Street, the Québec student movement, the Chicago teachers’ strike, the eruptions against Walmart, the homeowner foreclosure resistance, etc. What you may not know is that we’ve also we’ve seen the rise of some of the best places for Lefty thought that we’ve had a very long time. If on Dr. King’s birthday you are looking for some material to inspire you and make you think, here are two:

Organizing Upgrade: some of the best thinking around about what it takes to build power and fight for justice, mostly written by folks with a lot of real-world experience behind their words.

Jacobin Magazine: some of the least-jargon-filled yet still very sharp Lefty thought on the web. It didn’t click with me when it first appeared, but over time I’ve come to really appreciate it.

I’m not saying these publications are perfect. There are plenty of articles in both that make me want to bang my head against the wall. But that’s okay; that’s part of the gig. If you create a real space where progressive types get to talk to each other, then at least some of the time — but only some of the time — somebody ought to be getting on your nerves. But unlike a lot of leftie rags, Organizing Upgrade and Jacobin are serious about singing to more than just the choir. They’re definitely worth checking out.

Changing the Terms of the Debate: from Fixing “Entitlements” to Fixing Inequality

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When folks start talking about “fixing” Social Security, mostly they talk about cutting benefits. Sometimes – if they are liberals or lefties – they’ll talk about raising taxes (e.g., “popping the top”). But what almost nobody talks about is inequality.

The idea is pretty simple. In the past few decades, a greater percentage of the wealth our society produces has been going to folks at the top. That’s meant relatively less money is collected in payroll taxes. Krugman lays out the impact:

a substantial part of our social insurance system — Social Security and the hospital insurance portion of Medicare — is funded through dedicated payroll taxes. If payrolls lag behind overall national income, this will tend to leave those programs underfunded given the way the laws are currently written.

So as a percentage of GDP going to labor has fallen, Social Security and Medicare have taken a huge hit. That’s why earlier efforts to “fix” Social Security failed.

back in the 1980s the Greenspan Commission supposedly fixed Social Security’s finances for 75 years, that is, until 2060. Why, then, do most projections show the trust fund running out well before then? Not because life expectancy is rising — that was already built into the projections. No, the big reason is rising inequality, which has led to a growing share of income coming above the payroll tax cap, so that SS revenue lags behind overall compensation. And yet the conventional wisdom is that we should respond to a financing issue caused by rising inequality by slashing benefits, further increasing inequality.

But there’s no reason it has to be this way. If we don’t treat the change in who gets what percentage of the wealth our society generates as natural or inevitable, we could look at this problem very differently.

the money is still there to support the programs, it’s just coming in the form of capital rather than labor income. There would be no problem, at least in economic terms, in continuing the programs by adding revenue from general taxation, maybe even from dedicated taxes on capital income.

It is truly amazing how effective our elites have been at narrowing not just what problems we talk about but how we talk about them. That’s the bad news. The good news is that there’s plenty of room to force the debate wide open. There’s no reason that every single time some blithering pundit talks about cutting Social Security that we can’t use it as an opportunity to talk about cutting inequality – assuming, of course, we’re ready to fight to win.

New Year’s Resolution: Stop Falling into the Deficit Obsession Trap

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If our side needs another New Year’s resolution, I’ve got one: let’s stop getting trapped in Deficit Obsession.

A few weeks ago, the economist blogger Eschaton succinctly summed up why. Brad DeLong had made this point about deficits under Bush I vs. Clinton:

Remember the context: Mankiw loved the Bush-era fiscal policies to create long-run structural budget deficits, and worked hard to implement them–the unfunded war and unfunded tax cut and unfunded entitlement policies that did so much to create our structural deficit. Mankiw did his best to join in the process of taking the work that we in the Clinton administration had done in the 1990s to restore America’s fiscal balance–work that was very well done, very important, and work that we were and are very proud of–and casually smashing it on the floor.

Eschaton replied:

But Republicans will inevitably see a balanced budget as an opportunity to give money to rich people (tax cuts and crony capitalism). The reward for liberals for this well done very important work? Tax cuts for rich people and unpaid for disastrous wars.

Liberals should spend their time in office figuring out how to implement a sticky liberal agenda, one which is hard to dislodge, not figuring out how to create a pot of money for Republicans to steal when it is their turn.

It’s not that deficits don’t matter at all. We don’t want to spend too much of our budget paying interest on the deficit. And at some point a truly enormous deficit could we could eventually spook the bond market – although as we’ve seen from the past couple of decades, it would take far more debt than even the wildest lefty argues for to get us into that kind of trouble. But for the most part, focusing on the deficit is a trap and it’s time we stopped getting caught in it.