There’s little doubt that the rating agencies helped inflate the housing bubble. But when we round up all the culprits, we shouldn’t ignore the regulators and affordable-housing advocates who pushed lenders to make loans in low-income neighborhoods for reasons other than the only one that makes sense: likely repayment.
As Matt Taibbi put it responding to similar sentiments from Byron York, “Tell me you’re not ashamed to put this gigantic international financial Krakatoa at the feet of a bunch of poor black people who missed their mortgage payments.”
The notion that loans made to lower-income borrowers through the CRA somehow caused the housing crisis has been thoroughly debunked again and again. Only six percent of the subprime loans made by CRA-covered lenders went “to lower-income borrowers or neighborhoods in their CRA assessment areas,” while 60 percent went to middle- or high-income borrowers. It was non-bank mortgage companies — not covered by CRA — that originated 50 percent of subprime loans, while another 30 percent were made by non-bank subsidiaries of banks or thrifts.
After promoting that idea that the CRA helped ignite the housing crisis, Husock goes on to claim that “we no longer need blunt regulatory instruments to draw lenders into low-income neighborhoods.” This is also a misguided assessment, as lenders are still discriminating against aspiring minority homeowners.
Just this week, the National Commission on Fair Housing and Equal Opportunity released a report showing that “U.S. housing is still racially segregated 40 years after civil rights laws to end unfair practices”:
The report found that whites got better loans than blacks, Latinos and Asians, who make up roughly a third of the population and who were sometimes steered away from buying homes in predominately white communities.
As Federal Reserve Board Governor Randall S. Kroszner said last week “CRA has, in fact, been helpful in alleviating the financial isolation of many areas of concentrated poverty.” This week, meanwhile, the Times’ editorial board advocated “strengthening fair-lending laws, especially the Community Reinvestment Act.” Indeed, weakening these regulations in a misplaced attempt at assigning blame for the housing crisis is counterproductive, and will further exacerbate already existing housing divisions.
Today, Interim Assistant Secretary for Financial Stability Neel Kashkari — who is responsible for administering the $700 Troubled Assets Relief Program (TARP) — appeared before the House Financial Services Committee to testifyabout concerns that the TARP has insufficient oversight.
During the hearing, Rep. Brad Sherman (D-CA) pressed Kashkari regarding “appropriate standards of executive compensation,” which is one of the provisions that banks must accept before they can access TARP funds. Sherman pointedly asked Kashkari, “as to $30 million, is that appropriate or inappropriate, or you have no opinion?” Kashkari replied that he’s “not in a position to opine on a specific number, if it’s appropriate or not.” Watch it:
Kashkari’s hesitancy to condemn $30 million bonuses for bailed out bank executives is troubling, because “chief executive officers of the firms most responsible for causing the crisis collected hundreds of millions of dollars in pay last year.” And while many — like Wachovia CEO Robert Steel — have chosen to forgo this year’s bonus, some still think that they deserve the money.
AIG, though, has not seen the light, and has “offered cash awards to another 38 executives…with payments of as much as $4 million.” AIG’s defense is that it “would be doing a disservice to the taxpayer — and would place AIG’s asset divestiture plan at risk — if we did not act decisively to ensure that our key employees remain.”
Kashkari’s answer, meanwhile, shows that the Treasury is simply unwilling to do anything to curb this kind of behavior, even though companies like AIG are operating thanks to TARP dollars, and Treasury has the explicit ability — granted by the TARP legislation — to “require that [a] financial institution meet appropriate standards for executive compensation.”
Today, a congressional oversight panel, led by Harvard law professor Elizabeth Warren, released a report which noted that “Treasury cannot simply trust that the financial institutions will act in the desired ways; it must verify.” Thus far, it’s clear that Treasury has not verified much of anything.
President-elect Barack Obama’s reported selection of Dr. Steven Chu as Secretary of Energy is a bold stroke to set the nation on the path to a clean energy economy. Chu, a Nobel Prize-winning physicist, is the sixth director of the Lawrence Berkeley National Laboratory, a Department of Energy-funded basic science research institution managed by the University of California. After moving to Berkeley Lab from Stanford University in 2004, Chu “has emerged internationally to champion science as society’s best defense against climate catastrophe.” As director, Chu has steered the direction of Berkeley Lab to addressing the climate crisis, pushing for breakthrough research in energy efficiency, solar energy, and biofuels technology.
At Berkeley Lab, Chu has won broad praise as an effective and inspirational leader. “When he was first here, he started giving talks about energy and production of energy,” Bob Jacobsen, a senior scientist at the Lawrence Berkeley Lab, told the San Francisco Chronicle in 2007. “He didn’t just present a problem. He told us what we could do. It was an energizing thing to see. He’s not a manager, he’s a leader.” In an interview with the Wonk Room, David Roland-Holst, an economist at the Center for Energy, Resources and Economic Sustainability at UC Berkeley, described Chu as a “very distinguished researcher” and “an extremely effective manager of cutting edge technology initiatives.” Roland-Holst praised Chu’s work at Lawrence Berkeley, saying “he has succeeded in reconfiguring it for a new generation of sustainable technology R&D, combining world class mainstream science with the latest initiatives in renewable energy and climate adaptation.”
The reality of past threats was apparent to everyone whereas the threat of global climate change is not so immediately apparent. Nonetheless, this threat has just got to be solved. We can’t fail. The fact that we have so many brilliant people working on the problem gives me great hope.
Chu’s leadership extends beyond this nation’s boundaries. As one of the 30 members of the Copenhagen Climate Council, Chu is part of an effort to spur the international community to have the “urgency to establish a global treaty by 2012 which is fit for the purpose of limiting global warming to 2ºC,” whose elements “must be agreed” at the Copenhagen summit in December, 2009.
Last year, Dr. Chu co-chaired a report on “the scientific consensus framework for directing global energy development” for the United Nations’ InterAcademy Council. Lighting the Way describes how developing nations can “‘leapfrog’ past the wasteful energy trajectory followed by today’s industrialized nations” by emphasizing energy efficiency and renewable energy.
It’s hard to decide if the selection of Dr. Chu is more remarkable for who he is — a Nobel laureate physicist and experienced public-sector administrator — or for who is not. Unlike previous secretaries of energy, he is neither a politician, oil man, military officer, lawyer, nor utility executive. His corporate ties are not to major industrial polluters but to advanced technology corporations like AT&T (where he began his Nobel-winning research) and Silicon Valley innovator Nvidia (where he sits on the board of directors). Chu is a man for the moment, and will be a singular addition to Obama’s Cabinet.
Daniel Weiss, a Senior Fellow and the Director of Climate Strategy at the Center for American Progress Action Fund, remarks:
The Secretary of Energy is one of the most challenging jobs in the U.S. Government. He will oversee the national energy labs, nuclear triggers on our missiles, clean up of contaminated nuclear sites, and research on fossil fuels and clean renewable energy. DOE oversees nuclear nonproliferation efforts as well as the disposal of nuclear waste. The next Energy Secretary will play a critical role in the design, adoption and implementation of any program to reduce global warming pollution.
Dr. Steven Chu has a unique set of qualifications to oversee the unruly Department of Energy –- physicist, energy lab manager, energy efficiency expert. What a contrast compared to President Bush’s first Secretary of Energy, Spencer Abraham, who was appointed even though he advocated eliminating DOE just a few years earlier. He will bring a scientific rigor to President-elect Obama’s clean energy and global warming agenda. Following on the heels of the anti-science Bush administration, its like going to Mensa after spending eight years in the flat earth society.
,In a presentation at this summer’s National Clean Energy Summit convened by the University of Nevada Las Vegas, Sen. Harry Reid (D-NV), and the Center for American Progress Action Fund, Dr. Chu described why he is dedicated to fighting global warming:
,Climate Progress’s Joe Romm weighs in: “Chu would be a great choice. And since he is a hardcore science and cleantech guy, he would be a perfect complement for the new point person at the White House on energy and climate — Carol Browner.”
The Washington Post’s Al Kamen has the scoop that Carol Browner, the Clinton administration’s Environmental Protection Agency Administrator, has been tapped for a new position “as head of environmental, energy, climate and related matters” in President-elect Barack Obama’s White House. She may be heading a new National Energy Council, recommended in the the Center for American Progress Action Fund’s Change For America blueprint for the new administration, to drive “both policy and strategic options with respect to energy and climate change.”
On December 1, CAPAF hosted Browner, New York Times columnist Tom Friedman, and Gov. Ed Rendell (D-PA) for a lively discussion on the future of energy and environmental policy. In the question-and-answer period, Browner explained her view that government can spur economic growth by raising standards:
As a former regulator — and I can cite you any number of stories — when the government steps up and says there’s a requirement, that we’re going to have to take sulfur out of diesel fuel, you’re going to have to get rid of CFCs (chlorofluorocarbons) by a date certain, what the government is doing is creating a market opportunity.
American innovation and American ingenuity time and time again has risen to that challenge, and inevitably more quickly and at less cost than was anticipated.
And so, while the governor has been talking very importantly about how we need to make investments, those investments, when they are partnered with a government requirement — a regulation that we’re going to reduce greenhouse gas emissions, that we’re going to reduce this climate pollutant — the upside is phenomenal, more than we can possibly imagine in this room.
Browner’s view that higher standards build economic growth has proven to be true. A study of California’s green economy found that its “energy-efficiency policies created nearly 1.5 million jobs from 1977 to 2007″ and grew the economy by $45 billion without any growth in per-capita electricity use. Writing in favor of strong global warming standards, Hank Ryan, chair of the California Small Business Association, explains that energy regulations have given “California small businesses a competitive edge over their counterparts in other states because while they’re wasting money on inefficiency, we’re spending it on employees, building a better product, advertising, and capital improvements.”
The Wonk Room and ThinkProgress have been documenting the many last-minute regulatory changes that President Bush’s administration is pushing through as his term winds to a close. White House spokesman Tony Fratto’s assertions aside, the changes weaken health care, workers rights, and expose the environment to further pollution and irresponsible behavior.
But the Bush administration is also making sure to wreck the tax system on its way out the door. Today, Time’s Stephen Gandel reported that, in the last year, the Internal Revenue Service has been “unusually aggressive in doing what it can to lower corporate taxes, going above and beyond what has been allowed in the past”:
The IRS this year has issued 113 notices, many of which will lower the taxes companies will pay this year and in the future. That breaks the previous record of 111 in 2006, and is nearly double the 65 issued in the last year of Bill Clinton’s presidency.
One of the more egregious examples of Bush’s various gifts to big business was a change to the tax code — enacted in the midst of the $700 billion bailout debate — which gave “American banks a windfall of as much as $140 billion.” Gandel notes that Wells Fargo will receive a $5 billion tax break from this change, while Capital One will receive a $500 million windfall.
Perhaps the largest windfall though, will come from a proposed change stating “companies that lose money in any given year are entitled to a rebate on money they have paid in taxes for the prior two years“:
For instance, in 2008 there are projected to be 107 companies in the S&P 1500 that will lose money, as much as $80 billion. About half of those companies were profitable in 2007, making nearly $30 billion as a group. That means, based on an average corporate tax rate of about 30%, those companies could receive as much as $10 billion in tax rebates from last year alone.
A new report by Jessica Arons of the Center for American Progress Action Fund finds that the career pay gap — the difference between the median wages of all full-time working men and women over a 40 year period — deprives women of $434,000, on average, over the course of their working life.
Read the full report, which breaks down the career pay gap by state, education level, and occupation, here.
Currently, a typical woman earns 78 cents for every dollar earned by a man doing similar work. Over a lifetime, this disparity accumulates, widening over time, and depriving a woman and her family of hundreds of thousands of dollars. The wage gap makes it even harder for single women and especially single moms to make ends meet. The pay gap persists across all income and education levels, with the widest career gap among those with a Bachelor’s degree or higher.
As Arons writes, “The career pay gap represents an outrageous, unacceptable, and unjustifiable loss to women and their families, as well as to our economy. We must increase our efforts to close this gap as much as possible and as quickly as possible, in order to ensure women’s full equality, a fair workplace, and a more stable economy.”
Congress can act to address this problem by passing the Lilly Ledbetter Fair Pay Act and the Paycheck Fairness Act, which would make it easier for women to be compensated for pay discrimination and give employers incentives to close the pay gap. But the U.S. Chamber of Commerce and other business groups have come out hard against these bills, saying they impose too much of a cost on doing business.
Today, four former CEO’s of Fannie Mae and Freddie Mac testified before the House Oversight Committee, in a hearing meant to “examine the extent to which the actions and policies of Fannie Mae and Freddie Mac may have contributed to the ongoing crisis.”
A favoritepastime of conservatives is to blame the housing crisis on Fannie and Freddie. However, as Rep. Henry Waxman (D-CA) announced at the beginning of the hearing, the 400,000 Fannie and Freddie documents amassed by the Oversight Committee show that “it is a myth to say [Fannie and Freddie] were the originators of the subprime crisis”:
At an earlier hearing, the minority released a report that called Fannie and Freddie “the central cancer of the mortgage market, which has now metastasized into the current financial crisis.” The next day, John McCain made a similar statement during a presidential debate in Nashville, stating that “Fannie and Freddie were the catalysts, the match that started this forest fire.” The documents do not support these assertions.
Fannie and Freddie were undeniably irresponsible in that they purchased risky loans and mortgage securities. As the Washington Post reported today, both Fannie and Freddie were “warned” that they were investing in risky mortgages “that could pose dangers to the firm.” Fannie and Freddie’s chief regulator — the Office of Federal Housing Enterprise Oversight (OFHEO) — failed to prevent them from investing in toxic mortgages, despite its clear mandate to ensure “the safety and soundness” of the two institutions.
However, to point to Fannie and Freddie as the catalyst of the crisis is absurd. As Nobel Prize-winning economist Paul Krugman noted, Fannie and Freddie “didn’t do any subprime lending, because they can’t“:
[T]he definition of a subprime loan is precisely a loan that doesn’t meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.
As the Center for American Progress Action Fund’s Tim Westrich laid out “the real culprits in the mortgage mess are non-bank mortgage companies…that originated the lion’s share of bad mortgages at the heart of the crisis”:
They made an estimated 50 percent of subprime loans in 2005. Another 30 percent of loans were made by non-bank subsidiaries of banks or thrifts.
Fannie and Freddie should not have bet the farm on risky loans in the midst of a growing housing bubble. However, that, by itself, is not an adequate explanation for the housing crisis.
At ThinkProgress, Amanda Terkel points out that, “Later in the hearing, Rep. Edolphus Towns (D-NY) asked the four CEOs whether poor people caused the current financial crisis. All said ‘no.’“
Gov. Jon Corzine (D-NJ) has been at the forefront of the push for an economic stimulus package that includes aid to state and local governments. “This is a very dangerous time,” Corzine has said. “We need action now.” Along with Gov. David Paterson (D-NY), Corzine testified before the House Ways and Means Committee that states will have to make “devastating cutbacks” if they do not receive assistance from the federal government.
Today, Corzine sat down for an interview with ThinkProgress, and said with regards to the stimulus package, “the only thing that I have been arguing is, whatever big is, make it bigger.” He also explained what he believes needs to be included in the package:
So, a five-part program: infrastructure, social safety net, tax cuts, mortgage finance, and something in health care. If we cover those areas with a very substantial program, I think we can end up arresting the slide of the economy, laying a foundation for the economy to recover, and then get back to more normalized business growth activity and economic growth activity.
Corzine is quite right to focus on these areas as the ones most useful for stimulating the economy. An analysis by Moody’s Economy.com shows that the most “fiscal economic bang for the buck” comes from aid to state and local governments, as well as from increased spending in the form of extended unemployment benefits, a temporary increase in food stamps, and increased infrastructure investment.
Corzine is also right to focus on mortgage relief as an integral part of any response to the financial crisis. Last week, he noted that “we saw 7,500 foreclosures in October [in New Jersey]. We’re going to be at 50,000 this year versus 30,000 in previous years. If you don’t stop that, you’re going to have a hard time ever fixing the banking system.”
Indeed, stemming the tide of foreclosures — which Treasury Secretary Henry Paulson is stubbornlyrefusing to do — is the best way to reverse what Corzine called “this pattern of accumulating deterioration that is in place.”
Over the weekend, laid-off workers from the Chicago-based factory Republic Windows and Doors began what they call a “peaceful occupation,” refusing to leave the shuttered business due to claims that they are “owed vacation and severance pay and were not given the 60 days of notice generally required by federal law when companies make layoffs.” The workers, members of the United Electrical, Radio and Machine Workers of America, said that they were given only three days notice that the factory was closing.
During a press conference yesterday, President-elect Barack Obama offered his support to the protesting workers, saying, “The workers who are asking for the benefits and payments that they have earned, I think they’re absolutely right.”
As Matthew Yglesias noted, “How nice it is to have a pro-labor president.” Indeed, by bringing a pro-worker perspective to the White House, Obama has the opportunity to reform a Department of Labor (DOL) that under President Bush has been “widely criticized for walking away from its regulatory function across a range of issues, including wage and hour law and workplace safety.”
In a report released today by the Center for American Progress Action Fund, David Madland and Karla Walter examine the negative effect that current “lax enforcement by DOL” has on “workers, taxpayers, and law-abiding businesses”:
Every year, workers lose $19 billion in wages and benefits through illegal practices, nearly 6,000 American workers die on the job, and at least 50,000 workers die due to occupational disease. Taxpayers are cheated out of $2.7 billion to $4.3 billion each year in Social Security, unemployment, and income taxes from just one type of workplace fraud that misclassifies employees as independent contractors. Employers who play by the rules have trouble competing with irresponsible firms that keep labor costs illegally low.
In July, Obama sent a letter to Labor Secretary Elaine Chao expressing “serious concern” that the agency “was not fulfilling its enforcement mission.” To correct this, Madland and Walter note that Obama’s DOL can use already-existing penalties to create a “culture of accountability“:
The Obama administration must use penalties forcefully, especially in cases of willful, repeated, or high-hazard violations. It should also work with Congress to increase maximum allowable fines, and it must promote a depoliticized agenda where DOL is again seen as the top labor cop.
As the AFL-CIO pointed out, “Chao’s Labor Department has been consistently anti-worker…[and] Bush appointees in the Labor Department have been handsomely rewarded for their lack of concern for workers’ rights, getting cushy jobs at union-busting law firms and corporate lobbying groups.” Obama has a chance to reverse these practices, and make Labor a department that American workers can trust.
Our guest blogger is Daniel J. Weiss, a Senior Fellow and the Director of Climate Strategy at the Center for American Progress Action Fund.
George Bush’s deep unpopularity, lack of a positive agenda or accomplishments, and his waning days in office have sapped most of his presidential powers save one: the ability to say “no.” His intransigent opposition to long term bridge loans to save General Motors, Chrysler, and Ford has forced Congressional leaders to scramble to provide assistance to prevent bankruptcy, which would devastate the already ailing economy. It appears that there is a tentative deal that will keep GM and Chrysler on life support until the new president and Congress can provide long-term assistance to nurse them back to health.
The possible deal would loan GM and Chrysler up to $17 billion from the Advanced Technology Vehicles Manufacturing Incentive Program, established by Sec. 136 of the Energy Independence and Security Act. This program provides up to $25 billion in loans to retool factories so that they can produce more efficient vehicles that meet new fuel economy standards. Already, the Big Three and smaller innovative start up companies are seeking these funds.
Speaker Nancy Pelosi opposed using these funds for the bridge loans because they are supposed to jump start efforts to build significantly more efficient cars. Taking this money would only delay this critical effort, slowing American companies’ efforts to win the race to build the super efficient cars of the 21st Century.
“Congress is considering various short term funding options for the American automobile industry. We will not permit any funds to be borrowed from the advanced technology program unless there is a guarantee that those funds will be replenished in a matter of weeks so as not to delay that crucial initiative. Regardless of the source, all funding needs will be tightly targeted with vigorous supervision and guaranteed taxpayer protection.”
This weekend, Congressional leaders will hammer out the conditions for the loans. Read more
Either in December or after the new legislative session starts in January, Congress is going to have to decide the size and scope of an economic stimulus package. Economists from allover the ideological spectrum acknowledge the need for massive economic stimulus, but there are disagreements over how the spending should be targeted.
In order for the stimulus package to be effective, it should — at least in part — be geared towards those hardest hit by the economic crisis. As explained by the Center for Budget and Policy Priorities (CBPP), “Because this recession is likely to be deep and the government safety net for very poor families who lack jobs has weakened significantly in recent years, increases in deep poverty in this recession are likely to be severe.”
Focusing some of the package this way, though, would not make it a bailout for the poor at taxpayer expense. At a Center for American Progress (CAP) event today entitled “Stimulus and Recovery: Where Should the Spending Go?,” CBPP Executive Director Robert Bernstein explained that focusing stimulus in this way is “not simply for social or equity reasons, but for hard-headed economic reasons,” like keeping consumer demand up and thus preserving jobs.
The reason these measures are particularly effective at spurring demand is basic. Those most in need are compelled by their circumstances to spend the money they receive just to obtain the necessities. Thus, while some stimulus policies face the risk that the funds dispensed will end up getting pocketed instead of spent, producing little change in the economy, policies to help those in need face no such risk.
As Will Straw, CAP’s Associate Director for Economic Growth and a co-author of the report said, “this is not a socialist plot,” it’s just that with large tax cuts “there’s no guarantee it’ll be spent.”
The root of this shortfall — like most of the financial crisis — can be traced back to the implosion of the housing market. Depressed home values have led to reduced property taxes, at the same time that personal cutbacks have led to decreased collection of sales taxes, and thus states are left in a revenue hole that they did not see coming.
40 percent of local school budgets come from property taxes, and in order to balance their budgets (as many states are constitutionally mandated to do), states have taken to slashing education funding. Gov. Jon Huntsman Jr. (R-UT) has proposed a $59 million cut in state education funding, while in Washington, higher education institutions were “warned to prepare for 20 percent cuts.”
Allowing this trend to continue would be a mistake. America is already losing its competitive academic edge, and can ill-afford to fall further. As former Secretary of Labor Robert Reich wrote, the disappearance of education funding is “absurd“:
Schools are being closed, teachers laid off, after-school programs cut, so-called ‘noncritical’ subjects like history eliminated, and tuitions hiked at state colleges…We’re bailing out every major bank to get financial capital flowing again. But we’re squeezing the main sources of our nation’s human capital. Yet America’s future competitiveness and the standard of living of our people depend largely our peoples’ skills, and our capacities to communicate and solve problems and innovate – not on our ability to borrow money.
Reich adds that “without adequate funding we can’t attract talented people into teaching, or keep class sizes small enough to give kids a real chance to learn, or provide them with a well-rounded curriculum, and ensure that every qualified young person can go to college.”
This assertion generated a lot of pushback from people who feel passionately that any stimulus package should focus on creating jobs right now. Clearly that’s important, but it is also not a long-term fix, particularly when the jobs to be created are not likely to be the high-quality, long-term career positions that make for a successful economy. From this perspective, investing in human capital is the way to go.
Indeed, The Wonk Room has previously noted the “significant positive returns” that would result from investments in human capital: better educated people are more productive, less likely to require public assistance, and make more money, thus paying more taxes that can be spent on providing education to the next generation.
Our guest blogger is Tim Westrich, a Research Associate at the Center for American Progress Action Fund.
In a front page article in today’s American Banker (subscription required), Peter Wallison, a Fellow at the conservative American Enterprise Institute and a promoter of deregulation, shows that he has a backward understanding of the financial mess.
The root cause of the financial mess is the hands-off approach towards mortgage and finance markets by the Bush administration, and its lack of action when a disaster was imminent. But desperate to point the finger elsewhere, conservatives are blaming the Community Reinvestment Act, a 1977 law that covers banks and thrifts and was intended to reverse the discriminatory lending process known as redlining.
CRA-covered institutions succeed at bringing conventional, prime loans to lower-income communities, while non-covered institutions are the ones that drove bad practices. However, Wallison would have us believe it’s the other way around:
“[CRA] caused standards for mortgages to deteriorate very substantially because it forced banks to find new ways to offer mortgages to people who couldn’t meet the normal standards,” said Peter Wallison, a fellow at the American Enterprise Institute and a member of the Shadow Financial Regulatory Committee. “Then those lower standards spread to the rest of the mortgage markets, so people who could have qualified for prime loans were able to get interest-only or negative amortization loans, and all of those things became more or less the standard for mortgage loans.”
Wallison isnotalone among conservatives who are blaming the mess on the poor and advocates for the poor. However, studiesshow that CRA works at what it was intended to do. And moreover, federal regulators — including Federal Reserve Board Governor Randall S. Kroszner and Comptroller of the Currency John C. Dugan — have said there’s no link between CRA and the mortgage crisis
The real culprits in the mortgage mess are non-bank mortgage companies — not covered by CRA — that originated the lion’s share of bad mortgages at the heart of the crisis. They made an estimated 50 percent of subprime loans in 2005. Another 30 percent of loans were made by non-bank subsidiaries of banks or thrifts, which are allowed — at their option — to use their subsidiaries’ loans to count toward their CRA rating.
Now, Paulson is finally headed in the right direction, offering a plan to purchase mortgage securities. However, buying securities for newly issued loans does nothing to stem foreclosures, and thus misses the point of purchasing securities entirely. The problem in the financial system was not caused by recently issued mortgages, but by toxic mortgages that are already on the books.
Chairman of the Federal Reserve Board Ben Bernanke last week took an important step by directing the Fed to purchase mortgage backed securities from Fannie Mae and Freddie Mac. In a speech today, Bernanke explained the “public policy case for reducing preventable foreclosures”:
Foreclosures create substantial social costs. Communities suffer when foreclosures are clustered, adding further to the downward pressure on property values. Lower property values in turn translate to lower tax revenues for local governments, and increases in the number of vacant homes can foster vandalism and crime. At the national level, the declines in house prices that result from the addition of foreclosed properties to the supply of homes for sale create broader economic and financial stress.
Already at the forefront of the push to stem foreclosures is Sheila Bair, Chairman of the Federal Deposit Insurance Corp. However, Bloomberg reported today that Timothy Geithner, the incoming Treasury Secretary, is looking to push Bair “out of office.” The Obama economic team has allegedly decided that “she won’t play a central role in policy,” even though Obama said yesterday that “We’ve got to start helping homeowners, in a serious way, prevent foreclosures.”
When Indymac was seized (something I wish she had done earlier, but she waited as long as she could), she and her organization became the laboratory, the great central testing zone for what will work and what won’t work to stem foreclosures, the root cause of all of our financial problems. She was ignored, systematically ignored, even though she had the knowledge base.
Paulson has insisted on doing everything except addressing foreclosures. Bair, meanwhile, has found a formula that works. To purge her makes no sense at all.
Our guest blogger is James Kvaal, Senior Fellow at the Center for American Progress Action Fund.
America’s prosperity was built partly on its strong schools. For most of the last century, America led the world in educational achievement. Our academic edge drove the United States’ exceptional economic growth and low income inequality, according to Harvard professors Claudia Goldin and Lawrence Katz.
The rapid increases in schooling were impressive. In only 30 years — between 1910 and 1940 — the number of 18-year-olds with high school diplomas increased from 9 percent to 50 percent. And 30 years later, about half of American students were attending at least some college — leading the world.
But since the 1970s, the U.S. educational system has rested on its laurels, and we are losing ground. Educational achievement among young workers (between the ages of 25 and 34) has slipped to tenth in the world, according to new analysis from the National Center for Public Policy and Higher Education.
In part, that’s because tuition has grown by 439 percent over the past 25 years while family incomes have increased by only 147 percent, according to the Center. More resources are needed to keep tuition low and expand scholarships. The College Board makes a compelling case for financial aid reforms that could help more students earn their college degrees.
But there are broader problems as well. We also need to raise high school graduation rates, which average only about 73 percent by some estimates. Stronger academic preparation is needed, particularly in struggling urban schools. And we need to raise students’ aspirations and help them navigate the complicated college and financial aid systems.
As the debate over whether or not to provide a $25 billion loan to America’s ailing auto industry rages on, conservatives have propagated the myth that the auto workers’ unions are to blame for the Big Three melting down. For instance, Fox News anchor Gregg Jarrett has proclaimed “You retire and you get health care for life? Since when? I mean, no wonder the Big Three are broke.”
Last night, Leo Gerard, president of United Steelworkers International, appeared on the Rachel Maddow Show to dispel this falsehood. “Unions are being set up as if they are the reason that America can’t be that competitive and that business has failed,” Maddow said. “Do you feel that is a political attack on unions as a union leader right now?” Gerard replied, “Of course it’s a phony attack” to blame “an auto worker that makes $57,000 a year.” Watch it:
Lost in this whole debate are the obvious economic benefits for workers that are derived from being in a union, including increased wages, better health care, and better pensions. As the Center for Economic and Policy Research noted this week, joining a union can have a profound effect on the wages and benefits that women receive in the workplace, in particular:
On average, unionization raised women’s wages by 11.2 percent – about $2.00 per hour – compared to non-union women with similar characteristics. Among women workers, those in unions were about 19 percentage points more likely to have employer-provided health insurance and about 25 percentage points more likely to have an employer-provided pension.
Today, the Wall Street Journal reported that the “number of consumers with delinquent mortgages is poised to almost double by the end of next year, hitting its highest level in at least 16 years.” In the fourth quarter of 2009, it is estimated that 7.17 percent of consumers will have mortgages that are 60 days or more past-due.
The Wonk Room has been arguing for sometime that addressing the housing crisis is the best way to stem the overall financial meltdown. At the forefront of the effort to offer mortgage modifications is Sheila Bair, Chairman of the Federal Deposit Insurance Corp. (FDIC). Bair has put forth a plan that — for $24 billion — would help 1.5 million Americans avoid foreclosure. Thus far, however, Treasury Secretary Henry Paulson has rebuffed her request to pull that $24 billion from the $700 billion Troubled Assets Relief Program (TARP).
Today on CNN, Bair was asked where the “the logic” is in Paulson’s refusal to let her implement her plan. Bair only laughed, later saying she and Paulson have “different perspectives on this issue.” Watch it:
A report being released today by the Government Accountability Office states that Treasury has “yet to address a number of critical issues” in combating the financial crisis. Elizabeth Warren, chairwoman of the Congressional panel overseeing the TARP, said that Treasury seems “to be lurching from one tactic to the next without clarifying how each step fits into an overall plan.”
Our guest blogger is Brian Levine, a Senior Policy Adviser at the Center for American Progress Action Fund.
The United States faces an economic imperative to develop reliable, affordable, clean sources of energy and use them more efficiently. In the face of deep economic challenges and a rising federal budget deficit, some have argued that the United States should postpone its investments in a clean energy supply. But the opposite is true. There is widespread agreement that running a deficit to pay for an economic stimulus and recovery plan is necessary now. Investing in clean energy creates jobs in the short run, helps combat global warming, spurs long-term growth, and ultimately helps restore fiscal balance by improving our economic circumstances.
Our dependence on oil leaves us vulnerable to higher and higher prices in the coming decades, continued price volatility and shocks, and the demands of hostile and unstable countries. Climate change caused by reliance on fossil fuels is leading to stronger hurricanes and other storms, floods caused by rising sea levels and massive precipitation, droughts, and heat waves that will ultimately cost trillions of dollars a year.
These are the reasons why we need action on clean energy, and it should proceed in two stages. First, we should act immediately to invest in a green stimulus and recovery plan, creating desperately needed jobs and beginning the transition to a clean and more efficient energy future. Second, in 2009 we must begin putting in place an economy-wide greenhouse gas cap-and-trade program—the best long-term solution to catastrophic climate change—as a central component of a comprehensive clean energy strategy.
Yesterday, Gov. Ed Rendell (D-PA), New York Times columnist Tom Friedman, and Obama transition adviser Carol Browner met at the Center for American Progress to discuss these challenges and opportunities. The complete session, introduced by CAP’s Joe Romm and moderated by Bracken Hendricks, can be watched online here. In the following excerpt, Rendell discusses the future of renewable energy, coal, and regional transport, and Friedman explains the meaning behind the title of his new book, “Hot, Flat and Crowded.”
Our nation faces great economic challenges. Immediate government investments will help put us on a path to recovery while also speeding the arrival of an economy powered with clean, sustainable, and secure sources of energy. We cannot be confident of sustainable economic growth in the future unless we also move ahead with the important structural transformation to a low-carbon economy.
Over the weekend, the Wall Street Journal reported that a “face-off is brewing between labor and employers” in regards to the Employee Free Choice Act, which would aid American workers in the path toward unionization. Indeed, despite the bill having widespread public support, the debate surrounding it is becoming increasingly vitriolic.
The chamber deployed a network of operatives in a number of key Senate races this year and campaigned aggressively — on the air and on the ground — against the card-check legislation. It will be maintaining those operations, hoping to win over some senators and peel back others, in addition to running TV ads. Last week it released the first in a series of reports refuting what it calls union rhetoric.
American Rights at Work recently released a report showing that “many employers blatantly violate” the National Labor Relations Act by “firing, demoting, or retaliating against workers for their support of a union [and] ignoring their duty to negotiate a contract.” Ultimately, employers have little reason to follow current unionizing laws “as the financial disincentives of violating the law are minimal.”
What the Free Choice Act does is give workers another option — one in which they will be able to avoid these kinds of employer intimidation and delays.
As the housing bubble burst and the ensuing economic crisis gained steam, conservatives set about trying to find someone to blame for the meltdown of the mortgage market. First, it was Fannie Mae and Freddie Mac, and then loans made to low-income people through the Community Reinvestment Act.
As The Wonk Room has noted, the problem was actually the Bush administration’s failure to regulate the mortgage markets, while financial institutions developed ever-more sophisticated instruments for securitizing mortgage debt and selling it around the world.
Today, the Associated Press offered more evidence of Bush’s failure, reporting that his administration “ignored remarkably prescient warnings that foretold the financial meltdown,” and “backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed.”
In 2005, banking regulators proposed a series of regulations that “reads like a list of what-ifs“:
- Regulators told bankers exotic mortgages were often inappropriate for buyers with bad credit.
– Banks would have been required to increase efforts to verify that buyers actually had jobs and could afford houses.
- Regulators proposed a cap on risky mortgages so a string of defaults wouldn’t be crippling.
- Banks that bundled and sold mortgages were told to be sure investors knew exactly what they were buying.
- Regulators urged banks to help buyers make responsible decisions and clearly advise them that interest rates might skyrocket and huge payments might be due sooner than expected.
“In hindsight, it was spot on,” but “people kind of looked at us regulators as old-fashioned,” said Jeffrey Brown, a former top official at the Office of Comptroller of the Currency. Indeed, the administration “trusted market forces and discounted the value of government intervention in the economy,” thus dismissing the proposed regulations.