The Wonk Room

Unemployment Hits 10 Percent — Are Tax Credits For Homebuyers And Seniors The Best We Can Do?

Back in June, President Obama predicted that the unemployment rate would eventually hit 10 percent before the recession truly ended. Well, here we are.

Today, the Labor Department announced that the unemployment rate has hit a 26-year high of 10.2 percent, after employers shed 190,000 jobs in October. The wider U-6 measure of underemployment also ticked up to 17.5 percent, from 17 percent last month. The Labor Department also revised September’s losses down to 219,000 from 263,000. At the same time that joblessness continues to increase, productivity — output per hour worked — has soared (as employers make do with fewer employees).

Economist Dean Baker said that he did not expect declining unemployment rates until next spring. “We may be looking at very high levels,” Baker said, “barring a policy response, for several years into the future.” So as Brad DeLong asked “if you had told everyone last election day what would happen, economically, in 2009, what policies would they have adopted then to stem this disaster? And why aren’t we implementing those policies now?”

Indeed, there are positive steps that can be taken, now, that would support the labor market. As Matt Yglesias pointed out, we should probably be deploying more aid to state and local governments, to prevent layoffs and keep infrastructure projects up and running. (Let’s not forget that state aid was significantly reduced during negotiations over the stimulus package.) Paul Krugman, for his part, is advocating a WPA-style direct jobs program — “think of it as the stimulus equivalent of getting the middlemen out of the student loan program.”

Instead, as Steven Pearlstein wrote, “what [lawmakers are] proposing to do is to spend a lot of money that they don’t have in ways that won’t work to help too many people who are neither desperate nor deserving.” These ideas take the form of the badly misguided homebuyer tax credit, and the politically brilliant but economically pointless $250 payment to seniors.

Already, the response that we’ve seen from Congress has been fearmongering about deficits or using the unemployment rate as a nonsensical reason to kill health care reform. Neither of those provide much hope for some productive policy emerging. But if nothing is done, it’s going to be a long, painful slog back to a positive employment situation.

Same EFCA Opponents Claiming To Defend Democracy Oppose Democratization Of Railway Labor Act

Opponents of the Employee Free Choice Act (EFCA) like to portray themselves as the great defenders of democracy, protecting the “secret ballot” for workers everywhere. “There are sacred principles that epitomize American democracy,” wrote Rep. John Kline (R-MN), the ranking member on the House Ed. and Labor committee, while attacking EFCA. “They have private ballots in America, but not in other countries where there are tyrannies and socialism,” agreed Mark McKinnon of the Workforce Fairness Institute (WFI).

But now that the National Mediation Board (NMB) — which oversees labor-management relations for the airline and railroad industries under the Railway Labor Act (RLA) — wants to issue a rule change making unionization elections in those two industries more democratic, Kline and WFI are singing a different tune.

Currently, under the RLA, employees who choose not to vote in a union election are counted as “no” votes, while under the National Labor Relations Act (NLRA), employees who don’t vote simply aren’t counted at all. So, in practice, this means that employees under RLA must get a majority of employees to vote affirmatively, while those under NLRA must get a majority of voting members to do so, just like in an election for a political office.

The NMB wants to change the RLA’s rules, to equalize the two processes. Kline and WFI reacted like this:

Republican Reps. John Kline (Minn.) and John Mica (Fla.) issued a release that called it a radical proposal that adds “to a troubling perception that federal agencies have embraced a culture of union favoritism.” [...] The Workforce Fairness Institute issued a press release titled “Forced Unionization” in response to the proposed rule change, and criticized the NMB for providing a “bailout” to the AFL-CIO.

The NMB has opened its proposed change up to a 60-day comment period, and with their respective responses, Kline and WFI reveal that their opposition has nothing to do with democracy. It’s about preventing unions from gaining more members, at all costs. After all, in what other election do people who don’t vote get counted for one side or the other?

Much like the push in Congress to bring truck drivers for FedEx under the NLRA, this rule change would eliminate an odd inequity in the system that is the product of the antiquated RLA, which was written in 1934. There is no reason to have the deck stacked against railway and airline workers, simply because they are pulled under an older law. But to Kline and WFI, it seems, whichever rules make it harder to form a union are those that epitomize democracy.

Is Senator Shelby A Bank-Buster?

Sen. Richard Shelby (R-AL)

Under Kanjorski’s proposal, “the power to restructure a company could go to the systemic-risk council and involve the Treasury secretary, with a final decision made by the president.” This goes much further than the legislation proposed by either the administration or House Financial Services Chairman Barney Frank (D-MA).

The bill has already “set off alarms across K Street.” “That was a little unexpected,” one bank lobbyist told The New Republic’s Noam Scheiber. “It sort of…threw people for a loop.” However, Kanjorski has at least piqued the interest of one prominent player in the regulatory reform debate: Senate Banking Committee ranking member Richard Shelby (R-AL):

Senator Richard Shelby, the top Republican on the Senate Banking Committee, said today he liked the idea. “I don’t think anything is too-big-to-fail,” said Shelby, of Alabama. “We ought to be looking at legislation to deal with a bank beforehand if we can, or an institution that would cause systemic risk, to make it stronger, or make it smaller.”

Now, Shelby has already toyed with the Democrats, saying that he might be able to support creating a Consumer Financial Protection Agency (CFPA), only to characterize such a move as “folly and dangerous” when legislation started to move.

However, back in 1999, Shelby was the only Republican who voted against the repeal of the Glass-Steagall Act, which separated investment banking from traditional banking. And with the UK beginning to break up large, bailed-out financial institutions and more and more people talking about enacting some sort of wall between depository and investment banking, this seems like an issue that is not going to go away. For his part, Kanjorski said that he’s “getting some good feedback” on his measure. “Most people are coming up to me and saying we should have done this originally, why didn’t we?” he said.

It’s too soon to tell how this will all shake out, especially since Senate Banking Chairman Chris Dodd (D-CT) has yet to release his version of regulatory reform legislation. But Dodd is already planning to deviate from the House and the administration’s reform vision in significant ways. Will Shelby’s willingness to at least talk about breaking up the big banks push Dodd to go even further? And if he does, will Shelby be able to bring any other Republicans along?

The British Go Bank-Busting — Is There A Lesson For The U.S.?

Much like the U.S., the United Kingdom has been grappling with what to do about its bailed out, “too big to fail” banks. But unlike the U.S., the British are now telling the banks that are “too big to fail” that they are also too big to exist:

The British government — spurred on by European regulators — is forcing Royal Bank of Scotland, Lloyds Banking Group and Northern Rock to sell off parts of their operations. The Europeans are calling for more and smaller banks to increase competition and eliminate the threat posed by banks so large that they must be rescued by taxpayers, no matter how they conducted their business, in order to avoid damaging the global financial system.

The two banks are being forced to sell of hundreds of branches, credit card payment businesses, and online financial service companies. The mortgage giant Northern Rock, meanwhile, is being cleaved in two. According to Britain’s Treasury the forced divestments “together represent almost 10 percent of the UK retail banking market.”

One particularly interesting aspect of the British bank-busting is that the banks’ assets will be sold “only to new entrants to the British banking market to ensure more competition.” The American response to the financial crisis was to push failing institutions into the arms of other firms (like Merrill Lynch going to Bank of America), which has resulted in more consolidation, with previously “too big to fail” firms getting even bigger.

But as British Chancellor of the Exchequer Alistair Darling said, selling only to new entrants is the best way to ensure “proper competition and choice.” Having just “half a dozen big providers was not acceptable,” he added. The sales will take place over an extended period of time — at least three to four years — “so that the assets are not dumped at fire sale prices.”

Since RBS and Lloyds were 70 percent and 43 percent owned by the British government, respectively, the most direct comparisons for U.S. purposes are Citigroup and Bank of America, the two banking behemoths in which the U.S. taxpayer has a stake. So is it time to use that stake to forcibly unwind them as well?

“We still need to see exactly which parts the [British] banks will need to sell off to judge whether the goal of having smaller banks is really achieved,” said Richard Portes, an economics professor at the London Business School. “But there are lessons here for the United States. The supposed economies of scale of massive financial institutions are outweighed by the difficulties in controlling risk inside them.”

Indeed, as Felix Salmon put it, for these companies to be successful, they need to be boring — “the kind of companies that Warren Buffett has made his fortune by buying-and-holding.” But instead, we have let our perpetually bailed out banks (particularly Citigroup) go right back into the betting business, this time with taxpayer money. Breaking up three of its behemoths will not fix all that ails the super-concentrated British banking system. But at least for the U.S. banks which are still “too big to fail” and too weak to survive without government support, it may be time to follow the British model and force them to unwind.

Shelby: Consumer Protection Agency ‘Folly And Dangerous,’ ‘Would Make The System Less Safe’

Sens. Chris Dodd (D-CT) and Richard Shelby (R-AL)

And then there’s Sen. Richard Shelby (R-AL), the ranking member of the Senate Banking Committee. Back in October, Politico called Shelby “a deal maker,” and said that “he’s looking more and more like he’s ready to compromise [on reg. reform] — regardless of whether his party leaders want to slow walk a Democratic priority.” Politico even reported that Shelby “hasn’t shut the door” on the creation of a Consumer Financial Protection Agency (CFPA). However, now that Banking Committee chairman Chris Dodd (D-CT) is gearing up to release his bill, Shelby’s door seems to be shut pretty tight:

Shelby backs stronger consumer protections “where appropriate, but believes the creation of a stand-alone agency is neither necessary nor wise,” said Jonathan Graffeo, spokesman for the Republican lawmaker. As drafted, the proposed consumer agency in Shelby’s judgment “would make the system less safe,” Graffeo said.

This comes just a few days after Shelby called the very notion of a CFPA “folly and dangerous.” As Reuters put it, “the latest assessment of Shelby’s views shows that he and [Dodd] have a long way to go.”

It seems then, that Senate Republicans are going to reprise the House Republicans’ argument that consumer protection responsibilities should not be removed and placed within a new agency, but should instead remain with the same regulators who had them — and failed to use them — in the buildup to the economic crisis. As McClatchy’s Kevin Hall wrote, “that’s the back story to the U.S. financial crisis. At every turn where regulation was missing in action, the actors did the wrong thing, all along the long, interconnected trail of transactions that make up mortgage finance.” That seems to be the system that Shelby is arguing to preserve.

One intriguing aspect of the Senate dynamic, though, will be how the Republicans approach Dodd’s plan to consolidate all of the existing federal bank regulators into one super-regulator. House Financial Services Committee Chairman Barney Frank (D-MA) and the administration oppose such a move. With Democrats on either side, where will Shelby and co. come down?

Chamber Scoffs At Lack Of Paid Sick Leave: ‘The Problem Is Not Nearly As Great As Some People Say’

Randel Johnson, senior v.p. for labor, U.S. Chamber of Commerce

Partially in reaction to the problems posed by H1N1, Congress is considering the Healthy Families Act — sponsored by Rep. Rosa DeLauro (D-CT) and currently sporting 113 co-sponsors — which would mandate that employers with more than 15 employees provide some paid sick leave. “Sometimes you talk about legislation in the abstract, but this is making people begin to understand the problem,” DeLauro said.

However, the Chamber of Commerce doesn’t seem to understand at all:

“The vast majority of employers provide paid leave of some sort,” said Randel K. Johnson, senior vice president for labor at the United States Chamber of Commerce. “The problem is not nearly as great as some people say. Lots of employers work these things out on an ad hoc basis with their employees.”

Actually, almost 50 percent of private-sector workers in the U.S. have no paid sick days. A survey last year by the National Opinion Research Center at the University of Chicago found that “68 percent of those not eligible for paid sick days said they had gone to work with a contagious illness like the flu.”

And this is a problem that disproportionately affects lower-income workers, 76 percent of whom have no paid sick leave. This includes 86 percent of food service workers and 78 percent of hotel workers, even though they, arguably, are most able to spread disease. As Ann O’Leary and Karen Kornbluh wrote in The Shriver Report: A Women’s Nation Changes Everything, “too often, most low- and many moderate-wage workers cannot access even the minimum benefits provided to more highly paid workers.”

The U.S. is the only developed country without a policy mandating some form of paid sick leave, while lost productivity due to sick workers attending work and infecting other employees costs the U.S. economy $180 billion annually. And the National Partnership for Women and Families actually found that “while a paid sick days policy would impose modest costs, the estimated business savings total $11.69 per week per worker from lower turnover, improved productivity and reduced spread of illness.”

So, in addition to catching us up with the rest of the world, mandated paid sick leave could be good for business. But the Chamber prefers to overlook low-income workers and real economic benefits in order to advocate for the perceived interests of large employers.

Shiller: Income Inequality Is A Problem That Could Be ‘Bigger Than This Whole Financial Crisis’

Yesterday, economist Robert Shiller — co-creator of the Case-Shiller housing price index and a professor at Yale — appeared on CNN to discuss Wall Street’s bonus bonanza and its implications for economic policy. Shiller is of the opinion that the bonuses are indicative of America’s greater problems with income inequality, which he feels will be become “bigger than this whole financial crisis” if left unaddressed:

To me, I would hope that this would spur public discussion about the structural problem that inequality, economic inequality, has been worsening in the United States and in other countries for 30 years. And it’s gotten really — especially at the high end — it’s gotten really off…This, I think, is potentially the big problem which is bigger than this whole financial crisis. If these trends that we’ve seen for 30 years now in inequality continue for another 30 years, we’re going to look like — it’s going to create resentment and hostility. It’s not a country that — we could turn into a country that even the rich would rather not be in. [...]

And I think we ought to think about — I have a proposal. I’ve talked about this in my other, some of my books. I have proposed that the government should index the tax system to inequality.

Watch it:

The income gap in America is at an all-time high, with the wealthiest 10 percent of Americans earning 11.4 times the amount made by those living near or below the poverty line in 2008. And most of that wealth is concentrated at the very top, as between 1979 and 2006, the inflation-adjusted after-tax income of the richest 1 percent of households increased by 256 percent (compared to 21 percent for families in the middle income quintile and 11 percent for the bottom). In 2007, the last year for which data is available, executives and other highly compensated employees received more than one-third of all pay in the U.S.

As The New York Times’ David Leonhardt pointed out, in recent years “the wealthy have received both the largest pretax raises and the largest tax cuts.” Under Shiller’s “Rising Tide Tax System,” tax rates would “automatically adjust along with levels of income inequality.” If the incomes of the middle class and the poor were growing faster than those of the rich, tax rates on the rich would fall. If the incomes of the rich were growing faster, their tax rates would rise.

I don’t see much of a chance of anything resembling Shiller’s plan making an appearance in Congress anytime soon. However, the surtax in the House’s health reform bill — which is still causing all manner of consternation — would help to address some of the inequality, by increasing taxes on the very wealthiest to pay, in part, for a bill that would rein in health care costs for everybody.

Cable News Networks Help Spread Republicans’ ‘Highly Misleading’ Stimulus Math

Back in January, the Republicans staked out their opposition to the administration’s economic stimulus package by claiming that it would cost $275,000 for every job created. “All told, the plan would spend a whopping $275,000 in taxpayer dollars for every new job it aims to create, saddling each and every household with $6,700 in additional debt,” said Rep. John Boehner (R-OH).

This number was derived by taking the entire cost of the stimulus package and dividing it by the number of jobs created in just one year, obviously inflating the per job cost a few times over. At the time, Paul Krugman called the Republicans’ number a “bogus talking point,” while Joe Klein dubbed it “phony-baloney propaganda.”

With the White House’s announcement last week that the stimulus package has thus far created 640,000 to 1 million jobs, the GOP is at it again. Don Stewart, spokesman for Sen. Mitch McConnell (R-KY), told reporters on Friday to “get out your calculators” and divide the spending by the jobs, ending with a figure of $230,769 per job. In addition to Republican lawmakers, Fox News, CNN, and CNBC have all repeated some variation of the number (using slightly different estimates) in the last few days. Watch a compilation:

The Associated Press’ Calvin Woodward, however, was not fooled, and today released a piece telling readers to “beware the math” coming from the Republicans:

Some Republican lawmakers critical of President Barack Obama’s stimulus package are using grade-school arithmetic to size up costs and consequences of all that spending. The math is satisfyingly simple but highly misleading…First, the naysayers’ calculations ignore the value of the work produced. Any cost-per-job figure pays not just for the worker, but for material, supplies and that worker’s output — a portion of a road paved, patients treated in a health clinic, goods shipped from a factory floor, railroad tracks laid. Second, critics are counting the total cost of contracts that will fuel work for months or years and dividing that by the number of jobs produced only to date.

As Woodward wrote, “dividing apples by oranges won’t settle” whether or not the stimulus package has been a success. But it seems to be good enough for the Republicans and all of the cable news hosts that they can get to listen.

Bank Lobbyists: Overdraft Fees Are ‘A Courtesy,’ ‘Very Popular,’ Keep Customers ‘Happy’

Today, the House Financial Services Committee held a hearing to examine Rep. Carolyn Maloney’s (D-NY) Overdraft Protection Act of 2009, which would amend the Truth in Lending Act to address a spate of problems with overdraft protection programs.

Overdraft fees — which are incurred when a consumer overdraws a checking account — may climb to $38.5 billion this year, up from $10.3 billion just five years ago. According to the Center for Responsible Lending (CRL), at least 50 million Americans overdraw their accounts over the course of a twelve month period, and 27 million of those will incur five or more fees. The standard fee across the banking industry is currently $34.

But you wouldn’t know that there were any problems with overdraft fees if you listened to the representatives of the American Bankers Association, the Consumer Bankers Association and the Independent Community Bankers Association, who were singing the praises of such fees during the hearing. They said that overdraft fees are actually “a courtesy,” “very popular,” and ultimately keep customers “happy.” Watch a compilation:

Actually, 80 percent of consumers say that they would rather have their debit card rejected for a $5 purchase than be charged an overdraft fee, which only falls to 77 percent when the price of the purchase is increased to $40. And the fees tend to hit those who can least afford them, as CRL’s Eric Halperin told the committee:

The FDIC’s recent study of overdraft programs, consistent with CRL’s previous research, found that account holders who overdrew their accounts five or more times per year paid 93 percent of all overdraft fees. It also found that consumers living in lower-income areas bear the brunt of these fees. Seniors, young adults, military families, and the unemployed are also hit hard. Americans aged 55 and over pay $6.2 billion in total overdraft fees annually — $2.5 billion for debit card/ATM transactions alone — and those heavily dependent on Social Security pay $1.4 billion annually.

Confounding this problem is the fact that 75.1 percent of banks with overdraft programs automatically enroll consumers, according to the FDIC. In fact, Maloney’s legislation would mandate that overdraft protection be opt in instead of automatic. As Rep. Barney Frank (D-MA), a co-sponsor of Maloney’s bill, said, “We wouldn’t be in a situation where we’re considering legislation if you would have had an opt-in regime from the beginning…Don’t do people favors without asking them.”

Of course, there is serious merit to the point that consumers should take some personal responsibility and not overdraw their account. But, until fairly recently, banks were willing to discipline poor accounting by simply rejecting a debit card purchase at the point of sale. In fact, in 2004, 80 percent of institutions had a policy of rejecting a purchase if it would overdraw the account. Today, the percentage is exactly the opposite, with 80 percent permitting the purchase and charging an overdraft fee. Banks saw that overdraft fees were a significant profit center, and have now taken such fees to absurd heights.

Cayman Islands Financiers Celebrate Weak Baucus-Rangel Tax Evasion Bill

This week, Sen. Max Baucus (D-MT) and Rep. Charlie Rangel (D-NY) unveiled the Foreign Account Tax Compliance Act of 2009, which “would require an array of new reporting by foreign financial institutions in an attempt to give the IRS more data to detect fraud and tax evasion.” “This bill offers foreign banks a simple choice — if you wish to access our capital markets, you have to report on U.S. account holders,” said Rangel.

The Baucus/Rangel bill does go a long way toward preventing another UBS situation, in which loads of individuals are able to shelter their money offshore. However, unlike a bill sponsored by Rep. Lloyd Doggett (D-TX) and Sen. Carl Levin (D-MI), the Baucus/Rangel legislation doesn’t go after multinational corporations that set up shell companies on foreign soil in order to avoid U.S. taxes. As Doggett said, it “stops short of targeting all fat cats.”

Dogget and Levin’s legislation, the Stop Tax Haven Abuse Act, “would require more scrutiny of shell corporations’ actual owners and create a ‘blacklist’ of countries in which certain transactions would be more suspect.” “U.S. corporations should not be able to dodge U.S. taxes simply by filing a piece of paper and renting a foreign mailbox,” Doggett said.

And providing evidence that the Baucus/Rangel bill doesn’t strike fear into the tax haven world is the fact that the Cayman Islands’ financial sector is celebrating it:

Cayman Finance, representing the financial industry based in the Cayman Islands, today congratulated Chairman Max Baucus of the Senate Finance Committee and Chairman Rangel of the House Ways and Means Committee on their plan to tackle offshore tax abuse through increased transparency and enhanced reporting requirements. The new comprehensive proposal does away with the damaging features of Senator Levin’s Stop Tax Haven Abuse Act…”Cayman Finance commends Chairman Baucus, Chairman Rangel and their colleagues for their leadership on this important issue,” said Cayman Finance Chairman Anthony Travers. “This proposal is entirely consistent with the approach suggested by Cayman Finance in our many meetings with these and other U.S. policymakers.”

The Cayman News Service described the feeling amongst the Cayman’s financiers as “relief.”

Of course, the Caymans are one of world’s most well-known tax havens. The Government Accountability Office actually found that 18,857 U.S. companies maintained a post office box in one five story building in the Caymans. That building has only one occupant, the law firm Maples and Calder. Morgan Stanley has 158 subsidiaries in the Cayman Islands, while Citigroup has 90, and Bank of America has 58. Exxon, Dell, Goldman Sachs, News Corp., Pepsi, and United-Health have all set up shop there, as well.

Citizens for Tax Justice (CTJ) estimates that the stronger tax haven crackdown in Doggett and Levin’s bill would result in revenues of $9 billion over ten years. The Baucus/Rangel bill, as a whole, raises $8.5 billion over ten years.

Gutierrez Pushes For Bank Failure Fund: Banks Don’t Race Toward Destruction Because The FDIC Exists

Today, the House Financial Services Committee began discussing how to create a resolution authority for dismantling large, complex financial institutions. Emerging as the most contentious aspect of the legislation — which was unveiled by Rep. Barney Frank (D-MA) this week — is how the money for dismantling these firms should be raised.

Frank and the administration have designed a plan under which the government loans money to a failing company to help it unwind, and then recovers that money by hitting up shareholders and then assessing a fee on other large banks. But some in Congress feel that the largest financial institutions should have to pre-pay into an insurance fund, which will then be accessed when a firm goes into a tailspin.

The administration prefers the post-failure assessment because it believes that the mere existence of a fund would create moral hazard, as large firms would take the knowledge of the fund as permission to excessively gamble. During the hearing, Rep. Luis Gutierrez (D-IL) let Treasury Secretary Tim Geithner know that he disagrees:

Let’s create the fund, just like the FDIC, so when we need to resolve [a financial institution], it stands. Your argument is, ‘oh, but Luis, moral hazard’…I don’t see banks racing to the precipice of destruction and bankruptcy because the FDIC exists. Nor do I go to an insurance company and take out a life insurance policy on myself, and the next day decide, wow, maybe I’ll just start smoking. Maybe I’ll start drinking, maybe I’ll start driving my car in a crazy manner. Maybe I really don’t care whether I live or die. I’ve got life insurance, what the hell if I die, everything is taken care of. No, that’s not the way it works.

Watch it:

I agree with Gutierrez that a fund should be built up, over time, to be used in the event that a large financial institution hits the skids. And FDIC Chairman Sheila Bair, who knows a thing or two about insurance funds, agrees as well, telling the committee that “Congress should establish a Financial Company Resolution Fund (FCRF) that is pre-funded by levies on larger financial firms — those with assets of at least $10 billion…We believe that a pre-funded FCRF has significant advantages over an ex post funded system.”

There are two reasons for this. The first is that, as Simon Johnson pointed out, “you should be paying in the good times –- not right after the crisis.” If one investment bank goes under, chances are that some others are in bad shape as well. Asking them to cough up money to facilitate their competitor’s failure could be dangerously pro-cyclical.

The second reason is political. Though it isn’t, the administration’s plan looks needlessly like the much reviled Troubled Asset Relief Program (TARP), because of the upfront loan by the government. And though the plan calls for all of the money to be recovered in 60 months, as Mike Lillis pointed out, “the provision also allows the government to extend that 60-month recovery window indefinitely.” “It could be 60 years,” said Rep. Brad Sherman (D-CA). Having a pre-paid fund would prevent any outlays on the part of the government.

As far the moral hazard argument, I think it is rendered moot so long as the legislation makes it clear that under no circumstances will a failing financial firm be saved. As Frank put it, the resolution authority has to be a “death panel” for banks. If use of the resolution authority always results in a firm ceasing to exist, that should eliminate any notion that the government will facilitate a bailout.

Education Secretary Duncan And Former Prime Minister Blair Champion Community Schools

Today, Education Secretary Arne Duncan and former British Prime Minister Tony Blair came to the Center for American Progress to advocate for community schools, which are schools that extend their hours and partner with non-profits and other agencies to provide a host of non-academic services — including health care and behavioral health services — in addition to standard classroom instruction. The idea is that, by providing these services and being open for longer, the schools will become a valuable resource for students and parents, particularly in poorer areas where parents are working multiple jobs and services are harder to come by.

As Duncan explained in an interview with The Wonk Room, community schools can do a lot to alleviate poverty, but they also improve the education system across the income spectrum:

It’s a different mindset. It’s really thinking that schools open six hours a day, five days a week, nine months out of the year — the real fundamental question I’m asking people to think about is ‘who do those schools serve well?’ And I would argue that they don’t serve anyone well. All of our children, whether it’s two-parent middle class families, or single moms working one or two or even three jobs trying to make ends meet, or children going home to no-parent families, all of our children need schools open much longer hours. This has to become the norm.

Watch it:

The first time that community school initiatives were specifically funded by the federal government was 2008’s Full Service Community Schools Program, which funded 10 programs for $5 million. However, the United Kingdom has been funding an widespread community schools effort since 2003. The UK allocated ₤840 million ($1.3 billion) in start-up funds for schools to provide extended hours between 2003 and 2008, and has pledged another ₤1 billion ($1.6 billion) through 2011. By 2010, the UK is on pace to have every school in the country offer extended hours. In an interview with The Wonk Room, Blair said that community schools should rightly be the “way of the future”:

Our experience is that community schools work, they become a resource for the whole community. And for a lot of the children, they don’t just have an education issue. It’s much broader than that. It could be health issues, there could be problems getting fed before schools, doing their homework after school. And also there are a lot of adults that can use the school resource. Community school is definitely the way of the future.

Watch it:

Last month, House Majority Leader Steny Hoyer (D-MD) and Sen. Ben Nelson (D-NE) introduced the Full Service Community Schools Act of 2009, which would establish a five-year grant program to encourage the growth of community schools.

Citigroup Chairman Who Pushed For Glass-Steagal Repeal: Put It Back

Last week, the New York Times reported that Paul Volcker, the former Federal Reserve Chairman and current head of the President’s Economic Recovery Advisory Board, is having a hard time within the administration selling his view that banks should be forced to separate their depository functions from their investment banking wings. “People say I’m old-fashioned and banks can no longer be separated from nonbank activity,” Volcker said. “That argument brought us to where we are today.”

One of the manifestations of that argument was the repeal of the Glass-Steagal Act, which from 1933 to 1999 prohibited a bank holding company from owning investment arms. The prohibition was repealed by the Gramm-Leach-Bliley Act, after intense lobbying on the part of two companies that wanted to merge: Travelers (which owned the investment bank Salomon Smith Barney) and Citicorp. These two companies combined to create Citigroup.

Of course, Citigroup received $50 billion in TARP money, and is not likely to pay back anytime soon, which has evidently led to some soul-searching on the part of John Reed, the former Citi CEO whose “strenuous lobbying” helped lead to the Glass-Steagal repeal. Real Times Economics noted that Reed penned a letter to the New York Times saying that things were better the old way:

As another older banker and one who has experienced both the pre- and post-Glass-Steagall world, I would agree with Paul A. Volcker (and also Mervyn King, governor of the Bank of England) that some kind of separation between institutions that deal primarily in the capital markets and those involved in more traditional deposit-taking and working-capital finance makes sense. This, in conjunction with more demanding capital requirements, would go a long way toward building a more robust financial sector.

As Noam Scheiber wrote, “Wow. Maybe the consensus on this really is starting to change.”

Many economists blame the repeal of Glass-Steagal for inciting a casino-like mentality in a previously staid banking industry. “The culture of investment banks was conveyed to commercial banks and everyone got involved in the high-risk gambling mentality. That mentality was core to the problem that we’re facing now,” said Nobel Prize-winning economist Joseph Stiglitz.

Of course, separating investment banking from deposit-taking wouldn’t have solved all of the ills in the financial sector. After all, AIG, Lehman Brothers, and Bear Stearns would not have been any better off. At the end of the day, much stronger capital and leverage requirements and a resolution authority for unwinding any firm, no matter how complicated, will do a lot to ensure that a giant financial institution doesn’t need to be propped up in order to protect the wider economy.

That said, it’s surprising the extent to which the administration has ducked and dodged this question. At least, some discussion of a policy that ensures banks aren’t mixing risky with non-risky activities internally (even if it doesn’t amount to breaking the companies up) should be on the table.

Does Resolution Authority Mean ‘TARP In Perpetuity’ Or ‘Permanent Bailout Authority’?

Rep. Barney Frank (D-MA) is expected to reveal legislation (possibly today) creating a “resolution authority,” which would enable the government to negotiate an orderly unwinding of large, complex financial firms like AIG, Citigroup, or Lehman Brothers.

The banking industry has already begun to criticize the proposal and Republicans have taken to characterizing it as enshrining taxpayer-funded “bailouts.” Last night, Rep. Spencer Bachus (R-AL), the ranking member on the House Financial Services Committee, and CNBC’s Larry Kudlow went so far as to call resolution authority “TARP in perpetuity,” and “permanent bailout authority“:

KUDLOW: It’ll perpetuate TARP, in perpetuity. TARP will be used to somehow string these institutions along. Is that right, is that fair, is that your question? [...]

BACHUS: It’s a permanent bailout authority.

Watch it:

While it makes sense, politically, to invoke the unpopular TARP to oppose anything that the administration is proposing, Kudlow and Bachus are pretty far off the mark. In fact, resolution authority is meant to ensure that the government doesn’t find itself, as it did last year, having to choose between letting a company’s disorderly collapse ripple through the economy or infusing that company with money to prop it up, indefinitely.

And contrary to Kudlow’s positing, the resolution money will not come from TARP. That said, there is a legitimate question of how it will be raised, and Frank and the administration were looking at two options to find the answer.

The first was having the largest banks pay into an insurance fund that would be used in the event of a failure that required resolution. The second, which Frank and Treasury have reportedly settled on, is having Treasury loan the failing institution money, which will then be recouped from the company’s assets and from a fee on other large institutions, after the fact.

Unfortunately, I think Frank and the administration have this backwards. We already have a system in which the Federal Deposit Insurance Corp. assesses fees on banks, which it uses to pay depositors when an institution fails. I don’t see why a similar system wouldn’t work to build a fund for resolution authority.

The big banks are going to cry foul either way, but at least if they had to pay into a fund, it’d be simple to say that the fee was meant to guard taxpayers against any of them failing. Collecting fees post-failure means that one firm will have to pay for the mistakes of another, directly, with some undetermined formula for how much each institution should pay.

Simon Johnson, professor at MIT Sloan School of Management, said that charging banks after the fact was “a non-starter,” while Rep. Brad Sherman (D-CA) said that “the only way he could vote for the bill would be if it had large insurance premiums levied on the biggest banks.” Indeed, framing the fee as insurance, instead of forcing banks that didn’t fail to pay a penalty, seems like the better way to go.

Romer: It’s ‘A Genuine Worry’ That Insurance Premiums Will Push Wages Into A Decline

Today, Council of Economic Advisers (CEA) Chair Christina Romer appeared at the Center for American Progress to discuss how health care reform is essential if we want to get the nation’s budget deficits under control. During her speech, Romer explained how rising premiums have contributed to the current three-decade long stagnation in wages for American workers, and said that if premiums are not controlled, wages will actually be pushed into a decline. This not only lowers the standard of living for workers, but also contributes to a loss in revenue (and thus less ability to address deficits), as taxable income disappears.

During an interview with The Wonk Room, Romer said she believes that if premiums come down, workers will actually see an increase in wages, as employers redirect savings:

We do know that what’s been happening to median income, to wages for workers in this country, is we have seen them stagnate…We do know that a bigger and bigger fraction of people’s compensation is taking the form of that health insurance benefit, as health insurance has been getting more and more expensive…Our projections, actually very reasonable projections for what might happen to the growth rate of health insurance costs, does say that take home wages — or that part of compensation net of insurance costs — would start to go down in the not so distant future. So that is a genuine worry. [...]

I do think that competition is a really important part of making sure that workers get their fair share and I think the fact that firms have to compete for workers is the main thing that helps to make sure that, if firms are spending less for health insurance, it does show up in people’s take home wages.

Watch it:

Here’s a chart from the CEA showing how wages will be affected if health care reform doesn’t occur. The top line is total compensation (in 2008 dollars) inclusive of insurance premiums, while the bottom line takes the premiums out. As you can see, even as compensation goes up and up, take home wages actually begin to decline in the next few decades.

But it’s not as if companies are just going to cough up savings in the form of higher wages instantly. In the short-term, it’s more likely that companies will just pocket the difference, particularly given the weakness of today’s labor market, which removes bargaining power from the worker. I’m not as optimistic as Romer that competition will be enough to boost wages in the short-term (though that would likely occur over the much longer-term).

Of course, simply getting back to a 1990’s style strong labor market, in which workers have more leverage, would help in this regard, but so would better collective bargaining abilities for workers — possibly in the form of a higher rate of unionization — which is what helped workers earn their fair share of productivity gains pre-1980.

Banking Industry Pans Resolution Authority: It Makes Business ‘Unnecessarily More Expensive’

Rep. Barney Frank (D-MA), after consulting with the Treasury Department, plans to introduce legislation this week that would create a resolution authority for liquidating large, complex financial firms. It’s widely acknowledged (though not universally) that one of the problems facing the government during the economic crisis was that it had no authority to unwind the likes of AIG or Citigroup. Thus, propping them up was the only alternative to the widespread economic pain that would have been caused by their collapse.

As federal Reserve Chairman Ben Bernanke said, taking AIG into some sort of receivership “would have been far preferable” to the recurring AIG bailout. To that end, resolution authority will legalize a systematic process “for the government to seize control of troubled financial institutions, throw out management, wipe out the shareholders and change the terms of existing loans held by the institution.”

According to the New York Times, the bill will also require corporations to set up “the equivalent of living wills” — their own procedure for being disentangled — which the administration says “ought to be made public in advance.” But like so many of the recent regulatory reform efforts, the banking industry is coming out hard against resolution authority, this time without even seeing the bill:

Even before Mr. Frank unveils his latest proposals, industry executives and lawyers say its approach could make it unnecessarily more expensive for them to do business during less turbulent times. “Of course you want to set up a system where an institution dreads the day it happens because management gets whacked, shareholders get whacked and the board gets whacked,” said Edward L. Yingling, president of the American Bankers Association. “But you don’t want to create a system that raises great uncertainty and changes what institutions, risk management executives and lawyers are used to.”

For the record, as Shahien Nasiripour pointed out, Yingling has been spectacularly wrong about, well, everything, when it comes to the effects of regulations. And it’s really not surprising that the banking industry wants to enshrine “too big to fail,” as the alternative is unappealing from a business point of view.

But resolution authority is arguably the most important part of regulatory reform, as it should seriously mitigate the “too big to fail” problem. If there is a mechanism for taking apart a firm, no matter how large, an implicit government guarantee goes by the wayside. Bernanke is even advocating some sort of assessment on financial institutions, to build up a fund that will be used when resolution authority is invoked, moving the taxpayer a step further away from funding an institution’s failure.

Of course, problems could still occur if regulators — for whatever reason — are hesitant to pull the trigger and take a firm into receivership. That’s why even the most robust resolution authority needs to be pared with much stronger capital requirements and leverage limits for the banks, which will disincentivize and discourage excessive size or risk-taking. That way, a bank failure will really constitute a management failure, as it occurred despite all the safeguards.

And as for “unnecessary” expenditures, I’d like to ask Yingling what he thinks of the $700 billion spent to pull the banking system back from the brink. I bet he thinks that was a very necessary expense.

Lincoln-Kyl Estate Tax Giveaway Now Has Matching House Counterpart

Sens. Blanche Lincoln (D-AR) and Jon Kyl (R-AZ) are leading a fight in the Senate to implement a cut in the estate tax that would lower the rate from 45 percent to 35 percent and bump the exemption (the amount to which the tax does not apply) from $3.5 million to $5 million ($10 million for a couple). Thanks to a Bush-era accounting gimmick, the estate tax is set to disappear in 2010, and come back with a much lower exemption and higher rate in 2011, thus necessitating Congressional action.

As we’ve noted here before, the Lincoln-Kyl plan constitutes a $250 billion giveaway to the rich. And not to be outdone in terms of bad bi-partisan proposals, the House now has it’s own version of the Lincoln-Kyl “compromise,” introduced by four members:

The stakes were raised today in the House, when Reps. Shelley Berkley, D-Nev., Artur Davis, D-Ala., Kevin Brady, R-Texas, and Devin Nunes, R-Calif., introduced legislation to set the rate at 35 percent going forward, with the exemption bumped up to $5 million from the current $3.5 million and indexed for inflation…Brady said it would exempt 99.8 percent of all estates from the “death tax,” calling it the “best option available today to preserve small businesses and family farms in America.”

As National Journal noted, the House measure “would be much more expensive than extending the 2009 rate.” For the record, under current law, 99.7 percent of households will be completely exempt from the tax. So by Brady’s own calculation, $250 billion will buy an exemption for .1 percent of households.

And as for looking to “preserve small businesses and family farms,” current law would only affect about 100 of them, and “all but a handful would have sufficient liquid assets on hand (such as bank accounts, stocks, and bonds) to pay the tax without having to touch the farm or business.” The House plan would drop that number to 40.

House Democratic leaders are pushing for a permanent extension of current law. But if there is wide disagreement, Congress may punt, install a one year extension, and revisit the issue before 2011. Can a better deal be worked out? I certainly hope so.

Wall Street Journal And CNBC Get Schumer’s ‘Shareholder’s Bill Of Rights’ All Wrong

Today, in the wake of special master for compensation Kenneth Feinberg’s decision to significantly restrict compensation at the seven companies under his office’s purview, the Wall Street Journal reported that Sen. Chuck Schumer (D-NY) “is mulling a law to apply the new rules to all public companies.” CNBC picked up on the Journal’s claim, and has been reporting over and over that Schumer wants to cap pay at every company in the U.S. Watch a compilation:

This seemed like pretty earth-shattering legislation — essentially proposing a pay regulator for everyone — so I called Schumer’s press office to clarify. His spokesman called the Wall Street Journal’s reporting “incorrect” and explained that Schumer is actually advocating that Feinberg apply the “Shareholder’s Bill of Rights” to the seven companies that he oversees.

That makes a lot more sense. Schumer introduced the Shareholder’s Bill of Rights in May with Sen. Maria Cantwell (D-WA), and the bill lays out a series of provisions aimed at improving corporate governance — and hopefully reining in corporate excess — by empowering shareholders with more influence over their company’s decisions. The bill would:

- Implement “say-on-pay,” which mandates that shareholders hold a non-binding vote on their company’s compensation packages;

- Require that companies allow shareholders access to the company’s ballot if they want to nominate directors for the board, require board directors to receive at least 50 percent of the vote in uncontested elections in order remain on the board, and require all board directors to face re-election annually;

- Mandate that companies split the jobs of CEO and Chairman of the Board and that public companies create a separate risk committee comprised of independent directors.

“These companies are the poster children for the total breakdown in corporate governance and lack of effective board oversight that contributed to the recent crisis, and I believe these reforms are critical if the government is serious about turning these companies around,” wrote Schumer in a letter to Feinberg.

And applying these provisions to all publicly traded companies would actually be a great idea, since management incompetence seriously contributed to America’s last two business booms (and subsequent busts). During both the dot-com and mortgage bubbles, corporate managers failed to rein in excessive risk-taking and irrational speculation, or resorted to accounting gimmicks to hide massive losses.

And management was utterly unaccountable to shareholders, who under America’s corporate governance structure are all but powerless to exert influence. They have no say over compensation, and if they want to place directors on the board, they have to expend millions to send out their own, separate ballot, while the current board sends a ballot on the company’s dime.

My guess is that CNBC’s crew wouldn’t like this any more than the proposal that it’s imagining — but the criticism should at least be levied at something that actually exists!

Fed Releases Guidelines For Bank Compensation — Will They Do Any Good?

Today, on the same day that the administration’s special master for compensation placed significant pay restrictions on the seven companies under his watch, the Federal Reserve released new guidelines regarding compensation practices at all banking organizations.

“Compensation practices at some banking organizations have led to misaligned incentives and excessive risk-taking, contributing to bank losses and financial instability,” said Federal Reserve chairman Ben Bernanke. “The Federal Reserve is working to ensure that compensation packages appropriately tie rewards to longer-term performance and do not create undue risk for the firm or the financial system.” According to the Fed, compensation practices should:

- Provide employees incentives that do not encourage excessive risk-taking beyond the organization’s ability to effectively identify and manage risk;

- Be compatible with effective controls and risk management; and

- Be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

The guidelines apply to all banks, including regional and community banks, but the Fed will give special scrutiny (and require detailed descriptions of current practices) to 28 “large, complex banking organizations.”

The New York Times noted that the Fed’s principles “are less strict than plans suggested by some European leaders and some members of Congress. They do not impose caps on pay or prohibit multimillion dollar pay packages.” But more than that, they are simply devoid of specifics, and have no teeth behind them. So long as the banks make an attempt to conform with the principles above, it seems like the Fed will be willing to give them a pass.

Remember, as of late the Fed has been scrambling to issue various sets of guidelines, in an attempt to prove it’s taking regulatory reform seriously, as Democrats in Congress advance legislation stripping the Fed of some of its regulatory functions. This could easily be about symbolism, with little intention of following through on the substance.

One interesting aspect of the proposal, though, is that the Fed is soliciting comments on whether “formulaic limits [for compensation] be adopted for some or all banking organizations”:

[Some] have suggested consideration of an approach in which at least 60 percent of all incentive compensation received by senior executives of all large, complex banking organizations be deferred and at least 50 percent of incentive compensation be paid in the form of stock, options, or other equity-linked instruments. Would such formulaic limits on determining and paying incentive compensation likely promote the long-term safety and soundness of banking organizations generally if applied to certain types or classes of executive or nonexecutive employees across all or certain types of banking organizations?

I think the answer is undeniably yes, deferring payment is a smart move, so that pay is linked to the longer-term health of a firm (assuming the length of deferment is long enough to accurately determine how well a banker’s bets are paying off). And if a formula is indeed adopted, the Fed’s proposal will suddenly look a lot better.

CNBC: Paymaster Must Make Pay Comparable ‘Across The Industry’ Or Bankers Will Go Work At The DMV

Today, Kenneth Feinberg, the administration’s special master for compensation, plans to announce that the seven companies under his office’s watch must cut pay packages for their top 25 executives by about 50 percent, including a 90 percent reduction in cash salary. Feinberg also plans to “curtail many corporate perks, including the use of corporate jets for personal travel, chauffeured drivers and country club fee reimbursement.”

An executive at one of the seven companies told the Wall Street Journal that “the terms came as a shock,” and that the restrictions “were clearly much worse than what had been anticipated.” And of course, CNBC, which never hesitates to defend bailed-out bankers and their sky-high bonuses, went to bat for the banks once again, arguing that Feinberg should make pay comparable “across the industry,” lest some bankers take such exception to their pay cuts that they go work at the DMV. Watch it:

CNBC also managed to blame the falling value of the dollar on Feinberg’s decision. But if Feinberg really applied compensation levels comparable to other Wall Street banks, his restrictions would be rendered moot, as Wall Street pay is headed for a record high this year, eclipsing the previous highs from 2007. (For the record, the average DMV employee makes $35,000 per year.) Goldman Sachs alone has already set aside $16.7 billion for compensation.

And this gets at the limitations of the administration’s action. While I think it is entirely appropriate that Feinberg crackdown on the pay at these seven companies, they represent only the tip of the iceberg when it comes to problems with Wall Street’s pay structures.

As Nomi Prins wrote, “by simply tying compensation caps to the TARP program (a year late), Feinberg and the Obama administration are completely ignoring the rest of the $14.6 trillion federal bailout and subsidization of the banking industry, which has helped propel many key banks to 2007 levels of compensation, unfettered.” And as evidenced by Goldman Sachs analyst Brian Griffiths’ comment yesterday that we must “tolerate” income inequality “as a way to achieve greater prosperity and opportunity for all,” Wall Street doesn’t seem too interested in changing things on its own.

The Fed took a step towards reform today, seeking comment on compensation formulas that would defer payment over a longer-term. Indeed, what has to happen — by regulation if necessary — is that a large percentage of any particular pay package needs to be tied to the long-term performance of the firm. This, along with a resolution authority that ensures that banks can fail without bringing down the rest of the economy, will correctly align incentives going forward, and hopefully help to prevent another situation in which Wall Street bankers run to the federal government for aid and then use that aid to line their own pockets.