Relevant and even prescient commentary on news, politics and the economy.

Elizabeth Warren and Glass Steagall

Via Truthout 21st centurty Glass Steagall Act

You need to know this. Senator Elizabeth Warren wants to make banking boring again. Yesterday, the freshman senator introduced the 21st Century Glass Steagall Act, which would break up the big banks, and rebuild the wall between traditional banking and Wall Street gambling. In a statement, Senator Warren said, “Despite the progress we’ve made since 2008, the biggest banks continue to threaten the economy.” Senators John McCain and Maria Cantwell, the pair who attempted a similar bill back in 2009, joined Senator Warren as she introduced her new legislation. Of course, taking on the “too-big-to-fail” banks won’t be an easy challenge. Previous attempts to reign in bank size and power were met with huge resistance from the banksters, who railed against proposals to break up the banks.

PDF is here.

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Figuring the costs of minimum wage hikes

Real News interviews  Jeannette Wicks-Lim is an Associate Professor at the Political Economy Research Institute in Amherst, Massachusetts. Wicks-Lim specializes in labor economics with an emphasis on the low-wage labor market…

WICKS-LIM: Well, one of the things I’ve been thinking a lot about is that because of the recent proposal by President Obama to raise the federal minimum wage to $9 an hour, I’ve been thinking about the debate that always, you know, gets rehashed each time the minimum wage proposal is put on the table. And every single time the minimum wage proposal has been put on the table, there is this back-and-forth argument about whether there are negative employment effects from raising minimum wage. There’s almost verbatim this fight about, you know, whether or not raising minimum wage is going to cost jobs, and despite the fact that there’s been a large amount of research in the recent years that has pointed towards basically finding no negative employment effects from minimum wage increases, and we still have the same old debate.

And so I’ve been thinking about, you know, what is it that would really help answer this question about whether or not there are job losses from raising the minimum wage. And one of the simple facts that we’ve come up with here in PERI in our research around the minimum wage is that actually when you look at the cost that businesses face when the minimum wage goes up, the costs are actually quite modest. And that’s what explains why there isn’t some big negative, you know, job loss that you can associate with any minimum-wage hike. This is something that we try to make clear but seems to get lost in the debate.

I’ll just give you a very concrete example. One year, in 2006, we looked at Arizona state minimum wage proposal, which was a 30 percent increase in the state minimum wage. At the time, it was $5.15, and it was being proposed to be raised to $6.75. This [incompr.] typical size of minimum-wage increase.

And what we did is we went and we looked to see how much would this cost businesses. We looked at what are the wages of workers at the time, how many hours did they work. We added that all up. We looked at payroll taxes and how much that would go up for employers. We looked at the raises that would go to workers who earn more than the–that would be earning more than the minimum wage, that is, more than $6.75 [incompr.] little bit of a boost from the minimum-wage increase. We added all that up and we compared that to businesses’ sales revenues. So that’s sort of the capacity, what they had to work with to cover these costs.
What we found is, for the average business in Arizona, that the cost increase would be less than 0.1 percent. And so if you want to think about it in real concrete terms, businesses, by raising their prices by less than 0.1 percent, would be able to cover all the costs of a minimum-wage increase of a size of 30 percent.

Further reading in connection to Europe can be found here.

Elizabeth Warren can be found at Senate hearing asking food industry representatives about their claims there is a significant impact:

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Warren questions Benanke on ‘too big to fail’

Via Bloomberg comes this snippet from testimony between Senator Warren and Ben Bernanke.  Follow the link as the embed does not seem to work.

Partial Transcript via Global Economic Trends

Warren: These big financial institutions are getting cheaper borrowing to the tune of $83 billion in a single year, simply because people believe government would step in and bail them out. And, I’m just saying, if they’re getting it, why aren’t they paying for it?

Bernanke: I think we should get rid of it.

Warren: Alright. I’ll ask the other question. You were here in July, and you said you commended Dodd-Frank for providing a blueprint to get rid of “Too Big to Fail”. We’ve now understood this problem for nearly five years, so when are we going to get rid of “Too Big to Fail”?

Bernanke: Well, some of the you know uh as we’ve been discussing, some of these rules take time to develop. Uh, uh. ….”

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Two Important Op-Ed Pieces Today

I want to draw AB readers’ attention to two of the most important op-ed pieces I’ve read in a while.  They address entirely different, but profoundly important, matters.

One is Elizabeth Warren’s piece today in Politico, called Stop riggingsystem against small business.

The other is Bill Keller’s column today in the New York Times, called The Leak Police.

These articles speak for themselves just fine.  No commentary on them is needed.  

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Elizabeth Warren campaigns in MA

Elizabeth Warren is running for the US Senate in Mass. and came by Casey’s Diner Monday at lunchtime, a stop among many.   Eventually the campaign will heat up as a lot of money is being raised, and the summer ends.

Ezra Klein of the Washington Post interviewed Elizabeth Warren this Monday as well. Here is part of the transcript with questions and answers regarding JP Morgan and Jamie Dimon from the wonky economic policy and regulatory angle:

EK: That gets us to the Volcker rule, which is what would keep banks that get that guarantee from gambling with customer money and a federal backstop. But at this point, I don’t think very many people — even people who follow this stuff quite closely — have a very specific sense of what the difference between a good and bad Volcker rule is. So how do you think about that?

EW: I’m going to reframe it slightly: Who profits from the complexity of the Volcker rule? It’s the largest financial institutions. No financial institutions want a simple Volcker rule. They want layers and layers of complexity because it’s in complexity that there are loopholes. That’s where it’s possible to back up regulators who are not quite certain about the ground they stand on. And it’s a larger problem with our regulatory structure: Complexity favors those who can hire armies of lobbyists and lawyers. The big push I made at the Consumer Financial Protection Bureau was simple rules. Simple mortgage documents. Simple credit card agreements. Because complexity creates too many opportunities for an army of lawyers to turn the rules upside down.

 EK: I agree that complexity is where lobbyists and lawyers work their dark magic. But when I talk to people in the industry about this, they say that simple rules sound great, but they’re not really possible. It’s hard to distinguish a hedge from a bet, or a speculative trade from a legitimate one. The world is complex, and that’s why regulators and politicians who don’t like Wall Street and don’t like being browbeaten by lobbyists end up allowing complex rules, too.

EW: Here’s another way to look at what you just described: That’s the strongest argument for a modern Glass-Steagall. Glass-Steagall said in effect that hedge funds should be separated from commercial banking. If a big institution wants to go out and play in the market, that’s fine. But it doesn’t get the backup of the federal government. If it’s too complicated to implement the Volcker rule, do you say we give up and let the largest financial institutions do what they want? Or do you say maybe that’s the reason we need a modern Glass-Steagall?

EK: What about breaking up the big banks?

EW: You’re approaching risk from two different directions. One is the risk of the activity. That’s the Volcker rule. The other direction is to say risk is an assumption of size. Community banks shouldn’t have to deal with complex regulatory oversight, but the largest institutions should be subject to far more aggressive oversight and have to pay more for the protections they receive from the American taxpayer. Then shareholders may decide to invest in institutions that are not so large.

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Elizabeth Warren 2009

As the Senate election begins in earnest in Massachusetts, with a great deal of money already pledged and attack ads begun, the contest has the ability to capture the nation’s attention and imagination. We will be following aspects of the election for our readers as the year progresses. Re posted is a statement she made on regulation and the role of non-banks in our system. Of course the issues are ongoing today:

Angry Bear post 2009

Elizabeth Warren of the Congressional Oversight Committee for TARP, and champion of an active voice for consumer protection regulation, offers her thoughts in Real Change: Turning up the heat on non-bank lenders with one of her latest essays at New Deal 2.0, part of the Roosevelt Institution.
We have watched regulation slip away, which is of course not always bad, through terminating good rules, decreased funding to an agency to make enforcement less of an issue, and leadership in an agency to change the intent of regulatory function.

 

The big banks are storming Washington, determined to kill the Consumer Financial Protection Agency (CFPA). They understand that a regulator who actually cares about consumers would cause a seismic change in their business model: No more burying the terms of the agreement in the fine print, no more tricks and traps. If the big banks lose the protection of their friendly regulators, the business model that produces hundreds of billions of dollars in revenue — and monopoly-size profits that exist only in non-competitive markets — will be at risk. That’s a big change.
But there is an even bigger change in the wind: regulating the non-banks. Democrats and Republicans alike agree that the proliferation of unregulated, non-bank lenders contributed significantly to the financial crisis by feeding millions of dangerous financial products into the economic system. Non-bank institutions were active participants in the race to the bottom among lenders. From subprime mortgage loans to small dollar loans, they showed how to wring high fees and staggering interest rates out of consumer lending. Their fine-print contracts, and new tricks and traps, transformed the market.
Despite widespread agreement about the problem, the U.S. has never made a sustained, systemic effort to regulate non-bank lenders…

…As lending abuses became more obvious, there was no effort to close regulatory gaps and loopholes or to devote federal resources toward the oversight of non-bank institutions. The reasons are many, but one of the most benign explanations is that policymakers for too long assumed that states could deal with the non-banks because the non-bank lenders are often small and often operate locally (although Countrywide showed that state-based organizations can metastasize rapidly). As it turns out, the states actually faced several limitations in reining in these lenders.
States, just like the federal government, were subject to intense lobbying by creditors. In short order, many states changed their rules to undercut basic protections. For example, the consumer finance industry succeeded in rewriting state interest rate regulation to allow for massive increases in allowable effective rates — even when the advertised rate looks far lower and obscures the true cost of credit. In many states, making an end run around local usury laws is now as easy as running around a single fencepost. At the same time, state legislatures face the perpetual lag-behind problem. They are unable to adjust to a rapidly changing financial services market, too slow to identify problems and not capable of changing the laws quickly enough to head off serious problems.
Moreover, resources are always constrained at the state level, and the enforcement of consumer credit laws competes with a wide variety of other state obligations. When consumer credit laws were violated, states often lacked the capacity to undertake serious investigations or to prosecute offenders. Some states made heroic efforts, but others left consumer financial issues far down their priority list.
The problem of enforcement has been exacerbated by a serious structural problem. When an abuse surfaced-for example, a local paper ran a news story about an unfair practice or a consumer group assembled evidence of sharp practices-local officials often responded by jumping on small banks. The non-banks were often scattered and difficult to find, while the biggest financial institutions were typically protected from local prosecution through pre-emption. That left the small banks holding the bag. These small banks, often those with state charters, were the easiest institutions to locate and the cheapest to prosecute — even if they were only tangentially involved in deceptive practices. The result was that the worst offenders slipped away. Non-banks could shut down for a while, and then reappear when the heat was off. In effect, the state enforcement structure benefitted the big banks and the non-banks.
The CFPA presents the first real opportunity to change that harmful structure.
First, the CFPA will regulate consumer financial products across the board-using the same rules for all mortgages or for all small dollar loans, regardless of whether the mortgage or the loan is issued by a national bank, a state bank or a non-bank. The old practice of different sets of rules and different regulatory structures for the same products would disappear. Instead, the CFPA would create a coordinated set of baseline rules applicable across the board.
Consolidated rule-making will also stop the practice of lenders shopping around for the regulator with the weakest rules. Bank holding companies have enjoyed an enormous advantage by having the freedom to structure their many business divisions to exploit regulatory weakness. They can operate a federally chartered bank when preemption is valuable to them. At the same time, they can purchase the products of non-banks in bulk, creating informal partnerships that exploit gaps in the state regulatory system. In fact, the Center for Public Integrity found that 21 of the 25 largest subprime issuers leading up to the crisis were financed by large banks. (Remember this the next time you hear a lobbyist blaming the crisis on non-banks and denying the role of the bank holding companies.) With consistent rules across the board, the CFPA would put an end to these practices.
Consistent rules are important, but, as we now know, it isn’t enough to have good rules on the books. There must also be a serious effort to enforce those rules. With the right sources of funding and some smart strategic thinking about how to force non-banks to follow the same rules as other lenders, the entire landscape of consumer lending would change.
From history, we have learned that an agency’s source of funding is critical to its success. By allowing the Agency to tax lenders directly — perhaps a dime for every open credit card account, a quarter for every open mortgage, etc. — Congress can make sure that the CFPA stays well-funded in the years ahead. The right funding structure will allow the Agency to develop the capacity to go after the non-banks and the dangerous products they originate, and it will insulate the Agency from political efforts to starve-the-regulators into inaction. Moreover, as we now know, the cost of even a well-funded agency is dwarfed by the cost to the government and the economy as a whole of bank failures. The cost of the failure of just one thrift – IndyMac — was almost ten times the annual budget of the Securities and Exchange Commission.
New forms of strategic thinking will also be needed. By creating a system for mandatory lender registration, for example, CFPA will be able to keep track of the consumer lenders out there — something that no current regulators have the tools to do. To encourage compliance, the CFPA can work with other federal agencies — like the Treasury Department or the Internal Revenue Service — to identify unregistered lenders. In states that already register certain non-bank lenders, the CFPA can work off those registrations and collaborate with state officials. This is tough work, but a consumer agency with expertise and resources will rise to the challenge.
The CFPA can also get smarter with enforcement by exploiting concentration points, places where small players are effectively grouped together. In the case of mortgage brokers, for example, without the large bank holding companies and their subsidiaries as customers for the loans they place, many would be out of business. Focusing regulatory attention on the buyers would create substantial leverage over the brokers as well. If the sponsors and funding mechanisms for the worst practices go away, so will the worst practices.
There is more that we can do to deal with non-bank lenders, but only if Congress creates a strong CFPA. If we stick with the status quo — which treats loans differently depending on who issues them and places consumer protection in agencies that consider it an afterthought – we know what will happen because we have seen it happen before. Lenders will continue their tricks and traps business model, the mega-banks will exploit regulatory loopholes, and the non-banks will continue to sell deceptive products. In that world, small banks will need to choose between lowering standards or losing market share, and they will still get too much attention from regulators while the non-banks and big banks get too little. Dangerous loans will destabilize both families and the economy, and we’ll all remain at risk for the next trillion-dollar bailout.
Regulating the non-banks hasn’t been tried in any serious way. The CFPA offers a real chance to level the playing field, to add balance to the system, and to change the consumer lending landscape forever.

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My mission is to restore America’s great middleclass

AlterNet / By Elizabeth Warren

Elizabeth Warren: My Mission Is to Restore America’s Great Middle Class
At Netroots Nation, Elizabeth Warren spoke about how the new Consumer Financial Protection Bureau could help protect the U.S. economy.

August 1, 2010 |

Editor’s note: The following is a speech delivered by Elizabeth Warren at Netroots Nation 2010. Check out AlterNet’s petition at Change.org urging President Obama to appoint Warren to lead the new Consumer Financial Protection Bureau.

My grandmother, when she was a teenager, drove a wagon in the land rush that settled Oklahoma. Her mother was dead, and her little brothers and sisters were in the back of the wagon. Her father had ridden ahead and tried to find a piece of land that might be somewhere near water–a hard task in Oklahoma. She grew up in that part of the world, she met my grandfather, they got married, they started building one-room schoolhouses and little modest homes across the prairie. They had kids, they stretched, they scratched, they worked hard, they made a little money, and they put it aside, put it in the bank. It got completely wiped out in 1907 in an economic panic. But like many American families, they came back. They started scratching and stretching again, and having more babies–and then the Depression came. And they got wiped out one more time.

You see, my grandmother was born into the world of boom and bust, boom and bust, as it had been from 1794 until the Great Depression. But my grandmother also lived in a world of economic transformation. Because coming out of the Great Depression, just three laws fundamentally altered the course of America’s history.

The first one, FDIC insurance, made it safe to put money in banks. The second one, Glass-Steagal, tried to separate the risk-taking on Wall Street from your local community bank. And the third one, SEC regulations, provide some cops to watch the robbers. And so, out of that, what we got was 50 years of economic peace. No financial panics, no meltdowns. And during that 50 years, we built a strong and prosperous middle class in America.

Now, my grandmother, when she died in 1970 at the age of 94, had been part of that. She owned a little house, she had plenty of groceries in the cupboard, and she had some cash in the bank. She was part of the growth of middle-class America. As were her children and her grandchildren. But shortly after my grandmother died, within a few years, we began unraveling that. Part of it was on the regulatory side. We hadn’t been clever about regulations. They stayed ossified. The regulations put in place in the 1930s had not been updated. They had not adapted to a new world. And along came a new group of people who said, “Let’s just get rid of the regulations. What are they there for anyway? They just cost money. Dump the regulations.” And so the regulatory framework, or the “cops,” who were on the beat began to disappear. They lost their effectiveness. ………..(more)

The complete piece is at: http://www.alternet.org/economy/147699/eli… /

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