Opinion

The Great Debate

from Bethany McLean:

How Ralph Nader learned to love Fannie and Freddie

Corrects story issued February 18 in third-to-last paragraph regarding efforts to contact Ralph  Nader.

“It is time for [government-sponsored enterprises] to give up ties to the federal government that have made them poster children for corporate welfare. Most of all, Congress needs to look more to the protection of the taxpayers and less to the hyperbole of the GSE lobbyists. –Ralph Nader, testimony before the House Committee on Banking and Financial Services, June 15, 2000

“Fannie Mae and Freddie Mac should be relisted on the NYSE and their conservatorships should, over time, be terminated. –Ralph Nader, letter to Treasury Secretary Jacob Lew, May 23, 2013

People certainly do change.

Right now, one of Ralph Nader’s key projects, Shareholder Respect, is supporting a group called Restore Fannie Mae. They are fighting for “an end to the unconstitutional conservatorship of Fannie Mae and Freddie Mac by the U.S. government.”  To that end, Nader has written an op-ed in the Wall Street Journal, “The Great Fannie and Freddie Rip-Off” and sent the above letter to Treasury Secretary Jack Lew, as well as one to the new Federal Housing Finance Authority director, Mel Watt. Nader also held a roundtable to drum up support for the cause, which largely seems to be about making sure shareholders get paid--but which seems an argument for a return to the status quo.

For most of their existence, Fannie and Freddie have been controversial.  Critics argued that their gains during good years would go to shareholders and executives, while taxpayers would be saddled with any losses, thanks to an implicit government guarantee. That’s indeed what happened during the 2008 economic crisis.

Populism: The Democrats’ great divide

One day after President Barack Obama called for moving forward on trade authority in his State of the Union address, Senate Majority Leader Harry Reid (D-Nev.) declared, “I am against fast track,” and said he had no intention of bringing it to a vote in the Senate.

Reid’s announcement came after 550 organizations, representing virtually the entire organized base of the Democratic Party outside of Wall Street, called on Congress to oppose fast track. Though obscured by the Democrats’ remarkable unity in drawing contrasts with the Tea Party-dominated Republicans in Congress, the debate between an emerging populist wing of the Democratic Party and its still-dominant Wall Street wing is boiling.

For a constantly disputatious “big tent” party, Democrats are remarkably unified behind the jobs and inequality agenda the president ticked off in his State of the Union address — raising the minimum wage, immigration reform, paycheck fairness for women, paid family leave, investment in infrastructure, education and research and development, and an “all of the above” energy strategy. Republicans block action on all these relatively modest reforms, providing ammunition for Democrats in the November midterm elections.

Obama’s small steps won’t fix inequality

President Barack Obama is taking on the challenge of increasing the United States’ all but stagnant economic mobility.

He wants, he said in Tuesday’s State of the Union Address, to both “strengthen the middle class” and “build new ladders of opportunity” into it. His modest plan — modest so that it does not need the congressional approval he’s unlikely to receive — includes raising the minimum wage for federal contract workers and offering workers a new workplace retirement savings account option.

It’s a nice start. But nowhere near enough.

The United States’ sluggish economic mobility is not new. According to a paper recently published by academics at Harvard University and the University of California, Berkeley, it has been mediocre for those born in the 1970s, and it is just as bad for those born 20 years later.

Why conservatives spin fairytales about the gold standard

ILLUSTRATION: Matt Mahurin

The Federal Reserve is celebrating its 100th birthday trapped in a political bunker.

At few points since the Fed’s founding in 1913 has it taken such sustained fire. It’s taking fire from the left, because its policies favor Goldman Sachs, Bank of America and the other financial corporations that are most responsible for the 2008 financial meltdown and the Great Recession. But it is also taking fire from the right.

Conservative or Tea Party Republicans have a different kind of criticism. They reject the notion that the Fed should even have the power to regulate the money supply and “debase” the dollar. They believe in hard money and a return to the gold standard.

‘Democratic wing’ of Democratic Party takes on Wall Street

The chattering classes are fascinated by the Republicans’ internecine battle to redefine the party in the wake of the George W. Bush calamity and the Mitt Romney defeat — from Senator Rand Paul’s revolt against the neoconservative foreign policy, to intellectuals flirting with “libertarian populism.” Less attention has been paid, however, to the stirrings of what Senator Paul Wellstone dubbed “the Democratic wing of the Democratic Party” — now beginning to challenge the Wall Street wing of the party.

Perhaps the strongest demonstration of this was the barrage of “friendly fire” that greeted the White House’s trial balloon on nominating Lawrence Summers to head the Federal Reserve Bank. More than one-third of Democrats in the Senate signed a letter supporting Janet Yellen, now vice chairwoman of the Fed. More than half of the elected Democratic women in the House of Representatives signed a similar letter. Many were appalled at the notion of passing over the superbly qualified Yellen for Summers, with his notorious record of denigrating and dismissing women.

But, as Katrina vanden Heuvel, editor of the Nation wrote in the Washington Post, Summers also drew opposition because he was the “poster boy for the Wall Street wing of the party — literally.” (Summers joined then-Treasury Secretary Robert Rubin and then-Federal Reserve Chairman Alan Greenspan on the now risible 1999 Time magazine cover celebrating the “Committee to Save the World” — before the global financial collapse exposed the folly of their policies).

Derivative rules: Global problem needs global solution

The 2008 financial crisis demonstrated how interconnected the global financial system is. What began as a real estate bubble fueled by subprime mortgages in many states ballooned into a global financial panic of unprecedented magnitude. Bundles of poorly underwritten mortgages generated toxic derivatives bet on in a global market. When the dust settled, there was broad agreement that not only did we need a new financial regulatory regime, it had to be globally coordinated.

The United States, the European Union, Britain, Japan and other nations should come up with a regulatory regime that works across all borders. This does not have to be the exact same set of rules and regulations, but rather compatible systems, based on a common set of definitions and structures.

The need for international coordination in swaps is particularly important, for many of them involve parties in different countries. One common derivative, for example, an exchange-rate swap, allows parties in the United States to get payments in dollars while those in Europe are paid in euros. Any variation is the exchange rate between the two currencies is covered by the swap — for a fee.

A case of lobbysts vs. small cap investors

It’s tick season again: the time of year when those small, seemingly unimportant beasts emerge and attack the unsuspecting or unaware. This year, they seem to be everywhere and have a particularly robust group of carriers. The problem with ticks is that, while they seem benign, they can cause significant harm to those who are not vigilant.

But this is not about those annoying little creatures that hang out in the tall grass and spread Lyme disease. We’re talking about the kind on Wall Street, transported not by deer, but by a loud army of lobbyists.

Representative David Schweikert (R-Ariz.) and this army of lobbyists, a loose-knit association of exchanges, traders and others who stand to gain financially, are asking the Securities and Exchange Commission and Congress to consider legislation that will increase the cost of trading the stocks of smaller companies — those with market capitalizations of less than $500 million. Those stocks are often less-liquid stocks than those of large-cap businesses.

Can Congress pull back from the brink?

Americans want to see Congress and the president make a deal on the “fiscal cliff,” that noxious mix of expiring tax cuts and mandatory spending slashing due at year’s end. They just don’t think it will happen without a lot of pain, according to recent polls.

But if Washington leaders don’t reach an agreement, which looks more than possible, it will be for a good reason: Incentives are strongest for policymakers to act only after the cliff has come and gone ‑ and wreaked a great deal of havoc in the process.

So far, the fiscal cliff looks like the Y2K of 2012. It’s an eventuality that requires a great deal of preparation and occupies politicians and the chattering classes but which has yet to produce the visible scars of crushed 401(k) statements, widespread layoffs or television graphics about a plunging Dow.

The perils of cliff-diving

The fiscal cliff is a danger to the economy.  Some have argued that cliff diving is benign either because the cliff itself is an illusion – it is really a gentle slope – or because policymakers have the cartoon-like power to reverse going over the cliff without hitting the abyss.

Both arguments miss the key role that would be played by financial markets.  Cliff diving would have a significant impact on financial markets, impairing asset values, exacerbating credit stringency and amplifying the direct effects on the Main Street economy. These effects cannot be “unwound” by retroactively legislating away the fiscal cliff.

Taken at face value, the fiscal cliff is a large negative policy shock.  The tax increases are nearly $400 billion and the spending cuts about $145 billion.  The total, $540 billion is roughly 3 percent of gross domestic product.   For perspective, trend economic growth now appears to be less than 2 percent — but certainly nowhere close to 3 percent.

2013: The year of tax reform

Policy and political circles are now both talking about the prospect of comprehensive federal tax reform next year. From Capitol Hill to Wall Street to Main Street, people are asking how this reform will be structured. They should look to states across the country for their model. Many are due to embark on sweeping overhauls, even complete rewrites, of their tax codes in 2013.

Lawmakers in numerous state capitals are now poised to introduce major tax reform when they come back into session early next year. As we’ve seen with other policy matters, reforms that percolate in the states often make their way to Washington. More than half of all state governments are controlled by one political party, so it’s likely that state lawmakers will move far more quickly than the folks on Capitol Hill. What these state legislators do will provide a preview of and parallel the debate in the new Congress.

Consider North Carolina. Republicans took control of the General Assembly in 2010 for the first time since Reconstruction, and next month the Tar Heel State is likely to become the 26th state where Republicans control the governor’s mansion and both chambers of the state legislature. The Republican gubernatorial nominee, former Charlotte Mayor Pat McCrory, has said that tax reform will be a top priority if he is elected, which appears likely given his double-digit lead in the latest polls. The state now has one of the nation’s least competitive tax regimes. But based on proposals being discussed at the capitol, North Carolina lawmakers next year could enact one of the boldest and most pro-growth state tax reforms in history.

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