If you want to join us, come to 79th and Central Park West at 11am, in front of the Natural History Museum. We will have signs and a banner. See you there, I hope!
I am super excited to announce that best-selling British author Nafeez Ahmed will be speaking at the Alt Banking group this Sunday. The title of his talk is Mass Surveillance and the Crisis of Civilization: The inevitable collapse of the old paradigm and the potential for the rise of the new.
Ahmed is an international security scholar and investigative journalist and executive director of the Institute for Policy Research & Development. He writes for The Guardian on the geopolitics of interconnected environmental, energy and economic crises, and is currently on tour in the United States to launch his science fiction novel, Zero Point.
As advance reading for this talk, we recommend browsing through his Guardian articles, including the widely read June 2014 piece, Pentagon preparing for mass civil breakdown. He’s also recently published on occupy.com an article entitled Exposed: Pentagon Funds New Data-Mining Tools To Track and Kill Activists, Part I.
Details: Ahmed will speak from 2-3pm on Sunday, August 24th, in room 409 of the International Affairs Building of Columbia University at W. 118th Street and Amsterdam Ave. After that we will have our regular meeting from 3-5pm in the same room, followed by food and drinks at Amsterdam Tapas. Please join us! And if you can’t this weekend but want to be on our mailing list, please email that request to email@example.com.
I’m excited to announce that Zephyr Teachout, a Fordham Law School professor who is running against Andrew Cuomo for Governor of New York, will be coming to speak to the Alternative Banking group next Sunday, July 13th, from 3pm-5pm in the usual place, Room 409 of the International Affairs Building at 118th and Amsterdam. More about Alt Banking on our website.
Title: Teachout-Wu vs. Cuomo-Hochul in the Democratic Primary in New York!
Description: Come hear candidate Teachout talk about her anti-corruption trust-busting campaign against Governor Cuomo.
Background: Teachout is an antitrust and media expert who served as the Director of Internet organizing for the 2004 Howard Dean Presidential Campaign. She co-founded A New Way Forward, an organization built to break up the power of big banks. Teachout was the first national director of the Sunlight Foundation. More here.
If we have time after talking to Zephyr we will discuss Stiglitz’s article, The Myth Of America’s Golden Age.
Please make time to come hear Zephyr, and please spread the word.
This is a great book. It’s well written, clear, and it focuses on important issues. I did not check all of the claims made by the data but, assuming they hold up, the book makes two hugely important points which hopefully everyone can understand and debate, even if we don’t all agree on what to do about them.
First, the authors explain the insufficiency of monetary policy to get the country out of recession. Second, they suggest a new way to structure debt.
To explain these points, the authors do something familiar to statisticians: they think about distributions rather than averages. So rather than talking about how much debt there was, or how much the average price of houses fell, they talked about who was in debt, and where they lived, and which houses lost value. And they make each point carefully, with the natural experiments inherent in our cities due to things like available land and income, to try to tease out causation.
Their first main point is this: the financial system works against poor people (“borrowers”) much more than rich people (“lenders”) in times of crisis, and the response to the financial crisis exacerbated this discrepancy.
The crisis fell on poor people much more heavily: they were wiped out by the plummeting housing prices, whereas rich people just lost a bit of their wealth. Then the government stepped in and protected creditors and shareholders but didn’t renegotiate debt, which protected lenders but not borrowers. This is a large reason we are seeing so much increasing inequality and why our economy is stagnant. They make the case that we should have bailed out homeowners not only because it would have been fair but because it would have been helpful economically.
The authors looked into what actually caused the Great Recession, and they come to a startling conclusion: that the banking crisis was an effect, rather than a cause, of enormous household debt and consumer pull-back. Their narrative goes like this: people ran up debt, then started to pull back, and and as a result the banking system collapsed, as it was utterly dependent on ever-increasing debt. Moreover, the financial system did a very poor job of figuring out how to allocate capital and the people who made those loans were not adequately punished, whereas the people who got those loans were more than reasonably punished.
About half of the run-up of household debt was explained by home equity extraction, where people took out money from their home to spend on stuff. This is partly due to the fact that, in the meantime, wages were stagnant and home equity was a big thing and was hugely available.
But the authors also made the case that, even so, the bubble wasn’t directly caused by rising home valuations but rather to securitization and the creation of “financial innovation” which made investors believe they were buying safe products which were in fact toxic. In their words, securities are invented to exploit “neglected risks” (my experience working in a financial risk firm absolutely agrees to this; whenever you hear the phrase “financial innovation,” please interpret it to mean “an instrument whose risk hides somewhere in the creases that investors are not yet aware of”).
They make the case that debt access by itself elevates prices and build bubbles. In other words, it was the sausage factory itself, producing AAA-rated ABS CDO’s that grew the bubble.
Next, they talked about what works and what doesn’t, given this distributional way of looking at the household debt crisis. Specifically, monetary policy is insufficient, since it works through the banks, who are unwilling to lend to the poor who are already underwater, and only rich people benefit from cheap money and inflated markets. Even at its most extreme, the Fed can at most avoid deflation but it not really help create inflation, which is what debtors need.
Fiscal policy, which is to say things like helicopter money drops or added government jobs, paid by taxpayers, is better but it makes the wrong people pay – high income earners vs. high wealth owners – and isn’t as directly useful as debt restructuring, where poor people get a break and it comes directly from rich people who own the debt.
There are obstacles to debt restructuring, which are mostly political. Politicians are impotent in times of crisis, as we’ve seen, so instead of waiting forever for that to happen, we need a new kind of debt contract that automatically gets restructured in times of crisis. Such a new-fangled contract would make the financial system actually spread out risk better. What would that look like?
The authors give two examples, for mortgages and student debt. The student debt example is pretty simple: how quickly you need to pay back your loans depends in part on how many jobs there are when you graduate. The idea is to cushion the borrower somewhat from macro-economic factors beyond their control.
Next, for mortgages, they propose something the called the shared-responsibility mortgage. The idea here is to have, say, a 30-year mortgage as usual, but if houses in your area lost value, your principal and monthly payments would go down in a commensurate way. So if there’s a 30% drop, your payments go down 30%. To compensate the lenders for this loss-share, the borrowers also share the upside: 5% of capital gains are given to the lenders in the case of a refinancing.
In the case of a recession, the creditors take losses but the overall losses are smaller because we avoid the foreclosure feedback loops. It also acts as a form of stimulus to the borrowers, who are more likely to spend money anyway.
If we had had such mortgage contracts in the Great Recession, the authors estimate that it would have been worth a stimulus of $200 billion, which would have in turn meant fewer jobs lost and many fewer foreclosures and a smaller decline of housing prices. They also claim that shared-responsibility mortgages would prevent bubbles from forming in the first place, because of the fear of creditors that they would be sharing in the losses.
A few comments. First, as a modeler, I am absolutely sure that once my monthly mortgage payment is directly dependent on a price index, that index is going to be manipulated. Similarly as a college graduate trying to figure out how quickly I need to pay back my loans. And depending on how well that manipulation works, it could be a disaster.
Second, it is interesting to me that the authors make no mention of the fact that, for many forms of debt, restructuring is already a typical response. Certainly for commercial mortgages, people renegotiate their principal all the time. We can address the issue of how easy it is to negotiate principal directly by talking about standards in contracts.
Having said that I like the idea of having a contract that makes restructuring automatic and doesn’t rely on bypassing the very real organizational and political frictions that we see today.
Let me put it this way. If we saw debt contracts being written like this, where borrowers really did have down-side protection, then the people of our country might start actually feeling like the financial system was working for them rather than against them. I’m not holding my breath for this to actually happen.
This coming Sunday my friend Adam Reich is coming to Alternative Banking to talk about his work as the faculty director of a collaborative project this summer between Columbia’s INCITE and the OUR Walmart campaign.
The plan involves twenty students to scatter across the country, organizing and conducting oral history interviews alongside Walmart workers in five regions.
It is also, not coincidentally, the 50th anniversary of the Freedom Summer of 1964, when a bunch of volunteers including students helped register black Mississippians to vote.
Adam is an activist and a sociologist professor at Columbia. He is also an author of three books including Selling Our Souls: The Commodification of Hospital Care in the United States.
Details are as follows, and I hope you can come:
Where: Room 409 of the International Affairs Building at 118th and Amsterdam.
When: Sunday, June 8th, 2-3pm.
Aunt Pythia is bowing out today from an exhausting week, and she extends her apologies.
But if you are looking for opinionated advice, please feel free to try out my recent Slate Money podcast with Felix Salmon and Jordan Weissmann. This week I complain about Ben Bernanke, I talk reparations, and complain about white collar crime going unpunished. Last week was also great, because I got to complain about Tim Geithner. And two weeks ago we started the podcast talking Alibaba and the minimum wage.
If you enjoy listening, please subscribe via iTunes and also, please rate the podcast on iTunes so we get more traffic.
When you hate on certain people and things as long as I’ve hated on the banking system and Tim Geithner, you start to notice certain things. Patterns.
I read Tim Geithner’s book Stress Test last week, and instead of going through and sharing all the pains of reading it, which were many, I’m going to make one single point.
Namely, Tim was unqualified for his jobs and head of the NY Fed, during the crisis, and then as Obama’s Treasury Secretary. He says so a bunch of times and I believe him. You should too.
He even is forced at some point to admit he had no idea what banks really did, and since he needed someone or something to blame for his deep ignorance, he somehow manages to say that Brooksley Born was right, that derivatives should have been regulated, but that since she was at the CFTC everybody (read: Geithner’s heroes Larry Summers and Robert Rubin) dismissed her out of hand, and that as a result he had no ability to look into the proliferating shadow banking or stuff going on at all the investment banks and hedge funds. So it was kind of her fault that he wasn’t forced to understand stuff, even though she warned people, and when shit got real, all he could do was preserve the system because the alternative would be chaos. And people should fucking thank him. That’s his 600 page book in a nutshell.
Let’s put aside Tim Geithner’s mistakes and his narrow outlook on what could have been done better, and even what Dodd-Frank should accomplish, for a moment. It’s hard to resist complaining about those things, but I’ll do my best.
The truth is, Tim Geithner was a perfect product of the system. He was an effect, not a cause.
When I dwell on the fact that he got the NY Fed job with no in-the-weeds knowledge or experience on how banks operate, there’s no reason, not one single reason, to think it’s not going to happen again.
What’s going to prevent the next NY Fed bank head from being as unqualified as Tim Geithner?
Put it another way: how could we possibly expect the people running the regulators and the Treasury and the Fed to actually understand the system, when they are appointed the way they are? In case you missed it, the process currently is their ability to get along with Larry Summers and Robert Rubin and to look like a banker.
Before you go telling me I’m asking for a Goldman Sachs crony to take over all these positions, I’m not. It’s actually not impossible to understand this system for a curious, smart, skeptical, and patient person who asks good questions and has the power to make meetings with heads of trading floors. And you don’t have to become captured when you do that. You can remember that it’s your job to understand and regulate the system, that it’s actually a perfectly reasonable way to protect the country. From bankers.
Here’s a scary thought, which would be going in the exact wrong direction: we have Hillary Clinton as president and she brings in all the usual suspects to be in charge of this stuff, just like Obama did. Ugh.
I feel like a questionnaire is in order for anyone being considered for one of these jobs. Things like, how does overnight lending work, and what is being used for collateral, and what have other countries done in moments of financial crisis, and how did that work out for them, and what is a collateralized debt obligation and how does one assess the associated risks and who does that and why. Please suggest more.