issue: Financial Services

A simple way to grow America’s economy and create jobs

Posted on by The Progressive Policy Institute

It’s hard to find common ground between the two parties in Washington these days, but getting America out of this protracted entrepreneurial slump should be an urgent national priority. Here’s one idea that ought to appeal to both sides: Enable the nation’s credit unions to invest more in new and small businesses.

One of the most important measures of U.S. economic dynamism is the rate of new business creation. Unfortunately, the number of start-ups has been declining for three decades. In fact, more businesses are dying than being born.

According to the Kauffman Foundation, new businesses (those less than five years old) are responsible for nearly all net job creation in America. And businesses less than one year old have created an average of 1.5 million jobs per year for the last three decades.

And it’s not just jobs; start-ups also drive innovation. New enterprises “commercialized most of the seminal technologies of the past several centuries, including the car, the airplane, the telegraph, the telephone, the computer and the Internet search engine,” notes Brookings Institution economist Robert Litan.

Continue reading at The Hill.

 

 

Wall Street Journal: Obama’s Big Idea for Small Savers: ‘Robo’ Financial Advice

Posted on by The Progressive Policy Institute

If you’re a Democratic policy maker worried about retirement savings for the little guy, would you deny millions of small savers access to financial advisers in ways that could cost them $80 billion in the next market downturn? Would you ask working families to pay more to keep the adviser they have?

The obvious answer to both is no. But the White House and the Labor Department have teamed up to propose a new “fiduciary rule” on brokers and advisers serving individual retirement account investors, which would produce precisely these unintended consequences.

The White House starts with good intentions—a concern that too many Americans are unprepared for retirement, and need to save more, and invest wisely. But instead of urging Americans to save, the administration has launched a campaign against a phony villain. If you’re not on a path to a secure retirement, the White House implies, it’s because evil financial advisers are ripping you off.

Continue reading at the Wall Street Journal.

The Washington Post: Three of Obama’s biggest fights are about to be decided

Posted on by The Progressive Policy Institute

PPI Chief Economic Strategist Michael Mandel was quoted in The Washington Post regarding the impact of the OECD’s BEPS rules on U.S. jobs and tax revenue:

An international tax agreement could draw companies out of the United States, writes the Progressive Policy Institute’s chief economic strategist, Michael Mandel. “You probably haven’t heard of the BEPS project — but you soon will. Short for Base Erosion and Profit Shifting, the BEPS Project… changes the international tax rules by forcing companies to pay corporate taxes according to the location of the economic activity and value creation generating their profits. … Remember that most European countries already have substantially lower corporate tax rates than the United States does. … Under the proposed BEPS rules, though, the only way for American companies to take advantage of these lower rates in a European country would be to prove to tax authorities that they are engaged in value creation in that country. And the simplest way to show the location of value creation is to move jobs to that country.” The New York Times.

Read the piece in its entirety at The Washington Post.

NEWSMAX: Mandel: Obama’s Support of Global Tax Reform Is Big Loser for US

Posted on by The Progressive Policy Institute

PPI Chief Economic Strategist Michael Mandel was quoted in NEWSMAX regarding the impact of the OECD’s BEPS rules on U.S. jobs and tax revenue:

The Obama administration backs the project to ensure that more corporate tax payments enter the government’s coffers. “But as the project heads for its end-of-year deadline … nobody in Washington is paying attention to a simple fact: the United States lost, and lost big,” Mandel writes in the New York Times.

“BEPS rules will likely not generate more tax revenues for the United States. Instead, they will encourage American companies to quickly move high-paying jobs, such as those of research scientists and software developers, to Europe to take advantage of lower tax rates.”

Without quick corporate tax reform by Congress, BEPS could “turn into an enormous job-and-revenue grab by Europe, and an enormous loss of jobs and revenues by the United States,” Mandel argues.

Read the piece in its entirety at NEWSMAX. 

Congress Answers PPI Call, Exempts End-Users From Dodd-Frank

Posted on by The Progressive Policy Institute

The Senate voted 93-4 Thursday to reauthorize the Terrorism Risk Insurance Act (TRIA) for six years. The legislation, which is expected to be signed into law by President Obama, includes a provision exempting “end-users”– non-financial institutions, such as farms, ranches, manufacturers, small businesses, etc.– from certain inadvertent regulations imposed by the 2010 Dodd-Frank Wall Street reform law.

In a 2011 policy brief, The Risks of Over-Regulating End-User Derivatives, PPI Senior Fellows Jason Gold and Anne Kim warned policymakers to be wary of these unintended requirements as they implemented the law and called on Congress to rectify the issue:

No one doubts that the abuse of some forms of exotic derivatives contributed to the systemic risk that led to the 2008 crisis. But derivatives are an important tool used by major American manufacturing and service companies (“end users”) to manage and protect against risks—not create them. These derivatives contribute little—if anything—to systemic risk.

Federal agencies are nonetheless contemplating regulations that could put the conventional derivatives companies use to hedge against risk in the same categorical box as the speculative trades or trades done by systemically risky firms, even though Congress did not intend for this to occur.

Subjecting these derivatives to the same limitations as riskier speculative trades—such as by imposing “margin” requirements and other overly tough regulations—would unnecessarily burden American companies. It would tie up capital that would otherwise be directed to investment and hiring, drive up the cost of producing goods and services, and ultimately cost American jobs. Ironically enough, the result would be to create more potential risk for the economy, not less.

As we emerge from the worst recession in generations, policymakers are confronted with the dual task of implementing regulations that promote private sector economic growth while also mitigating systemic risk. Sensible regulations to deal with end-user derivatives and the companies that use them are an important piece of meeting this challenge.

See: The Risks of Over-Regulating End-User Derivatives.

Is the CFPB Committing Regulatory Overreach?

Posted on by The Progressive Policy Institute

The Consumer Financial Protection Bureau (CFPB) is touted as one of the crowning achievements of the Dodd-Frank Act. But a new CFPB report on student loans is highly flawed, raising doubts about its regulatory reach over the private student-loan market.

The CFPB was created to bring all consumer financial products under one regulatory umbrella. It oversees everything in the financial sector that affects consumers — from credit cards, to mortgages, to auto and student loans. In its short history, the agency has responded so quickly and forcefully to allegations of consumer harm that few have questioned its expanding authority or overlapping jurisdiction with other federal regulators.

Last week, the CFPB issued its third annual report on student loan complaints. The agency first created a platform for student loan complaints in 2012, and embarked on a massive solicitation for general comment on private student loans in 2013. Shortly after, CFPB brought private non-bank loan servicers under its oversight authority.

At first glance, the report paints a picture of student borrowers victimized by unscrupulous private lenders and loan servicers. Complaints regarding loans and loan servicers are up 38 percent year over year, with many complaints indicating private lenders and servicers “provided no options [to modify repayment plans], leading the borrower to default.” Complaints against student loan giant Navient (formerly Sallie Mae) were up a staggering 48 percent, with the entire rise dubiously occurring in the month of December. An unwary reader could easily conclude that the private student-loan market is the heart of the student debt crisis, squeezing hardworking young college graduates of every dollar.

But a closer look reveals the report is fundamentally flawed. Although such a database is valuable for identifying concerns and promoting accountability, it should never be used as stand-alone justification for new regulation or policy. Yet that is exactly what this report does — it is basing policy recommendations simply on a compilation of unsubstantiated complaints.

Worse, the report is misleading in two big ways. First, the report makes the private student-loan market seem entirely to blame for the growing student debt crisis. And second, it offers no analytical evidence that private student lenders are unwilling to work with struggling borrowers.

Continue reading at The Hill.

GSE Reform: Not So Fast

Posted on by The Progressive Policy Institute

Like so many issues in Washington these days, the debate over what to do with the nation’s housing Government Sponsored Enterprises (GSE)—Fannie Mae and Freddie Mac—has been caught up in the Jihad against the role of government in any form.

That’s a shame because last spring, with the announcement from Senate Banking Committee Chairman Tim Johnson (D-S.D.) and ranking member Mike Crapo (R-Idaho) of a bipartisan bill to reform the nation’s housing finance system, it appeared that the question of what to do with Fannie Mae and Freddie Mac had finally been answered.

Instead, the Johnson-Crapo bill became another victim of ultra-right ideology, as strident opposition to anything short of the elimination of any government role in the mortgage backed securities marketplace remains unacceptable to House Republicans. Their approach—which was incorporated in the PATH Act (which passed the House last year), proposed virtually eliminating the Federal guarantee of mortgages in five years.

That’s not to say the Johnson-Crapo bill was perfect by any means. Compromise isn’t about creating the best solution, but rather a better solution than the status quo.

Conitue reading the brief here.

Does Ex-Im Bank Need a ‘Third Option’?

Posted on by The Progressive Policy Institute

Long dogged by claims of corporate welfare, the Export-Import Bank (Ex-Im) finds itself once again fighting for its survival. At 80 years old, Ex-Im has always won the fight. But this time, a “third option” of reform might just be what it needs — one that focuses on making the agency better, not closing its doors.

The Export-Import Bank is a government agency with a mission to support U.S. jobs through exports. The bank provides loans, guarantees and insurance to help U.S. exporters level the playing field against foreign competitors, in a world where 59 other countries provide export financing assistance. As a “lender of last resort,” each transaction must demonstrate “additionality,” where the export would not go forward absent Ex-Im Bank.

In the past, trade promotion by leveling the playing field has been argument enough for reauthorization. But now, the battle over Ex-Im Bank is about more than corporate welfare — it’s a face-off between the establishment Republicans and Tea Party conservatives.

Continue reading at The Hill.

Senate hearing on student loans did not HELP

Posted on by The Progressive Policy Institute

Yesterday’s hearing of the Senate Health, Education, Labor and Pensions (HELP) Committee on student loans seemed to clearly answer the question of who is to blame for our $1.2 trillion and climbing student debt debacle. The only problem is, it was inaccurate. That makes the conversation unproductive regarding making federal aid policy effective.

If you believed the hearing, private lenders, loan servicers (TIVAS), and greedy state guaranty agencies (GAs) are to blame. During the hearing Sen. Patty Murray (D-Wash.) prided her role in passing recent cuts to GA-collected fees, as “providing relief to struggling borrowers.”

This is little more than politically charged rhetoric. There is no question young Americans are struggling more than any other age group, and this is exacerbated by student debt. But in reality, the finger-pointing for whom to blame is not so cut and dry, and any real improvement to the student aid system must reflect that.

Just as with the subprime mortgage crisis, everyone involved played a role in driving our student debt burden. States have decreased funding for public universities (for example, Colorado is expected to stop all funding by 2022), schools have increased tuition to fill the difference, borrowers have little incentive to make smart borrowing decisions, for-profit institutions have a less than stellar track record, and funding has been readily available regardless of credit backgrounds to enable equal access and opportunity. Of course, there is also the epidemic lack of financial literacy of student borrowers. Lenders, school counselors, parents, or the borrowers themselves could all be to blame.

Moreover, the underlying dominance of four-year college model is also partly to blame. The fact is not all four-year degrees are created equally, and not all jobs require a four-year degree. Yet the lack of other viable options for workforce success could explain why everyone is encouraged to pursue a four-year degree. It could partly explain the astonishing rise in graduate school over the last decade, as poor employment prospects force college graduates to find ways to stand out, and the rising student debt that comes along with it.

Certainly some private loan servicers are not completely innocent, and may not always put student interests above their own short-term goals. But the harsh tone taken by Sen. Elizabeth Warren (D-Mass.) yesterday does not address the larger issues at play. Her comment, “Sallie Mae has repeatedly broken the rules and violated its contracts with the government, and yet Sallie Mae continues to make millions on its federal contracts,” even prompted the Department of Education to come to Sallie Mae’s defense.

Indeed, not all private-sector participants among the accused are approaching borrowers with mal-intent. Take for example state guaranty agencies (GA), the legacy administrators of the Federal Family Education Loan Program (FFELP) for a given state. Left out of the hearing discussion seemed to be the important fact that GAs are non-profit companies designated by the Department of Education. Their fees are used for an important cause – for extensive financial literacy training programs set up across state networks. The more their fees are cut, the fewer financial literacy services they will be able to provide.

The demonization of private loan servicers might lead one to think that federalizing student loan servicing would solve the problem. However, isolating TIVAS is counter-productive. Not only are student loan servicers not the greedy profiteers they are made out to be, but there is no reason to believe the government would be more cost-effective at loan administration. Further, there is no evidence that expanding the federal role in student loan administration would do much to relieve the existing student debt burden.

Instead, Congress should work with TIVAS and GAs as partners as they work to reform the federal student aid program. Just as the issues surrounding the student debt burden are systemic, so too must be the solution. Pointing fingers at a select few accomplishes little, even if it does sound good during election season.

If there is any take-away from yesterday’s hearing, it is that student loans have become the latest issue in need of greater awareness and education concerning all of the aspects. There are over 80 million young Americans under age 20 that are counting on policymakers to get the federal aid system right for when they invest in college. Luckily, since the re-authorization of federal student aid programs is almost certain to get postponed for yet another year, it is not too late.

This article was originally posted by The Hill, read it on their website here.

Jamie Dimon, JP Morgan and the ‘Whale Trade’ Fallout

Posted on by The Progressive Policy Institute

Last week, JP Morgan Chase settled with regulators in both the United States and United Kingdom over massive losses suffered in the 2012 “London Whale” trading fiasco. Chase, America‘s largest bank, fessed up to wrongdoing and agreed to pay a stiff $920 million fine. As part of the agreement, regulators agreed not to pursue further charges against Chase’s top brass.

Thus ends the biggest financial hiccup since Wall Street nearly tanked in 2008. The story begins in April of 2012, when Bruno Iksil, an obscure trader in the big bank’s London unit, got caught in a series of outsized derivatives trades that went bad. Fellow traders dubbed Iksil the “London Whale” for the monstrous size of his bad bets. Chase CEO Jamie Dimon was initially dismissive, calling the burgeoning scandal a “tempest in a teapot.”

Iksil escaped prosecution by cooperating with authorities. But two former employees in the London branch weren’t so lucky and are being prosecuted for falsifying books and regulatory filings in an effort to cover up the trader’s disastrous positions.

“The defendants deliberately and repeatedly lied about the fair value of assets on JPMorgan’s books in order to cover up massive losses that mounted up month after month,” Preet Bharara, the U.S. Attorney for the Southern District of New York, said when announcing the charges. “Those lies misled investors, regulators and the public, and they constituted federal crimes.”

Continue reading at U.S. News & World Report.

Don’t Make Credit Unions Die for Banks’ Sins

Posted on by The Progressive Policy Institute

Five years ago this week, a collapsing housing bubble plunged America into its worst financial crisis since the Depression. Wall Street’s near meltdown midwifed both the tea party and the Occupy movement, and triggered a bitter debate about the big banks that continues to this day.

The ongoing controversy over whether we have solved or compounded the “too big to fail” problem may have cost Larry Summers his shot at the Federal Reserve’s big chair. But amid all the focus on the handful of U.S. mega-banks, policymakers have paid scant attention to their little cousins – America’s credit unions.

Now, however, credit unions are drawing fire from the banking industry for their not-for-profit tax status. The banks claim this exemption should be revoked because it gives credit unions an unfair competitive advantage over for-profit banks. “Credit unions were never intended to be untaxed banks, yet that is what many have become,” according to Frank Keating, president and CEO of the American Bankers Association.

Keating’s sentiment is representative of many in the banking industry, but ultimately his words ring hollow. His association boasts a diverse membership of large and small banks. Last time I checked, there aren’t any credit unions that maintain a profitable global derivatives business and an essential investment-banking unit that underwrites multi-billion dollar corporate mergers and acquisitions like some of his members.

Eliminating the tax exemption is a terrible idea that would deal a fatal blow to 6,815 credit unions that provide low-cost financial services to 93.8 million members nationwide. It would also eliminate one of the safest and soundest segments of the financial services industry that stewards more than $1 trillion.

Continue reading at U.S. News & World Report.

Simplify, Simplify, Simplify: The First Principle of Tax Reform

Posted on by The Progressive Policy Institute

Overhauling the federal tax system is one of the most important steps U.S. political leaders can take to promote economic growth and fairness. It is also that rarest of issues in today’s Washington—one that commands broad support on both sides of the political aisle. For these reasons, the Progressive Policy Institute urges the White House and Congress to give top priority to fixing our broken tax system over the next 12 months.

Everyone knows our tax code is too complicated, too inefficient and too riddled with preferences for special interests. Americans deserve better. PPI believes we need a federal tax system that is simpler and more progressive; that steers investment into productive, job-creating activity; that enables U.S. workers and companies to compete on an even footing in world markets; and, that serves the most basic purpose of any tax system—raising enough revenue to finance the government while ensuring fairness to taxpayers.

Comprehensive tax reform obviously poses daunting political obstacles. Nevertheless, it’s a goal Democrats and Republicans share. The Senate Finance Committee has published 10 papers on various options while the House Ways and Means Committee has organized 11 subgroups to consider different areas of the tax law. Over 1000 comments have been filed. With Sen. Max Baucus retiring this year, and Rep. Dave Camp term-limited as chair of the House Ways and Means Committee, the two most important players on tax policy are strongly motivated to get something done.

This paper will not offer a sweeping blueprint for reform. Instead it focuses on one crucial aspect of reform: Simplification. PPI has long argued that our tax system is too complex and ill-fitted to the needs of middle-class families and small entrepreneurs. They benefit little from the existing array of incentives and loopholes, which are mainly targeted on special interests or people with a level of income and wealth they can only dream about. The code’s byzantine complexity also costs business and individuals hundreds of billions in compliance. In a recently released annual report to Congress, the IRS’s National Taxpayer Advocate, Nina Olson, estimated that individual and business taxpayers spent 6.1 billion hours to complete filings. The bloated federal code contains almost four million words and on average has more than one new provision added to it daily.

The code is so complex that nearly 60 percent of taxpayers hire paid preparers and another 30 percent rely on commercial software to prepare their returns.

In fact, according to PricewaterhouseCoopers, only four nations have more pages of “primary tax legislation” than does the United States. And the World Bank’s www.doingbusiness.org ranks 61 nations as having tax systems friendlier to business than does the United States, while the World Economic Forum puts the U.S. tax system in 107th place in a ranking of the efficiency of 117 national tax regimes.

Congress perennially fiddles with the code, and it takes a full-time army of lobbyists to keep track of all the changes: the Treasury Department reports that there have been more than 14,400 revisions since 1986. It is imperative, then, that any comprehensive overhaul of the federal tax system not make the code even bigger and more complicated. Tax reform without dramatic simplification should not be considered genuine reform.

Download the policy brief.

The Perils and Promise of Payroll Debit Cards

Posted on by The Progressive Policy Institute

Last week, New York Attorney General Eric Schneiderman started looking into the controversial new practice of issuing workers debit cards in lieu of paychecks. The practice first came to light last month when an employee of a McDonald’s franchise in Pennsylvania sued over being forced to accept pay in the form of debit cards. Soon after, the New York AG’s office sent inquiries about debit card payroll practices to several companies, along with a request to see a list of fees associated with the cards.

Some of the companies that were contacted by the AG’s office were high profile brands such as Wendy’s, Costco, Darden Restaurants and Walmart. As the list suggests, these are enormous corporations with lots of hourly workers. Instead of a physical paycheck or direct deposit, workers get debit cards they can use to purchase items or access cash via ATMs.

So far so good. But workers soon discovered that such transactions are often laden with income–reducing fees on common transactions such as balance inquiries and even penalties for periods of inactivity…

Continue reading the article at U.S. News & World Report.

Why We Should Relax and Learn to Love Rising Mortgage Rates

Posted on by The Progressive Policy Institute

Mortgage rates have been scraping the cellar floor in recent years, bottoming out at around 3.5 percent for 30-year loans. Economics 101 says cheap money can’t last forever and, sure enough, goverment backed mortgage giant Freddie Mac reported last week that fixed rates jumped, now up a full percentage point, to 4.5 percent

For the average homebuyer, that’s not trivial. On a $270,000 loan, roughly the national median price of a single family home, it will boost monthly interest payments by around $125 a month. That could be just enough to deter a first-time homebuyer or to eat into the savings of families trying to refinance their homes before rates get any higher.

In housing finance circles, there’s been a lively debate over the recent surge in housing prices: Is the sector’s recovery real – that is, built on market fundamentals? Or are we seeing yet another housing bubble inflated by the Fed’s policy of monetary easing?

Surging interest rates – and all indications are they aren’t going back down – will likely give us the answer by testing the resilience of U.S. housing markets. Here are some key indicators housing experts will be keeping their eyes on:

What happens to credit that many claim is already too tight? The idea that credit is too tight – that capable borrowers can’t get mortgage loans despite low interest rates – is widespread, but is it really true? In fact, the real issue may be bank origination capacity, not credit.

Continue reading at US News and World Report.

Rating the Credit Raters

Posted on by The Progressive Policy Institute

Credit rating agencies (CRAs) are supposed to be hard-eyed accountants whose job is to assess credit risk. But they also got swept up in the euphoria that swelled the housing bubble, failing with the Fed and other market participants to predict the extent of the housing crash. That’s partly because they over-extended the use of AAA-ratings, the highest “grade” given to a structured financial product, which falsely indicated low-risk assets.

Senator Al Franken (D-Minn.) has introduced an amendment to make credit raters more transparent and accountable. But while this amendment has the right intention, whether it could actually work is another question. Even Sen. Franken himself doesn’t seem all that confident that his measure will work. “I would like to emphasize that we hold no pride in authorship,” Franken said in an e-mailed statement. “We will applaud the implementation of any proposal or set of proposals that ultimately protect consumers and the American public.”[i]

The Franken Amendment essentially calls on the Securities and Exchange Commission (SEC) to create an oversight board of the rating agencies. The private sector rating agencies and investment firms would have majority representation. The board would oversee a process where a random firm is selected to conduct the initial evaluation of each new financial product that requires a CRA review. Under the proposal, issuers of new securities aren’t allowed to be involved in this part of the process.

But a public-private coordinated oversight board tucked within the SEC is destined for failure. If the pendulum swung too far in one direction prior to 2007, with issuers and most players underestimating risk, this move swings the pendulum right back. A structure like this is confusing to markets and will easily be seen as the federal government granting a guaranteed seal of approval on all ratings.  Even risky debt might be seen as a viable investment inviting dangerous behavior fraught with moral hazard. The market needs to create the appropriate amount of risk, with appropriate public oversight; this proposed set up will
only exacerbate it.
Continue reading “Rating the Credit Raters” →

Student Debt: A Bubble More Like a Balloon

Posted on by The Progressive Policy Institute

There is an intense debate as to whether the student debt crisis is a bubble or not. The short answer: yes, but it’s more like a balloon. And the good thing about balloons is that they don’t have to burst; there is an option to deflate them slowly.

In some ways the ongoing student debt crisis has the classic symptoms of a bubble. There is an artificial inflation of value (here, tuition) that is in part fueled by low-cost funding (here, government-issued student aid). The latest Federal Reserve numbers show student debt is now a staggering $1 trillion and climbing. Yet the real earnings of young college grads are falling, down 15 percent since 2000. Already student loan defaults are at 11 percent and rising. Moreover, the true default rate is actually higher because of post-graduation grace periods. Not surprisingly, the Wall Street Journal reported earlier this week that student loan debt is now crowding out other borrowing and spending.

In other ways the student debt crisis is different—potentially worse—than the typical financial bubble. First, student debt is uncollateralized. There’s no home or property that can be reclaimed in default. Second, student debt cannot be discharged in bankruptcy, or restructured to meet the repayment ability of struggling debt owners. And most importantly, the majority (85 percent) of student debt is owned by the government. That means taxpayers are directly on the hook for $850 billion in potential losses. Worse, the government doesn’t really have the option to cut back on loan issuances or raise interest rates because that would go against equal access and opportunity.

The fact that the government holds the majority of student debt is what could transform this bubble into a controlled balloon—a balloon that can be deflated slowly. We know where most student debt is; it is not as spread out across unknown entities like subprime mortgage debt.

This week we released a preliminary proposal for the creation of private-sector student debt investment fund (SDIF) that would purchase existing student loans, refinance the debt at today’s historically low interest rates, and apply a discount to the loan amount. This could be the release valve that deflates the balloon, by reducing the financial burden to debt holders and transferring risk. That could free up government resources to address another important issue—rising tuition.