Nel's New Day

June 14, 2014

‘A Fighting Chance’: Elizabeth Warren’s Thoughts on the Rigged System

fighting chanceMen complain how women take everything personally. Elizabeth Warren makes that a good thing. For the past four decades, she has taken the problems of the poor and the middle class of this country very personally. She’s fought against unfair bankruptcy, concealed bank practices, and now excessive interest for student loans.

Warren’s newest book, A Fighting Chance, is far more than her personal story about her family and political campaigns. Throughout her book about how the middle class is trapped in a vise of debt, she shows that she is a person determined to help desperate people in this nation.

Warren grew up when employers could refuse to hire her because she was pregnant—or just because she is a woman. She married and had children early, and her husband—as most men in society at that time—thought it was her responsibility to be sole caretaker of both him and the children. Yet she managed to earn a law degree from Rutgers. Part of her success in education, according to her book, is that education was much cheaper then. She attended a state commuter college and paid $50 a semester for tuition. Now a state college can cost $15,000 a year for instate students.


Her original title of the book, Rigged, shows that U.S. politics gives control to plutocrats and bankers at the expense of most of the people in the nation. She writes about this issue in clear, simple language instead of the vague, ambiguous, wordy “fed speak” that most people high in the economic leadership use. Past Federal Reserve chair Alan Greenspan said about his use of fed speak: “You soon learn to mumble with great incoherence.”

One joy of A Fighting Chance is the lack of mumbling. With clarity and common sense, Warren delivers her message of giving everyone in the country a fair chance. Early in her teaching career, she taught a class on bankruptcy at a time when textbooks didn’t cover the new 1978 Bankruptcy Reform Act. In doing her own research on the law, she learned that almost 90 percent of people declared bankruptcy because of a job loss, a medical problem, or a family breakup, not because of bad choices.

Passion about the subject of bankruptcy led Warren to write a book about it and talk to groups about the law. That led her to become an advisor to lawmakers, giving her the opportunity to advocate for vital updates that allowed desperate people to get relief from their debt. Through this advocacy, she met such greats as former Sen. Edward Kennedy (D-MA), whose seat Warren now occupies in the U.S. Senate.

As Maura Casey said in her review:

“She’s mad as hell, and many readers will be, too, by the time they finish this book. Warren explains how the financial crisis was preceded by congressional and court decisions that shredded public protections for high interest rates and predatory banking practices during the 1980s and ‘90s. ‘Gradually [the bankers’] strategy emerged,’ she writes. ‘Target families who were already in a little trouble, lend them more money, get them entangled in high fees and astronomical interest rates, then block the doors to the bankruptcy exit if they really get in other their heads.’”

Her next project was to give the financial world transparency for everyone. Warren knew that as long as financial industries kept consumers and voters ignorant, that banks and credit cards could charge whatever fees and interest rates that they wished. The same ignorance on the part of consumers led to eight times as many bankruptcies in 2010 over 1980 and caused these same people to lose their homes at a enormous rate. Thanks to her support from such luminaries as Rep. Barney Frank (D-MA) and a Democratic president, a new agency, the Consumer Financial Protection Bureau, created a simpler way of looking at financial contracts. Credit card agreements are now one page, and mortgages use understandable language.

elizabeth_warren_graduates-620x412Republicans made a major mistake when they refused to make Warren the head of this agency. Because of this loss, she ran for Senate against a popular incumbent—and won. Her current crusade is to put student loans on the same footing as bank loans.

Banks pay less than 1 percent in interest, giving them a subsidy of $83 billion a year that they stash away instead of helping people with the funds. Students pay nonnegotiable rates of over 8 percent, in a time when mortgages are under 4 percent.

The bill allows students to take out government loans at 3.86 percent interest and let existing borrowers to refinance their current loans down to that lower rate. It also proposes that the $5.1 billion loss each year through refinancing would be off-set by $7.1 in new revenues from a surcharge tax on millionaires to ensure that they pay at least 30 percent of their income in taxes.

Warren said:

“We put the plan to pay for it right on the table. No gimmicks or smoke-and-mirrors. We said that when the government reduces its profits on student loans, the money should be made up by stitching up tax loopholes so that millionaires and billionaires pay at least as much in taxes as middle class families.”

As Warren told the Boston Globe:

“It’s a basic question on our values. Does this country protect millionaires’ and billionaires’ tax loopholes? Or does it try to help young people who are just starting their economic lives?”

This past week, GOP senators filibustered her bill on student loans and temporarily killed it. She obtained 56 votes to overcome the filibuster: that’s six votes over a majority of the Senate but not enough for the filibuster policy that mandates 60 votes. There were actually 57 votes to close the filibuster, but Majority Leader Harry Reid changed his vote to no so that he could bring up the bill again. Thirty-eight GOP senators voted to protect the 22,000 millionaires/billionaires.

Warren never quits. She’ll be back with the bill again. And she’s got help. A few hours after the bill was blocked, Chuck Schumer, the third-ranking Democrat in the Senate, told Jon Stewart on The Daily Show:

“You can refinance your home, you can refinance your car, but the federal government doesn’t allow you to refinance your college loan if you’re paying too much. Why shouldn’t we do that? We’re gonna keep going at it. We’re going to bring this bill up over and over.”

Businesses and local governments can also refinance loans for a lower interest rate.

High interest on the $1.2 trillion that over 40 million people owe in student loans hurts the country’s economy. Most of them cannot buy cars and homes, causing fewer jobs to make and sell these. Dropping the interest rate would put billions into the economy and billions into the government coffers through tax revenue.

The GOP couldn’t even come up with a rationale justification for voting against the bill. Minority Leader Mitch McConnell (R-KY)  said, “The Senate Democrats’ bill isn’t really about students at all. It’s really all about Senate Democrats. They want an issue to campaign on to save their own hides this November.” At the same time, the Senate Finance Committee has approved a measure to cut taxes for the wealthy that cost $8 billion a year with no offset.

Warren has an answer for McConnell. She’s headed to Kentucky to campaign and fundraise for his opponent, Alison Lundergan Grimes.

Although much of the book is about policy and law, it is a very personal book as Warren writes about how she developed her value system. She grew up poor and always has an eye on the dollar. It is that background that makes her valuable in her fight for the people struggling against a rigged system. She has lived their lives. And she understands how all these lives, rich and poor, are interconnected.

“There is nobody in this country who got rich on his own. Nobody. You built a factory out there? Good for you. But I want to be clear: You moved the goods to market on roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police forces and fire forces the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory…. Now look, you built the factory and it turned into something terrific, or great idea? God bless. Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid that comes along.”

Warren’s  weapon throughout her achievements is her call for transparent systems. As she says, “When you have no real power, go public—really public. The public is where the real power is.” After the GOP blocked her bill, she said:

“I think it is time to come back louder than ever. I think it is time to show up at campaign events and town halls and ask every single Republican who voted against this bill why protecting billionaires is more important than giving our kids a chance to pay off their loans. I think we need to ask, and ask again, and ask again.”

That’s what Warren is doing in Kentucky, and it’s great advice. It might give the people of the United States a fighting chance.

April 10, 2013

Stop U.S. Bank ‘Bank Ins’

Economics are one of my weak points. I know just a tiny bit more about this field than sports, about which I know nothing. But with the stock market shooting up like a meteor, the GOP budget plan shooting the majority of individual income in the United States down into the center of the world, I decided to pay attention to this article, “The Wall Street Ticking Time Bomb That Could Blow Up Your Bank Account,” by Ellen Brown.

She definitely got my attention with the describing the “bail in” which took place in the two bankrupt Cyprus banks, especially because all the big monitory control groups okayed this. “Bail out,” much resented by people across the United States, means that the government uses taxpayer money to give all those “too big to fail” banks that gamble away their own capital. “Bail in” means that banks “recapitalize” themselves by taking their creditors’ funds deposited in their banks. It just skips the middle process of getting people’s money from the government. This policy is already in the works for the United Kingdom, Canada, New Zealand, Australia,–and the United States.

Why are banks in trouble? It has to do with derivatives, a word that always confuses me. From what I can understand, the problem with derivatives is that they can change in value from one moment to the next because they are a contract based on assets that change—commodities, bonds, interest rates, etc.

Because derivatives can shift in value from one instant to the next, the Glass-Steagall Act of 1933 tried to prevent another Great Depression by stopping banks from gambling with depositor funds. In 1999 Congress removed that barrier, meaning that banks could take money from savings accounts and gamble them away in the derivative market. The loss of the derivatives goes to the bank; the owner of the contract takes the collateral—i.e., your savings or retirement account.

In 2008, to save the banks—and all the personal accounts in them—the government “loaned” them $700 billion in taxpayer funds. Think what it would take to save the banks now. The FDIC insurance fund, which covers all those bank deposits under $200,000 has only $25 billion. Two banks, JPMorgan and Bank of America, each have over $1 trillion in deposits, and total deposits covered by FDIC insurance are about $9 trillion. Bloomberg stated in November 2011 that Bank of America’s holding company had almost $75 trillion in derivatives, and 71% were held in its depository arm; while J.P. Morgan had $79 trillion in derivatives, and 99% were in its depository arm. The cash calculated to be at risk from derivatives from all sources is at least $12 trillion.

When the FDIC (Federal Deposit Insurance Corporation) runs out of money, Section 716 of the Dodd Frank Act prevents more taxpayer funds bailing out a bank because of a bad derivatives gamble. That means no more $700 billion taxpayer bail outs, moving the banks on to bail ins.

Legally a bank owns our money the second we put in into their bank. We become “unsecured creditors” holding IOUs, promises to pay. Until recently, the bank was obligated to pay our money back on demand.  Four months ago, the FDIC and the Bank of England (BOE) put out a document, “Resolving Globally Active, Systemically Important, Financial Institutions.” Under the FDIC-BOE plan, our IOUs are converted into “bank equity.”  The bank gets the money, and we get stock in the bank. When our IOUs are converted to bank stock, they are no longer subject to insurance protection. Instead, the deposits will be “at risk” and vulnerable to being wiped out. As “unsecured creditors,” depositors are put below interbank claims. The function of the FDIC may have been changed to confiscate deposits to save the big banks.

The only mention of “depositors” in the FDIC-BOE directive as it pertains to U.S. policy is in paragraph 47: “The authorities recognize the need for effective communication to depositors, making it clear that their deposits will be protected.” There is no indication of how the depositors will be protected if the assets are gone. The derivatives claimants are first in line, before the depositors. There is no rescue from taxpayers because Congress stopped that alternative. The FDIC has only $25 billion.

“Secured creditors,” including state and local governments, are also in trouble because many of them keep revenues in Wall Street banks with smaller local banks lacking the capacity to handle such complex business. Although U.S. banks are required to pledge collateral for any deposits of public funds, the derivative claims have super-priority over other claimants, including other secured creditors.

Harvard Law Professor Mark Row maintains that the super-priority status of derivatives needs to be repealed. He writes:

“. . . [D]erivatives counterparties, . . . unlike most other secured creditors, can seize and immediately liquidate collateral, readily net out gains and losses in their dealings with the bankrupt, terminate their contracts with the bankrupt, and keep both preferential eve-of-bankruptcy payments and fraudulent conveyances they obtained from the debtor, all in ways that favor them over the bankrupt’s other creditors.

“. . . [W]hen we subsidize derivatives and similar financial activity via bankruptcy benefits unavailable to other creditors, we get more of the activity than we otherwise would. Repeal would induce these burgeoning financial markets to better recognize the risks of counterparty financial failure, which in turn should dampen the possibility of another AIG-, Bear Stearns-, or Lehman Brothers-style financial meltdown, thereby helping to maintain systemic financial stability.”

In The New Financial Deal: Understanding the Dodd-Frank Act and Its (Unintended) Consequences, David Skeel calls the Dodd-Frank policy approach “corporatism”–a partnership between government and corporations. Congress has made no attempt in the legislation to reduce the size of the big banks or to undermine the implicit subsidy provided by the knowledge that they will be bailed out in the event of trouble.

Skeel also blames the Lehman bankruptcy of 2008 on the bankruptcy exemption for derivatives. When the bank seemed to be in trouble, the derivatives owners all made their claims, causing a run on the collateral before it ran out. According to Skeel, the problem could be resolved by eliminating the derivatives exemption from the stay of proceedings that a bankruptcy court applies to other contracts to prevent this sort of run.

Other ways to block the Wall Street asset grab:

  • Restore the Glass-Steagall Act separating depository banking from investment banking. (H.R. 129)
  • Break up the giant derivatives banks.  (Bernie Sanders’ “too big to jail” legislation)
  • Nationalize the “too big too fail” banks as recommended in the New York Times. (Gar Alperovitz)
  • Make derivatives illegal, as they were between 1936 and 1982 under the Commodities Exchange Act. They can be unwound by simply netting them out, declaring them null and void.  As noted by Paul Craig Roberts, “the only major effect of closing out or netting all the swaps (mostly over-the-counter contracts between counter-parties) would be to take $230 trillion of leveraged risk out of the financial system.”
  • Support the Harkin-Whitehouse bill to impose a financial transactions tax on Wall Street trading.  Among other uses, a tax on all trades might supplement the FDIC insurance fund to cover another derivatives disaster.
  • Establish postal savings banks as government-guaranteed depositories for individual savings. Many countries have public savings banks, which became particularly popular after savings in private banks were wiped out in the banking crisis of the late 1990s.
  • Establish publicly-owned banks to be depositories of public monies, following the lead of North Dakota, the only state to completely escape the 2008 banking crisis. North Dakota does not keep its revenues in Wall Street banks but deposits them, by law, in the state-owned Bank of North Dakota.  The bank has a mandate to serve the public, and it does not gamble in derivatives.

The Volcker Rule, part of the Dodd Frank Act that keeps banks from making some speculative investments, doesn’t go into effect for over a year. U.S. banks are fighting it, lobbyists are trying to postpone the date, and there may not be enough money to monitor it.

If you think that banks are responsible entities, think about the way that Jamie Dimon misled investors and regulators to lose over $6 billion for JP Morgan Chase. According to Sen. Carl Levin (D-MI) regarding the Senate investigation into Dimon, JP Morgan had “a trading operation that piled on risk, ignored limits on risk taking, hid losses, dodged oversight and misinformed the public.”

Google the subject of “bail-in,” and you’ll find a pile of articles that indicate there is no problem about people in the United States losing their bank deposits. That’s what the banks said during the Great Depression right before they permanently closed their doors.

This morning my partner and I talked about when the next Wall Street financial disaster would occur. I’m guessing that it will be in a little over a year—just in time for the GOP to blame the Democrats on Wall Street problems in order to get votes. Now might be the time to stop worrying about the national budget and think about what happens if we lose their bank deposits.


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