Must Reads of the week: In the Economist, U.S. finance editor Tom Easton discusses the restructuring of American capitalism in a "move towards types of firm which retain very little of their earnings: 'pass-through' companies which every year pay out more or less as much as they take in." Morgan Stanley has a new report out about impact investing. Meanwhile, Demos' Robert Kuttner examines how "the unleashing of markets, especially financial markets, has concentrated wealth and economic power."
This week we start with a couple of editorial cartoons from Dan Wasserman in Boston.com on the difficulties of banking in the United States:
Greenspan's "I didn't know" excuse is so absurd as to be painful. The explosion of exotic mortgages in the bubble years was hardly a secret. It was frequently talked about in the media and showed up in a wide variety of data sources, including those produced by the Fed. In fact, there were widespread jokes at the time about "liar loans" or "Ninja loans". The latter being an acronym for the phrase, "no income, no job, no assets". The fact that banks were issuing fraudulent mortgages by the millions, and that the Wall Street crew was securitizing them as fast as they could get them, was not top secret information available only to those with special security clearance. This was the economy in the years 2002-2006.
In the aftermath of the 2008 economic crisis, notes economist Nouriel Roubini, sub-par GDP growth and high unemployment continue to plague advanced economies and says policymakers struggle with the best way forward:
Central banks, they argue, now have two goals: restoring robust growth and low unemployment with low inflation, and maintaining financial stability without bubbles. Moreover, they have two instruments to achieve these goals: the policy interest rate, which will be kept low for long and raised only gradually to boost growth; and macro-prudential regulation and supervision of the financial system (macro-pru for short), which will be used to control credit and prevent bubbles. But some critics, like Fed Governor Jeremy Stein, argue that macro-pru policies to control credit and leverage – such as limits on loan-to-value ratios for mortgages, bigger capital buffers for banks that extend risky loans, and tighter underwriting standards – may not work. Not only are they untested, but restricting leverage in some parts of the banking system would merely cause the liquidity from zero rates to flow to other parts of it, while trying to restrict leverage entirely would simply drive the liquidity into the less-regulated shadow banking system.
Since the financial crisis, microcredit has taken off in the United States, attracting thousands of clients who do not qualify for credit cards or traditional bank loans.
The purpose of the loans, as conceived by Muhammad Yunus, the Nobel Prize-winning founder of Grameen Bank, is to help countless millions of poor people unlock their inner entrepreneur, to “use money to make money,” as he put it in a telephone interview. But its newfound popularity may say more about the increasingly unstable nature of American poverty, in which credit is hard to come by and sustenance is cobbled together from part-time jobs and threatened by unpredictable expenses.
“Families in rural Africa are more like U.S. families than everyone wants to believe,” said Jonathan J. Morduch, the executive director of the Financial Access Initiative at New York University, who has studied microcredit and is taking a close look at the financial lives of low- and moderate-income Americans. “The hidden inequality in America is about fundamental security, the ability to plan.”
"Wall Street’s influence on the residential real estate market is growing" and crowding out traditional home buyers thanks in part to mortgage rates, reports Kathleen Howley over at Bloomberg.
SNAP enrollment increased by about 80 percent during the recession...Part of that increase reflects SNAP's role as an "automatic stabilizer," supporting families when hard times hit. As families saw their incomes drop (or vanish entirely) during the recession, more became eligible for assistance.
In the NYT's Economix blog, economist Nancy Folbre offers these thoughts on the utility of means-tested programs that might be of interest. Does welfare pay better than full-time work? The writers over at Investors Business Daily argues it does and notes "108.6 million people received one or more means-tested government benefit programs — bureaucratese for welfare." [EDIT: The Cato study cited in the article can be found here, and here are the two CNSnews articles, with links to the cited Census data.] Over at ZeroHedge, anonymous blogger "Tyler Durden" tries to get at the roots of what this all means:
From the right comes criticisms over certain parts of the US population using EBT cards (the debit cards used to distribute the program’s payments) to buy beer and potato chips. This, yes, does occasionally happen. From the left, we get missives that feel a lot like that guy who told the world to “Leave Britney alone!” Food stamps, these folks argue, are part of living in a just society, which doesn’t allow anyone to go hungry. Half of all the people enrolled in SNAP are children, so it is pretty easy to see their point of view as well. In the spirit of bringing our two warring readerships together, I would propose the following statement: “Something has changed about America since the Financial Crisis, and the still widespread popularity of the SNAP program is emblematic of that shift.” Or, in the words of Bill Parcells, “You are what your record says you are.” The American economic record, based on the Food Stamp data, is still pretty lousy.
Meanwhile, in the Harvard Business Review, Umair Haque turns the idea of who benefits from U.S. entitlements and the idea of capitalism on its head:
Maybe what’s practiced in the USA isn’t capitalism at all. It seems to be a toxic admixture of capitalism for the poor, who are ruthlessly whittled down, in brutal Darwinian contests; and socialism for the rich, for whom there appears to be no limit to bailouts, subsidies, and privileges...I’d call it “growthism.” It’s not just a system or a set of institutions. It’s a mindset; an ideology; a set of cherished beliefs. And one that’s hardened into dogma.
Demos has a new report on how the poor and the middle class are working harder to just get nowhere. CNN's John Sutter in this report looks at what he says is the most unequal place in America, Lake Providence, La. The Washington Post offers up a new chart examining U.S. inequality:
Tressie McMillan Cottom wrote an interesting article in response to a Twitter post from Errol Louis, who complained about poor people buying very expensive things they cannot afford. Cottom, who titled the post, "The Logic of Stupid Poor People," offered these thoughts:
At the heart of these incredulous statements about the poor decisions poor people make is a belief that we would never be like them. We would know better. We would know to save our money, eschew status symbols, cut coupons, practice puritanical sacrifice to amass a million dollars. There is a regular news story of a lunch lady who, unbeknownst to all who knew her, died rich and leaves it all to a cat or a charity or some such. Books about the modest lives of the rich like to tell us how they drive Buicks instead of BMWs. What we forget, if we ever know, is that what we know now about status and wealth creation and sacrifice are predicated on who we are, i.e. not poor. If you change the conditions of your not-poor status, you change everything you know as a result of being a not-poor. You have no idea what you would do if you were poor until you are poor.
Chapman University's Joel Kotkin over at the New Geography blog says California's push for a green economy is really just class warfare by liberal elites:
Due to the rise of the green gentry, California is becoming divided between a largely white and Asian affluent coast, and a rapidly proletarianized, heavily Hispanic and African-American interior. Palo Alto and Malibu may thrive under the current green regime, and feel good about themselves in the process, but south Los Angeles, Oakland, Fresno and the Inland Empire are threatened with becoming vast favelas.
Companies are transcending power now. We are becoming the eminent vehicles for change and influence, and capital structures that matter. If companies shut down, the stock market would collapse. If the government shuts down, nothing happens and we all move on, because it just doesn't matter. Stasis in the government is actually good for all of us.
The Washington Post reports that more than 1000 nonprofits on their 990s have reported "a significant diversion" of assets since 2008, "when a question about such losses first began being phased in" their disclosure reports. The Economist reports on "the Omidyar way of giving." Check out this Bill Moyers report on this new nonprofit super market based in Chester, Pa. which targets a food desert. This report featured in Science Daily looks at how substandard housing affects children.