Tags: Senate | middle class | bank | America

Senators Ruminate Over American Dream

By    |   Monday, 10 June 2013 03:28 PM

On June 6, the Senate Banking Committee's Subcommittee on Economic Policy, chaired by Jeff Merkley, D-Ore., held a hearing called "State of the American Dream: Economic Policy and the Future of the Middle Class."

It is the first hearing under Merkley, and I do not recall such a subcommittee; hearings on a subject like this would normally be held by the Joint Economic Committee (JEC).

The thought occurs that perhaps there should be a moratorium on the use of the term "American Dream," because it has contributed to so much mischief, particularly in the mortgage market and the banking industry over the past 40 years or so.

Seven witnesses testified the subcommittee and were divided into two groups. First, three witnesses — Diedre Melson, John Cox and Pamela Thatcher — are all subjects of the documentary movie "American Winter" and told their stories. What they all have in common is that they prepared for careers, either through college or a career program, and they thought that they were securely placed in the middle class, but they lost these jobs and have not been able to find employment, and whatever jobs are available are at half the income of their previous jobs. Therefore, they are struggling with mortgage and other debt and are barely surviving on public assistance, which they never thought they would need.

The testimony of the unemployed witnesses served to put a so-called "human face" on the discussion of theoretical issues raised by the other four witnesses. The testimony of the expert witnesses touched on two themes. First, that the ongoing financial crisis has been caused by faulty government policies, much of it generated by rent-seeking elements of the so-called private sector, based on the theory that this is a democracy and that it's legitimate to take a company's crackpot ideas, such as Sandy Weill's concept of a universal bank, and translate them into public policy supported by public subsidies.

Second, that the toxic financial products and related policies that will cause the next episode of the financial crisis are being invented now.

The following are brief comments on the presentations of the four experts. By far the most interesting was Nick Hanauer of Second Avenue Partners. Readers might do well to start with his testimony and perhaps end there, as well:

1. Atif Mian, professor of economics and public policy at Princeton. At the risk of overusing the word "crackpot," the professor has an idea for curing the flawed mortgage market by creating a new product, based on the (flawed) 30-year, fixed-rate model, augmented by downside protection for the buyer that would be financed by a 5 percent call option retained by the originating bank.

As an economist, one would think that Mian would realize that products based on models informed by the historic performance of the mortgage market don't work. As the saying goes, "Past performance is no guarantee of future results." Something is always different, and then policymakers act surprised when their contrivance blows up and risks taking the entire economy with it.

Then the answer is to go back to the drawing board. That's where Mian is, and it might be a good idea for conservatives to defuse this bomb, but again, history shows that some Republican senators — and a few names come to mind — could decide to jump on this in hopes of goosing up the housing market/bubble yet again.

2. Amy Traub, senior policy analyst at Demos. Traub's presentation was a lamentation on the unequal distribution of wealth and political clout due to a fraying of the so-called social contract. Her agenda is to strengthen the so-called "pathways to the middle class" — living-wage jobs, backed by an increase in the minimum wage to at least $15; education; home ownership; and small business.

This agenda is about "distributive justice," but it also has a component of so-called campaign finance reform and helping to get out more of the so-called progressive vote. It is a traditional tax-and-spend agenda, and, reassuringly for conservatives, it proposes to create a new federal agency that would acquire and refinance underwater mortgages.

I predict that one day such an agency will acquire and refinance underwater retirement accounts.

3. Steve Hill, executive director at the Nevada Governor's Office of Economic Development. Hill, a former banker, recounted the experience of this idiosyncratic state through 20 years of boom and a violent bust that left 400,000 foreclosures in its wake. Hill has an optimistic agenda based on promoting career education, Warren Buffett buying the state's monopoly energy company and a NASA program for testing aerial vehicles. The last, at least, may depend on the ability to leverage the clout of Senate Majority Leader Harry Reid, D-Nev. The program recognizes, at least rhetorically, the need to diversify beyond the industries of gaming, hospitality and natural resources.

4. Nick Hanauer of Second Avenue Partners. It is helpful to have an actual "1 percenter" on the panel, and Hanauer, an original investor in Amazon, has a startling message. He blows up the myth that the whales of the economy are job creators.

Rather, he stated plainly that "rich people like me" hire workers only as a last resort, when needed to meet demand. His presentation was a traditional tax-and-spend argument, but the viewer is left to ponder the fact that Amazon is able to service an $80 billion business with a mere 60,000 employees where 1 million employees would be needed to do the same volume through traditional channels.

Chairman Merkley concluded the hearing with a statement that he would continue to pursue the issues discussed, "because citizens across the country demand it." He asserted that America is a democracy, and government policy can help get the economy back on track. Conservatives should probably take this as a threat rather than a promise.

(Archived video and witness statements are available here. Note that while the time shows as 4 ½ hours, there was a delay in starting, and there was an interruption for some other business, so the event is perhaps actually shorter.)

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On June 6, the Senate Banking Committee's Subcommittee on Economic Policy, chaired by Jeff Merkley, D-Ore., held a hearing called "State of the American Dream: Economic Policy and the Future of the Middle Class."
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Monday, 10 June 2013 03:28 PM
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