Category Archives: cpe blog

Housing Economics Alternative Housing Models Workshop

WEDNESDAY MARCH 27TH, 2013 @ 6:00 – 7:30 PM (Arrive by 5:45) 
640 PAGE BLVD, SPRINGFIELD, MA (Directions Here
SNOL
Western Mass Jobs W/ Justice and the Center For Popular Economics are putting on a workshop that couldn’t be more timely – a popular ed workshop on alternative housing models. Springfield No One Leaves/Nadie Se Mude plans to bring many members and all are invited, especially Springfield Residents. As we continue to grow our Homes For All Campaign, SNOL & SBTA members are exploring alternative housing models to reclaim and rebuild our communities!
REGISTER FOR THE WORKSHOP BY E-MAILING wmjwj@wmjwj.org
 

 

Will the CFPB save us from the student loan crisis?

by Anastasia Wilson

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Last year student debt ballooned to $1 Trillion. Months earlier in the previous year, it surpassed outstanding credit debt in total, making it a substantial part of the American household debt portfolio. This year, policy discussion is finally taking place to tackle both ends of the problem: Federal and private student loan debts.

As the so-called student loan crisis loomed, the Obama administration began to make small patches to the Federal side of the problem. The reforms that came packaged with health care legislation established an income-based repayment option (IBR) for Federal student loans and consolidated lending and services practices. IBR allows Federal loans to be repaid on a sliding scale based on a percentage of yearly earnings. The repayment schedule is roughly 10% of income, or lower for those near the poverty line, and is applied to the principal of the loan. Interest may continue to accrue, however after 25 years of qualifying payments under IBR, the remaining balance is forgiven. In the future, all Federal loans will be serviced directly by the government instead of using corporations such as Sallie Mae as intermediaries. With the important exception of IBR which can be applied for with outstanding loans, most of the new practices will only apply to loans originated after 2014. Baby steps, but in the right direction.

While the IBR program is meant to offer relief to borrowers, the policy itself may suffer from framing problems, making it underutilized by those who need it. The Roosevelt Institute Campus Network recently published a series of student essays called “A New Deal for Students”. Their first proposal was automatic enrollment in IBR for Federal loans. Behavioral economists have used experiments to show that even when some money or stress saving option exists, having to go through the process of enrollment often shies people away from enrolling in a program, even if it makes them much better off. The Roosevelt essay by UCLA student Razmig Sarkissian explains concisely:

“Many borrowers are either unaware that the IBR program exists or are deterred by a complicated application process. In a June 2012, President Obama acknowledged this problem, “Too few borrowers are aware of the options available to them to help manage their student loan debt, including reducing their monthly payment through IBR,” Obama wrote. “Additionally, too many borrowers have had difficulties navigating and completing the IBR application process once they have started it.”(6)”

In other words, the transactions cost of dealing with IBR enrollment makes it, in the moment, not worth it or impossible to deal with for many. By making IBR the default option, this could relieve a number of borrowers who would ordinarily end up in default or delinquencies. Making IBR the default option would prevent loan defaults.

But what about the rest of student loan borrowers, who are cash strapped by payments for private student loans?

The Consumer Financial Protections Agency (CFPB) may have a solution. Private student loans represent a fast growing segment of all student loans, and of personal household debt in general. With a 25% annual growth rate, private loans will eventually eclipse Federal loan totals, as Federal loan amounts get maxed out and tuitions continue to rise. Private loans, like their Federal counterpart, cannot be discharged under bankruptcy, yet unlike Federal loans they offer little flexibility in repayment. These loans are often funded by corporate bond offerings from financial industry players like Sallie Mae Corporation, which just recently sold $1.1 billion in student loan asset backed securities (SLABS). These SLABS, which remain a hot go-to safe asset on bond markets, bear an eerie resemblance to the MBSs that took down the financial system (and the rest of the economy with it) back in 2008. Here’s another form of private debt, rebundled for financial profit, except unlike a mortgage foreclosure is not an option. For private student loans, payment negotiation also remains difficult.

So what’s the solution? The CFPB has announced its support for IBR for private student loans. Like the mortgage modification policy that helped relieve some borrowers from financial stress, IBR and refinancing of private student loans would ease the crunch. Instead of waiting for the crisis to happen though, the CFPB is recommending this more pro-active approach, with director Richard Chopra stating, “”If you think everything in this market is hunky-dory, you’re missing the warning signs. Waiting any longer is just not an option.” Let’s hope the government policy-makers hear the warning signals this time. 

The CFPB will be taking public comments on Student Loan Affordability policy until April 8, 2013.

Some Thoughts on Ayn Rand

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by John J. Fitzgerald

February is the shortest month of the year.  (This is by design. The ancient Romans made February their month of fasting, so they made it as short as possible! The Romans were not known for their fanaticism.) Despite being a short month, it has a large number of famous people claiming it as their birth month. George Washington, Abraham Lincoln, Charles Darwin and W.E. B. DuBois were all born in February. So was the novelist and pseudo philosopher – Ayn Rand.

Rand has enjoyed a surge of popularity recently, thanks to Mitt Romney’s choice of a running mate, Representative Paul Ryan of Wisconsin. Ryan is a disciple of Ayn Rand.

He said of her, in 2005, “The reason I got involved in public service, by and large, if I had to credit one thinker, one person, it would be Ayn Rand. And the fight we are in here, make no mistake about it, is a fight of individualism versus collectivism.” Three years ago Ryan was still praising Rand. “What’s unique about what’s happening today in government, in the world, in America, is that it’s as if we’re living in an Ayn Rand novel right now,” Ryan said. “I think Ayn Rand did the best job of anybody to build a moral case [for] capitalism, and that morality of capitalism is under assault.”

Recently, April 2012, Ryan told National Review that his views of her had changed. “I reject her philosophy,” Ryan said. “It’s an atheist philosophy. It reduces human interactions down to mere contracts and it is antithetical to my worldview.” He added that he had merely “enjoyed a couple of her novels” and his true inspiration was the Roman Catholic saint, Thomas Aquinas.

St. Thomas Aquinas favored burning the likes of Ayn Rand at the stake for heresy.

Who was Ayn Rand and what did she advocate?  What follows is my attempt to delineate and explicate her message.

Ayn Rand was born in Russia on 2 February 1905. She survived the Russian Revolution and hated the Communist government that came to power there. She migrated to the United States in 1926 and found work in Hollywood as a writer. An early patron was the director Cecil B. DeMille. She is best known for her novels, The Fountainhead and Atlas Shrugged, and for developing a philosophical system she called Objectivism.

She first achieved fame with her 1943 novel The Fountainhead. In 1957, she published the novel Atlas Shrugged. Afterward she turned to nonfiction to promote her philosophy, publishing her own magazines and editing several collections of essays. She died in 1982. Her death was due to lung cancer brought on by a lifetime addiction to cigarettes. So much for the place of reason in her life.

Rand advocated reason as the only means of acquiring knowledge and rejected faith and/or religion. She supported rational and ethical egoism, and rejected ethical altruism. In her world, altruism was a vice not a virtue. In politics, she condemned the initiation of force as immoral and opposed collectivism and statism as well as anarchism, instead supporting a system of limited government and laissez-faire capitalism, which she believed was the only social system that protected individual rights. She was sharply critical of most philosophers and philosophical traditions known to her, except for some works of Aristotle and Nietzsche. She was a vehement opponent of Plato.

Some people see Rand as a cultural beacon guiding them to a better world away from “the herd” and the mass of conforming society.  For them, she points the way to a new world with powerful heroes liberating themselves from “the yoke” of servitude that most humans live under. Others see Rand as, at best, an uncertified lunatic with extreme reactionary tendencies that verge on the edge of psychopathology. I tend to support this group.

Rand seems to resemble the Bourbons of France after the French Revolution. Of them it was said, “They never learned anything and they never forgot anything.” Rand was a fanatical anti-Communist and seemed to see signs of the Soviet State in every government that she lived under. Her much valued belief in freedom was contradicted when she spoke before the House Un-American Activities Committee to protest sympathetic treatment of Communists and labor union activists in Hollywood films. Rand did not seem to recognize the difference between a labor union working for higher pay, shorter hours and better working conditions and a political party seeking revolutionary change. To her they were the same thing.

In Hollywood, Rand became involved with the Motion Picture Alliance for the Preservation of American Ideals, a Hollywood anti-Communist group, and wrote articles on the group’s behalf. She also joined the anti-Communist American Writers Association. In this activity she was rubbing shoulders with the likes of Cecil B. DeMille, John Wayne, Walt Disney, Gary Cooper, Ginger Rogers and Ronald Reagan. These folks sided with the views of the Hollywood studios and corporate capital.

In 1947, Rand wrote a pamphlet for the Alliance. She wrote, “…The principle of free speech requires that we do not use police force to forbid the Communists the expression of their ideas — which means that we do not pass laws forbidding them to speak. But the principle of free speech does not require that we furnish the Communists with the means to preach their ideas, and does not imply that we owe them jobs and support to advocate our own destruction at our own expense.”  In other words, in the name of freedom and liberty, Ayn Rand supported the “black listing” of so-called “subversive writers”.  She did not want to jail them, but she wanted them rendered un-employable.  So much for the First Amendment.

In 1964 Rand supported the election of Barry Goldwater. He was the man who said in his acceptance speech at the Republican convention, “I would remind you that extremism in the defense of liberty is no vice. And let me remind you also that moderation in the pursuit of justice is no virtue.” Goldwater went on to lose every state in the union except for Arizona and five states in the Deep South where black voters were not able to vote.  In Mississippi, Goldwater got 87% of the white vote.

Ayn Rand might have some value as a writer of fiction, but she is hardly a decent guide to the realities of life in the modern world. May she rust in peace.

Originally published in the Longmeadow News February 28, 2013

Wellspring Cooperative Collaborative – community revitalization through economic democracy

By Emily Kawano, Executive Director, Center for Popular Economics and coordinator, U.S. Solidarity Economy Network

Springfield is a mid-sized city in western Massachusetts that has been hard hit by many decades of factory closures. It has the dubious distinction of being the poorest city in the state, with unemployment almost double that of the rest of Massachusetts, and a child poverty ranking at the sixth highest in the entire country.

Traditional economic development strategies from prettying up downtown, streamlining traffic, building a riverfront Basketball Hall of Fame, and an urban mall have failed to revitalize the city. The current ‘big hope’ is to lure a casino to the city, despite evidence that casino economies are pretty dicey (pun intended). The poorest communities, which are largely African American and Latino, have continued to suffer from bad schools, high rates of crime and violence, and few job opportunities.

The Wellspring Cooperative Collaborative is working on a different strategy of community revitalization. We seek to build community wealth by developing worker-owned businesses (co-operatives) that will be located in, and hire from, low income communities in Springfield. These businesses will leverage the huge purchasing power of the anchor institutions – institutions that are locally rooted, like hospitals and colleges. Furthermore, the businesses will be interconnected by an overarching cooperative corporation that will enable them to provide mutual support such as training, financing, human resources coordination and exchange of best practices.

Why worker-owned businesses? We believe that workplace democracy is a good model. Workers own the business; they get to practice democracy every day and have a voice in key decisions. Research indicates that this experience has a positive spillover effect to overall civic participation (Majee 2009). As members of the community as well as in accordance with cooperative principles, worker owned businesses strengthen the social weave of the community. As owners, workers get a share of the profits and are able to build wealth that they can take with them when they leave or retire. As worker owners, they are unlikely to close up shop and move offshore in search of higher profits.

Cooperatives have been shown to be very resilient. A Canadian study showed that the five year survival rate for cooperatives in British Columbia was 67% compared to 38% for conventional start-ups (Murray 2011). The Mondragon Cooperative Corporation in the Basque region of Spain has had only two or three of their now 150 cooperative businesses fail over the course of 60 years – a remarkable track record. They weathered the economic crisis by redeploying workers within the Mondragon network and accepting reductions in wages and hours in order to protect jobs. Studies of financial cooperatives such as credit unions show that they have thrived in the face of the financial crisis because they didn’t engage in the kind of high risk shenanigans that the big banks did, and because people trust them (Ketilson 2009).

Wellspring builds on Cleveland’s Evergreen Cooperative model which launched a $5.7 million state of the art green laundry, a successful solar installation business, and is building a hydroponic greenhouse the size of a football field. Evergreen aspires to continue to launch dozens of other cooperatives all of which would use anchor institution demand as a stabilizing foundation for the success of their businesses. Evergreen in turn borrowed much from Mondragon, including the creation of an overarching cooperative corporation, which is a critical piece of providing greater collective resilience.

In Springfield, our Wellspring Collaborative includes all of the major anchor institutions in the city, along with community and labor groups. We have found that there is a great deal of openness to a different approach to economic development. There is strong interest in job creation and there has been virtually no push-back on the idea of worker owned businesses. We are making every effort to make all of the businesses that we’re developing as sustainable as possible. We are close to launching a furniture upholstery cooperative that will refurbish worn auditorium seating rather than see them thrown out. We’re also exploring a food service business that will source local, fresh food, and a hydroponic greenhouse that will draw waste heat from landfills.

We do have to be wary of well-intentioned pressure to support the status quo. For example we repeatedly are urged to support existing businesses by connecting them with anchor institution markets. While we have nothing against this, it is not the strategy that we’re pursuing. Supporting local businesses is not enough, even if it might result in additional jobs. It is important to be clear about the long term and larger vision. We are working to revitalize poor communities by building economic democracy, community wealth, jobs for local residents, and a business network to make these cooperatives resilient. We are working to contribute to an alternative strategy of economic development – one that puts people, democracy, equity and solidarity front and center.

Sources:

Ketilson, Johnston Birchall and Lou Hammond. “Resilience of the Cooperative Business Model in Times of Crisis.” International Labour Organization, 2009.

Majee, Wilson and Ann Hoyt. “Building Community Trust Through Cooperatives: A Case Study of a Worker-Owned Homecare Cooperative.” Journal of Community Practice, 2009: 444-463.

Murray, Carol. “Co-op Survival Rates in British Columbia.” BALTA, June 2011.

 

A Fiscal Cliff with a Financial Trampoline

By Prof. Gerald Epstein, UMass. Economics Dept. & Co-director, PERI

(Excerpted from CPE’s Fall Newsletter)

Last year, President Obama boxed himself into a corner…almost. During negotiations with the Republicans in control of the House of Representatives, he agreed to back himself —and the US Economy—up against a “fiscal cliff” that required an agreement on a new budget after the election but before January 1, 2013, or face automatic tax increases, and spending cuts that not only could send the US economy into a recession, but that could also imperil social programs. Still, the typical Republican constituencies might have even more on the table: on the chopping block are Pentagon budgets and the wallets of the very rich, with automatic increases on the wealthy destined to go into effect.

In this scenario, the big danger is that President Obama might try to strike a “grand bargain”, like he tried to do in the summer of 2011, in which he trades away key benefits by weakening Social Security or Medicare in order to reach a budget deal. This time, a number of economists and political leaders have called on President Obama to walk off the cliff, rather than be pushed into a bad bargain.

The Congressional Budget Office has predicted that this approach might create a new recession, raising the unemployment rate back up above 9% (CBO: An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022 http://www.cbo.gov/publication/43539 ).

Such a massive fiscal contraction could have very serious negative effects on workers and communities if nothing else were done. At the same time, this approach would have some benefits: it would cut military spending dramatically, and significantly raise taxes on the wealthy.  And, the strategizing goes, after January 20, 2013, President Obama could then propose tax cuts just for the poor and middle class which the Republican House might find politically difficult to oppose. This could help catch the economy as it was falling off the cliff.

In addition, these “cliff jumping” nightmare scenarios forget that there is another institution making macroeconomic policy: The Federal Reserve. The Fed has been keeping short term interest rates near zero for several years and plans to continue doing so for the next few years. This zero interest policy would continue to provide some cushion beneath a massive free fall from the cliff, but the Fed should do much more. The problem is that, so far, their near zero interest rate policy (sometimes called Quantitative Easing (QE) ) has not been terribly effective in restoring economic growth.

The reasons the QEs are not having a larger effect are many and can be divided into demand-side factors and supply-side ones. On the demand side problem is the classic “pushing on a string” problem. Too few firms have profitable expansion opportunities given the short-fall in aggregate demand. So they either do not want to borrow, or appear too risky to banks to justify lending to them.

But there is another side to the problem:  the financial intermediation system is broken.

This has a number of dimensions. One is that many large banks still have toxic assets left over from the financial bubble and  crash; this toxic over-hang leads banks to hold on to excess cash to cover law-suits, write downs, and fines to angry borrowers and government investigators, timid as they may seem. All told, US banks are holding almost $1.6 trillion in excess reserves. Robert Pollin estimates that as much as 600 billion might be precautionary holdings for these types of possibilities.

Another key factor is that the large Wall Street banks have so much market power, that they are using the Fed’s low interest rate policy to pocket vast quantities of profits by borrowing at low interest rates, and then refusing to pass on the savings to borrowers.

Progressive economists have developed important proposals to transform monetary policy to make it more effective. Robert Pollin in a series of papers proposes a carrot and stick: tax excess bank reserves to induce banks to lend out more, while providing government loan guarantees for loans to small business to induce banks to lend more.

But, there also needs to be more direct action. With the banking system so broken, there also has to be direct action to help debtors – home owners and students – to by-pass the broken banking system all together.  Senator Jeff Merkely of Oregon has proposed, for example, a fund to buy-up mortgages that middle class and poor homeowners can’t afford to service, and reduce the debt to manageable levels. This is modeled on the Depression era Home Owners Loan Corporation that was highly successful in keeping families in their homes. The Fed could support a program like this by buying the bonds issued by the fund, reducing the costs of running the program.

It is this kind of direct intervention by the Fed, bypassing the broken and overly concentrated banking system, and offering targeted lending to directly help households and students who are facing massive debt over-hangs, that could help transform weak monetary policy into a “bottom-up economic recovery”. This type of monetary policy and debt restructuring could place a “trampoline” for the economy under the fiscal cliff.

 

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