AFL-CIO Announces Major New Push to Expose McCain's Economic Record

Washington, May 8

Contact: Steve Smith 202-637-5018

"McCain Revealed" Grassroots Campaign Kicks Into High Gear with Nationwide

Door-to-Door Canvass to 200,000 Union Members and Families

Health Care Top Issue

The AFL-CIO today announced plans for a major new push to expose Sen. John McCain's economic record and disastrous health care proposals, which includes a massive door-to-door canvass to 200,000 union swing voters in 22 battleground states over the next two weekends. 

AFL-CIO Secretary-Treasurer Richard Trumka and Executive VP Arlene Holt Baker will join 6,200 union volunteers going door-door in 125 locations nationwide on May 10 and May 17 to discuss McCain's record on key issues including health care, job creation, trade policy and retirement security.  The effort is part of the AFL-CIO “McCain Revealed” campaign, the nation’s largest mobilization to educate voters on McCain’s economic positions and urge McCain to shift course.

“Sen. McCain’s economic path would lead to disaster for America's working families,” AFL-CIO President John Sweeney said. “He wants to tax health care benefits and supports unfair trade policies that send family-supporting jobs overseas. It's time for McCain to tune out the corporate and insurance industry lobbyists who hold sway in his campaign and start listening to the real concerns of working people.”

Volunteers will focus on McCain’s health care proposals when visiting union voters at the door, highlighting his intent to tax employer-based health care, which would elevate costs and drastically reduce coverage. McCain’s plan also would push workers into the

private market to fight big insurance companies on their own.

“McCain’s plan will create a new tax on working families by making employer-provided health benefits part of taxable income,” the AFL-CIO canvass literature states. “Don’t let McCain undermine your health care.”  

Door-to-door canvass locations open to media include:

* Activity begins at 9 a.m. local time unless otherwise noted

May 10

Denver, Colo.

Detroit, Mich.

May 17

Philadelphia, Pa. (AFL-CIO Sec. Treas. Richard Trumka attending)
Seattle, Wash. (AFL-CIO Exec. VP Arlene Holt Baker attending)

Miami, Fla. (9:30 a.m.)
Indianapolis, Ind.
Louisville, Ky.
Lewiston, Maine (8:30 a.m.)
Minneapolis, Minn.
St. Louis, Mo.

Manchester, N.H.
Albuquerque, N.M.
Cincinnati, Ohio

Cleveland, Ohio
Youngstown, Ohio

 

In addition to the 22-state canvass, the AFL-CIO will ramp up outreach to union swing voters through direct mail, phone calls and e-mails. Since the McCain Revealed campaign was launched in early March, union volunteers have delivered more than 1 million worksite flyers on McCain’s economic record. More than 400,000 mailers featuring union a veteran have been sent to swing union voters in Ohio, Pennsylvania, Wisconsin, Michigan and Minnesota, and thousands of phone calls have been made to union voters in battleground states.

“If Sen. McCain thinks he can hoodwink working families into believing he’s supportive of an economy that works for them, he’s sorely mistaken,” Sweeney said. “Everywhere McCain goes, the voices of working families call on him to reverse course and reject the failed Bush economic policies.”

AFL-CIO working families continue to have a strong presence at every McCain campaign stop, calling on him to offer real solutions to the economic crisis facing working people. This week workers were visible at his stops in North Carolina and Michigan, and will be out in front of his fundraiser in Lakewood, NJ today.

Later this month, the AFL-CIO will re-launch its “McCain Revealed” Website (www.mccainrevealed.org), featuring a wealth of new information on McCain’s record and plans on economic issues. 

Inflation and Stagnant Wages Hit European Workers and Middle Class, Too

As inflation squeezes middle-class Europe, anxiety about the future By Carter Dougherty and Katrin Bennhold
International Herald Tribune

Tuesday, April 29, 2008 LES ULIS, France: When the local bakery increased the price of a baguette for the third time in six months last year, Anne-Laure Renard and Guy Talpot invested in a bread-baking machine. When gasoline became their single biggest monthly expense in January, they decided to sell one of their two cars.

Now, as everything from baby milk to chocolate desserts drives up their living costs, Renard, a teacher, and Talpot, a mailman, are planning their most radical lifestyle change yet: They are getting married to reduce their tax bill.

"I never thought I would be in this position, counting every cent," Renard said one recent evening as her companion measured milk powder for their 13-month-old son, Vincent, in the kitchen. "I mean, I am a teacher. If I can't get by, how do others manage?"

They are not poor, but they are peeved.

Across Europe, people in the middle layer of the labor force - from office workers, civil servants and skilled laborers to low-level managers - are coping with a growing sense that they are being pushed to the margins like never before, as a combination of rising costs and stagnant wages erodes their purchasing power.

Prices for basic goods from gas to milk are rising sharply, outpacing pay rises linked to official rates of inflation. Families that once maintained pleasant lifestyles afforded by two incomes find the rise in costs - which have accelerated worldwide in the past year - has pushed them to the tipping point. Many Europeans are pinching pennies on food and everyday items, while cutting back on a range of extras, from movie tickets to vacations abroad.

More worrisome, a generation of European workers is grappling with a rising sense of injustice as they face the reality that they may be becoming worse, not better, off than their parents. Even holding classic middle-class professions with a university degree has become less of a guarantee against economic hardship. That, in turn, is igniting concerns of an even more uncertain future for their own children.

"We are cycling against the wind," said Robert Rochefort, director general of Credoc, a institute based in Paris that researches living standards and consumption patterns. "We have to pedal faster so we don't slow further. But pedaling faster doesn't mean we will necessarily go faster."

To be sure, the middle class in Europe is still more prosperous than the disturbingly large group of citizens who are at risk of poverty. According to the European Commission, 16 percent of the population of Europe falls into this category. Policy makers are concerned that could worsen as the economy feels the sting of a U.S. slowdown, while inflation spirals around the globe.

Yet these same forces are also widening the pool of middle-class Europeans who see themselves on the edge of impoverishment.

"The problem," said Julián Cubero, chief economist for Spain for BBVA, a leading Spanish bank, "is that if your salary rises more slowly than the cost of products you buy on a daily basis, you feel poorer every day."

That concern boiled over to anger last week in Britain, when teachers closed the country's schools for the first time in two decades to protest pay deals that are not keeping up with the soaring cost of living. Especially for those who were not lifted by the latest financial market bubble before it started to collapse last summer, there is fear that proposed pay rises of about 2.5 percent are too meager to absorb food and oil costs that have surged in Britain by about 7 percent and 20 percent, respectively, from a year ago.

Their rallying cry is the latest to echo across Europe. German workers in several industries last month waged a series of strikes to demand a greater piece of the economic pie after years of being asked to make do with stagnant wages.

In France, a range of professions from teachers to factory workers have taken to the streets to urge politicians to counter a decline in purchasing power. This month, thousands of European workers protested on the same theme in Ljubljana, the capital of Slovenia, which currently holds the EU's rotating presidency.

Bowing to public concern, some European governments are promising relief, though their powers to curb inflation or raise pay are limited. In France, where the erosion of purchasing power has overtaken unemployment as the No. 1 public concern, the administration of President Nicolas Sarkozy is, among other things, looking into alleged "abuses" of pricing by food merchants. Neighboring Germany is mulling lower social insurance taxes to offset higher prices.

Capturing the squeeze felt by the European middle class in statistics and across national boundaries is tricky because this grouping has no universal definition. National authorities calculate purchasing power differently, making cross-border comparisons difficult.

Much of the story of declining purchasing power can be traced to policy decisions and economic developments that have taken place within the last decade, when the forces of globalization began to reshape the European and global landscapes.

Governments and employers, especially in industrial sectors, have kept pay rises modest, a trend that was manageable as long as inflation did not accelerate in a surprisingly sharp manner. In addition, more of each country's income has gone to the wealthiest individuals, underpinning the acute feelings of inequality across the broad middle class.

"If you have a slowly growing cake being distributed more unevenly among the population, that is felt as a reduction in purchasing power," said Daniel Gros, director of the Center for European Policy Studies in Brussels.

In Germany, the largest European economy, purchasing power had already been declining since 2000, when employers were able to wrest wage concessions or simply shift jobs away as Eastern Europe and China emerged as centers of low-cost labor. Inflation-adjusted incomes rose between 1 percent and 2 percent in the late 1990s, but in 2006 they rose only 0.5 percent and then declined by the same amount last year.

In France, the introduction of a shortened, 35-hour workweek in 2000 has kept average annual pay increases small. Spain, which generated thousands of new jobs for Spaniards and migrant workers by pumping up the housing market, has seen joblessness jump since the bubble burst, while wages are eaten by an inflation rate that is more than double the 2 percent level that most economists consider stable.

Stagnant pay and soaring food and energy prices have curbed consumption in Italy more than any of the other 14 countries that share the euro, sharpening fears that the country cannot escape decline.

Since 1999, consumer prices in the EU's 27 member states have risen 22.5 percent, and are up 18.8 percent among the 15 countries that use the euro.

But some pushback is emerging, as the demonstrations in Britain suggest.

Employers and economists in Germany drummed into public discourse the point that labor costs had spun out of control, costing manufacturers much of their market share.

But with purchasing power eroding, unions are trying to reverse the trend, drawing a tougher line in wage talks - with some success.

"The idea that 'I will sacrifice to save my job' is dying," said Ralf Berchthold, a spokesman with Ver.di, the largest services union in Germany. "People are ready to fight now."
 

Carter Dougherty reported from Frankfurt. Victoria Burnett contributed reporting from Madrid

and Elisabetta Povoledo from Rome.
 

April Unemployment Numbers (by AFL-CIO President John Sweeney)

Contact: Steve Smith 202-637-5018

May 2, 2008

Today’s jobs report is another troubling signal for working families already struggling to keep up with the rising costs of food, gas, health care and energy. 

The combination of a shrinking job market, stagnating wages and rising costs is a toxic mix that is poisoning our economy and pushing families over the edge.  Now our nation has lost jobs for the fourth month in a row.  The loss of 20,000 jobs in April plunges thousands more into economic despair and adds new stress to those already out of work.

Contrary to the claims of President Bush and Sen. McCain who say the recent downturn is simply a bump in the road, the current nosedive is the result of a number of fundamental economic imbalances that have resulted from misguided policies put in place over the past 30 years.

To get us out of this economic mess, we need to enact both short-term stimulus to stop the bleeding and long-term structural changes to prevent the economy from failing working families time and time again. First, Congress must pass a second stimulus bill, including fiscal relief to cash-strapped states and an extension of unemployment benefits to help those most at risk as the job market worsens.  There should also be an immediate moratorium on foreclosures for subprime loans, to keep more families from losing their houses as the economy sours.  Then we need an aggressive job creation plan to put Americans back to work. We can start with ready-to-go infrastructure projects that will rebuild our crumbling schools, bridges and roads – and invest in the green jobs of the future.

Like Bush, McCain has offered only band-aid solutions for an economy that is quickly bleeding out.  Our nation needs a bold economic recovery program to change the failed policies of the past and end the vicious roller-coaster of economic instability working families have been riding for years.   

We need fresh vision and new direction to turn around the economy.  We must restore economic growth, rebuild our national competitiveness and assure the benefits of a strengthened economy are broadly shared.

Have at Least $3000 in Income?  File Tax Return to Get Stimulus Payment!         

 IRS Encourages Organizations on Outreach to Low-Income Workers*
        

WASHINGTON, March 14, 2008 — As part of a national outreach effort, the Internal Revenue Service today encouraged nonprofits, charities and other community groups to reach out to low-income Americans who may not realize they are eligible for the 2008 economic stimulus payment.

Workers who normally do not file a tax return because their income is too low but who have at least $3,000 in wages, tips or salary or other qualifying income may be eligible for an economic stimulus payment. However, they must file a 2007 income tax return in order to receive a payment.

The IRS encouraged government and nongovernmental organizations, especially churches and charities that works with low-income Americans to help spread the word to individuals and families. Because it lacks name and address information for many low-wage workers, the IRS is unable to contact everyone who may be eligible.

"Many people who don't normally file a tax return may not realize they need to take an extra step this year to receive an economic stimulus payment," said Acting IRS Commissioner Linda E. Stiff. "We are encouraging groups across the country to help us get out the word that low-income workers and others need to file a tax return in order to receive a stimulus payment."

“Some low-income taxpayers may never have filed a tax return before yet qualify for an economic stimulus payment,” added National Taxpayer Advocate Nina E. Olson. “Community-based organizations can play a vital role in spreading the word about the steps people must take to receive their payment. Part of that message should be to seek help from reputable sources and avoid Internet solicitations.”

Generally, workers who earn less than $8,750 if single, $11,250 if a single parent or $17,500 if married are not required to file a tax return. This year, however, they should file a simple tax return if they had at least $3,000 in qualifying income which is defined as earned income, nontaxable combat pay or certain Social Security, Veterans Affairs or Railroad Retirement benefits. It also can be a mix of pay and benefits.
 

The IRS will mail 20.5 million information packages to Social Security and Veterans Affairs recipients, starting next week. In all, more than 130 million individuals and couples may be eligible for an economic stimulus payment of up to $600 ($1,200 for married couples.). Some households may qualify for an additional $300 for each eligible child younger than 17.

People who normally do not file a tax return may be eligible for the minimum payment of $300 ($600 for married couples) plus the additional $300 per eligible child.
 

There are some caveats: People must have at least $3,000 in qualified income, valid Social Security numbers for themselves and their qualifying children and cannot be a dependent or be eligible to be claimed as a dependent on someone else’s tax return.

Organizations with interest in providing information to Americans who may be eligible for these payments can go to IRS.gov for materials and marketing tools to help spread the word.

An IRS.gov Web page, _Economic Stimulus Payments: Marketing Products for Partners_ <http://www.irs.gov/newsroom/article/0,,id=179735,00.html>, has one-page flyers, envelop stuffers and more information that can be downloaded. Also available is the Package 1040A-3, a 8-page package containing everything low-wage workers need to file a tax form immediately.

The IRS also is working with a number of key national organizations such as AARP, National Community Tax Coalition/Center for Economic Progress, National Council on Aging, Center for Budget and Policy Priorities, National Disability Institute, United Way of America, Catholic Charities, Disabled American Veterans and others.

In addition, the IRS is reaching out to small business employers and employees across the nation with the help of organizations such as the United States Chamber of Commerce, the National Federation of Independent Business and the National Association for the Self-Employed.

Starting in May, the IRS will begin issuing economic stimulus payments based on the 2007 tax returns being filed this spring. Filers who have bank accounts can receive their stimulus payments faster by using direct deposit.

Free help is available. For those with computer access, _IRS Free File –Economic Stimulus Payment_ <http://www.irs.gov/efile/lists/0,,id=179739,00.html> is available at IRS.gov. People can use IRS Free File to prepare returns and submit them electronically for free.

People also can print out _Package 1040A-3_ <http://www.irs.gov/pub/irs-utl/package_1040a-3.pdf> (pdf), the 8-page publication containing tips for completing a return, a sample Form 1040A and a blank Form 1040A, which people can complete and mail to the IRS.

There are also thousands of free tax preparation sites staffed by volunteers nationwide.  And, there are more than 400 IRS Taxpayer Assistance Centers nationwide.

 

Christopher Miller
IRS Media Relations
Wisconsin, Iowa & Nebraska
414-231-2828
 

Sweeney vs. McCain on Health Care

Contact: Steve Smith/Alison Omens
202-637-5018

AFL-CIO Working Families Mobilize

 to Counter McCain’s Insurance Industry-Friendly Healthcare Plan

Workers will be outside McCain events with 175,000 signatures on band-aids saying that real healthcare reform is necessary

(Washington, Apr. 29) Today, AFL-CIO President John Sweeney denounced Sen. McCain’s healthcare plan as a boon for the insurance companies at the expense of working people. He promised that AFL-CIO families would be outside McCain’s tour this week - - presenting 175,000 signatures on band-aids - -  to let him know that working people need healthcare reform that will give them a leg up in the souring economy, not another break for corporations and lobbyists.

“Sen. McCain showed his answer to the health care crisis is more power for the insurance industry and fewer protections for working families. He even goes so far as to tax people’s employer-provided health care benefits,” said AFL-CIO President John Sweeney. “Under McCain, quality health care would become like limousines and mansions – something available only to the very rich.”

AFL-CIO families were outside McCain’s speech in Fla. and will be in Allentown, Pa., Cleveland, Ohio, Des Moines, Iowa, and Denver, Colo. to let Sen. McCain know that his healthcare proposals are not the answer to their economic woes. They will call on him to offer proposals that put working people before insurance companies.

Throughout the week, protestors will deliver 175,000 signatures of members of the AFL-CIO community affiliate Working America.  The signatures are on multi-colored band-aids stuck on petitions that say “IN AMERICA, no one should go without health care. It’s time to cap skyrocketing costs, protect our health care, fix a broken health care system and provide secure, high-quality health care for everyone in America. Count me in for healthcare we can count on!” They will hold giant bandaids and signs that call on McCain to “Turn Around America” rather than follow the failed Bush economic policies.

This week’s activities are part of the AFL-CIO’s “McCain Revealed” campaign. In the coming weeks, 13 million union voters will hear from the AFL-CIO specifically on McCain’s healthcare plan. The AFL-CIO is currently in the process of distributing more than 1 million worksite flyers. On May 17, there will be a national door-to-door canvass, when 6,200 volunteers will visit union voters at the doorstep in 125 locations across the country. On May 17 alone, volunteers reach nearly 200,000 doors.

###

“McCain Revealed,” is an AFL-CIO national campaign to expose Sen. John McCain's economic record and plans to continue the failed Bush economic agenda, and to generate public pressure on him to support policies that advance working families’ interests. To learn more, go to www.mccainrevealed.org.
 

AFL-CIO President John Sweeney on Supreme Court Voter ID Decision

Contact: Caren Benjamin 202-637-5018

April 28, 2008

Now, more than ever, America needs every voice to be heard.   We need fewer hurdles, not more, between voters and the voting booth.  That’s why today’s U.S. Supreme Court’s decision that voters can be forced to show a government identification is the absolute wrong direction for our nation and our democracy. 

For many Americans, the cost of processing the paperwork for a government ID is so daunting they may not vote.  The logistics of tracking down documents, traveling to offices and even just knowing where to begin, can be extremely daunting for the elderly, the disabled, the poor and voters in rural communities.

Voter ID laws like Indiana’s were enacted to take advantage of the fact that getting a government ID is not easy. These laws are no more than a cynical attempt to suppress turnout among groups who tend to vote for candidates who prioritize working families’ issues including lower income Americans and people of color.

In making this decision today, the U.S. Supreme Court put its seal of approval on what is in essence a poll tax.   It’s the wrong decision for our country, and the wrong decision for America’s working men and women. 

We will continue to fight for and defend Americans' right to vote in the face of this and other schemes to depress turnout, especially as we approach November's crucial election.
 

Labor Scores Symbolic Victory Against Colombia FTA

Mon. Apr. 28, 2008

Labor unions and other opponents of the Colombia Free Trade Agreement won a symbolic victory late last week when the National Conference of State Legislatures defeated a resolution in favor of the trade pact. On a 7-4 vote, with one abstention, the NCSL's Labor and Economic Development Committee killed a measure put forward by Florida state Rep. Juan Zapata, a Republican born in Medellin, Colombia, urging Congress to pass both the Colombia FTA and an expansion of Trade Adjustment Assistance for displaced workers. The Bush administration has said it is willing to negotiate on TAA if it means movement on the Colombia FTA. That signals a shift from last year, when the White House threatened to veto a House-passed bill on TAA authored by House Ways and Means Chairman *Charles Rangel* and Trade Subcommittee Chairman *Sander Levin*, D-Mich.

The resolution failed Friday called for passage of the trade agreement as well as an expansion of TAA so that it would cover service-sector workers as well as manufacturing and agricultural workers. It also made several other recommendations for TAA renewal, including lifting a $220 million cap on job-training funds, allowing states more flexibility in administering the program, and expanding eligibility for the Health Coverage Tax Credit. Now that a congressional FTA vote is delayed indefinitely, however, Democrats are likely to demand larger concessions from the White House as part of a new economic stimulus plan for allowing a vote on the Colombia FTA at all.

Labor groups and others, in contrast, argue the violence in Colombia, particularly against trade unionists, continues unabated, and say that no legislative deal can be struck to gain their support for the Colombia trade pact. "I don't see how state leaders could support a deal with a government linked to right-wing death squads," said Teamsters President James Hoffa Friday. Lori Wallach, director of Public Citizen's Global Trade Watch division, said: "That a bipartisan organization representing state legislatures so resoundingly rejects the Colombia FTA sends a loud signal that most Americans do not want to be connected with either an expansion of the North American Free Trade Agreement or the Colombian government's record of horrible human rights atrocities."

Labor sources said Colombia's ambassador to the United States, Carolina Barco, attended the NCSL vote. Her office could not be reached for comment by presstime. The Colombian government argues it is prosecuting paramilitary members and that violence is at record-low levels. Zapata's resolution noted that since 2000, homicides are down 40 percent, terror attacks have fallen by 61 percent, and kidnappings, 76 percent. "In recent years, Colombia's democratically elected president has taken courageous steps to stop drug traffickers, rein in paramilitary groups, and enforce the law," said Zapata's resolution. An embassy spokeswoman declined today to comment on the vote but said "we will keep on working with different groups and actors to promote the advantages of the FTA and its approval."

by Peter Cohn

David Newby, President
Wisconsin State AFL-CIO

6333 W. Blue Mound Rd.
Milwaukee, WI  53213

414-771-0700 x11 (Office)
414-771-0700 (Fax)

www.wisaflcio.org

davidrnewby@sbcglobal.net.
 

AFL-CIO President Sweeney Blasts Bush's US-Colombia "Free Trade" Agreement
April 7, 2008
Contact: Alison Omens (202) 637-5018

Statement by AFL-CIO President John Sweeney on U.S. - Colombia Free Trade Agreement
 

President Bush’s decision to send the U.S.-Colombia Free Trade Agreement to  Congress tomorrow over the strong objections of the leadership of both the  U.S. House of Representatives and the Senate
shows an outrageous disregard  for basic human and workers’ rights. Workers in Colombia are terrorized  every day for standing up for their economic freedom and union supporters  are routinely murdered.   Our government should not reward the Colombian  government for such callous indifference to the rights and lives of  Colombian workers.  Working people – in the U.S. and around the world -- are bearing the brunt  of years of bad trade policy.  Our nation has lost three million good  manufacturing jobs on President Bush’s watch alone.  The economic damage has  inspired a new consensus around the necessity of protections for workers’  basic rights to stanch the worldwide race to the bottom in living standards.  Yet today, the Bush Administration has scuttled the progress toward a new  consensus with its willingness to turn a blind eye to rampant human rights  atrocities -- all for a trade agreement that even Administration economists  anticipate will be of little economic consequence.  Today’s announcement  makes a complete mockery of the labor protections that were negotiated and  incorporated into the trade agreement, and which would be violated from day  one.

In Colombia, joining a union or advocating for workers’ rights can be a de  facto death sentence. The human rights atrocities against union activists  and supporters are not isolated, rogue events; they are committed largely by  the armed forces and paramilitary organizations with ties to elected  officials close to President Uribe.  This year, we have witnessed the brutal  murders of Colombian trade union activists at
a rate of over one a week.  This year is shaping up to be even worse than the last, when 39 union  workers were murdered, 11 were victims of attempted murder and 224 received  death threats.  An unimaginable 2,500
have lost their lives in the last two  decades simply trying to provide good homes for their families and decent  workplaces for themselves and their coworkers.  This long legacy of atrocities affects workers today.  The continued murder  and threats of murder has a chilling effect on workers’ drive for economic  freedom through unions.  Many have had no choice but to leave the labor  movement to protect themselves and their families. Others simply no longer  speak out at work, even in the face of desperate poverty.
 
Those responsible for violence against human rights defenders and labor activists are simply not facing justice in Colombia.  There was not a single  indictment of a paramilitary last year under the Peace and
Justice Law,  allowing impunity to flourish and creating the space for new, armed  organizations to emerge and terrorize union leaders and rank and file.  The  Office of the Attorney General of Colombia reported
earlier this year that  it has secured convictions in only 68 cases related to violence against  trade unionists from 2001 to the present – a rate of impunity of over 97  percent.  Even more alarming, just over half of those sentenced are actually  in custody.

The AFL-CIO stands in solidarity with our brothers and sisters in Colombia  in opposition to violence against trade unionists.  We stand for the rights  of workers in both Colombia and the United States to organize and bargain collectively without fear of firing, retribution or bodily harm.  The AFL- CIO is strongly opposed to the Colombia FTA and will mobilize with all of our might to defeat it.
 

The Collapsing Housing Bubble and Resulting Financial Fallout

POLICY MEMO

April 1, 2008

To:              Interested Parties

From:          Dean Baker, Center for Economic and Policy Research

Topic:         The Collapsing Housing Bubble and Resulting Financial Fallout

In the decade from 1996 to 2006, the United States developed an enormous housing bubble that had no precedent in the country's history. During this decade, house prices rose in excess of 70 percent of their historic trend rate of growth, creating more than $8 trillion in housing bubble wealth.

This bubble is now collapsing. Its collapse is throwing the economy into a recession and threatening the stability of financial markets. In assessing the various proposals and measures being put forward to address this situation, there are several important factors to keep in mind:

1. the housing bubble cannot be sustained - prices must be allowed to return to trend levels;

2. housing policy should be focused on helping homeowners who were often tricked into buying predatory mortgages, not helping institutional holders of bad mortgage debt;

3. bailouts of financial institutions should focus on keeping the financial system operating smoothly while avoiding as much as possible giving taxpayer dollars to the people whose actions created the current crisis;

4. the Fed should pursue a policy of maximum transparency - lack of transparency was a major factor leading up to the current crisis;

5. where it is impossible to avoid having the federal government provide aid to troubled financial institutions, there should be an explicit quid pro quo, with the government either accomplishing an important policy goal or getting a return on their investment.

1. The bubble must be allowed to deflate.

It is important to recognize that the housing market experienced an unsustainable bubble. There were no changes in the fundamental supply or demand factors in the housing market that could explain the unprecedented run-up in prices over the last decade. There was also no unusual increase in rents during this period, which would have been predicted if the run-up in house sale prices was explained by market fundamentals.

This means that prices must fall back towards their trend level. This fact must inform housing policy. In cities in which house prices are still out of line with trend levels, government programs to buy up or guarantee mortgages will lead to large losses for the government, and will also cause homeowners to pay far more in ownership costs than they would pay to rent a comparable unit.

Furthermore, since prices are still falling, homeowners who receive "assistance" will almost certainly acquire no equity in their houses. Under such circumstances, government support really only helps current institutional mortgage holders, since it pays them a price for their mortgage that is almost certainly much larger than what it would be worth in the absence of government intervention. 

2. Government policy should be tailored to help homeowners.

It is possible to structure a housing guarantee plan that would help homeowners. The key would be to set the purchase/guarantee price at a multiple to appraised rent (a sale-to-rent ratio of approximately 15 would be reasonable and in line with historic trends). This would ensure that the government doesn't step into the middle of a collapsing bubble.

An alternative mechanism for protecting homeowners would be to temporarily change the rules on foreclosure. If homeowners facing foreclosure temporarily had the option to remain in their house as long-term renters, paying the fair market rent, this would provide an important element of security to homeowners, and would stabilize neighborhoods facing large numbers of foreclosures. More importantly, since banks do not want to become landlords, it would give mortgage holders a very powerful incentive to renegotiate the terms of loans in ways that allow homeowners to remain in their homes [1].

This proposal would cost the government nothing. It can also be targeted to ensure that it only benefits low- and moderate-income families by setting a cap restricting the rule change to homes that sold at less than the median house price in an area, or some comparable cutoff. Such a cutoff could ensure that only relatively low-income people benefit from this rule change.

3. The Fed should help the financial system, not the financial sector.

On the issue of financial bailouts, it is important to distinguish between actions that protect financial institutions, and actions that protect the financial system. The government's policy should rightly be focused on preventing the collapse of a major financial institution that could lead to a chain reaction within the industry.

The model for such intervention should be the takeover of the Northern Rock bank by the British government. The bank was essentially bankrupt, even after being given special low-interest loans from the Bank of England. To prevent a chain of collapses, the government took over the bank and replaced the management. The immediate task of this new management is to get the books in order, at which point the bank will be resold to the private sector. The original stockholders will be entitled to any money from the stock sale, net of government infusions into the bank.

The Northern Rock takeover is a model because it sustained the stability of the financial system while getting rid of the management who had driven the bank into bankruptcy, and did not give any taxpayer money to shareholders.

4. Investors and the public deserve transparency.

The current actions of the Fed do not look good by comparison. First, the creation of the Term Auction Facility (TAF) allowed banks to borrow large amounts of reserves from the Fed without any public record. If a bank is in a situation where it finds it necessary to borrow large amounts of reserve, this information should be known to investors and the general public.

The terms of Bear Stearns' takeover also raise important concerns, especially with the increase in the takeover price. It is not clear whether J.P. Morgan is paying $1.3 billion for Bear Stearns, or for a $30 billion guarantee from the Fed. If J.P. Morgan is actually interested in buying Bear Stearns and paying a substantial price to its shareholders, then there is no obvious reason for the Fed to get involved. The current terms make it appear as though Bear Stearns shareholders are profiting at taxpayer expense.

Finally, the Fed has implicitly (almost explicitly) indicated that it will guarantee the loans, credit default swaps and other commitments of the major investment banks. In addition, it has made them eligible to borrow hundreds of billions of dollars at low-cost through the Fed's discount window.

5. No free rides.

Under the circumstances, this may be good policy, but the public should demand some return for the Fed's generosity. As a first and necessary step, the Fed should regulate investment banks. The primary goal of this regulation would be greater transparency in investment bank dealings, such as full disclosure of the volume of their credit default swaps and other liabilities.

This step would be completely voluntary for the financial institutions. If they do not want to take advantage of the Fed's implicit guarantee or have access to the discount window, they can operate outside the Fed's purview. Of course, they may find it much more difficult to get customers once it is known that the Fed is not concerned if the bank fails.

The second part of the quid pro quo could be in the form of either a share in the company, a social policy commitment, or both. It is important to remember that the discount window is in effect providing banks with access to loans at below the market rate of interest. Even more important, the Fed's guarantee is effectively allowing banks to sell credit default swaps that are backed up by the government - not by the banks themselves, since they lack sufficient capital. In effect, the banks are selling the Fed's good credit, not their own.

It is entirely reasonable for the taxpayers to get something in return for providing enormously valuable credit guarantees to the investment banks. One option would be for the government or the Fed to get some amount of stock options each year, so that it would share in any gains incurred by the bank. A second option would be for the Fed to charge a fee for providing this guarantee that would be proportionate to the bank's capital.

On the social policy side, the government could impose limits on executive compensation at the institutions they assist with guarantees. For example, it could prohibit the annual total compensation for any executive from exceeding $5 million. These limits would ensure that taxpayers are not subsidizing exorbitant salaries and bonuses. Since the exorbitant salaries on Wall Street have been guideposts for other high-paying occupations, bringing these salaries down to earth could go far toward reducing inequality in our society. 

[1] This plan is outlined at http://www.cepr.net/index.php/op-eds-columns/op-eds-columns/the-subprime-borrower-protection-plan/.

Center for Economic and Policy Research, 1611 Connecticut Ave, NW, Suite 400, Washington, DC 20009
Phone: (202) 293-5380, Fax: (202) 588-1356, Home: www.cepr.net
 

Rich Investment Banks: Bailouts with Our Money;  Ordinary Folks: Chump Change

A Stock Transfer Tax: The Right Medicine for Wall Street

By Dean Baker

This column was posted on TPM Cafe on March 15, 2008.

Bears Stearns, the Wall Street investment banking giant, is now on life support, being kept alive only by infusions of tens of billions of taxpayer dollars courtesy of the Federal Reserve Board. In the months ahead, it is virtually certain that more of the Wall Street big boys will be pushed to the edge, victims of excessive greed and really bad judgment.

Until about six months ago, Wall Street was at the center of the world-wide neo-liberal push to eliminate government regulation and allow the market to operate unfettered. (This was always more hype than reality as I show in The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer [free download available].)

Things are different today. With the banks on the edge of collapse, the bankers are demanding the sort of government help they would deny to working mothers trying to provide their kids with health care, child care, and decent housing and education. Of course the situation is very different. The working mothers are looking for chump change, the Wall Street boys want real money.

While the bankers are claiming to have hostages - they say the financial system and the whole economy will be brought to its knees if we don't meet their demands - they are not telling the truth. We absolutely have an interest in keeping the banks operating in an orderly manner. This can be done without bailouts.

England gave us the model last month when the government took over Northern Rock, a major bank that managed to get itself in serious trouble with bad bets in the mortgage market. The government replaced the top management and put in new people who set about getting its books in order. Once they have this done, the bank will be resold to the private sector.

Northern Rock is still in business. Depositors can get to their money and the bank sill conducts its normal business. There have been no runs in England due to this takeover.

The difference between what happened with Bears Stearns and what happened at Northern Rock is that the managers at Bears Stearns who bankrupted the bank are still calling the shots and collecting their multi-million dollar salaries. The stockholders also have about $4 billion in wealth in a bank that would otherwise be insolvent, if not for the courtesy of the cash infusion from U.S. taxpayers.

Northern Rock gives us the model for getting through this financial crisis. We want to keep the banks operating, but we have absolutely zero interest in giving taxpayer dollars to some of the richest people in the country, who apparently weren't smart enough to handle their own affairs. No nanny state for the rich boys.

In fact, we should look to borrow another policy from the United Kingdom that can help set our financial markets in order. The U.K. imposes a modest stock transfer tax of 0.25 percent on every purchase or sale of a share of stock. This sort of tax would make almost no difference to a typical middle class shareholder. However, a tax of this size, with comparable taxes on various other financial instruments, like options and futures, would put a serious crimp in the money shuffling business that has wrecked so much havoc on the U.S. economy.

Furthermore, such a tax could raise a great deal of money, easily in the neighborhood of 1.0 percent of GDP or $150 billion a year. Imagine that we could finance national health care insurance with a financial transactions tax, or provide quality child care and pres-school education, or build up a green 21st century infrastructure, or maybe just have a nice middle class tax cut of $1,000 per family.

There is no shortage of good uses for the money that could be raised through a financial transactions tax. This is the conversation that the country should be having. Instead of funneling tens or hundreds of billions of taxpayer dollars to the failed wizards of Wall Street, we should be talking about what they can do for us.

Dean Baker is Co-Director of the Center for Economic and Policy Research, in Washington, D.C.

Center for Economic and Policy Research, 1611 Connecticut Ave, NW, Suite 400, Washington, DC 20009
Phone: (202) 293-5380, Fax: (202) 588-1356, Home: www.cepr.net

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