The Occupy Wall Street movement has reason to protest. Special interest-driven deregulation policy was at the heart of the recent economic collapse. It has been the “99%” that has paid the price for this policy failure with lost employment, devalued housing prices, retirement accounts being cut in half, and increased levels of poverty while the wealthiest in America continued to do well. A valid question is why our elected representatives are not working together to put a stop to failed policy that has been so damaging to the majority of Americans. This article will examine the disproportionate number of the wealthy who hold elected office in Washington and the conflict of interest they face in setting policy versus their own financial interests as well as the special interests that finance their campaigns. And it will explore an incentive that politicians have to stay in office where they can act on non-public information to their own financial benefit. It examines the issue of whether our Congress has become ‘Our Unrepresentative Representation’.
Policy Was at the Heart of the Great Recession
Alan Greenspan, who presided over the Federal Reserve for 18 years before stepping down in 2006, was one of our nation’s leading voices for deregulation. He was considered an economic sage whose words affected market direction and, as noted by Bob Woodward, was celebrated as the “Maestro” (ref). Yet, it was a humbled Alan Greenspan who admitted before Congress in 2008 that his belief in deregulation had been shaken (ref). “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief” he relayed to the House Committee on Oversight and Government Reform. Henry Waxman, chair of the committee, asked “Do you feel that your ideology pushed you to make decisions that you wish you had not made?” Mr. Greenspan’s responded “Yes, I’ve found a flaw…I’ve been very distressed by that fact”.
When the Fed cut interest rates to near record lows from 2001 until mid-2004, housing prices climbed far faster than inflation or household income giving rise to concerns of a speculative bubble in both home prices and construction that would go bust; concerns that were ignored and calls for tighter regulation on subprime mortgages and other high risk mortgages were resisted. Republican lawmakers tried to blame the mortgage meltdown on Fannie Mae and Freddie Mac claiming that Democratic lawmakers blocked measures to reform the companies. Greenspan disagreed placing far more blame on Wall Street companies that bundled subprime mortgages into pools and sold them as mortgage backed securities. He stated that demand for these securities was so high that Wall Street companies pressured lenders to lower their standards and produce more “paper” (note the impact of repealing Glass-Steagall below). Mr. Greenspan stated “The evidence strongly suggests that without the excess demand from securitizers, subprime mortgage originations (undeniably the source of the crisis) would have been far smaller and defaults accordingly far lower”.
A 2008 report published by the Organization for Economic Co-Operation and Development (OECD) agreed with Mr. Greenspan’s testimony. The report concluded that the financial crisis originated from distortions and incentives created by policy actions and identified 2004 as being critical to causality (ref).
Quoting from that report:
“In 2004 four time specific factors came into play. (1) the Bush Administration ‘American Dream’ zero equity mortgage proposals became operative, helping low-income families to obtain mortgages; (2) the then regulator of Fannie Mae and Freddie Mac, the Office of Federal Housing Enterprise Oversight (OFHEO), imposed greater capital requirements and balance sheet controls on those two government- sponsored mortgage securitisation monoliths, opening the way for banks to move in on their “patch” with plenty of low income mortgages coming on stream; (3) the Basel II accord on international bank regulation was published and opened an arbitrage opportunity for banks that caused them to accelerate off-balance-sheet activity; and (4) the SEC agreed to allow investment banks (IB’s) voluntarily to benefit from regulation changes to manage their risk using capital calculations under the ‘consolidated supervised entities program’. (Prior to 2004 broker dealers were supervised by stringent rules allowing a 15:1 debt to net equity ratio. Under the new scheme investment banks could agree voluntarily to SEC consolidated oversight (not just broker dealer activities), but with less stringent rules that allowed them to increase their leverage ratio towards 40:1 in some cases.) The combination of these four changes in 2004 caused the banks to accelerate off-balance sheet mortgage securitisation as a key avenue to drive the revenue and the share price of banks….
“When OFHEO imposed greater capital requirements and balance sheet controls on Fannie and Freddie, banks that had been selling mortgages to them faced revenue gaps and an interruption to their earnings. Their solution was to create their own Fannie and Freddie look-alikes: the structured investment vehicles (SIVs) and collateralised debt obligation (CDOs). The influence of the controls affecting Federal Mortgage Pools and the corresponding response in private label RMBS is shown in Figure 2 [see report]. This new surge of RMBS caused by the Fannie- Freddie regulator was picked up much too late by Bank regulators to take effective action. “
In the context of the above it is important to note some other deregulation (also, failure to regulate) policy decisions. The banking industry had been seeking repeal of the Glass-Steagall Act since at least the 1980’s and it occurred in 1999 (ref). Glass-Steagall was legislation that was put into place following the Great Depression that, amongst other things, separated commercial from investment banking to remove the conflict of interest inherent to an institution controlling both (note Greenspan’s testimony that investment banks were pressuring commercial lenders to issue more “paper”, i.e. risky mortgages, because of the high demand for mortgage-backed derivatives). Also, there was CFTC’s failed attempt at regulating and bringing transparency to OTC derivatives in the late 1990’s thus allowing the market for those financial instruments to grow unregulated for the next ten years (ref). These instruments, backed by risky assets, were at the heart of such dramatic failures as Bear Sterns and AIG. And there was tax policy that contributed to pushing more income and wealth into a small sliver of our population when our economy is 70% personal consumption.
Reference for above figure (ref)
In both instances where 1% of our population held up to 24% of this nation’s income (prior to the Great Depression and Great Recession) our country experienced a severe economic downturn (ref).
Above figure from Krugman (ref).
And who paid the price for these failed policies? It was those in what has been called the “99%” by the Occupy Wall Street movement. Their purchasing power not keeping pace with the growth of the economy.
Their homes losing value (most often the middle class’s key investment). Their retirement accounts being cut in half. And jobs disappearing as corporations cut back on expense to maintain profitability. And this pain is being experienced while the richest of Americans quintupled their income during the heart of the Great Recession (ref) and millionaire households (the “1%”) hold a sum of wealth equivalent to almost three times the size of our national economy that is anticipated to double within the next decade as money makes money at historically low tax rates (ref). And income from that wealth (dividends and capital gains) is not subject to payroll tax that supports programs that the rest of America depends on during their senior years (Social Security and Medicare).
And yet the drumbeat of deregulation and tax policy largely benefitting the wealthiest continues. We continue to hear that it is not smart to tax our ‘job creators’; yet job creation in large part was anemic during 4 year periods where ‘trickle down’ policy was in place (ref).
* Total Non-Farm Payroll expressed in millions
The money we borrowed to support the tax benefit to the wealthiest (the debt being assumed by America’s taxpayers and future generations) went to support both ‘Wall Street’ and high growth business interests abroad (ref). We continue to hear that regulation is stifling business, and yet it was deregulation of the financial industry that was at the heart of the financial crisis as noted by both Mr. Greenspan’s testimony as well as the OECD report (see above). We continue to hear about privatizing Social Security; this after we have witnessed the level corporate risk taking that lead to the financial crisis Mr. Greenspan said left him in ‘shocked disbelief’. And with an estimated 45,000 Americans dying each year (ref) (including over 2000 military veterans) due to a lack of access to essential care, those who are denied coverage are required to pay tax to support the healthcare benefits of our elected officials, the same officials who are accepting large sums of money from special interests opposed to universal coverage.
And there is question about the emotion underlying the Occupy Wall Street movement?
With these failed policies having caused so much pain for much of America, a fair question is why our elected representatives are not working together in putting a stop to this. They are, after all, our elected representation. It is difficult to dismiss that many of our elected officials face a conflict of interest regarding their charge to represent ‘the people’ versus their own financial self-interests as well as the special interests that carry them to office. This article will examine the disproportionate number of the wealthy who hold elected office in Washington and the conflict of interest they face in setting policy versus their own financial interests as well as the special interests that finance their campaigns. And it will explore an incentive the wealthy have had for staying in office where they can act on non-public information to their own financial benefit. It will explore whether our Congress has become our ‘unrepresentative representation’.
The Senate has been called a millionaires club (ref) with about half of its members holding that status. In 2009 244 members of Congress were millionaires – 138 Republicans and 106 Democrats (ref). However, a picture is worth a thousand words. The following graphics were sent to me by one of my readers:
A significant imbalance exists (around 40- to 50-fold) regarding the number of millionaires holding elected office in Washington versus the general public. The median American family had a net worth of $96,000 in 2009 per the Federal Reserve Board while the median net worth for members of the US House of Representatives and Senate was $725,000 and $2.4 million, respectively (ref). The reference provides a list of the 20 wealthiest members of Congress based on 2009 reports, 10 Republican and 10 Democrats, with Representative Darrell Issa (R-California) holding the top spot with an average net worth of over $300 million dollars.
Special Interest Contributions
There is a high correlation between candidate spending and winning elected office (ref). In the 2010 midterm elections, candidate spending correlated to success in 85% of House races and 83% of Senate races. And historically the correlation has even been greater; in 2004; 98% of House seats and 88% of Senate seats went to the candidates who spent the most. Why does this correlation exist? Because candidate exposure is expensive. Elections are won by the expensive tactic of manipulating high probability voters through repeated messaging over TV during prime time hours (information obtained from a political consulting group during my exploration of a Senate run). The average cost of winning a Senate seat was $8.28 million in 2010 and $1.09 million for a House seat (ref).
Most self-financing candidates faltered in the 2010 cycle and significant investments from outside groups helped to elect more than 200 federal candidates. “In two-thirds of races where outside groups spent at least some money on advertisements and other political communications, the dollars spent supporting the winner, coupled with amounts spent opposing the loser, exceeded dollars spent supporting the loser or attacking the winner..” (ref).
As a candidate can not raise near enough within their own district to support an election effort, the vast majority of campaign contributions come from outside sources. What follows for Representative Issa’s campaign contributions (Jan 2005 – Dec 2007) holds true for most elected officials. Only 5% of his contributions came from within his district; 54% ($674,370) came from outside his state and 94% ($1,173,693) came from outside his district (ref). The largest sum of out-of-state contributions came from the Washington DC area where special interest lobbying groups operate.
Personal Wealth vs Tax Policy
Regarding the disproportionate number of the wealthy holding elected office, consider tax policy, especially capital gains and dividends. Capital gains in the 1970’s were taxed at 35% (ref) and have since been lowered to the current 15% rate (ref). Capital gains and dividends comprise a disproportionate amount of the income for the wealthy and, as Warren Buffet has noted, is responsible for the lower net income tax paid by the wealthiest (ref). Additionally, this income is not subject to payroll tax that supports Social Security and Medicare, programs that much of America depends on in their later years. The president’s plan to raise taxes may include a change in how capital gains are taxed (ref). Consider that the richest 0.1% of Americans pay 44 percent of all capital gains taxes and the richest 1% pay 68% of that tax. The bottom 80% of Americans account for less than 3% of all capital gains taxes paid. About 40% of members of the US House of Representatives and nearly half of all US senators reported capital gains in 2009 (ref). Many of the GOP presidential candidates have suggested eliminating the capital gains tax all together (ref). Increasing the tax rate on capital gains, which largely affects the wealthiest and which would help reduce the federal deficit, would directly affect 176 members of the House and 48 US senators (ref). I submit that many in our Congress face a conflict of interest between their own financial self-interests versus policy that could help reduce our federal deficits to the benefit of our future generations.
Campaign Financing vs Representation
The conflict that exists for politicians whose campaigns are financed largely by money raised outside their districts is apparent and expressed in their behavior. A few examples are provided below.
During the healthcare reform debate it was found that more that a dozen lawmakers placed comments into the Congressional record that were ghostwritten, in whole or in part, by lobbyists working for Genentech (ref). This was caught because the remarks made by multiple lawmakers lined up word for word. Genentech’s PAC had made financial contributions to many House members including some who filed statements into the Congressional Record. Although the head of Genentech’s Washington office claimed that “there was no connection between the contributions and the statements”, company employees had been among the hosts at fund-raisers for some of those lawmakers. Additionally there is the example of senator Joe Lieberman’s behavior during that debate. Consider his position of opposing a public option after he had reportedly accepted $427,644 from insurance companies since 2005 including at the time a recently received sum of $65,200 from Aetna and its employees (ref), this after tax payer money supports his own healthcare benefits.
Consider the attempts to raise taxes on the wealthiest of Americans to help reduce deficits. A recent poll (ref) showed nearly three-quarters of Americans (including two-thirds of Republicans) favoring such a measure as well as the evidence that when such policy was in place in the 1990’s our country had a strong economy and was paying down its debt. So a reasonable question is how can 100% of senate Republicans oppose a tax increase on the wealthiest when up to two-thirds of their party constituents agree with an increase. Consider that behavior in light of a substantial level of funding for Karl Rove’s Crossroads GPS reportedly coming from a small circle of extremely wealthy Wall Street hedge fund and private equity moguls “bitterly opposed to a proposal by congressional Democrats – and endorsed by the Obama administration – to increase the tax rates on compensation that hedge funds pay their partners” (ref). These hedge fund moguls and other wealthy donors contributed tens of millions of dollars (to protect their interests) that helped to secure big GOP victories in the 2010 midterm elections.
Consider CFTC’s Brooksley Born’s failed attempt to regulate and bring transparency to OTC derivatives in the late 1990’s (ref). These are the financial instruments that were at the heart of dramatic corporate and fund failures that sparked the market collapse at the start of the Great Recession. In 1998, ten years before the economic crisis, a hedge fund (Long Term Capital Management, LTCM) was near collapse and had used these instruments to leverage $5 billion into more than $1 Trillion while doing business with 15 of Wall Streets largest financial institutions. At that time the President’s working group was informed that the entire American economy hung in the balance and the Fed intervened to avert the crisis. Although the attempt to regulate was portrayed as a battle of ideologies between Born (Keynesian) and Greenspan/Rubin (Austrian and neoconservative laissez faire), Wall Street lobbying efforts proved to be powerful. “Under heavy pressure from the financial lobby, legislation prohibiting regulation of derivatives by Born’s agency was passed by the Congress”. This paved the way for ten years of unregulated growth of a market that was highly profitable to Wall Street and ultimately harmful to much of America.
Incentives (Insider Trading)
As reported by 60 Minutes (ref) “members of Congress and their aides have regular access to powerful political intelligence, and many have made well-timed stock market trades in the very industries they regulate”. Essentially, there is no law prohibiting Congress from ‘Insider Trading’, something that is a criminal offense for corporate insiders. Consider, for example, the closed door meetings between Congressional leaders and Treasury Secretary Hank Paulson and Fed Chairman Bernanke where lawmakers were being warned that a global financial meltdown could occur within a few days. These meetings were so secretive that cell phones and Blackberries were confiscated beforehand to prevent leaks. Literally the day following one such meeting, Alabama representative Spencer Bachus (who was at the time the ranking Republican member on the House Financial Services Committee and now its Chairman), bought option funds that would go up in value if the market went down. So although publicly he took the position of trying to keep the economy from cratering, he was privately betting that it would. Consider that it was Congress that enacted financial deregulation policy, and a ranking committee member who supported such policy could act on insider information to profit from its failure while much of America suffered the consequences of its failure.
Before retiring, Congressman Brian Baird (Washington) spent six unsuccessful years trying to get his colleagues to to prohibit insider trading in Congress and establish rules governing conflicts of interests. Despite outcries from the offices of Democratic Congresswoman Pelosi and Republican Speaker Boehner following the airing of the 60 Minutes report (both were questioned publicly by Steve Kroft about their involvement in the practice), at least 93 members of Congress have signed on as cosponsors of the Stock Act and for the first time the bill has been introduced in the Senate.
Harvard law professor, Lawrence Lessig, is author of “Republic, Lost: How Money Corrupts Congress – And a Plan to Stop It”. A point he made in interview (ref) is that the OWS movement has it wrong when it refers to the 99%. Dr. Lessig points out that only 0.05% of America max out Congressional campaign contributions, and only 0.26% give more than $200. As money provides access to government, it is not OWS’s 99%, but rather the 99.95% that is denied access. He points out that as 30 – 70% of a politician’s time is spent in fundraising, they become dependent on the funders rather than the people (and it is only worse now as the Citizen’s United ruling gives corporations the rights of a person). Politicians are therefore responding to a small sliver of our society. And he notes that politicians also extort business for financial gain by demanding corporate participation in campaign fundraising to get what it wants.
In a separate interview (ref) Dr. Lessig makes the point that in 1980 98% of financial assets traded in our economy were subject to the normal rules of transparency, anti-fraud requirements, and basic exchange-based rules of the New Deal. By 2008, 90% of traded assets were traded invisibly because they were not subject to such obligations. But what concerns him is what happened after 2008. After “every independent analyst had said there was a link between the structure of deregulation and the collapse (and he mentions Greenspan’s Congressional testimony),…Wall Street was able to blackmail the Democrats and the Republicans into handing them essentially a ‘Get Out of Jail Free’ card and effect no fundamental change in the architecture of our financial system”.
The Real Cost of Poverty: Lost American Lives
But the real cost of this special interest-driven policy failure is in the staggering number of American lives it has claimed. The latest census shows that 1 in 2 Americans have fallen into poverty or are scraping by on earnings that classify them as low income (ref). “The new numbers follow years of stagnating wages for the middle class that have hurt millions of workers and families”. However, what is not discussed is that one of the consequences of poverty is that it claims lives.
As I wrote in a previous article on income/wealth inequality as a moral crisis for this country (ref), a study conducted by Columbia University’s School of Public Health estimated that in 2000 875,000 deaths could be attributed to a cluster of social factors bound up with poverty and income inequality (ref). The Great Recession has caused an increase in poverty and applying the 2000 mortality rate in the Columbia University report to the number of Americans currently living in poverty an estimated 1,228,169 Americans died in 2009 from the effects of poverty and income inequality (ref).
This estimated annual increase of more than 350,000 lost American lives due to poverty since 2000 (of which failed policy has contributed) dwarfs the total 4484 US military fatalities incurred over the entire course of the Iraq War (ref). This staggering loss of American lives due to the consequences of poverty is never part of the political dialog and our news sanitizes the picture of poverty in our country.
Consider that Congress just reached a deal that would prevent yet another threatened government shutdown by including a cut of $3.5 billion for low-income heating and utility subsidies (a cut of about 25%, ref) while maintaining the Bush era tax cuts largely favoring the wealthiest. In striking such a deal, our Congress has placed a higher value on special interest-driven policy than the lives of American citizens – and that does represent a moral crisis for our country.
Beware this Boy
A Christmas Carol is one of my favorite seasonal stories.
In writing the above this holiday season I was reminded of Scrooge saying that if the poor are to die then “they had better do it and decrease the surplus population”. I could hear the voice of Marley’s ghost screaming at Scrooge that “Mankind was my business”. I could see the Ghost of Christmas Present revealing the two wretched children to Scrooge, the girl being ‘Want’, the boy being ‘Ignorance’ and saying to him: “Beware them both, and all of their degree, but most of all beware this boy, for on his brow I see that written which is Doom, unless the writing be erased.”
Really not a bad time of year to reflect on what has happened to our Congress. We must erase the writing on the brow of ignorance. We must not allow our Congress to remain Our Unrepresentative Representation.