For those over 50, when we think about banks, we think about our neighbor who operates the local bank that gave our neighbors mortgages. Not any more. Now we are dealing with huge multinational banking corporations. In 1989 the five largest firms controlled just 7% of the mortgage servicing industry; by 2007, the five largest firms controlled 46%.  The Nation tells us that after Bank of America merged with Countrywide, three banks, Bank of America, Wells Fargo and Chase controlled 48% of the nation’s $11.5 trillion in mortgages. These banks have become so large that any financial problems they meet will become the nation’s problems. And indeed that has happened. 

Banks became too highly leverage particuarly in the mortgage business. Until recently, homeowners were required to put 20% down on any mortgage they sought. However, terms changed as deregulation of the marketplace was encouraged after President Reagan was elected.  Banks began offering mortgages with little or no money down. This became true in other purchases as well.

Banks and other financial institutions in the US have usually kept their leverage ratios at about 10. International standards usually specify a maximum leverage ratio for financial institutions of about 12. During the boom years, large securities firms in the US had much higher leverage ratios. In 2004, the US Securities and Exchange Commission, which supervises these firms, approved a waiver for five large securities firms – Goldman Sachs, Merrill Lynch, Morgan Stanley, Lehman Brothers, and Bear Stearns. They promptly took advantage of the waiver. Leverage ratios of 30 and more were not uncommon. At these levels of leverage, a fall in asset values of about 3 – 4 % makes a firm insolvent. It was a disaster waiting to happen.

In and around 1997, the US Congress – supported by President Clinton – did two things. One was the real estate capital gains tax cut, which eliminated the capital gains tax on primary home real estate held over two years up to $250,000 for a single filer and $500,000 for a married couple. This may be the biggest tax cut ever, and it made real estate the most favored investment class. Small wonder, then, that real estate prices rose in an unprecedented manner for approximately ten years in a row. At some point, however, as in any bubble rising, it went too far. It became easy to see at some point after year 2000 when in many places it had become cheaper to rent than to own, pointing to over-inflated prices.

It wasn’t just the Republicans who were running amock, it was the Democrats. President Clinton did not have the backbone to fight the banking interests. It was easier to go along with his Republican Congress. We need to press Congress to pass banking regulation that reins in the investment community risk takers. The difficulty is how to defeat the powerful financial interests in this country who wish to continue deregulation.

Author Lynne Weikart is available for radio, television and print interviews on how the fiscal elite use access to capital to undermine the voters’ will. She puts a human face on each of New York City’s fiscal crises, analyzes their historical patterns, and compares the tenure of several mayors. This timely book, Follow the Money: Who Controls New York City Mayors, has become an invaluable book for those interested in the future of American cities during the nation’s severe financial crisis.

Through the history of politics, Weikart reveals how financial elites in New York City have exploited recurring fiscal crises and sharply curtailed the range of choices open to mayors in setting priorities and implementing budget choices. In the face of enormous pressure during a fiscal crisis to defer programs and compromise promises to constituents, however, committed mayors from Fiorello LaGuardia to Michael Bloomberg have at times managed to overcome obstacles and achieve their goals.

Weikart writes: “As the world center of financial services, New York City is an informative case study of the power that financial elites exert over the political leadership and how mayors can push back to assert their own political agendas. In the final analysis, although some mayors do achieve their own policy initiatives, their choices are significantly limited by these powers of the financial interests particularly during times of fiscal crisis.”

This book is available through SUNY Press.
See http://www.sunypress.edu/details.asp?id=61778

For more information contact Lynne Weikart
By Phone: 917-494-3231
By Email: lweikart@gmail.com

To read her current thoughts on the fiscal crises go to:
http://www.followthemoneyus.com/

Why are we in such a financial mess? It started in 1978 when the U.S. Supreme Court ruled that banks could lend at interest rates set by the state where the bank is chartered and not where the loan is made (Marquette National Bank v. First of Omaha Service Corporation). In effect Minnesota could not enforce its usury law against a credit card issued by a Nebraska bank. The effect of that was that banks set out to find states that had no ceilings on interest rates. And you wondered why credit cards were being issued from South Dakota?

Reasonable state limits of 5 to 9 percent were cast aside as states repealed their limits and lessened any usury laws in order to meet the competition. Interest rates spiked.
Of course, ceilings on interest rates are still on the books in many states and you will often read that it is against the law to charge too much interest. However, Congress took care of those state laws when it comes to mortgages and credit card issuers.
In 1980, when inflation was raging, the U. S. Congress passed the Depository Institutions Deregulation and Monetary Control Act exempting federally-chartered savings banks, installment plan sellers and chartered loan companies from state usury limits. This effectively overrode all state and local usury laws.

The Alternative Mortgage Transaction Parity Act (AMTPA) was enacted as part of the Garn St. Germain Depository Institutions Act of 1982.  AMPTA preempted any state law that restricted alternative mortgage financing.  This law enabled predatory mortgage lenders to make seemingly affordable loans, like adjustable rate and interest-only loans that lead to foreclosure for so many people. Also state-chartered banks were given the same ability to charge out of state customers the highest interest rate permissible in the state where the bank is headquartered.

Federal law delivered the death blow for a state’s usury limit in 1999 with the Gramm-Leach-Bliley Act, a section of which permitted local banks to charge the greater of the state usury limit or the rate charged by an out-of-state bank with a branch in the state.
The sky is the limit!

Now let’s see who was in charge when all this happened. In 1980, Democratic President Jimmy Carter signed the DIMCA and in 1999 Democratic President Bill Clinton signed the Gramm-Leach-Bliley Act. So much for blaming this financial mess on just the deregulation movement of the conservative Republicans. Democrats are right in there with them.

I usually write about finance but I saw this article the other day on fusion centers and I thought I would share this with you.

 

We should always follow the money. The way we spend our resources defines who we are. If you as an individual like to buy lots of books, it defines you just the same way you are defined if you like to buy lots of clothes. This nation likes to buy safety and it is under the illusion that it can do so by putting people in jail. According to a study by Office of Justice Program’s Bureau of Justice Statistics, almost 7.2 million people were under federal, state, or local probation or parole at the end of 2006.  298 million people lived in the United States in 2006. The rate of incarceration in prison at year-end 2006 was 501 sentenced inmates per 100,000 U.S. residents, up from 411 in 1995. This amounts to 1.5 million people which means 8.7 million people were involved either in prison or on probation in the United States in 2006; that is 3% of the United States population was in the criminal justice system in 2006.  That is the highest proportion of population involved in the criminal justice system in the world. In countries such as England, Italy, France and Germany, the incarceration rate is about 1 in 1,000 persons. In the United States it is about 1 in 143 (Justice Anthony Kennedy in a speech before the American Bar Association Annual Meeting, August9, 2003). 

 

The amount of money we are spending to keep citizens in jail is enormous. The cost of caring for all those in prisons is over $40 billion a year (again Kennedy). And this doesn’t include the other costs of courts, probations, and homeland security. Billions of dollars are being poured in Homeland Security and when that happens, the money is often spent to watch Americans in America. The federal government has set up fusion centers around the country who conduct research and investigations on suspicious Americans. Homeland Security tell us: “As of February 2009, there were 58 fusion centers around the country. The Department has deployed 31 officers as of December 2008 and plans to have 70 professionals deployed by the end of 2009. The Department has provided more than $254 million from FY 2004-2007 to state and local governments to support the centers.”

 

This is getting scary. The ACLU in Virginia exposed a controversial report from Virginia’s Fusion Center assessing the threat of terrorism not just from overseas but domestically.  The ACLU, which brought the report to the public’s attention several weeks ago and recently urged government officials to investigate the Fusion Center, had criticized the report for exaggerating the threat of terrorism in Virginia and using baseless generalizations to connect racial minorities, college students, and religious organizations with threats of terrorism in the state. Take a look at this. These types of investigations are being financed throughout the country. The way we spend our money defines who we are. And right now we are spending far too much money on watching Americans whose only crime is to disagree with the political elites of this country. 

Author Lynne Weikart puts a human face on each of New York City’s fiscal crises, analyzes their historical patterns, and compares the tenure of several mayors. This timely book, Follow the Money: Who Controls New York City Mayors, has become an invaluable book for those interested in the future of American cities at a time of the nation’s severe financial crisis.

Through the history of politics, Weikart reveals how financial elites in New York City have exploited recurring fiscal crises and sharply curtailed the range of choices open to mayors in setting priorities and implementing fiscal policy.  In the face of enormous pressure during a fiscal crisis to defer programs and compromise promises to constituents, however, committed mayors from Fiorello LaGuardia to Michael Bloomberg have at times managed to overcome obstacles and achieve progressive goals. 

Weikart concludes: “As the world center of financial services, New York City is an informative case study of the power that financial elites exert over the political leadership and how mayors can push back to assert their own political agendas. In the final analysis, although some mayors do achieve their own policy initiatives, their choices are significantly limited by these powers of the financial interests particularly during times of fiscal crisis.”

This book is available through SUNY Press.

For more information:  http://www.followthemoneyus.com

To Purchase this book goto: Amazon Books

I bet you have never heard of the Depository Institutions Deregulatory and Monetary Control Act of 1980 (DIDMCA) or the Garn-St. Germain act of 1982. Those acts, one signed by President Carter and the other signed by President Reagan, helped create the financial mess in which we find ourselves.

The DIDMCA effectively ended all the states usury laws. It meant that if a state decided that interest rates on mortgages and credit cards should be capped at 5%, that state was stopped from doing so.  The Garn-St. Germain Act permitted a “shadow banking system” to develop without any of the regulations required of banks.  In effect the Garn-St.Germain Act cut the savings and loan institutions loose from any regulation.

There are other Congressional acts as the financial elites slowly carved their way out of Glass-Steagall Act of the Great Depression (which required commercial and investment banks to be separate and required insurance and brokerage houses to be separate) until banking regulation disappeared.  What a country!

There are solutions for the credit crunch that too few policymakers are talking about. Here is the list:

Short term: Federally insure subprime mortgages, restructure troubled mortgages, extend unemployment insurance benefits, provide funding to state governments for infrastructure.

Long term: Limit subprime mortgages or outlaw them, require transparency in all mortgage dealings, pass legislation regulating financial markets to prevent highly leveraged deals, stop predatory lending.

So when are we going to see such solutions debated in Congress. Don’t hold your breath. Solutions offered by our federal government so far rescue financial markets but not people. If it weren’t for Gordon Brown of Britain, we would not even be talking about the federal government buying prepared stocks in banks. Buying stocks in banks may be beneficial to the taxpayer, we might even make money on it.

Eliot Spitzer was a dynamite Attorney General. He wrote a column in the Washington Post on February 14, 2008 (see http://www.washingtonpost.com/wp-dyn/content/article/

2008/02/13/AR2008021302783.html in which he said that “In 2003, during the height of the predatory lending crisis, the OCC (office of the Controller of the Currency) [under the direction of President Bush] invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government’s actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules.”

The states attempted to stop predatory lending and the Bush administration stopped them. After all, we don’t want states to over regulate. When this sorry tale of taking advantage of the poorest of our citizens is told, the Bush administration will once again be demonstrated to be a disaster. Meanwhile good government groups try to get this administration to focus on people rather than financial markets. It is an uphill battle.

We made a choice. We voted for Obama and get a rational, thoughtful, educated politician who believes in federal regulation to deal with this crisis instead of McCain, an emotional, impulsive, politician who believes in less government. But Obama has to deliver and so far when dealing with the financial crisis, he is listening to the same people who created it.

Students are now paying outrageous amounts to pay off their private college loans. Unlike federal loans, which are limited to 6.8%, loans from private banks can have interest rates in excess of 20%.  Graduating college students faced with a bleak job market are at a loss as to how to repay thousands of dollars in tuition debt.  And students have no recourse to repayment.  Unlike other loans for housing or cars, college debt cannot be forgiven in bankruptcy.  If students cannot get a decent job and keep up their payments, they are faced with a mountain of debt that keeps growing because of high interest rates their entire lives. Students have reported in Congressional hearings of owing hundreds of thousands of dollars because of late fees and interest.Because Congress is lobbied intensely by banking interests, there are few Congresspeople interested in the problem of mounting student debt.  Two senators who were willing, Senators Kennedy and Clinton, are no longer advocating for helping people who have been scammed by the private loan scandal. With mounting evidence from consumer groups (such as www.studentloanjustice.org and the new America Foundation, www.newamerica.net), we need other senators to stand up for the ordinary citizen and not surcome to lobbyists.

Recently Mayor Bloomberg in New York City sought to install congestion pricing for automobiles in Lower Manhattan. Yielding to cries from the city’s suburbs, at first, the State Legislature refused to permit the Mayor to introduce congestion pricing. The action by the State Legislature is an example of the difficulty mayors face as they attempt to respond to the challenges of climate change. How do we make our cities green when politicians respond so quickly to political pressure of those uninterested in protecting our environment? There is no easy answer to this but there are answers.

Some cities have succeeded in initiating major changes to their environment. Seattle is the leader in environmental awareness. The city has established an Office of Sustainability and Environment which coordinates the implementation of the city’s environmental plans which include light rail, green buildings, cleanest city cars and trucks, rapid bus transit and an urban leader in recycling. Why don’t other cities join Seattle? They are but slowly. Seattle officials constantly play host to dozens of city officials who visit their city to learn how Seattle accomplished so much. We must concentrate our energies on local issues but not neglect state officials who often play a deciding role in environmental issues.

Because New York had just elected a new Governor, Eliot Spitzer, there was some movement. Spitzer and Bloomberg created a commission, NYC Traffic Mitigation Congestion Commission, as part of a state law governing congestion pricing. The Mayor’s initiative would have died without the Governor’s help. Obviously, part of the answer is to elect officials who commit to improving our environment. Voters need to pay particular attention to state elections because it is the states that have control over our cities and suburbs where 80.6% of Americans live. Unfortunately, voters do not pay close attention to state elections as they do to local elections. Voters who will know the name of their city council member will have no idea who their state assembly person might be. Yet, it is these state legislators who will make decisions about the greening of our cities. Politicians listen to voters if they think the voters are a large enough constituency to influence their elections. Certainly, the environmental movement is growing in strength and influence on every level of government. But at the state level, much remains to be accomplished.

New York City has been a city of progressive thought and provider of generous social services for its citizens beginning with the Great Depression of 1929. The Great Depression was the opportunity for progressive elected officials to construct a safety net of social services for citizens. New York City did so by embracing redistributive policies. During the Depression, Mayor Fiorello La Guardia, with financial support from President Franklin Roosevelt, established extensive governmental services for city residents – public housing, new public schools, rent control, expansion of public health services and public hospitals, to name some of the most important actions. The Great Depression brought substantial progressive services for citizens of the city for over 40 years until the fiscal crises of the 1970s unraveled the progressive social services safety net of that earlier period.[1]

Today, the city retains a semblance of rent control, to the consternation of the powerful real estate lobby, and is one of the few remaining cities to do so. It supports 11 public hospitals, the only city in the nation to do so. It also has the largest public housing authority in the country. It retains the third largest public university in the country which, until 1975, required no tuition.[2]

Nevertheless, the city has also lost a great deal. The 1975 fiscal crisis sparked the end of an era in the history of New York City and in the history of America. In 1975 the city had a $1.5 billion deficit out of a $12 billion budget as well as $11.3 billion in debt of which $4.5 billion was in short term notes maturing within a year.[3] There is no question that the city needed rescue. The city, in effect, would run out of cash, unless the banks bought their bonds, and this, in 1975, was what the banks refused to do. They declined to buy any more NYC bonds. “The terms of the financial rescue put the city in a budgetary straitjacket that made it impossible to sustain the high level of social activism and income redistribution that had characterized the Lindsay and Beame mayoral years.”[4] In secret meetings with Mayor Abraham Beame, the Financial Community Liaison Group (FCLG), consisting of officials from the largest New York banks, insisted the Mayor slash services and end free tuition at the City University system.[5] Faced with the worst fiscal crisis since the Depression and under enormous pressure from the combined forces of Governor Carey and the FCLG, Mayor Beame agreed to charge tuition at the City University system (CUNY) and to lay off 40,000 workers, disrupting vital city services.

The cutbacks were devastating. The schools were in chaos as over 10,000 teachers were laid off; park maintenance was abandoned; crime increased as the police force was reduced; fire stations and health clinics were closed, and a third of CUNY’s faculty were terminated. Tuition was established which has now increased dramatically to $2,000 a semester.

The schools were beleaguered. Over a two-year period, 1975 to 1977, over 5,700 classroom teachers were lost in the elementary schools; over 2,000 in the junior high schools, and over 1,800 in the high schools. The impact of these layoffs was a loss of 1 in 5 teachers in elementary schools and about 1 in 6 on the upper levels. [6] It was not simply teachers -assistant principals were gone; guidance counselors were lost – 1 out of every 2 at the elementary school level, school secretaries were laid off, thousands of paraprofessionals lost their jobs, as well as school crossing guards and security guards. The schools were in chaos from loss of staff resources and from teacher transfers as seniority rights of teachers took precedent, and teachers were transferred all over the city in recognition of their seniority.

Public health was compromised for years to come. In 1977, the NYC Department of Health (DOH) lost 1,700 staff members, 28% of its 1974 workforce.[7] The agency lost seven of its district health centers, dramatically cut its methadone program, terminated the employment of 14 of 19 health educators, and closed 20 of 75 child health centers (responsible for TB screening and diagnosis). At the NYC Health and Hospitals Corporation (HHC), the city payroll was cut by 17% between 1975 and 1978. In 1975, HHC cut all of its 50 community-based clinics. John Holloman, president of HHC from 1974 to 1976, fought the cuts and was fired. These budget cuts played an important role in the resurgence of TB in the 1980s and the city’s lack of preparation to deal with the AIDS crisis.[8]

The Parks Department lost 1,440 employees in those two years. The green lawn in Sheeps Meadow became a dust bowl. The Parks Department has never recovered from the drastic cutbacks in 1975-77. NYC now spends the least dollars for parks of all high density cities. Chicago spends more on its parks than NYC with only one-third of the people. Among high density cities, NYC ranks last in the number of swimming pools and recreation centers. Philadelphia has twice as many pools than NYC and four times as many recreation centers for a population one fifth NYC’s size.[9]

The housing stock was equally devastated. NYC had “the first program in the United States which transferred ownership of privately held buildings to low-income tenants. The program expanded rapidly so that by 1973 there were 136 properties, which included a total of 286 buildings, at various stages of the process. However, only 42 of these properties had completed rehabilitation and conversion when the program was aborted as a result of the New York City fiscal crisis in 1975.” [10]

The subway system underwent radical reduction in services and a rapid increase in crime. The subway fare was increased 43%. Ridership dropped 27 percent between 1965 and 1982. Unmanageable graffiti, track fires and frequent train breakdowns became nationally recognized symbols of the degradation of a once-great transit system.[11] And the Second Avenue subway dig was stopped.

Public safety suffered the devastating loss by the Police Department of 20% of its workforce. In 1972, the NYC police force numbered 31,000; by 1980 it had shrunk to 22,000. Robberies increased by 15% by 1983 while murders saw a slight rise of 2%. The Fire Department had undergone cuts before the fiscal crisis which were exacerbated during the fiscal crisis. Ladder companies were reduced from six to five people; engines were reduced from five to four people in 1975. “By 1976, and in rapid succession, some 35 fire companies had been removed from primarily high fire-incidence areas and fire department personnel had decreased from about 14,700 in 1970 to about 10,200 in 1976.”[12] The “burning of the Bronx” was found to be closely related to the reduction in fire protection in the 1970s.

Another disappointing trend was the migration out. Whites fled the city – almost two million left between 1975 and 1983. Although the methodology counting ethnicity changed somewhat between 1970 and 1980, still the drop in the white population was quite serious. Both African-Americans and Hispanics had slight increases, but New York City’s population was in serious decline from 7.9 million to 7.1 million by 1983.[13] In addition, the median family income dropped from $43,952 in 1969 to $38,593 in 1979 as the more educated left for the suburbs. The percent of households with low income increased by almost 10% while medium and high income households decreased 3.3% and 5.4% respectively.[14] New York City was no longer perceived as an attractive place to live.

City residents were infuriated at the ravaging of city services. Abe Beame, a former NYC Comptroller, who had won his job on a platform of financial responsibility, lost all credibility with the voters and became a one-term mayor. No one denies that the city spent more than its revenues. What is open for interpretation was why the only solution was drastic cutbacks that created miserable living conditions in the city, resulting in, for those who could afford it, a mass exodus to the suburbs. Why did conservative forces demand cutbacks before helping the city regain its financial stability? Could Mayor Beame have adopted different strategies to avoid this devastation? Could anyone?

The fiscal crisis did not end with Mayor Beame’s tenure - the Municipal Assistance Corporation (MAC), Emergency Financial Control Board (EFCB), and the NYS Special Deputy Comptroller for New York City, all institutions created by the combined forces of New York State officials and bankers during the fiscal crisis - constrained the fiscal policy choices of subsequent mayors to this day, more than thirty years after the fiscal crisis.

Each subsequent mayor underwent sizeable fiscal crises. From 1975 to the present, New York City has undergone cycles of economic strength and decline - fat surpluses followed by huge deficits breaking over the city. These cycles are closely related to national and regional economic trends.[15] And in each of these subsequent crises, the financial structures established during the 1975 fiscal crisis dominated New York City fiscal policy. These institutions call upon the city to reduce taxes and cut back government services based upon the theory that private business will be stimulated by the tax reductions and that less government spending means more capital for the private sector. However, at some point fewer government services works against the city being attractive enough for business.

Through this case study of New York City’s fiscal crises, we consider the strength of the financial elites in their relationships with elected officials. Is it possible for mayors to oppose business interests, or is the influence of the financial elites indomitable? If states are in close alliance with financial elites, what kinds of options do urban mayors have in developing local fiscal policy? Elkin maintains that “political leaders have choices in how to respond to this economic context.”[16] As the world center of financial services, New York City is an informative case study of the power financial elites exert over the political leadership, and how mayors can push back to assert their own political agendas. In the final analysis, although some mayors do achieve their own policy initiatives, their choices are significantly limited by the powers of the financial interests.

[1] Inman (1995) defines crisis as anytime when the city is unable to raise sufficient revenues to cover the city’s expenditures. Also see Wolff, G. B. 2004.

[2] The City University of New York (CUNY) is third in population behind the State University of New York (SUNY) and California State University system.

[3] Shalala & Bellamy, 1976, page 1125.

[4] Rockefeller 2003, 196.

[5] Ibid.

[6] Weikart, 1983, page.167.

[7] Freudenberg, etc. 2006, p. 425.

[8] Ibid. p. 416.

[9] Croft, 2006, page.2.

[10] Lawson, 1998, page 61.

[11] Schaller, 2003, page 1.

[12] Wallace, 1981, page 433.

[13] New York Times, 1983, B1.

[14] U.S. Census SOCDS Data.

[15] Forsythe, 1997, 15.

[16] Elkin 1987, 8.