Primary Season Opening Day (May 9)

Update 270 — Primary Season Opening Day
Yields Robust Crop of Progressive Nominees

Last night saw results come in from the country’s first round of primary contests this cycle. While there were few surprises, a number of promising Democratic candidates for the U.S. House emerged successful and will mount strong challenges to their GOP opponents in November.

We’ll cover the most signal and salient primary races and results over the course of the primary season, highlighting some of the most compelling  candidates and campaigns with an eye towards economic policy.





Sen. Brown to Face Trump-Endorsed Renacci

Last night, Sen. Sherrod Brown, seeking a third term, learned that he will face Rep. Jim Renacci in November. Renacci, who serves on House Ways and Means, rode an early endorsement from President Trump to victory in the Buckeye state.  In an election that pits two populists, we foresee the campaign focusing on the pensions crisis, banking deregulation, and the Tax Cuts and Jobs Act, a product of Renacci’s main Committee.


Key House Races

OH-01: Pureval (D) v. Rep. Chabot (R)
• 2016 Pres. Results: Trump 51/Clinton 44
• 2012 Pres. Results: Romney 52/Obama 46
• 2016 House Results: Chabot (R) 59/Young (D) 41
• Cook PVI: R+5

Aftab Pureval will challenge long-time Republican incumbent Steve Chabot in Ohio’s first district. Pureval, a Democratic county clerk from Hamilton County, Ohio, ran uncontested in the Democratic primary and is on the DCCCs “Red to Blue” program list. A former federal prosecutor, Pureval will seek to paint Chabot as a rubber stamp for President Trump in this urban Cincinnati district.

While Pureval faces an uphill battle against Chabot, he has experience playing the underdog in Ohio.  His 2016 come-from-behind county clerk victory landed the Democrats a seat they had not controlled for over 100 years.  Cincinnati Mayor John Cranley proclaimed Pureval the Democrats’ best chance to reclaim OH-01 in a decade.

OH-12: O’Connor (D) v. Balderson (R)
• 2016 Pres. Results: Trump 53/Clinton 41
• 2012 Pres. Results: Romney 54/Obama 44
• 2016 House: Tiber (R) 67/Albertson (D) 30
• Cook PVI: R+7

This district will likely be looked to as an early bellwether for the ‘18 elections as there will first be a special election in August before the General three months later.  Danny O’Connor won the Democratic special election and general election primaries handily, while Troy Balderson won each Republican contest by one percent. Balderson ran close to, but not fully aligned with Trump relative to his opponents.  O’Connor was a hand-picked Democratic candidate. Republicans have controlled the northeastern Ohio district for 35 years, but being an R+7 district may not be enough to prevent O’Connor, a progressive former prosecutor, from ending that streak.

OH-14: Rader (D) v. Rep. Joyce (R)
• 2016 Pres. Results: Trump 53/Clinton 42
• 2012 Pres. Results: Romney 50/Obama 47
• 2016 House Results: Joyce (R) 63/Wagner (D) 37
• Cook PVI: R+5

Some progressives are enthusiastic about flipping OH-14, others are uncertain about this mixed suburban-rural Cleveland district which has not had a Democrat represent it since 2002.  Democrats are placing their hope in Betsy Rader, a civil rights attorney who spent much of her young life in poverty. Rader will face Rep. Dave Joyce, a moderate Republican serving on the House Appropriations Committee.

Rader would bring a progressive bend to the Ohio delegation.  She is running on a platform emphasizing investment in a bold economic infrastructure plan and job training programs, stringent enforcement of antitrust laws, and initiatives to increase wages to help working families escape poverty.

OH-15: Rick Neal (D) v. Rep. Stivers (R)
• 2016 Pres. Results: Trump 53/Clinton 40
• 2012 Pres. Results: Romey 52/Obama 46
• 2016 House Results: Stivers (R) 66/Warton (D) 34
• Cook PVI: R+7

Rick Neal, an international aid worker, won over 63 percent of the Democratic primary vote in Ohio-15 yesterday and will face incumbent Rep. Steve Stivers, the GOP’s Congressional Committee Chair, in the general.

Neal’s primary focuses have been on increasing the minimum wage, defending unionized labor, and investing in infrastructure. Neal also intends to expand Medicare and CHIP, lower drug prices, and protect Social Security. This south-central Ohio district will be difficult to win, but a victory for Neal over a leadership Republican would mean an overwhelming blue wave in the fall.



Senate Bout Decided: Donnelly v. Braun

Mike Braun, a wealthy businessman from Indiana, won in a stunning upset over two strong Republican Representatives, Rep. Luke Messer and Rep. Todd Rokita.  His prize: facing Senator Joe Donnelly. The primary race came down to who was more loyal to President Trump. Braun, Messer and Rokita each took pains to convey how they would demonstrate fealty to the President. Expect Senator Donnelly to run again as a “common-sense hoosier” in the tradition of former Senators Richard Lugar and Evan Bayh.

IN-02: Hall (D) v.  Rep. Walorski (R)
• 2016 Pres. Results: Trump 59/Clinton 36
• 2012 Pres. Results: Romney 56/Obama 42
• 2016 House Results: Walorski (R) 59/Coleman (D) 36
• Cook PVI: R+11

In a wave year, IN-02 is a district to watch. Sen. Joe Donnelly’s former district was Democratic as recently as 2010 but has since shifted to the Republicans. Mel Hall, an entrepreneur and business owner from South Bend, will hope to reclaim the district for Democrats.  Labeled “must watch” by many Indiana Democrats, Hall will take on Representative Jackie Walorski, a member of the influential Ways and Means Committee, who played an integral role in the creation of the Tax Cuts and Jobs Act.

Hall was the presumptive primary victor from the word go. He staked out a more moderate  stance than his opponents on healthcare reform, but also took more liberal positions on the economy, especially regarding pro-union and workers’ rights issues. Hall also advocates for increased wages and benefits for workers.

IN-09: Watson (D) v. Rep. Hollingsworth (R)  
• 2016 Pres. Election Results: Trump 61/Clinton 34
• 2012 Pres. Election Results: Romney 57/Obama 40
• 2016 House Results: Hollingsworth (R) 54/Yoder (D) 41
• Cook PVI: R+13

An historic swing district, IN-09 is another race to watch closely for signs of an impending blue wave. The progressive community is excited about nominee Liz Watson, a former Labor Policy Director for congressional Democrats, who coasted to victory in last night’s primary.  She will face-off against incumbent Rep. Trey Hollingsworth, a member of House Financial Services who has repeatedly advanced legislation to destabilize capital markets and destroy the regulatory framework for Wall Street banks.

Watson, as her previous experience suggests, is a staunch pro-labor candidate, advocating for a $15 minimum wage and the right to organize.  She also supports specific infrastructure revitalization programs, raising the low income housing tax credit, and expanding and strengthening Medicare for all Americans.



WV-03: Ojeha (D) vs. Miller (R)
• 2016 Pres. Results: Trump 73/Clinton 23
• 2012 Pres. Results: Romney 65/Obama 33
• 2016 House Results: Jenkins (R) 68/Detch (D) 24
• Cook PVI: R+23

The southernmost West Virginia Congressional District is the most winnable for Democrats in the Mountain State. While this coal country turf embraced Donald Trump in 2016, Democrat Richard Ojeha’s brand of working class populism could spell success in a district that was ground zero for the teacher’s strike. Ojeha, who admitted to voting for Trump and now openly regrets it, possesses a unique opportunity to express the frustrations of West Virginians. He has centered his campaign around West Virginia teachers, who carried posters of him during the strike. He will take on State Senator Carol Miller, who narrowly won the GOP primary with less than 30 percent of the vote.

Ojeda is staunchly pro-labor and has lined up strong support among the state’s most powerful coal miners union. In the state senate, Ojeha introduced legislation to give teachers a tax break for buying classroom supplies, stabilize health care premiums for public employees, and give public employees a $5,000 raise over three years. We expect he will argue for raising taxes on wealthy corporations, which he insists are getting undue breaks from legislators without giving anything back for West Virginia residents.


NC-09: McCready (D) vs. Harris (R)
• 2016 Pres. Vote: Trump 54/Clinton 43
• 2012 Pres: Romney 55/Obama 45
• 2016 House: Pittenger (R) 58/Cano (D) 42
• Cook PVI: R+7

In 2018’s first congressional casualty, incumbent Republican Robert Pittenger lost a close primary fight to Republican challenger Mark Harris. Harris’ victory demonstrates that the anti-establishment rift that brought President Trump to power in 2016 is very much alive among Republican voters. This will be welcome news to Democratic primary winner Dan McCready who can now turn his attention to the general election without having to worry about battling an incumbent.

McCready, a former Marine and solar energy entrepreneur, is a top candidate on the DCCC’s “Red to Blue” program. McCready will hope that a platform which includes protection of Social Security and Medicare, early childhood education, and fiscal responsibility will be enough to woo voters in this historically red district.  Should the impending blue wave materialize, McCready stands a real chance. He starts the race with a significant financial advantage over Harris, and the dramatics in the Republican primary reveal a party that remains deeply divided.

NC-13: Manning (D) vs. Rep. Budd (R)
• 2016 Pres. Vote: Trump 53/Clinton 44
• 2012 Pres: Romney 53/Obama 46
• 2016 House: Budd (R) 56/Davis (D) 44
• Cook PVI: R+6

Kathy Manning, another Red to Blue program designee, likely represents the Democrats’ best chance of flipping a district in North Carolina. The lawyer and philanthropist decidedly won last night’s primary against fellow Democrat Adam Coker, and hopes to maintain this momentum heading into a general election fight against incumbent Republican Ted Budd.  Manning has an impressive professional record of providing job retraining, mortgage assistance, and healthcare to people who lost work after the 2008 financial crisis. He has also worked extensively on economic development projects in Greensboro. Manning is using this experience to run on a platform that focuses on job creation, affordable healthcare, and increased education funding.

In the Tax Cuts’ Wake (May 7)

Update 269: In the Tax Cuts’ Wake:
Pensioners, Workers to Pay the Piper

Whether the GOP will campaign on last year’s tax cut is a central question of the midterm season.  American taxpayers aren’t as enamored by this as much as similar cuts in the past. The sense has taken root, stoked by Paul Ryan and other GOP leaders, that there is no free lunch and there is no free tax cut.  And that the price to pay — the fiscal bill for the multi-trillion dollar cut bill — will come from entitlements.

Is this all smoke?  Or is there fire here regarding the most incendiary issue one could want in an election year?  We look at the state of and the prospect for a GOP threat to entitlements this year.

Speaking of, next — the first in our series of updates on primary election results this Wednesday following tomorrow’s primaries in Indiana, North Carolina, Ohio, and West Virginia.




Tax and the Imbalancing Act

As Republicans in Congress passed a tax bill in December that greatly deepened America’s fiscal hole, those preparing for and in retirement across the country gulped, for they sensed what was coming.  The resulting annual trillion dollar fiscal deficits carries acute consequences for them.

There are two crisis points in today’s retirement system: a chronic multiemployer pensions crisis and the depletion of the Social Security Disability Insurance (DI) and Old Age Survivors Insurance (OASI) Funds.


Prospects for America’s Retirees

Today, millions of America’s retirees are leaving the workforce with almost nothing in savings.  42 percent of Americans have less than $10,000 set aside for retirement. The retired are forced to spread meager savings over a longer time period, as average life expectancy has increased by 20 years since the 1930s.  Seniors must also face rising costs of care to deal with failing health.

By 2035, a typical senior will spend one out of every seven dollars of retirement income on medical care, a 40 percent increase from 2012.  According to the Supplemental Poverty Measure (SPM), 7.1 million adults ages 65 and older (14.5 percent) live in poverty. These figures will only worsen if Social Security and Medicare funds become solvent.


Entitlement Programs’ Financial Security

Social Security funds are stable today, but last year, the Social Security trustees projected they will not be in ten to fifteen years. Over the next decade and a half, voters concerned about their retirement have a few dates to keep in mind:

•  the Disability Insurance (DI) trust fund will deplete by 2028
•  the Old Age Survivors Insurance (OASI) trust fund will deplete by 2035
•  combining the two funds, social security is expected to deplete in 2034

After these years, revenue would be able to pay out just 77 percent of scheduled beneficiaries. Under the Social Security Act, beneficiaries are legally entitled to their full scheduled benefits. Nevertheless, a conflicting law, the Antideficiency Act, prohibits the federal government from spending in excess of available funds – tying the Social Security Administration’s hands.

The result could mean retirees suffer from receiving benefits on a delayed basis or receiving benefits on the same schedule but at reduced levels. Since retirees are legally owed their full benefits on time, expect substantial legal action to take place.



These projections were issued just before the passage of the Tax Cuts and Jobs Act (TCJA). With the new tax law,  Republicans claimed to help reduce the average person’s taxes today. What the GOP did not mention is that diminished revenues over time will exert downward pressure on the government’s ability to compensate for shortfalls in Social Security trust funds.


OASDI net cash flows as a percentage of GDP, 1957–2009, projected under the intermediate assumptions, 2010–2085; SOURCE: Social Security Administration, Office of the Chief Actuary.


Ongoing Crisis: Multiemployer Pensions

Even today, the TCJA is siphoning resources from retirees, as they are short-changed in the multiemployer pension space. Republicans have done nothing to address the issue.

Pension plans of all kinds were undermined by two financial market crashes between 2000 and 2009. Among the factors in addition to market crashes that harmed multiemployer pensions were a declining union workforce, global competition, technology, and the ratio of retirees to active participants.

PBGC’s Multiemployer Program

Multiemployer plans are meant to allow related small businesses and large companies to pool resources to provide for workers in old age. These plans are insured by the US Federal Government’s Pension Benefit Guaranty Corporation, with 10 million Americans participating in about 1300 plans.

Until 2004, the PBGC’s multiemployer insurance pool was operating with a surplus, but the 2008-2010 financial crises had a dramatic impact. Now the program is projected to become insolvent in 2025. Once its funds are depleted, the PBGC will likely only be able to pay a fraction of the (already low) guaranteed benefits – as little as 10% of original benefits for some pensioners.

There are about 100 multiemployer plans covering nearly 1 million participants deemed “critical and declining.” While this means that a majority of multiemployer plans are healthy, the entire multiemployer system is fragile, and part of the solution needs to consider how to keep all participants (the struggling and the healthy) in good shape over the long haul.

Congressional Activity on Multiemployer Pensions

•  The MPRA: The Multiemployer Pension Reform Act (MPRA) of 2014 has not solved the problem. The MPRA addresses plans currently in crisis but does not help to strengthen plans or help workers prepare for the future.
•  The Joint Select Committee: With pressure from Teamsters, retirees, and unions, congressional leaders passed the Bipartisan Budget Act of 2018 which created the Joint Select Committee on Solvency of Multiemployer Pension Plans to address the impending insolvency of large multiemployer defined benefit pension plans and the PBGC.  The Committee is required to propose legislative language to improve solvency by November 30, 2018.
•  The Butch Lewis Act (H.R. 4444/S.2147): Sen. Brown introduced this act along with Rep. Richard Neal. A few House Republicans have praised the bill as well.  The Act would create the Pension Rehabilitation Administration (PRA) to lend money on very favorable terms to the troubled plans, who can show they will eventually be able to repay the loan.


Going Forward

With the 65+ population rising as Baby Boomers retire, Social Security burning through its funds, the PBGC depleted, and the TCJA sapping revenues across the board, the situation is becoming unmanageable. A handful of ideas could strengthen Social Security and help prevent its depletion:

•  fully index benefit payments for inflation to help retirees keep up with rising costs,
•  raise the $128,700 taxable maximum cap on the FICA payroll tax to raise revenue from wealthier taxpayers,
•  expand compensation subject to FICA taxes to include capital gains rather than exclusively salaried income,
•  create earnings credits for people who are not working because they are caring for a child or a family member and for those who work in noncovered jobs,
•  implement a new minimum benefit to keep low-paid workers above the poverty level, and
•  redirect OASI funds to the DI fund to prolong the life of DI to 2034.

Dealing with an entitlement crisis is not a question of if but when. With the action being taken by Congressional Republicans, the crisis has become even more imminent. Unless steps are taken to strengthen SS, we will have a lot of angry retirees and newly influential Democrats on our hands.

State of the Labor Market(s) (May 2)

Update 268 — State of the Labor Market(s);

Workers Seeing Red in Republican States

Sometimes you can see where starving the beast cuts to the bone. Two months ago, teachers in West Virginia began a statewide strike that would last for weeks.  It would pay off, winning gains for educators who have endured some of the lowest wages and worst benefits in the country.

These are the wages of austerity, irony aside.  Further, the stuck wages afflicting so many workers stand alongside a 45-year low in new unemployment claims last week.  What explains this disparity? What in fact are the prevailing labor and wage conditions in the country? What are the political implications for November?

More below.



Inspired by the efforts in West Virginia, teachers across the country’s low-wage states have initiated job action. Tens of thousands of teachers have walked out across Oklahoma, Arizona, Kentucky, and Colorado to protest low wages, poor benefits, and shrinking education funding.  Tensions are simmering in North Carolina and Mississippi, and calls for action in Texas and Indiana suggest that the wave of teacher strikes is likely far from over.

Americans overwhelmingly support teachers’ demands for higher wages.  Over 50 percent of the country would support higher taxes to raise teachers’ wages.  Perhaps this support is attributable to familiarity. If the grievances that these educators cite to justify labor action sound familiar, that’s because stagnant wages and declining benefits have come to define the American labor market conditions in recent years.


For Most, Stuck Wages

As with red-state teachers, a vast majority of Americans rely on their paychecks and employer-provided benefits to make ends meet, and these have hardly improved in decades.

Between 1950 and 1970, Americans enjoyed a post-war boom that saw wages grow in line with the broader economy.  Economists have long thought that if worker productivity rises, wages will also increase in kind. The three decades after WWII supported this notion.  Over this period, wages rose by 91 percent, almost exactly in step with the 97 percent rate growth in national productivity.

In 2016, American workers were 75 percent more productive than they were in 1973, but had only seen their take home pay rise 12 percent in that time. American workers have seen their share of productivity gains collapse.



Paradox:  Plentiful Work, Slow Wage Growth

President Trump and congressional Republicans say that the stable and historically low unemployment rate is their doing, not that they inherited an economy that saw steady reductions in unemployment for five straight years.

Real wages have been stagnant for even longer, but Trump is not taking credit here.  In many cases even the declines seen in unemployment rates are concentrated predominantly in low-wage, low-quality job sectors.  While the economy has been adding jobs, in many places around the country these jobs tend to pay the minimum wage. Regional differentials in labor markets can also confuse national-level statistics.


A Look Behind The Numbers

Beyond this, while today’s unemployment rate is certainly low, this can obscure real problems in the labor market.

During the great recession, the labor force participation rate fell from 67 percent to 63 percent.  Many people fell into underemployment or lost faith in the notion that any opportunities existed for them. The size of the workforce has remained around 63 percent since, suggesting fewer opportunities and a lingering disillusionment among those that have fallen out of the workforce.

The Bureau of Labor Statistics (BLS) quantifies an alternative measure of slack in the labor market that takes the above categories of workers into account. While the unemployment rate (measuring only those seeking jobs within the last four weeks as being unemployed) is 4.1 percent, another measure reveals a more substantial underutilization of the workforce.  When taking into account the workers who are involuntarily part-time, marginally attached workers, and discouraged workers, the U-6 unemployment rate is 8.3 percent today – more than twice that of the conventional measure.


New Ideas About Bargaining Power

There is considerable debate as to why incomes have stagnated for as long as they have. Some theorists see “market-exogenous” changes in technology and globalization to explain the rise of inequality.  In this formulation, advances in shipping and information technologies allowed capital unfettered access to the entire world’s labor supply, causing a shift in production from high wage areas to low wage areas.

More recently, economists and policy thinkers have turned their attention to the role of market power or labor market concentration in wage analysis.  This theory focuses on concentration as a driving factor in wage stagnation. Market concentration accounts for 10-15 percent of annual wage losses, suggesting that workers’ wage bargaining power is weakening in certain robust labor markets.

The last forty years has seen a retreat from policies and institutions that support the relative bargaining power of workers. The decline of American unions is an oft-cited reason for the erosion of workers’ bargaining position vis-a-vis employers, but other factors tether employees to low wages as well, including:

• a retreat from the pursuit of full employment by policymakers
• the predominance of noncompete clauses in low wage environments
• salary history disclosure requirements
• public infrastructure degradation and a dearth of mass transportation options.

The concentration of labor markets and the collapse of worker power have played an important part in the divergence between labor productivity and wage growth, and can at least partially explain the why wages are hardly responding to very low unemployment rates.


Labor Market Not Monolithic for Midterms

America is comprised of very diverse economies across many regions. While technological changes and shifting market power have depressed employment levels and wages overall, the composition of local economies determine the effect those developments have on a local workforce.  Regional economies with significant vulnerability to trade competition have seen commensurate declines in employment. Those exposed to technological change have undergone a reorganization of the local workforce.  Those that have experienced market consolidation have seen other deleterious effects.

President Trump and Congressional Republicans may try to take credit in the run-up to the November midterm elections for the nation’s continued low unemployment rate.  But their claims will likely fall on deaf ears in communities where trade competition have depressed employment and where laborers have lost negotiation power relative to their employers.  After cutting taxes overwhelmingly for the corporations and the wealthiest, the GOP hasn’t shown many voters yet the benefits they were promised; instead, they continue to struggle with continually stagnant wages and precious few good jobs.  But with all the GOP tax talk, they increasingly perceive another threat to their retirement security, which we will address next time.

If Charity Begins at Home (Apr. 27)

Update 267 — If Charity Begins at Home,
Tell it to the Congressional Majority First

This month marks the fiftieth anniversary of the Fair Housing Act’s signing.  That landmark Act authorized the Department of Housing and Urban Development (HUD) to limit discrimination in housing.  While HUD has helped millions of Americans find stable, affordable housing, millions of others face crisis conditions in the housing market and housing discrimination persists as a problem for many minority communities.

Republicans in Congress and the administration are attempting to worsen already difficult circumstances for those without secure housing.  Now comes HUD Secretary Carson with the helpful idea of tripling rents. We provide an overview of less novel legislative and administrative developments on the housing market and housing finance below.

Good weekends, all.




Context: Continued Crisis Conditions

The foreclosure crisis plunged national homeownership to new lows.  In the aftermath, millions of Americans still face draining housing expenses.  In many parts of the country, these pressures have yet to abate at all. For over 11 million Americans, rental payments take up more than half their paycheck.  2.5 million Americans annually are evicted and pushed out of the communities in which they work.

Mortgage rate costs are putting homeownership out of reach for too many, a problem that is felt particularly acutely in communities of color.  Increasing numbers of Americans are being forced to leave home and find a place, whether with family members, friends, in cars, or on the street.

All of this occurs in the context of drastic resource shortages.  Of the $200 billion in federal resources devoted to all housing programs, only $50 billion goes to low-income families.  Just a quarter of those who qualify for Section 8 public housing support ultimately receive it.

Fannie Mae and Freddie Mac, the  government-sponsored enterprises responsible for housing finance, have been held under Federal conservatorship since the financial crisis, when they carried $5 trillion in mortgage-backed securities and debt on their balance sheets. Negotiations have long been underway to end this conservatorship and determine the structure of a new guarantee.


Senate Hurting Low-Income Borrowers?

Legislative action by this given Congress could only put low-income people into a deeper bind.  While S.2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act was touted as helping the little guy, a look at its provisions reveals the bill is a gift to banks that turns a blind eye to practices that harm financially vulnerable borrowers.

S.2155 – A handful of provisions in S.2155 reintroduce risk to the housing market by:

• Permitting steering by manufactured-home companies to affiliated lenders, increasing cost and risk to financially vulnerable borrowers.
• Eliminating escrow requirements for high-cost mortgages made by banks with assets between $2 billion and $10 billion, removing a protection designed to prevent the likelihood a borrower loses their home due to an unpaid tax lien.
• Exempting loans held in portfolio by these same banks from Qualified Mortgage requirements (they would no longer have to assess a borrower’s ability to repay).
• Exempting 85 percent of lenders from having to report the age, credit scores, and racial and ethnic breakdowns of borrowers. This would end a protection that prevents borrowers from being overcharged or discriminated against.
• Ending appraisal rules for high-risk mortgages in rural areas, introducing risks for rural borrowers.

GSE Reform — Senate Banking Committee members have been working for some time on a Government-Sponsored Enterprise (GSE) reform package that differs from the Federal Housing Finance Agency recommendations.  Legislative time before the midterms is likely too short for Congress to craft a genuine bipartisan deal on GSE but here are the issues at the core of the negotiations:

Building on a 2014 bill passed by the Senate Banking Committee, the Senate agreement that leaked earlier this spring would place Fannie Mae and Freddie Mac into receivership and repeal their charters to replace them with 10 private market guarantors.  The 2014 bill:

• Created the FMIC to ensure continued, widespread availability of an affordable mortgage rate, such as the 30 year fixed-rate mortgage.
• Set eligibility at a credit score around 750 and a 30-year fixed rate mortgage in which borrowers achieve an 80 percent loan-to-value ratio.
• Note: less than 50% of Americans have a credit score that qualifies them.

The deal introduced now would eliminate affordable housing goals in favor of an incentive system to encourage lending to low-and middle-income borrowers.  In addition, Republicans and Secretary Mnuchin have affirmed the importance of the 30-year mortgage, Sen. Warren has said she will not support a housing finance reform unless “it addresses the affordable housing crisis in this country.”

The specifics of the Senate Banking GSE reform package are:

• The 10 private-guarantors model differs from FHFA model, which recommends a limited number of guarantors.
• The agreement would turn these institutions into utilities with access to an explicit government guarantee against catastrophic loss.
• Tension exists regarding affordable housing concepts of “duty to serve” as opposed to a “mortgage assistance fee approach.”  A mortgage assistance fee is the conservative alternative to the Agencies’ mandate to serve underserved areas.

Secretary Carson’s Rent Hike

On Wednesday, Housing and Urban Development (HUD) Secretary Ben Carson, introduced a sweeping housing subsidy reform. This follows the executive order that President Trump signed earlier this month directing federal agencies to expand work requirements for low-income Americans receiving Medicaid, food stamps, public housing benefits and welfare. The administration cynically dubbed these administrative efforts “Welfare Reform 2.0.”

Sec. Carson’s initiative would raise rent for tenants in subsidized housing to 35 percent of gross income, up from the current standard of 30 percent of adjusted income. HUD officials estimate that about half of the 4.7 million families receiving housing benefits would be affected by this change. In some cases, rent for the nation’s poorest families would triple, increasing from a minimum of $50 per month to $150 per month.

This increase, which HUD argues is necessary to streamline its operations, would amount to about $3.2 billion in slashed benefits from the rent increase. This rediscovered Republican concern with spending rings hollow in the wake of their $1.5 trillion tax giveaway to corporations and the ultra wealthy. To the GOP, deficits are only a concern when they benefit the country’s most vulnerable.

HUD’s Rampage on Rental Assistance

While Sec. Carson is busy raising the financial burden on the most vulnerable Americans, he has been derelict in his duty to execute legislation that has been passed by Congress. Most notably, Carson is delaying the implementation of the Housing Opportunity Through Modernization Act of 2016 (HOTMA), which was passed with bipartisan support. The measure would streamline the formulas for calculating rents, deductions, and other factors for housing aid, ensuring that rental assistance continues to make housing affordable for low income families.

The House Joins In

Carson’s delayed implementation of HOTMA provisions buys time for congressional Republicans to undercut the act. On Wednesday, a House Financial Services, Housing Subcommittee hearing was held to discuss draft legislation, the Promoting Resident Opportunity through Rent Reform Act (PROTRRA). PROTRRA would significantly weaken housing choice vouchers and sweep aside many HOTMA reforms by creating a tiered rental system that could raise minimum rent 11 times higher than under current law.

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Looking Ahead through the Midterms

Democrats have developed proposals around housing that they can campaign on this fall. Last year, Rep. Ellison introduced the  Common Sense Housing Investment Act. This legislation would change the mortgage interest deduction to a 15 percent credit and increase the amount of homeowners who receive the credit from 43 million to 60 million. The bill lowers the deductible cap on allowed interest expense paid on a mortgage from $1 million to $500,000, which would help to ensure that wealthy homeowners no longer get such disproportionate favored treatment.

It is unlikely that significant housing legislation will advance during this Congress. Republican GSE reform seems to be on the back burner while housing programs passed by the House are redundant next to Sec. Carson’s actions to triple rental costs.  With housing facing a severe crisis, Republican leadership makes itself vulnerable as voters weigh the impact of their policies.

Dereg Now, Dereg Whenever (Apr. 25)

Update 266 – Dereg Now, Dereg Whenever:
Capital Rules Debate Pits Quarles vs. Quarrels

If rapidly increasing economic growth, historic highs in financial industry profits, and capital markets in record territory of late all call for deregulation, there’s no bad time for it.  And if proponents of financial deregulation control the House, Senate, and White House — for now — this is most certainly the time, regardless of sectoral circumstances.

Here’s the story of the GOP working with financial regulators and market participants to bring down the “hairpin turn ahead” sign because no more accidents were occurring.




Last Week, Federal Reserve Vice-Chair for Supervision Randal Quarles appeared before House and Senate Committees to answer questions on his approach to supervisory standards.  In recent weeks, the Fed has issued revisions to a number of fundamental post-crisis standards. Quarles’ innocuous words like “efficiency” and “recalibration” belie the serious systemic implications these rulemakings have.  Leading regulators at the Fed and other regulatory bodies have raised important objections.

This while a Senate Banking bill, S.2155, sits at the doorstep of the House.  The Economic Growth Regulatory Relief and Consumer Protection Act would empower the Fed to free 25 of the largest 34 banks from stress testing, living wills, and the liquidity coverage ratio.  Quarles’ rulemakings suggest he is eager to tailor the same DFA pillars that S.2155 would deregulate.

These efforts look like a solution in search of a problem. The banking sector has been unprecedentedly profitable for three years running, lending remains strong, and the economy as a whole is gaining steam.

GOP Regulatory Pref: Capital over Supervisory

Reduced capital levels run counter to what some Republican appointees and officials have suggested about the value of capital requirements. In 2016, then-Chair of the Senate Banking Committee Richard Shelby said that for years, he has “urged regulators to implement strong capital standards.”  Just a year ago, Jerome Powell suggested capital levels were just right. Now in power, conservatives seem determined to relax rules for the largest banks under the guise of “modernization,” a familiar deregulatory term.

Capital Regimes Pre- and Post-Crisis

Capital held by the five largest banks doubled from 2008 to 2015, but only from 3 percent to 6 percent. Today, equity capital requirements range from 7 percent to 11 percent of risk-weighted assets, but it appears Quarles is primed to permit a reduction in capital levels.

Proposed Revisions

Enhanced Supplementary Leverage Ratio (ESLR) – On April 11, the Federal Reserve and the Office of the Comptroller of the Currency (OCC) issued a proposal to reduce the enhanced supplementary leverage ratio capital rules applied to Globally Systemically Important Banks (G-SIBs) and their subsidiaries. The proposal’s impact varies from bank to bank, but would slash some ESLR by up to 40 percent. Currently, G-SIBs must maintain a minimum SLR of more than 5 percent (3 percent plus a 2 percent buffer). G-SIB subsidiaries must maintain a 6 percent SLR. The new proposal would take the 2 percent buffer and turn it into a figure equal to one half of the firm’s GSIB surcharge. Subsidiaries’ SLRs would fall from 6 percent after similar tailoring.

•  The FDIC estimates this will result in the GSIB subsidiaries holding $121 billion less in capital at their FDIC-insured subsidiaries. Quarles sought to temper critics who cite this figure by predicting that aggregate capital will fall by just $400 million among bank holding companies. Nevertheless, the discrepancy here is troubling, indicating the Vice-Chair does not see systemic risk residing in subsidiaries across these firms’ operations. In the past, it was the norm for the regulatory bodies like the Fed and FDIC to be on the same page when it comes to capital requirements.

Stress Testing/Capital Buffers – On April 10, the Federal Reserve proposed a new “stress capital buffer” that totals the amount equal to losses incurred during a hypothetical stress test or 2.5 percent, whichever is greater. The revision would replace the existing requirement that 2.5 percent of risk-weighted assets be held as capital. It also replaces the quantitative objection to a firm’s capital plans under CCAR.  Under the new proposal, if a bank has common equity tier 1 capital of 8 percent and it falls to 5 percent, the bank’s stress capital buffer would be 3 percent. This would be added to the minimum 4.5 percent common equity requirement to total 7.5 percent. Federal Reserve estimates suggest this will lead to increased capital among GSIBs, but lower levels of capital among non-GSIBs.

Some analysts are concerned, however, that the loosening of assumptions related to balance sheet growth and the time horizon for expected dividend payments, would ultimately reduce overall capital levels. Recent stress testing data projects these proposals would lower capital at major banks by $30 billion. Goldman Sachs expects the eight largest banks to reduce equity capital by $54 billion as a result of potential stress test changes.

New accounting standard for loan losses – Federal reserve rules include a new accounting standard for loan losses.  This is significant, as it requires banks to forecast and set aside money for easily foreseeable loan losses before they occur. In the lead up to the financial crisis, banks were not recognizing losses well. Since capital rules are in place to guard against unforeseen losses, combining loan loss projections (for anticipated losses) with capital requirements is potentially dangerous.


Source: Federal Reserve Bank of Atlanta; Federal Financial Institutions Examination Council; Journal of Economic Perspectives; Keefe, Bruyette & Woods; regulatory filings


Brainerd on Cyclicality – In the first dissent since the Federal Reserve began to publicly disclose votes, Governor Lael Brainard voted in opposition to a rule that slashes the enhanced supplementary leverage ratio. In a recent speech, Brainerd said it was too soon to consider lowering capital requirements for big banks and urged against making judgements about the current capital and liquidity coverage before a full economic cycle has been completed.

•  Gruenberg on ESLR – FDIC Chair Martin Gruenberg reaffirmed support for the SLR set in 2014, refusing to join the Fed and OCC in issuing the new proposed rule. Gruenberg said leverage ratio requirements are “among the most important post-crisis reforms,” and that “the existing simple approach has served well in addressing the excessive leverage that helped deepen the crisis.”

•  Sen. Warren – At last week’s Senate Banking Committee hearing, Sen. Warren reminded Vice Chair Quarles that taxpayers were left holding the bag when the big banks didn’t hold enough capital. Under the new rule, JP Morgan, Citigroup, and Morgan Stanley could reduce capital by more than 20 percent at their bank subsidiaries and still meet leverage capital requirements. Wells Fargo and Bank of America can each reduce their capital by more than 15 percent.

•  Wall Street Journal – Even the Wall Street Journal’s editorial board criticized the Fed’s proposed supplementary leverage ratio reduction. The board pointed out that the current 6.6 percent leverage ratio among GSIBs is only slightly greater than their losses during the stock market crash in 2008. Reducing them any further would only endanger the system, the editorial board argued.

S. 2155 in this Context

These proposals reflect Quarles’ apparent objective, to include risk-profiling in the financial regulatory capital regime.  Increased tailoring of enhanced prudential standards has been a primary post-crisis goal of congressional Republicans. Critics see tailoring as little more than a euphemism for sotto voce deregulation.

When a handful of Senate Democrats joined with Republicans to pass S. 2155, they voted to give the Federal Reserve a wide purview to tailor enhanced prudential standards on a variety of fronts for banks between $100 and $250 billion in assets.  These pillar revisions include changing the approach to company run stress tests, living wills, and liquidity requirements.

Faced with congressional questioning about how he would customize supervisory standards, Quarles highlighted four key risk profiles for supervisory standards on an individual bank– size, complexity, interconnectedness, and character of bank portfolios. In a rare case of a GOP-led Senate bill ceding authority to the Fed, S. 2155 gives the Fed sweeping discretion to tailor systemic risk rules set by DFA.

What’s Next?  Rules on Fed’s Radar

In his testimony, Quarles hinted more deregulation is on the way at the Fed.  Before the HFSC, Quarles attacked the Volcker Rule, implied he would reduce the risk-based capital surcharge at some of the nation’s largest banks, and hinted that he wanted to end limits on capital distributions due to weakness in risk management at large banks. In front of the Senate, Quarles outlined his plans improve the “regulatory efficiency” of stress testing, calibrate the LCR for non-GSIBS, and enhance stress testing transparency.

While Quarles is powering ahead, S. 2155 is currently held up in the legislative progress. The bill passed a Senate floor vote more than a month ago, 67-31, but has since been held up in the House. This is because Rep. Jeb Hensarling, the outgoing Chairman of the House Financial Services Committee, is refusing to rubber stamp the legislation. For the moment, he has the backing of House Republican leadership. Negotiating with Hensarling would surely involve making the bill more deregulatory, and that would risk alienating cosponsoring Democrats and dissolving the bill’s bipartisan backing.


1st Qtr Bank Profits Break Records (Apr. 23)

Update 265 — 1st Qtr Bank Profits Break Records
But Markets Skeptical: Is an Encore in Store?

With the last of the financial sector’s quarterly earnings reports for 1Q18 trickling in, we take a look at the condition of the large and diverse financial sector in the United States.  

What we find is a sector whose largest institutions almost all report recording-breaking if circumstantial profits. Analysts and some bank executives cast doubt though on the sustainability of the performance. Still, the banks’ performance begs the $2155-dollar question: why deregulate under these conditions?




Wall Street Gets a Tax Break, Sheds Risk

The Wall Street giants emerged from the financial crisis bigger and more profitable than ever.  Over the past ten years, the three largest banks by assets — JPMorgan Chase, Bank of America, and Wells Fargo — have added more than $2.4 trillion in domestic deposits.

Net income at JPMorgan Chase, the nation’s largest bank by assets and deposits, rose 35 percent to $8.71 billion.  Corporate tax cuts helped the six largest U.S. banks produce a combined net income that surpassed $30 billion for the first time ever.  The new corporate tax rate has saved the six largest banks about $2.9 billion thus far, contributing a ten percent increase in quarterly net profit.  The tax cuts are supposed to spur economic activity, such as lending and hiring. But loans at the four largest commercial lenders fell $2.5 billion last quarter and the combined loan count was below where it was a year earlier.

Can Wall Street Repeat?

The financial sector’s earning season that just ended makes clear the condition of its largest institutions, measured by annual profits. Along with the massive tax savings, the main factors behind Wall Street profits over the last 12 months have been:

• Trading Activity:  Trading revenue was the highest in three years as they capitalized on volatile equity markets.  Volatility in the markets came in and helped the equity trading. In particular, equity derivatives benefited Bank of America and others. Rising interest rates fueled revenue derived from lending.  Equity trading led, with every investment bank blowing past expectations in the most volatile quarter in years — even with U.S. stocks seeing the worst single-day plunge in almost seven years in early February.

• Interest Income: JPMorgan, Bank of America and Citigroup benefited as the Federal Reserve raised rates twice in the past four months, meaning they can charge more for loans.  All three firms posted higher net interest income in the first three months of the year, which they attributed to higher rates and loan growth.

• FinTech: Customers’ increasing acceptance of digital products and tools. Before online and mobile banking became popular, consumers generally opened a new account at the bank with the nearest branch; with more banking transactions done online or through smartphones, customers are picking national banks because of their well-known brands and the perception that their technology products are superior.

• Credit Quality: Credit quality remains a top concern for investors as Federal Deposit Insurance Corp. (FDIC) data shows credit-card loans reached a record last year. Bank of America and JP Morgan Chase both saw write-offs climb about eight percent, attributing the increase to souring credit-card loans. Citigroup warned that its cost of credit will likely increase in the current quarter. Regardless, all of the banks say consumer credit quality is holding up well amid low unemployment.  JPMorgan had to set aside more money to cover potentially bad loans, and the bank’s total charge-off rate — the percentage of loans it expects are not likely to be repaid — climbed to 1.20 percent of all loans. That compares to 1.07 percent of loans in 2Q17.

The following might put the profit margins on Wall Street in perspective. Wells Fargo announced a one-off write-down last week of $800 million to cover losses associated with its settlement with regulators. The firm’s tax savings from the first quarter alone came to $636 million, 80 percent of Wells’ settlement charge.
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Can Wall Street repeat this performance?  Citigroup Chief Financial Officer John Gerspach said last week that businesses had only begun taking advantage of the changes: “I think the best is yet to come.”

Community Banks Profitability Also Up

Having locked in long term loans at favorable interest rates, big banks have also taken steps to move risk off of their balance sheets.  As a result of this interest rate environment and competitive lending conditions, riskier assets have moved further down the industry as smaller, mainstreet financial institutions have “reached for yields.”

At first glance, the nation’s 5,700 community banks, with nearly $5 trillion in assets and record profits, appear to be as healthy as they have ever been.  Despite record profits, there is evidence suggesting some community banks are distributing lower quality loans in search of higher yields.

Some analysts are concerned that this combined with dangerous mortgage loans could increase risk in the community banking sector.  A provision in S.2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, would grant relief for banks with under $10 billion from the Volcker Rule and Qualified Mortgage safe harbor, opening the door for community banks to make riskier mortgage loans. The good news is that while individual banks may overextend themselves, community banks pose far less systemic risk than their larger counterparts.

Regional Bank Euphoria

While fewer than ten regional banks have announced their first quarter 2018 earnings reports, the results have been favorable for these institutions thus far. Comerica and KeyCorp each reported substantial increases in adjusted net income year over year. Northern Trust’s Q1 earnings totaled $381.6 million vs. $276.1 million the year prior. BB&T’s quarterly earnings are up 22 percent, compared to 4Q17.

Some institutions will see some short-term pain in exchange for long-term gain with the recognition of past tax deferrals. For instance, BMO Financial’s 1Q18 net income fell 35 percent due to the revaluation of its deferred tax asset of $425 million. This upfront charge will be more than worth it for BMO going forward as the company can now claim a significantly decreased tax rate.

If it passes the House, S.2155 is one of the biggest gifts the regional banking sector could have asked for. In raising the threshold for automatic enhanced prudential standards from $50 billion to $250 billion, the bill would allow regional banks to devote fewer resources to maintaining required capital buffers, complying with stress testing, and submitting resolution plans. In the short term, this will benefit these banks, but increased systemic risk could harm the financial system in the medium to longer term. Regional banks tend to have similar balance sheets, so while profit is strong at present, this class of banks rises and falls together.

The Sectoral Landscape 

The U.S. financial sector is far more stable than it was a decade ago.  Record profits, bolstered by the Republican corporate tax cut, do not appear to hide the same kind of asset bubbles, no-doc lending practices, and others risks that accompanied but went largely missed or ignored in the run up to the 2008 crisis.

The strength and stability of the financial system is thanks in no small part to post-crisis regulations. But industry lobbyists are presently hard at work taking aim at Dodd-Frank’s systemic risk protections via S.2155.

Even regulators themselves — the steadily increasing number of Trump-appointed ones at least — are not so much diligently applying lessons learned but are designing new federal rules to relax critical capital buffers, the leverage ratio, and stress testing.

More to come this week.

GOP Double-Down Hair-Doo (Apr. 17)

Update 264 — GOP Double-Down Hair-Doo:

Liked the Tax Cut?  How about a Perm?
While today marks the last day Americans will file their taxes under the old tax code, a number of Americans have already seen their paychecks influenced by lower tax withholdings.  Republicans wasted little time celebrating the Tax Cuts and Jobs Act (TCJA) before turning to tax reform 2.0 — the next round of tax cuts.
On the theory that nothing succeeds like success, the GOP seems to be staging a sequel.  What does entail substantively and will Americans want to see this movie again. And again…?




Tax Cuts Round Two

Lead by Rep. Mark Meadows, Chair of the House Freedom Caucus, Republican leadership is grating up a “phase two” of tax slashing in anticipation of the upcoming midterm elections.  This tax cut 2.0 is likely to be rolled out on two fronts: individual permanence and the indexing of capital gains.

Individual Permanence

The TCJA was a massive restructuring of the American tax code that significantly cut corporate taxes and provided more modest relief for individual filers.  Because no Democrats could be sold on it, the GOP had to pass the tax Act along party lines through the reconciliation process. Using reconciliation required tax drafters to adhere to the Byrd rule and ensure that their legislation did not add to the deficit beyond a ten-year window.

Making the individual tax cuts permanent would cost approximately $1.5 trillion in the decade after 2025.  Republicans hope this maneuver will put Democrats in an awkward position come November, because allowing the cuts to expire in 2025 would see the bottom 80 percent of income earners paying higher taxes than if the law had never passed in the first place (see more below).  This is a dangerous political game, however, as such a ploy would double the cost of the TCJA and further balloon the deficit.

Indexing Capital Gains

Beyond individual rate permanence, Republicans also seek to reduce the capital gains rate in a second round of tax cuts.  One initiative spearheaded by Sen. Ted Cruz would deflate capital gains for inflation. GOP lawmakers have long sought to slash the capital gains rate in the name of increasing investment.  But Trump railed against the preference on the campaign trail. National Economic Council Director Larry Kudlow has gone so far as to argue that the President could index capital gains via executive order.

Such an effort would only serve to make the Republican tax reform effort less equitable. According to the Tax Policy Center, nearly two-thirds of the gains from the Tax Cuts and Jobs Act will accrue to the top 20 percent of earners.  Increasing the preference on capital gains will double down on this upward redistribution because nearly 70 percent of all capital gains income is claimed by households making at least $1 million.

Gratuitous, if Deficit-Financed, Stimulus

CBO estimated this month that the country will hit trillion-dollar annual deficits by 2020, mostly thanks to Republican tax efforts and the recently passed omnibus.  Many economists view this level of stimulus as risky given where we are in the business cycle. The Fed is likely to continue to raise interest rates as the unemployment rate hits four percent, and rising debt combined with rising interest rates means rising interest costs.

The GOP has already started deflecting blame for its fiscal profligacy, with House Ways and Means Chair Kevin Brady claiming that “we don’t have a revenue problem in Washington, we have a spending problem.”  Brady then pointed to entitlement spending as an example of out-of-control spending, an indication that Republicans plan on making the middle class pay for their tax cuts twice – straddling future generations with huge deficits, and contemporary ones with entitlement cuts.

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Politics of Tax 2.0

GOP Fecklessness — This new round of tax cuts is additional evidence of a fundamental truth: it is in the Republican DNA to cut taxes.  The GOP has shown that its fiscal hawkishness during the Obama administration was nothing more than a political ruse.  Since assuming power they championed tax legislation that will increase the debt by $1.5 trillion over a decade and next negotiated a spending Act that will bring the deficit to $1 trillion in the next fiscal year.  All told CBO expects the debt to balloon to $33 trillion by fiscal 2028.

Legislation in the Works — Legislation to make individual rate cuts permanent has been introduced in both houses.  Senator Ted Cruz introduced a Senate bill to this effect, while Congressman Rodney Davis introduced a House version that makes pass-through rates permanent in addition to individual rates.  Republicans will use this legislation to chide Democratic candidates who decried the fact that the TCJA’s made corporate cuts permanent while setting individual cuts expiration date at 2025.  GOP leadership will suggest this is the Democrats’ opportunity to support making individual rates permanent. Don’t expect Democrats to bite.

The Democrats’ Take — Democrats are currently not going to support anything that does not fix more fundamental problems with the TCJA.  As Rep. Lloyd Doggett, member of the Ways and Means Committee, stated, the Republican proposals only “will make this debt situation even worse.” Senate Democrats have introduced legislation to roll back major parts of the TJCA.

Tax Plays Into Midterms

The push for a second round of tax cuts is nothing more than a political re-run in an election year.  As in the first round, Republicans did not involve Democrats in these talks. While they did not need Democratic support to pass the original TCJA, they need 60 votes this time around – a threshold they surely will not clear.  In short, Republicans always knew individual rate cuts would expire while corporate cuts would be permanent.

Nevertheless, polling trends indicate Democrats should prepare for the tax cuts’ growing popularity.  In December, the TCJA polled poorly, with just 33 percent approving. By January, that figure had increased to 46 percent approving somewhat or strongly.  February polls revealed a shrinking Democratic lead in generic Congressional control surveys alongside approval ratings for the TCJA reaching over 50 percent.  Since February, approval for the Act has leveled off marginally, with just four in ten Americans saying they like it.

By reopening the tax debate, Republicans run the risk of suffering the consequences after a winter where they were viewed as doing the bidding of the wealthiest.  It is hard to know which direction public opinion on taxes will go after tax day, but as always, but it is unlikely the Act will be resoundingly popular and a fair chance it may be associated with voters with entitlement reform and retirement insecurity.