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This video, by the National Nurses United, promotes a financial transaction tax on Wall Street trading to help restore the economy.

Wall Street waged war on the American economy and middle class with its reckless gambling.

It wasn’t Fannie Mae or Freddie Mac that crashed the economy. It wasn’t the federal government. It wasn’t hapless homeowners who were sold mortgages they couldn’t afford. It was Wall Street financiers that aggressively sought and bought mortgages to package and sell as derivatives, which the banks could wager on.

Americans bailed out Wall Street, handing it a Marshall Plan for reconstruction after its bad bets blew up the world economy.  Now, three years later, happy days are here again for the Wall Street banksters. They’re hauling in big profits and paying outrageous bonuses. But the American middle class continues to suffer high unemployment, record foreclosures and rising poverty.

So it’s time for Wall Street to pay reparations. It’s time for a crash tax, a tiny sales tax on Wall Street transactions, the revenues from which would pay for Main Street restoration. It’s time for the 1 percent to repay the 99 percent, for Wall Street to share in the sacrifices necessitated by its rogue behavior.

The levy, sometimes called a Tobin Tax after the American economist and Nobel Laureate James Tobin, who endorsed it in the 1970s, is far from shocking or novel.  A financial transaction tax is advocated by a huge range of groups and individuals, from billionaires to conservative heads of state. Thirty nations, including Great Britain and Switzerland, already tax some financial transactions. The United States imposed a similar tax from 1914 to 1966. In addition to raising revenue in a time of government deficits worldwide, the tax would suppress the very kind of risky speculation that got the global economy into this mess.

Supporters of the tax include the expected — the AFL-CIO, Democratic benefactor George Soros, consumer advocate Ralph Nader, and economist Dean Baker, one of the few who saw the housing bubble and predicted its bursting. The unexpected include billionaires Bill Gates and Peter G. Peterson; former Goldman Sachs chairman John Whitehead, and former chairman of the Federal Reserve Paul Volcker. Conservative political leaders behind it include German chancellor Angela Merkel and French president Nicolas Sarkozy. Experts promoting it include Nobel Laureates Joseph Stiglitz and Paul Krugman. Moral leaders advocating for it include Archbishop of Canterbury Rowan Williams and the Pontifical Council for Justice and Peace.

Here’s what Archbishop Williams wrote in support of imposing the levy:

“There is still a powerful sense around – fair or not – of a whole society paying for the errors and irresponsibility of bankers; of messages not getting through; of impatience with a return to “business as usual” represented by still soaring bonuses and little visible change in banking practices.”

The European Commission recommended in September that the 27 European Union member countries adopt a .1 percent tax on financial transactions beginning in 2014. It estimated that the tax would raise $78 billion a year. Europe hesitates to institute the tax without a similar levy in the United States.

Earlier this month, two U.S. lawmakers who have long supported the levy introduced legislation to impose a smaller tax — .03 percent or 3 cents on $100 in transactions. The tax proposed by U.S. Rep. Peter DeFazio, D-Ore, and Sen. Tom Harkin, D-Iowa, would raise about $350 billion over a decade. (more…)

Video by Richard Curtis and Bill Nighy about the Robin Hood Tax, a tiny levy on bank transactions that could raise hundreds of billions for public services. Add your own voice to the campaign at http://www.robinhoodtax.org.uk

Eric Lotke

By Eric Lotke
Research Director at the Campaign for America’s Future

Today’s new unemployment report contains no news, just decimal point changes. It tells us what we already know, that times are bad. The question is whether our great nation can rise to the challenge.

Unemployment remains unchanged at 9.5 percent, with 14.6 million people out of work. In July, we lost 202,000 jobs in the government sector as the census winds down, and we gained 71,000 jobs in the private sector. African American unemployment grew fractionally worse to 15.6 percent, and teenagers to 26.1 percent.

But the micro details don’t change the big picture. People are out of work and out of hope. Mortgages are underwater, savings are in the tank and fewer than half of grown-ups think their kids will be better off.

So what are we going to do about it? Our 200 year old democracy ended slavery and turned the Great Depression into the New Deal. Can we thrive in this century too?

We know what doesn’t work. Asset bubbles and trade deficits. Tax cuts and supply side economics. Shopping for cheap stuff made in China. (more…)

Dean Baker

By Dean Baker
Co-Director, Center for Economic and Policy Research

Kenneth Feinberg, President Obama’s compensation czar for bailed out banks, appears to have taken some genuine steps to rein in excessive executive compensation at the basket case banks that received the most TARP money. He cut cash salaries by 90 percent in some cases and reduced overall compensation for the top executives at the seven institutions that received the most government money.

This is a good first step, but it is only a first step. The pay caps involve only a relatively small number of people in an industry where hugely bloated salaries are the norm. Even in these cases it is too early to know that the pay caps will actually prove to be binding. After all, Wall Street’s main craft is evading regulations and taxes. It is entirely possible that those clever Wall Street boys will find a way to get around whatever pay restrictions Mr. Feinberg puts in place.

Whatever happens to the pay of this small group of executives the real problem goes much deeper. The Wall Street folks view the wreckage from last year as a minor distraction and are eager to get back to business as usual. This attitude was best expressed by “a person close to A.I.G.’s board,” who said of plans to restrict pay at the AIG division that wrecked the company to $200,000: “that’s insulting … why wouldn’t anybody quit?”

Of course, this “insulting” pay package would still give our AIG executives more pay than 99 percent of the work force. They would be getting more than three times as much as the average teacher, firefighter, or nurse. They would be getting more than five times as much as the average factor worker and more than ten times as much as minimum wage worker.

Furthermore, if anyone among these other groups of workers mess up so badly that they bring down their employer, they lose their job. They don’t get to go somewhere else because a $200,000 paycheck is “insulting.”

Wall Street badly needs fixing. Fortunately we have the tool to do the job. It’s called a financial transactions tax (FTT) – a modest tax on trades of stock, futures, options and other financial instruments. Such a tax could easily raise $100 billion a year, while cutting the financial sector down to a manageable size.

An FTT is not an alien concept. We actually had a tax on stock trades until 1964. The United Kingdom still has a 0.25 percent tax on stock trades that, relative to the size of its economy, raises the equivalent of $40 billion a year in the United States.

If we follow the lead of the UK, we will a great revenue source that will barely touch most of the population. Investors who buy and hold stock for 10 years will barely be affected, as is the case of a farmer hedging her wheat crop. However, someone who buys stock at 2:00 with the intention of selling at 3:00 would pay a substantial price.

There are many other good arguments for an FTT, including that it is the fairest way to fix the damage to the budget caused by the recession and the bailout, but an FTT will not get an airing in a Congress where the banks continue to wield enormous power. Congress will only consider an FTT, as opposed to more regressive proposals like a national sales tax, if the public demands it.

The public will have an opportunity to express their outrage at the banks and the need to rein them in at the Showdown in Chicago beginning on October 25. If this protest proves successful, and there are hundreds more like it around the country, then Congress may start thinking more clearly about measures to change Wall Street culture and to get back our money.

***

Dean Baker is the author of the new book, “Plunder and Blunder: The Rise and Fall of the Bubble Economy.”

*** 

This piece was first published on Huffington Post.

Leo W. Gerard: Economist James K. Galbraith, the Lloyd M. Bentsen Jr. Chair in Government/Business Relations at the University of Texas, recently told Deborah Solomon of the New York Times that you are “the person with the most serious claim” for predicting the onslaught of the current credit disaster.

The promo for your most recent book, Plunder and Blunder: The Rise and Fall of the Bubble Economy (PoliPoint Press, 2009), says the fall of the bubble economy was “completely predictable.” But you were standing nearly alone out there for some time yelling, “The collapse is coming, the collapse is coming.”

When did you get the first inkling that the collapse was impending and what did that feel like?

Dean Baker: I learned from the stock bubble in the 90s that the timing was hard to predict but  I first became convinced that it was starting to burst in the fall of 2006, (house prices had begun to fall) and I wrote a forecast projecting a recession for 2007. It turned out that I was still somewhat premature. I was expecting the price decline to gain speed more quickly and to have a more immediate impact on the economy. However, according to the National Bureau of Economic Research, the official arbiter of recessions, the current recession did begin in 2007, so I was not too far off.

As a more general matter, I did feel somewhat vindicated, although it was striking to me, that even as the bubble was very much in the process of deflating in late 2007 or even early 2008, most economists were still convinced that it would have little consequence for the economy. I recall repeated pronouncements from former Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben Bernanke that the problems were contained in the subprime market.

Gerard: What were the clues you saw that others ignored or missed?

Baker: For most economists, the idea that a market would take leave from its senses – that it would be driven by speculation – is almost inconceivable. Given that we had just seen a massive bubble in the stock market, it really should not have surprised people to see one also develop in the housing market.

The main factor that attracted my attention was the sudden spurt in house prices beginning in the mid-90s. For the hundred years from the 1890s to the 1990s, house prices nationwide had just tracked the overall rate of inflation. Yet, from 1995 to 2002 (when I first noticed the bubble), house prices rose by 30 percent in excess of the rate of inflation.

There was no explanation for this sudden jump in prices based on the fundamentals of supply and demand. Income growth had been healthy in the late 90s, but not extraordinary by the standard of the early post-war years. Furthermore, income growth had largely stopped during the 2001 recession.

Population growth was slowing, which should have slowed housing demand. On the supply side, we were building houses at near record rates, so clearly there was no serious supply constraint.

If there is a big run-up in house prices and no obvious force driving it on either the demand or the supply side, then it sure looks like a bubble. Just as additional confirmation, I checked rents, which tend to more or less follow sale prices. Rents had increased only slightly more than the rate of inflation in the late 90s, and by this decade, they were falling behind inflation. There certainly was no evidence of growing demand pressure on the housing market there. 

Finally, I noticed the rise in vacancy rates. This is consistent with people buying homes for speculative purposes. Many investors were willing to gamble on a high price for a new home or condo, betting that it would go up even more in the future. Of course, this is not sustainable. Not many people can afford to keep a unit vacant for a long time, since it means that they are paying the mortgage and getting little or nothing back. The high vacancy rates of this era virtually guaranteed that the bubble would burst.

Gerard: Did you also see problems with subprime mortgages contributing to the bubble?

Baker: The problems in the mortgage market were hardly a secret. The subprime share of the market nearly tripled from 2002 to 2006. The Alt-A share, which are typically mortgages taken out by small business owners with variable income (and often in accurate tax returns), exploded from around 1 percent to 15 percent. This should have set off flashing red lights to any serious economist.

And, the stories about liar loans and phony documents were everywhere. I was getting e-mail from people around the country telling me about friends and relatives employed by mortgage banks who were told to put in fake numbers so that the banks could issue loans. Certainly the regulatory agencies must have known this was going on.

Gerard: But if you noticed those clues, and looking back on it, those clues are actually quite obvious, why did the vast majority of financial analysts and economists and managers for large investment funds including pensions and endowments, fail to see the bubble and its implications?

Baker: The bulk of financial analysts and economists largely repeat the conventional wisdom without ever seriously trying to assess whether it makes sense. They unthinkingly follow the conventional wisdom because of the structure of incentives in their profession. No one is going to get fired because they didn’t see the housing bubble. In fact, few people are likely to even miss a promotion because they didn’t see the bubble.

Economists and financial analysts are not like steelworkers or people in other occupations. They don’t get evaluated based on their performance. They can mess up every day of the week through their whole careers, and this would be just fine, as long as they messed up in the same way as their peers.

On the other hand, the few economists/analysts who spoke up to warn about the bubble were taking huge risks. Of course, we were all ridiculed at the time. If you were an economist working at a major investment bank and tried to tell them that all their big money-making deals were going to get them in trouble, they would probably tell you to shut up and fire you if you didn’t.

If the housing market stayed strong and house prices kept rising or just remained stable, then any economist who had warned of the bubble would be laughed off as a chicken little.

In short, the incentives are such that the overwhelming majority of economists will never challenge conventional wisdom even if they think it is wrong. They are there to hold on to their jobs, not to inform the public about the economy.  

Gerard: Did you know the collapse would be this bad? How bad will it get?

Baker: I knew that it could be very bad. I was trying to be contained in my pessimism (I couldn’t completely ignore the conventional wisdom either), but I did warn that the downturn could develop into a Japan-style financial crisis. This obviously is the case that we are looking at.  Of course, if the Fed and Treasury had moved more quickly, they could have prevented some of the damage that the financial system is now seeing.

The same applies to fiscal stimulus. It was painful sitting through the months of the election campaign and then the transition when the government was completely paralyzed. At that point, economists from across the political spectrum all recognized that the economy needed further stimulus, but the politics were such that nothing could move.

As it is, the stimulus package passed by Congress is a good start, but it is nowhere near big enough to turn the economy around. The unemployment rate is virtually certain to shoot past 8.0 percent in the February jobs report and is likely to hit 9.0 percent by summer. If we are lucky, the stimulus will provide enough of a boost to keep the unemployment rate from reaching 10 percent, although I would not take this for granted at this point.

In addition to higher unemployment, house prices will continue to fall at least until summer. The big question in my mind is whether house prices return to their pre-bubble level or they overshoot on the way down. At this point, I would bet on overshooting. This implies an even larger loss of wealth for homeowners, more foreclosures and more big losses for banks.

Gerard: Will the stimulus stop the free fall?

Baker: If we are to turn things around, we really need much more stimulus and we need it quickly. My favorite idea at this point is a tax credit to employers for giving workers paid time off. For example, if employers offer paid parental leave or sick leave, or paid vacation, or increase the days they already offer, then the tax credit would cover the lost work. This can be a quick way to get millions of people back to work.

The arithmetic on this is straightforward. Suppose that employers of 100 million people give their workers an amount of additional paid time off that is equal to 5 percent of their work time. These employers would suddenly have demand for 5 percent more workers, or 5 million workers. I can’t think of a quicker, less bureaucratic way to create jobs at this point, especially now that we have already funded most of the shovel-ready infrastructure projects.

Gerard: What must be done to prevent this from recurring?

Baker: There are two key points. First we must rein in the political and economic power of the financial sector. The financial sector must serve the real economy, not the other way around. There is a long list of reforms that are needed to ensure this outcome, but the main point is that an efficient financial sector is a small financial sector.

One way to keep it small is to tax it. If we had a very modest financial transactions tax, for example 0.25 percent on the purchase or sale of a share of stock, it would have very little impact on people who invest for the long-term. However, it would have a huge impact on people who are buying at 2:00 and selling at 3:00. This sort of tax would discourage such speculation, making the markets friendlier to long-term investors.

It would also reduce the size of the financial sector, since the industry makes much of its profit off this sort of speculation. In addition, such a tax could raise more than $100 billion a year. That’s real money even in Washington.

The other point is that a balanced economy, in which workers share in the gains of growth, is not conducive to financial bubbles. We didn’t have any major bubbles in the three decades following World War II. During this period, productivity gains were passed on in wage gains, which in turn fed consumption, which led firms to invest in expanded capacity. The basis for the bubble economy was created in the 80s when this virtuous circle broke down and workers could no longer count on seeing their wages rise in step with productivity.

In short, if we want to prevent another financial bubble and the sort of economic collapse caused by its bursting, we should support policies that allow workers to share in the gains of growth. That sort of world favors investment in the productive economy rather than financial speculation.

***

Dean Baker, co-director of the Center for Economic and Policy Research in Washington, DC., has written several books. His most recent, Plunder and Blunder: The Rise and Fall of the Bubble Economy (PoliPoint Press, 2009), chronicles the growth and collapse of the stock and housing bubbles and explains how policy blunders and greed led to the catastrophic market meltdowns. 

His analyses have appeared in many major publications, including the Atlantic Monthly, the Washington Post, the London Financial Times, and the New York Daily News. His blog, Beat the Press, features commentary on economic reporting. 

 He is a frequent guest on National Public Radio, Marketplace, CNN, CNBC and other news programs.