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Monday, December 09, 2019 {{ new Date().getDay() }}

Republicans Know Deficits Don’t Matter (When They Control Spending)

“No politician (has) ever lost office for spending more money.” Donald Trump reportedly relayed this message from Mitch McConnell to his staff recently, and you can see that philosophy at work in the two-year budget deal he just struck with Congress.

In exchange for putting off the debt ceiling for two years, Trump agreed to eliminate the discretionary spending sequester—automatic spending cuts authorized in 2011 but continually nullified in the ensuing decade—which translates into $320 billion in new spending. This increase is partially offset by the extension of some customs fees and Medicare reimbursement caps that maintain the status quo.

While sequester waivers have become routine, the trend lines on spending point to something really different under Trump. Barack Obama and a Republican Congress cut discretionary spending by an average of 2 percent per year in his second term; so far Trump and Congress have increased it by 4 percent every year in office. And this accounts for much the economy’s resiliency in the Trump era, alongside the tax cuts he highlights.

The Brookings Institution Hutchins Center Fiscal Impact measure shows fiscal policy contributing to GDP growth since the end of 2017 by a rising margin, peaking at 0.86 percent in the first quarter of this year, a figure that will only rise with this new budget deal. As Justin Fox points out, the shift from fiscal policy detracting from growth in Obama’s last six years to contributing to growth under Trump accounts for the entire increase in GDP since 2017.

The point here is that old-fashioned federal spending works to increase demand and boost growth. None of the negative side effects we constantly hear about—public spending “crowding out” private investment, or deficits leading to runaway inflation—have materialized since the Great Recession. We had a persistent demand shortfall, and when government finally decided to fill it, the economy accelerated. This may be a spending theory more associated with liberals, but it’s certainly assisted the last two conservatives in the White House.

You will hear Republicans come back to these declarations about the evils of government spending as soon as a Democrat takes the oath of office and occupies the White House. While Obama’s economic team did prefer pivoting to deficit reduction after the first two years of stimulus, Republicans angrily denounced his presumably profligate spending at every opportunity. They demanded the sequester, and assorted budget cuts and caps along the way. They took every opportunity to reduce public investment as soon as they took control of the House in 2011. By 2013, public investment was at its lowest level since the Truman administration, according to The Century Foundation.

Republicans, in short, adopt situational ethics about spending—stiffly opposed when a Democratic president would sign the bill, broadly in support when a Republican wields the pen. Not coincidentally, these tendencies translate into throwing a wet blanket on economic growth in the Democratic years, and pumping it up in Republican years.

Of course, GOP officials are all too happy to performatively restrict spending on the very poor—applying work requirements to Medicaid, for example, or limiting states from maximizing access to food stamps. But these should rightly be seen as social and not fiscal policies, meant to reverse allegedly unfair handouts to people who don’t vote for them. The spending itself is a means to an end, and the aggregate level rises and falls depending on which party might benefit in elections.

Democrats should not be expected to play a similar game of demanding austerity depending on the White House’s occupant. Unlike Republicans they wouldn’t harm the economy for political gain. No, they do something far worse: Acting as responsible stewards, they seek to handcuff themselves in office by forwarding deficit reduction packages, sabotaging their own economies in the process. Both the Clinton and Obama administrations paid close attention to deficits, egged on by Republican legislatures but to some degree in on the game themselves.

The current incarnation of the Democratic Party sets up more to the left of those past administrations. Still, there are a few things they could fight for more strongly. For one, discretionary budget “parity”—an equal amount of spending in the discretionary budget on defense and non-defense items—has become a sought-after goal. Another way of saying that is that the government spends as much on the military as it does on every other non-mandatory program in the budget combined. But why should that be the standard? The fight should seek to have non-defense discretionary exceed military spending by a wide margin.

Second, in this particular case, Democrats agreed to pass an emergency supplemental spending bill at the border outside of the two-year budget deal. That seems to me to be an unnecessary relinquishing of leverage. Trump very obviously did not want to engage in any brinksmanship over the budget: Pairing that to the standards many Democrats wanted for the treatment of immigrants and refugees in the border supplemental, or at least trying to do so, would have been a strong move.

The budget deal also didn’t salt the debt ceiling under the earth, which many progressives see as an unforgivable error. I don’t. Under House rules, any time a budget resolution passes, the debt ceiling is deemed lifted; this is known as the Gephardt rule after the former Democratic House Majority Leader. The Senate doesn’t have such a rule, which is why we’ve had this trouble with debt extensions this year. Win the Senate and adopt the Gephardt rule and the debt ceiling problem goes away. McConnell doesn’t willingly give away leverage; it will have to be taken.

What McConnell does engage in, like his Republican colleagues, is runaway spending as long as a Republican is president. The hypocrisy of the cries of deficit hysteria from the GOP under Obama is certainly galling. But we should heed the lessons available here. Fiscal policy works. The warnings against it have yet to come true. Democrats should not apply brakes to themselves on spending if they get the chance. And if Republicans try the same special pleading for austerity under the next Democratic president, well, that’s what nuking the filibuster is for.

Why Are Big Banks Going To War With A Federal Judge?

The nation’s largest banks have devised a novel way to protect their interests and save themselves from hundreds of billions of dollars in legal exposure. They’re taking a judge to court.

Lawyers for 17 banks submitted an unusual filing in the Second Circuit Court of Appeals this week (just listing all the corporate lawyers involved takes up the first four pages). The banks – including JPMorgan Chase, Bank of America, Wells Fargo, Goldman Sachs, Citigroup and Morgan Stanley – stand accused of ripping off the mortgage giants Fannie Mae and Freddie Mac. The Federal Housing Finance Agency, Fannie and Freddie’s conservator, alleges that these banks improperly sold $200 billion worth of mortgage-backed securities without disclosing the shoddy underwriting of the underlying loans. FHFA argues the banks knew the loans in the securities were bad, yet sold them to Fannie and Freddie anyway, leading to massive losses and the need for a government bailout. So FHFA wants the banks to buy back the securities they improperly sold under false pretenses.

U.S. District Court Judge Denise Cote took over the case in December, 2011, and quickly made a series of rulings in the case, first denying a motion by the banks to dismiss the lawsuit. The bank lawyers have become so dissatisfied with Cote’s rulings, in fact, that they have asked the Second Circuit to reverse them. The filing calls for a “writ of mandamus” that would throw out a series of rulings around discovery, which the bank lawyers claim “deprived Petitioners of their right to obtain evidence.” (You can chew for a moment on the idea that banks are being deprived of their rights.)

Specifically, the banks want access to evidence on a separate unit of Fannie and Freddie’s business that stands apart from the traders who purchased the mortgage-backed securities. They want to raise the limit of depositions of the plaintiffs in the case – questions for executives at the FHFA, Fannie Mae and Freddie Mac – from 20 to 400. They want the judge to lower the threshold for relevance to collect evidence on the specific claims of fraud and punitive damages. All of these efforts by the banks would significantly lengthen the discovery phase of the trial, and could represent a fishing expedition, with the lawyers trying every tactic to muddy the core issues in the case.

What’s really surprising is that the banks would try to go over the head of Judge Cote, who will eventually have to preside over the case. Normally you wouldn’t try so hard to piss off a presiding judge and get a higher court to reverse her rulings. In the filing, the banks take pains to call Judge Cote “an experienced jurist,” but say that they simply must seek the writ of mandamus because of her “gravely prejudicial rulings.”

What’s really going on here?  The banks are frightened about their legal exposure. A loss at trial would lead to a multi-billion-dollar payout to FHFA. But even a cash settlement (which the banks claim Judge Cote, by her rulings, is trying to coerce) would likely trigger a wave of private litigation. Every investor who ever bought a mortgage-backed security would have a roadmap for recouping losses. Large banks are already on the hook for $100 billion in legal costs from their actions during the financial crisis. An adverse ruling in the FHFA case, and those costs would rise much higher.

This weighs on the banks’ stock prices, as investors steer clear of entities absorbing billions in losses every quarter. They want to limit their obligations wherever possible. And if that means suing a judge, so be it.

Photo: Matthew Knott via Flickr.com

How Deadbeat Banks Pushed Detroit To The Brink

This week, Michigan will attempt to finalize the assignment of an emergency financial manager for the troubled city of Detroit, essentially taking fiscal control from the duly elected city government. The new manager will have authority over a wide array of policies to balance the city budget, including unilaterally reworking wages and benefits in municipal labor contracts, firing entire staffs of city agencies, and selling off public assets. It’s not hard to see this plan as union busting sanctioned by the state. Amid a sea of public protests, the Detroit City Council will appeal the emergency manager’s installation at a hearing on Tuesday, but Mayor Dave Bing has resigned himself to the prospect.

Detroit faced major challenges even before the Great Recession, with the loss of manufacturing jobs in the auto industry and the hollowing out of the urban core (“white flight” into the ring suburbs robbed Detroit of its tax base going back several decades). The financial crisis and subsequent economic crash sent these problems into overdrive. But lately a new meme has arisen from supporters of the emergency manager ruling: Scapegoating the citizens of Detroit by characterizing them as a bunch of tax cheats. A report in the Detroit News asserted that only half of city property owners pay their property taxes, leaving $246.5 million uncollected annually. This figure represents the highest rate of unpaid property tax among major U.S. cities.

Rather than demonizing “deadbeat” homeowners, however, we should examine who actually evades responsibility for paying taxes on those properties. Detroit has been ravaged by an unending foreclosure crisis. Predatory loans trapped borrowers into monthly mortgage rates they couldn’t pay, with lenders particularly targeting lower-income minority areas like Detroit. Many of those homeowners are gone now, evicted from their properties. It is a pattern that has sunk property values, making the high property tax rates in Detroit even more unsustainable. But it also has turned banks into the real deadbeats, depriving the city of revenue.

In a foreclosure, the property reverts back to the bank, which then becomes responsible for all maintenance and upkeep, as well as any fees. Some banks simply ignore these responsibilities and refuse to pay taxes or keep the vacant property in good order. The more clever banks stick evicted homeowners with the bill.

Across the country and particularly in Detroit, banks have engaged in “walkaways,” where they start foreclosure proceedings but then find them too costly to complete. They choose not to finish the legal steps to foreclosure, leaving the properties vacant.  Banks that walk away from homes do not have to notify the city, or even the borrower, that they have abandoned the foreclosure process. Borrowers kicked out of their homes then find themselves still responsible for property tax payments.

We know this kind of behavior has occurred all over the country, leaving foreclosure victims stuck with the “zombie title” to an old property for years. And Detroit is ground zero for the phenomenon. A 2010 report of the Government Accountability Office found 500 bank walkaways in just four Detroit zip codes.

It’s impossible to know the real number of bank walkaways in Detroit without a house-to-house study.  Nevertheless, we know of the staggering number of vacant homes in Detroit, particularly in the neighborhoods ringing downtown. Someone is responsible for those properties, and it’s probably the bank. And we know that banks have a financial incentive to cut and run from cities like Detroit, starving their budgets and creating a cascade of blighted properties in their wake.

So while it’s easy to blame Detroit’s financial troubles on deadbeat homeowners, the more appropriate parties to blame may well be the deadbeat banks.

Photo: ifmuth/Flickr