Erika Eichelberger

Erika Eichelberger

Reporter

Erika Eichelberger is a reporter in Mother Jones' Washington bureau. She has also written for The NationThe Brooklyn Rail, and TomDispatch. Email her at eeichelberger [at] motherjones [dot] com. 

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The Fed Was Supposed to Rein In Its Bailout Powers. Instead It Did This.

| Thu Mar. 13, 2014 12:05 PM EDT
Federal Reserve chair Janet Yellen at a House hearing in February.

Between 2007 and 2009, the Federal Reserve—the US central bank tasked with regulating unemployment and inflation—handed out an unprecedented $20 trillion in super-low interest loans to failing Wall Street banks. The 2010 Dodd-Frank financial reform law required the Fed to restrict its emergency lending powers so that too-big-to-fail banks don't expect the central bank to dole out easy money again in the event of another financial crisis. The Fed waited over three years to craft regulations to comply with the Dodd-Frank provision, and now it has finally drafted rules to limit its bailout powers, financial reform advocates say the restrictions are far too weak.

Dodd-Frank says that any future emergency lending by the Fed can't be used to bail out insolvent firms, has to be backed by good collateral, and can't go to a single institution. The law also imposes time limits on the Fed's emergency loans to banks. The draft rule that the Federal Reserve released in late December (before current Fed chair Janet Yellen was confirmed) misses the mark on all these requirements, Marcus Stanley, the policy director for the advocacy group Americans for Financial Reform (AFR) said in a letter to the Fed this week, adding that though the rule "complies with the letter of the law, it does not fulfill the spirit of the Congressional mandate," which intended to significantly restrict the Fed's bailout abilities.

"The rule mostly reiterates the language of [Dodd-Frank]," Stanley says. "And the drafters take advantage of every opportunity to interpret the statute in ways that minimize limits on emergency lending authority."

Instead of limiting the Fed's emergency lending powers to temporary cash assistance as it is supposed to, the draft rule imposes no clear time limit on how long a big bank may remain dependent on Fed largesse. And the draft regulation defines "solvency" with far too broad a brush, according to AFR. The proposed rule does not require the Fed to assess if a potential borrower's liabilities exceed the value of its assets.

While the emergency lending rule would ban loans to a single institution, it would still allow the creation of loan programs that lend to, say, three or four of the largest banks, while allowing smaller banks to flounder.

The Fed's draft emergency lending rule does not even set an interest rate at which loans will be extended, a provision that would help to limit the "moral hazard" of easy money, AFR notes. And the rule is unclear as to how it would value borrowers' collateral.

The Fed declined to comment. But last year, former Fed chairman Ben Bernanke dismissed concerns that the central bank had not yet drafted a rule limiting its emergency lending powers, insisting that the language in the Dodd-Frank law was sufficient. "I think that [Dodd-Frank] is very clear about what we can and cannot do. And I don't think that the absence of a formal rule would allow us to do something which the law prohibits," including bailing out an individual firm, or lending to an insolvent bank, he said at a House hearing in July.

The Fed is currently accepting public comment on its emergency lending rule, so it is possible that reformers may win some victories before a final rule is put in place. Though the lobbying clout of the financial industry vastly outweighs that of pro-reform groups.

Before the Fed finally drafted its emergency lending rules, financial reformers said the central bank was likely dragging its feet because it didn't want to cede some of its authority over the financial world. This latest lukewarm effort to rein in its bailout abilities makes it seem like that may be the case.

"There are two ways to keep the economy on an even keel," AFR's Stanley told me last July. "Through clear, transparent rules that treat everyone the same—which is pretty challenging, and involves taking on a lot of interests." Or, he says, "you get to create a whole bunch of money out of nothing and you can hand it out wherever the problem is… It's easier to have this magic power."

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VIDEO: Elizabeth Warren Calls for Closing Loopholes for the Rich to Cut Student Loan Debt

| Thu Feb. 13, 2014 11:52 AM EST

On Wednesday, Sen. Elizabeth Warren (D-Mass.) called on her colleagues in the Senate to reduce interest rates for Americans crushed by student loan debt, and pay for it by closing tax loopholes for the rich.

Last summer, after a rancorous debate, Congress passed a law setting interest rates for new student loans for undergrads at 3.86 percent for the coming year. (Rates were set to double to 6.8 percent.) However, the legislation did not cut interest rates for those who took out the same type of loan before July 1 of last year. Americans who financed their education earlier than that are paying off debt with interest rates of 7, 8, or 9 percent. On Wednesday, Warren joined Sens. Dick Durbin (D-Ill.), Jack Reed (D-R.I.), and Kirsten Gillibrand (D-N.Y.) in a speech on the Senate floor to highlight her plan to introduce legislation that would allow Americans with high-interest student loan debt to refinance their loans at the new rates being offered to first-time borrowers this year.

"Refinancing those old loans would lower interest rates to 3.86 percent for undergraduate loans," Warren said. "This is real money back in the pockets of people who invested in their education. Real money that will help young people find a little more financial stability as they work hard to build their futures. Real money that says that America invests in those who work to get an education."

Warren proposed that the rate cut be paid for by closing tax loopholes for the rich. "Right now, this country essentially taxes students—by charging high interest rates that bring money into the government—while at the same time we give away far more money through a tax code riddled with loopholes and let the wealthiest individuals and corporations avoid paying a fair share," Senator Warren said. "We can close those loopholes and put the money directly into refinancing student loans."

The senator said the Buffet Rule—part of a tax plan proposed by President Barack Obama that would eliminate tax loopholes for the wealthy to ensure that billionaires pay at least as much in taxes as their secretaries—would be a good place to start. Many of the wealthy end up paying a lower tax rate because they earn income through investments, for example, which is taxed at the capital gains rate of 15 percent. Meanwhile, an average head of household who makes $50,000 pays about 25 percent of her income in taxes. The Buffet Rule would require millionaires to pay an effective tax rate of at least 30 percent of their gross income.

Last year, during the debate over what to do with skyrocketing student loan rates, Warren introduced her own bill that would have cut need-based undergrad loan interest rates to the same low 0.75 percent interest rate that banks pay to the Federal Reserve for short-term loans. The bill was never brought up for a vote. Warren voted against the compromise plan that Obama signed into law in August, which allows interest rates on undergrad loans to fluctuate all the way up to 8.25 percent.

Wednesday Was Full of Good News for Obamacare. Here Are the Charts That Prove It.

| Wed Feb. 12, 2014 6:55 PM EST

More Americans enrolled in Obamacare plans in January than expected, according to data released Wednesday by the Obama administration. The Department of Health and Human Services (HHS) had expected to sign up 1,059,900 people last month. Instead, about 1.14 million people purchased health plans through the federal and state health insurance exchanges.

This is the first time since the uninsured started buying insurance on the exchanges in October that the administration has beaten a monthly enrollment goal. Here's what that looks like, via Sarah Kliff at the Washington Post:

The January sign-up number is down from the 1.8 million people who enrolled in December, but that was expected, because many Americans wanted to sign up before the start of the new year. Since enrollment began, a total of 3.3 million Americans have signed up for health insurance through the exchanges.

There was also a slight uptick in the number of young adults signing up for coverage in January. A quarter of the Americans who have enrolled so far are young people, who tend to be healthier, and who the Obama administration needs to hold down insurance costs. That's below the 40 percent target, but the trend is moving in the right direction.

The percentage of Americans who are uninsured hit a five-year low this month, according to a Gallup poll released Wednesday. Sixteen percent of adults do not have health insurance, the lowest uninsured rate since 2009.

Take a look (via Gallup):

 

Elizabeth Warren to Fed: Stop Delegating on Enforcement

| Wed Feb. 12, 2014 1:25 PM EST

On Tuesday, Sen. Elizabeth Warren (D-Mass.) and Rep. Elijah Cummings (D-Md.) called on the heads of the Federal Reserve, the US central bank that sets monetary policy and helps regulate Wall Street, to take a more active role in bank oversight.

The Fed metes out dozens of penalties against banks each year, for infractions including faulty foreclosure practices and inadequate money laundering protections. But the seven board members—including newly-minted Fed chair Janet Yellen—who head the Federal Reserve rarely vote on penalty and enforcement decisions. Of the roughly 1,000 formal enforcement actions taken by the Federal Reserve over the past 10 years, only 11 were voted on by the board. The rest were delegated to Fed staff, sometimes even mid-level employees. Warren, who sits on the Senate banking committee, and Cummings, the ranking member of the House oversight and government reform committee, have been critical of this arrangement, arguing that the delegation of authority results in penalties that are too lenient. On Tuesday, the two Democrats sent a letter to Yellen asking her to tighten the Fed's rules governing when the Board of Governors may delegate regulatory decisions, and when they must take important supervisory duties into their own hands.

"We respectfully request that the Fed…require that the Board retain greater authority over the Fed's enforcement and supervisory activities," Warren and Cummings wrote. "We believe that increasing the Board's direct role in overseeing enforcement and supervision would strengthen the Fed's efforts to reduce systemic risk in our financial system."

The two note that the Fed Board gives more attention to monetary policy decisions than to its other mandate, bank oversight: "While the Board votes on every important decision the Fed makes on monetary policy, the board rarely votes on the Fed's important supervisory and enforcement policy decisions." Other Wall Street regulators, such as the Securities and Exchange Commission (SEC), require that all bank penalties be approved by their head panels.

In their letter, Warren and Cummings ask Yellen to require the Fed board to vote on any penalty agreement that exceeds $1 million or that involves changes in bank management. They also urge that all board members be notified before staff members enter into an enforcement action against a bank.

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