Each week, in order to help promote transparency within the government, we will bring you an abridged congressional hearing, called a SenateShort. While we do our best to keep in the most crucial material, we do not excise anything because we think it’s unimportant. We are just trying to give the public a more manageable (and entertaining) glimpse into a very important part of our governing process. After reading, and if you have the time, we suggest that you take a look at the complete transcript.

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Introduction

When you see a rapid increase in private debt, that increase is not sustainable economically because it is basically reflecting reduced market power or reduced purchasing power of a core group of the population, and at some point they are going to collapse. And when that happens, it is going to affect everyone.

For more information on Professor Mian’s research please click here.

Atif Mian

Atif Mian is a professor of economics and public policy in the Department of Economics at the Woodrow Wilson School and Julis-Rabinowitz Center for Public Policy and Finance at Princeton University. He holds a bachelor’s degree in mathematics and a Ph.D. in economics from MIT. His recent work centers on understanding the origins of the global financial crisis, the political economy of Government intervention in financial markets, and the link between asset prices, household borrowing, and consumption.

The affluent are overrepresented among voters, Beltway influencers, and campaign donors. This unequal political influence is particularly consequential because of significant differences in policy preferences by income level. The general public is far more open than the wealthy to a variety of policies that would help restore the middle class.

For more information on Amy Traub’s research please click here.

Amy Traub

Amy Traub serves as senior policy analyst at the think tank Demos. She has a broad research focus on consumer debt, job quality and job creation, and policies to build the American middle class. Prior to Demos, Amy worked for Drum Major Institute for Public Policy, where she authored a number of influential reports, including “Principles for an Immigration Policy To Strengthen and Expand the American Middle Class.” She has contributed essays and opinion articles to a variety of publications, and her book chapter, “A Strengthened Middle Class,” appeared in Thinking Big: Progressive Ideas for a New Era.

Anyone who has ever run a business knows that hiring more people is a capitalist’s course of last resort. It is what we do if and only if rising customer demand requires it; further, that the goal of every business—profit—is largely a measure of our relative ability to not create jobs relative to our competitors. In this sense, calling ourselves “job creators” is not just inaccurate; it is disingenuous.

To read more about Hanauer’s causes please visit him online.

Nick Hanauer

Nick Hanauer is a partner in the venture capital firm Second Avenue Partners. One of the Pacific Northwest’s most successful entrepreneurs and investors, he has founded or financed dozens of companies across a broad range of industries, including manufacturing, retail, e-commerce, digital media, software, aerospace, and banking. Notably, he was one of the first investors in Amazon.com and the CEO and then chairman of aQuantive, which was purchased by Microsoft in 2007. Mr. Hanauer is involved in numerous civic and philanthropic causes and coauthor of two books, The True Patriot and The Gardens of Democracy, both national bestsellers in politics.

The businesses that we talk to are bottom-line driven and we do have to be competitive in order to attract them, or they will locate elsewhere. And so Nevada is looking in every way possible to try and be a competitive place so that the citizens there will have those opportunities. That is not just tax based, and it is certainly not just regulatory based. We need to provide a workforce that allows the business case for that business to want to do business in Nevada.

To learn more about Hill, please read his extended bio here.

Steven D. Hill

Steven D. Hill is Nevada’s director of the Governor’s Office of Economic Development. He is also the founder of the Silver State Materials. Prior to accepting his appointment, Mr. Hill served as CalPortland’s senior vice president, as well as chairman of the Service 1st Bank of Nevada, chairman of the Las Vegas Chamber of Commerce State Policy Task Force, and commissioner on the Nevada Commission on Economic Development. Hill has also served as chairman of Government Affairs for the Las Vegas Chamber, the Associated Builders and Contractors, and the Associated General Contractors.

Chairman Senator Jeff Merkley (D-Ore)

Oregon’s Senator Jeff Merkley has spent his lifetime in public service, getting his start as an intern for Oregon’s U.S. Senator Mark Hatfield. From there he and went on to serve as a national security analyst, first for the Pentagon and then for Congress. After returning to Oregon, Merkley led Habitat for Humanity before becoming President of the World Affairs Council in Portland. Elected to the state legislature in 1998, and in 2006, Jeff led a band of new leaders to take control of the Oregon House and end the gridlock in state government. In 2008, Oregonians made Jeff the first Oregonian to defeat an incumbent U.S. Senator in over 40 years. For more information, please visit him online.

Senator Dean Heller (R-NV)

Dean Heller was sworn in to the United States Senate on May 9, 2011. Prior to Heller’s service in the Senate, he served as Nevada’s Representative to the Second Congressional District, as Nevada’s Secretary of State for three terms, and in the Nevada State Assembly for two terms.He currently serves on the Banking, Housing, and Urban Affairs Committee; Committee on Veterans’ Affairs; Energy and Natural Resources Committee; the Commerce, Science, and Transportation Committee; and the Special Committee on Aging. Dean grew up with five brothers and sisters in Carson City, where he attended high school. In 1985 he received a Bachelor’s Degree in Business Administration from the University of Southern California, specializing in finance and securities analysis. He also worked as a stockbroker and as a broker/trader on the Pacific Stock Exchange. For more information, please visit him online.

Senator Elizabeth Warren (D-Mass)

Born in Oklahoma City in 1949, Elizabeth Warren became the first member of her family to graduate from college, eventually earning her law degree from Rutgers University. After working as a law professor at Harvard University, Warren was selected to lead the National Bankruptcy Review Commission. In 2008, she headed the Congressional Oversight Panel for the Troubled Asset Relief Program. Four years later, in November 2012, Warren won election to the U.S. Senate, defeating incumbent Scott Brown. For more information, please visit her online.

S. Hrg. 113-55 State of the American Dream: Economic Policy and the Future of the Middle Class

Hearing before the Subcommittee on Economic Policy of the Committee on Banking, Housing, and Urban Affairs

First Session on Examining The State Of The Middle Class And The “American Dream” Today From Personal And Policy Perspectives

June 6th, 2013

For the full transcript please click here.


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June 6 2013, 9:35AM. Room SD-538

Chairman Senator Jeff Merkley (D-Ore)
The American Dream is a powerful concept that has driven generations of Americans to strive for a better life. Every American might define the American Dream a little differently, but for most, it is a concept broadly based around prosperity and economic opportunity, regardless of where one started in life. Unfortunately, over the last decade at least, the American Dream has slipped slowly out of reach for many families. Today’s hearing aims to shed light on both the challenges of the Great Recession and those that have been developing over a longer period of time. We are also fortunate to have joining us a panel of experts in economics and business. I hope we can have a robust conversation about the causes of our shrinking middle class and what we can do at the national level to restore the pathways to the middle class.

Atif Mian
I want to focus my attention on the rules of the game in our financial system and how those rules impact the middle class and the broader economy.

In particular, I will just give the example of mortgage contracts, the way they have been written in the past and how they impacted the middle class and the economy. When the decline in house prices happened starting in 2007-08, people had most of their wealth in their homes. They lost all of that wealth, but that was not all. Many of them continued to use their retirement income to pay off the debt on a house that did not belong to them anymore because they were underwater.

That is the first impact of the financial crisis, and it is a direct consequence of the way we wrote down those mortgage contracts. The net impact of that on the American middle class has been devastating, and the enormous impact it has had in increasing wealth inequality in the U.S. is really remarkable.

The other important thing is that it is not just a question of middle class. Because we live in an interdependent ecosystem, what happens to middle class has a wider impact on the rest of the economy through two key channels in the mortgage context. One is the foreclosures that are imposed as a result of homeowners being underwater devastate home ownership across the country due to the fall in house prices that results from foreclosures. The other negative impact is the aggregate demand effect. When people lose wealth on their homes as they become underwater, they cut back on their spending drastically, and it is the middle America that has the highest propensity to consume, to spend.

The bottom line is that it is a result of the contracts that we decided to write down, the mortgage contract, that leads to this destruction of wealth of middle class as well as the decline in aggregate demand and the overall economy.

So what can we do to rectify this situation, to prevent it from happening again? We need to have smarter contracts and smarter policy. I have laid out the details (page 55 of this document) of what I refer to as “the shared responsibility mortgages.” These mortgages are very similar to your standard 30-year fixed-rate mortgages, with two important differences: the first one is that these mortgages offer downside protection for the homeowner based on her local house price index that is easily available these days. Under this protection, the standard 30-year fixed-rate mortgage payment, for example, will decline by X percent if the local house price index declines by X percent relative to when the mortgage was originally issued. It is very easy to implement, and think about what would have happened: there would be no such thing as an underwater homeowner, no foreclosures, and we would have prevented the negative externalities that I talked about.

Now, one cost of doing this is that the lender is going to charge more up front for the protection that they are going to offer. So for that, I am going to offer a second suggestion, which is that we add to the mortgage contract a 5-percent net capital gain that will go to the lender whenever the homeowner chooses to sell their house or refinance their mortgage. Given the average appreciation in house prices and the average volatility in house price growth in the U.S., if you do the math, one can show that the 5-percent net capital gain sharing with the lender completely neutralizes the cost of the downside protection that the lender offers. And so we come back to the same cost for mortgages as we have under the current system, but, importantly, this suggestion gives us the opportunity to share risks equally across the population. It protects the middle class and it protects our overall economy and our overall labor market.

If we had this system in 2007—and I have worked through the numbers—one can show that we would have largely avoided the Great Recession itself. In fact, if you think about the details, the proposal is entirely market based. There is no subsidy from the taxpayers involved ever. In fact, the shared responsibility mortgages help reduce budget deficits in the long run because they limit the need for countercyclical fiscal policy in the first place.

These mortgages give the lender a direct interest in worrying about potential bubbles, so that automatically imposes a safety valve in the system so the lenders will lean against the wind, so to speak, if they think they are in a bubble, because they are offering the downside protection so they will raise the interest rate or the cost of a mortgage if they think the housing market is in a bubble. So not only do these mortgages reduce the negative effects of the housing bubble, but they also reduce the likelihood of those bubbles from happening in the first place.



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Jordan Weil MD
2013-10-23 22:04:15
This seems like a brilliant idea and one I've never heard of before. But it would never happen. Can you imagine what the lobbyists would do if they got wind of something like this?
Angelia Harrington
2013-10-24 17:45:58
This is a thing? Never had it done to me before. I'd promptly withdraw myself from consideration if it did. Not because I have bad credit, but because I don't want to work for an employer that untrusting.