TIME europe

Europe’s Economic Woes Require a Japanese Solution

Rome As Italy Returns To Recession In Second-Quarter
A pedestrian carries a plastic shopping bag as she passes a closed-down temporary outlet store in Rome, Italy, on Tuesday, Aug. 12, 2014. Italy's economy shrank 0.2 percent in the second quarter after contracting 0.1 percent in the previous three months. Bloomberg—Bloomberg via Getty Images

The region’s economy is starting to resemble Japan’s, and that threatens to condemn Europe to its own lost decades

No policymaker, anywhere in the world, wants his or her national economy to be compared to Japan’s. That’s because the Japanese economy, though still the world’s third-largest, has become a sad case-study in the long-term damage that can be inflicted by a financial crisis. It’s more than two decades since Japan’s financial sector melted down in a gargantuan property and stock market crash, but the economy has never fully recovered. Growth remains sluggish, the corporate sector struggles to compete, and the welfare of the average Japanese household has stagnated.

The stark reality facing Europe right now is that its post-crisis economy is looking more and more like Japan’s. And if I was Mario Draghi, Angela Merkel or Francois Hollande, that would have me very, very nervous that Europe is facing a Japanese future — a painful, multi-decade decline.

The anemic growth figures in post-crisis Europe suggest that the region is in the middle of a long-term slump much like post-crisis Japan. Euro zone GDP has contracted in three of the five years from 2009 and 2013, and the International Monetary Fund is forecasting growth of about 1.5% a year through 2019. Compare that to Japan. Between 1992 and 2002, Japan’s GDP grew more than 2% only twice, and contracted in two years. What Europe has to avoid is what happened next in Japan: There, the “lost decade” of slow growth turned into “lost decades.” A self-reinforcing cycle of low growth and meager demand became entrenched, leaving Japan almost entirely dependent on exports — in other words, on external demand — for even its modest rates of expansion.

It is easy to see Europe falling into the same trap. Low growth gives European consumers little incentive to spend, banks to lend, or companies to invest at home. Europe, in fact, has it worse than Japan in certain respects. High unemployment, never much of an issue in Japan, could suppress the spending power of the European middle class for years to come. Europe also can’t afford to rely on fiscal spending to pump up growth, as Japan has done. Pressure from bond markets and the euro zone’s leaders have forced European governments to scale back fiscal spending even as growth has stumbled. It is hard to see where Europe’s growth will come from – except for increasing exports, which, in a still-wobbly global economy, is far from a sure thing.

This slow-growth trap is showing up in Europe today as low inflation – something else that has plagued Japan for years on end. Deflation in Japan acted as a further brake on growth by constraining both consumption and investment. Now there are widespread worries that the euro zone is heading in a similar pattern. Inflation in the euro zone sunk to a mere 0.4% in July, the lowest since the depths of the Great Recession in October 2009.

Sadly, Europe and Japan also have something else in common. Their leaders have been far too complacent in tackling these problems. What really killed Japan was a diehard resistance to implementing the reforms that might spur new sources of growth. The economy has remained too tied up in the red tape and protection that stifles innovation and entrepreneurship. And aside from a burst of liberalization under Prime Minister Junichiro Koizumi in the early 2000s, Japan’s policymakers and politicians generally avoided the politically sensitive reforms that might have fixed the economy.

Europe, arguably, has been only slightly more active. Though some individual governments have made honorable efforts – such as Spain’s with its labor-law liberalization – for the most part reform has come slowly (as in Italy), or has barely begun (France). Nor have European leaders continued to pursue the euro zone-wide integration, such as removing remaining barriers to a common market, that could also help spur growth.

What all this adds up to is simple: If Europe wants to avoid becoming Japan, Europe’s leaders will have to avoid the mistakes Japan has made over the past 20 years. That requires a dramatic shift in the current direction of European economy policy.

First of all, the European Central Bank (ECB) has to take a page out of the Bank of Japan’s (BOJ) recent playbook and become much more aggressive in combating deflation. We can debate whether the BOJ’s massive and unorthodox stimulus policies are good or bad, but what is beyond argument at this point is that ECB president Draghi is not taking the threat of deflation seriously enough. Inflation is nowhere near the ECB’s preferred 2% and Draghi has run monetary policy much too tight. He should consider bringing down interest rates further, if necessary employing the “quantitative easing” used by the U.S. Federal Reserve.

But Japan’s case also shows that monetary policy alone can’t raise growth. The BOJ is currently injecting a torrent of cash into the Japanese economy, but still the economic recovery is weak. Prime Minister Shinzo Abe finally seems to have digested that fact and in recent months has announced some measures aimed at overhauling the structure of the Japanese economy, by, for instance, loosening labor markets, slicing through excessive regulation, and encouraging more women to join the workforce. Abe’s efforts may prove too little, too late, but European leaders must still follow in his footsteps by taking on unions, opening protected sectors and dropping barriers to trade and investment in order to enhance competitiveness and create jobs.

If Europe fails to act, it is not hard to foresee the region slipping hopelessly into a Japan-like downward spiral. This would prove disastrous for Europe’s young people — already suffering from incomprehensible levels of youth unemployment — and it would deny the world economy yet another pillar of growth.

MONEY Employment

Youth Employment Enjoys Summer Surge

Jason Priestley as "Brandon Walsh" working at The Beverly Hills Beach Club in 90210
A summer job at the beach club helped Jason Priestley's "90210" character save money for a new set of wheels. ©Aaron Spelling Productions—Courtesy Everett Collection

The number of employed youth increased by 2.1 million this summer, as many young people took summer jobs or began looking for full time work.

From April to July of this year, the number of employed youth between the ages of 16 and 24 increased by 2.1 million, according to a report released Wednesday by the Bureau of Labor Statistics. The total number of youth employed increased to 20.1 million.

July is usually peak employment time for young people, and the numbers reflect that. At the same time, as the number of 16- to 24-year-olds looking for work increases, so does their demographic’s unemployment rate. The number of unemployed youth also spiked from April to July, rising by 913,000 to 3.4 million, down from 3.8 million last summer.

Overall, youth unemployment declined year over year, but only slightly. Since last July, this group’s unemployment rate declined 2 percentage points, to 14.3%. The labor force participation among young people—the total number working or looking for work—was 60.5%, the same as the previous two summers.

As far as where these young people are working, traditional summer jobs remain the norm. One-quarter of employed youth worked in the leisure and hospitality industry, which includes food services, and another 19% worked in retail.

While summer jobs remain popular, they’re a lot less common than in previous generations. Prior to 1989, the July labor force participation rate for young men was in the 80% range, and the participation rate for young women peaked that year at 72.4%. Since then, however, the labor force participation rate among young people has drastically declined, decreasing by about 20% for men and roughly 15% for women.

 

TIME Economy

Last Tango in Buenos Aires

Argentina’s debt snarl tells us how risky the global financial system still is

There’s a legal adage that goes, “Hard cases make bad law.” A recent U.S. court ruling against Argentina, which pushed the country into a new technical default on its sovereign debt, is a case in point. In 2001, Argentina defaulted on $80 billion worth of sovereign debt, the bonds that a country issues to raise money. It had to restructure, just as Greece had to more recently, and over the years, some 93% of creditors went along with the cut-rate deals, taking “exchange” bonds that paid 30¢ on the dollar. But some, like Elliott Management, the hedge fund started by Wall Street titan Paul Singer, held out. Tens of millions of dollars in legal fees later, Elliott won its case.

U.S. federal judge Thomas Griesa ruled earlier this summer that unless Argentina paid creditors like Elliott and other holdouts 100% of their claims, it couldn’t pay anybody else either. Paying Elliott in full would mean that, contractually, the country would also have to pay everyone else in full too–a $29 billion commitment. The case is full of gnarly legal and financial issues. But what it tells us is dead simple: the world financial order is still far too complex and opaque.

It’s tough to cry for Argentina–or the hedge funds. Elliott says Argentina’s claim that it has been victimized by “vulture funds” is a populist political strategy to drum up support for President Cristina Fernández de Kirchner’s flagging party. “Argentina isn’t a poor country. It’s a G-20 nation,” says Jay Newman, Elliott’s Argentina-portfolio manager. “It’s chosen for political reasons not to negotiate a fair settlement with us or more than 61,000 other bondholders.” Certainly no one would argue that the Argentine government is a paragon of best practices; Argentina, which had the same per capita GDP as Switzerland in the 1950s, has defaulted eight times.

Then again, the vultures haven’t done so badly either. Many bought bonds postdefault for pennies on the dollar. Now they are eschewing an already rich return for a regal one, while setting a precedent that could make creditors reluctant to cooperate when nations default in the future. “This has become a morality play which has given rise to a host of new legal problems,” says Jonathan Blackman, the Cleary Gottlieb partner defending Argentina. Both sides are waging an ugly media war complete with ad campaigns, as thousands of other creditors and financial institutions around the world nervously await the final result.

The Argentine crisis says three important things about the global economy. First, the balance between creditors and debtors has shifted. As data from the McKinsey Global Institute (MGI) show, there’s more debt globally than there was before the 2008 financial crisis. But now, the largest portion of it consists of public-sector debt. “Debt in the economy is like a balloon,” explains Susan Lund, a partner at MGI. “When you squeeze it out of one place, it grows in another.” With the rise in public debt comes a greater risk of sovereign defaults, which can wreak havoc on the global economy. (Remember the euro crisis?)

Second, the global economy is becoming more fragmented. The fact that a federal court in New York City ruled in favor of the holdouts is a sign that the global economy is splitting along national and ideological lines: British courts tend to go with majority rule in sovereign cases, and local markets have any number of other ways of handling sovereign-debt deals. The BRIC nations, aside from increasingly cutting their own trade deals, have set up a new development bank, which may become a source of capital for countries like Argentina if they remain shut out of the Western credit markets. That could give Russia and China more leverage over, for example, Argentina’s natural resources. (The country has the world’s second largest shale-gas deposit.)

Finally, the case shows how much work remains to be done in making our financial system more transparent. In addition to establishing a single standard for sovereign default, we desperately need to make complex security holdings more visible. Academics like Joseph Stiglitz say Elliott Management actually stands to benefit from an Argentine default, since nearly $1 billion worth of credit-default swaps exist on the country; that’s insurance that will pay out now that Argentina has defaulted. While the Elliott subsidiary that went to court against Buenos Aires says it holds no such swaps, the hedge-fund firm as a whole doesn’t disclose trading positions, and the swaps holdings of individual companies aren’t public record. They should be. Knowing exactly who stands to gain–or lose–from fiscal turmoil that can affect all of us could help make the right fixes at least a little more apparent.

TO READ MORE BY RANA FOROOHAR, GO TO time.com/foroohar

TIME cities

Trump Isn’t the Only Loser in Atlantic City

Revel Closing
People walk past the Revel Casino Hotel in Atlantic City, N.J. on July 23, 2014. Mel Evans—AP

Four casinos are expected to close this year in the New Jersey gambling destination

How big a loser is Atlantic City? So big that Donald Trump sued to have his name removed from two casinos he no longer controls. He may have to amend the suit, since one of them, Trump Plaza plans to shut down next month. And it will have company. The two-year old, twice-bankrupt, $2.4 billion Revel casino will also close after its owners failed to find a buyer, company officials announced Tuesday. As the saying goes, you don’t throw good money after bad.

Revel’s shutdown brings A.C.’s losing streak to four properties that announced a closing this year. The Atlantic Club was taken out earlier this year and Showboat, owned by Caesars Entertainment, locks down at the end of the month. Through June, revenues at the casinos are down 6.3%, continuing a long-term trend. The city’s casinos brought in $2.86 billion last year compared with $5.2 billion in 2006.

Atlantic City is a victim of the saturated mid-Atlantic casino market, and nearly 8,000 workers are slated to lose their jobs as the price to pay. There will be more closings, and not just in the mid-Atlantic states. In Tunica, Miss., Harrah’s (also part of Caesars) is closing a casino, citing declining gaming revenues due to higher competition.

In Atlantic City, some of those displaced workers will be able to catch on at the city’s remaining seven casinos—who will no doubt see an uptick in business—but the losses and closures are indications that the runaway growth days of gaming are over. Any new casino built in the region—indeed, just about anywhere– will have to take business away from somebody else.

And that’s exactly what’s been happening to Atlantic City– a municipality that never blossomed into the revived seaside resort envisioned when New Jersey opened its first legalized casino in 1978. It has remained mostly a weekend gambling jaunt for many punters, and they have since found other places to play. Oddly enough, north of Atlantic City, from Asbury Park to Long Branch, Jersey’s casino-less shore towns have revitalized and grown, despite taking a hit from Hurricane Sandy.

What’s grown around Atlantic City is competition. Just to the south in Delaware, three casinos are now operating. But one of them, Dover Downs, showed a 10% drop in revenues its first quarter. In Pennsylvania, there are 12 casinos in Philadelphia, Bethlehem, in the Poconos and near Pittsburgh. And revenues in that state have begun to slide in part because of competition from Ohio. The Buckeye state is about to open its 11th gambling den with the debut of the Hollywood Gaming at Mahoning Valley Race Course.

Americans threw down nearly $39 billion in gaming halls last year, according to the University of Nevada at Las Vegas, but that amount is flat with 2012. Meanwhile, the number of gambling locations continues to rise. As a result, says UNLV, 10 out of the 22 states with gaming in 2007 have seen declines since then. That would include Connecticut. Revenues from Foxwoods and Mohegan Sun peaked at $1.7 billion in 2006; they dropped to $1.17 billion last year according to UNLV. Pieces of the pie will only get smaller now that Massachusetts is planning to join the game.

It’s still possible that someone could buy the closed Revel and reopen it as a casino. “We hope that Revel can be a successful and vital component of Atlantic City under a proper ownership and reorganized expense structure,” the company said in a statement. But that doesn’t make much economic sense. Neither does building another casino anywhere in the region, but don’t bet against it. Plans are being hatched for a betting fortress in Jersey City, where the population density might favor the house a little more. And across the border in New York, Gov. Andrew M. Cuomo is planning to add four casino destinations in the upstate region to the nine racinos and five casinos already operating. The promise is jobs and more tax revenue, but New York may eventually discover what New Jersey did: that it had four more casinos than it actually needs.

TIME Security

The Government Is Trying To Explain Bitcoin to Normal People

US Government Issues Bitcoin Warning
A customer purchases bitcoins from the BMEX bitcoin exchange's Robocoin-branded ATM in Tokyo, Japan, on Wednesday, June 18, 2014. Bloomberg via Getty Images

Stepping into the Bitcoin market is like "stepping into the Wild West"

An independent government agency issued an exhaustive warning Monday about the risks of virtual currencies like bitcoin in an attempt to explain cryptocurrencies to the uninitiated.

The 6-page walkthrough from the U.S. Consumer Financial Protection Bureau outlined several of bitcoin’s potential dangers, including vulnerability to hackers, limited security, excessive costs and scams. It also announced a system that accepts virtual currency complaints. Though virtual currencies have become increasingly integrated into society, with states, companies, political organizations and even schools approving their use, the Internal Revenue Service has not granted it legal tender status in any U.S. jurisdiction.

“Virtual currencies are not backed by any government or central bank, and at this point consumers are stepping into the Wild West when they engage in the market,” CFPB Director Richard Cordray said in the statement.

Bitcoin risks, the CFPB said, include hackers who steal users’ private keys—the password to your digital wallet—using viruses and other malware. Unlike banks or credit unions, in which deposits are protected by federal agencies in case of failure, bitcoin isn’t insured by any government agency. If you lose your bitcoin stash, then “you are own your own,” the CFPB warns, and “there is no other party to help you.” Some digital wallet companies promise reimbursements for fraudulent transactions, but if there’s a widespread fraud event, it would probably be hard for most of these firms to come through on that promise. So what’s a bitcoin user to do?

“Read your agreement with your wallet provider carefully,” the report states. “Really, read your agreement with your wallet provider carefully.”

The report also tries to clarify bitcoin ATMs, which the CFPB points out don’t actually spew out bitcoin. Rather, the ATMs allow you to insert cash to be transferred into bitcoin to be moved into your digital wallet. The ATMs’ transaction fees may run as high as 7% and exchange fees $50 more than what you’d get elsewhere — and perhaps even more given bitcoin’s high volatility, the warning said.

The CFPB additionally warned customers of scams enticing users to invest bitcoin on the promise of high interest rates and no risk. In actuality, their bitcoin may be funneled into something else entirely, like someone’s food, shopping and gambling habits. The U.S. Securities and Exchange Commission previously warned of these so-called Ponzi schemes involving virtual currencies, and noted that such “fraudsters are not beyond the reach of the SEC just because they use bitcoin or another virtual currency.” And while the SEC’s authority provides some comfort, there’s generally few safeguards for average folks who step into the so-called Wild West without their guns and bugles.

Moral of the story? Using bitcoin may have its benefits, but don’t let it be your fool’s gold. Because “if it’s too good to be true,” the report said, “it just may be.”

 

TIME Economy

A Global Financial Guru Who Predicted the Crisis of 2008 Says More Turmoil May Be Coming

Reserve Bank of India Governor Rajan Unveils Interest-Rate Decision And Images Of Market Reactions
Raghuram Rajan, governor of the Reserve Bank of India, speaks during a news conference at the central bank's headquarters in Mumbai on August 5, 2014 Bloomberg/Getty Images

Raghuram Rajan, the governor of India's central bank, fears supereasy money from the world’s central banks is inflating assets and encouraging bad investments

Back in 2005, Raghuram Rajan, then economic counselor at the International Monetary Fund, stood up in front of the annual meeting of prominent economists and bankers at Jackson Hole, Wyo., and gave a presentation that his listeners could never have expected. The U.S. investor community was reveling in the high growth and stable financial conditions then prevalent around the world, but Rajan had examined global financial markets and come to a very different opinion. He argued that increasingly complex markets, which spewed out complicated instruments like credit-default swaps and mortgage-backed securities in ever greater quantities, had made the global financial system a riskier place, not less so as many believed. Such comments were considered near blasphemy at the time, and Rajan’s audience didn’t take him very seriously.

Three years later in 2008, however, his views proved prophetic. Rajan had generally predicted the sources of the worst financial collapse since the Great Depression of the 1930s.

Today, Rajan, now governor of the Reserve Bank of India, the country’s central bank, is worried again. This time, he’s fretting about the impact of the superloose monetary policies pursued by the U.S. Federal Reserve and other central banks to combat the financial crisis and resulting recession. Long-term low interest rates and unorthodox programs to stimulate economies — like quantitative easing, or QE — could be laying the groundwork for more turmoil in financial markets, he argues.

“My sense is that monetary policy can only do so much and beyond a certain point if you try to use monetary policy it does more damage than good,” Rajan tells TIME in his Mumbai office. “A number of years over which we, as central bankers, have convinced markets that we continuously come to their rescue and that we will keep rates really low for long — that we do all kinds of ways of infusing liquidity into the markets — has created markets that tend to push asset prices probably significantly beyond fundamentals, in some cases, and make markets much more vulnerable to adverse news. My worry is that, with inflation not being strong, this can continue for some time until things are so stretched that any signs of inflation, and a rise in interest rates, could precipitate a fairly strong market reaction. Certainly that volatility hurts across the world.”

Rajan, 51, would not pinpoint specifically where the most dangerous spots in global finance may be, but he did say that he believed assets of all sorts have become inflated. “I don’t know what the right level of the market is,” he says. “But I do know that, when I look at my portfolio and try to figure out where to invest, I can’t think of what I think is fairly valued.”

On top of his worries about market volatility, Rajan is also concerned that supereasy money is causing the misallocation of capital in the global economy, with potentially huge consequences down the road. “My greater worry is that by altering the price of capital for a substantial period of time, are we also, in a sense, distorting investment decisions and the nature of the economy we will have,” Rajan says. “Have we artificially kept the real rate of interest somehow below what should be the appropriate natural rate of interest today and created bad investment that is not the most appropriate for the economy?”

Still, Rajan agrees with Federal Reserve chairwoman Janet Yellen in her policy of slowly withdrawing stimulus measures and reintroducing higher interest rates. “We’re in the hole we are in. To reverse it by changing abruptly would create substantial amounts of damage. So I’m with Fed officials in saying that as we get out of this, let’s get out of this in a predictable and careful way, rather than in one go,” Rajan says.

Rajan has had to confront fallout from Fed policy personally. When he took the helm at India’s central bank in 2013, India was suffering as one of the “fragile five” — the emerging markets deemed most vulnerable to the winding down of Fed stimulus. India’s currency, the rupee, tumbled in value as investors fled, fearful that the curtailing of dollars in the world economy would strain the country’s ability to finance its large current-account deficit. In a series of deft and quick steps, Rajan stabilized the currency and wooed back investors, earning him breathless praise in the Indian media. Newspapers dubbed him a rock-star banker and even compared him to James Bond.

Now India, he says, is “absolutely” out of the “fragile five” stage. With narrowing fiscal and current account deficits, falling inflation and rising currency reserves, India’s fundamentals, he argues, are much improved and the country is less vulnerable. However, he sees the turmoil India experienced as part of a larger problem: a lack of coordination between the Federal Reserve and other central banks around the world. The actions the Fed takes are based mainly on U.S. domestic economic factors, but because of the unique position of the U.S. in the world economy, those decisions ripple through dollar-dominated financial markets in ways the Fed leadership does not take into account.

The results, Rajan argues, can ultimately be detrimental to the world economy. He points to a rise in increase in reserves in India and other emerging markets – built up as a cushion against potential fallout from the Fed’s tapering of stimulus – as one of those negatives. By topping up reserves, these emerging markets are in effect decreasing their demand for goods from the U.S. and elsewhere, and that is in the end bad for global growth.

“The U.S. should recognize that the actions we have to take to protect ourselves long run come back to effect the U.S.,” he says. “Therefore there is room for greater dialogue on how these policies should be conducted, not just to be nice, but because in the medium run it is in [America’s] own self-interest. If you are not careful about the volatility you are creating, the others have to respond and everybody is worse off.”

Ironically, Rajan has faced some criticism at home for doing just the opposite of the Fed — keeping interest rates high. Unlike most of the world, where bankers worry about low inflation or even deflation, India has been an outpost where inflation has been running too high, and Rajan took steps to bring the rate down — with some success. Some critics, however, complained that Rajan’s high-rate policy was acting as a drag on growth, and there was much press speculation when newly elected Prime Minister Narendra Modi took office in May that Rajan would come under pressure to cut rates to aid the administration’s promise to get the Indian economy back on track.

Rajan, though, says the central bank and the Modi Administration “are completely on the same page” when it comes to fighting inflation. “I have said repeatedly that the way to sustainable growth is to bring down inflation to much more reasonable levels,” Rajan explains. “That message is something the government is completely on board with. Once we do bring it down then we will have the opportunity to cut interest rates.”

Rajan also seems to be on the same page as Modi on economic reform. He expressed confidence that the new government is taking the initial steps necessary to set the sluggish Indian economy on its way to recovery. Growth rates can be restored to 6% to 7%, from current levels under 5%, Rajan believes, by making the government more efficient in implementing policies — unlocking badly needed but stalled investments in the process.

“Those are the things that are really needed to get the economy back to reasonable growth,” Rajan says. “This government has set about the implementation in a steady way and I am hopeful that we will see the fruits of that in the months to come.” Maybe Rajan will prove prescient this time around too.

TIME

Obama Can Still Secure His Legacy

If he plays his last two years like the final quarter and not the back nine

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The article also appears in the Aspen Journal of ideas

A question that faces president Obama, however the midterm elections turn out, is whether he’s going to play his final two years as the back nine of a casual afternoon of golf, coasting toward the clubhouse of former presidents, or as the final quarter of a tight basketball game.

When I was working with Steve Jobs on a biography in 2009, he had an inkling that he might only have a couple of active years left. As his cancer kept recurring, instead of slowing him, it spurred him on. In those two years, he refined the iPhone and launched the iPad, thus ushering in the era of mobile computing.

President Obama has scored two monumental achievements: helping to restore the financial system after the 2008 collapse and making it possible for every American to get health care coverage, even if they leave their jobs or have preexisting conditions. Obamacare may be undermined if the Supreme Court guts subsidies for the federal exchanges. If so the sweeping nature of the reform will survive only if Obama mounts a rousing, state-by-state campaign to rally passion for protecting the new health benefits.

As for rescuing the economy, this could be remembered as a hollow victory unless the recovery restores economic opportunity for all Americans. Growing inequality—of income, wealth, and opportunity—is the economic, political, and moral issue of our time. The fundamental creed of America is that if you work hard and play by the rules, you can support your family with dignity and believe that your children will have an even better future. But that is being lost as the middle class continues to be hollowed out and the poor get left further behind.

From the Pope to Thomas Picketty, and from Paul Ryan to Rand Paul, there has been a renewed focus on the moral imperative of economic opportunity. Obama seems ready to make that the defining passion of his final two years. Fighting for a fair deal for every American goes to the core of what he believes, rounds out the narrative of his presidency, secures his historic legacy, and leads naturally into what is likely to be the mission of his post-presidency.

The foundation for such a crusade could be a simple goal, one with moral clarity and patriotic resonance: that every kid in this country deserves a decent shot. He’s got a fresh team in place, and he’s already proposed many elements of an opportunity agenda in his My Brothers’ Keeper Initiative and other speeches. Among them: Universal preschool, so that no child starts off behind. Quality after school activities and summer internships. Apprentice programs like the bill proposed by Senators Cory Booker and Tim Scott. What also could be included is a public-private effort to create a service year program so that every kid after high school or college has the opportunity to spend a year serving their country in a military or domestic corps.

I’ve been reading Doris Kearns Goodwin’s magisterial narrative of the Teddy Roosevelt era, The Bully Pulpit. In 1903, Roosevelt felt a fierce urge to energize the American people around what he dubbed his “Square Deal for every man, great or small, rich or poor.” He spent nine weeks crossing the country by train, delivering 265 speeches. Most were carefully-crafted explanations of why corporate trusts needed to be reined in and workers needed to be respected. But when he arrived at the Grand Canyon, he began adding passionate calls to protect the environment and preserve nature. The trip not only refreshed his presidency, it refreshed him personally. The old boxer relished not only the “bully pulpit” but also being “in the arena.”

It’s probably not feasible for President Obama to embark on a weeks-long whistle-stop tour barnstorming for a new Fair Deal and a dedication to preserving the planet, though it would sure be fun to watch. It’s hard to break through all of the static, but after the midterms, it may be possible for him to propound a narrative that ties together his proposals for economic opportunity, poverty reduction, and immigration. A vision of a land of opportunity would appeal to most Republicans as well as Democrats.

For the final two years of his term, President Obama could stay above the fray and recognize that it would be pointless, given the dysfunctional nature of Congress, to try to accomplish anything significant. A rational calculus of risks and rewards, and a sober assessment of the possibilities for accomplishing anything in Washington, would argue for that approach. But I can’t help but hope that he decides to race against the clock rather than run it out.

TIME Economy

Wall Street Didn’t Win—Financial Reform Is Working

Stocks Continue Two Day Slide Downward After Federal Reserve Comments
A pedestrian passes the New York Stock Exchange on June 20, 2013 in New York City. Spencer Platt—Getty Images

The political system made the financial system more resilient—though not immune—to crises

For some critics, it’s an article of faith that the Obama Administration’s financial reforms were a sham, that the Too-Big-To-Fail banks that shredded the system in 2008 are riskier than ever, that “Wall Street Won,” as my favorite magazine declared last year. But there’s a mountain of evidence that reform is working. And the mountain grew last week, despite the denials of the critics.

The strongest new evidence came from a July 31 General Accountability Office report, a report commissioned by congressional critics who expected it to show that bailouts of megabanks were likelier than ever. The report did not show that at all. It showed that expectations of government support for the biggest banks had declined significantly, along with the funding advantages created by those expectations. The report clearly suggested that thanks to the Dodd-Frank financial reforms, the Too-Big-To-Fail problem is becoming less of a problem.

Now the critics are scrambling to spin the GAO’s inconvenient findings. New York Times columnist Gretchen Morgenson, a reliable geyser of outrage about Wall Street’s purported control of Washington, quickly dismissed the report as a “muddle” and a “mishmash.” Senators Sherrod Brown of Ohio and David Vitter of Louisiana, the critics who requested that GAO investigate the Too-Big-To-Fail phenomenon, emphasized that the report did not conclude that the phenomenon had disappeared. Salon headlined its story: “America’s Recurring Nightmare – Big Banks Are Still Too Big To Fail.”

The critics claimed another victory August 5 when the Federal Reserve and the FDIC declared the so-called “living wills” for 11 megabanks—blueprints suggesting how they could be wound down safely if they got into trouble—were deeply inadequate. “Banks Are STILL Too Big To Fail,” complained the Daily Mail. Perhaps I’m biased–I helped former Treasury Secretary Timothy Geithner, the main architect of financial reform, with his recent book–but federal regulators cracking down on megabanks doesn’t sound to me like evidence that reform is failing. It sounds like evidence that reform is working. If the big banks don’t improve their living wills, they could face serious consequences.

Speaking of consequences: Bank of America just agreed to pay $16 billion to settle federal investigations into sales of sketchy mortgage securities, the largest corporate settlement in U.S. history. Overall, BofA has paid more than $50 billion to the government in fines and settlements, much of it related to bad behavior at Countrywide Financial and Merrill Lynch before it purchased them during the crisis. JP Morgan, Goldman Sachs, and other megabanks have also paid megafines. The critics have complained about the lack of executives in handcuffs—and there are legitimate questions about the design of some of the settlements—but the notion that Wall Street paid no price for the shenanigans that created the crisis is ludicrous.

After all, the worst financial firms either collapsed (Lehman Brothers), collapsed into the arms of a stronger partner (Bear Stearns, Washington Mutual, Countrywide, Merrill, Wachovia), or collapsed into the arms of the government (Fannie Mae, Freddie Mac, AIG). The shareholders of all those firms took baths. And since Americans are still furious about the Wall Street bailouts, it can’t be repeated enough: The banks paid for their extraordinary support. Taxpayers got all their money back, and will end up making more than $100 billion on their investments. It’s silly to argue that Wall Street got off scot-free just because the surviving Wall Street banks are making a lot of money. That’s what Wall Street banks do.

It’s even sillier to argue that the system is no safer than it was before the crisis. Long before the events of the last week, it was clear the problems that made the crisis so damaging have become less problematic. The big banks are no longer so overleveraged. They hold much more capital against potential losses. They’re much less dependent on precarious short-term funding. Large financial institutions like AIG and Goldman Sachs that once operated in the shadows because they weren’t technically “banks” have been subjected to much stricter regulation. And there’s a powerful new Consumer Financial Protection Agency looking out for Americans who were once at the mercy of payday lenders, mortgage brokers, and big banks. Even Paul Krugman–no fan of Secretary Geithner–now admits that reform “has actually done considerable good.”

In other words: Washington won. The political system made the financial system more resilient—though not immune—to crises. Government rarely makes things perfect. But in this case government made things better.

TIME Banks

U.S. Regulators: Wall Street’s Largest Banks Still Too Big To Fail

Bank Of America Reports Loss Due 6 Billion Dollar Legal Charge
Spencer Platt—Getty Images

The biggest banks still don't have adequate bankruptcy plans to avoid precipitating another economic crisis, said U.S. regulators

Eleven of the nation’s largest banks still do not have viable bankruptcy plans that would avoid causing widespread economic damage, U.S. regulators said Tuesday in a sweeping admonition of Wall Street’s giants.

The Federal Reserve and the Federal Deposit Insurance Corp said that the bankruptcy plans submitted by the 11 biggest banks in the United States fail to prepare for an orderly failure, have “unrealistic or inadequately supported” assumptions and do not properly outline changes in firm structure that would prevent broader economic repercussions.

“…[T]he plans provide no credible or clear path through bankruptcy that doesn’t require unrealistic assumptions and direct or indirect public support,” said Thomas Hoenig, the second-in-command official at the FDIC, in a statement.

Banks are required to submit an annual “living will” under the 2010 Dodd-Frank law, a legacy of the financial crisis of 2007-2008, in which the bankruptcy of Lehman Brothers was a precipitating factor in the economic crash that led to the Great Recession.

Regulators called for banks to create “living wills” to plan for a bankruptcy process that would not require the billions of dollars in taxpayer money doled out during the financial crisis, when many of Wall Street’s biggest financial institutions had to borrow billions from the Treasury to avoid disastrous collapse.

With Tuesday’s announcement, the large banks face the threat of tougher capital rules and restrictions on growth if they do not address the issues by July 2015.

“Too big to fail is alive and well. The FDIC’s statement that these living wills are not credible means that megabanks will live on taxpayer life support in the event of a crash,” said Sen. Sherrod Brown (D., Ohio), a proponent of legislation to increase capital requirements for the biggest banks, the Wall Street Journal reports.

Tuesday’s findings apply to banks with assets greater than $250 billion in assets, including Bank of America, Citigroup, Goldman Sachs, J.P. Morgan Chase, Morgan Stanley, Deutsche Bank, Credit Suisse, Barclays and others.

TIME Economy

S&P: Income Inequality Is Damaging the Economy

Improved education will have clear benefits for GDP growth, S&P says

Rating agency Standard & Poor’s has become one more emphatic voice blaming the halting post-recession recovery on high income inequality in the United States, as an S&P report out Tuesday claims that unequal wealth distribution is dampening the country’s economic growth.

Rising levels of income inequality in the U.S. is a drag on economic growth, and was a factor that contributed to S&P lowering its growth rating over the next decade from 2.5% to 2.8%, the report said. Income inequality leads to extreme economic swings, an uncompetitive workforce, and discourages investment and hiring, per S&P.

The U.S. Gini coefficient, a widely-used measure of income inequality, rose by 20% from 1979 to 2010. The non-partisan Congressional Budget Office showed that after-tax average income ballooned 15.1% fro the top 1% of earners, but grew by less than 1% for the bottom 90% of earners.

The S&P said in its report that government policies on taxation and government wealth transfers, including Social Security and Medicare, have not significantly reduced income inequality. Many government programs aren’t limited to assisting lower-incoming households and extend to wealthier groups more than they did at their inception, according to the report. The bottom 20% of households received only 36% of transfer payments in 2010, but received 54% in 1979, according to S&P.

The S&P recommended greater education levels as a key means to improve productivity, saying that if the American workforce completed just one more year of school over the next five years, productivity gains could add over $500 billion, or 2.4% to the level of GDP relative to the baseline.

S&P is an American financial research and ratings firm known for its stock market indices, including the S&P 500 and credit ratings on the debt of public and private corporations, as well as nations’ debts.

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