Occupy Wall Street’s MTA Protest Fundamentally Misguided

Last week, protesters offered commuters a free morning subway ride in a protest against alleged mismanagement and corruption in the MTA. Video released this weekend show masked cohorts chaining open the emergency exit doors at 20-25 stops around the city. Fake MTA flyers were posted around the station urging riders to use the emergency door until the labor negotiations are resolved in favor of the Transit Workers Union. While the identities of those involved remain unknown, sources indicate they are a combination of OWS protesters and rank-and-file members of the TWU Local 100.

The Transit Worker Union leadership denies any knowledge of the stunt, but OWS put out a press release taking credit for the actions. Rate hikes, service reduction, poor working conditions, and racism are all cited as reasons for staging the protest, but OWS’s big beef comes with the levels of debt the MTA holds. They state:

“But here’s the real cause of the problem: the rich are massively profiting from our transit system. Despite the fact that buses and subways are supposed to be a public service, the government and the MTA have turned the system backwards—into a virtual ATM for the super-rich. Instead of using our tax money to properly fund transit, Albany and City Hall have intentionally starved transit of public funds for over twenty years; the MTA must resort to bonds (loans from Wall Street) to pay for projects and costs.

The MTA is legally required to funnel tax dollars and fares away from transportation costs and towards interest on these bonds, called “debt service.” This means Wall Street bondholders receive a huge share of what we put into the system through the Metrocards we buy and the taxes we pay: more than $2 billion a year goes to debt service, and this number is expected to rise every year. If trends continue, by 2018 more than one out of every five dollars of MTA revenue will head to a banker’s pockets.”

What’s more troubling than the outlandish notion that anyone is using the perpetually cash strapped MTA as a “virtual ATM” is the fundamental misunderstanding of financial markets. Let’s talk about this for a second.

According to OWS’s understanding, bonds are held by the investment banks, and interest is straight profit for the investment bank. In fact, bonds are not bank loans, and are not held by investment banks. Instead a bond is underwritten (or originated) by a bank for a fee, and sold to institutional investors (pensions, endowments, insurance companies etc.) who receive the interest on the bonds.

That means those $2 billion that allegedly go to “banksters pockets” are actually going to your dad’s 401k or NYU’s endowment — all of sudden those interest payments seem pretty important. And here’s the kicker; Goldman Sachs has no interest in holding onto MTA bonds for the next 30 years to collect their 5% coupon — that’s not their business.

Ok, but if the MTA got more funding from the state, then they wouldn’t need to issue debt in the first place, right? (Fun fact: the MTA received more funding from NYS and NYC this year than last, and had less total debt). Sure, if all of the MTA’s financing was subsidized by the state there wouldn’t be MTA bonds — but there would be more New York State and New York City bonds. Our government runs structural deficits, which means city, state, and federal Governments have to go to public capital markets to fund their spending, and guess who underwrites those bonds? Here’s a list of New York’s State recent bond sales and their underwriters.

The fact is that so long as we continue to run deficits, all governmental spending will be partially funded by debt, regardless of whether it comes from an agency, a municipality, the state, or Washington. Now, this raises an important question of how to fix our deficits, but that’s simply not what OWS is protesting by robbing from the MTA.

The issue of debt in project finance proves itself even more complicated than a simple governmental deficits. In short, the capital needs of a public transportation service is incredibly uneven. If an agency is in the process of a massive infrastructure installment — like that giant hole under 2nd Ave — there will be a need for billions of dollars to finance the project. Government budgets, on the other hand, are very smooth in terms of revenues and expenses. Even a government with a comfortable surplus will not want to accommodate billions for public works irregularly. Due to the mismatching of revenue streams of the government, and capital requirements of a public transportation service, debt issuance will always be a necessity.  Any large scale infrastructure project you can think of has probably been made possible in large part by debt financing.

There are plenty of issues on Wall Street that people should be protesting to change, but debt financing simply isn’t one. The interest payments go to institutional investors, not bankers, and they allow large scale projects to be completed. Whether OWS is willing to admit it or not, debt financing is not a conspiracy of the 1%, but an absolutely essential function of capital markets that enables the development of infrastructure. In this action, OWS robbed from the MTA and the taxpayers with a misguided sense of vigilantism that only highlights their misunderstanding of the financial system.

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14 Comments

  • John Penley
    April 3, 2012

    I have to say that if some of the money is going to NYU to help it take more space and gentrify more of the city, well, I would have to say that I am 99% behind the Occupy Wall Street transit protest. NYU has too much money and real estate as it is and if poor and working class people got a free ride on NYU’s dime I LIKE it.

  • Britton T. Burdick
    April 3, 2012

    OWS seems to misunderstand the financial system, and Mr. Penley seems to misunderstand gentrification. NYU doesn’t own the bars, clubs, headshops, cafes, music venues, or boutiques that can be found along the streets of the West Village.

    NYU didn’t close Mars Bar or Rusraty Afghan Imports, and NYU didn’t open the Marc Jacobs Bookstore or Ralph Lauren.

    If you want to complain about gentrification, that’s fine. But aim your criticism at the retail landlords who jack the rent from $3,000 a month to $25,000 a month in under three years, not a New York institution that’s been around since 1831.

  • Christian Redding
    April 3, 2012

    @john, you sound like an idiot. 401k’s and NYU endowments are merely examples of where this interest could go. Keep it in your pants.

  • Ian Hartz
    April 3, 2012

    @John Actually, money going to NYU’s endowment would help increase financial aid for its students. One of OWS’s main contentions is that the cost of education is unattainably expensive. So in essence, this whole stunt seems outrageously counterproductive to their cause. Once again OWS has failed to grasp the way the system works.

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  • Kaitlin Kelly
    April 3, 2012

    Thank you, thank you, thank you. It’s so nice to see that somebody not only gets it, but can explain why in clear and accurate terms.

  • Calvin Morris
    April 3, 2012

    If I were Kyle’s TA, I would check his papers for plagiarism. Seriously, is this crap copied from an econ 101 textbook? Did he hand this article in for an intro to municipal finance class? Thanks for the self-satisfied condescension, though. Keep telling yourself that you and your Daddy are the only people who “get” the system. I’m sure that’s what the crew on the Titanic thought about that ship as it was sinking, too.

  • Calvin Morris
    April 3, 2012

    If I were Kyle’s TA, I would check his papers for plagiarism. Seriously, is this crapola copied from an econ 101 textbook? Did he hand this article in for an intro to municipal finance class? Thanks for the self-satisfied condescension, though. Keep telling yourself that you and your Daddy are the only people who “get” the system. I’m sure that’s what the crew on the Titanic thought about that ship as it was sinking, too.

  • Kyle Zinn
    April 3, 2012

    @Calvin, I’ll be sure to tell them to keep a look out.

    But in all seriousness, I’d love for you to make a substantive response refuting any of the points I made. Unfortunately, your response — in true OWS style — relies on sarcasm, personal attacks, and vague analogies, rather than facts or reality.

    You’re not creating discussion or engaging in debate, you are simply further polarizing the issue through empty rhetoric.

  • Daniel HC
    April 3, 2012

    Regardless of whether OWS understands the way debt financing works, subway fares are still much higher than they should be. I paid about $90 a month to get to and from my high school because the city thought I lived too close to school, even though it was about a 40 minute walk. My parents could afford to pay, but there are plenty of people, students and workers, to whom that’s a burden. Subway fares are, in effect, a form of regressive taxation. Given how much the people of New York City rely on public transit, the state should be subsidizing the MTA heavily enough that fares at least don’t continue to rise (though NYS’s tax structure isn’t entirely progressive either).

    Whether OWS should have been chaining open service doors is another question, but they’re at least right that public transit, as the name suggests, is a public service, and should be publicly funded.

  • Michael Youhana
    April 3, 2012

    @Kyle

    Daniel HC partially touched on this point:

    Yes, the city or state would need to take on more debt to allocate more funding to public transport. A key difference between the MTA and the city or state is the means each has to raise revenue. The assumption underlying OWS frustration is that the city or state have the means to more evenly distribute the burden of paying for the MTA across society.

    Like Daniel HC suggests, they believe that the MTA is a public good in the purest sense of the term. Therefore, ‘the public’ [whatever that may be], as a whole, should share the burden of paying for the MTA — not just the portion of the public who finds the MTA useful.

    They make a second assumption and that is that “the rich” ultimately profit off of the bonds. They make a mistake I think you overlooked — assuming that the term “the rich” is synonymous with “bankers” and “Wallstreet.”

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  • Kyle Zinn
    April 3, 2012

    @Michael,

    I don’t necessarily agree with the notion that the city has any better means to evenly distribute the burden across for society. Whether the bonds are being issued by NYS/NYC or the MTA, they will ultimately be covered by the taxpayers, either directly in former case, or indirectly in the latter.

    I completely agree with both of you that the MTA is a public good, and as it stands today ‘the public’ contributes close to half the cost. According to their financials, they received $4.1 billion from the government in order to cover $9.7 billion in operating costs. Fares generated $5.2 billion in revenue. So for every 5 dollars generated from metrocards/tolls, you have 4 coming from ‘the public’.

    As to your second point, not only do I agree with you, but I took it one step further. Obviously there are plenty of rich people who are not bankers, but my point was that its not even just rich people who are receiving these interest payments. As I mentioned, pension funds are some of the biggest investors, and certainly most of the end recipients of those funds are not rich.

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