Middle-Class Issues

It's great news that Obama is doing as well as projections like this one suggest (where he wins with almost 350 electoral votes). But he has campaigned as a moderate, appealing to the economic majority with a combination of tax cuts and cheap, low-cost reforms in areas like health-care. If the economy hadn't gone into crisis mode, we would be taking more skeptical views of Obama's political genius right now.

How should the mass middle-class decide how to vote? A clear choice was laid out by John McCain and Michael Moore.

On October 26th, John McCain said this at a rally:

We’re going to double the child deduction for every family. We’ll cut the capital gains tax. We’ll cut business taxes to help create jobs and keep American businesses in America. You know, as Joe the Plumber and small business owners across the country have now reminded us all, America didn’t become the greatest nation on earth by giving our money to the government to spread the wealth around.

This reflects the core Republican position throughout the 20th century: cut taxes and justify it by larding large cuts for the top brackets (capital gains) with apparently middle-class cuts (child deduction). Denounce redistribution, and make this seem like something other than plutocracy by equating redistribution with socialism and poverty.

In reality, public services create wealth, and they built the mass middle-class. Governments built middle classes with high-quality common systems - schools, roads, mass communication infrastructure, bus and train systems, health care, etc. - that market forces always undervalue and underinvest in (this comes from 1950s neoclassical innovation economics - Kenneth Arrow, Richard Nelson - and not only from the left). America did "become the greatest nation on earth by giving money to the government" to build things companies never build - Microsoft, Exxon, Cindy Hensley McCain's beer distributor Hensley & Co.

Hopefully Obama knows this, though he won't say it out loud. Sounds like "taxes." But later a big education campaign will be needed to get the middle class to see where its origins really lie.

Why don't they know this already? Alaska has socialism, in the form of Sen Ted Stevens's federal pork train. Sarah Palin increased the windfall profit tax to double the annual state handout to every man, woman and child to about $3300 a year, or $13,000 for a family of four. The red states who vote against big government get more from big government than the blue states that like it. Nothing wrong with this- they're mostly more backward and more poor than the blue states. But they are pretty dumb to have never figured out where roads and sewers in Alaska actually come from.

On the Obama side, it was Michael Moore who raised the mass middle-class issue of who runs the economy.

AMY GOODMAN: How did it happen that they didn’t change, that you have now in Michigan the highest unemployment rate in the country?
MICHAEL MOORE: It happened because the workers don’t control the means of production. Oops, I guess I can’t be president now that I said that. No, but seriously, I think that if the autoworkers, years and years ago, could have had a say in the cars that were being built, the Big Three would have built cars that people wanted to drive, instead of the kind of crappy-mobiles that they continue to build, the gas-guzzlers they continue to build. And people wanted something different, and nobody listened, because the auto companies were arrogant.

Moore starts with a classical marxist formulation, then Americanizes it by saying it's common sense to put worker knowledge into the production process, and Detroit's massive failure proves the stupidity of not doing this. He's right: unilateral executive control - the watchword of US "free market" capitalism - is not only unfair and undemocratic, but inefficient as well.

In fact "markets" have made the economy more oligarchic than it was 30 years ago - unionized workers and white-collar professionals have generally speaking less governing power than ever, in the midst of what is supposed to be a knowledge economy. This is no accident, and a turnaround toward democratic economics is the core stake of this election.

Republicans are right about what the first practical outcome of a turnaround like that: a major stimulus plan for the states, where most public systems need to be rebuilt and upgraded for the twenty-first century.

Bailout Misuse 2

Yesterday Binyanim Appelbaum reported in the Washington Post that "U.S. banks getting more than $163 billion from the Treasury Department for new lending are on pace to pay more than half of that sum to their shareholders, with government permission, over the next three years."

The 33 banks signed up so far plan to pay shareholders about $7 billion this quarter. Companies generally try to pay consistent dividends and, at the present pace, those dividends will consume 52 percent of the Treasury's investment over the initial three-year term.

"The terms of our capital purchase program were set to encourage participation by a broad array of financial institutions so they strengthen their financial positions," Treasury spokeswoman Michele Davis said.

The Treasury's approach contrasts with decisions by foreign governments, including Britain and Germany, to require banks that accept public investments to suspend dividend payments until the government is repaid. The U.S. government similarly required Chrysler to suspend its dividend payments as a condition of the government's 1979 bailout.

The legislation passed by Congress authorizing the Treasury's current bailout program is silent on the issue.

The Financial Times reports today that AIG, the huge bailout beneficiary, has borrowed from one federal program to pay back loans taken out from another federal program. The reason? "Analysts said that AIG might have used the commercial paper facility to pay back the loan because the interest rates charged were lower. The government demanded a punitive rate of 8.5 per cent over the London Interbank Borrowing Rate on its $85bn two-year loan, while the Fed is charges interest of around 2-3 per cent for three-month commercial paper."

Another contrast with Europe: the German Bundestag's bailout legislation, passed October 17th, restricts executive salaries at any beneficiary institution to 500,000 Euros per year. Some executives warned that this would discourage banks from participating, thus admitting that many executives would consider letting their banks default rather than try to survive on the minimum wage of 500k a year. But it passed nonetheless, the conservative prime minister Angela Merkel intoning, "no aid without a quid pro quo."

Use and Abuse

The bailout money was supposed to pay banks to do their actual job and lend money. There are reports that the money will be used for a new round of bank mergers and acquisitions. Amy Goodman reported on October 28th that "Bank Bailout May Lead to Greater Consolidation".

A similar message came from the other end of the political spectrum, the investment advisers at Money Morning:

Those billions are a virtual lock to set off a merger tsunami in which the biggest banks use taxpayer money to get bigger – admittedly removing the smaller, weaker banks from the market, but ultimately also reducing the competition that benefited consumers and kept the explosion in banking fees from being far worse than it already is. . . .

According to Dealogic, government investments in financial institutions has reached $76 billion this year – eight times as much as in all of 2007, which was the previous record year. And that total doesn’t include the $125 billion the U.S. government is investing in the large U.S. banks as part of its rescue package, the similar amount it may invest in smaller banks, or other deals that the feds are helping engineer (JPMorgan Chase & Co.’s (JPM) buyouts of The Bear Stearns Cos. and Washington Mutual Inc. (WAMUQ) are two such examples).

MM quotes an M&A analyst explaining why: "When it comes to M&A, there’s always a pronounced ‘domino effect.’ Consolidation breeds more consolidation as industry leaders conclude they have to keep acquiring in order to remain competitive.” The crisis hasn't made the drive toward concentration go away: it's made it worse.

Market logics aren't being checked by government money. They are using government money to carry on business as usual. That is of course the point of government efforts, most effectively laid out by Sarkozy in France: reassure the public, but also get market leaders back on their feet, which will mean plowing a lot of weaklings - aka your local regional bank - into the topsoil, fertilizing it with tax dollars, and giving the financial giants a whole new root system.

Money Morning says, invest in a regional bank today, before it gets bought! Especially in the Southeastern US!

The amount of leveraging is so enormous that the bailout money can't stop it. Think of leverage as Hurricane Katrina and the bailout as the New Orleans levees. Here's MM's Keith Fitz-Gerald on the combination of size and the absence of real knowledge about what's sitting out there.

As scores of highly leveraged hedge funds dump billions of dollars worth of holdings at once, they effectively “flood” the markets with whatever the asset is that they are trying to sell. In doing so, they push the values down for the rest of us. For an example, imagine a house in your neighborhood selling for 50% of its appraised value. Upon completion of the sale, all “comparables” in the area, including your own home, will likely take a hit as a result. So it’s in everybody’s interest to keep prices as high as possible.

But nobody can do that when there are more homes than buyers – even in the best neighborhoods.
So when is it going to stop?

We don’t know. No one does. Hedge funds are notoriously secretive in their reporting, so even though there are estimates as to how much they own and (by implication) how much they owe, it’s hard to gain perspective on how much leverage is actually being used. Nor do we really know who holds what asset – especially as it relates to potential liquidations.

Over the weekend, rumors were flying that U.S. Federal Reserve examiners are hounding Citadel Investment Group LLC regarding “counterparty risk” and its exposure to debt. Citadel, naturally, vehemently denies this, but lately where there’s smoke, there’s certainly been the potential for fire.

Then there’s Europe. Despite the fact that many Europeans find it fashionable to blame the whole financial-system meltdown on the United States, mounting evidence suggests they may be the biggest hypocrites of all.

Data from the Bank of International Settlements shows that Western European Banks may hold as much as $4.7 trillion in cross-border bank loans to Eastern Europe, Latin America and emerging Asian markets, which means, as Bloomberg News journalist Tom Cahill described it as “the exposure of continental European banks to a whole set of ‘sub-prime’ nations in the form the former Communist bloc may be the Achilles heel of the European banking system.”

That means that “the elephant in the room is that while public sector debt was held in check by policymakers, private debt as a percentage of GDP exploded, as that was not part of convergence criteria to join the Eurozone."

Secrecy, no public figures, no knowledge - that's the core of all of this.

Fools Who Run Things

The most shockingly dumb moment of the week was former Fed chairman Alan Greenspan apparently said this to the House Committee of Oversight and Government Reform:

I made a mistake in presuming that the self-interest of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms."

If Greenspan really said this, it is admission that markets do not self-regulate and that self-interest is not the highest form of government. It then follows that you need actual governments, and that democratic processes can control markets if they want to.

This is in short the self-immolation of 50 years of the right-wing market ideology that he has championed his entire career, that was advanced by the Reagan era, and that Greenspan implemented during his 18 years as the summit of global financial policymaking at the Fed.

The Wall Street Journal reports it slightly differently. And neither statement appears in Greenspan's prepared remarks. The latter are baldly incoherent. Greenspan offers several different explanations for the crazy mispricing of mortgage-backed and other assets, and then says this:

It was the failure to properly price such risky assets that precipitated the crisis. In recent decades, a vast risk management and pricing system has evolved, combining the best insights of mathematicians and finance experts supported by major advances in computer and communications technology. A Nobel Prize was awarded for the discovery of the pricing model that underpins much of the advance in derivatives markets. This modern risk management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year because the data inputted into the risk management models generally covered only the past two decades, a period of euphoria.

The model collapsed. It collapsed was based on bad history? Think about what this says about the ruling paradigm of finance capital for the last 30 years - gone - and about economic models in general - no better than historical data.

Greenspan is finished, but rescues are being attempted in John McCain's non-stop clown show. Many people have commented on his weird performance on Fox News on Sunday, where he denounces socialism while praising the government bailout. Actually, McCain's position is totally coherent. "Socialism" for McCain means "redistribution" in which incomes become more equal (we've been in the midst of an inequality boom for 30 years). "Bailout" means giving $700 billion to banks, which means maintaining if not extending income inequality. "Socialism" means more money below. The bailout means more money above. McCain's support for bailouts makes perfect sense. (Rick McArthur does a nice job explaining to Amy Goodman why Obama is a conservative and not a socialist.)

Another act that had the center ring for a while was famous investment genius Warren Buffett, who used a piece in the NYT to try to talk all the little frogs back into the boiling water. Buffett says his money is now in stocks, tells everyone to buy stocks without the disclaimer of his own self-interest in helping himself out with this advice, and then tells everyone the only way to make real money is to do the opposite of everyone else. In other words, buy when they panic sell, sell when they frantically buy.

This is irresponsible, reprehensible advice: regular people cannot do the opposite of what everyone else is doing, since the only basis for doing that is the kind of professional training and experience that Buffett has and that you and I do not. Nor do we have Buffett's billions to gamble on buying some real crap cheap, only to see it go down for ever.

Buffett is at least nice about it. Another circus act in the Wall Street Journal abuses Joe Blow investor for not taking enough risks, then for taking too many risks by, at age 55, still being in stocks! The springs are flying out of the Jack-in-the-box.

Maureen Dowd issues the first call for revenge I've seen in the NYT. Now we're getting somewhere.

Dean Baker is best skewerer of the "sorry, it was an accident" school of letting big financial fish off the hook. He was predicting the collapse of the housing bubble for years, and is wonderfully vicious about the protestations of financier innocence that are justifying the bailout. He describes an alternate universe in which Alan Greenspan says in 2002 that there is a housing bubble and uses the Fed to educate the press and the economists and the realtors and the public. Had this happened, he asks,

Does anyone think that the execs at Goldman Sachs, Citigroup, Merrill Lynch and the rest could say "who could have known?" to their shareholders, who just saw most of the value of their stock disappear? My guess is that all of these execs would be out of their jobs and facing lawsuits for neglecting their responsibilities to their shareholders.

(See his equally valid dig at the NYT for attributing noble educational motives to wealthy conservatives but not to organizations like his.)

This has been another horrible financial week for Earth, especially its regular folks. While my Google news feeder was telling me that Obama was going to visit his grandmother, Monday's Financial Times was a slow-motion train wreck. " ING takes 10bn E injection from state." "Silicon Valley suffers wave of job losses amid pessimism." "Crisis engulfs the Emirates." That's just the front page. Page 2: "Call for west Europe to support east." "Mexico inquiry into derivatives is widened." "Soeul launches $130bn loan and liquidity rescure." "Pakistan seeking IMF help. " "Rations cut for army of buyers." "Public blame bankers for abusing system." Page 3: "US faces its worst recession in 26 years." "Indicators hint China on verge of sharp slump." The only thing making any money is the Obama campaign (page 4) - and some of the giant banks that got us here. By today it was even worse, with markets in Japan, Korea, and Hong Kong having now lost 50% just this year .

And that doesn't even get to the real economy, where companies are busy flinging their employees into the water.

Years of Counterfeiting

The big news for most people in the US this week was not the equities plunge but the plunge's impact on retirement assets - they've lost 20 percent of their value in the past 15 months. This will cause a seismic shift in retirees' feelings about markets - right as the boomers try to retire in earnest.

The other big news is that the confidence fixes didn't work. The feds didn't do nothing like 1929. But they did next to nothing like 1987. Actually more than 1987. But junk wasn't enough, and buying commercial paper wasn't enough, and the math still doesn't work out - the market in Credit Default Swaps is worth $62 trillion! So now the Repubs have to tear their hearts out and take government ownership positions in exchange for cash. And it still won't work.

Why not? Because banks won't lend to other banks whose assets are counterfeit. Many many many assets consist of notes whose value was created in the writing of the notes, and which hinged on leveraged debt. These notes had that value once in a specific exchange. They don't have it anymore.

I'm not saying credit isn't real. I'm saying issuing credit is like printing money. There was way too much of it. The amount of "M3" money increased from 1971 to 2006 by a factor of 14. People depended too much on it for their standard of living. It also made life to expensive. The deflating of invented assets isn't over yet.

Costs of other bailouts (from Le Monde October 3, 2008 p 9):

1986 -1995: savings and loan bailout - $160 billion, or 3.7% of GDP, 78% paid by the government

1991-1993: Swedish banking crisis - $65 billion crowns, or 4% of GDP

1998-2001: Japanese banking crisis - Y60 trillion, or $500 billion dollars, 12% of GDP; 70% of cost to state paid by selling shares on the market

Scarier than Usual

Here's a piece from today's Financial Times that gets at the underlying instability in the financial markets - at the underlying insolvency, to be exact.

Reshaping the banks: time to ask the IMF for help

by Raghuram Rajan

Financial markets are in panic. Central banks are willing to lend against all manner of collateral. Yet inter-bank credit markets are freezing up. Why? Have central banks contributed to the problem? And what do we do now?

The root of the problem, of course, lies in one class of assets, mortgage backed securities, rising in complexity as a result of defaults on the underlying housing mortgages, and falling in liquidity and value. Banks found they could no longer pledge these assets as collateral against borrowing. A bank now had two problems.

One was an immediate liquidity problem. It had to find a way to finance the mortgage backed securities that were previously financed with debt. The second was a capital problem. Because the market value of its assets had fallen, it was very thinly capitalized on a market value basis. But this problem could be handled later.

This, in a sense, was the Bear Sterns situation – illiquidity rather than insolvency. Central banks reacted by expanding the range of entities they would lend to and the range of assets they would accept as collateral. This immediately alleviated the liquidity problem, as banks borrowed pledging illiquid assets at the central bank.


But having solved the liquidity problem, banks did little to bolster their capital. Indeed, the capital problem has been getting worse. Moreover, with much of the collateral pledged, the bank has to rely on unsecured funding. Unsecured lenders to the bank (and the inter-bank market is unsecured) are now unwilling to lend, knowing that their claims will be hit when the bank defaults. And unless the central bank is willing to substitute for the entire unsecured loan market, the bank will have to default. What was a liquidity problem is now a solvency problem, which cannot be solved by further small increases in liquidity infusion.

Why have the banks not been more pro-active in raising capital? Clearly they felt they had time, in large part because the assistance from the central banks alleviated the liquidity problem. Rather than selling equity when asset prices were moderately depressed, they thought they could wait the crisis out. And central banks may have been at fault in not pressing the issue harder when it was easier to raise capital, especially given that their liquidity assistance was helping banks postpone capital raising.

What now? In the United States, the Treasury Plan has focused on buying distressed assets rather than on recapitalizing banks. Of course, if the price of mortgage backed assets can be boosted sufficiently and quickly, some banks will be recapitalized, but given that the values of many other assets are falling, this may only be a partial fix, even if it works. And it may be too late. Hopefully, the authority obtained from Congress can be quickly redeployed in recapitalizing banks more directly.

The reluctance to call this a problem of inadequate capital is, partly, prudence (which central banker wants to say parts of the banking system are insolvent) and partly optics. A liquidity intervention could perhaps be passed off as something that need not cost the taxpayer, while a capital infusion by the government seems a more final use of taxpayer money. Politicians still may believe drastic action is not warranted, though it seems that buying assets at made-up prices is as drastic, if not more, than buying equity or preferred shares at market prices.

The more Machiavellian view is that large players in the banking sector like the way it is currently being reshaped, as these too-big-to-fail entities are willing to run down their capital ratios buying the lucrative businesses of entities that have failed. They prefer a selective and limited rescue. While a reshaping of the banking system may be needed, it would be unfortunate if access to government protection rather than efficiency determined how it was reshaped.

There have been many suggestions on what to do. A temporary guarantee of the short term liabilities of all levered financial institutions, a quick audit, followed by speedy resolution of those that are beyond revival, and a recapitalization plan, perhaps including government money, for those that can survive, are all elements of what needs to be done. Key here is to provide incentives for private capital to participate, and even do the bulk of the lifting. Purchases of distressed assets from banks will be part of the solution, but it cannot be the sole item. Indeed, there is tremendous experience in the IMF of how this can be done. All the United States needs to do is ask!

The author is a professor of finance at the GSB, University of Chicago.

October 7th, 2008

What the Numbers Mean

Listening to French Bloomberg in Lyon, seeing the shocked face of the newscaster as she looks at a world of red ink, seeing the CAC 40 fall over 9 percent in one day, Germany's DAX down 8 and the Dow back under 10,000, I think that this will destroy the blind faith in markets for a generation.
As you watch the sheep heading over the cliff, you naturally wonder why you followed them in the first place.

There's lots of anger everywhere about giving $700-800 billion to the same people who created the need for it in the first place. Here's the sound of an angry economist. Here's an apologetic columnist, misusing the kind of argument I made yesterday about peer pressure in markets to say new regulation might stifle innovation. He's right to say that "The returns on what turned out to be toxic assets were just too good to miss. Any banking chief who had dared pull out of the market for, say, leveraged loans or mortgage-backed securities in 2005 and 2006 would have been lynched by investors for destroying shareholder value."

It went way beyond that. Covering today's Congressional hearings on the Lehman Brothers' collapse, the New York Times noted that "Another document showed that executives were warned in a January 2008 meeting that the company was facing liquidity problems. Yet the firm moved forward with capital outlays, including $5 billion in bonuses, $4 billion in shares and $750,000 in dividend payments between 2007 and the firm’s bankruptcy filing on Sept. 15." Massive debt, leverage, invented investment vehicles, obscured risk, deception, wishful thinking, free credit sponsored by the US government - all maxed out to max out gains.

Meanwhile, in France, Le Figaro, the conservative newspaper, published a poll (Friday October 3, p 21) in which they asked with which of 2 views on the current crisis their readers agreed the most. One was that the current crisis was like the others capitalist systems have, and that the system will soon get back on its feet. One-third agreed with this. The other was "the financial crisis is a crisis that shows that it is necessary to change fundamentally the capitalist system." 59% chose this.

Avoiding the Tailspin

Behind every failure there is the moment of coercion. With Fannie Mae, it was the moment in which Angelo Mozilo, then the head of Countywide Financial - now defunct - told Daniel Mudd, the head of Fannie Mae, that Fannie Mae would either buy all the subprime mortgages that Countwide wanted to sell it, or they would take all their business directly to Bear Stearns and similar firms.

Charles Duhigg reports the following conversation in the New York Times:

“You’re becoming irrelevant,” Mr. Mozilo told Mr. Mudd, according to two people with knowledge of the meeting who requested anonymity because the talks were confidential. In the previous year, Fannie had already lost 56 percent of its loan-reselling business to Wall Street and other competitors.

“You need us more than we need you,” Mr. Mozilo said, “and if you don’t take these loans, you’ll find you can lose much more.”

Then Mr. Mozilo offered everyone a breath mint.

These and many similar pressures forced Fannie Mae to contradict its own judgement and lap up subprimes. It's easy for us on Sunday morning to say that Mr. Mudd shouldn't have gotten drunk on Saturday night. But actually they put a funnel down his throat and poured the beer down for him.

Different pressures were coming from Congress. Duhigg summarizes them as wanting Fannie Mae to support more affordable housing. Here's another key moment:

“When homes are doubling in price in every six years and incomes are increasing by a mere one percent per year, Fannie’s mission is of paramount importance,” Senator Jack Reed, a Rhode Island Democrat, lectured Mr. Mudd at a Congressional hearing in 2006. “In fact, Fannie and Freddie can do more, a lot more.”

This is the moment when unthreatened people realize that they've caught the wrong guy - the perpetrator is not Fannie Mae, but the new financialized economy itself. But everyone was caught in the squeeze. And everyone did the wrong thing.

The argument for regulation is not that citizens, especially leading bankers, need to be under tighter government control. The argument is that regulation sets standards such that a few especially aggressive operations don't drag everyone else down.

Another example is retail underpricing. France still has a lot of local bookstores because the maximum legal discount is 5 percent. The Fnac, France's equivalent of Borders and Circuit City rolled into one, can't get people to avoid their local and cross town for a 40 percent discount. The same goes for bread and a lot of other products where quality matters to society, and so does a healthy distribution network that keeps neighborhoods thriving.

Why can't we figure this out in the US?

For an economist's version of this argument, see Robert Frank, who has to again state a case for minimum collatoral standards that should be obvious. Why isn't it obvious?

My gut feeling is that it's the prevalence of the threats.

Is the Depression Near?

There was a lot of action this last week that was plastered all over every newspaper on earth, so I won't repeat it here. Suffice to say that everyone is deeply upset. Most people hated the Paulson bailout plan. Most people hated its rejection by Congress. The modified plan had accountability and ownership. The real problem is nobody thinks that it will work. The markets in most things are gyrating in a way that makes them a joke. The Euro lost 3 cents in 3 hours this afternoon, while the NYSE was going up, having lost 777 points the day before. Krugman denounced McCain's flipflops, and why not? But everything is flipflopping.

Naomi Klein was on the radio a few times saying the crisis is an example of the "shock doctrine," in which unpopular and radically anti-populist policies are rammed through because everyone is paralyzed with fear. It's not quite happening that way. She's generally right, but it's also worth remembering shock works best when it's genuine in people like Paulson.

A fairly sober End of the World column is Martin Wolf's. For the End of American Power, see ye olde British conservative John Gray.

We were joking over the weekend that the FT is the New Left of anti-finance. It's not literally true, but close enough to be the scariest part of this. As of yet, there is no alternative. Amy Good man did a sequence yesterday on FDR, just to show you how backward things are.

A Progressive Bailout?

Dean Baker takes his shot at a recipie for a progressive bailout.

Progressive Conditions for a Bailout

By Dean Baker

The events of the last week showed the urgency of dealing with the financial crisis. There is a real risk that the banking system will freeze up, preventing ordinary business transactions, like meeting payrolls. This would quickly lead to an economic disaster with mass layoffs and plunging output.

The Fed and Treasury are right to take steps to avert this disaster. While there is an urgency to put a bailout program in place, there are several important issues that Congress should address in the context of bailout.

While there is not time to prepare all the details of the financial restructuring that will follow after the bailout, there can be an agreement on the outlines that this restructuring should take. This list of suggestions is presented in that context:

Principles to Guide the Bailout

1) Financial institutions should be forced to endure the bulk of the losses with taxpayer funds only used where absolutely necessary to sustain the orderly operation of the financial system.

2) The bailout must be designed to minimize the opportunity for gaming.

3) The bailout should be designed to minimize moral hazard.

4) In the case of delinquent mortgages that come into the government's possession, there should be an effort to work out an arrangement that allows the homeowner to remain in her house as owner. If this proves impossible, then former homeowners should be allowed to remain in their homes as renters paying the market rent. This should be done even if it leads to losses to the government.

5) There should be serious efforts to severely restrict executive compensation at any companies that directly benefit from the bailout.

Principles for Restructuring the Financial System

1) Combating asset bubbles must be one of the Fed's key responsibilities.

2) The government should impose a modest financial transactions tax, comparable to the one in the United Kingdom. This can both restrain excessive trading and raise more than $100 billion a year in revenue.

3) Regulatory agencies should require that potentially tradable assets (e.g. credit default swaps) actually be traded on exchanges.

4) There should be strict limits on leverage for all regulated financial institutions.

5) Fannie and Freddie should remain fully public institutions, returning them to a status comparable to Fannie's prior to its privatization in 1968.

6) The Fed should be restructured so that all the key decision makers (e.g. the open market committee) are appointed by democratically elected officials. Its responsibility is to manage the economy in the interest of the general public, not the financial sector.

Given the urgency for passing a bill, Congress should look to enshrine principles in a bailout bill that will allow subsequent legislation to circumvent ordinary procedural issues (e.g. the filibuster in the Senate).

Am I Reading the Onion?

This is Bloomberg, really:

The Wall Street that shaped the financial world for two decades ended last night, when Goldman Sachs Group Inc. and Morgan Stanley concluded there is no future in remaining investment banks now that investors have determined the model is broken.

The Federal Reserve's approval of their bid to become banks ends the ascendancy of the securities firms, 75 years after Congress separated them from deposit-taking lenders, and caps weeks of chaos that sent Lehman Brothers Holdings Inc. into bankruptcy and led to the rushed sale of Merrill Lynch & Co. to Bank of America Corp.

``The decision marks the end of Wall Street as we have known it,'' said William Isaac, a former chairman of the Federal Deposit Insurance Corp. ``It's too bad.''

Wall Street ain't over. One reason is the Paulson plan, and Krugman has a good short critique this morning.

The Left on the Crisis

The main problem with the Bush bailout and its colossal scale is that we don't know what the public gets in return for its money, and we don't know that decision-making power will be moved from Wall Street to Main Street. We need some arguments to accomplish this.

If you are looking for a clearly progressive or left-wing perspective on the Internet, what can you find? Here's a start (just from this past week).

• William Greider at The Nation. Greider is one of the country's leading financial journalists, and has written books on the Federal Reserve, globalization as the return of super-exploitation of labor, democratic economics, and much more. His short piece says that the "new financial architecture" was based on irrational leverage, the absence of prudent reserves to cover possible losses, and the selling of false hopes for sustainable high returns. The problem is systemic, he writes, and this may be a new 1930s. He concludes: "At some point, the new president might have to do what FDR did in the wreckage of early 1933--declare a "bank holiday" and announce emergency rules to govern banking and finance until the crisis is broken. For the country's sake, I think this a better approach than buying up junked banks and failed financial firms, one by one. People have the right to ask: what exactly are the rest of us getting for our money?"
• Naomi Klein argues that since market ideology is a "servant to the interests of capital," its ideologues will use the version that works best at a given time. For many years financiers made the most money off of laissez-faire (utterly untaxed transactions, capital gains federal taxes at about half what wage-earners pay - this one especially bothers me). Now they will make the most money (or lose the least money) with massive government intervention and taxpayer-funded bailouts, not to mention transaction restrictions like the temporary ban on short-selling a list of 799 financial stocks). When the wind shifts, Klein says, laissez-faire will come roaring back: the consistency can be found in the financial interests behind the statements. Klein ends by saying that governments ignored speculative excesses because they thought they lead to economic growth: "What is really being called into question by the crisis is the unquestioned commitment to growth at all costs. Where this crisis should lead us is to a radically different way for our societies to measure health and progress."
• Willliam Pfaff, a genuine conservative "maverick," most clearly points out that "The financiers, as Joseph Stiglitz has observed (in a recent CNN interview), were doing what the system demanded of them. They were assured generous rewards for managing risk and allocating capital so as to improve the efficiency of the economy enough to justify their generous compensation. 'But they misallocated capital; they mismanaged risk-they created risk. They did what their incentive structures were designed to do: focusing on short-term profits and encouraging excessive risk-taking.'" Incentives must be redesigned to favor public rather than private interests.
  
• Chuck Collins points out that the financial leaders that caused this crisis get to keep what they made while we pay what they lost. The head of Lehman, which declared bankruptcy last week, does not "disgorge" his $354 million in compensation from the last 5 years. Collins offers six taxes that would raise the bailout money from its beneficiaries, including closing off-shore corporate tax havens (the sucking of major capital away from large, complex societies and into "fiscal paradises" is a big issue in Europe), and "Instituting a 50 percent tax rate surcharge on incomes over $5 million and a 70 percent rate on incomes over $10 million[that] would generate $105 billion a year."
• In another Nation article, Greider calls the Paulson bailout (the $700 billion general one) a "historic swindle" that will cause popular unrest. "The scandal is not that government is acting. The scandal is that government is not acting forcefully enough--using its ultimate emergency powers to take full control of the financial system and impose order on banks, firms and markets. Stop the music, so to speak, instead of allowing individual financiers and traders to take opportunistic moves to save themselves at the expense of the system. The step-by-step rescues that the Federal Reserve and Treasury have executed to date have failed utterly to reverse the flight of investors and banks worldwide from lending or buying in doubtful times. There is no obvious reason to assume this bailout proposal will change their minds, though it will certainly feel good to the financial houses that get to dump their bad paper on the government." Greider is calling for a serious nationalization that would not mean Washington running finance permanently but an imposing of political and social imperatives on the financial system and its leaders. For starters, a new "central authority' would obligate banks to continue to lend responsibility to individuals and business at affordable rates so that the real economy doesn't tank. Direct government lending may be required, as with some loans for college students.
• Then there is the old-fashioned "Screw Wall Street." Why should we figure out how to save them. Let them drown.
• There is also the "unchecked greed" thesis, accompanied by the observation that the little people will pay yet again for this rich man's bailout.
• And a somewhat classic summary from Steve Fraser: "It's time for a reversal of course. Stringent re-regulation of FIRE is not enough anymore. Washington's mission may, at this late date, be an even greater one than Roosevelt's New Deal faced. The government must figure out how to deploy its power to shift the flow of investment capital out of the mine-fields of speculative paper transactions and back into productive channels that will help meet the material needs of American society. Real value must be created in place of chimeras. In the meantime, we all have ringside seats -- in fact, far too close to the action for comfort -- as another gilded age is ending. What comes after is, in part, up to us."
  

I got this first clump of pieces from "Common Dreams," which is a progressive site that has in general not covered economics at all until now. Most of the pieces come from "The Nation,' and the rest from the Nation alum who run a handful of prog websites. Maybe this says something about Common Dreams, but it also says something about the current state of the Left on economics. For starters, it is too small.

The spectrum of Left responses runs something like this.

1. the financial system was spoiled by greed and excess (of leverage, of made-up securities, etc). Most conservatives would also agree with this, and it wouldn't not allow, say, Obama, to distinguish himself from McCain. This view is compatible with a $700 billion Bush-Paulson bailout.

2. new regulations are necessary to block future bubbles by stamping out greed and excess, starting with the deeds of the bad actors . We could implement new rules about minimum margin requirements to reduce leverage, for example. This is compatible with the Barney Frank position as a liberal Democrat in Congress who hated having his chops busted about the evils of big government for 25 years and is going to get a little payback. It is also close to Dean Baker's preoccupation with bubbles that competent professional economists can measure and deflate before they blow up.

3. We need not only reform, but a government takeover of the financial system. This is Grieder's position, and few others', as far as I can tell.

4. We need to identify the winners and the losers when the financial system was working, and make the winners pay for their crimes. The losers under Bush should not lose again by paying for the crisis. This is Collins' position, and is compatible with Greider's. It is sometimes called "populism" in the press, and it makes class distinctions. It is an insurgent view in the US only because conservatives who say the wealth of the wealthy helps the poor have successfully marginalized clear discussions of wealth and and income inequality for 25 years.

5. We need to reconceptualize the purpose of economics, and resubordinate economics to the public's cultural, political, and social goals. This is Klein's position, and Fraser's, and also Pfaff's, and historically speaking is a close to the old Popular Front, to Marxist humanism, to various kinds of democratic socialism, to parts of the enivronmental movement, to some forms of anarchism, and also to civic republicanism (small r), which helps explain Pfaff.

The most urgent position for the Left is (3), in order to block a Trickle-Down Bailout, in which the public will buy private junk that enables the main perpetrators to keep deciding what does and doesn't get funded in the wider economy.

The problem with American politics is trying to get beyond (2) to some combination of (3-5). A lot of people like (5), and I have argued in Unmaking the Public University that the public university was unmade in part because it was cranking out a millions of grads a year who thought economics should serve their existential, personal, and political visions. This was very bad for conservative rule, and conservatives managed to discredit most if not all of this vision with culture wars and budget wars, among other things.

But even where (5) is solid, most Americans are uncomfortable talking about class inequality and economic victims, especially when it involves contemplating the possibility that the victimization was deliberate - that big investors win big by getting the companies they own to outsource jobs, pay less in taxes for hospitals, schools, and in general shrink the middle class and impoverish lower-wage workers.

So (4) is an uphill battle. And few people in the US love (3), Greider's government takeover, unless they are absolutely desperate. We don't have France's tradition of "la republique" in which the central government constitutes a balanced and effective society. To get (5) in the US, a kind of humanist economic democracy, by using (4) to justify (3) - that is, by using systematic inequity to justify government control - you need an acute, desperate crisis (e.g. the Great Depression). And skeptics like me would point out that (3) doesn't generally lead to (5) - the New Deal was limited and lacked a strong economic alternative to neoclassical economics, which made it vulnerable to the politicization of technical critiques of monetary and inflation people (cf. the strange triumphs of Milton Friedman).

Left economics needs to work much harder this time around on the Klein-Fraser-Pfaff side of the critique, without abandoning Greider. We now need much stronger humanist visions of what economics is for.

Post-Finance Capitalism

Today it looks like the Fed and Treasury are not just buying highly-visible crap owned by say AIG, but are buying all the crap in sight. They're also buying a lot of crap they can't see at all, but are only guessing at. The markets went ape all over the world, running up prices on everything they could find.

This is all pretty goddam unbelievable. Watching Bush, a guy whose entire career rests on attacking big government, say that government intervention is not only right but necessary, I thought I'd been teleported to Earth 2 in a parallel universe.

Actually, Republicans specialize in pushing public money into private pockets. Remember Haliburton's cost-plus contracts that have done so well rebuilding Iraq? There are actually more strings on this deal than usual - the public actually owns something - crap debt - rather than giving money away hoping for trickle-down.

The New York Times had a decent editorial today about the situation, driven by anger at the absence of honesty and reality in the official versions of investment banking behavior. It assigns blame to underregulation. As I said yesterday, that's only the beginning.

Politics aside, what kind of crap are we buying today? A lot of Credit Default Swaps, for one, and I found a nice explanation of them on Money Morning's website from last April, when we still weren't worrying about our "$50 trillion problem." CDS's were sold and resold by and to what even mainstream NYT columnists have taken to calling "the shadow banking industry" that rules the world. Actually, that holds the world at gunpoint until we give them the REST of our money.

Here's a frighteningly accurate prediction from the April column (it will make more sense if you first read the definition of CDSs).

There are two sources of likely loss on CDS:

Default by the underlying borrowers, the companies that originally took out the loans.

And default by the banks or other financial firms that bought the credit default swap - counterparties in the endless chain of banks, insurance companies, hedge funds and general riff-raff that have done these deals.

Since the total outstanding balance of the CDS market is $50 trillion, compared with the entire U.S. home mortgage market at about $11 trillion and the subprime part of that market at only $1 trillion, you can see why people are worried.

American International Group Inc. (AIG), the insurance company, lost $7 billion on its CDS portfolio in its fiscal quarter ended November 30, and that was on "super senior" CDS.

A more recent piece by Shah Gilani notes that "Credit default swaps are not standardized instruments. In fact, they technically aren’t true securities in the classic sense of the word in that they’re not transparent, aren’t traded on any exchange, aren’t subject to present securities laws, and aren’t regulated. They are, however, at risk - all $62 trillion (the best guess by the ISDA) of them."

and it continues:

What is happening in both the stock and credit markets is a direct result of what’s playing out in the CDS market. The Fed could not let Bear Stearns enter bankruptcy because - and only because - the trillions of dollars of credit default swaps on its books would be wiped out. All the banks and institutions that had insurance written by Bear would not be able to say that they were insured or hedged anymore and they would have to write-down billions and billions of dollars in losses that they’ve been carrying at higher values because they could say that they were insured for those losses.

The counterparty risk that all Bear’s trading partners were exposed to was so far and wide, and so deep, that if Bear was to enter bankruptcy it would take years to sort out the risk and losses. That was an untenable option.

The Fed had to bail out Bear Stearns.

The same thing has just happened to AIG
Since the insurance companies AIG owns are OK, and the Fed now owns their assets, the Fed - we taxpayers - may do OK on this.

FT's chief economics commentator Martin Wolf, not what you'd call a huge fan of government intervention, said "the whole regulatory regime has to be transformed."

And FT columnist John Pender, in his piece "Toxic Assets Head Towards the Public Balance Sheet," writes

In the space of just two momentous weeks, the landscape of global finance has been dramatically transformed. President George W. Bush’s administration has mounted a multi-billion-dollar rescue of the financial system at the cost of inflicting severe damage on the US model of free- market capitalism.

There are two moments of interest in Pender for the coming era after finance capital:

1. A shift from leverage: "This is what happens when an overleveraged global financial system unwinds. Borrowing is being forcibly reduced across the world after the greatest credit bubble in history. It amounts, says David Roche of Independent Strategy, a research boutique, to a “tectonic shift from leverage to thrift as the means of financing growth and the concomitant dramatic reduction in global imbalances such as the US current account deficit.”'
2. Finance's revealed incompetence on society and the "real" economy: "This inability to handle externalities has again been apparent in the markets over the past two weeks as speculators have engaged in short-selling strategies against AIG and the investment banks in the US and HBOS in the UK."

Let's see what we can do with this.

Mineland

They were selling junk. They were selling it for lots of money. People were paying lots of money. They were borrowing to buy more and selling to borrow more. They could put down one dollar and borrow 30 more. For a while the junk was expensive. Then it was cheap. It was just junk again. And there was no end of the stuff.

In the Financial Times, Gillian Tett says the markets are disoriented. No they're not. They're soaking up all the public money in sight, revalidating their credit, and waiting to see what will run up next.

On Tuesday and Wednesday newspapers described the markets as "panicked." The Financial Times described investors' "flight to safety" (to bonds and gold) as the most acute since early in World War II. The information was already known, and the current pattern was predicted by the FT in August 2007, and by Warren Buffet in 2003. It is minefield investing, in which half the moves you make will blow you up. And you have no idea which moves those are.

The main thing that was lost was belief that all the structured investment vehicles weren't junk. They'll start believing again. On Wednesday the Dow lost more that 400 points. On Thursday it gained them all back again.

The political shock was the markets' need to be saved by governments. Rep. Barney Frank put it well: "this is one more affirmation that the lack of regulation has caused serious problems. That the private market screwed itself up and they need the government to come help them unscrew it.” Can we finally stop bowing to self-regulating markets?

Financially, the best summary of this week's trigger is John Gapper's:

The thing that frightened me was that Mr Paulson put up US government money when he so obviously did not want to. Having examined the heart of darkness – AIG’s $60bn book of derivatives written on other derivatives based on bad residential mortgages – his resolve crumbled.

Lord knows where this leaves us, since only He knows what a credit default swap (CDS) on a collateralised debt obligation (CDO) is worth.

Actually we do know where this leaves "us," that is, regular folks who work for cash. It leaves us without our play money, the stuff we used via stock run-ups in the 1990s and housing run-ups in the 2000s to supplement the real-money raises we weren't getting.

Causes and critiques are flying in every direction, so let's sort them out:

1. the markets were corrupted by the government. This is the argument that government guarantees, like those for mortgage-lenders Freddie Mac and Fannie Mac, allowed executives to take ridiculous risks without the market discipline of looming sudden death for big mistakes. Look for the phrase "moral hazard," a technical term from neo-classical economics that is being used even by financial journalists I respect, like John Authers.

2. the markets were corrupted by too little government. This was the meaning of Frank's comment above. Nearly everyone is calling for some kind of reregulation, as are both McCain and Obama. But nobody is saying what kind of regulation would have or will actually work.

Just to make things more confusing, most outfits are saying (1) and (2) at the same time. The FT is a good example, since it calls for more regulation while also calling for the end to government protection for financiers and, by implication, very few bailouts like the one for AIG.

It would be more accurate to say this:

3. The crisis was supposed to happen, because it follows from normal market incentives.

It works like this. Financial instruments have no intrinsic value. They are worth exactly what people are willing to pay for them. People paid what they think these things are worth. Some people made up new financial instruments with bizarre, complicated, arbitrary rules - Credit Default Swaps, whatever. If you land on Go, collect $200 dollars, unless you took more than seven rolls to go around the board and your last roll was a three, in which case you collect $200 minus the average of each of your 7 plus rolls. Other people made up stories about why this made sense, usually consisting of saying if prices go down you get paid something, and if they go up you win big. Still other people bought this stuff by the ton - pension and mutual fund managers, etc.

here's John Gapper again, but this time missing the point:

The word “irresponsible” does not begin to describe AIG’s behaviour. Like Bear, Lehman and others, it saw a way to get in on the growing action in mortgage-backed derivatives. Its bankers were soon earning huge fees for themselves and AIG by piling up unimaginable risks.

Call me a spoilsport, but I do not believe that AIG or any other capital markets institution should be allowed to play like that with my money (I am a US taxpayer) in future

OK, you can call them names, but that represses your knowledge that AIG's bankers were heroes and geniuses in their time, doing exactly what they were supposed to do - take risks and maximize shareholder value. Why is this arbitrary process with huge cuts for the players OK when prices go up but bad when they fall?

There's also the sucker's rationality to think about. After 9/11, the prime rate went to 1 percent. Stocks went sideways or down. Housing prices were going up. If you stayed in the market or in savings accounts, you were by definition economically stupid. Only a stupid person would get 1.5% a year when she could get ten times that. Everyone piled into houses. It was logical and rational. This made housing prices go up even more - helped by deliberate financial policies that kept interest rates low. Why stick with 1 percent instead of 10?

This is true for ordinary people, and also for financial professionals. If you stuck with low-risk instead of high, and 3.5% instead of 18, you wouldn't stay a financial professional for long. If you avoided leverage, you were a fool. I can't tell you how many university faculty I've heard complain about the University of California's low pension return by comparison to Yale's, without having any idea of the content of the private placements - the Structured Investment Deals, maybe the CDSs tied to CDOs - that Yale was using to get more than 20 percent.

All this talk of moral hazard etc avoids the nature of market rationality, which is herd instinct. The contrarians often do well, but they are few. Overall, "the trend is your friend." You buck the trend, you lose. You ride the trend, you win. Add in the stagnation of US wages and the conversion of traditional pensions to investment funds - 401(k), 403(b) - and the trend became your ONLY friend. Then throw in "mental hazard." This refers to the absence of actual knowledge about investment vehicles, e.g. what's in them. These vehicles had names and marketers, and it was all press releases, TV authorities, what I think this morning as opposed to yesterday afternoon. It's also proprietary investment models whose assumptions are not only too abstruse for most people, but deliberately, systematically, and legally veiled. They are models created by companies that profit from them. They are there to benefit me, but not to benefit you. Meaning that you, the regular investor, had to buy a model and stick it out to the end.

Which is where we are now, with widespread market failure and damage done. But market failure was happening all along, and never should have been left to themselves

Tax them properly, regulate them, bring them back into society. This will take lots of the profits out of them, but that would be good. We'd have more money back in the real economy.

Is Joe Biden Obama's Dick Cheney?

I really can't think about it after a couple of weeks back in le Morvan - aka The Shire - dodging the the news. I also moved to Lyon and started my new 2-year j0b as the director of two University of California study centers - one here and the other in Grenoble, which is surrounded by the best mountain scenery I've seen in France. My main memory of the first week is spending four hours at Ikea outside of Lyon buying giant boxes, and then four hours turning the boxes into furniture. And then doing it all over again. It was actually fun, and the place looks great.

Here are some shots from the first week back in July:


I'm looking west from the middle of Place Bellecour towards the hill and the cathedral on Fourviere hidden behind it. that's my building, and I have the top floor windows - the three on the right.

Here's the best Ikea living room in history - main credit to Avery:


And here are two shots from yesterday evening looking left out the window in front of the table above (Place Bellecour, la grande roue, and the "crayon"), and then looking right.





I like it here.

You can see 100 or so pictures from the first week at Grenoble EAP on my Facebook page.

Once I built a railroad; now it's done

The most poignant political moment in a very very bad week for the economy and for civil liberties came when the 90ish NPR commentator Daniel Schor soloed a verse of "Brother, Can You Spare a Dime." Let's party like it's 1931.

This week's whiffs of the 1930s:

• A bank run: failed IndyMac Bank was besieged by depositors unconvinced by federal guarantees
• A crash in the stock price of what most people thought were the federal guarantees - Freddie Mac and Fannie Mae. On Tuesday they lost 25% and 22% of their market value.
  
• runs on bank shares - down 4% in one day yesterday
• lunatic overextension: "At the end of the first quarter Freddie’s balance sheet showed assets of $803 billion and shareholder equity of just $16 billion," CNNMoney reported. "That means Freddie has just one dollar in equity for every $50 of mortgages and other assets it holds. The company’s mortgage portfolio is even more disconcerting, as it shows just 70 cents worth of equity for every $100 worth of business on its books."
• political paralysis. As Steven R. Weisman put it in the NY Times, "the latest trouble in the financial markets, rising energy prices and spreading joblessness were also sowing new discord among lawmakers" about social programs vs. tax cuts. Which brings us to:
• intellectual paralysis. Same liberalism attacked by the same conservatism. So far that's all she wrote.
  
• steady betting against the US: the dollar is weak and always ready to get weaker. Nobody wants to buy our steaming piles of dubious, odoriferous investment vehicles. Why buy even T-bills when the dollar will sink? Why buy our crappy debt when you can just buy the Chrysler building instead?
• fear: in one major way we are still where we were in August 2007: nobody knows what's in these instruments. Nobody really knows what they're worth. Nobody knows what they should pay for them. Nobody knows how risky you are. Everybody thus raises their rates.

Nothing got better in the 1930s until the paradigm changed. Nothing got better until the fear was contained.

If instead we carry on as we are, there will only be steady decline. Gretchen Morgenson summed it up on Sunday when she started her column like this:
It’s dispiriting indeed to watch the United States financial system, supposedly the envy of the world, being taken to its knees. But that’s the show we’re watching, brought to you by somnambulist regulators, greedy bank executives and incompetent corporate directors.

This kneeling has been going on for fifty years, as we have walked away from a series of lines in the sand.

• we have the best manufacturing workforce in the world, we said through the early 1970s. Then we gave that up.
• we have the best corporate managers on earth, we said through the 1980s and 1990s. Then we gave that up.
• we have the best high technology, we said through the 1990s dot-com era. Are we giving that up?
• we have the best capital markets in the world, we're still trying to say. We're giving that up. The basic math doesn't come out right. Can we still add and subtract? What numbers should we add and subtract with?
  

Anti-Tax Dumbness

Howard Jarvis gave California Proposition 13, the cap on property tax assessments that has created chaos out of state budgeting for 30 years. It is the source of the 2/3rds majority requirement for tax increases, in addition to capping property assessments at the time of sale plus a little more than 1% annual increases maximum. The results were predictable at the time - gross inequalities in assessments of identical neighboring houses, with the new buyer paying much more, a transfer of wealth from young to old, from newcomer to old-hand, and endless controversy around the support of basic public services. The current Assembly speaker wants to have a blue-ribbon commission to study the problem, but the one thing she'll keep off the table is the straitjacket known as Prop 13.

The Howard Jarvis Taxpayers Assn writes me regularly, and their materials shows how the middle-class can be encouraged to fall on its sword. Their only figures are a "Homeowner's Property Tax Savings Chart" - if you bought a median house in 1993 ($188k), as I did, you have now "saved" $88k by having an assessment of 1% instead of 2.6%. What's missing of course is all the money we've paid out in other ways - for houses grotesquely overpriced in part due to suppressed assessments, for private services, e.g. private schools to get around crappy public ones and for big cars to avoid bad public transit. What's also missing are the costs for renters, for the state, for new businesses - for California society which is increasingly divided and still controlled by an entrenched landed class.

As a model for a "new economy" this is really really dumb.

The Bell Tolls

Amazing headlines today for your old m-c pals Freddie Mac and Fannie Mae, the descendants of Bailey's Bank in It's a Wonderful Life that kept the speculative mogul wolf Potter outside the door and built the US middle-class. How about "Big Mortgage Death Watch - Freddie and Fannie in freefall." As we saw yesterday, even airline management has figured out that the US run by finance capital is a chain of Pottersvilles.

Did I Just Feel Sorry for United?

As a regular user of United Airlines I have no sympathy whatsoever for a management system that someday is going to make me bust a blood vessel at a customer service counter after my third flight has been canceled in the same day. They are manipulative and deceitful on a regular basis, and seem to think the yellow-brick road to solvency lies through fields of stranded, price-gouged, or just plain hungry customers. Ben Stein's classic piece about United's financial screw-job on its own employees is required reading for air travelers everywhere.

And yet today I got a mass mailing from United management complaining about how finance capital has done a screw-job on them! The industry's CEO's have come together to denounce speculators and start a social movement. Wow is it fun to see the shoe on the other foot, the foot getting shot by oneself, the dog lying down and getting up with fleas, etc etc. Sign up with the corporate running dogs if you must, but first read their poignant denunciation of international finance.

Our country is facing a possible sharp economic downturn because of skyrocketing oil and fuel prices, but by pulling together, we can all do something to help now.

For airlines, ultra-expensive fuel means thousands of lost jobs and severe reductions in air service to both large and small communities. To the broader economy, oil prices mean slower activity and widespread economic pain. This pain can be alleviated, and that is why we are taking the extraordinary step of writing this joint letter to our customers. Since high oil prices are partly a response to normal market forces, the nation needs to focus on increased energy supplies and conservation. However, there is another side to this story because normal market forces are being dangerously amplified by poorly regulated market speculation.

Twenty years ago, 21 percent of oil contracts were purchased by speculators who trade oil on paper with no intention of ever taking delivery. Today, oil speculators purchase 66 percent of all oil futures contracts, and that reflects just the transactions that are known. Speculators buy up large amounts of oil and then sell it to each other again and again. A barrel of oil may trade 20-plus times before it is delivered and used; the price goes up with each trade and consumers pick up the final tab. Some market experts estimate that current prices reflect as much as $30 to $60 per barrel in unnecessary speculative costs.

Over seventy years ago, Congress established regulations to control excessive, largely unchecked market speculation and manipulation. However, over the past two decades, these regulatory limits have been weakened or removed. We believe that restoring and enforcing these limits, along with several other modest measures, will provide more disclosure, transparency and sound market oversight. Together, these reforms will help cool the over-heated oil market and permit the economy to prosper.

The nation needs to pull together to reform the oil markets and solve this growing problem.

We need your help. Get more information and contact Congress.

Hell, for once United management is right. I'll try to remember this moment next time I give them $907.00 for a 350 miles x2 round trip from Santa Barbara to San Francisco.

Earth to Middle Class: Deal's Off

Father Frank had a good piece this Sunday wondering whether Obama has jumped the shark. Actually he jumped the shark in the first episode, economically speaking. The economic problems of the US and the world are so serious, so structural, that it's hard to see how our really very dumb political system can even start to deal with it.

I do mean dumb. David Runciman called his great article on US politics "The Cattle Prod Election." Lots of political blogs and general discourse are really astute, he writes. But they are trying to create a dramatic collision of ideas and forces by covering up the crucial fact: "demography trumps everything: people have been voting in fixed patterns set by age, race, gender, income and educational level, and the winner in the different contests has been determined by the way these different groups are divided up within and between state boundaries." Polls are bad, he continues, because their samples are so small. And they are small because "if you keep the polling sample sizes small enough, you can create the impression of a public willing to be moved by what other people are saying. . . . The hard truth this time round is that most people are voting with the predictability of prodded animals."

Our political system is completely unable to cope with our economic decline But there's more good daily newspaper coverage of the majority's long-term tailspin. Ben Stein got to the heart of it a week ago Sunday:

Get this, friends: from 1947 to about 1973 — from the days from the great Harry S. Truman to the great Richard M. Nixon — real hourly pay for nongovernment workers rose by about 40 percent. The peak year was the one before R.N. left for San Clemente in 1974. Since then, real wages both hourly and weekly for all nongovernment workers, on average, have fallen by about 5 percent, very roughly.

I get it. So does everyone I know. But none of us make economic policy.

Peter Gosselin does an overview in the LAT of the loss of basic support structures - pensions (only 10% of the workforce has a traditional defined-benefit pension, down from almost 2/3rds a generation ago); low-cost health care; higher education (1/3 of the cost is now covered by loans, up from 15% a while back).

These are epochal shifts that change hundreds of millions of lives for the worse and yet everyone acts like they're inevitable. And none of the commentators have any idea what to do. Stein says that big policy changes are a good idea, but they won't happen. "So the only thing for workers to do is to drive less, buy fuel-efficient cars and trucks and, above all, whip their children into a frenzy to get more education." What do you think we've been doing for 30 years, Mr. Stein?

The big middle-class safety-net become inflation in investment assets - dot-com era stocks, then housing, now commodities or something else. The gospel was buy and hold. John Authers announces in the Financial Times that "It’s official: US stocks have had a wasted decade. The real return on the S&P 500 since 1998, after subtracting consumer price inflation, is just below zero. The last time this was true, according to Merrill Lynch, was in 1983."

All those systems of mutual support- pensions, health care, insurance - need to be rebuilt. But first people need to figure out how much they've lost.

Sometimes there IS progress

My momma was right after watching Wimbleton: progress happens. All sorts of things have gone bad, but it is just amazing to see two Black American women - Venus Williams (l) who won, and her sister Serena - duking it out on center court at Wimbledon. I should try again to give up the business pages for sports.

Mixed Signals

Yes - United manage- ment IS asleep as usual. They think they can over- come "peak oil" and their own ineptitude by charging $15 for checked baggage.

Leaders don't generally pay their way. In fact they cost a lot more than they're worth - generally about 3,400,000 more, by my scientific estimate. People kind of know this, and don't expect much, and try not to think about politics most of the time. Folks I know like Obama because he will bring people together, Whitman style - "and what I assume you shall assume." They don't like him because he will lead them solo out of the wilderness.

The good news this week was a massive reigning-in of leaders - the Guantanamo decision, in which the Supreme Court said in essence that executives can't do whatever they want to prisoners by putting them in off-world limbos like Guantanamo. It was a nice victory for habeas corpus, even if it never should have been necessary. It was also a win for the regular folks - the mass middle class - who either win with law or lose with force.

Road Warrior Cometh

The premise of the Mad Max series is a comb- ination of "peak oil" - the radical decline of this resource coupled with strong-man anarchy. May ended with emerging signs of the coming dog-eat-dog.

There are various signs here and there, and I won't even mention the increase in deadly tornadoes.

• Baraka Obama's new economic policy director is Jason Furman, who has been close to Robert Rubin and other architects of Clintonomics. Clinton, Rubin, Larry Summers, et al presided over many a Road Warrior scenario around the world, Argentina and Russia being classic examples. Naomi Klein links the "shock doctrine" to right-wing warriors like Milton Friedman, but concentrated finance capital has the same effect, holding policymakers hostage and undercutting whole industrial sectors as money whips in and out of nations to arbitrage small price spreads. With the 1990s Washington Consensus embodied by Furman, Obama won't be able to resist the darkness.
  
• the hidden laws of finance. Here's a short overview of the quasi-private way that a small group of unknown authorities set the LIBOR bank rate - a key international index.
• ye olde middle-class high-tech foundations continue to erode. The Semiconductor Industry Association reported that revenue from memory chips "declined by 34 percent even as unit shipments increaesd by more than 30 percent in the first four months of 2008 compared to the same period last year." We can barely make money on more or less our best industry. Strap on those rooftop fuel tanks.
• L.A. area hospitals were dumping poor, sometimes helpless patients on Skid Row, usually in hospital gowns . Hollywood Presbyterian got fined $1 million and will need to appease a federal monitor. Maybe patient dumping will stop. But given the state of LA County healthcare, it probably won't.
• The NYT's front page for May 30 juxtaposed two stories: "For the Military, Ultimate Fighting, but with a Cheering Section," about how the military is using the human equivalent of dogfights to recruit poor kids into the military. Next to this: "As Oil Prices Soar, Restaurants Learn to Lock Up Old Grease": "The bandit pulled his truck to the back of a Burger King in Northern California one afternoon last month armed with a hose and a tank. After rummaging around assorted restaurant rubbish, he dunked a tube into a smelly storage bin and, the police said, vacuumed out about 300 gallons of grease."

Now you'll have something to put in your rooftop tanks.