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.

To Do Nothing is to Die a Little

The hardest thing about any kind of decline is watching its victims take it lying down.

Lying down also takes the form of sheer ignorance, and standing up can take the form of correcting it. So on Memorial Day it's worth also remembering the teachers and the journalists who devote themselves to setting the record straight. The Sacramento columnist for the LA Times, George Skelton, offers a nice example of the genre today, correcting a few instances of massive middle-class dumbness about taxes and what they pay for.

Speaking of the uncorrected, our Governor has been spreading the myth that private companies will rebuild California more efficiently and cheaply than government can. His ode to public-private partnerships in his State of the State address last January is worth quoting in full:

Now, also over the next 20 years we have $500 billion worth of infrastructure that needs to be met. Now, as we head into this new century, we also need digital infrastructure to keep our economy growing. So the question is: How do we meet all those needs?

There isn't enough money in the public sector, we all know that. Can't do all of it. We need to expand partnerships where government and the private sector work together to meet the needs of the people. These partnerships can often deliver infrastructure faster, better and cheaper.

For instance, in British Columbia, public/private partnerships are common for building highways, bridges, rapid transit, water treatment and so on, and everyone is happy. The political leaders are happy, business is happy, the public is happy, the economy is happy, the future is happy.

Well, bond investors are happy. As Skelton points out, Arnold's champion borrowing has tripled the amount of state money that goes directly to service the states' debt. His latest plan, to increase state revenue by issuing bonds backed by future state lottery revenues, is another in his series of Wall Street Full Employment Acts - the fees and returns on these customized investment vehicles are huge.

In reality, private money increases returns by reducing costs, and one time-honored way of doing that is to externalize costs by getting the public to pay for them. You can make more money with your trucking business if the entire public builds and maintains freeways, rather than putting most of the cost on truckers themselves. The same is true of universities, as our two reports have shown: sponsorships and philanthropy flow to focused activities of interest to the donor, and not to general education. The reason is obvious once you start thinking about it: donors want effective results, and they leverage public money to do it. They use state-funded laboratories, federally-sponsored graduate students, and the like.

Other forms of private "partnerships" spring to mind:

• corporate sponsorships of Gov. Schwarzenegger's public events puts businesses with a financial interest in state decisions into the statehouse
• privatized utilities around the world, including electricity in California: one of the unavoidable cost increases that the University of California can't figure out how to pay for next year are elevated utility costs. Privatization has encouraged underinvestment in the electricity distribution system in many countries, as nicely summarized on page 10 of this book on solar energy. The logic is obvious: you make money by operating a grid that previous generations of taxpayers or fee payers already bought, not by investing in it. The same goes for the once-great British Rail and London Underground systems which pale by comparison with the far cheaper and more efficient SNCF and urban Metro systems in France.
  

What the hey. People do stand up a lot and figure things out. Leading recent examples are the California State Supreme Court decision legalizing gay marriage, which was written by a Republican jurist who said he was inspired by the Black civil rights movement (and the case Perez v. Sharp).

And there was also Barak Obama fighting back when Bush implied in his speech to the Israeli Knesset that the Democrat opposition are appeasers of terrorists. This is the only thing that will allow Obama to win in November - standing up.

And there is the memory of the war dead today - the ones who caught bullets and bombs thanks to the dumbness of the living, neither in vain nor forgotten, we will make sure of that.

The New Dark Ages

The signs are everywhere that we continue to move backwards into the political past. One of the most important is the return to private government.

• A good piece on Gazprom in Russia describes the extent to which the country's monopoly gas and oil company controls the state. Putin's handpicked successor as President was Dimitri A. Medvedev, Gazprom's Chairman. Here he is, thumbs up, posing with his favorite rock group, Deep Purple. Deep Purple was my favorite rock group too - for a few months in 1972. Why do moguls and hedge-fund managers like groups who long ago stopped having anything to say? OK, I answered my own question. Back to Gazprom - their taxes constitute 20% of the Russian state's budget, may soon surpass everyone's favorite oil company Exxon Mobil as the world's largest, will start to raise domestic gas prices 25% per year (Medvedev's brilliant idea), and is about to accept the man Putin is replacing as Prime Minister, Viktor Zubkov, as its new chairman. Musical chairs - or neofeudalism.
  
• The US State Department has renewed Blackwater's contract to provide security for US diplomats, the NY Times reported yesterday. Blackwater had been under investigation for starting a Baghdad firefight that killed at least 17 Iraqis last September. Oh well. Rep. Henry Waxman says he can't understand the renewal. He's right to be upset, but wrong not to understand it. "The chief reason for the company’s survival? State Department officials said Friday that they did not believe they had any alternative to Blackwater, which supplies about 800 guards to the department to provide security for diplomats in Baghdad. 'We cannot operate without private security firms in Iraq,' said Patrick F. Kennedy, the under secretary of state for management. 'If the contractors were removed, we would have to leave Iraq.' The US government is neither large nor independent enough to protect itself. A little harmless outsourcing - or neofeudalism.
  
• Finance historian Peter Bernstein starts his column today with this: "In the darkest days of the Depression, Treasury Secretary Andrew W. Mellon, one of the richest men in the United States, opposed any government action to stem the tide of plunging business activity and soaring unemployment. Instead, he urged a policy of supreme indifference. 'Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,' he said. 'It will purge the rottenness out of the system,' he added, and values 'will be adjusted, and enterprising people will pick up the wrecks from less competent people.'" Vicious, lazy, rich-man pseudo-Darwinism? No - just neofeudalism. Bernstein rejects it, but his piece is so defensive in suggesting it was ok for the Fed to intervene in the credit crisis this year that it's clear that modern government is in his financial circles a beleaguered thing.
• Same goes for Gretchen Morgenson's headline, "Big Rescues Can Work," which summarizes the difficult collaboration among banks, unions, governmental bodies, etc. that refinanced New York City's bad debt in 1976. She notes that President Gerald Ford's attitude really was "New York: Drop Dead" until he went to "an economic summit outside Paris sponsored by President Valéry Giscard d’Estaing of France and Chancellor Helmut Schmidt of West Germany." These leaders told him that if he didn't fix New York he'd have "a global dollar crisis." Ford didn't care about New York, but he did care about the dollar, in part because he cared about himself, and his election campaign.

Politics as usual - or neofeudalism? Ford was the starting point of Pitiful Government as we know it today. I vote for the latter once again.

Dum n Dummer 2

The LA Times had a poll today showing John McCain losing to either Clinton or Obama, which is good news for the economy. The bad news is that although 56% of the folks in this poll think the economy is "the top priority for candidates running for president to address," only 25% of them thought this in December 2007. Too late - you're already screwed!

"This American Life" ran a good show today on the subprime and credit crises. A former trader at Morgan Stanley's mortgage-backed securities desk said that they realized it was all going wrong around Halloween of 2006. Over a year later, only a quarter of the general public was very worried about the economy, and this was five months after the blow-ups of August. Why so slow, people? At this rate, we'll never turn it around.

Rediscovery For a Change

There are limits to dumbness:

• This weekend I've been at a family reunion in Marin County in honor of my brother's father-in-law Murray Kaufman's 90th birthday. If I were a media anchor I would call him a great American. Murray was a leftist CCNY student in the 1930s, in the US Army in France in World War II, was a printer in New York before becoming a high school teacher in Rossalyn on Long Island, where among many other things he coached the tennis teams and started one of the country's first high school curricula in environmental studies. Murray has never stopped fighting against unfairness and screw jobs in all their stupid forms. This is why his example is so important, why his company is such a pleasure, and why he has lived so long.
  
• I was in Oaxaca during the Obama-Jeremiah follies, where the media finally figured out how to play the race card - the ghost of panther-nationalism. I haven't had time to write about Oaxaca properly. We visited about a dozen frontyard, backyard, and cottage workshops of every kind. Some people make high-end crafts for tourists, some make art so expressive and direct it is hard to imagine it coming from the United States. Some get up before dawn to make animal characters they've invented out of pieces of scrap wood that they spend 12 hours in the local market trying to sell for the equivalent of 2-3 dollars or so. Nobody in the US who doesn't know how the Oaxaca half lives should ever lecture about entrepreneurship again.
• Meanwhile, a vacation did Tom Friedman good. He's got a sense of our royal American screw-ups much deeper than before. Maybe he's less screened by the effects of his regular diet of CEO kool-aid. He even borrows a title from an old book by one of the country's best business journalists, the Nation's William Greider ("Who Will Tell the People" - that their leaders' dumb ideas have sunk them). Here he is: "millions of Americans are dying to be enlisted — enlisted to fix education, enlisted to research renewable energy, enlisted to repair our infrastructure, enlisted to help others. Look at the kids lining up to join Teach for America. They want our country to matter again." That's a good start. He spoils it a bit by adding that America's Youth want it to "be about building wealth and dignity — big profits and big purposes. When we just do one, we are less than the sum of our parts. When we do both, said Shriver, 'no one can touch us.'" Well, no. The big stuff - teaching, research, invention, change - isn't about winning. You can't measure progress with profits. The search for profits is what has largely destroyed our search for purposes. But at least Friedman is starting to see what happened to the country while he was drinking the CEO drink.

Pains of Slow Decline

The Pew foundation has released a new poll about middle class decline, and I've pasted in the wire service summary. Papers are cutting back, you know - no one's around to actually read the report live. Dismal.

Decaying infrastructure is a related topic, since public services and the middle-class decay in lockstep. It killed a firefighter in LA two weeks ago. And the amazing airline chaos of the past couple of weeks offers the private version of the same underinvestment, in the air services at prices that allowed the masses to go long distances for the first time. Jeff Bailey at the New York Times has a good overview of the long-term problem that led one carrier - American - to cancel 3000 flights during last week.

***


http://www.latimes.com/business/la-fi-pew10apr10,0,2719008.story
From the Los Angeles Times
Middle-class Americans say they're feeling pinched
From the Associated Press

April 10, 2008

WASHINGTON — More middle-class Americans say they aren't better off than they were five years ago, reflecting economic pressures amid growing personal debt, a study released Wednesday found.

Their short-term assessment of personal progress, according to the study, is the worst it's been in nearly half a century.

The survey by the Pew Research Center, a Washington-based organization, paints a mixed picture for the 53% of adults in the country who define themselves as "middle class," with household incomes ranging from below $40,000 to more than $100,000.

It found that a majority of all Americans said they hadn't progressed in the last five years.

One in four said their economic situation had not improved, while 31% said they had fallen backward. Those numbers together are the highest since the survey question was first asked in 1964. Among the middle class, 54% said they had made no progress (26%) or fallen back (28%).

Asked about their financial experiences in the last year, 53% of middle-class people said they had to cut spending because money was tight. Nearly 18% said they had trouble getting or paying for medical care, while 10% reported they had lost their jobs.

Looking ahead to the coming year, half of the middle class surveyed said they expected to have to further reduce personal spending. Among those employed, one in four, or 25%, expressed worries that they would be laid off, that their job would be outsourced or that their employer would relocate in the coming year, while 26% were concerned that they would see cuts in salary or health benefits.

Middle-class prosperity overall also lagged compared with richer Americans. From 1983 to 2004, the median net worth of upper-income families -- defined as households with annual incomes above 150% of the median -- grew by 123%, while the median net worth of middle-income families rose by just 29%.

At the same time, most middle-class people remained upbeat when asked to measure their progress over a longer time frame, although their level of optimism lagged behind their wealthier counterparts. Two-thirds, or 67%, of middle-class Americans say their standard of living is better than the one their parents enjoyed at the age they are now.

In contrast, 80% of the rich said they exceeded their parents' living standard. Among lower wage earners only 49% reported better conditions.

Planet Boardroom

One of the pillars of the middle- class view is that we are not only the industrious but the represen- tative class. America R Us, and that means that elites with far more money and influence than your average teacher, accountant or internist nonetheless see things as we do.

This is a crippling delusion, since it allows the middle class to hand over its interests to whomever is in charge, e.g give up health care to HMOs, public universities to Republican state-funding cutters, tax policy to hedge-fund lobbyists. But if you still believe it then we have evidence you can use to retrain your senseless reflexes.

As the papers announced on Friday that the US economy has lost jobs for the third month in a row (80,000 more), and across a range of sectors, the NY Times published a poll showing that 81 percent of the public things the country is on the wrong track. 81 percent is an amazingly high number.

The same issue featured a business page story about all the CEOs who bought new penthouses in Manhattan while the banking system unwound.

In January, Lloyd C. Blankfein, chief executive of Goldman Sachs, closed on a $26 million duplex at 15 Central Park West, one of Manhattan’s hottest new buildings. Scott A. Bommer, a hedge fund manager, bought a Fifth Avenue co-op for $46 million. And Edgar Bronfman Jr., part of a private equity consortium that owns the Warner Music Group, spent $19.5 million for his own Fifth Avenue co-op.

This is as investment bank revenue fell 45 percent industrywide during the first quarter - or worse. "James E. Cayne’s $28 million purchase of two units in the Plaza was not the biggest deal, but it was among the most awkwardly timed. A few weeks after the second deal closed, the Wall Street firm where he is chairman, Bear Stearns, collapsed."

Investment moguls are not only out of touch with ordinary reality: they're out of touch with the strange world of their own industries.

More evidence of clueless leaders:

- as the economy went down down down, executive pay went up up up. ("According to the Congressional Research Service, average pay for chief executives stood at 179 times average worker pay in 2005, up from a multiple of 90 in 1994. Adjusted for inflation, average worker pay rose by a total of only 8 percent from 1995 to 2005; median pay for chief executives at the 350 largest companies rose 150 percent.")
- the executive compensation game shows the huge personal paydays that come from nepotism and insularity.
- details of the Bear Stearns deal
- coverage of Senate hearings, where Sen Christopher Dodd, recipient of great Bear Stearns largess, seemed especially interested in whether the government forced too low a price on the hapless victim investment bank.
-a column arguing that regulators still aren't admitting any mistakes in letting the banking system get so opaque and overleveraged that "a 'well-capitalized company' [Bear Stearns] could not find anyone willing to lend it money without government help."
- a piece on subprimes showing that most lenders weren't exactly defrauded by false claims by borrowers, because they didn't exactly check up on them. The author, Gretchen Morgenson, asks this question about our Head Geniuses In Charge:

Can investors stuck with losses on these loans sue to recover their investments based on this due-diligence failure? After all, mortgage originators made representations and warranties to investors that the quality of these loans was good when it clearly was not. And they made these representations knowing that they had not bothered to conduct quick and easy borrower-income checks.

Hey - maybe a national lawsuit will wake up the boss. Let's try it and see!

Meanwhile, check out the toxic buildup coast to coast.

The Great Shanking

The broad middle class is in bigger financial trouble all the time. For the short run - which raises the cost of borrowing to pay for that pillar of the American dream the family home - see an updated overview on the financial crisis after Swiss bank UBS announced another $19 billion in write-downs. If you're keeping score, see the chart at the left.

UBS's chairman stepped down, to be replaced by his former General Counsel. This looks a lot to me like replacing Tweedledum with Tweedledee. If it ain't, please explain.

Then there's the long run. The middle class these days is supposed to retire on its investment income. The private sector's defined-benefit pension system (where your income depended on a formula of age, years worked, final salary, etc. and not on market movements) has been almost converted to a defined-contribution system in about 25 years. Projections in the US and the UK suggest big retirement shortfalls coming up. Finance historian and practitioner Peter Bernstein offers a reason why. Though stocks are supposed to go up over 7% every year, in 1 of 5 years they go down, and "Nearly one in five of those 20-year spans produced real, or inflation-adjusted, total returns of less than 3 percent a year." So it's quite possible to have real returns of well below 7%. Add in the costs of buying and selling, normal management fee deductions, and bad timing, and your 401(k) rapidly becomes NOT like having a pension.

Bernstein talks about another detail that hugely matters.

Over the last 20 years, dividends have provided 39 percent of the total return.

But that was the past. Today, the dividend yield is only about 2 percent, compared with the long-run average of more than 4 percent since 1925. Achieving the long-run, inflation-adjusted annual return of 7 percent when starting with dividend yields of only 2 percent is a tough call, especially as earnings per share over that long run have grown more slowly than real gross domestic product, or only about 2 percent a year after inflation.

Wake up and check your pension! Whoops, never mind - you gave away pensions a decade or two ago. Wake up and sell the house! Well try to wait just five or ten more years, so prices can stop going down . . .

A Moment of Insight

OK, it just goes to show that anyone can be brilliant some of the time. Bush's first Treasury Secretary Paul O'Neill turned out not be as delusional as the other economic players during Bush II's first term, but he was no shining light. And yet he does offer the world's best one sentence explanation of the spread of the subprime problems into a general financial crisis.

If you have 10 bottles of water, and one bottle had poison in it, and you didn’t know which one, you probably wouldn’t drink out of any of the 10 bottles; that’s basically what we’ve got there.

Glad we straightened that out.

My Favorite Judges

One bit of good news in a bad week for the American middle- and working-classes was the freeing of Iftikhar Mohammed Chaudhry, the Chief Justice who had been deposed and put under house arrest by Pakistan's military dictator aka President Pervez Musharraf. Pakistan's new Prime Minister was behind the move, and it will be interesting to see how this plays out.

Why mention this now, when the American middle-class is trying to get through the financial crisis? Because we won't get through the crisis unless we learn to fight like these guys. Middle-classes of the world - all you economic majorities everywhere - wake the hell up.















Why can't our lawyers be more like these guys?

This Week in American Decline

Everyone was picking through symptoms of the financial crisis this week. The fire sale of bad boy investment bank Bear Stearns got five times more expensive than it was on Friday. The Financial Times reported that the $2 share deal came unglued not just because of Bear Stearns shareholder outrage but because JP Morgan, the buyer, didn't sew up the deal legally. This is not very comforting, given that they are the rescuer here.

Other financial themes persist:

• The economic confidence of middle-class and working folks has been crushed. Floyd Norris has the week's best view of the underlying issues. In terms of overall confidence levels, the last time we were this low was the oil crisis of 1973! He points out it's not just falling housing prices and market volatility that is the problem, but rather the

  evidence that America is no longer a leader, or perhaps even competent, in one area in which we believed it excelled.
  
  That area is finance. Only months ago, American financial institutions were pre-eminent in the world economy. We were the country that invented all the new financial products and that made lots of money from them. It was our investment banks that were called upon to advise companies and governments in other countries, and then to arrange the financing they needed.
  
  Now that reputation lies in tatters. Our big banks have been forced to turn to places like China and Abu Dhabi for capital as losses have mounted. But no similar angel turned up for Bear Stearns, and the Federal Reserve Board had to step in to avert disaster.
  
  The Fed, which only months ago seemed omniscient, now seems to be making it up as it goes along.

• Blind-date investing. Big asset pools remain mystery dinners. What the hell is inside the Bear Stearns asset pool, for example, which in theory among the most scrutinized? Who knows whether it's "really" all worth $2 a share, $10? 5 cents a share? Senators don't know either.
  
• crumbling middle-class dreams. The NYT again discovered the equity crisis and the truly amazing amount of credit on which the trappings of prosperity have come to depend.
  
• Obama sought to occupy working-folks ground with his speech on the financial crisis. Paul Krugman pointed out his proposals are all weaker than Hillary's.
• Help the Top First (and then Stop). The economist Dean Baker pointed out that the Fed guaranteeing nearly all of Bear Stearns's assets bails out the big institutions that hold instruments backed by BS assets. In the same vein, Republican candidate McCain made it clear that he will follow anti-government dogma on the genius of markets and not intervene. Treasury Secretary Paulson also rejected the New Deal quid pro quo: you get government money and support, you get government ground-rules.
• Hail Mary in High-Tech. Motorola hasn't found a product replacement for its smash hit Razr phone. Sales decline. Stock prices fall. Gorilla investor Carl Ichan gets upset. Motorola appeases Ichan by deciding to "split itself into two separate publicly traded companies, spinning off its unprofitable mobile phone unit to investors." Which is stupider - selling your main business, cell phones, instead of fixing it, or thinking that if you brand it a loser investors will buy it? I don't know. I do know the "real economy" folks don't know any more than last year's hedge fund geniuses. I also know that Carl Ichan should retire.
  

Politically, the crisis has continued and not transformed the two-party politics we've seen all decade. Republicans favor the upper brackets, really the top 0.1% and top 1% over even the top 10%. McCain's speech was proof that the best Republican minds see no mounting opposition to this.

Everyone else has to rely on the Democrats. There's an uptick in popular fear and hence popular suspicion of the Republican monopoly-market policies that got us here. But no one calls it that, and the Dems still have 1) too-little-too-late plans and 2) no overall philosophy of "social markets" or something similar that would be truly counter-cyclical and get the economy moving again. So for the moment, both the economy and the political debate are going nowhere.

Meanwhile, "Old Europe" and its apparently backwards social infrastructures (aka welfare states) is doing relatively well, even with the strongest currency in a couple of generations.

The Shadow Banking System

Let me first say what I've had to say before. There is only only one general daily newspaper in the United States that covers business properly, and that is the New York Times. The Wall Street Journal does fine, since it's a business newspaper. The Financial Times does well, but it's also not even from the United States. If you go to your quality regional daily like the Los Angeles Times looking for what you need to know you will not find it. You will learn nothing. If you get your financial news on TV, you are in the financial equivalent of the sixth grade, and I would like to sell you some collateralized debt obligations newly backed by the Fed.

Even the NYT will tell you that the barn door is open only after your money horse is gone. But at least it will help you understand how the door got open. This means that YOU, dear reader, are in serious long term financial trouble. No agency in American society cares about your financial stability, and yet you, who do care, are thanks to our pitiful media likely to stay middle-class stupid.

Luckily knowledge springs eternal. The NYT has a good long account of the financial "monster." They have picked up the term "the shadow banking system." Two of many useful moments:

It is a stealth market that relies on trades conducted by phone between Wall Street dealer desks, away from open securities exchanges. How much changes hands or who holds what is ultimately unknown to analysts, investors and regulators.

Credit rating agencies, which banks paid to grade some of the new products, slapped high ratings on many of them, despite having only a loose familiarity with the quality of the assets behind these instruments.

Even the people running Wall Street firms didn’t really understand what they were buying and selling, says Byron Wien, a 40-year veteran of the stock market who is now the chief investment strategist of Pequot Capital, a hedge fund.

This is the key: the epistemology is shot, the math is shit. They can't run numbers that come out right. How do you restabilize then?

Another useful moment, on how we got here:

A milestone in the deregulation effort came in the fall of 2000, when a lame-duck session of Congress passed a little-noticed piece of legislation called the Commodity Futures Modernization Act. The bill effectively kept much of the market for derivatives and other exotic instruments off-limits to agencies that regulate more conventional assets like stocks, bonds and futures contracts.

Supported by Phil Gramm, then a Republican senator from Texas and chairman of the Senate Banking Committee, the legislation was a 262-page amendment to a far larger appropriations bill. It was signed into law by President Bill Clinton that December.

Mr. Gramm, now the vice chairman of UBS, the Swiss investment banking giant, was unavailable for comment. (UBS has recently seen its fortunes hammered by ill-considered derivative investments.)

Gramm was an arch-conservative ally of Newt Gingrich and his merry pranksters, haters of government bordering on the sociopathic. Sometimes gov got in the way of raking in the real money like this. Fun for them, while it lasted.

Gretchen Morgenson has a good piece on the credit insurance markets. In addition to the content, it's a good reminder that we still don't know much about how much gaming is still going on. There is no transparency here, really, just endless buyer beware. How do you get trust back out of this?

Same for Ben Stein, the NYT's best Main Street Manhattan Republican. His piece should be called "Time to Panic." He goes on for a bit about how the real economy hasn't been torpedoed by the financial one - yet. But then he says stuff like this:

The task of the hedge funds is to find a weak spot in the market, and to put so much pressure on it that they can move it down, scare other players into selling (with the endless help of guileless journalists), wreak havoc with the markets’ indexes and then create that much more selling. Once the process starts rolling, it’s shooting fish in a barrel.

Just think of what the short sellers did to Bear Stearns. It’s true that Bear Stearns’s fabled risk management was not up to par in its portfolio. But it’s also true that without the hedge fund heavies of great wealth and great gossip beating them to the ground, Bear would surely have “shlepped it through,” as we say. . . .

This is important for two reasons. One, if market manipulators terrify the banks, lending will slow, and the economy will really falter. It won’t be rumor. It will happen.

Second, as the hedge funds change the stock market into a chamber of horrors, the retirement hopes of tens of millions of Americans will be dashed, and the stock market as a place for sensible Americans to place their money for long-term growth will be destroyed.

Actually, the latter happened a while ago. You never hear it first in the NYT, but you do eventually hear it.

Krugman throws out the same term "shadow banking system" today. He also quotes Clinton's Treasury Secretary Robert Rubin on the quid pro quo of new regulation: "If Wall Street companies can count on being rescued like banks, then they need to be regulated like banks." Krugman goes on to say there's no obvious will or insight behind such a move among Democrats, which we should note is partly the result of the the tireless and triumphant deregulation efforts of Dims like Rubin, who turned economic policy over to Wall Street.

Today's most amazing financial story is buried in Bloomberg's Currency news: "For the first time in 13 years, people who trade currencies say confidence in the markets to determine exchange rates is dwindling." Friends, THIS is news.

Half-Way Houses of the Less Than Blind

I can't remember a time in my life of watching politics - going back to Nixon and Watergate - when so many people called a campaign speech one of the best in American history (Samantha Power, in a talk in Santa Barbara), or one of the best ever on race (Orlando Patterson) or one of the best in post-war history (Frank Rich). The reference is of course to Barak Obama's race speech in Philadelphia last week, and at the moment Obama is the king of the kingdom of racial healing and the king of the kingdom of political candor.

Of course in the US both of these kingdoms are kingdoms of the blind (see this ignorant, backward lead piece in the New York Times today). To rule them Obama need only have one eye. In the first, he need only admit both racial anger and racial mixed feelings, both of which have been denied in US political life. Thus he referred to his white grandmother both loving her African grandson above all things in the world, while admitting she was often afraid when she saw black men on the street. We must admit the feelings and the racial programming, Obama said. In the second kingdom, US politics is ruled by lying buzzwords that deny the emotional fabric of people's everyday life. See Obama's example of disagreeing with and yet loving his pastor, Jeremiah Wright, or his acknowledgement that he has been called both too black and not black enough, or his descriptions of the white resentment over their economic stuckness that both wrongly scapegoats black folks and yet is real and must be addressed.

The most appealing moment of the speech came toward the end, when he point-blank blasted the dissociative, the denial-based understructure of American political life.

We can pounce on some gaffe by a Hillary supporter as evidence that she's playing the race card, or we can speculate on whether white men will all flock to John McCain in the general election regardless of his policies.

We can do that.

But if we do, I can tell you that in the next election, we'll be talking about some other distraction. And then another one. And then another one. And nothing will change.

That is one option. Or, at this moment, in this election, we can come together and say, "Not this time." This time, we want to talk about the crumbling schools that are stealing the future of black children and white children and Asian children and Hispanic children and Native American children. This time, we want to reject the cynicism that tells us that these kids can't learn; that those kids who don't look like us are somebody else's problem. The children of America are not those kids, they are our kids, and we will not let them fall behind in a 21st century economy. Not this time.

Obama named the corrosive source of American political stupidity - the mass refusal to face real sources of our problems. He did so in multiracial terms. He thus also rejected the politics of racial stigmatization. And he rejected the politics of group repudiation. These have been the twin pillars of right-wing rule for thirty years. Obama the two-eyed man - the one who would actually win both the nomination and the election - is the one that can tap these vast emotional reservoirs where lie mixed feelings and hence the capacity to negotiate with the other sides, including the other sides of oneself. Were this to happen, it would mean the sidelining of the authoritarian tendency in American political life, a tendency that has allowed conservatives to rule with ideas that, by any measure, have consistently and routinely failed.

Obama's political intelligence rests in his ability to offer Americans - especially whites - a political and a racial half-way house. The political half-way house appears in moments like this one: Why associate myself with Reverend Wright in the first place, they may ask? Why not join another church? And I confess that if all that I knew of Reverend Wright were the snippets of those sermons that have run in an endless loop on the television sets and YouTube, or if Trinity United Church of Christ conformed to the caricatures being peddled by some commentators, there is no doubt that I would react in much the same way.

But the truth is, that isn't all that I know of the man.

Obama says it's OK for you to reject the anti-white moments of this anti-racist preacher, one who may remind you of Malcolm X, or at least Radio Raheem in Do the Right Thing, since he, a black member of this black congregation would feel just as you do - IF he didn't know what he knows. So Obama relieves the white repudiation of black radicalism of its guilt and shame, and at the same time says look again. American politics without shame would be a revolution indeed - it would end the Right's power as we have known it.

Unfortunately, Americans in their political life move too easily from relief to innocence. Obama held out this temptation too by orienting his major race speech around a repudiation of the core beliefs of Jeremiah Wright, as in this unpleasant passage.

But the remarks that have caused this recent firestorm weren't simply controversial. They weren't simply a religious leader's efforts to speak out against perceived injustice. Instead, they expressed a profoundly distorted view of this country — a view that sees white racism as endemic, and that elevates what is wrong with America above all that we know is right with America; a view that sees the conflicts in the Middle East as rooted primarily in the actions of stalwart allies like Israel, instead of emanating from the perverse and hateful ideologies of radical Islam.

As such, Reverend Wright's comments were not only wrong but divisive, divisive at a time when we need unity; racially charged at a time when we need to come together to solve a set of monumental problems — two wars, a terrorist threat, a falling economy, a chronic health care crisis and potentially devastating climate change — problems that are neither black or white or Latino or Asian, but rather problems that confront us all.

In this speech Obama criticizes Rev. Wright again and again. It starts to feel like his version of Bill Clinton's Sister Soljah moment in 1992, when he showed how he could talk to and about black radicals as though they were misbehaving ghetto schoolkids. Obama relapsed into the language of racial scapegoating, using the particularly insidious updating that links anti-white "racism" to anti-Israeli "anti-semitism." In both cases, the vast majority of criticism of white racism and of Israeli policies are critics of the specific outlooks and actions of those parties, not of some essence of evil (whites as essentially racist, Israel = Jews = anti-Arab). Here weakened his "candor" with falsehood. We of course all do this - find freedom of thought in one area and bondage to received ideas on the other. But he blanketed with innocence one of the key Obamablindnesses of American domestic policy (that things are terrible for many if not most black folks today, and that white racism persists), and one of the blindnesses of American foreign policy - the obvious absence of fairness and evenhandedness and respect for popular Arab democracy. Both leave him open to manipulation by Hillary Clinton and John McCain alike. As he knows better than any other current politician, it is the lie that will leave him open to defeat.