Trump's Triumph Over the Professional Middle Class

I'm going to tote up a few things that are sometimes too obvious to say, but that should be in circulation.  The end point is that Donald J. Trump's post-fact ethos is the visible piece of a submerged crusade to make the United States a post-middle class society.

The first visible thing is the national knowledge crisis.  People now talk about a post-fact era, and  even the summit of the Washington establishment is feeling distress about Trump's power to dismiss any analysis that "conflicts with his a priori assumptions."    A more banal but pervasive problem is that it is impossible to understand any public issue through television, our dominant news medium.  This is also true of most print outlets, where coverage is superficial and fragmented. That is slightly better than superficial and chaotic, or simply propagandistic, which is the range on TV.  (Social media varies from deep, authoritative expertise to fake news propaganda to dark marketing psy-ops, but I leave that aside here.)  The U.S. has no public framework of political understanding today.  Crisis is too weak a word for the state of national knowledge.

The second clear thing is that Trump's success rested on a classic plutocratic appeal to white racial resentment.  There are two parts to this. Part one, the resentment, takes the form, "my white stuff has been given to minorities by the government."  We often talk as though this just another way of saying "white racism," but that begs the question, what is white racism today? My own sense is that it is tied to a white feeling of superiority and to a white feeling of failure--to the economic and cultural failure to be successful, central to the society, recognized as such. The complicated result is racial resentment, which is fused with resentment of government. Our knowledge crisis then helps many whites trace their sense of failure to the great government giveaway to racial minorities.*

Part two: Plutocracy is Trump running as the American businessman-king, who has a sovereign power to make everything work.  This figure is embodied in the corporate CEO, who has two core features. He [sic] maximizes private/corporate self-interest. He [sic] has a proven capacity to dominate others in pursuing this private self-interest. A plutocracy admits no public interest that is separate from the private interests of the dominant figures. It has no need for democratic processes that are separate from the executive's power to dominate ("to get things done").  Hence Trump's failure to admit the need to separate his business interests from the state or to grant the importance of the emoluments clause that opposes this use of the state to advance private interests.  He of course understands that there are frequent conflicts of interests (Carrier management and Carrier employees, perhaps Putin the oil baron vs. Putin the Middle East strategist). He does not grant that conflicts must be adjudicated by a non-dominating public-interest procedure that differs from the behavior of the strong private executive, and is ruined by the executive.

So far we have a knowledge crisis sustaining a plutocracy crisis that hinges on racial scapegoating. This gets us to a third thing: Trump's voters supported plutocratic racial capitalism because they hate the supposed alternative, the professional-managerial class's knowledge economy, championed by the Democratic party.  The professional-managerial class** seems to oppress them more directly--as managers and know-it-alls--than moguls do. Moguls like Trump act like Machiavelli's Prince, existing above all laws and rules, possessed of a magical ability to get things done.  A quarter-century of Clintonian know it alls--including Robert "symbolic analyst" Reich and Richard "creative class" Florida--have abandoned the American working class and let their towns and cities go to hell.

On top of that, Clintonist professional-managerial types demanded that workers convert themselves into people like them if they wanted jobs.  This meant not just demanding university degrees of 45 year olds but a change in their culture and values and relationships.  On the other hand, Republicans offered the preservation of some manufacuturing and extractive industry jobs for which blue-collar folk were already trained--as well as the continuity of conservative cultural values.  Republicans have been the political champions of blue-collar work, even as their tax giveaways to the wealthy undermine it.  Blue-collar workers can legitimately wonder how much worse Trump could be for them than Clinton and Obama.

Fourth, the professional-managerial class displays a conceptual failure that rests on this practical failure to keep the working class (only 1/3rd white male in the mid-1990s, and less so today) fully inside the U.S. economy  The conceptual failure is to have abandoned a sharp distinction between the public and the private good.  As Clintonist centrist Democrats practically abandoned the industrial working class and racial equality of outcome, they also gutted public good conceptions of social cohesion and majority prosperity.

Fifth, in abandoning the blue-collar economy and a strong public-good ethos, Clinonist professional managerial folk mooted the difference between expert authority and executive authority.  The PMC is supposed to earn its (limited) authority on the basis of knowledge, which is then to generate equity and effectiveness.  Expert authority is supposed to be an alternative to domination, while executive authority is domination. A good large chunk of the population, including the nonprofessional middle-class, now seems to think we may as well have domination via Trump, and this Trump strength exists because the supposed non-domination of expert authority has done nothing economically for Trump voters in the past 35 years.

The two great government programs even Tea Partiers like, Social Security and Medicare, were New Deal and Great Society programs that were in place a generation before the Clinton-Obama quarter century of Democracy Lite.  The yuppie army of knowledge economy advocates added nothing to them. They never built an employment base to match that of dirty industry--steel, auto, coal, et al. To top it off, the Clintons personally squandered the PMC claim to equity and effectiveness--to the absence of partiality and corruption--with their steady stream of minor but revealing scandals over these 25 years.  They also got rich through government service--a common right-wing talking point--further eroding the public vs. private good distinction on which professionals' superior virtue depends.

Disliking professional authority helps explain why Trump's vote correlates with medium and low levels of education more than with higher or lower levels of income: the population that respects the moral and political claims of expertise has shrunk to other experts or near experts like holders of B.A. degrees.  Trump's people never penalized him for his contempt for the governing claims of professional people--quite the opposite. He needs functional skill, but this is a commodity that he can buy, and the Trumps of the world can buy any expertise at some price.  As a commodity, knowledge expertise lacks political rights or moral authority.  The Clinton period has witnessed the commodification of increasingly complex skill, with the irony that professional skill is going the way of blue-collar skill--a point I discuss at length in The Great Mistake.

At this point, a card-carrying professional like myself can rush into discourse critique: In contrast to people like doctors, lawyers, engineers, teachers, accountants, nurses, college professors, city planners, and so on, Trump has spent his life in a world where a sales pitch plus money and influence creates its own reality, which is good at fleecing people but not at building a society.  More fundamentally, his personality structure disables the sort of verbal analysis, debate, and synthesis that is second nature to knowledge workers. His move is to throw the disputant out of the language game, which, in Jean-François Lyotard's classic definition, is terrorism.  Lyotard's definition of "postmodernism" in his famous book on the topic was not the end of "master narratives," but the rise of economic determinism, embodied in the U.S. by the businessman-king, who has the power to expel any irritating opponent from the language game before it starts.   Right-wing media plays its major partnering role.  The point is not to debate democratic socialists, for example, but to define them as bad people who want to destroy America, which means you don't need to debate them at all.  In this discursive sense, Trump is the Terror King.

All true enough. But the structural point is that Trump is also the triumphant enemy of the professions and professionals that make up the PMC.  Professionals, living in their traditional world of self-regulated standards and widespread social respect, do not understand this fact: the American right in general, and Trump in particular, have built a post-knowledge economy in which expertise is a commodity they buy for pennies on the global market.

The convenient effect of this hatred for the professions is that Trump can create the kind of cabinet he has:  foxes will guard every henhouse.  He picked an enemy of the minimum wage and the 40 hour week to head the Department of Labor, an enemy of public education to run the Department of Education, an unhinged opponent of everything public to run Housing, an extractor of treasury funds to run the Department of Treasury, a fan of war to run Defense, an enemy of environmental protection to run the Environmental Protection Agency, the head of the World Wrestling Federation to run the Small Business Administration, and now, reportedly, the leading advocate of private petro-interests to run the Department of State. From from Trump's point of view, why not?  Professional expertise and democratic deliberation either don't really exist or are obviously inferior to executive command.  And the public interest isn't different from private self-interest (an American neo-Smithian truism not limited to Trump).  This frame lends logic to Trump's kleptocapitalist cabinet, running energy policy for the petro sector, banking for hedge funds, labor for fast food chains, and education for charter school chains.

The wider political spectacle will be executive power crushing self-proclaimed independent professional expertise.  Every member of the cabinet of predators represents the use of autocratic authority against collective forces--cultural change, social movements, labor unions--whose political claims have been embodied in the disinterested languages of ethics, the law, and bureaucratic rationality.   Most professionals still think they are sheltered from direct executive power, and the high end perhaps believes their high salaries will protect them.  Protect them from poverty perhaps, but not from humiliation or political marginalization--or from being made historically obsolete as they had made the nonprofessional working and middle classes.

In short, the key achievement of Trump's business wing of the Republican party is have contained the knowledge economy.  It has done this by overcoming the class opposition between the working class and the bourgoisie that Eric Olin Wright could still identify twenty years ago. He has forged a working-class/bourgoisie alliance by rendering the professional middle classes their common enemy.

One big effect is to turn high-end professionals into servants, as I already mentioned.  Another is to have flattened the democratic potential of the tech economy that advocates like John Seely Brown had long predicted. Brown's co-authored Shift Happens is a good window into the promise of 2009 (and 1999). The shifts this book describes are:

1. Value is moving from stocks to flows
2. Power is shifting from organizations to individuals
3. Performance is falling for organizations.

(3) is entirely true: corporations are failing, measured as Return on Assets and other ways.  Large, top-down organizations in general are a mess, and are burdening society in many ways I can't go into here.  In addition, (1) and (2) are true in principle. But the point of resurgent, extractive, financialized Trumpian organizations ruled by businessman-kings is to make (1) and (2) false. Trump's capitalism locks up value in stocks that companies control and meter, and traps individual insight and energy within organizations, where they commodify that insight.  In our era after the knowledge economy, management is more powerful than ever, audit culture rules professional organizations more than during the Bush years, and executives are more entitled autocrats than in any other period.

This is the work of Trump's circle of allies, waging war on dissent, focusing Prince-like entirely on their own rule, and making knowledge creators into subordinates.   It is also the work of Silicon Valley culture, which has been stupid about and contemptuous of human processes and so can't protect them.  It is also the work of Clintonism, which has blamed people and their (non)skills rather than management/moguls for every economic thing. The Valley and Clintonism broke whatever alternative to Trumpism was in the minds of the Google bus dissidents as they were shipped in their rolling crates to work.

The current default is that Trump autocracy will rule American capitalism, keeping it extractive and oppressive to white- and blue-collar labor alike, opposing even minimal reforms, accelerating the aging of the U.S. economic apparatus and its productive decline.  The result is to be a U.S. that is no longer middle class in economic entitlement, political rights, or multi-racial equality.

Such is what the executive-plutocracy-working class alliance foretells.  When the musician Beck, in the top photo, released "Loser" a few weeks after Bill Clinton's inauguration in 1993, he called it "forces of evil in a bozo nightmare."  We were warned, and now we have to do something about it.

Addendum: I started this blog as a kind of diary ten years ago this month. In the first post I pointed out that "when the gloves come off, the Creative Class goes down like a bag of cement." Still so true!  Happy anniversary to "Middle Class Death Trips."

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*I realize someone like George Lakoff would say facts won't change the framing, and that analysts going back to Du Bois would say facts won't change the social structure.  I agree: a national knowledge system rests on frames or paradigms and not just facts, and the frames are rebuilt every day, week after week.  Thus a functional national knowledge system would fail to support, and therefore erode, this white sense that, to paraphrase Zizek, "the government has stolen my enjoyment.  And given it to racial minorities." We don't have one.

**I generally use Erik Olin Wright's 12-class model from Class Counts (1997), in which the middle-class is a set of "contradictory positions within class relations" that reflect variations of authority and expertise.  This class ranges from expert to skilled to unskilled, and has a range of authority positions as well.  I'll use professional managerial class for the expert/skilled white-collar people, and gloss over a bunch of details, particularly the current civil war between professional and managers in medicine, academia, and elsewhere.

Depressing Hillary

The reality is that I don't know a Democrat who is actually enthusiastic about Hillary Clinton becoming the next president. Many Democrats think she's earned her shot and is very qualified. Everyone sees the value of having a woman president.  And yet my twenty-something feminist friends and students have said, "yes I want a woman president.  Just not that woman."  Reports this morning are that in spite of the Trump terror factor, African American early voting is down.

Clinton has not broken with her dynasty's 1990s New Democrat vision of business as the great progressive force, and made no case in the debates that the public mission would be back in charge.  She already ran for president in 2008, when she was defeated by the then more populist candidate Barack Obama.   She didn't have a good record in her last big job as Secretary of State--her acceptance of the removal of the democratically elected Manuel Zelaya as president of Honduras helped disintegrate that society, which in turn led to some of the immigration that Donald J. Trump has successfully stigmatized.  And she isn't clearly willing the integrity race with the demagogic salesman, scapegoater, tax avoider, and OPM artist Trump.   On policy, she will be Obama Minus: about the same centrist ineffectuality on banking reform and economic redevelopment, and worse on the Middle East on other areas of foreign policy.  On personal integrity, she isn't in Obama's league--she's more like Trump Plus.

The root problem is her neoliberal self.  This has been nicely defined by the political theorist Wendy Brown as devoting one's working life to increasing the value of oneself as human capital.  The Clintons are profoundly unoriginal thinkers who have stayed inside of the influential orthodoxies of the particular time, for example, favoring stereotype-driven"super predator" mass incarceration in the 1990s rather than confronting the deindustrialization that drove the crime spikes; then opposing mass incarceration thanks to Black Lives Matter et al. in 2016.  This reflects the fact that they always take positions that will maximize their own position and influence. People who have watched them over the years understand this, and it is at the root of the feeling that they are unreliable allies.  The single worst example early on was Bill Clinton's abandoning of Lani Guinier, his nominees for the civil rights head of the Department of Justice, when a Wall Street Journal labeled her a quota queen.  But everyone can imagine the Clinton's abandoning a position at any time, which gives them a queasy feeling.

Another aspect of the neoliberal self is not being able to tell the difference between public goods and self-advancement.  This seems like something anyone could and should be able to do, but this has become less true in practice.  One of the FBI investigations of the Clintons involved "pay to play" use of their foundation in which foreign leaders that Hillary Clinton treated as the Secretary of State could get enhanced access through donations to the Clinton foundation.  Reporters have found a statistical correlation between donations and meetings with Hillary Clinton. The causal connection would never be direct, but what matters is the general ability to imagine that Bill would certainly do this and that Hillary would go along.  They spent the 2000s using their political prominence to get rich.  Though they pay full taxes on their multi-million dollars of annual income, they are the kind of people that can't imagine their wealth impairing their public vision.  That's neoliberalism.

This week CNN announced the firing of former DNC head Donna Brazile because they found that she was feeding questions to the Clinton campaign ahead of interviews.   This is cheating.  The same goes for former head of the party Debbie Wasserman, who was forced to resign in the wake of WikiLeakes information of her skewing party resources away from Bernie Sanders. Hillary's response to that was not to apologize for taking advantage of unfair advantage, but to give Wasserman a job.

I have a bad feeling about what is to come.

The Crash Was the Best Thing for Finance Ever

Simon Johnson quantifies the benefit of the crash to the ones who caused it:

the purely fiscal damage wrecked by big banks – apparent in 2008 but building for longer – will end up increasing our net government debt held by the private sector by around 40 percentage points of GDP.  . . . Around half of our existing government debt burden and much of our continuing fiscal vulnerability is due to the dangers posed by unreformed big banks.

There's the direct benefit to private financial interest of the bailout with public money.  There's the indirect benefit of crippling the public sector and lowering its tax costs to corporations and wealthy individuals.  This is the only agenda of the California Republican party, whose social vision consists in its entirety of blocking tax increases on large incomes, this year by gutting the pensions of public employees.

This has already happened in Illinois, and click here to hear Arnold Schwarzenegger's spokesperson repeatedly saying that the state budget deficit makes public pensions unaffordable. In America, saying something again and again makes it true.  Another guest pointed out that state employees get 2% of their salary as a pension for every year worked, so after 30 years they get 60% of their final few years averaged salary, and the average is $24,000 a year.  Apparently this is too much money for someone who worked for the public for 30 years, compared to the enormous piles both needed and deserved by wealthy investors.

The banks are continuing on much as they were: too big to fail will survive the reforms,  along with the banks' first lien on all national wealth.  Derivatives trading will carry on with small changes.  The only tools at ordinary folks' disposal - disclosure, data, discussion- will remain unavailable (see Morgenson's summary).   The economic leadership's silent passion for impoverishment means that people are still losing their houses even with loan modification programs. In the California counties of the new middle class of the 2000s -- around 1 in 100 houses received a forelosure notice just in the month of May 2010.

This system is grossly unjust and inefficient - inefficient like baronial 18th century French agriculture. Inefficient like Greece agreeing to austerity and paying even more for credit than before. Inefficient like families having no place to live. Inefficient like a third depression.   Inefficient like today's college-age adults being less well educated than their parents.

What amount of decline is going to upset the middle classes enough to fight for their jobs and their homes?

New Elite at War with Everyone

This past month has seen the final shoving of Germany towards supporting a Greek bailout, the condition being an imposed austerity whose terms will lower Greek living standards for years to come.  Most of the Greek public is opposed, having never seen most of the money their financial and political sectors managed not to invest in rebuilding a modern Greek economy.  They are getting their wages and pensions cut anyway, and are regularly in the streets.

The media largely still tells the story as between past and future, meaning labor and finance, or unions, who seek self-protection that looks backward to a vanished era, and responsible, enlightened business opinion, which seeks austerity.  For example, a leading proponent of serious financial reregulation in the U.S., Simon Johnson, calls for austerity in Greece.  Economists who point out that this is a recipe for poverty and financial depression - which in turn endangers loan repayment - are in a minority.

The "capital vs. labor" paradigm suggests that there is a large, forward-looking majority -- wealthy business elites, of course, but also a large affluent middle-class with BAs, MBAs, JDs and MDs -- and that this combined majority sides with enlightened business interests who create new wealth and the future's new industries.  They oppose the dwindling, outmoded blue-collar folks represented by unions and the public sector in general, who fight a rear-guard action for privileges that the marketplace, reflecting the real economy, no longer supports.

There was a time during the post-war "golden age" when the very top of the financial pyramid cemented the loyalty of a large middle class with generous benefits, delivered largely through a well-funded public sector.  Great public universities were one major example, but so were cheap freeways and subsidized suburban developments, hospitals and schools, the whole panoply of the "American way of life" for what was actually a fairly ordinary bunch of people, judged by global standards.  This time has come and gone. I've written at length about the deliberate downsizing of the middle class through attacks on its central institution, the public university, and we now have abundant evidence of the result: a splitting of a tiny elite -- an upper 0.1% or so -- from the rest of the top, which it opposes.

We're actually seeing a return of the Three Estates of the profoundly pre-democratic French 18th century social system: well-educated brainworkers are falling into a huge Third Estate of unprotected, insecure workers of vastly different educational qualifications. One example of the tendency is the ongoing effort to eliminate public pensions in California, which provide compensation for the relatively lower wages of public service workers many of whom are as well educated as $800,000 / year attorneys (nurses, college professors, financial analysts, etc.)

A good example of our "post-democratic" class structure appears in a nice paper by Mike Konczal.
He finds a way to distinguish the views on financial reform of Certified Finanacial Analysts, whose median incomes of around $250,000 put them in the top 1.5%, in contrast to the people who hire them, in the top 0.1%.

Studies of the distribution of the financial gains of the past decade show much the same thing - the lion's share not to the top 10% or even the top 1% but to the top 0.1% and 0.01% of the population.  The result is an unsustainable economy - as the crisis has shown - and a fractured polity that even the apparently skillful Barack Obama is blatantly unable to glue together again in the absence of meaningful 'reform."

The only cure is moving ahead into a new egalitarian phase of whole-society development.  But this depends entirely on a push from the great majority that is currently losing ground.  And where is that push?  Konczal's paper went up on HuffPo on May 3rd.  Almost three weeks later, it has zero comments. Meanwhile, a clip of Rand Paul's dumb, obviously right-wing stuff about the Civil Rights Act has over 16 thousand. Great, we've figured out that Paul is Tea Partying right-winger, like he hadn't already said that everyday in his campaign.  Meanwhile, the middle-class seems completely unable to define the reforms on which depends for its survival.

The Goldman Sachs Complaint

Joe Nocera has a good summary of the issues involved in its Goldman Sachs complaint, and the SEC has a condensed description of it. Here are the two key paragraphs:

According to the SEC's complaint, filed in U.S. District Court for the Southern District of New York, the marketing materials for the CDO known as ABACUS 2007-AC1 (ABACUS) all represented that the RMBS portfolio underlying the CDO was selected by ACA Management LLC (ACA), a third party with expertise in analyzing credit risk in RMBS. The SEC alleges that undisclosed in the marketing materials and unbeknownst to investors, the Paulson & Co. hedge fund, which was poised to benefit if the RMBS defaulted, played a significant role in selecting which RMBS should make up the portfolio.

The SEC's complaint alleges that after participating in the portfolio selection, Paulson & Co. effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (CDS) with Goldman Sachs to buy protection on specific layers of the ABACUS capital structure. Given that financial short interest, Paulson & Co. had an economic incentive to select RMBS that it expected to experience credit events in the near future. Goldman Sachs did not disclose Paulson & Co.'s short position or its role in the collateral selection process in the term sheet, flip book, offering memorandum, or other marketing materials provided to investors.

These are our financial geniuses at work on a straight con. The CDO lost 83 percent of its value in the first six months.  Nice.

James Kwak at Baseline has a helpful exegesis on the "type of transaction involved — in which a hedge fund makes a CDO as toxic as possible in order to then short it."  He notes:

It seems like the key will be proving that Paulson influenced the selection of securities enough that it should have been in the marketing documents. Paragraphs 25-35 include quotations from emails showing that Paulson was effectively negotiating with ACA over the composition of the CDO, so it’s pretty clear he had influence. The defense will presumably be that ACA had final signoff on the securities, and Paulson was just providing advice, so Paulson’s role did not need to be disclosed. (I don’t know what kind of standard will be applied here.)

Kwak adds, "no doubt to the annoyance of many, I don’t blame Paulson. It’s Goldman that had the duty to its investors, not Paulson."

Michael Lewis is more explicit about all this in an interview that Kwak quotes elsewhere:

all of the people you mentioned all swallowed a general view of Wall Street, which was that it was a useful and worthy master class, that these people basically knew what they were doing and should be left to do whatever they wanted to do. And they were totally wrong about that. Not only did they not know what they were doing, but the consequences of not knowing what they were doing were catastrophic for the rest of us. It was not just not useful; it was destructive. We live in a society where the people who have squandered the most wealth have been paying themselves the most, and failure has been rewarded in the most spectacular ways, and instead of saying we really should just wipe out the system and start fresh in some way, there is a sort of instinct to just tinker with what exists and not fiddle with the structure.

Lewis also hits this blog's humble theme, the intellectual limits of the mass middle class that continues to prevent it from overcoming its humiliating defeat by financial forces it never bothers to understand:

The question is how does Washington move away from those institutions and make decisions that are in the public interest without regard for the welfare of these institutions. It’s a hard question because . . . this is the problem. Essentially the public and their representatives have been buffaloed into thinking that this subject — financial regulation, structure of Wall Street — is too complicated for amateurs. That the only people who are qualified to pronounce on this are people who are in it. And there are very very few people who aren’t in it in some way who have the nerve to stand up and fight it. . . .

The reporter as much on this beat as anyone in the U.S. Gretchen Morgenson, discusses why John A. Paulson who set this up was not indicted. Paulson's firm released a statement that said in part,

There’s no question we made money in these transactions. However, all our dealings were through arm’s-length transactions with experienced counterparties who had opposing views based on all available information at the time. We were straightforward in our dislike of these securities, but the vast majority of people in the market thought we were dead wrong and openly and aggressively purchased the securities we were selling.

Morgenson (and Louise Story) continue:

After analyzing risky mortgages made on homes in Arizona, California, Florida and Nevada, where the housing markets had overheated, Mr. Paulson went to Goldman to talk about how he could bet against those loans. He focused his analysis on adjustable-rate loans taken out by borrowers with relatively low credit scores and turned up more than 100 loan pools that he considered vulnerable, the S.E.C. said.

Mr. Paulson then asked Goldman to put together a portfolio of these pools, or others like them that he could wager against. He paid $15 million to Goldman for creating and marketing the Abacus deal, the complaint says.

One of a small cohort of money managers who saw the mortgage market in late 2006 as a bubble waiting to burst, Mr. Paulson capitalized on the opacity of mortgage-related securities that Wall Street cobbled together and sold to its clients.

 In a video clip, Story points out that the case seems to be proof that Goldman does bet against instruments it markets to its own clients, contrary to its repeated denials.  In another clip, the SEC's Robert Khuzami answers questions about the compliant.

The complaints are finally getting under way.

The Spineless go to the wall

Jane Hamsher is right in her bitter lament about the Dim "left" cave on health care:

Nobody will take progressives in congress seriously, nor should they. Their threats are idle and they won’t fight for anything they believe in. In the end, they’ll just take turns shaking their fists in futility and alternately sucking so no serious liberal challenge ever emerges to anything.

Tbe pain is visible on Democracy Now as Dennis Kucinich, whos's spent his congressional life as a pirncipled outsider, explains why he switched to Obama after a ride on Air Force One:

it would be impossible to start a serious healthcare discussion in Washington if this bill goes down, despite the fact that I don’t like it at all. And every criticism I made still stands.
I want to see this as a step. It’s not the step that I wanted to take, but a step so that after it passes, we can continue the discussion about comprehensive healthcare reform, . . . But if the bill goes down and we get blamed for it, I think there’ll be hell to pay, and in the end, it’ll just be used as an excuse as to why Washington couldn’t get to anything in healthcare in the near future. 

Clearly Obama and the other Dem leaders were planning to retaliate against Kucinich and other holdouts, perhaps as the party retaliated against Cynthia McKinney in Georgia by running a "moderate" against her in the Demoratic primary.   Goodman and Gonzalez gave Kucinich every opportunity to say that he got something for caving in.  He seems to have gotten only the absence of retaliation.

It's sad because of Kucinich's courageous and unpopular stands against various wars along with other wasteful, destructive stupidity that the U.S. blunders into and then feels entitled to continue - like  the main elements of its awful healthcare system.  Sadder still is his apparent belief that by conceding this time, he will be listened to next time.  Au contraire.

Why does the progressive middle-class think that if it concedes now it will win later? If I agree with you now, will you agree with me later?  Ha ha ha, of course not!

There were some institutions that did work like that: large organizations with clearly-defined roles and job security, professional groups like medical practices, and other structures that institutionalized reciprocity, or codified it informally.  These were humanizing forces in society, even when they were bureaucratic, stratified, exclusionist, and so on. They are being relentlessly eaten away by the external and unilateral use of power, particularly forms of financial control like treatment regulations imposed on doctors by HMOs. That is the time of the iceberg.

Middle-class America  will increasingly approximate the condition of the US Congress, except without the floods of lobbyist cash. The failure continues to be intellectual, as Talk Left points out:

[Nate] Silver can not imagine a progressive bargaining position that threatened the passage of the health bills. No one could imagine it, even progressives. Until they can not only imagine it, but in fact project it in a political negotiation, progressives will remain irrelevant outside of Democratic primaries, when they will receive a plethora of campaign promises sure to be abandoned by pols.

Monopoly Endgame and Middle-Class Decline

Yesterday the NYT ran a very good piece on the rise in the long-term unemployed. One of the featured people is Jean Eisen, out of work for two years. A former comic, she's turned to Christianity because prary offers the kind of health insurance she can afford.

Twice, Ms. Eisen exhausted her unemployment benefits before her check was restored by a federal extension. Last week, her check ran out again. She and her husband now settle their bills with only his $1,595 monthly disability check. The rent on their apartment is $1,380.

“We’re looking at the very real possibility of being homeless,” she said.

The piece states the clear implication:

Every downturn pushes some people out of the middle class before the economy resumes expanding. Most recover. Many prosper. But some economists worry that this time could be different. An unusual constellation of forces — some embedded in the modern-day economy, others unique to this wrenching recession — might make it especially difficult for those out of work to find their way back to their middle-class lives.

And also offers a more candid-than-usual explanation of why:

Large companies are increasingly owned by institutional investors who crave swift profits, a feat often achieved by cutting payroll. The declining influence of unions has made it easier for employers to shift work to part-time and temporary employees. Factory work and even white-collar jobs have moved in recent years to low-cost countries in Asia and Latin America. Automation has helped manufacturing cut 5.6 million jobs since 2000 — the sort of jobs that once provided lower-skilled workers with middle-class paychecks.

“American business is about maximizing shareholder value,” said Allen Sinai, chief global economist at the research firm Decision Economics. “You basically don’t want workers. You hire less, and you try to find capital equipment to replace them.”

Jobs used to grow at a 3.5% rate each year. After 1980, they grew during expansions at under 1% a year.  To make the point as directly as possible, U.S. economic leaders shifted the conditions of revenue growth so that they depended on the reduction of employment growth.  In other words, U.S. expansions become almost-jobless recoveries by design.   The actually jobless recovery after 2003 under George W. Bush was the holy grail of this economic policy.

The Obama Administration is doing what it can to draw a somewhat bent line from Bush to Hooverization.   Its money goes to big banks not small ones, who are not lending to the small businesses that produce the vast majority of new jobs in any recovery.  (See my Capitalist Pal on this crowding out.)  Small business is not recovering, and employment will recover that much more slowly.  Strategic sectors like green energy are on the ropes.  The federal stimulus will not rebuild enough of the crumbling country by in the process hire the hundred thousand a month required just to keep unemployment in place.   Instead, its unemployment bill will mushroom, as people are paid not to work on public projects but because they can't find work. Cash-starved governments will try to contain the mushrooming bill by throwing people off of "safety-net" programs that include welfare: "as of 2006, 44 states cut off anyone with a household income totaling 75 percent of the poverty level — then limited to $1,383 a month for a family of three."  The effect here obviously is to insure that welfare leads to paralyzing, unhealthy poverty.

It's all getting to be too much even for some of the Summers-Rubin Lexus worshipping fans of unhinged business.  Tom Friedman's column is titled "The Fat Lady Has Sung," and has the quip that sums up pretty much everything.

But now it feels as if we are entering a new era, "where the great task of government and of leadership is going to be about taking things away from people," said the Johns Hopkins University foreign policy expert Michael Mandelbaum. 

Ms. Eisen's life story is a history of So. Cal deindustrialization, as she energetically jumps from one industry to the next with a cheery entrepreneurial spirit, only to see that entire industry die or get sent abroad (aerospace, a travel agency, then beauty product sales . . .)

The worst comes nearly last.  Another successfully member of the middle class who hasn't been able to find a job in two years remarks, "“What is going to happen? . . .I worry about my kids. I just don’t want them to think I’m a failure.”  The worst is that many of those on the front lines of middle-class decline don't see the structural problems.  It's hard to imagine, given the incredibly low mental level of most US media, that they ever will.  But without a reason or a will to revolt against this dead-end system, all they can do is spiral wagewise to the bottom.

There's a direct connection between the U.S.'s monopoly-prone economy and wage / employment decline.  It won't change unless members of the ex-middle class start to realize the removing jobs has for thirty years been the U.S. economy's dominant recipie for revenue success.

Future of Housing?

At Calitics, Robet Cruickshank has a nice piece on boomer housing fortunes and looming failures - the housing boom as a short-cut to wealth that has helped wreck California and that won't save their retirement either.  It's more  relearning of the old lessons we stuipidly forgot, and maybe too late . . .

Here's his summary of the dumbness:

After having spent 30 years steadfastly refusing to pay higher taxes to help provide to younger generations the affordable education, health care, and other benefits [boomers] themselves enjoyed when they were younger, they have now created a situation where they'll either have to live in their paid-off houses without the ability to provide for their own needs, or will have to sell for cash at fire sale prices in a marketplace without enough buyers.

thanks to Michael M for the link

Screwed by "Partnership" Again

The deep cultural issue with the plan-of-the-week for detoxing bank assets is the sad commentary it makes on the social attitudes of bankers overall. The Geithner plan is a "public-private partnership" that, like most PPPs, is skewed in favor of the private side. In this case, risk is 85-15 public-to-private, as not stated candidly by Treasury, but as calculated here and here, but the contracted profit split, if any, is 50-50.

Why the hell can't bankers rejoin society with a one-to-one risk-to-reward split? Every six-year-old on earth understands the concept of 50-50. Why not bankers? Why the double standard? Why always a bigger take for them than for everybody else? Why a bigger split for them NOW, when they have torpedoed the entire global economy and we could buy most of them for less than the bailout money they already have? Why now, when most of us want bankers to shut up, not to mention to cut these overpriced, grotesquely overpaid, unaffordable bankers out of the financial system, kind of like we should do with HMOs.

The answer is that unless their win is a lock, and their extra cut is guaranteed, the banks won't even show up.

The Obama administration is at least as eager to show the world's bankers that the US is "not Sweden" as they are to fix the economy. They believe that keeping bankers in charge is the prerequisite to fixing the economy. They know bankers, so they know this means that they have to give banks the farm they already foreclosed on once, after they rolled the farm's subprime mortgage into a toxic security they sold to your retirement fund.

Bankers wonder why they are being singled out. They have singled themselves out by demanding special deals before they are willing to roll out of bed - after they burned the house down, went next door, took over your bed, cashed in your insurance policy and asked you to sleep on your couch.

In the midst of this forlorn exchange of big economists about the plan, see Mark Thoma's comments about the privates getting " free insurance against downside risk." I wish he'd gone on to say that this is going to be an orgy of asset-flipping. People will own the toxic waste long enough to flip it to another sucker. If the Chinese government doesn't line up this time, who will? If there's no sucker in sight, no one will buy.

Why don't we just nationalize the banks? Answer 1: because Sweden did it once. Answer 2: because nationalizing banks would be cheap now. Citigroup's market capitalization is about $16.5 billion today. We've already given them three times that amount in bailout money ($50 billion). So we have to wait until nationalization will cost us everything, so the banks can have all the money.

Too cynical? Well a couple of trillion later, do we yet have a functioning banking system? How much more is it going to take?

All the dollars and cents you can make.

There's plenty of economic unworkability in this latest public-private skewed subsidy plan. If you need huge bribes of public money to get asset scavengers to buy toxic waste they won't touch with their own unsubsidized money, they why will these securities' "market value" float on their own?

But more deeply, at the cultural bottom, it will be impossible to fix an economic system that has been eroded by its own gross unfairness with another round of gross unfairness.

Anger at Bankers

I've been working in Britain this week, and the tabloid press has awakened to the scandal of the Royal Bank of Scotland's dependence on the British government for its survival, which required an additional L 325 billion in insurance and L 25.5 billion in directly injected government capital in a week in which it announced a L 24.1 billion loss for 2008 (L 40 billion absent some technical issues). The tabs analyzed the absurd, make-up securities on which RBS made billions before it lost billions, and proposed the de-securitization of the transactional banking system while slamming the phony "value" created by bankers who got rich on commissions - that is, not by creating anything valuable but by charging a toll like the troll who lives under the bridge. "Fred the Shred Revealed as Biggest Troll of All" screamed the respectable center-left paper The Guardian, in a story that carefully exposed Fred's personal net worth, and likened his position in the bank to a mosquito with a hundred beaks for sipping the blood of depositors and taxpayers.

NOT!

None of that reporting happened, although the events did. That'll be the day.

Well the tabs did perk up a bit at RBS's former head Sir Fred Goodwin's pension, at L 693,000 per year unto death, and headlined "Fred the Shred"'s refusal to give it up. PIGGY BANKER shouted the giveaway paper The Metro, and provided this helpful illustration:
Shades of that great 1970s slam of British capitalism O Lucky Man, in which eager-beaver salesman Malcolm McDowell stumbles onto a military-industrial experiment that consists of fusing humans and pigs - perhaps to create the perfect consumer we need to get us out of our new depression.

There are two statements that Fred the Shred's pension prompts.

1. leaders of failed enterprises shouldn't be rewarded for a bad market performance.
2. leaders of successful enterprises shouldn't be given the rewards bankers were getting in the first place.

But actually only #1 has been spoken. # 2 is lurking around the edges, as when the Guardian's print version of this story on Obama's budget was actually headlined "Republican anger as Obama plans to tax the rich in L3.5 trillion budget." (The Guardian also carried a story titled "Rich seek tax breaks to fund UN development donations." - well that speaks for itself.) The idea that the billionaire men's clubs were not making "market" salaries has appeared in veiled form from establishment centers, as in this comment on Sir Fred's pension:

Bank of England governor Mervyn King condemned executive pay and the City culture of bonuses and pensions.

He said: 'It was a form of compensation that rewarded gamblers if they won the gamble but there was no loss if you lost it. It's obvious that if you do that you will give people incentives to gamble."

This is at least right in assuming that Sir Fred's toxic security marketing wasn't creating value, and the rewards for that were not tied to value creation. But we need to go farther (without sinking into the deep philosophical questions like "is value in the eye of the beholder"?)

Farther can be simple. Picture the proverbial market in which people step up one by one and sell their type of labor to an assembly of buyers. The plumber comes forward, the wheat farmer, the winemaker, the neurosurgeon, the divorce lawyer, the farmworker, the high school teacher, everybody is there. Let's say most of these folks get market bids - it is open bidding, so its actually a broad social conversation - that are close to the current average of their salary category. The neurosurgeon makes $600,000, or 10x the high school teacher and 20x the farmworker. We can debate how right this is, but say you have a 20:1 spread for whatever reason.

Then the Fortune 500 executive steps up, and is followed by a hedge fund manager.

What possible argument could show that in our primal auction the assembly that represents the market would pay the CEO $14 million a year (233x the teacher) and the manager of a top-20 hedge fund $657.5 million a year? (10,958x the teacher?) To earn what the hedge-fund manager earned in 2007, the teacher would have had to start working 9,000 years before Christ was born, in the middle of the last Ice Age. What actual living "market" of real bids would ever bid within a factor of 1000 of those numbers? Why would such a group give a banker even a dollar more than a neurosurgeon? or a farmworker . . . but well we are talking about current society.

It's pretty easy to show that the idea that $14 million is a market salary is ludicrous. It's less easy to have a general discussion about this.

The issue has as special urgency this week, as we learned the economy went off the cliff. Housing prices continue to plummet, and the Center for Economic and Policy Research projects that

the median household in the 45 to 54 age cohort saw its net worth drop by more than 45 percent since 2004, to just over $80,000 (including home equity). For early baby boomers, those between the ages of 55 and 64, the losses were not quite as steep but still came to 38 percent of net wealth, with the median wealth falling to $140,000, approximately 80 percent of the price of the median home. Nearly 30 percent of late baby boomers will need to bring cash to a closing to cover their outstanding mortgage and transactions costs.

In CEPR's scenarios, the American Dream home destroyed most f the wealth of its owners between 2004-2009. In two of the report's three scenarios, renters have more wealth than homeowners when they try to retire.

The US press is showing its mental blinders by casting Obama's first budget entirely in political terms: is this the end of Reaganism? Well yes, but actually Reaganism ended itself by blowing up with no help from the Democrats or Obama. The real issue is: WHERE IS THE MONEY?

We'll need to work on the following things:

1. attacks on and full discrediting of market culture: the rampant, delirious anti-egalitarianism that make this fragile, collapsed banker capitalism possible and, more importantly, immune from criticism. These spreads will need to be denounced as widely as Fred the Shred's pension before we can exit the Age of Inequality that undermined our societies and our economies at the same time. (See Reich's liberal pragmatic explanation that inequality hurt the economy, and Wolff's left-theoretical one).
   
2. forced repatriation of US wealth hidden offshore (there was a start on this last week).
3. taxing the rich.

It's either that or the steady downgrading of the poor and the evaporation of the US middle-class at the same rate as the fall of housing prices and the disappearance of large-company jobs.

***
PS. Aficianados of the bankers' phony markets will enjoy this story about the non-value of collateralized debt obligations (CDOs, of which securitized subprime mortgages were a subset): different classes of AAA-rated CDOs are seeing recovery rates of from 32 to 5 cents on the dollar.

Shredding Your Own Safety Net

Steven Greenhouse has a good Sunday piece on the weakening of unemployment protections. Unemployment benefit duration has fallen from 65 to 39 weeks. Only about a third of unemployed workers receive any unemployment benefits (down from one half in the mid-1970s), and 40% of very poor families who quality for public assistance actually get it, or half as many as in 1990. The implication is that more people losing all of their private-sector income with no public replacement will make the recession worse, or turn a recession into a depression.

The middle-class's happy cutting of social services was premised on a cluster of incorrect ideas: that investment income (including their house(s)) would always rise faster than inflation, they could always borrow at low rates and roll over the loan indefinitely, and that social services were for Other People, generally foreign and/or undeserving. Now bankruptcy filing are setting new records. The NYT has a good piece on this, with a story about one middle-class family caught in the bind, and caught by doing what they thought they were supposed to do.

The same goes for 401(k) plans, whose ability to harness the wealth-producing genius of the markets persuaded tens of millions of employees to allow their companies to replaced defined-benefit pensions with defined-contribution pensions. This "great risk shift" from companies to employees was sold as the road to riches. The LA Times writes that with many employees having lost ten years of gains in the last few months, these middle-class stalwarts are having a rethink.

The dismantling of social infrastructure - including unemployment and poverty benefits - was premised on the idea that poor people were bad people. If your society had good social services, it would encouraging losers. These losers would hang on to their loser habits. They would breed and multiply. (Hence the power of the image of the "welfare mom," who was also a "welfare queen," who "bought vodka with food stamps" - Reagan's oft-repeated urban legend - that she obtained by having six children with six different absent fathers.)

Well hey - Losers R Us. If we got rid of the dumb economic moralizing, we might both avoid Great Depression II and rebuild society.

Emphasis on the word WE. They, the economic leaders of the country and the world, aren't going to do Jack. See Gretchen Morgenson's typically acerbic analysis of the Paulson fumbling which isn't even helping bank credit, to say nothing of credit for the people.

Since the $700 billion TARP was funded, it has been used solely to shore up banks and other financial institutions. (An irreverent friend calls it The Act Rewarding Plutocrats.)

Treasury officials did move closer to helping consumers with a new plan floated last week aimed at offering $50 billion in loans to companies that issue credit cards, make student loans and finance car purchases.

Kind of interesting, isn’t it, that troubled homeowners are missing from the list of TARP beneficiaries and left to fend for themselves?

Yes you said it - interesting. Interesting that WE helped build this system by submitting to its world view. Interesting that WE might reconsider.

America the Socialist - you WISH

Fivethirtyeight.com has a nice explanation of the electoral shift in 2008 that appears in the map at the left. Well and good for Dims to win elections. But it misses the big picture.

The big picture is that whites took a look at a Republican candidate who offered tax cuts skewed toward the wealthy investors that had just tanked their middle-class pensions, and who will double their government's deficit, and who are forcing cuts in every public support for middle-class life known to man, and took a look at this candidate who defined the 30-year boom in income inequality and 30-year wage freeze for 80% of Americans as the fountain of wealth, and who trashed tax cuts NOT skewed toward the rich as socialism - and 55% of the dimwits voted for him!

We have to face the fact that when it comes to their own money, white Americans are the dumbest fuckers on earth.

Reality check. Guess who made the middle class. Franklin Delano Roosevelt. Pushed by the labor movement, by Democrats, and by socialists. And by communists! And then by the New Deal's mass public works program that was finally and sadly given its proper enormous scale by World War II, and still later by retaining and expanding it via the Republican Gov Earl Warren in California and even a little by Dwight D. Eisenhower in the Republican 1950s White House, even as McCain and Palin's ideological godfathers were defining socialism as anti-Americanism, and by being expanded yet again by Dem Gov of California Pat Brown and Republican Gov of New York Nelson Rockefeller - before that kind of Republican was drummed out of the party and turned into a Clinton Democrat.

Here's a short, starter list of the socialist government programs that created the middle-class out of the abandoned farmers and union-busted workers and semi-educated fake professional service workers like the folks who bred me.

• Federal Home Loan Bank Act (1932): creates savings and loans to fund mortgages with federal guarantees in case of default
• Home Owners’ Loan Act (1933): cheap credit
  
• Glas-Steagall Banking Act (1933): established Federal Deposit Insurance Corporation and kept banks from blowing all of your money like they did after its repeal in the late Clinton period.
  
• Various New Deal Legislation (1930s): support for farms, small business, home building, credit stability, rural electrification
• Servicemen’ Readjustment Act (1944) (“GI Bill of Rights” - supports education, job training, medical care consumer loans, home loans for vets
• Highway Authorization Acts (1947, 1956): 79,000 miles constructed
  
• Federal Housing Administration: direct loans (4%) and loan guarantees for large-scale housing development

Each of these programs had to be pried open over many years for African Americans and other people of color. But this long civil rights struggle doesn't change the fact that the middle-class, segregated then more integrated, exists only because of mass social investment, now and forever, amen.

Meanwhile, yesterday, mass social investment was indeed taking place, for the t0p 0.01%, and NOT happening for everyone else:

• AIG upped its take of your money to $150 billion. For just one gambling insurance company, that's what it costs for us to cover its lost bets.
• Fannie Mae announced another $29 billion in losses for the 3rd quarter of 2008.
• American Express declared itself a bank so it could feed at the same federal windows.
• Arnold Schwarzenegger, put into office by the white middle-class, and saying every week for years that the state of California spends too much, suddenly declared that the real problem is the state doesn't tax enough. His solution: increase the sales tax, soaking the middle and the poor.
• GM has decided to save its dwindling cash reserves by stopping retiree health benefits for its former white-collar workers.
• The New York Times published data suggesting that 10 million homeowners will soon have their houses "underwater" - worth less than the mortgage they are paying to stay in the house.
• The University of California announced that its pension fund had lost 28.3% of its value since June 30, 2007 - echoing similar losses all over the country.
• The Los Angeles Times reported that the federal bank bailout could cost the state of California $2 billion in lost tax revenues.
  

Meanwhile the war in Iraq, that great murderer of Iraqis and fleecer of the American public, got going again.

Smile as you write those checks, and give thanks to Baal that we have no socialism in America!

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.

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.

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.

Bush's Iraq War on America

Bush's economic policies are designed to move wealth from the large middle to the small top of the American social pyramid. I have blogged with charts on this before, and will do so again, but it's pretty obvious that these policies continue thirty years of attacks on what I call "majoritarian economics" and that they are succeeding at increasing the gap between the very rich and everybody else.

The war in Iraq has a similar effect, continuing the slow strangulation of the public services - health, higher education, long-term research, social security - on which the large middle classes depend. The occupation of Iraq has no achievable goal, except, that is, the destruction of a useful domestic government, both in Iraq and the United States. Federal uselessness was on grotesque display in Louisiana and Mississippi after hurricane Katrina, and milder, less visible declines in the quality of everyday life are as obvious as the growing wealth and income skew. It's not the Iraqization of the U.S., but it is the Brazilianization - a long, steady regression towards the old plantation ways of the region that continues to control U.S. politics, the American South. If you doubt me, look at income, wealth, health, and education indicators for the Deep South states that remain in thrall to the Republican Right. Hell, look at the indoor plumbing indicators. Back, back, back we go to the Middle Ages. And by the way, the Middle Ages lacked a middle class.

Why the middle class votes for the chuckleheads who undermine their conditions of life - well that's the vote against life and for death that gives title to this invisible blog. We will keep trying to explain it. In the meantime, what will we do in the wake of Bush's Little Surge speech this week?

The Surge is a booby-trap, but not for the Iraqi "insurgents." 20,000 more troops is about a 15% increase. Even if you captured 15% more snipers and bombers that would obviously not solve the problem. On top if this, the surge is actually a series of smaller incoming waves, a few thousand troops at a time. Even John McCain expressed doubts about the military value of this strategy, and the surge was basically his idea.

So who's the booby-trap set for? Congressional Democrats, of course. If they successfully oppose the surge, Bush-Rove will blame failure on them. This kind of fact-free finger-pointing works well in this undereducated country where a lot of people seem to believe their televisions. On the other hand, if the Democrats support the surge, they will squander the issue that gave them control of Congress last November. Since they ARE Democrats, they will dither and splinter and do little good for anybody here or in Iraq. We will get a better minimum wage and maybe some cheaper medications, and that's about it.

The reason is that the Democrats cannot take responsibility for the consequences of their values and choices, since these consequences generally contradict their values and choices. Democrats don't like to cut health care benefits and see mass layoffs - that's their long-standing pro-working class value frame. And yet they vote for forms of free trade, tax cuts, and fiscal austerity that do exactly that. The same is true of the war in Iraq, which the vast majority of them supported. They may not have wanted the invasion, but they felt they had to go along with it - support the president, fight terror, look tough, look good, not be called bad names by Republicans. The war - their Democratic war too - is a horrible failure. Actually leaving Iraq, and not just opposing being there, will make them look bad.

The pundit who faced this fact was, of all people, Thomas Friedman in the New York Times, writing on January 12th. Normally, Friedman is a cheerleader for American deindustrialization with a lemon-twist of safety net programs so the sinking middle doesn't feel so bad. But this time he faced a real reality, and not one he made up. He said Bush should set a firm deadline for withdrawl, and then wrote this:

Of course, just leaving would be bad for us and terrible for those Iraqis who have worked with us. We need to give them all U.S. passports. We have a moral responsibility to them. But it would also be bad for a lot of bad people. They would be left to fight it out with each other. And yes, Syria and Iran would “win” Iraq — meaning they’d win the responsibility of managing the mess there or have it spill over on them. Have a nice day.

Friedman also said some decent stuff about reducing the flow of oil money to oppressive authoritarian leaders in the oil states.

Forget the "make them fight all of us" bravado. Friedman offers two insights that would make the middle-class less self-destructive. First, follow the money, and then be ready to change its course. And second, face the effects of what you do.

The only hope lies in the economic and political majority of this country no longer pretending to look good, and learning to face the bad. Their bad.