Woes of the French Government

Here's the best English-language potboiler version of the scandal plaguing the Sarkozy presidency in France.  An equally important story are the ongoing existence of actual independent journalism - in this case, the web-based paper Mediapart - amidst the profession's clientalist servility to the powerful ones who grant it access (witness the anger of the Washington press core at the revelations of Gen. McCrystal's contempt for the civilian government that came from a relative outsider working for the Rolling Stone).

The other big story is of course the extent to which the Sarkozy government works mainly for the rich and connected.  Huge majorities are already upset enough by the absence of real economic accomplishments among contemporary governments -- Sarkozy's approval ratings have been below 50% for a year or two. They are even more infuriated by the prospect of the minister of finance, whose wife handles financial matters for Mme. Bettancourt, working to help the richest woman in France with a fortune of $17-20 billion reduce her tax burden. 

Governments look increasingly like court servants of the each country's elite, in a throwback to the medieval period. The passivity of the middle-classes in effect supports the forces that jeapordize these classes's survival.

Brooks Upset By How Wrong He is, Blames Krugman

As if. You won't want to read the excruciating full-length version of David Schoolboy Brooks complaining about how the pro-stimulus prog economists are wrong even though they are turning out to be right as the recovery dies on the vine.  So cut to the commentary and various retorts. 

The only interesting thing about this is the development of the term "demand-siders" to describe Krugman, Dean Baker, and other neo-Keynesians who think that people's incomes are an important part of economies and that they should be higher rather than lower.  (This is in contrast to the "supply-siders" who came to power with Ronald Reagan, and who used the needs of suppliers, i.e. company owners and investors, as a reason to cut taxes for the high brackets.)  It suggests that the Right is no longer able to pretend that the center-left in the US has no coherent economic strategy.  This was the core of their "one church" approach to capitalism -they pretended there were no actual arguments against small government, no taxes, no public investment, etc. that needed a fair hearing. They taught a couple of generations of conservatives that all the "liberal" arguments had already been refuted, and they could be safely ignored.

That defense line has crumbled, and the next round of arguments is going to be quite different.

Another Dismal Overview

This one pulls together a lot of stats around employment.  Brace yourself.

Or just read this  summary:

Let's recap. Unemployment is high and is in reality going higher if you count those who would take a job if they could get one. Incomes are weak. Plans to purchase discretionary items are falling. Housing is likely in for a further drop in prices. The stock market is not exactly booming. Treasury yields are falling, not from a credit crisis or a flight to quality, but because of economic conditions (deflation). Money supply is flat or falling. Prices are under pressure. The list goes on, and all factors are indicative of deflation.

Fret Index Climbs

More of my capitalist pals are really starting to worry about Great Recession 2 - and I mean the investment advisors that have optimism thrust upon them by the need to find good new deals for their clients.  John Hussmann is predicting that equity markets will fall below their March 2009 lows, and Markos Kaminis is now a believer in the often-heralded double-dip recession. 

Among folks not selling products, Simon Johnson points out that the banks' push into emerging markets repeats past mistakes of the 1970s and 1990s, making me wonder how we can get out of this with such a complete lack of new ideas at the top.  He also notes yet again how impossible it is to imagine Goldman Sachs et al. supporting reforms of their own system, as opposed to supporting their own maximum freedom of movement.  I still don't know why there isn't a massive middle class outcry about this.

The New York Times had a good piece on Ireland sinking under the weight of its austerity regime, with premonitions of long-term decline.  “Ireland isn’t going to spend on infrastructure probably for another 10 to 15 years,” said one observer. Another, her business caught in the middle of a new yet dying housing development, said, “It’s so destroying.  We all live day by day, and we don’t know when it will ever pick up.”

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?

Sometimes Goliath Loses Even Today

California had its primary elections this week, and the Republicans nominated a billionaire and a megamillionare to be their candidates against Jerry Brown for governor (yes, as is typical of our sclerotic political system, 1970s Jerry Brown is California's only hope for avoiding another four years of oligarchic politics by giving us four years of paralytic centrist politics). In the midst of this was a nice story of Pacific Gas & Electric getting beaten in its attempt to require a 2/3rd vote before a municipality could offer its residents a public alternative to the existing power monopoly - even though PG&E outspent its opponents 1000-1.

Perfect Storm

Here's interesting death-trip summary of Friday's economic activity by Bo Peng

Friday's US equities market strikes me as being highly unusual.

1. S&P 500 followed a perfect straight channel down through out the day.
2. VIX only touched 36.

In other words, there's never any sign of panic or crash, which is quite remarkable when the broad market is down 3-4% across the board; the Dow broke the symbolic 10,000 level, EURUSD broke the symbolic 1.2 level, interbank funding and corporate/muni bond markets have all but dried up, next housing sales are bound to be bad as predicted by the latest mortgage application number, a number of government bond auctions (Brazil, Hungary, Romania, Spain -- almost) have failed, CDS on French sovereign shot up. For the weekend: US bank seizures and Spanish bank mergers/failures, Bilderberg Club to decide on dismantling the Euro, BP (BP) oil washing up Florida beaches, etc

I doubt there's ever been a day like Friday before.

Panic is usually followed by quick reversals. But calculated, organized retreat means gone for good. This is well-controlled retreat. The calm is scary. A perfect storm is brewing.

Global Hoovermania 2

Scarecrow adds fuel to yesterday's post, starting his comment on the G20 by saying, "Unless I misunderstand these stories, it appears the world’s biggest economies just decided, over US objections, to resurrect Herbert Hoover, rebury Keynes and pursue another Great Recession, tanking their economies and putting millions more out of work."

Democracy vs. Finance, Governments vs. Progress

Markets are supposed to create rigor and discipline, to reflect economic reality.  In this standard view,  the public is seen as self-serving and self-deluded about economic reality.  Governments that reflect the wishes of their majorities are almost by definition going to impose inefficient, nostalgic policies suited to a bygone age that discourage their population from adapting to the economic needs of today.  Democratic governments are seen as dangerous for the economy.  This is why "central bank independence," which is seen as the prerequisite to central bank reliability, means independence from both popular desires and from democratic representatives like the U.S. Congress.

Is this how things really work?  The economist Mark Weisbrot has a nice summary of the European crisis that suggests not.  First on markets:

"the markets" can't seem to decide what they want from these governments in order to love them again. Two weeks ago the euro was plummeting because the financial markets wanted more blood: they wanted Greece, Spain, Portugal, and the other currently victimised countries of Europe (Italy and Ireland) to commit to more spending cuts and tax increases. Then they got what they wanted, and within a day or two, the euro started crashing again because "the markets" discovered that these pro-cyclical policies would actually make things worse in the countries that adopted them, and reduce growth in the whole eurozone.

Markets are pushed by investing institutions, which are fairly close to a global monoculture of neoclassical economic orthodoxy.  So austerity is always job 1.  But orthodoxy recognizes contraction and that austerity policies can make contraction worse.  Markets are ruled by an economic orthodoxy that is contradictory and pushes investors in different directions.

Similarly, here's Weisbrot on governments:

Unfortunately the European authorities – especially the European Central Bank – are even worse than the markets. They are less ambivalent and more committed to punishing the weaker economies by having them cut spending even if it causes or deepens recession and mass unemployment (over 20% in Spain).  . . .

There is a class dimension to all of this, with the EU authorities and the bankers united in wanting to balance the books on the backs of the workers – and adopt "labour market reforms" that will weaken labour and redistribute income upward for generations to come. The EU authorities and financiers believe that real wages must fall quite sharply in these countries in order to make them internationally competitive – but the protesters are responding with a fiscal version of "No justice, no peace".

In short, "markets"  change their minds every few days about the necessary medicine because they really have no idea how to develop economies.  Governments are now devoted to de-developing their populations: lower wages is a euphemism for increased poverty.

Economists aren't doing much better, for the most part.  Writing in the Financial Times on June 1, the prescient critic of finance Nouriel Roubini contradictorily calls  for "radical reform of finance" and for Europe to "deregulate" and "liberalise."  And Weisbrot calls for an end to the Euro so that countries like Greece can rebalance by deflating a national currency, rather than calling for EU-based economic re-development.

The only way out is to start by recognizing that markets seek to make money for the people who invest in markets, and do not seek to develop economies. This will help keep governments from catering to them, and impoverishing their populations in the process.  It will also relegitimize popular economic demands, which are in fact closer to developmental wisdom than are the self-serving calculations of investors and the central banks who set things up for them.

Democratic theory presumes the long-term wisdom of the deliberative majority. Finance -- via its economic theorists -- has declared itself to be the great exception to democracy, and remains the area in public life where frankly anti-democratic, elitist  theory flourishes.  It drags public policy in its wake, and in spite of lucid mass hostility to banks, has intimidated and paralyzed the popular reimagination of economics.  This has set up a kind of ancien regime within democracy as such. In the arena of financial capitalism, democracy has been effectively canceled.

Either we democratize finance with a basis in a coordinated retheorization of it or Europe and the US will keeping heading straight the poorhouse.

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.

Falling Ideology?

In addition to running good steady commentary on the banking reform legislation (e.g here), Simon Johnson remarks on the Baseline Scenario that "the ideology of unfettered finance is crumbling."  Clearly top Obama economics advisor Larry Summers hasn't heard. It's worth watching the clip to see the weird blasé attitude towards "things that happen on Wall Street" - the tone is more important than the words.  I'm not feeling the shift yet but he's there and I'm not so here's hoping.

Finance as Fraud Itself

This morning the Vulcan cloud of cinders is as good a commentary as we're going to get on the fragility of an economy that depends on unsustainble long range transport. 

Krugman is a bit late but still lucid defining the crisis as issuing from deliberate fraud. He mentions a good ProPublica piece on the same kind of toxic stuffing at a hedge fund with one of the stupid fake names bankers love - Magnetar, which immediately dissolves into several variants composed of amputated partwords stitched together by Dr. Frankenstein - Mangy-tar, eat-tar (from the French manger- to eat), eat nectar, magnet-star . . .)

A commentary on Goldman Sachs by Will Hutton gets at two other core issues in the rise of finance over the past 30 years in the Anglo-American version of capitalism (beyond the use of complexity to defraud one group of clients for the benefit of another).  The first is the abuse of independent professionals as fronts of legitimacy: clients couldn't see under the hood of the instruments they were buying, so they took the word of analysts on the basis of their professional stature and institutional affiliation.  "A court-appointed examiner found that collapsed investment bank Lehman knowingly manipulated its balance sheet to make it look stronger than it was – accounts originally audited by the British firm Ernst and Young and given the legal green light by the British firm Linklaters."

And in the Goldman Sachs case,

Goldman allegedly went one step further, according to the SEC actively creating a financial instrument that transferred wealth to one favoured client from others less favoured. If the Securities and Exchange Commission's case is proved – and it is aggressively rebutted by Goldman – the charge is that Goldman's vice-president Fabrice Tourre created a dud financial instrument packed with valueless sub- prime mortgages at the instruction of hedge fund client Paulson, sold it to investors knowing it was valueless, and then allowed Paulson to profit from the dud financial instrument. Goldman says the buyers were "among the most sophisticated mortgage investors" in the world. But this is a used car salesman flogging a broken car he's got from some wide-boy pal to some driver who can't get access to the log-book. Except it was lionised as financial innovation.

The investors who bought the collateralised debt obligation (CDO) were not complete innocents. They had asked for the bond to be validated by an independent expert into residential mortgage-backed securities – a company called ACA management. ACA gave the bond the thumbs-up on the understanding from Fabrice Tourre that the hedge fund Paulson were investing in it.

 Whether or not Goldman Sachs' Tourre lied to his investors and said that Paulson was investing in the CDO when in reality he seems to have made it as toxic as possible so he could bet it would collapse, as it did, the deeper point is that these transactions were confidence games, literally speaking.

The further issue is that the transactions had no value except in the confidence game that constructed them. Outside of that, they had no value, certainly not for society.  Hutton writes,

It is time to reframe the question. Banks and financial institutions should do what economy and society want them to do – support enterprise, direct credit to where it is needed and be part of the system that generates investment and innovation. Andrew Haldane – and the governor of the Bank of England – are right. We need to break up our banks, limit their capacity to speculate and bring them back to earth.

That would be to end high finance as we know it, because that does not invest in enterprise or places where credit is socially needed.  The returns there are lower than what it can get elsewhere.

In a similar spirit, see the Stiglitz presentation on financial reform at a large economics conference at Cambridge University a couple of weeks ago.  It comes from a world that doesn't yet exist.  Perhaps it will be revealed by the passing of the Vulcan cloud of ash.

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.

Long Slide in the Post-Crisis

Some good books on the financial crisis have come out in the past month, including two I've bought but am still waiting to get time to read. One is 13 Bankers, by Simon Johnson and James Kwak (who also run the blog Baseline Scenario, an excellent source for blow-by-blow commentary on the ongoing struggle for a soupçon of financial reform. Another is Econed, by the author of the blog Naked Capitalism, which details the intellectual failures of doctrinal US economics and their real world impact.

Kwak has a good review of another of the good recent books, The Big Short by Michael Lewis.  Kwak gets at the crucial problem with the financial system in general, which is that the supposedly iron logic of objective market forces to which financial players are all subject in fact masks rules made up by a fairly small number of insiders to maximize their take.  Here's just a taste:

The problem was that the banks, as the swap dealers, got to decide what the swaps were worth. So, for example, Charlie Ledley bought an illiquid CDS on a particular CDO from Morgan Stanley. Five days later, in February 2007, the banks started trading an index of CDOs that promptly lost half its value. But, as Lewis writes, “With one hand the Wall Street firms were selling low interest rate-bearing double-A-rated CDOs at par, or 100; with the other they were trading this index composed of those very same bonds for 49 cents on the dollar” (p. 162).* That is, the market price of the already-issued CDOs didn’t affect the sale price of new CDOs. And what’s more, Ledley’s broker insisted that the price of his CDS (which should have soared as the index of CDOs fell) had not changed. Here you see the banks simultaneously ignoring a market price in two separate ways: once so they can continue selling new assets that are extremely similar — worse, if anything — to assets that they are trading as garbage; and again so they can avoid sending collateral to their hedge fund client.

Got that?  It's people making stuff up, and making a pile of dough as a result. This is finance that has nothing to do with investment, productive or otherwise. Its only impact on society is to damage it.  The rest of us are supposed to believe in its objectivity and defer to the outcome.  How far along are we in knowing enough to think otherwise?

We're looking as usual at a huge gap between the insight of experts and that of the general public.  A sign of where the public discussion is can be found in Jane Hamsher's comment on the its basic non-existence.

The social damage continues to spread. People are looking at Portugal next, and even the best financial commentators, like Simon Johnson, counsel cuts and austerity till the end of financial time.

For example, just to keep its debt stock constant and pay annual interest on debt at an optimistic 5 percent interest rate, the country would need to run a primary surplus of 5.4 percent of G.D.P. by 2012.  With a planned primary deficit of 5.2 percent of G.D.P. this year (i.e., a budget surplus, excluding interest payments), it needs roughly 10 percent of G.D.P. in fiscal tightening.

It is nearly impossible to do this in a fixed exchange-rate regime — i.e., the euro zone — without vast unemployment.  The government can expect several years of high unemployment and tough politics, even if it is to extract itself from this mess.

Neither Greek nor Portuguese political leaders are prepared to make the needed cuts.

Greece's crisis has settled into semi-permanence in the style that is becoming typical of our new post-crisis era: permanent low-level anxiety, permanent austerity, and permanent stagnation in wages. All of this is imposed with a financial logic of inevitability. The continuous message is that there is no escape.  Greece is looking at a lost decade for its society. The West is dealing with a crisis caused by its small, arrogant, uncaring, incredibly rich financial sector by downgrading the resources and the vision of its societies.  After ten more years of this, what visions and aspirations will be left?

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.

Contradiction in Obama's Economic Philosophy

Commenting on Obama's health care 'summit,' Krugman identifies the pattern that dominates health care and pretty much everything else in national politics: "Democrats [offer] moderate plans that draw heavily on past Republican ideas, and Republicans [respond] with slander and misdirection."

Why do we see this same pattern of compromising Dims and savage Cons year in and year out?  One theory is that the Dims are actually Cons and so by losing to the Cons can get what they secretly want.  This theory works some of the time. But it doesn't explain the Dims tolerance for highly-visible losses, which are supposedly a bad thing. 

Another theory is that the Dims are not really Cons, especially in the sense that they are basically nice, humane people unlike Cons and therefore don't fight to kill and win. They actually like compromise, believe in everyone getting along, have faith in the high road, etc.  This theory is also more than partly true.

This blog has long interested itself in what allows people to formulate a strong position and then actually achieve it. This is equivalent in our terms to avoiding the pursuit of decline and failure, which has become so common in the vast but shrinking middle rungs of American society.

One central precondition is intellectual coherence.  Obama's political weakness is related to the fact that he lacks this.  His health care proposal, weak as it is, assumes an expanded role for government in the delivery of health care.  This in turn assumes that government plays a necessary regulative role in a market-based system dominated, to majoritarian distress, by a small number of large and powerful corporations.  This regulative role further assumes that government is a positive and constructive force in negotiating society's relationships with private entities like Blue Cross.

How does this fit with Obama's overall economic approach?  In a speech to the Business Roundtable last March, Obama offered a good summary of his economic philosophy, so to speak:

I’ve always been a strong believer in the power of the free market. It has been and will remain the very engine of America’s progress — the source of a prosperity that has gone unmatched in human history. I believe that jobs are best created not by government, but by businesses and entrepreneurs like you who are willing to take risks on a good idea. And I believe that our role as lawmakers is not to disparage wealth, but to expand its reach; not to stifle the market, but to strengthen its ability to unleash the creativity and innovation that still makes this nation the envy of the world.

But I also know this: Throughout our history, there have been times when the market has fallen out of balance. There have been moments of economic transformation and upheaval when prosperity and even basic financial security have escaped far too many of our citizens. And at these moments, government has stepped in not to supplant private enterprise, but to catalyze it — to create the conditions for thousands of entrepreneurs and new businesses to adapt and ultimately to thrive.

That’s why we laid down railroads and highways to spur commerce and industry — to stitch this nation together. That’s why, even in the midst of civil war, Lincoln launched a transcontinental railroad, and Land Grant colleges and the National Academy of Sciences. That’s why we initiated universal public high schools and passed a GI bill to nurture the skills and talents of all our workers. That’s why Eisenhower built an interstate highway system, and Kennedy pointed us to the moon, knowing that the exploration would lead to unimagined innovations here on Earth.

That’s what we’ve done in the past. And that’s why I’ve chosen to address education, health care, energy and this budget — because we can’t wait to make the investments today that will lead to tomorrow’s prosperity.

Such thoughts are why Cass Sunstein called Obama a "Chicago School Democrat" - the market creates all wealth, except when the market fails, at which point government must fix the market.  This also a "public private partnership" (PPP) philosophy, similar to that espoused by Blair and Brown Labour in the UK.

Unfortunately, Obama's position -- a common one among centrist Dim and Labour elements --  makes neither political nor conceptual sense.  If the market fails with any kind of regularity, then government is also a source of wealth and value. If government is a source of wealth and value, then the market is not the dominant if not the only source of wealth and value.  In the case of health care, if the market is the very engine of American progress, then America's free market system that has placed such enormous profits in the hands of HMOs and insurance corporations has been an amazing success, and we should not now be talking about bringing government in to regulate it.  Cons take continuous advantage of Obama's awkward stance.

The political problem with Obama's position is similar. How can he rally a mass base by chiding Wall Street bankers one day and praising their wealth the next? How can he be taken seriously by saying business should run the economy and then invoking the railroads to say government should help run health care?  The scope and timing of intervention is also always at issue, and you need some coherent principles to decide when and where.

The obvious solution is for Obama to say loudly and often that "government creates wealth" - in exactly the ways he describes in his speech, with quality education being at the heart of value-creation along with universal health care.   Society creates wealth, and government is one instrument and business is another, and in a democracy society gets to decide the scale and scope of the various instruments.  Government and businesses are co-generators, which means that public investments should be both ackowledged and compensated - which would reduce profits for companies that have gotten used to getting all sorts of public stuff for next to nothing, and would challenge American capitalism as it is, which of course Obama has to do if he wants a real recovery, except he thinks we already have one.

Obama's intellectual failure to expound a coherent social-democratic vision of society, which would also be post-capitalist in the sense of being post our inefficient, wasteful, crooked, silly current version of capitalism will, if it continues,  be yet another source of his political failure.

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.

Obama Heart Banks

When Obama praises the spirit of piling money higher and deeper as the great Spirit of America, and absolves the bank bonusers of any wrongdoing, he makes no sense ethically or economically - finance and its grotesque incomes is grossly inefficient, really unaffordable in our struggling world. But on the level of simple tactics he makes his alleged crackdown on the banks into a joke.  Henceforth all of his stern fingerwaggings will be greeted with a wink and a nod - except in middle America, where the pitchfork crowd signs up for Tea Party populism and waits for the chance to run Obama out of town.

I never thought I'd be seeing him as simply dumb but I am starting to.

Global Hoovermania

The national debt crisis in Greece is an example of a case where a combination of Eurozone rules and financial market pressure will force huge cuts in public spending, damaging both living standards and delaying economic recovery.  On Sunday, the New York Times reported that some of Greece's hidden debt was concealed courtesy of instruments sold to it by Goldman Sachs in 2001.  In November 2009, Goldman Sachs tried to do it again. The Financial Times reported today that EU authorities have requested information about the swaps.

Greece's national debt is over 100% of its annual GDP.  But this is not so horribly out of line with other countries, as can be seen at left and here.

"High" debt is a matter of interpretation, and 40 years of attacks on the existence of government, the public sector, and public debt as a source of public investments has greatly reduced the markets' tolerance for debt levels that are still well below what seemed normal in times of crisis like World War II. Markets put up with high debt levels during war.  If we were serious about, say, decarbonization, we would run 200-300% deficits in gigantic crash programs in solar power, total transportation system reengineering, weatherproofing every building on the planet, you name it, so that there will be great-great grandchilren around to pay the debt we left them.

The interpretation of debt levels as too high is threatening the recovery, since it will force governments to cut spending when they should be increasing it.  This is the plan for Greece, the famous land of Generation 800 Euros (youth salaries per month) and meager economic development outside of coastal estates built on land removed from government protection by arson-set forest fires.

Government employment is a pillar of the middle class everywhere in the world.  It is also being squeezed everywhere: in Sacramento, California, a moron's consensus reigns on the virtues of cutting state employee salaries 5%.  In all countries, public service employment is the crucial gateway to the middle class -- as it was in the United States from the 1940s to the 1960s, for African Americans in particular who faced ongoing discrimination in the private sector. Countries like Argentina that were forced into IMF-style austerity programs that slashed the public sector have one common feature: an incredible shrinking middle class.

Most pundits seem to have learned nothing in all these years. Thomas Friedman recently contrasted two years in the Middle East. 1977 was good -- neoliberal policies implemented in Egypt by Sadat.  1979 was bad -- the Iranian revolution, Whahabi-reaction in Saudi Arabian Islam, etc.  But "liberalization" and "modernization" were themselves the source of the radicalization of mass Islam that Friedman deplores.  They impoverished the great majority in Egypt, ruined Cairo's public systems for starters (on my recent trip there an archictectural institute informed me that 60% of Cairo's housing is "informal" - built by occupants because the private and public sectors both refuse.) 


Krugman points out that the bigger debt problem in the Eurozone is Spain. But for some reason he spends his column attacking the very idea of a single currency in a variable region rather than attacking austerity politics, though he knows in the U.S. case that the focus on debt will kill the recovery.

Since the world needs both recovery and stable currency and debt arrangements across diverse national economies - both of which the financial system has not delivered - Krugman et al. need to figure out how to avoid screwing the populations of countries like Greece.  The world has to learn how Greece can have a modern, efficient, green infrastructure with its current economy, and then discover how to provide the same to about 130 other countries that are in even greater need.

If the EU can't fix Greece, it can't fix anything that needs fixing.

Hitting the Iceberg on Purpose

The simplest summary of President Obama's State of the Union message is that the Wall Street bailout was a success, and the Main Street bailout must stop.  Why else would he point out ongoing suffering and then call for a 3-year freeze in the federal funding that is the only meaningful source of support and social development money in the United States?

For the pre-limbic thought processes that are leading the Democrats into a deliberate steering of economic recovery and their own political power onto the iceberg, see this dismal collection  of inane forgetting of basic politics and economics not to mention the basic purposes of the Democrat party.

The Dismal Collection gets to the backstory behind Krugman's excellent slam of Obama's "deficit-peacock strut." Obama has produced too small a jobs program and too weak a health-cost containment because "our political system doesn’t seem capable of doing what’s necessary." Behind the political failure is mass mental failure: learned and extremely astute people like Obama have their options shaped by 8th grade arguments and personal attacks that wouldn't score any points at all on most issues in most educated countries.

Afghanistan is a good example, and the NYT's London bureau chief John Burns perfectly articulates the incoherent strategy for which Obama is risking his presidency.  "Winning" Afghanistan means winning hearts and minds, but the actual US strategy is to win on the battlefield by killing a lot of Taliban, thus demoralizing them, at which point they will accept our money to switch sides forever to the Stars and Stripes.  This is as dumb as it gets, but Obama is racing down this road because of dimwit beltway concerns about "Obama the man."

Obama is letting himself get blown around by the gale-force winds generated by airhead Repubs and Dims all calling for him to move to a center that is well to the right of Richard Nixon.  He went from the US inventing the world's cheapest solar cells to "building a new generation of safe, clean nuclear power plants in this country" from one paragraph to the next.

Obama's former enthusiasts are getting desperate.  Cenk Uygur says that if the Dims reappoint Bernanke the great Titantic captain  "there’s no helping them and there is no hope in them."  The great summary of this dead end is Jon Stewart's:  "No matter what you do, the Republicans are not going to let you into the station wagon. . . .and you're the majority party. It's your car!"  Later Assif Mandvi explains, "The Democrats are going to need bipartisan support if they're ever going to see Bush's agenda enacted."

Finally: "you can't hurt us anymore. We're already dead."

Stewart's stuff about the Repubs not letting the Dims into their own car gets at some deep Democrat yearning for approval from authoritarian dickheads on the Right, and from the same elements in their own constituencies.  How can their survival do more that degrade us further?