GLASS-STEAGALL 101

We are entering the section on economic policy making in my Introduction to American Politics class. Last week we made it to the Great Depression and discussed the rationale behind the Glass-Steagall Act. For those of you who are not familiar with the Glass-Steagall Act (1933) you can read about it in my book, or you can get a broader history from PBS here.

In brief, the Glass-Steagall Act (also known as the Banking Act of 1933) was passed by Congress in 1933. It specifically prohibited local commercial banks from doing what Wall Street investment banks do. It was enacted in response to the failure of nearly 5,000 local banks who, you guessed it, were using the bank deposits of their customers to gamble on investments and other projects they knew little about.

While Glass-Steagall was made possible by the stellar investigations done by the Pecora Commission, Franklin D. Roosevelt made it a cornerstone of his New Deal program.

Ferdinand Pecora

The Glass-Steagall Act gave the federal government more control over national banks, created the Federal Deposit Insurance Corporation (FDIC), and prohibited bank sales of securities. It didn't keep Wall Street from gambling with money from their clients accounts (see here and here) but it did protect the little guy on Main Street, for over 50 years.

Here's MSNBC's Dylan Ratigan explaining how Glass Steagall actually worked:

Visit msnbc.com for breaking news, world news, and news about the economy

After being attacked by Wall Street for years Glass-Steagall was finally repealed in 1999 when President Bill Clinton signed the Financial Services Modernization Act (aka Gramm-Leach-Bliley). Commercial banks could now get into investment banking. Nice. This clip from 1999 reminds us that Senator Byron Dorgan (D-ND) saw a market collapse around the corner, even if he didn't know exactly when it was going to happen ...




The fact that we haven't done anything to bring back Glass-Steagall is just one of the reasons it's easy to argue that we're going to have another 2008 market collapse, again.

- Mark

HISTORY: "ON HOOVER'S ATTEMPTS TO RESCUE THE BANKS"

Bloomberg.com has a regular "Echoes" column that covers economic history. The articles are not long, are informative, and provide insight into who we are today. Below I've posted the opening to Phillip Scranton's article "On Hoover's Attempts to Rescue the Banks." If you see similarities to what's happening today you're not alone.

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In 1929, there were nearly 25,000 banks in the U.S. Many European nations had fewer than 100. More than 90 percent of U.S. banks served small towns and rural districts, held state charters and hadn't joined the Federal Reserve System (which was mandatory for nationally chartered banks). Thus they couldn't seek loans from the Fed to support liquidity.

Given that deposits were uninsured, "runs" commenced when rumors circulated that a bank was having difficulty collecting mortgage and loan payments. Accountholders lined up hoping to recover their savings or liquidate their checking accounts. Banks often responded by limiting payouts or requiring, say, 30 days' notice for withdrawals. Fears of being "wiped out" spread and deepened, credit dried up, closures multiplied.

About 800 banks closed their doors in late 1930, and more than 1,500 in 1931 ...

Read the rest here.

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- Mark

THE EURO MESS ... MARCHING US TOWARDS THE PAST?

This commentary on the European Summit-Debacle - from Tyler Durden at Zero Hedge - is both succinct and spot on. This one pretty much sums it up:

"... it means that the Greek scheme of playing chicken with the Euro zone, has now been adopted by everyone else in the core."

Our (America's) political and economic challenges won't make things any better for the global economy.

Not only is history whispering in our ear, but the coming calamity doesn't appear to be on anyones radar screen. I don't know whether it's a product of people not knowing their history, or because people are still caught up in a failed free market ideology that blinds them to reality. Simply believing in free market myths does nothing for people who are desperate and out of work. Desperate people do desperate things.

Indeed, desperate people will also follow stupid people who say and do stupid things. It may take a while, but a collapsing global economy is a bigger threat than al Qaeda. Big time.

Stay tuned. Sigh ...

- Mark

IT'S DEJA VU ALL OVER AGAIN

It's déjà vu all over again ... yet, all the U.S. media want to talk about are Herman Cain's girlfriends, while ignoring the GOPs "Just Say No" obstructionism in Congress. Today, with the debt crisis in Europe flaring up again (this time with Italy), we're reminded that there's another world out there that warrants some serious discussion. Yet, America's political burlesque show is mesmerized (again) by sex scandals, and appears more than content pondering why Mitt Romney hasn't caught fire with the GOP (like that's some kind of mystery). Sigh ...

All of this kind of reminds me of all the Gary Condit sightings, and the shark fear mongering off the Florida coast right before 9/11. Seriously, what's happening with Europe's debt-to-default dance is pretty big stuff, and deserves more attention than Herman Cain's predations. Consider the following ...

Here's a statistical table with more countries that could be affected once the financial dominoes begin to collapse in Europe ...

I know, I know. Simply putting figures like these up without context is unfair.

So consider this. When Germany finally defaulted on it's World War I debt obligations after 1929 it had a debt-to-GDP ratio that stood at around 90 percent (they owed about $33 billion, or about $402 billion today, which was a reduction from the original $63 billion, or about $768 billion today). Today Greece's debt-to-GDP ratio stands at 157.7 percent, while Italy is around 120 percent. Is history whispering in our ear, again? I think so.

Relatedly, when Germany finally defaulted the French Chasseurs Alins (elite mountain infantry) had already occupied Germany's Buer (in North Rhine-Westphalia) region in 1923.

Today, instead of sending in the troops to deal with troubled debtors the world's economic mandarins are banking on central bank (or IMF sanctioned) cash. Specifically, they're banking on the Federal Reserve shoving half a trillion dollars or more on to Europe's books (and hoping no one notices). When all is said they're doing little more than pushing the economic debt can down the road.

This is especially not good when you consider that MF Global's recent Chapter 11 bankruptcy was not supposed to happen. Think about it. In our post 2008 market collapse environment, a firm like MF Global wasn't supposed to be able to borrow so heavily (or use investor funds) to make multi-billion bets on European debt. How much did MF Global borrow? It appears that MS Global may have had a 40:1 debt to equity ratio. What does this mean? It means that if you made $40,000 per year at your job, the bank would give you a $1.6 million loan ... three years after doing the same thing and watching previous clients piss it away gambling.

Yet MF Global's private industry regulator raised no red flags about MF Global debt to equity ratios, nor said anything about it dipping into $600 million of investor money to make their bets.

Yeah, it's déjà vu all over again, on so many levels.

- Mark

DEPRESSION ECONOMICS?

Northern Trust has a list of FAQ that compare the Great Depression (1929) to the Great Recession (2007-2008), which we're currently experiencing. The charts are particularly helpful. Check it out here.

- Mark

THE COMING CALAMITY ...

In my book and on my blog I've written about the impact collapsing economies could have on global security, and how we can see historical parallels to what we are experiencing today with what happened in the 1930s. It's not pretty. But it doesn't seem to matter.

The Europeans, who should know better - and who have taken steps to rein in some of the stupidity - nonetheless have embraced their own blind alley of debt. Meanwhile, in the United States income inequality, wealth gaps, and personal debt loads continue to grow. America's financial mandarins, however, are doing just fine, which is part of the problem.

All of these developments, as unfortunate as they are, were pre-conditions to the frivolity and stupidity that preceded the global calamities of the 1930s and 1940s.

Those of you who've read my book, or taken my classes, understand what's happening. Even the global institutions that were designed to help avoid these situations are in trouble. But no one seems to be able to piece any of this together. There is no sense of urgency, or instruction. Which is strange, because we've done this before.

As I pointed out in my book, and on this blog, history is now whispering in our ear.

This is why this piece from Market Watch is so interesting. I'm not so much concerned that it's advocating higher taxes on those who got us into - and are now profiting from - our market mess. Nor does it discuss the international implications with any depth. Still, the article is important because it points out how our domestic situation is on a path to blow up in our collective faces. The date the author is point to (2012) isn't as important as the parallels he discusses.

Apart from growing impatience domestically, the author points out that there “are two remarkable similarities in the eras that preceded" 1929 and the market collapse of 2008. Both eras "saw a sharp increase in income inequality and household-debt-to-income ratios” and in each case “as the poor and middle-class were squeezed, they tried to cope by borrowing to maintain their standard of living.” The end results was a market crash. The serpents of Nazism were unleashed, and economic warfare followed.

It's a short but good read. But don't get too caught up in the tax the super rich stuff (as much as I agree with the argument).  Your focus should be on tying what's happening today to what happened 80 years ago.

Seriously. History is whispering in our ear.

- Mark

UNFORTUNATELY, WALL STREET STILL KNOWS BEST

Apart from being the type of financial reform that only the comics at Monty Python could appreciate, the new financial reform bill does almost nothing with regards to change the structural conditions that led to the 2008 market collapse. John R. Talbott, author of The Coming Crash in the Housing Market (2003) has a detailed master list of what makes the financial reform bill largely toothless.

But the real sin that I see in the financial reform legislation is not what it leaves out, but in it's premise. Fundamentally it's guided by a corrupted and failed ideology where the God's of Wall Street can say one thing ("When we're in trouble you need to bail us out") and then say another to Main Street ("When you're in trouble you can eat crack").

While our market ideology is supposed to be guided by the principle that if you work hard you will get ahead - which is the moral justification of capitalism - it's been turned on its head by Wall Street's new guiding lights of favorable legislation and unnecessary tax cuts. While the first corrupts the ideology, the latter deprives the state of the funds it needs to function.

Worse, after experiencing a catastrophic market collapse caused by 30 years of following Wall Street's "No tax, No Government" approach to public policy our political mandarins continue to believe that we need to appease the God's of Wall Street, as if they just did our nation a favor. What they don't understand is that the Wall Street's market players today are little more than rats on a sinking ship.

The failure to extend unemployment benefits, and the rather weak financial reform bill in front of Congress now, makes it clear that Congress is prepared to appease the Wall Street Gods. What they conveniently ignore is that unemployment benefits are needed because of what Wall Street did, and should not be determined by the sense that Wall Street will be offended by another $33 billion in debt (especially since we could pay for the benefits by retroactively taxing Wall Street's undeserved bonuses).

What our national leadership doesn't seem to understand is that as long as Wall Street is able to live by one set of rules, while Main Street is supposed to live by another, their concern over a few billion dollars in additional debt, and focusing on a set of weak "structural reforms" is akin to rearranging deck chairs on the Titanic. Want some evidence? Check out these two charts.

When compared to other economic downturns in the post-war era job losses have never been as steep as they are now.

Worse, the period of unemployment has almost doubled during this recession compared to other periods. It's one thing to be unemployed, but to be unemployed with no prospects on the horizon can be downright depressing.

The problem is that while Wall Street and their patrons have secured favorable legislation that's allowed them to change the rules of the game in their favor ("Bailouts & taxcuts for us, austerity & no job security for you ..."). This has created a situation where, as Les Lepold points out, there's "too much wealth in the hands of the few and too much power and wealth controlled by Wall Street".

While the new financial reform bill does little to limit this power and wealth, our too-big-to-fail banks, as Lepold points out, "are still with us--and cockier than ever." He adds:

Very few commentators or policy officials have the nerve to call for restoring taxes on the super-rich to the levels they paid from the 1930s through the 1970s. (Back then, their tax rate was up to 91%. Now they pay as little as 15% because they can claim their booty as "capital gains.") The 10 leading hedge fund managers each "earn" an average of $900,000 an hour (not a typo). Public officials and pundits should be calling such wildly excessive incomes a disgrace to democracy--especially given that without taxpayer bailouts the financial elites would have earned nothing at all. Instead we are told to admire the robbery as if it were a sign of entrepreneurial genius.

And, sure enough, we continue to admire the robbery. Think about it. How else could a group of people who caused our economic meltdown turn the tables and then be rewarded financially (bonuses & bailouts), legally (waivers), and with a politically opportunistic movement (Tea Party anyone?) that does their bidding? That Wall Street continues to have so much political influence after making a mess of things should be a national embarrassment.

At the end of the day, Wall Street and their political muscle in Congress continue to perpetuate the lie that we live in a free market economy. We don't (read The Myth of the Market). The reality is that Wall Street has become a voracious gambling den governed by favorable legislation and an irresponsible and clueless plutocracy.

Still, in the eyes of Congress, Wall Street continues to know best. Let's be blunt. As long as we continue to believe all we need to do is tinker on the margins of Wall Street's world, reform or no reform, we're in deep trouble.

- Mark

OUR EVOLVING THIRD DEPRESSION

Economist and NY Times' op-ed writer Paul Krugman sees the beginning of "the Third Depression" in America and around the world. Pointing to the Long Depression of the 19th century (beginning in 1873) and the Great Depression of the 20th century (1929), Krugman argues that what we saw both times was "an era of nonstop decline." This is what we face today.

Arguing that the Third Depression is really just getting under way, Krugman writes that "this third depression will be primarily a failure of policy" and points to "last weekend’s deeply discouraging G-20 meeting" where governments obsessed about inflation "when the real threat is deflation." For Krugman "preaching the need for belt-tightening when the real problem is inadequate spending" is a policy prescription destined for disaster because of the millions who remain unemployed.

The primary culprit here is "the victory of an orthodoxy that has little to do with rational analysis," with policymakers slavishly adhering to the idea that we need to assuage markets by holding back on spending. The outcome is a stunningly shallow belief globally "that imposing suffering on other people is how you show leadership in tough times."

When we throw in the fact that Republicans derailed legislation last week that would have extended unemployment benefits and sent billions to states in an effort to avoid layoffs it's easy to understand Krugman's pessimism. Over 1 million people will be affect by this decision. To be sure, apart from being unhinged ideologues who say one thing and do another, the Republican party's real goal is to keep the market collapse going so they can pin it on President Obama in November (so much for "America First"). Still, in the final analysis what we have is a leadership - both national and global - who cling to the tenets of a dying ideology like the monarchs of Europe clinged a decadent and dying feudal system.

Apart from the fact that Krugman has gotten so many things right over the years, I'm inclinded to agree with Krugman's assessment because of the evolving characteristics of our economic situation. The biggest issue for me is how we continue to believe that if we appease the same corrupt market gods who got us into this mess that they'll act good and respond with appropriate investment strategies, just like the textbook says it should happen. This expectation is simply naive.

From the tricks behind high frequency trading, to the astronomical bets made in derivative markets few understand, to the lack of transparency surrounding toxic assets, to the use of unicorn math (mark-to-market accounting) and a genuine depence on government favors (both bailouts and legislation), we are witnessing the wholesale destruction of market capitalism around the world. The focus is no longer on wealth creation, but wealth extraction. Adam Smith is turning in his grave.

That policymakers believe fiscal authority, without serious real financial reform, will save the day in this environment says much about our failure to learn the lessons of history. A third depression, indeed.

- Mark

WANT TO KNOW WHY BANKS AREN'T LENDING?

This Money Morning article is by far the best piece I have read about the "brokered deposits" and "hot money" pheonomenon that's challenging our banking and economic system. Simply put, the need to find higher yields with FDIC guaranteed deposits (which bank brokers do), coupled with the need of our biggest bank's to pad their books, helps to explain why bank loans to Main Street have collapsed (in spite of trillions in taxpayer dollars being thrown at the banks).

Students who have been in my American Politics class (and paid attention), and those who have followed this blog, will understand immediately the importance of our current brokered deposits situation. Brokered deposits help to explain why I believe we're gearing up for Round Two of our Economic Meltdown.

If you don't read anything else today read this article. And if you're inspired, you should read this piece from Zero Hedge, which explains how Bank of America is covering their losses with U.S. government guarantees.

- Mark

ET TU, OBAMA ... WHERE'S OUR TALF RELIEF?

A few posts back I suggested that President Obama needs to get on the side of Main Street and should enact an immediate payroll tax cut, spend hundreds of billions on infrastructure projects, and then go after Wall Street. I still think he needs to this. This Robert Reich post offers two other proposals that I like.

(1) Enact a second stimulus. It should mainly focus on bailing out state and local governments that are now cutting services and raising taxes, and squeezing the middle class. This would be the best way to reinvigorate the economy quickly.

(2) Help distressed homeowners by allowing them to include their mortgage debt in personal bankruptcy — which will give them far more bargaining leverage with morgage lenders. (Wall Street hates this.)

There's a reason why Wall Street hates the second proposal. It would force them to renegotiate with homeowners in a fashion that the big banks were able to negotiate with Washington when they had their economic meltdown. In many ways it would force the banks to consider negotiating TALF-like loans for homeowners, which would allow homeowners to get new loans by using their "legacy assets" as collateral.

More simply, it would allow homeowners to claim that, in their world, their house and their lives are too big to fail so they deserve help. Just like the big banks homeowners would be able to secure a new, lower value, loan on their home, as long as they stay in the home for a certain period. The loan would be made by the banks, and guaranteed by the federal government (like the TALF loans are). The argument, which was "all good" when Wall Street's financiers were going under, is not viewed as legitimate when it comes to Main Street. Nice.

Apparently, in the grand scheme of things, President Obama isn't going to put the effort into helping Main Street that he put into bailing out Wall Street. He's going to propose a three-year freeze on a large portion of discretionary spending, which will make it virtually impossible for him to stand up for Main Street's immediate needs, or it's interests. Economist (and frequent guest on my program) Mark Thoma calls it a "cheap political trick." I agree. This recession isn't your Great-Grandfather's depression. And, as Robert Reich points out, it's not the recessions Reagan or Clinton had to deal with either.

Of course Wall Street's happy as a bug in a rug because it signals that President Obama isn't going to put any teeth into taxing or reining in Wall Street's greed and stupidity. Main Street is the only sector that's going to take the hit on the recovery. This is all we need to know that President Obama's proposal stinks.

Like Julius Caesar, I get the strange feeling that our friends are stabbing us in the back, again. I'll have more to say on this later.

Sigh ...

- Mark

PREPARE FOR ANOTHER HOUSING COLLAPSE?

Here's an updated graph from Chicago mortgage broker Michael D. White. In a few words, if we're using historical trends in housing prices we can expect housing prices to drop ... another 43%!



Indeed, as Michael White previously pointed out (and I commented on here), whatever stabilization we're seeing in current housing prices may be an anomaly due the character of new purchases, and the trillions in government bailout cash that are propping up the economy. Worse, there's another issue that doesn't seem to be on anyone's radar at the moment. While it's one thing to be worried about declining home values no one seems to be looking at rising (and total) liabilities for the American homeowner.

Incredibly, according to the Sept. 17, 2009 Federal Reserve Statistical Release, total mortgage liabilities for the American homeowner (page 63 on the document, page 70 on the PDF scroll) are higher in 2009 than they were during the peak housing value years of 2006-2007. Yet, housing values have been going down.

Think about what this means. Since the market began it's collapse over a year ago very little new money has been lent out for new home purchases. Even less has been lent out for refinancing. We also know that housing prices have tanked from the 2006-2007 peak years. But Americans now carry more mortgage debt than they did before the market collapse?

Why is this happening? I'm not sure.

Can it be bigger (or more) refis? I doubt it. Are deliquent mortgage loans being reassessed with late penalties and fees tacked on? I have no idea. In all cases, something doesn't seem right.

Stay tuned.

- Mark

DARK POOLS AND 1929

One of the reasons that the stock market and the U.S. economy collapsed in 1929 was because of the sheer number of trades that were done without client knowledge. Many trades were done not because they were good investments but, rather, because market players got bigger and bigger commissions for each trade they made - whether the trade paid off or not. Because the market kept on rising clients didn't complain, so even more trades were made. Volume trades paid handsomely.

When market players weren't busy trading their client's shares - and raking in big commissions - commercial and investment banks often simply took bank deposits that they had in their institutions and used it to speculate and bet on the market. This was depositor - and not the bank's - money.

As you can imagine, with lax requirements, this often left banks with as little as $20-50 in their vaults when they opened up for business. But depositors didn't care because everyone was going to get rich. This shady and free-wheeling market environment eventually caught up with market players in 1929.

Incredibly enough, in spite of the market collapse last year, we may be doing the same thing (with taxpayer bailout dollars) all over again.

In this MSNBC segment Dylan Ratigan points us toward yet another market niche that allows market players to make trades without the knowledge of their clients, or even their industry competitors: Dark Pools.


In a few words, Dark Pools are trades that are made without the market player advertising or alerting others about their activities. While one market insider argues that Dark Pools allow market players to "minimize information leakage, manage market impact and execute block trades at beneficial prices" what he's really saying is that "if no one knows what we're doing we can get a better price for the product we're buying because no one will rush in to bid up the price." Market players on the sell side benefit because they don't have to pay exchange fees.

Put more simply, Dark Pool market players like operating in secret because it makes them more money. Better yet (for the traders), it allows market players to used the "dark venue" to speculate and bid up demand (and prices) on products they may bought earlier on the open exchange.

So, how big is this Dark Pool market? Pretty big. At the beginning of 2007 Dark Pools made up 10% of total market trading. Today it makes up to 15% of total market trading.

At this time, free market purists might say, "What's the big deal? As long as trades are made and people make money, it's all good." Wrong.

Because the amount of Dark Pool trading has grown so strongly market players have complained that it has become increasingly complex and difficult to find and execute trades in open and regulated markets. Worse, market players who have expressed concern about Dark Pool trading have made it clear that they worry about "the potential loss of underlying functionality."

In plain English they think Dark Pool trading has the potential to collapse the logic of the market ... like in 1929

- Mark

IT'S A DEPRESSION

Former Labor Secretary, Robert Reich, thinks we are now in Depression era mode. Here's some of the evidence ...

The March employment numbers, out this morning, are bleak: 8.5 percent of Americans officially unemployed, 663,000 more jobs lost. But if you include people who are out of work and have given up trying to find a job, the real unemployment rate is 9 percent. And if you include people working part time who'd rather be working full time, it's now up to 15.6 percent. One in every six workers in America is now either unemployed or underemployed.

Check out the rest of his commments on his blog here.

- Mark

ON STAGNANT WAGES & BUSHVILLES

This week Congress will take up discussion of legislation that will make it easier for workers to unionize. In a few words, the legislation would allow workers to simply sign a card demanding a union. Employers don't like it.

Employers would prefer to have mandated elections because they give employers time to bring in anti-union teams, fire organizers, and generally intimidate the workforce. Passing this legislation would be a first step in helping to address the imablances that have grown between management and labor over the past 29 years; imbalances which have produced stagnant wages for America's middle class, bloated CEO wages, and now - with the economy collapsing - growing tent cities that resemble the Hoovervilles that dotted the American landscape almost 80 years ago.



How badly needed is this legislation? Pay gaps between labor and management have grown so out of hand that wage gaps are as bad as they were when Herbert Hoover left office. Today, as more and more observers are pointing out, labor is now confronting the worst economic situation since the Great Depression.

What follows below is an edited excerpt from Chapter 10 of my forthcoming book, The Myth of the Free Market: The Role of the State in a Capitalist Economy. It explains, in part, how labor has seen its economic position deteriorate over the past 29 years to the point that more and more families are now 1 or 2 paychecks away from being out on the street. FYI, I have 5 charts and graphs in my book - scheduled for release this week - that provide figures for what's presented in this section. If I can get them on a pdf file I will post them later ...

STAGNANT WAGES AND DEBT
Among the forces that fed the market exuberance of the late 1990s and the early 2000s were cheap credit and debt. By feeding consumption, credit and debt fit the goals of both major political parties in America, but for different reasons. Democrats saw the democratization of credit; Republicans saw increased profits. Few thought it was necessary to take a look at collapsed savings rates and soaring debt levels in America . . . rarely was this question asked: What are the factors that cause many ordinary Americans to borrow beyond their means and that lead many into bankruptcy?

We know from Chapter 2 that divorce, job loss, and catastrophic illness cause 90 percent of all bankruptcy filings in America. But we need to shift the issue from uninvited life events to specific, policy-driven areas if we want to understand why Americans have been nudged to take on more and more debt over time. This means looking at wages in America.

In a 2007 speech, Federal Reserve Chairman Ben Bernanke considered incomes and focused on the growing gap between America’s middle class and the financial elite. Bernanke reported that, in spite of rising labor productivity and technological advances—which usually find their way into growing wages—income gaps had increased significantly in America since 1979 . . . perhaps his most significant observation was what he had to say about the impact that organized labor has on wages. According to Bernanke, unions not only reduce wage inequality, but at least 10 to 20 percent of wage inequality in America can be attributed to the decline of unions.

This is important, because organized labor was put on the defensive after Ronald Reagan entered the White House by an alliance of convenience between corporate America and political conservatives. According to Businessweek, things worked out so well for industry that as “[c]orporate America has perfected its ability to fend off labor groups” labor union membership dropped from 20.1 percent of the labor force in 1983 to 12 percent by 2006 . . . Economist, and Nobel laureate, Paul Krugman explains what happened:

It’s often assumed that the U.S. labor movement died a natural death, that it was made obsolete by globalization and technological change. But what really happened is that beginning in the 1970s, corporate America, which had previously had a largely cooperative relationship with unions, in effect declared war on organized labor . . . hardball tactics have been enabled by a political environment that has been deeply hostile to organized labor, both because politicians favored employers’ interests and because conservatives sought to weaken the Democratic Party. “We’re going to crush labor as a political entity,” Grover Norquist, the anti-tax activist, once declared.

The relationship between corporate America and the Republican Party has reaped financial benefits for America’s business elites and political payoffs for Republican political candidates. But it has been financially devastating for America’s working class.


Since the late 1970s, inflation, declining or stagnant wages, weakened unions, lax immigration policies, deregulation, and the challenges of having jobs shipped overseas have left ordinary Americans with an increasingly tough financial line to hoe. The arrangement, however, seems to have worked out well for America’s CEOs, who have seen their salaries rise in relation to the average worker: from a ratio of about 40:1 in 1980 to 262:1 in 2005 (other reports put the figure around 431:1).

Given that the federal government has been increasingly reluctant to intervene on behalf of labor over the past thirty-five years, ordinary working Americans have had to cope with rising costs and stagnating wages in a number of ways.

* Two-Income Households, 1970s: With the women’s movement came the rise of two-income households. Two working parents increased household income significantly.

* Credit and Charge It, 1980s: Americans began racking up serious personal debt in the 1980s when, as former Federal Reserve Chairman Alan Greenspan put it, “innovation and deregulation” worked to “expand credit availability to virtually all income classes.” At the end of 2008 total credit card debt stood at $969.9 billion (Graph 10.1).

* Decline of Leisure, 1990s: Although divorce and personal debt put a dent in disposable income, Americans began working more hours to make ends meet, even surpassing the Japanese in 1995.

* Household ATMS, 2000: To keep the American Dream alive, many Americans went on a borrowing binge, this time using their homes as ATMs.

With more and more households using their homes as ATMs, we can understand why home-owner equity in America was less in 2007 (at the height of the housing boom) than it had been seven years earlier. At the end of 2008 it was poised to drop below 50 percent for the first time since the government had started keeping track of this data.


The end result of stagnant wages, an increasingly hostile environment for labor, and easy credit was a savings rate that effectively stood at zero at the end of 2008. Not surprisingly, when the refinancing boom stalled because of plummeting housing prices and dried up credit markets, more and more Americans found other ways to cope with life’s expenditures—they began using “hardship withdrawals” to tap into retirement funds . . .

- Mark

A NATION OF MORONS? REICH SAYS "YES"

Two weeks ago, in "A Nation of Morons," I wrote that the republican plan is to say no to everything President Obama wants - no matter how far he sticks out his hand - so that they can put some distance between themselves and an American economy they helped George Bush destroy (I also discussed this with economist Marc Thoma on this past Saturday's program). Their plan is to blame President Obama for not doing anything about the economic mess, in the hope that they can turn the political tide and win back a few seats in 2010, like they did in 1994.

The republicans are banking on Americans forgetting that the republican party was the group that handed George Bush the flamethrowers he needed to burn through trillions of dollars, while setting our national house on fire. Simply put, republicans think we are a forgetful nation of morons.

It turns out that former Labor Secretary, Robert Reich, agrees with my premise. Check out his post here.

The larger point of my original post, however, still stands. Republicans don't understand how serious this mess really is. They're still playing political games, for no other reason than to gain political power. Like Nero, and George Bush, they prefer to fiddle while Rome burns.


- Mark

COLLAPSING ECONOMIES A BIGGER THREAT THAN AL QAEDA

Anyone who has taken any of my courses that deal with international relations and security issues will not be surprised by this statement:

... the U.S. intelligence community now says the failing global economy is a bigger threat to U.S. security than al Qaeda or the spread of weapons of mass destruction ...

It turns out that while we are still bogged down by two wars the Director of National Intelligence, Dennis C. Blair, who is also a retired Navy admiral, told Congress that "the longer it takes for the recovery to begin, the greater the likelihood of serious damage to U.S. strategic interests."

How does this happen? Real simple.

People who have no money, no jobs, and no hope become discontent with their lot in life. If there are no options, scapegoating begins. They look for convenient targets to cast blame for their predicament. Political extremism and race-baiting are not far behind. The darkness of despair breeds contempt and panic. People begin to doubt what they thought they knew and search for answers. Demagogues and emotionally bankrupt tyrants know how to play on these fears. It doesn't take a genius to figure out how this story has ended in other countries ...


It's really that simple.

- Mark

DEPRESSION ECONOMICS ... BANK RUNS IN AMERICA

From Dailykos ...

How bad are the problems we face in the economy? Watch Rep. Kanjorski (D-Penn) describe how close we came to a bank run back in September, and the problems that we face today:



Here's the money quote, about 2:10 into the clip:

... We were having an electronic run on the banks.

They decided to close the operation, close down the money accounts, and announce a guarantee of $250,000 per account so there wouldn't be further panic and there. And that's what actually happened.

If they had not done that their estimation was that by two o'clock that afternoon, $5.5 trillion would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed.

Now we talked at that time about what would have happened if that happened. It would have been the end of our economic system and our political system as we know it ...

Here's what Rep. Kanjorski (D-Penn) had to say 4:58 into the clip:

We're really no better off today than we were three months ago ...

Kanjorski's prognosis isn't much better:

We don't know.

This Welcome to Hooverville post from Dailykos is not encouraging either. We'll talk about this and more on Saturday's program.

- Mark

MILTON FRIEDMAN GOT THINGS WRONG TOO

Last week I had a post explaining "How We Got Here" and made reference to how economists and other academics dropped the ball when it came to holding policymakers to account. I ended by promising to post something that would show how Nobel prize economist Milton Friedman got things wrong too. Then I failed to post it. Ooops.

A day late, and a dollar short, here's the post I promised. What follows is an excerpt from my forthcoming book, The Myth of the Free Market: The Role of the State in a Capitalist Economy (click on the book's icon located on the left side of this blog).

In Free to Choose: A Personal Statement, Milton Friedman took care to review the causes of the Great Depression. With characteristic bravado he declared that “the independent Federal Reserve System was to blame for the mistaken monetary policy that converted a recession into a catastrophic depression.” He also claimed “[w]e now know that the depression was not produced by a failure of private enterprise, but rather by a failure of government.”

Speaking of failures, Friedman failed to say anything about the well documented market schemes, market myopia, speculative euphoria, and structural weaknesses in the overall economy at the time. Friedman’s greatest failure, however, was to falsely suggest – with his “We now know …” claim – that there’s scholarly consensus on the causes of the Great Depression. Nothing could be further from the truth.

Nobel Laureate Paul Samuelson, for example, argues there could be “dozens” of explanations for “cycle theories” that explain business slumps and economic depression. Looking at the claim that the Federal Reserve encouraged speculation early on John Kenneth Galbraith dismisses the argument as ‘formidable nonsense.’

Another Nobel Laureate, Kenneth Arrow, questioned Friedman’s focus on monetary policy, warning “the sole emphasis on incompetent monetary policy as the cause of the Great Depression is disputed by serious scholars.” He adds that “really bad turns in monetary policy did not come until the end of 1930” when the recession was already “severe.”

Friedman also ignores that before the creation of the Federal Reserve System capitalist history is rife with market failures on a grand scale, suggesting “instability” is “endemic in the free enterprise system.” Indeed, standard history texts of the American economy point to easy lending by industry (margin purchases, easy credit, shady loans, etc.), structural weaknesses in the banking industry, and slowdowns in the agriculture and housing markets, among other issues.

In sum, it’s clear the causes behind the Great Depression are far from decided, and the manias that lead to destructive herd mentalities in markets may be more common than we want to believe. More importantly, it tells us that Milton Friedman was prone to making broad statements that aren’t supported by the facts . . .

- Mark

SOCIALIZING THE LOSSES vs. PARTIAL NATIONALIZATION . . .

The NY Times has an excellent, and brief, six-step synopsis of what went wrong in our economy. In essence it points to a lax regulatory environment (with derivatives, corporate leverage levels, and subprime lending), failed policy responses (to foreclosures and Wall Street bailouts), and the colossal mismanagement of the TARP bailout money. Much of the article is old hat now, but for those of you having trouble keeping score at home, it's a quick score sheet that's not too technical (Full Disclosure: I also like it because it mirrors what I say in the last three chapters of my book).

In another NY Times article it's made clear that we're not going to get out of this mess until we clean up the "insurance" gambles (credit default swaps) that were bought and sold between financial institutions.

In this market we had market players buying and selling insurance for products, like debt contracts, that they couldn't pay off if the product they were insuring went south. What these guys did would be akin to you selling outrageously cheap car insurance, knowing full well that you wouldn't be able to pay out if people started wrecking their cars. Worse, apart from never planning to pay out on claims, the only thing you were really after was the monthly premiums. Bailing out this group of market players not only rewards bad behavior but will cost trillions of dollars.

Or we could do the smart thing and force losses on those who were gambling on America's economy going south, and didn't really care what they bought as long as they had "insurance." Think about it. If you purchased a bad insurance policy for your car the government wouldn't say, "that's alright, we'll pick up the tab for your wrecked car." We need to force losses on those who perpetuated an irresponsible system, gambling that the government would eventually cover their bets (by enforcing contracts, or by bailing out the industry). Read the article because it has several good recommendations.

What does this all mean? It means we're in a real mess. We've already encumbered at least $2.9 trillion in new debt but have little to show for it. Socializing the losses by having the American taxpayer pick up the pieces for stupid behavior is not good policy.

This is one of the reasons why I believe that partial nationalization of America's failing financial institutions is the best option available. Why? Because we get some control over bank actions (which we have to bailout anyways), and it will put the fear of God into an industry that has yet to learn any lessons from this mess (as they continue to pay out billions in bonuses, refuse to discuss what they're doing with TARP money, etc.).

The NY Times discusses the nationalization issue here.

- Mark

BEST ARTICLE OF THE YEAR

OK, I know it's just January 10, but this Frank Rich article ("Eight Years of Madoff") is a masterpiece. After going through a short list of the criminal activities and political blunders of the Bush administration, Rich makes a cogent but cautionary point about pursuing the criminality and incompetence of the Bush years:

If we get bogged down in adjudicating every Bush White House wrong, how will we have the energy, time or focus to deal with the all-hands-on-deck crises that this administration’s malfeasance and ineptitude have bequeathed us?

Rich then points out that because nothing less than our nation's honor is at stake that "every legal effort must be made to stop what seems like a wholesale effort by the outgoing White House to withhold, hide and possibly destroy huge chunks of its electronic and paper trail." With more than $10 Trillion in new debt and obligations piled up by Bush, Rich makes what probably is the best case for pursuing investigations, or creating high-level commissions . . .

The more we learn about where all the bodies and billions were buried on our path to ruin, the easier it may be for our new president to make the case for a bold, whatever-it-takes New Deal.

Put another way, it's not just our national honor and the rule of law that are at stake. Bush's incompetence needs to be revealed or else we could lose sight of the financial and political debacles confronting us.

- Mark