The U.S. economy has diverged: Wall Street is living high on the hog, while everyone else is struggling. The Dow Jones Industrial Average eclipsed 10,000 for the first time since last October this week, even as unemployment continues to spiral out of control. And while President Barack Obama has taken some very real steps to help ordinary people, his administration's efforts to save Wall Street have far outstripped their support of workers.
Matthew Rothschild details these disparities for The Progressive. Regulatory reforms are moving through Congress at a snail's pace and the wreckage from the mortgage bubble is increasing. Wage cuts are more widespread today than in any era since the Great Depression, even as bankers capitalize on taxpayer bailouts to score epic profits and outsized bonuses.
"One economy is for the rich and the upper middle class," Rothschild writes. "The other economy is for everybody else."
So how can a few big banks make so much money while the rest of the economy suffers? As Kevin Drum explains for Mother Jones, the kind of banking that helps the economy is a pretty simple business of taking deposits and making loans. But a lot of what we now call "banking" really just consists of making bets on just about anything you can dream up.
"Banks aren't using all this cheap money to increase lending. They're using it to fund bigger and bigger bets in the fixed-income sector - the same sector that brought us junk bonds, credit default swaps, subprime loan securitization, interest rate carries, collateralized debt obligations, and all the rest of Warren Buffett's 'financial weapons of mass destruction.'"
The banks, in other words, are gambling with taxpayer money. A host of big finance companies have reported earnings in the past week, and the numbers are ugly: JPMorgan Chase reaped $3.59 billion in third-quarter profits and Goldman Sachs is planning to payout $23 billion in bonuses from speculative trading, while Bank of America and Citigroup are hemorraging money on mortgages and credit cards. The Wall Street casino is alive and well, but anything that is actually tied to the real economy is a disaster.
According to a new report from the U.S. Treasury, lending among the largest recipients of the Troubled Asset Relief Program fell by 17% from July to August. Small businesses can't cope with the cutoff in financing. A lot of businesses stay profitable over the long-term by borrowing money to meet short-term expenses. A baker can borrow money to buy flour and pay the bank back when she sells her bread. With bank lending on ice and consumers cutting back on spending, many small businesses are failing. Thousands more will be at risk in the next couple of years while unemployment remains elevated.
Writing for Salon, former Clinton Secretary of Labor Robert Reich notes that these economic struggles are not reflected in major stock indices. Stock are soaring as big corporations who don't need bank loans score short-term profits from cost-cutting, i.e., mass layoffs. Obviously, this strategy can't work for very long. When millions of Americans are out of work, they can't afford to buy the things companies make.
There's an important lesson in our current economic state-of-affairs, as Katrina vanden Heuvel emphasizes for The Nation. The bailout has not done what Henry Paulson told us it would do. To be sure, it saved the banks-- even the strongest banks would have failed last fall without extraordinary government support. But it has not increased lending and kept the economy from disaster. The Obama administration, which has extended the Bush administration's support for bank balance sheets and bonus checks, is facing a political nightmare if it doesn't show produce some stronger economic results for ordinary citizens.
"Heading into 2010, the Obama administration must put itself back on the side of working people," vanden Heuvel writes.
The administration must address two critical problems in order to restore the nation's economic credibility. Putting the unemployed back to work is at the top of the list. Anything that saves jobs will help, including aid to states to keep teachers and cops on government payrolls and tax credits for companies that hire new full-time workers.
Something must also be done about the foreclosure epidemic. Nothing underscores our economic disparity like continuing housing mess, which has been in full-blown crisis mode since 2006. Despite a multi-trillion-dollar bank bailout, foreclosures are surging to all-time highs. Writing for The American Prospect, Tim Fernholz details the prolonged problems with the Obama administration's current foreclosure relief program.
While millions of troubled borrowers are eligible for the plan, which reduces monthly mortgage payments to affordable levels, foreclosures are still outpacing loan relief efforts by more than two-to-one.
Banks are dragging their feet and the administration has imposed no penalties on lenders who don't live up to the program's standards. Instead, the Treasury Department is offering banks cash incentives to keep people in their homes. Bank of America, which has received $45 billion in direct government bailout funds, plus hundreds of billions in government guarantees and other perks, has modified merely 11% of the mortgages it controls that are eligible for the plan.
Fernholz offers several potential improvements to Obama's foreclosure relief plan, including more aggressive government policing of the current plan and allowing foreclosed homeowners to continue to live in their homes as renters. With up to 12 million foreclosures projected by the end of 2012, just about anything the administration does will help.
The economy is a measure of social well-being, not a stock market index or a corporate earnings statement. Policymakers need to prove they can respond to the very real needs of all their citizens, not just those with financial clout.
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Ten days ago, we reported on Open Left that bankruptcy "cram-down" mortgage relief would not appear in the stimulus, but would appear in a different piece of legislation later this year. Despite our reports, the fight over bankruptcy "cram-down" legislation in the stimulus did not actually end ten days ago. As recently as Thursday, House Democrats will still fighting in to include the measure in the stimulus, and Senator Dick Durbin, the leading proponent of the measure in the Senate, was denying that President Obama was opposed to including the measure in the stimulus.
However, any lingering doubt about the fate of bankruptcy "cram-down" reform in the stimulus can now be put to rest. Senator Durbin has confirmed that President Obama opposes including the measure in the stimulus, and favors including it in later legislation instead (more in the extended entry):
Yesterday, David and I both blogged about passing mortgage related bankruptcy reform in the stimulus package (see David's post and my post). The specific legislation we are seeking to include in the stimulus is, in the House, HR 225 from Representative Brad Miller and, in the Senate, S 61 from Dick Durbin. The legislation will allow bankruptcy judges to re-write mortgages according to current home values rather than inflated "bubble" values, thus allowing hundreds of thousands, possibly millions, of people to keep their homes over the next two years. It is good legislation that will help lots of real people, and start putting the country back on track toward a post-bubble economy.
Here is the state of play on this legislation:
Senator Durbin is leading the charge to have the legislation included in the stimulus package. Considering his Senate position (ranking behind only Reid) and his close relationship with President-elect Obama, and that he is reportedly taking the inclusion of this legislation in the Senate as his personal mission, there is a good chance he can succeed. However, at this time, there is no definitive word that he has succeeded.
In the House, Brad Miller is basically a one-man campaign for this bill. Representative Miller and his staff are basically the only people around and available for this campaign. He is out-resourced by the opponents of the bill, as the next bullet point discusses.
In late 2007, Miller's bill was defeated by an alliance of Blue Dogs and the banking and realtor lobbies. At the behest of the National Association of Realtors, which gives more money to congressional candidates than any other PAC in the country, and which has 28 people working on the Hill full time as either lobbyists or researchers, sixteen Blue Dogs sent a letter to the House leadership asking them to spike the bill. The end result was that the bill was delayed, severely watered down, and ultimately deemed insufficient by the bill's sponsor, Brad Miller. There is every reason to expect a similar effort will be attempted to spike the bill this time around. And, as I already noted, the realtors and their Blue Dog lackeys have a lot more resources than Dick Durbin and Brad Miller, who are operating this campaign almost entirely by themselves.
To prevent this attempt to pass mortgage related bankruptcy reform, and thus a partial repeal of the odious Bankruptcy Bill of 2005, the strategy is simple: try to get as many Representatives and Senators supporting the inclusion of this legislation in the stimulus as possible. However, recognizing the relatively small size of our activist base here on Open Left, we can't just expect readers here to call their members of Congress, and the end result to be that enough members feel sufficiently pressured from their constituents to back the inclusion of this legislation in the stimulus. Instead, we have to be more selective in our targets, and choose carefully where we target our pressure.
So, my first idea is for Open Left readers to try and get all of our Better Democrats, for whom we raised money in 2008 and who are now members of Congress, to become sponsors of the bill and support its inclusion in the stimulus. Donna Edwards (MD-04) and Alan Grayson (FL-08) are already sponsors of H.R. 225, so they are spoken for. However, there are five members of the House and Senate from the Better Democrats page that have not yet sponsored either HR 225 (if they are House members) or S 61 (if they are Senators). Here are those four, along with the phone numbers of their Washington, D.C. offices:
The idea behind targeting these five is that, even though few of us are constituents of these five members of Congress, most of us can call as donors to one or more of these five members of Congress.
So, please, politely contact one of these five, and leave a message asking for to become a co-sponsor of either HR 225 (for House members) or S 61 (for Senators). Additionally, urge them to support the inclusion of this legislation in the stimulus package. If they ask for your constituent information and you are not a constituent, indicate that you were a donor to the 2008 campaign of that member of Congress.
Don't worry about it being after hours in D.C. If no one answers, leave a message-it will still be heard. Also, remember that we are entering a new era in D.C. where pressure like this can actually work. For example, Obama shelved his stimulus business tax cut proposal today, after Senators and grassroots alike raised their voice. Hopefully, we can get a few more sponsors for these bills as a result of this action. If it works, we can more onto more targets.
For what its worth at this late date, the following plan makes a lot more sense than the Paulson plan, even with the proposed Congressional add-ons. It's proposed by Nouriel Roubini, a professor at NYU's business school who saw this coming much earlier and more clearly than most anyone.
http://www.rgemonitor.com/roub...
Though it looks like Congress may end up moving fast on this, I'd love to see the netroots push this one hard, in conjunction with the elements of the "financial expert" community that are coming around to Roubini's way of thinking. Here are the highlights:
Roubini proposes a program he calls HOME (Home Owners' Mortgage Enterprise), which is basically an updated verion of the Great Depression's Home Owners' Loan Corporation (HOLC). And its got an even more politically attractive name, since it reminds people that helping Americans keep their homes is a lot more important than asking these already-stressed homeowners to bail out wealthy elites whose serious gambling problem is on the verge of taking down our economy.
Roubini explains how his HOME-focused approach is more important and would be more effective than the attempt by Paulson (and now Congress) to do an RTC-like bailout of financial institutions.
In 2004, I was working on a series of articles for the Isthmus in Madison, Wisconsin about the growth of 'non-doc' loans and the legislative push to have Fannie and Freddie insure riskier loans which had been extended to people with questionable credit or gaps in documentation, usually Mexican nationals applying for loans.
I knew a bit about the desire of banks to circumvent the sub-industry and get into the Hispanic market as a direct loan entity because when I worked for San Jose Group in 1999, a Hispanic marketing firm headed by George San Jose, a Republican with ties to the Bush family, PNC Mortgage had commissioned a study and exploratory creative work.
The Democratic link to Fannie and Freddie asserted in the McCain ads actually comes not through Democratic elected officials but through non-partisan Latino interest groups like the National Council of La Raza who, in the late 1990's, became conduits for corporate interests to push Hispanic issues that allowed corporations greater access to the Hispanic market. While many NCLR associates are Democrats, the group is truly non-partisan and enjoyed a long-time relationship with John McCain and Cuban Republican interests.
However, from the research I did for the there are only two elected officials who were involved in legislation designed to protect the non-doc loans taken directly into bank portfolios: Luis Gutierrez and surprise, Senator John McCain. McCain had a direct role in crafting legislation that had riders in it that were designed to protect these high risk loans that the banks had become nervous about. He partially did this for the economy of Arizona and development along the border but he also did this because Arizona has one of the most paper thin housing markets and economic wealth that is almost exclusively tied to real estate wealth in Scottsdale and the surrounding area.
If any official blogger or newspaper would like sources that show how both Republicans and Democrats are tied to the current financial crisis but mostly Republicans in that the current president abolished any oversight of the subprime lenders that was brewing in the Clinton administration, e-mail me at: editor@zeitgeistreport.com.
Both parties are at fault in this economic crisis but the tipping point that made things as bad as they are and that propagated crappy mortgages like rabbit was the lack of oversight by the Bush administration.
Since I plan to do academic work on this because I happen to know a lot about it out of pure luck, I will be writing more about this.
This is for serious inquiries only and mostly to help fight the Fannie and Freddie smears against Obama.
I'm not versed enough in economics to know if this technically qualifies as the nationalization of a major financial sector, but it sure sounds like it:
The U.S. government plans to put troubled mortgage finance companies Fannie Mae and Freddie Mac under federal control, the New York Times and Washington Post newspapers reported on Friday.(...)
The firms would be placed in a legal state known as conservatorship, the Post said, citing sources familiar with the conversations.
The value of the company's common stock would be diluted but not wiped out while the holdings of other securities, including company debt and preferred shares, would be protected by the government, the Post said.
Senior Bush administration and Federal Reserve officials called in top executives of Fannie Mae and Freddie Mac on Friday and told them that the government was preparing to place the two companies under federal control, officials and company executives told the New York Times.
The executives were told they and their boards would be replaced and shareholders would be virtually wiped out, but the companies would be able to continue functioning with the government generally standing behind their debt, The Times said.
The problem I have with this is not the move to nationalize the mortgage industry. That actually seems like a good idea to me. The problem I have is with the incredible cognitive dissonance surrounding "big government" in our national political discourse. Even as we have reached national consensus on nationalizing industries, which is the literal definition of socialism and big government, politicians of every party keep talking about "small government" as though it were a virtue. I mean, the day after the Republican convention, which included countless attacks on big government, the Republican administration goes out an nationalizes a major industry. It will probably be done in the corporate welfare style typical of American government--privatize the profits, socialize the risk--but it is still nationalization.
Voters, Democrats, Republicans, Independents, Conservatives, Moderates, Progressives, Greens--everyone is in favor of "big government" moves like nationalizing the mortgage industry now. And yet, all of those same people keep talking about how terrible big government is, and how we need to stop it. It is massive national lie. It is as though the entire country is a homophobe who is actually a closeted homosexual. It is as though the Emperor has no clothes, but now the entire nation has decided to dress to match.
Can we all stop lying to ourselves on this one? Please? Pretty please? This national self-delusion is a major obstacle to having an honest ideological debate in this country.
We have been trained to think of states as the supposed "laboratories of democracy," but what they really are these days are a check and balance against federal inaction and Potomac Fever. That's the case I make in my newspaper column out today - especially as it relates to the housing crisis.
Shit seems to be hitting the fan in the housing market. This seems to be an important but overlooked facet.
By region of the country, new home sales fell by 27.1 percent in the Northeast, 22.5 percent in the West and 17.1 percent in the Midwest. Only the South saw an increase in sales, a gain of 7.6 percent.
Well now isn't that interesting. It couldn't have anything to do with this, could it?
Between 1991 and 2001, "winner" states got nearly $1 trillion more in federal benefits than they paid in taxes. Alabama won the biggest, raking in $100 billion. Losers California, New York, and Illinois each paid $250 billion or so more than they got back. The huge gaps are driven by higher average incomes in the "donor" states, plus subsidies for farms, oil, mining--"extractive" industries that skew red. There are exceptions (Texas is a loser, Pennsylvania a winner), but the map on this page shows the big picture. The heist is more impressive considering that the winners have only a third of the U.S. population.
There are a few states, like Florida, that are going pop with the housing bubble, so the entire region isn't escaping. Still, there are two overall points here. One, there's opportunity to realign the country against the economy of the South. Two, the freakshow culture of the Republican base and leadership is fundamentally economic in nature. TR has a great post on the Left Coaster about why Republicans are scared of Youtube. The short of it is that the Republican base is composed of a bunch of authoritarian freakshows, and the leadership of the GOP has been successful at appealing to this base while appearing to be mainstream. The internet rips the mask off the facade, which is why Republicans are running from Youtube.
I'll supplement TR's analysis. This freakshow culture exists because it makes the Republican base a lot of money and insulates them from the rest of the economy. That's why the housing bubble is skipping much of the South, why Republicans are happy with the economy when everyone else isn't, and why Republicans think we're winning in Iraq. It's amazing what you'll believe when your income depends on it.
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