Sunday, September 28, 2008

Saving Wall Street, Pros and Cons

Readers of this column know that I don't much approve of how this nations' government or economy are run. But you know I like to illuminate the stuff in the box by gazing at it from outside the box. Right now the stuff in the box is a bail out for some of America's biggest investment banks, which in turn will bail out some of their biggest clients, who are holding mortgage-related investments. In all cases, we are talking about obscenely rich people who could care less about ordinary people and have repeatedly shown that with their actions.

Yet joining the criticism of the strange coalition of left-of-center Democrats and right-wind House Republicans who "opposed" the Treasury plan mainly to make political hay just seems like jumping on a pile of big guys who have already caused permanent injury to a quarterback who had a million dollar arm just a few moments earlier. The House Republicans say they don't want ordinary taxpayers to bail out Wall Street. That is a laugh, except that some of their constituents are so brain dead they probably swallowed that poll-driven excrement without a thought.
I agree with progressives that a bottom-up rescue plan would be better. But we are stuck with the decision makers that the American voters chose, and the way things work is most incumbents will be re-elected to Congress in November. I have never drunk the free-markets always work kool-aid, but I also know that a credit freeze will almost certainly throw this country into an economic depression, and quickly. It would be very hard to dig our way out of such a Depression. In 1929 when the last Depression began the national treasury was almost debt-free. That is not the case today. The government won't be able to spend its way out of a Depression because no one will be willing to finance that level of spending. The only alternative is the kind of inflation that destroyed Germany in the 1920's, or enduring the pain until the business cycle eventually gets back on track by itself. The possibility of the complete collapse of civilization as we know it is no longer totally improbable in the short run.

So I am for the $700 billion (probably more like $1 trillion, by the time it is over) bail out of Wall Street. In effect taxpayers are buying assets that may increase or decrease in value. Congress did insist on some good changes to the original plan. It could be much worse.

It is not the first bailout in American history, and it is not always Wall Street that gets bailed out. Remember that IRS "refund" check you got a few months ago? That, aside from being a shameless election year ploy, was a bailout for us all. And some bailouts are so institutionalized we don't think twice about them, like receiving unemployment insurance or Social Security disability payments, or food stamps.

The problem with bailouts evenly distributed among the citizens or taxpayers is that they just don't work in the kind of situation we have right now. Quite a few people may have caught up on a single mortgage payment with the tax refund, but they are in trouble precisely because they habitually spend more than they make, so most of them were probably in trouble again the next month. They need their life styles to be cut back. If they did that it might be worth the government doing something about refinancing their mortgage payments.

When Wall Street was raking in profits 3 years ago, it was because they concentrated the profits from millions of relatively small transactions. In this crisis we see the concentration of millions of small losses (small here might mean up to $1 million dollars per mortgage). To deal with the crisis quickly, the fire must be put out where it is burning, not where we would like to fight fires in the future.

What is sad is that once the crisis goes away, no fundamental reform is likely. There were a few fundamental reforms in the Great Depression partly because the crisis was not averted early on, in 1930. Some radicals might argue, (and I'm tempted) that therefore it would be best to let Wall Street and the entire free-market Capitalist religion fall. The problem is that good cultural, political and economic systems don't automatically spring up after bad systems have crashed. In the last Great Depression many nations ended up with Fascist governments (See my fascism pages): Italy, Germany, and Spain of course, but also France, Austria, Slovakia, Poland and others. Even the New Deal had many fascist-type elements, most notably the death-grip on power held by President-for-life Roosevelt.

Thursday, September 25, 2008

Bill Clinton, Pius XI, Hitler and Mussolini

No, this is not one of my blogs comparing famous historical persons, with shock value from the juxtapositioning of people Americans are trained to see as saints and demons.

I've added some serious essays to that have not been posted in this blog. I am just letting you know about them, in case you want to read them.

Yesterday I posted Clinton Era Memories. Remember President Bill Clinton, who was supposed to represent a return to liberalism after a decade of Reagan and Bush? I sure do.

Then there is Pius XI. I am going to be writing a lot more about him because I found a book by Avro Manhattan, The Vatican in World Politics, at a used book sale. This had been very helpful in filling in the factual details about the relationship of fascism to the Roman Catholic Church. Here are the links to the first two articles:

Pius XI and the Rise of Benito Mussolini
Pius XI and the Rise of Adolf Hitler

Look forward to future essays on Pius XI and the rise of fascism in Spain, Austria, Slovakia, Poland, and France. Then there is Pius XII, who helped Pius XI with all that and continued to support fascist regimes during World War II until it became clear that the Allies would win the war.

Wednesday, September 17, 2008

Gramm-Leach-Bliley, Glass-Steagall, and Bill Clinton

In the last couple of weeks some of the nationally known pundits, and the Barack Obama campaign, have started talking about how the Gramm-Leach-Bliley banking bill, which overturned the Great Depression-era Glass-Steagall act, has played a major part in the mortgage finance disaster of 2007-2008. I posted an article, Housing, the Credit Squeeze, and Glass-Steagall Act, back on February 4, 2008, when no one wanted to talk about the subject.

During an election, if the economy is bad, there is a tendency to blame everything on the party in power. Senator Obama's attacks on Senator McCain about Gramm-Leach-Bliley are not unjustified. However, Obama's party, the Democratic Party, was just as responsible for repealing Glass-Steagall as the Republican Party. Given Barack's spineless political career we can surmise that he would have voted for Gramm-Leach like everyone else, had he been in the Senate or House of Representatives at that time.

At the shallowest level, we are simply seeing the usual political-economic cycles that have been taking place since the first flint ax was traded for the first sea shell. Mixing ordinary banking (taking deposits, making loans) with Wall Street style banking (creating and trading stocks, bonds, and more complex financial instruments) was clearly a cause of the Great Depression. So Congress built a firewall with Glass-Steagall. At the time the bankers were bankrupt and unable to bribe their way out of the situation.

But when no fire transited from banking to brokerage houses, or vice-versa, for a number of decades, pressures began to build. That firewall did not just prevent fires, it prevent people from making quick bucks. Flexible politicians were found, particularly new ones who did not remember the Great Depression. One of the most flexible modern politicians was Bill Clinton, a Democrat. He named Robert Rubin to be his Secretary of the Treasury, and he kept Alan Greenspan as Federal Reserve Chairman. Think of these men as voracious predators with no respect for anything put power and money. Together they put in place the key "reform" that allowed the rapacious mortgage and derivatives frenzy of 2004-2006. Now taxpayers will be further burdened to clean up the mess.

So what is Senator Barack Obama going to do about it if he becomes President? What will Senator McCain do about it if he becomes President? The standard answer seems to be: make the Federal Reserve more powerful. None of the old "power to the people" solutions are even conceived of, except perhaps by Green Party candidate Cynthia McKinney. But it was the Federal Reserve that helped pressure Congress into repealing Glass-Steagall.

Politicians will say anything to get elected. Congress, not the President, is supposed to write the laws. Most American citizens vote without knowing anything about their representatives in Congress. Until people are better informed and more able to exercise power directly, don't expect any major changes in our system.

Sunday, September 14, 2008

Double Bubble, Toil and Trouble

Two economic bubbles burst in less than a decade. Is that just a run of bad luck, or is it a financial engineering feat? And how is it related to politics?

Consider that the Internet stock bubble that peaked in 2000 cannot be directly blamed on the Republican Party, since Democrat Bill Clinton was President and his Vice President Al Gore was a early proponent of the Internet. Congress, however, was controlled by the Republicans. The Federal Reserve probably deserves most of the blame for that bubble.

The Housing mortgage bubble that burst in 2007, with aftershocks still shaking up 2008, cannot be blamed on the Democrats. Even though Democrats controlled Congress by the time the bubble burst, we had a Republican President, George W. Bush, during the build-up to the bubble. Again, the Federal Reserve deserves most of the blame for the bubble (if you don't count the banks, the mortgage brokers, and the fools who bought at the top of the housing market).

So should we blame the Federal Reserve? Is the two-party system just a circus to keep most citizens distracted while we are really governed by an all-powerful, appointed, cabal of the highest reaches of banking and government? The two-party system is a circus, but it is not just a circus. The Federal Reserve is powerful, but today the corporate new media is saying the bubbles were because the Federal Reserve had too little power, not too much. There is a bit of truth in that, but they did have the power to raise interest rates. Raising interest rates earlier during each of the bubbles would probably would have prevented many of the excesses that damaged the entire economy when the bubbles popped. Yet those who hate the Federal Reserve would have hated that even more. In the housing bubble, the left would have pointed to the injustice of raising interest rates to the point where ordinary people were unable to buy homes, and the right would have screamed because it would have slowed down a none-too robust economy.

Noam Chomsky has talked about the way our "free market" economy tends to privatize profits and socialize losses. That is, the workers have to clean up after the rich. We are seeing that now with the banking bailouts. Executives walk away with their winnings, they don't have to give anything back to the stockholders or customers or employees or other losers. No one is paying back the fees generated by mortgages that should never have been made. The financial press, at least that part aimed (propaganda should always be carefully aimed, otherwise there might be casualties from friendly fire) at the unsophisticated, have failed to talk about bondholders at Freddie Mac and Fannie Mae. When the U.S. Government backs these institutions, it is saving the bondholders' investments. The bondholders took a risk in lending money to Fannie Mae to lend (through middlemen) to home buyers, but instead of being forced to take their losses, they will get paid all the interest and principle promised. Stockholders are losing almost everything; bondholders are fully protected. Old money tends to be in bonds; new money tends to be in stocks. Even among the very wealthy there is a system of caste and privilege.

Most Americans are just going to have to work harder and make do with less. Of course finding a job if you are an unemployed carpenter or real estate broker is not easy to do right now: you can't work harder when you are not working at all. American workers find themselves in the modern equivalent of lying prostate in the cotton field, genuinely unable to move a muscle because of poor food, heat, and exhaustion, while the overseer (never the master, who is drinking fine whiskey while trying to guess what price cotton will fetch in New Orleans this year) lays on the whip, demanding that they get up and produce more, more, more. You can't work harder or smarter if no work is to be found because the nation's capital was allocated to financial speculation.

The federal government is going to have to raise taxes or spend a lot less money on services, or it will bankrupt the entire nation without having to wait for the long term. Fortunately the Bush Tax Cuts for the Rich (which many Democrats in Congress originally voted for) are apt to expire in 2010, regardless of who is elected President, as long as the Democrats control Congress.

Financial bubbles have many components, but the ones that are large enough to matter are always based on credit bubbles. Credit is needed to provide the money used to bid up the price of whatever assets are in the bubble. The Internet Bubble was a typical bubble; many people called it a bubble long before it burst. Only idiots owned the stocks when they started to crash. Every Internet stock was hyped as the next Microsoft, while stocks of companies that were making real goods and profits were neglected. The credit involved was the ordinary kind, made possible by the Fed keeping interest rates too low.

The Housing bubble was weirder. With an Internet company at least the fiction was there that it might become more valuable over time, when it learned to convert page views to real money. But a house is a house. A neighborhood might become more popular, driving up prices locally, but the whole nation is not a neighborhood. House prices rise gradually over time mostly because of inflation. The bubble got its start because housing was not a popular investment during the 1990's stock market boom. When the Internet bubble broke, housing was relatively cheap and interest rates on mortgages were exceptionally low. Buyers moved in, sending up prices and getting the ball rolling. Then the bubble was driven by short-sighted banks and mortgage companies that were able to give credit at no risk because it was other people's money, and collect big fees for that service. As soon as the Federal Reserve raised interest rates towards normal levels, the bubble started to fall apart.

I think a lot of people saw it coming and decided to grab while the grabbing was good.

The real estate industry has always been a major financial backer of both Democratic Party and Republican Party politicians, from local city councils up through Congress and the Presidency. Don't expect anyone to give the real estate speculators a spanking.

As always, the American worker and small businesses, and a few well-run, non-glamorous, large businesses, will pull everyone's ass out of this mess and get no credit for it. But until ordinary Americans wake up and think things through, organize and act on a sound analysis, they are going to keep getting lashed by the wise guys on Wall Street. Neither the Democratic Party, nor the Republican Party, as currently configured, are capable of taking on Wall Street or the real estate speculation lobby.

With interest rates nice and low now, and no shortage of stupid people in the world, the next bubble is brewing somewhere. Only time will show where.

Tuesday, September 9, 2008

Remembering Ronald Reagan

I have mentioned former President of the United States Ronald Reagan in passing a number of times in my blogs. Today I gave him his own President Ronald Reagan page at, where I will have a list of pages that mention him. Ronald Reagan was an important American President who held office when I was just starting to practice political science. Here I am going to give some of my impressions and memories from the Reagan era without trying to be objective or even fact-check to see if my memory serves me correctly. Which is probably appropriate for writing about a President who probably suffered from the early stages of Alzheimer's disease while in office.

I considered myself a leftist revolutionary back in 1980, although I was involved in no leftist organizing that year (I was writing a novel that would never be published). Although the 1970's were not as turbulent as the 1960's, there were still a lot of Americans attracted to revolutionary ideas. Living near Berkeley, California, talking to people in People's Park, I knew Ronald Reagan had ordered the police to shoot at a crowd of protestors, resulting in the death of James Rector on May 15, 1969. I thought of former Governor Reagan as a sort of fascist, a potential Mussolini or Hitler.

I moved to New York City in 1981, in time to see the results of the Reagan Revolution. The streets filled up with homeless people. They were of three sorts (not including the homeless who had already been there). Some were the normal economic casualties of the 1982 recession, which took place because the Federal Reserve raised interest rates to extraordinary levels to try to stop inflation. Unemployment was over 10%. In addition many factories in the midwest closed down; families of people in cars would show up in New York City, and across the nation, looking for work. The third class of people in the streets were mental patients. Ronald Reagan cut federal funding for the mentally ill. Hospitals responded by dumping them into the streets.

Needless to say, I did not have a high opinion of Ronald Reagan. His 1981 tax cuts (passed, of course, with the support of the Democratic Party as well as the Republican Party), did not help me, and I saw no reason to lower taxes on the rich.

But I have to say this for Ronald Reagan: he was no fascist. Anyone with a lot of power may seem to be a fascist at times, but on the whole Reagan was a man who reduced the control of society by government. This did lead to the rich having more power and income, and the workers having less power and income, but it was not centralized or totalitarian in character.

The closest America has come to a fascist regime was under President-For-Life Franklin D. Roosevelt. I'll write more on that in a later essay.

Within the central portion of the spectrum of American politics (and keeping in mind that my true position is well to the left of that center), Ronald Reagan provided an antidote to an unnecessarily large, bureaucratic national government. Unfortunately he did that in a way that favored the most privileged members of U.S. society, which I opposed and still oppose.

In retrospect Ronald Reagan looks better to me mainly because things have gotten so much worse since that era. Much as President Richard Nixon seemed to be on the ultra-right at the time, but now would probably be denounced by even middle-of-the-road Republicans as a Communist, Ronald Reagan seems like a mild-mannered reformer. He did not get the U.S. into any big wars. He did spend on lot of money on the U.S. military that could have been invested domestically; I am not saying I agree with much of his policy. I am just saying that compared to the current crop of right-wing jackasses running for high office (yes, I am including Barack Obama as a right-wing jackass), he seems not so bad.

I'll go over the Reagan Era in more detail as time goes by. During the Reagan era I listened to Punk Rock, hung out with anarchists and organized against Reagan policies including the placement of Cruise and Pershing Missiles in Germany, worked as a paralegal and legal secretary, and lived my life basically unmolested by the U.S. government except when I was engaging in civil disobedience. We worried about the destruction of the ozone layer in the 1980's, but very few people were worried about global warming. About the time Ronald Reagan left office the old Marxist left in the United States went into near total collapse, allowing the anarchist trend to come to the forefront. Anarchism is about true freedom, not the freedom-for-the-rich of men like Ronald Reagan. So far it has not had much impact on modern America, but hopefully it will some time soon.

Sunday, September 7, 2008

Barack Obama's Dividend Play

Barack Obama has played just about all his cards right so far in the Presidential Poker game. He sounded Progressive early in the game, thus winning the Democratic activist primary pot. But now it is an all-or-nothing game.

On economic issues Senator Obama wants people to think that the Bush regime hurt them one way or another. Just as Herbert Hoover was blamed for the Great Depression when it would have happened with just the same if Democrat Al Smith had taken office in 1929, George W. Bush and the Republicans are being blamed for all of the nation's economic woes. [The Republicans would do the same, of course]

Strangely (until you analyze the game) Barack Obama has endorsed one Bush economic policy, special low tax rates on dividends paid by stocks. John McCain endorses the Bush policy as well, but because the will be a Democratic majority in Congress, supporting Barack Obama is a better strategy for the ultra-rich whose income comes mostly from dividends.

There are some arguments for a low tax rate on dividends, but then there are arguments for low tax rates in any specific category. The basic argument is that the tax amounts to double taxation because corporations (sometimes) pay taxes on profits, and then dividends are distributed out of profits and taxed when passed out to individuals. But money is constantly taxed in our society as it moves around. The money paid to wage earners has been taxed in various ways before they receive it from employers, and it is taxed again when they spend it (sales tax, real estate tax, etc.). So the double-taxation argument is just sophistry.

The bottom line is that only rich people derive a significant proportion of their income from stock dividends. So a tax cut on dividends is a tax cut for the rich, and an increase mainly hits the rich as well.

When George W. Bush took office dividends were taxed like any other income to individuals, which meant the top rate was about 40%. The Bush Tax Cuts for the Rich reduced the rate to 15%. John McCain wants to retain the 15% rate.

Democrats in Congress say they want to reverse the Bush Tax Cuts for the Rich. So if they had their way, the maximum tax rate on dividends would end up around 40%. If McCain is elected they can put that into effect. They don't need to worry about a McCain veto. All they have to do is let the Bush tax cuts expire.

Barack Obama has proposed raising the rate to only 20%. Democrats in Congress would not want to defy a Democratic President, so they would have to pass a new law lowering the dividend tax rate to 20% (the lefty Dems could vote against it, since there would be plenty of Republican congress people to vote for it). The rich will be better off under Obama than under McCain, if this scenario plays out.

Why would Barack Obama want to give the rich a break? Because actually he is from the same economic school as Ronald Reagan, the Chicago School of free-market economics. Barack taught law, a necessary adjunct to free market economics, at the school for years. He is not progressive on economics, but he had to sound progressive to win the Democratic primaries.

Obama apologists (an annoying lot) will ignore the realities and say Obama wants a 20% tax on dividends, McCain a 15% tax, so vote for the Democrat.

Monday, September 1, 2008

Barack Obama and Sarah Palin

Citizens of the United States can't lose in the next election. Either we will have a non-white President, Barack Obama, or we will have a female Vice-President. Either would stand in contrast with centuries of white male dominance of American politics.

On the other hand, citizens of the United States can't win the next election. Unless they are already among the economic winners. Despite being a working-class woman who became Governor of Alaska almost by accident, Sarah Palin, even if she become President, belongs in the Chicago School of economics (free-market capitalist). Barack Obama, despite being a super-educated product of super-educated parents, one of African ancestry, actually taught law at that very Chicago School.

For those sophisticated enough to see beyond Presidential election cycle dog-and-pony shows, this is going to reinforce the most basic lesson in the politics of change in the United States of America. Winning civil rights for groups of people denied civil rights is simply not on a level playing field with economic justice. In the later half of the 2oth century a variety of groups had their rights recognized: African-Americans, Native Americans and other citizens not of European descent, women, the disabled, and homosexuals. That is a good thing. It was not easy. People struggled and quite a few people died getting these reforms.

But in 2008 we have less economic equality of opportunity, much less economic equality, than we did in 1950. There are women and minority CEOs; there is a black middle class. The new discrimination is economic. It is harder today to get out of poverty than it was in the 1950's, regardless of your sex or race. Schools are worse. Destructive cultural habits - drugs, alcohol, negative attitudes towards education and work - are more prevalent among the poor and working class.

The class system has ossified. Requirements for entering professions have been elevated. A college degree is not nothing, it creates opportunities that a high school degree does not, but in most cases to get a chance at a good job you need a graduate degree. The economics of staying in college and then graduate school are daunting even for students from highly-educated families; they are nearly impossible for those who have working class parents and received their early education in public schools.

Tax codes are fiddled with, but in the end the rich must be taxed in the United States. They are the only people with money. Here I do not mean the super-wealthy, I mean the people who have professional and management jobs as well.

The ruling class has not stopped ruling. They have just admitted blacks and women to the club. It is funny to see the partisan froth being whipped up. On the right Barack Obama, a man whose economics are nearly identical to Ronald Reagan's, is blasted as a Communist. On the left Sarah Palin is being called a Neanderthal for her views on abortion, even though she is the first working class person I know of ever to be nominated for the Presidency or Vice-Presidency.

As people go, thinking within the two-party, one ruling class system, I think all four candidates are decent people who would try hard to do a good job. Of the four I like Joe Biden the least because of his ties to credit card companies, but then someone has to pay for people to buy their political offices.

Just don't expect anything beyond the usual posturing once the election is over. The basic economic structure and tax structure will not change. Your status in life will depend mostly on the status you were born with. With great effort, you can prevent yourself from sinking further still.

The vast majority of incumbents will be elected to Congress, as always. Democrats who supported the Republican agenda when that buttered their bread, like Congressman Mike Thompson of California, will still want to eat buttered bread. The Democrats (presuming Barack Obama wins) will throw breadcrumbs to their constituencies. Environmentalists will get some tighter regulations. Women will get a few cabinet posts. Gun control freaks will see a few types of guns added to the banned list.

But the basic attitude of Barack Obama and crew will be: Don't ask what your country can do for you. Ask what you can do for your country. Don't expect Barack Obama or John McCain either to do anything about excessive CEO pay, the fact that capital gains can go untaxed for decades, the lack of sufficient federal dollars to include locally produced, healthy, organic foods in the free and reduced lunch program for public schools, or any other issue that will actually help those at the bottom get a chance at the having the economic privileges of those in the middle; or that would allow those in the middle the same economic privileges as those at the top.