Last Friday, there was an excellent article in the Sacramento Bee that exposed how government policy at the state level accelerates the sub-proletarianization of America, complimenting federal policies towards the same end. In that article, Judge Marilyn Gilliard of the Sacramento Superior Court complained that the closure of the superior courts of the state one day per week, upon order of the administrative office of the courts, would impose great hardship. She was publicly joined in her opinion by another local judge, Loren McMaster, in a column that the Bee published on Sunday.

An overwhelming number of the court's judges had already signed a petition that Gilliard had originated in objection to the court closure being adopted as part of budget deal. On Friday, she was at her sanctimonious best: Let's talk about abused and neglected children whose cases are going to be delayed. Let's talk about crime victims. Let's talk about those accused of crimes. Let's talk about jurors who could be very well in the midst of deliberations on a murder trial being told they have to go home.

Here, in a nutshell, we have the let them eat cake mentality, disguised in the form of social concern, that is so pervasive upon elite figures, such as, in this instance, a member of the state judiciary, while so many Americans are being impoverished by this recession. Gilliard is apparently unaware that child abuse and crime victims are already suffering from a severe elimination of social services at the city and county level. This is happening for two reasons: (1) severe cutbacks in state funding; and (2) more generally, the seizure of county revenue sources to pay for the state budget deficit.

Furthermore, schools, K-12, community colleges and four year universities, are facing substantial losses in funding that can only result in declining educational opportunities for these victims as well as many others. In other words, these people, like millions of other middle income, lower middle income and poor people in California, are suffering severely because of the way that the Governor and the Legislature decided to address the budget deficit. But Gilliard, McMaster, and her other colleagues that signed the petition, have only begun to perceive the problem when it washes up upon the shores of the courthouse building on 9th and H Street.

Amazingly, this situation is also an illustration of the old adage, people who live in glass houses shouldn't throw stones. Gilliard and her colleagues make approximately $180,000 a year. They have received an approximately 16% increase in pay in recent years. None are currently being required to accept a cut in pay during the current budget crisis, as the Chief Justice of the California Supreme Court, Ronald George, has only requested that judges take a voluntary 4.6% reduction in salarly. Given that judges are only required to voluntarily request it, this not only means that some judges will refuse to do so, but also that we will never know which ones did and which ones did not, unless they tell us, because, after all, one's salary is a private, personnel matter. And, as you might have guessed, the Sacramento Superior Court judges have imposed a reduction in salary upon much lesser paid court employees while refusing to collectively accept one themselves.

Hence, we have a classic example of how the sub-proletarianization of America plays out at the local level. California judges continue to receive their full salary and benefits, unless they voluntarily decide otherwise. Rank and file court employees have accepted a 5% pay cut, with 4 hours of bankable furlough time. Middle income state workers are furloughed three days a month, losing 15% of their salary, based upon executive orders upheld by, of course, a judge of the Sacramento Superior Court. Thousands of working poor people dependent upon the Healthy Families program are going to lose health care coverage for their children. 17,000 children in Sacramento County alone could lose coverage, with an additional 11,000 children denied coverage.

Meanwhile, people with serious health conditions and disabilities dependent upon in home health services face either reductions or elimination of care. According to the Bee, a $226 million dollar cut eliminates services for those deemed in lowest need and reduces services for those who require some form of assistance to perform functions. Unlike judges, in home health service providers had their salaries cut from $12.10 an hour to $10.10 an hour, starting July 1st, but, fortunately, a federal district court judge has issued an injunction, preventing it from taking effect. One has little doubt that Gilliard and her colleagues would have reached a different conclusion.

No doubt, you've figured it out by now, but please bear with my summarization. If you are a judge in California, you get to decide if you are going to take a 4.6% pay cut. If you are a state worker, one of these same judges empowered the Governor to cut your pay 15%. If you are a lower middle income worker with a family, you face the prospect of losing heath coverage for your children, while others lose the opportunity to qualify for it. If you are an in home health services provider, the Governor and the Legislature decided to try to cut your already meagre salary by approximately 17%, while reducing the number of people entitled to receive such assistance.

Combined with the Darwinian consequences of the housing crisis, and the millions of foreclosures associated with it, this is a textbook example of the sub-proletarianization of America in action, as the privileged preserve their power and economic status, complaining, as Gilliard and her colleagues do, about making even the slightest, symbolic sacrifices, while millions of other Californians are forced to subsidize their privilege through salary cuts and an extreme reduction in social services.

Furthermore, it is essential to understand that California is far from the only state experiencing such dire budget problems. It is fair to assume that similar solutions are being adopted in other states, but I leave it to others to investigate more fully and report. Of course, President Obama could have decided to soften the blow by directing funds to the states as he did for the transnational financial institutions responsible for the creation of the crisis. But that would have prevented these same institutions, and the investors connected to them, from further consolidating their control over the domestic and global economy.

Labels: Bailout of Finance Capitalists, California, Global Recession, Housing Bubble, Neoliberalism, Sacramento, Sub-Proletarianization of America

I was perusing the articles posted over at Counterpunch, and came across one written by a kindred spirit, Carl Ginsberg:

"Crisis” is in the eye of the beholder. The Obama administration thinks in terms of years. Others are on a shorter leash. While millions are being marginalized right now, our president, and a supportive press, prepares us for consumer credit relief in the form of enhanced notice … in a law to be decreed a year from now, in the summer of 2010; he proposes new regulations for stockholder input on executive compensation (don’t the big stockholders already elect the board which pays the managers?); and his economists predict a return to positive economic growth in Q3. Overall, Treasury Secretary Geithner sees “important signs of recovery.” Abby Joseph Cohen of Goldman Sachs puts it this way: “We do see profit margins picking up.” Hang in there everybody. And save.

You wouldn’t know from these sources –in particular the millionaires that make up Obama’s West Wing as well as the wealthy reporters who chronicle it - that multitudes of Americans are getting slammed hard and it’s getting worse everyday, every single day. Crisis is everywhere. Wages and salaries have fallen at an annual rate of 3.1 per cent. Half of that decline is attributed to plummeting manufacturing, where most jobs are unlikely to return soon, if ever. Economist Mark Zandi believes that the US will have negative wage growth this year. According to Money magazine, 30 per cent of workers employed now, or about 42 million people, are independent contractors, part-timers, temporary staffers or self-employed—a contingent workforce expected to grow to 40 per cent in ten years. Crisis as a way of life. “There’s no use trying to avoid the inevitable,” says Money. Obama would say avoiding the inevitable is irresponsible.

For some, joblessness is the antithesis of crisis. It is opportunity. People without work equates to competition for employment which means low wages which means enhanced profits. In case you haven’t noticed, the stock market is up. Bond sales by businesses were $570 billion in Q1, a record…. Net financial investment in Q1 was $340 billion, also a record. Go Go.

I started posting about what I considered to be the essential socioeconomic characteristics of the bursting of the housing bubble in July 2007. At that time, the global economy was still growing, but the dark storm clouds of recession were clearly visible over the horizon, like a squall line in the Panhandle on a late July afternoon. I grasped that the signature feature of the coming crisis would be the increasing vulnerability of the populace as lenders curtailed access to credit. During the final weeks of the presidential campaign, as Congress passed the bailout over massive opposition, I observed, along with others, that the recession, and the governmental response to it, were being exploited to oligopolize the economy. Meanwhile, I warned that workers faced a bleak, insecure future despite the election of Barack Obama.

In short, as described by Ginsberg, I anticipated that corporate interests would seek to recover their lost, outsized profitability by a permanent transformation of the economy, a transformation centered around increased subsidy while workers paid the price through shortened work hours, increased taxes and unemployment. Several important sectors of the economy have experienced enormous job losses and many of them will never return, or, if they do, as noted by Ginsberg, most of them will be temporary ones. It is, as you might imagine, a sensitive subject that the mainstream media addresses with great care.

Back in the summer of 2007, the sub-proletarianization of America was an abstract concept, a tentative generalization of the social consequences of the global collapse of neoliberal economics. Neoliberalism, as it emerged and matured over the last 30 to 40 years, empowered global capital at the expense of workers, especially semi-skilled and unskilled ones, lesser developed countries and poor people overall because its central tenets, privatization of public resources, free movement of capital, deregulation and fiscal austerity, all operated to transfer wealth from laborers to investors, while further concentrating power in transnational corporations and international financial institutions, such as the World Bank and the International Monetary Fund. Meanwhile, governments were deprived of the funds necessary to provide essential social services, such as health, education, housing and welfare, as these were considered prime investment opportunities.

Contrary to a some liberal to progressive idealist thought of the previous decade, I never believed that neoliberalism carried within it the seeds of it own destruction and substitution by a more humane social order. Of course, I perceive a dialetical process in most socioeconomic matters, neoliberalism included, but not necessarily always for the better. So, when the housing bubble burst in 2007, I understood that it meant the end of an era of neoliberal economics as we had known it, but I did not believe that it was a harbinger of a new socially progressive era, as do a lot of my progressive friends who continue to embrace Barack Obama, warts and all.

Instead, I perceived that the bursting of the housing bubble, and the collapse of the numerous pyramid schemes associated with the extension of debt around the world, announced a new historical period in which both people and governments would be forced to prostrate themselves even more before the gods of capital. Demoralized by the recession, people would have even less of an ability to organize themselves effectively in a collective fashion, leaving the way clear for capital to assert even more control over governmental policy. Existing institutions, such as labor unions, for example, would be incapable of facilitating such organization after their enervating record of performance in recent years.

Hence, a nihilism stalks the land, and it is this nihilism that constitutes the primary feature of the sub-proletarianization of America as it has evolved from being an abstract conception of the future into a sinister description of the present. And, what are the other features of this new social order that has almost been completely constructed? Here's a cursory summary:

(1) the subsidization of transnational finance by the federal government without limitation and without preconditions;

(2) the degradation, and, in some instances, the elimination, of essential social services as states are required to brutally slash budgets in response to market pressure as communicated by declining tax revenue, despite the fact that the states, and the people dependent upon their services, had no responsibility for the decisions that caused the collapse of neoliberal finance;

(3) the subjection of people to the ruthlessness of the market, declining wages, job losses and home foreclosures, even as they pay taxes to a federal government that subsidizes the continued operation of financial institutions;

(4) planned benefit reductions in essential social programs for people, such as Medicare and Social Security, programs pejoratively described as entitlements, so as to impose fiscal austerity upon the populace in order to pay for open-ended subsidization of capital;

(5) an increasing tendency to target undocumented immigrants and people of color for the economic collapse, so as to distract attention away from the class warfare currently conducted by the elite;

(6) a fracturing of social movements dependent upon liberal and progressive support along a subterranean fault line separating those who survive, and even thrive, under current economic conditions, and those who do not;

(7) an entrenchment of a form of identity politics, wherein elites in communities of color celebrate their own successes, and ascribe them to neo-Social Darwinist doctrines of personal responsibility even as many of their brethren drown as the last remaining life lines of support in their communities in the form of jobs, government assistance and charitable organizations are pulled away.

Certainly, this is a contentious list, because we are dealing with the characterization of something as it emerges and evolves, and beyond that, there is the recognition that any attempt to characterize anything is inescapably imperfect. For us, the challenge before us is not an academic one of study and characterization, but, rather, what can we do to reverse what looks more and more like the consolidation of a harsh, inflexile system of social control and expropriation that will be with us for many years to come?

Labels: American Empire, Bailout of Finance Capitalists, Global Recession, Housing Bubble, Neoliberalism, Sub-Proletarianization of America

The Senate votes down, by a 51-45 vote against, a measure that would have allowed bankruptcy judges to only permit creditors holding residential mortgages to recover the current value of the property as a secured debt. The remainder would have been downgraded to unsecured status. For those of you unfamiliar with the procedure of the bankruptcy court, secured creditors get paid ahead of unsecured ones, and, if there is no money left for the unsecureds after the secured get paid . . . yes, they get nothing.

The consequences of this defeat are significant. In the big, macroeconomic picture, it eliminates an incentive for financial institutions to write off losses on mortgages issued during the bubble, and replace them with new ones based upon current market values, thus keeping more people in their homes, out of bankruptcy court, and capable of contributing to a stabilization of demand. Instead, many of the people currently underwater in their homes will be sub-proletarianized. Furthermore, it permits these institutions to persist in attempts in bankruptcy court to collect the entirety of the amount due on the mortgage as secured, to the detriment of other unsecured creditors, who will have to wait for payment, if there is any, until the note holders capitulate to reality. As a result, the credit crunch will remain with us longer than necessary.

But, wait, you say, perhaps it is a good thing. Won't this push us towards a more collective response to the global recession? Doesn't keeping people in their homes merely perpetuate the privatization of social life? Do we really want people to regain their access to credit, and, thus, continue to perpetuate a capitalist system of production, distribution and consumption? Well, no. But the notion that we persuade people that a collective, non-hierarchical alternative is superior by throwing them out on the street and tearing up their credit cards doesn't strike me as plausible. Many socialists and anarchists have historically sought to build support for their vision of society by assisting people in their day to day struggles, and that is an apt strategy here. And, there is always the peril that desperate people will embrace right wing extremism instead of left radicalism.

Meanwhile, one has to wonder why other sectors of the economy outside finance weren't actively lobbying for the passage of this bill. Measures that redirect funds from finance capitalists to the manufacture of goods and the provision of services, as this measure would have indirectly done, would most definitely be in their interest. But they have been immobilized in the face of the power displayed by Wall Street as financial institutions dictate policy for their exclusive benefit. As Michael Hudson said last November: A kleptocratic class has taken over the economy to replace industrial capitalism. Hence, the US is now a country defined by those who aspire to be a Suharto, not a Ford, Edison, Gates or Jobs.

Labels: American Empire, Anarchism, Bailout of Finance Capitalists, Credit Crunch, Global Recession, Housing Bubble, Neoliberalism, Sub-Proletarianization of America

[Family and work demands have prevented me from posting so far this week, but I hope to return with something new soon. In the meantime, you might find this post from last October of continuing interest.]

As I said the other day, I try to avoid substituting survivalism for political and social analysis. But that doesn't mean that we shouldn't consider the possibility of some dire outcomes as a result of the current financial crisis. Apparently, there is an old adage that financial market bears are too early and too optimistic. Unlike many, I knew that the housing bubble, and the subsidized credit that created it, couldn't be sustained. Even so, I failed to perceive the catastrophic consequences that would ensue when it burst.

For example, I didn't believe that home prices in Sacramento County, a housing bubble epicenter and my county of residence, would fall almost 50% from their peak in the summer of 2006. Nor did I realize that the worthlessness of subprime mortgage debt issued to purchase these homes here and elsewhere was the equivalent of an infectious disease that would contaminate the global financial system, paralyzing its ability to extend credit. I didn't anticipate that the deleveraging of this debt, and the derivatives associated with it, would spread exponentially, requiring the injection of hundreds of billions, if not trillions of dollars, in an attempt to arrest a deflationary spiral that would push the global economy into a protracted recession.

My anxieties were initially limited to a belief that we would experience a slow, grinding sub-proletarianization of America, as the lives of the lower middle class and many within the middle class are increasingly characterized by economic insecurity through foreclosures, job losses and the lack of access to credit. Collectively, this transformation will result in an alarming degradation of the quality of life within many American communities. More recently, I pondered whether the crisis was being manipulated for the purpose of consolidating the power of the dominant capital class. I am now, however, beginning to wonder if we are facing something much more serious.

Over the last 30 to 35 years, the expansion of the money supply through credit has been an essential feature of the neoliberal economic order constructed by Reagan, Thatcher, and, less commonly known, Deng Xiaoping. It is generally recognized that this expansion constituted a temporary substitute for stagnant wage growth during this period. Less emphasized is the extent to which it also facilitated the creation of a global system of finance, transport and telecommunications. Emerging markets, and the corporations within them, better known to us on the left as lesser developed countries, were now able to access capital through the issuance of debt, equity and the privatization of state controlled resources and services.

Transportation and communications systems were constructed out of this massive pool of capital as the architects exploited new technologies, such as the personal computer and fiberoptics. Two important things happened along the way. First, everything was fragmented, meaning any business enterprise, including those associated with the transportation and communications spine of the global economy, relied upon goods, services and skills that were dispersed, if not across the globe, then, at least regionally and continentally, as there was a merciless exploitation of the most efficient division of labor, which could now be accessed hundreds, and even thousands, of miles away.

Second, all of these enterprises relied upon business models that necessitated the use of significant sums of short, intermediate and long term debt, obtained directly from capital markets. Funding such activities through monies obtained through operations and state subsidy was out of the question, as the costs of this new infrastructure was too great, and, anyway, it was pretty much prohibited by the arbitrators of the global economic system, the IMF and the World Bank. Both the fragmentation of operations and their expansion through access to debt required reliable access to funds on capital markets at cheap rates. With the passage of time, it became an anomaly for any business enterprise to be able to conduct its day to day operations without perpetual recourse to short term credit.

Of course, the creation of this global system of finance, transportation and communication has not been a smooth one. It has proceeded in fits and starts. There has been much turbulence. After the euphoria of the fall of the wall, there was the 1995 peso crisis, the 1998 one involving a highly leveraged hedge fund, Long Term Capital Management, and, of course, the bursting of the NASDAQ bubble. Lesser ones afflicted individual countries and regions. But none of these crises, as serious as some of them were, threatened the ability of the enterprises to access the capital they needed to continue operations, or, perhaps, it can more accurately said that they did not do so to such a degree that they threatened to impair the functioning of the overall system. There were liquidations, consolidations, mergers and retrenchments, but the movement toward integration proceeded, with the inevitable jerkiness associated with neoliberal capitalism.

Now, it feels different, very different. Financial institutions are not doing business with one another, even for short periods of time. Lending to businesses, including the transnationals, is either drying up or becoming cost prohibitive, even if the duration of these loans is short. If this persists, the consequences could be very severe. Commerce can only sharply contract when its participants cannot access the funds they need to operate. If they are subjected to significantly increased costs for accessing it, they may be forced to reduce the scope of their activities, and passively permit the degradation of their equipment and services.

If we were living in the 1930s or the 1960s, Keynesian stimulus measures would probably suffice to overcome the problem. But we don't. Remember the two major consequences of credit expansion in the neoliberal era: fragmentation of goods, services and skills within the business enterprise and increased dependence upon access to credit markets to conduct operations. A prolonged period of lack of access to credit risks the unraveling of the global network. Communication and transport collapse. It becomes impossible to bring together, sometimes materially and sometimes virtually, the goods, services and skills necessary to manufacture an array of consumer products like cars, flat panel televisions, personal computers, and even furniture, clothes and other textiles. It becomes impossible to ship them to retailers, impossible to market them to the public.

Obviously, the more likely outcome is that credit is going to beome more costly as opposed to unavailable. Even so, we shouldn't be too reassured about the outcome. If credit becomes too expensive, under new, more rigorous standards, then there will still be a substantial reduction in the scope of service, creating the prospect that, in more and more places, global transport and communication will operate erratically, if at all, with similar outcomes as already described. Accordingly, while it would not lead to the systemic collapse provoked by a loss of access to credit, it could result in less reliability in the provision of consumer goods, somewhat reminiscent of the old USSR, but probably not as pronounced. It would also ignite the reversal of the neoliberal globalization process, as corporations would be forced, through application of a remorseless cost-benefit analysis, to decide whether more concentrated or atomized production platforms were more appropriate. In some instances, they would decide that shutting down production entirely was required.

If one has a particularly survivalist bent, one can imagine all kinds of deliciously nightmarish scenarios, with people around the world unable to purchase clothes and baby formula, much less computers and blackberries. Social order breaks down as people formerly used to effortlessly buying clothes and food from thousands of miles away can no longer reach others 150 miles away to obtain them. Farmers purchase automatic weapons to deter hungry urbanites and suburbanites intent upon seizing their organic blueberries. A flourishing black market in bicycle tires enriches a generation of anarchist bike repair geeks.

I wouldn't go so far as to say that such scenarios are impossible. But I still believe that they are not very likely. I do believe, however, that we are about to experience a serious decline in the quality of life, if one defines we as the middle and upper middle class of the developed world. The relaxed assurance that comes with knowing that the system works for us, and will continue to effortlessly convey consumer goods to us to fulfill our daily needs, whether real or perceived, is about to end. In other words, we are about to discover how the vast of majority of the world has lived under neoliberalism, and even the more benign aspects of it that we will experience are not going to be very pleasant.

Labels: Credit Crunch, From the Archives, Global Recession, Housing Bubble, Neoliberalism, YouTube

Not surprisingly, this New York Times article, written in the paper's time honored method of recourse to authority, ignores the more serious social implications of the economic restructuring that it describes. The reporters, Peter Goodman and Jack Healy, walk up to the edge of the water by recognizing that many of the jobs lost during this recession, particularly within manufacturing, finance and retail, are never going to return, but, fearful of getting their feet wet, they shrink away from the troubling consequences. Curiously, they also fail to recognize the extent to which job growth in recent years was driven by ancillary goods and services associated with the housing bubble. Here in Northern California, contractors are experiencing the economic equivalent of a nuclear winter. It is hard to imagine how all of them will survive, given that they are outside the system of unemployment compensation. For those of you interested in the serious, profound social dimensions of this recession evaded by Goodman and Healy, go here.

Labels: American Empire, Credit Crunch, Housing Bubble, Neoliberalism, Sacramento, Sub-Proletarianization of America

President Barack Obama, in his inaugural address:

What is required of us now is a new era of responsibility — a recognition, on the part of every American, that we have duties to ourselves, our nation, and the world, duties that we do not grudgingly accept but rather seize gladly, firm in the knowledge that there is nothing so satisfying to the spirit, so defining of our character, than giving our all to a difficult task.

From Fannie Mae, formally known as the Federal National Mortgage Association, in a Securities and Exchange Commission filing today:

Based on preliminary unaudited information concerning its results for these periods, management currently expects that the Federal Housing Finance Agency, acting in its capacity as conservator of Fannie Mae (the "Conservator"), will submit a request to the U.S. Department of the Treasury ("Treasury") to draw funds on behalf of Fannie Mae under the $100 billion Senior Preferred Stock Purchase Agreement entered into between Treasury and the Conservator, acting on behalf of Fannie Mae, on September 7, 2008, and subsequently amended and restated on September 26, 2008 (the "Purchase Agreement"). Although management currently estimates that the amount of this initial draw will be approximately $11 billion to $16 billion, the actual amount of the draw may differ materially from this estimate because Fannie Mae is still working through the process of preparing and finalizing its financial statements for the fourth quarter of 2008 and the year ended December 31, 2008.

Furthermore, as noted by CalculatedRisk: This follows the SEC filing from Freddie Mac outlining the request of up to $35 billion from the Treasury. For the uninitiated, Fannie and Freddie are government sponsored entities that have historically stabilized the housing market by agreeing to purchase mortgages and securitize them in the form of bonds. Note that they are government sponsored, not government owned, meaning that they are private entities in which private investors have made substantial profits over the years.

Both Fannie and Freddie continue to have unfettered access to the Federal treasury despite dubious histories that I described last September:

Meanwhile, there is the impolite question of fraud at the two institutions. Federal regulators decided to take action to seize them after encountering serious accounting irregularities. According to Gretchen Morgenson and Charles Duhigg of the New York Times, the government decided that the seizure of Fannie and Freddie was unavoidable because Freddie, and to a lesser extent, Fannie, had overstated their capital base, creating a more serious risk of default than either had acknowledged. Furthermore, Fannie and Freddie already had a history of manipulating earnings through questionable accounting practices, such as here and here and here and here. To date, I haven't heard any reports of a criminal investigation.

Another 46 to 51 billion dollars for Fannie and Freddie, and still no word about any investigation. I recall shuddering when I heard that Obama had emphasized responsibility in his inaugural address. In my experience, the degree of responsibility required by American politicians goes up as income goes down.

Or, perhaps more accurately in this context, as income goes up, responsibility evaporates. In the rarified world of Fannie and Freddie executives, nothing is demanded of them in return for billions in Federal assistance. Meanwhile, for the rest of us, there is the prospect of entitlement reform, more crudely known as cuts in Social Security and Medicare.

Hat tip to CalculatedRisk.

Labels: American Empire, Barack Obama, Credit Crunch, Global Recession, Housing Bubble, Neoliberalism, Sub-Proletarianization of America

[First posted on July 31, 2007: at the time, I didn't realize that the housing bubble would cause the worst global recession since the 1930s, but I did recognize that it would immiserate the middle and lower middle class. It is also worth noting that, at the time of this post, many economists, market watchers and governmental officials were saying that the problem was contained.]

With the exception of the late, lamented Steve Gilliard and Mike Whitney, my impression has been that few bloggers and mainstream media sources have examined the profound social consequences of the puncturing of the housing bubble. Typical of such stories, coverage has instead emphasized the impact upon the stock, bond and housing markets, treating it primarily as an issue for investors.

Hence, there has been no shortage of articles about the transformation of home mortgages into collateralized debt obligations, the impact of loan defaults upon the value of these instruments, the destruction of hedge funds that used incomprehensible amounts of leverage (otherwise known as loans to you and me) to purchase them and the chaos that is now erupting in the bond and equity markets as a result.

If you want to read all about it, go to thehousingbubbleblog.com or Calculated Risk. As for the people who purchased homes with all of these strange new mortgage products such as adjustible rate loans, interest only loans, and, my personal favorite, stated income loans (yes, as incredible as it sounds, your guess is correct, banks loaned money to people based solely upon what people said they earned), they are frequently maligned as either greedy or stupid. In other words, they got what they deserved.

At best, they are just another nameless, faceless population of people run through the system to be fleeced by sharp financial operators, while serving as a cautionary example to the rest of us. A classic instance of the creative destruction that perpetually transforms and preserves our capitalist society. But such a superficial analysis barely scratches the surface of some serious questions about the extent to which the lower middle class and middle class workforce of this country can afford to pay for its basic needs of survival.

We all know that health care is increasingly unaffordable to many Americans, and that the coverage that they receive, if they can afford it, is often mediocre. Sicko merely gave cinematic expression to the lived experiences of millions. We are now discovering, as a consequence of the housing bubble, that housing, as measured by home ownership, is also increasingly unaffordable to many people as well. This is true revelation of the proliferation of exotic credit instruments for home purchases in recent years.

People in places like Sacramento, where I live, could no longer afford to purchase homes as they had done for generations, with a payment of 20% of the purchase price and a 30 year fixed mortgage for the remaining 80% of the price of the home. Cities and regions like Sacramento, Las Vegas, Phoenix, the Inland Empire of Southern California and much of Florida, places where people had fled the cost of living on the coasts were now becoming more and more expensive, as speculators and foreign investors juiced demand to new extremes.

So, it became necessary to devise new financial instruments to enable people who actually wanted to live in the homes to purchase them. Lenders looked to the credit card industry as the model, using low introductory interest rates to close deals, letting the buyers sink or swim when these rates expired, replaced by much higher ones, requiring much higher monthly payments. For the lending industry and Wall Street, it was a great party while it lasted, as the loans were securitized and purchased by hedge funds, with lucrative fees pocketed by all.

Of course, they now have their own problems, as you can read on all over the web, but what about the people who are losing their homes? What is going to happen to them? The answer is, as we all know, it is going to be brutal. Many of them are going to be pushed into the rental market for the rest of their lives, and many are going to have to leave the locations where they currently reside because even the cost of rent is going to be too much for them. So, we are looking at the prospect of two migrations, one from houses to rentals, and the other from expensive parts of the country to less expensive ones. Furthermore, quite a number of communities built for home owners will rapidly become rental ones. Some may even resemble ghost towns, as it becomes impossible to fill all of the homes with residents.

Left academics would say that the socioeconomic life of the US will subtlely display more and more features of sub proletarization, as more and more people in the lower middle class and even the middle class find themselves forced to migrate internally within the country (an economically generated group of internally displaced people?) and live under conditions of financial insecurity. Analogizing them to global migrants is a stretch, demeaning their struggle for survival, and, yet, many Americans face a future of insecurity in all aspects of their lives.

It is easy to blame them as being greedy, stupid and gullible, and no doubt many were, but the fact is, they wanted something that they have been induced to believe that they should be able to achieve as Americans, and they were afraid, during the peak of the speculative mania, that, if they didn't buy a house, that they would never be able to do so. Financial institutions ruthlessly exploited this combination of fear, greed and lack of knowledge to destroy their financial futures, just as mutual funds and brokerage houses did during the stock market bubble of the turn of the century.

At the heart of it all remains the reality that the standard of living for many Americans has declined since the last 1960s. It has been artificially preserved, temporarily, by the creation and marketing of exotic forms of credit, such as the infamous home equity loan, that enabled them to live in a manner consistent with societal expectations. For example, the Sacramento Bee recently reported that the length of the average car loan is now almost 6 years, and that car sales have fallen in the last two years because of, yes, the bursting of the housing bubble, and the lack of any trade in value for vehicles purchased with loans over such a long period of time.

In other words, consumption at all levels has been subsidized by access to readily available credit. This is the portentious social change encapulated within the seemingly bland term that is now ubiquitous, the credit crunch. Going forward, money must be lent according to the remorseless calculations of risk that were suspended during the stock market and housing bubbles. As a society, we will be forced out of the universe of liberalized access to credit into an alternative one with pay as your go features, and it will be an agonizing exodus for many.

Socially, it is impossible to know how people will respond to it, just as it is equally difficult to predict how people will respond to the Iraq catastrophe, the flip side of the bubble coin. It is likely, however, that whatever transpires will be turbulent. It is not beyond the realm of possibility that we are experiencing the end of neoliberal economics, a transformation of the American economy that will rival the industrialization of the 19th Century and the deindustrialization of the late 20th Century in terms of importance.

Labels: American Culture, American Empire, Credit Crunch, Housing Bubble, Neoliberalism, Sacramento, Steve Gilliard, Sub-Proletarianization of America

From today's New York Times:

The farmers said it would not last, and they were right.

When the price of wheat, corn, soybeans and just about every other food grown in the ground began leaping skyward two years ago, farmers were pleased, of course. But generally they refused to believe that the good times would be permanent. They had seen too many booms that were inevitably followed by busts.

Now, with the suddenness of a hailstorm flattening a field, hard times are back on the American farmstead. The price paid for crops is dropping much faster than the cost of growing them.

The government reported this week that the cost of goods and services nationwide fell by a record amount in October as frantic businesses tried to lure customers. While lower prices are good for consumers in the short run, a prolonged stretch of deflation would wreak havoc as companies struggled to stay afloat.

In this lonesome stretch near the Texas border, farmers are getting an early taste of a deflationary world. They have finished planting next year’s winter wheat, turning the fields a brilliant emerald green. But it cost about $6 a bushel in fuel, seed and fertilizer to put the crop in. That is $1 more than they could sell it for today, and never mind other expenses like renting land.

Finally, the peril is perceived, but is it too late?

Labels: Credit Crunch, Global Recession, Housing Bubble, Neoliberalism

Labels: Bailout of Finance Capitalists, Credit Crunch, Global Recession, Housing Bubble

A prominent feature of societies in irreversible decline is that their leadership is incapable of addressing a crisis in any manner other than the perpetuation of the cronyism that created the problem in the first place:

Mr. Paulson and other U.S. officials have long been promising foreign finance ministers that Fannie Mae and Freddie Mac securities are as good as U.S. Treasury bonds while yielding higher interest. The resulting investment in these two mortgage-packaging agencies was a major factor in their $200 billion bailout. Letting their securities go under would have ended Dollar Hegemony for good. So getting foreign acquiescence in financing future U.S. balance-of-payments deficit is inextricably bound up with how to resolve the U.S. financial and real estate bubble.

Its bursting has prompted Congress to authorize $700 billion supposedly to re-inflate the property market. The Troubled Asset Relief Program (TARP) gives Wall Street money in the hope that it will lend enough to start inflating asset prices again, enable borrowers to get rich by going into debt again – “wealth creation” Alan Greenspan-style. It is as if the neoliberal bubble years 2002-07 were a golden age to be recovered, not the road to financial perdition. In doing this, Mr. Paulson is using junk economics to cope with the junk mortgage problem that in turn was based on junk mathematical models. His problem is to keep the fantasy going.

Congress has caught onto the game being played. Now that the bailout looks like a last-minute giveaway to insiders while the giving is good, Congress held hearings last week to ask why the Treasury abandoned its plan to buy the “troubled assets” (junk mortgages) that Mr. Paulson had originally said was the problem. Why has the Treasury bought $250 billion of ersatz “preferred common stock” in banks at prices far above what private investors such as Warren Buffett paid?

Drawing a picture of a just-pretend world to rationalize Wall Street’s free lunch, Mr. Paulson sought to deflect the issue by postulating a series of “ifs.” The Treasury’s $250 billion in bank stock would give lenders money that might be used to re-inflate the credit supply if banks chose to re-enter the commercial paper market and provide more mortgages on easier terms. This trickle-down patter talk is what passes for neoliberal economic theory these days. The fantasy is for banks to restore “balance” by granting more credit, increasing the indebtedness of bank customers so as to restore the housing market to its former degree of unaffordability.

Congressional interrogators pointed out that banks were not lending more money. Mortgage interest rates have risen, not fallen, even though the Fed is supplying banks with credit at only a quarter of a percentage point (an average of about 0.30 per cent last week). Credit standards (understandably) have been tightened to require prospective buyers to put up more of their own money. Foreclosures and evictions are up and real estate prices continue to plunge. Also plunging almost straight down has been the Dow Jones Industrial Average, sinking below the 8000 mark last week to the lowest levels in years. Nothing is working out the way Mr. Paulson promised.

Nor did he intend it to do so. But the cat is out of the bag. Everyone realizes that the TARP is merely just a big pot of money, to be laddled out, like a tasty stew, to people smart enough and influential enough to demand some. So, of course, the line of supplicants is getting longer and longer, the auto industry, bankrupt states, like California, and even cities like San Jose.

But, not to worry, bailouts are only for banks, not for participants in the real economy. Prime Minister Gordon Brown of the United Kingdom made that clear when he asserted that the European Union would challenge any assistance to the US auto industry as an illegal subsidy before the World Trade Organization. Strangely, Brown and the EU have been silent, or, as they say over in the liberal blogosphere, crickets, in regard to the trillions already poured into US financial institutions.

Meanwhile, the oversight board for the bailout is devoid of members, and the Federal Reserve is refusing to publicly release information in regard to the financial institutions that have received the 2,000,000,000,000 released to date or the collateral posted by them. Predictably, the Democratic point person, Representative Barney Frank, is supportive of the Fed's refusal, and the Obama economic team has no comment, despite prior commitments to transparency in governmental operations. What a way to run an economy! If only we could bring back the Marx Brothers. With a good script writer, they would produce a classic comparable to one of their masterpieces, Duck Soup.

Labels: American Empire, Bailout of Finance Capitalists, Barack Obama, Credit Crunch, Democrats, Global Recession, Housing Bubble

On July 31, 2007, I posted my first remarks on the housing bubble, one of the initial manifestations of the financial crisis that has expanded into a global recession, focusing upon its likely social consequences:

Left academics would say that the socioeconomic life of the US will subtlely display more and more features of sub proletarization, as more and more people in the lower middle class and even the middle class find themselves forced to migrate internally within the country (an economically generated group of internally displaced people?) and live under conditions of financial insecurity. Analogizing them to global migrants is a stretch, demeaning their struggle for survival, and, yet, many Americans face a future of insecurity in all aspects of their lives.

It is easy to blame them as being greedy, stupid and gullible, and no doubt many were, but the fact is, they wanted something that they have been induced to believe that they should be able to achieve as Americans, and they were afraid, during the peak of the speculative mania, that, if they didn't buy a house, that they would never be able to do so. Financial institutions ruthlessly exploited this combination of fear, greed and lack of knowledge to destroy their financial futures, just as mutual funds and brokerage houses did during the stock market bubble of the turn of the century.

At the heart of it all remains the reality that the standard of living for many Americans has declined since the last 1960s. It has been artificially preserved, temporarily, by the creation and marketing of exotic forms of credit, such as the infamous home equity loan, that enabled them to live in a manner consistent with societal expectations. For example, the Sacramento Bee recently reported that the length of the average car loan is now almost 6 years, and that car sales have fallen in the last two years because of, yes, the bursting of the housing bubble, and the lack of any trade in value for vehicles purchased with loans over such a long period of time.

In other words, consumption at all levels has been subsidized by access to readily available credit. This is the portentious social change encapulated within the seemingly bland term that is now ubiquitous, the credit crunch. Going forward, money must be lent according to the remorseless calculations of risk that were suspended during the stock market and housing bubbles. As a society, we will be forced out of the universe of liberalized access to credit into an alternative one with pay as your go features, and it will be an agonizing exodus for many.

It is now evident that not only has this remorseless process commenced, but that it is also reaching people beyond those being foreclosed out of their houses:

Big lenders — like American Express, Bank of America, Citigroup and even the retailer Target — have begun tightening standards for applicants and are culling their portfolios of the riskiest customers. Capital One, another big issuer, for example, has aggressively shut down inactive accounts and reduced customer credit lines by 4.5 percent in the second quarter from the previous period, according to regulatory filings.

Lenders are shunning consumers already in debt and cutting credit limits for existing cardholders, especially those who live in areas ravaged by the housing crisis or who work in troubled industries. In some cases, lenders are even reining in credit lines after monitoring cardholders who shop at the same stores as other risky borrowers or who have mortgages from certain companies.

This is where the action is on the left, among those people who are losing their jobs and homes after being forced to substitute credit for the lack of increased wages. With access to such credit diminishing, they face a challenging future, one that may make them amenable to a more left view of the world. The overwhelming grassroots hostility to the bailout is a slight, but encouraging sign.

If Nouriel Roubini is correct in his assessment that the US faces two years of negative GDP, we can be certain that there will be even more unanticipated opportunities. To exploit them, though, we will have to display the willingness to confront a President who skillfully knows how to retain left support in the absence of left policies.

Labels: Bailout of Finance Capitalists, Credit Crunch, Global Recession, Housing Bubble, Neoliberalism, Sub-Proletarianization of America

Meanwhile, enjoy this excerpt from Alexander Cockburn's summary of the last presidential debate, if you missed it:

Talk about falling to the occasion! You would not have an inkling from the candidates’ third and final debate at Hofstra University on Long Island that Wednesday had been a day of fearful carnage on Wall Street, throwing into question the desperate efforts of the US Treasury and the Federal Reserve to stabilize the situation.

You would not have known that across the last month the Dow Jones industrial index has lost 25 per cent of its value. You would not have known that in the considered estimation of many economists the United States could well be entering a prolonged recession.

You would not have known that every assertion about the merits of deregulation and about the primacy of market forces is now dead, skinned and nailed to the wall like a moose hide in the Palins’ garage.

Listening to both candidates in that last debate made me think of one of those reverses of the earth’s electro-magnetic field that occurs every 100,000 years or so. The last month has seen the sweeping away of all the shopworn economic coordinates by which conventional politicians set their course. Gone are the hallowed landmarks. Yet here were McCain and Obama trudging on, sighting their compasses on bearings that no longer exist.

There were, to be sure, dutiful references by both Obama and McCain to the economic crisis, but mostly it was as though they were talking about a minor traffic accident a couple of blocks away. McCain flourished a proposal to bail out homeowners. Obama claimed that the bankers’ bailout bill for which they had both voted contained exactly such provisions. Then the two retreated to mechanical reiteration of their tax plans, their health plans, their plans for Energy Independence, all of them topics interminably raked over in the earlier debates.

Anyway, I'm close to full recovery from a severe cold, and intend to have something more personal and substantive tomorrow.

Labels: Bailout of Finance Capitalists, Barack Obama, Credit Crunch, Elections, Housing Bubble, John McCain

Are US financial institutions eliminating bonuses for managers in light of their refusal to deploy bailout funds for lending? A refusal based upon the notion that they must first repair balance sheets that are hemorrhaging billions of dollars? Think again:

Financial workers at Wall Street's top banks are to receive pay deals worth more than $70bn (£40bn), a substantial proportion of which is expected to be paid in discretionary bonuses, for their work so far this year - despite plunging the global financial system into its worst crisis since the 1929 stock market crash, the Guardian has learned.

Staff at six banks including Goldman Sachs and Citigroup are in line to pick up the payouts despite being the beneficiaries of a $700bn bail-out from the US government that has already prompted criticism. The government's cash has been poured in on the condition that excessive executive pay would be curbed.

Of course, the problem is that the rest of us just don't understand how this industry operates:

None of the banks the Guardian contacted wished to comment on the record about their pay plans. But behind the scenes, one source said: "For a normal person the salaries are very high and the bonuses seem even higher. But in this world you get a top bonus for top performance, a medium bonus for mediocre performance and a much smaller bonus if you don't do so well."

Many critics of investment banks have questioned why firms continue to siphon off billions of dollars of bank earnings into bonus pools rather than using the funds to shore up the capital position of the crisis-stricken institutions. One source said: "That's a fair question - and it may well be that by the end of the year the banks start review the situation."

We should understand, however, that there is a perverse logic at work here. By this reasoning, high level managers that were able to successfully able to persuade the Treasury, the Federal Reserve and the Congress to shower them with nearly a trillion dollars, and possibly more, should be generously compensated for their achievement. As for the rest of us, I reiterate what I said before the bailout was passed: Bring on the Red Guards.

Labels: American Empire, Bailout of Finance Capitalists, Credit Crunch, Housing Bubble, Neoliberalism

The financial institutions receiving funds from the bailout aren't shy about expressing their unwillingness to use these funds to generate new loans to reinvigorate a moribund global economy:

Since mid-2007, when the credit crisis erupted, the country’s nine largest banks have written down the value of their troubled assets by a combined $323 billion. With a recession looming, the pain is unlikely to end there. The problems that began with home mortgages, analysts say, are migrating to auto, credit card and commercial real estate loans.

The deepening red ink underscores a crucial question about the government’s plan: Will lenders deploy their new-found capital quickly, as the Treasury hopes, and unlock the flow of credit through the economy? Or will they hoard the money to protect themselves?

John A. Thain, the chief executive of Merrill Lynch, said on Thursday that banks were unlikely to act swiftly. Executives at other banks privately expressed a similar view.

“We will have the opportunity to redeploy that,” Mr. Thain said of the new capital on a telephone call with analysts. “But at least for the next quarter, it’s just going to be a cushion."

Granted, the banks are in a deep hole. For every dollar the banks earned during the industry’s most prosperous years, they have now wiped out $1.06.

Even with the capital from the government, analysts say, the banking industry still needs to raise around $275 billion in light of the looming losses.

But Treasury Secretary Henry M. Paulson Jr. is urging them to use their new capital soon. On Monday, Mr. Paulson unveiled plans to provide $125 billion to nine banks on terms that were more favorable than they would have received in the marketplace. The government, however, has offered no written requirements about how or when the banks must use the money.

“There is no express statutory requirement that says you must make this amount of loans,” said John C. Dugan, the comptroller of the currency. “But the economics work so that it is in their interest to do so.”

Mr. Dugan added that he would not examine how the banks used the money, but he said their actions would “be open to the court of public opinion.”

In other words, the exhortations of government officials and elected officials are merely cosmetic, a charade designed to conceal one of the great thefts in world financial history. No doubt when the funds are gone, we will be treated to something similar to Captain Renault's cynically shouted justification to shut down Rick Blaine's club in Casablanca, paraphrased to conform to the circumstances: I'm shocked, shocked that the banks pocketed the money.

The willingness of bank managers to speak candidly about their true intentions reveals a confidence based upon an unassailable control of the US political system. It has been left to fiscally conservative budget hawks to summarize what has transpired:

“It is the government’s responsibility to set the terms and conditions on this money,” said David M. Walker, the former federal comptroller general and now president of the Peter G. Peterson Foundation. “This is the people’s money. They’re giving it out with no rules.”

Stiglitz has again exposed the corruption of the enterprise:

Britain showed at least that it still believed in some sort of system of accountability: heads of banks resigned. Nothing like this in the US. Britain understood that it made no sense to pour money into banks and have them pour out money to shareholders. The US only restricted the banks from increasing their dividends. The Treasury has sought to create a picture for the public of toughness, yet behind the scenes it is busy reassuring the banks not to worry, that it's all part of a show to keep voters and Congress placated. What is clear is that we will not have voting shares. Wall Street will have our money, but we will not have a full say in what should be done with it. A glance at the banks' recent track record of managing risk gives taxpayers every reason to be concerned.

For all the show of toughness, the details suggest the US taxpayer got a raw deal. There is no comparison with the terms that Warren Buffett secured when he provided capital to Goldman Sachs. Buffett got a warrant - the right to buy in the future at a price that was even below the depressed price at the time. Paulson got for the US a warrant to buy in the future - at whatever the prevailing price at the time. The whole point of the warrant is so we participate in some of the upside, as the economy recovers from the crisis, and as the financial system starts to work.

The Paulson plan responded to Congress's demand to have something like a warrant, but as a matter of form, not substance. Buffett got warrants equal to 100% of the value of what he put in. America's taxpayers got just 15%. Moreover, as George Soros has pointed out, in a few years time, when the economy is recovered, the banks shouldn't need to turn to the government for capital. The government should have issued convertible shares that gave the right to the government to automatically share in the gain in share price.

Whether we were cheated or not, the banks now have our money.

Unfortunately, Stiglitz is just another one of many Captain Renaults. Despite condemning the bailout before passage, he, like many other liberals, such as Paul Krugman and the Democratic leadership of Congress, supported it while saying that we should urge the next President and Congress to reform it, a position that he reiterates in this article. Perhaps, Stiglitz really believes this is possible, but, in the unlikely event any action is actually taken, the recipients of the funds will have already insulated themselves against it. In a political system greased by crony capitalists, one can be certain the corrupt will invariably prevail.

Labels: American Empire, Bailout of Finance Capitalists, Credit Crunch, Democrats, Housing Bubble, Liberals, Neoliberalism

Another selection of essential reading, this one courtesy of Mr. Mortgage. Click on the link, and find two interrelated posts that reveal the extremity of the insolvency within the global financial system, and the exposure of US banking institutions in relation to Level II assets that aren't actively traded, but marked to market, like their more commonly maligned Level III relatives.

Mr. Mortgage again questions whether the $700 billion bailout is anywhere near enough to deal with the insolvency of the US financial system, a subject that motivated me to perceive more sinister motivations inherent within a capitalist financial system. He also notes that the frightening fact that the US system may be among the better capitalized ones when compared to the EU and Turkey. One suspects that even an initially mild recession would provoke serious defaults among these financial instruments, a subject that has been heretofore ignored. After reading these two posts, all I can say is . . . . Yikes! I try to resist a survivalist mentality about the future, but it can sometimes be difficult.

Labels: American Empire, Bailout of Finance Capitalists, Credit Crunch, Housing Bubble, Neoliberalism

An excellent presentation about how the deregulation of finance, proselytized by Reagan and Thatcher and subsequently forged into a bipartisan consensus by Clinton, Blair and Schroeder, among others, pushed the global economy over the precipice. Complex concepts are broken down and conveyed simply and concisely. One looks forward to the forthcoming book by the author, Arun Gupta, an editor at the Independent, about the decline of the American Empire. Hat tip to Sam Smith over at the indispensable Progressive Review.

Labels: American Empire, Bailout of Finance Capitalists, Credit Crunch, Housing Bubble, Neoliberalism

In a short, surgically sharp article in the most recent New Left Review, Walter Benn Michaels examines the social perspective interwoven into the Obama campaign effort:

After half a century of anti-racism and feminism, the US today is a less equal society than was the racist, sexist society of Jim Crow. Furthermore, virtually all the growth in inequality has taken place since the passage of the Civil Rights Act of 1965—which means not only that the successes of the struggle against discrimination have failed to alleviate inequality, but that they have been compatible with a radical expansion of it. Indeed, they have helped to enable the increasing gulf between rich and poor.

Why? Because it is exploitation, not discrimination, that is the primary producer of inequality today. It is neoliberalism, not racism or sexism (or homophobia or ageism) that creates the inequalities that matter most in American society; racism and sexism are just sorting devices. In fact, one of the great discoveries of neoliberalism is that they are not very efficient sorting devices, economically speaking. If, for example, you are looking to promote someone as Head of Sales in your company and you are choosing between a straight white male and a black lesbian, and the latter is in fact a better salesperson than the former, racism, sexism and homophobia may tell you to choose the straight white male but capitalism tells you to go with the black lesbian. Which is to say that, even though some capitalists may be racist, sexist and homophobic, capitalism itself is not.

This is also why the real (albeit very partial) victories over racism and sexism represented by the Clinton and Obama campaigns are not victories over neoliberalism but victories for neoliberalism: victories for a commitment to justice that has no argument with inequality as long as its beneficiaries are as racially and sexually diverse as its victims. That is the meaning of phrases like the ‘glass ceiling’ and of every statistic showing how women make less than men or African-Americans less than whites. It is not that the statistics are false; it is that making these markers the privileged object of grievance entails thinking that, if only more women could crash through the glass ceiling and earn the kind of money rich men make, or if only blacks were as well paid as whites, America would be closer to a just society.

It is the increasing gap between rich and poor that constitutes the inequality, and rearranging the race and gender of those who succeed leaves that gap untouched. In actually existing neoliberalism, blacks and women are still disproportionately represented both in the bottom quintile—too many—and in the top quintile—too few—of American incomes. In the neoliberal utopia that the Obama campaign embodies, blacks would be 13.2 per cent of the (numerous) poor and 13.2 per cent of the (far fewer) rich; women would be 50.3 per cent of both. For neoliberals, what makes this a utopia is that discrimination would play no role in administering the inequality; what makes the utopia neoliberal is that the inequality would remain intact.

Such a perspective is not markedly different than the one presented by the hip hop artist Immortal Technique in his incendiary rap video The Poverty of Philosophy, posted here in February 2007:

My enemy is not the average white man, it's not the kid down the block or the kids I see on the street; my enemy is the white man I don't see: the people in the white house, the corporate monopoly owners, fake liberal politicians those are my enemies. The generals of the armies that are mostly conservatives those are the real Mother-Fuckers that I need to bring it to, not the poor, broke country-ass soldier that's too stupid to know shit about the way things are set up.

In fact, I have more in common with most working and middle-class white people than I do with most rich black and Latino people. As much as racism bleeds America, we need to understand that classism is the real issue. Many of us are in the same boat and it's sinking, while these bougie Mother-Fuckers ride on a luxury liner, and as long as we keep fighting over kicking people out of the little boat we're all in, we're gonna miss an opportunity to gain a better standard of living as a whole.

In other words, I don't want to escape the plantation I want to come back, free all my people, hang the Mother-Fucker that kept me there and burn the house to the god damn ground. I want to take over the encomienda and give it back to the people who work the land.

Immortal Technique may have voted for Obama in the New York primary because of Obama's refusal to scapegoat immigrants, but, as his remarks during this London appearance indicate, he refuses to romanticize him.

Obama does not hide the neoliberal emphasis of his candidacy. Quite the contrary. As the election nears, he highlights it, consistent with a strategy of placating the elites that he fears could deny him the presidency. During the debate on Tuesday night, he played along with the socially conservative bias of the moderator, Tom Brokaw, who exalts the primacy of sacrifice within the American experience because of his infatuation with the World War II generation that he profiled in his book, The Greatest Generation. Hence, he accepted Brokaw's premise that the next President must have the ability to motivate Americans to sacrifice, a premise crystallized in Brokaw's insistence that entitlement reform, more properly understood as the curtailment of social assistance to the middle and lower classies, is a major issue of concern.

Obama did not challenge this, either, taking care to evade the notion that the wealthy, after, in many instances, profitting from the circumstances that caused this crisis, should bear some responsibility for paying for it. In other words, he has already internalized the newly emerging consensus that the we are going to have to lower our expectations, or, more bluntly, tighten our belts. With McCain joining him in a duet on this subject, it became very obvious that fiscal austerity looms just over the horizon, regardless of the winner of the election. Given that both candidates advocate even higher levels of defense spending, significant cuts in domestic spending are inevitable. If I had still been single, instead of married, with a young son, I would turned off the debate, and watched something more uplifting, like, say, Sid and Nancy.

Things only got worse, as you might have guessed. McCain, desperate to reenergize his campaign, proposed that we buy the mortgages of distressed homeowners so as to enable them to avoid foreclosure, thus stabilizing their communities. $300 billion of the $700 billion appropriated to the Treasury to bail out global financial institutions would allocated for this purpose. It was a rare moment of Keynesian pragmatism in a debate that otherwise stayed within a irrelevant discourse of abstract, regulatory solutions and voting records.

Afterwards, McCain's domestic policy advisor, Douglas Holtz-Eakin described the proposal in more detail:

. . . under McCain's plan, homeowners would get new fixed-rate mortgages based on the homes' current value with an interest rate of about 5 percent, a percentage point less than the average current rate. The government would pay the difference between the original mortgage amount and what the homes are now worth.

During the debate itself, McCain nailed it in regard to the urgency of this sort of approach, an approach that would reinvigorate the economy and communities around the country:

Is it expensive? Yes. But we all know, my friends, until we stabilize home values in America, we're never going to start turning around and creating jobs and fixing our economy, and we've got to give some trust and confidence back to America.

It was a shocking moment of candor. Of course, the proposal is not a complete solution to the financial crisis, but it does direct relief to a broad group of middle and lower income people who are being economically devastated by the crisis. And, the Obama reaction? Straight out of Goldman Sachs:

"John McCain wants the government to massively overpay for mortgages in a plan that would guarantee taxpayers lose money, and put them at risk of losing even more if home values don't recover," Jason Furman, Obama's economic policy director, said in a statement. "The biggest beneficiaries of this plan will be the same financial institutions that got us into this mess, some of whom even committed fraud.

This is the sort of corporate populism that made the Clinton campaign so offensive in the spring, the manipulation of resentment to generate support for corporate friendly policy, as manifested most clearly in her request for a gas tax holiday. It always relies upon cynicism and the susceptibility of the intended audience to emotional manipulation. In this instance, Furman is particularly brazen, because, after all, Obama had just voted, along with McCain, to deliver $700 billion to financial institutions in return for nearly worthless debt instruments, generously priced in accordance with hold to maturity valuations, instead of the much lower ones in the market.

Accordingly, it is not, as asserted by Furman, a question of unfairly enriching financial institutions, McCain and Obama have already agreed on that one. Instead, McCain, upon reflection, admirably decided that the government must do something to stimulate consumer demand in addition to providing supply side incentives to extend credit. So, he decided that it was necessary to allocate a substantial portion of the bailout monies to purchase mortgages and free borrowers from increasingly onerous terms of repayment.

Furman can't openly say that his candidate prefers a trickle down solution, so he must instead resort to obfuscation. But then, we shouldn't be too shocked. He is known for his assertion that Wal-Mart is a progressive success story, his willingness to consider private retirement accounts for Social Security and his close connections to Wall Street through Robert Rubin. In his current role, he is making sure that Obama never strays from the Wall Street line.

Having used his campaign to legitimize the delivery of $700 billion to the Street and the global instituions with which it does business, Obama, faced with what must have been a surprise, relied upon Furman to confront the threat. Obama didn't spend a day and a half at campaign appearances promoting the bailout to solidify his support in the financial sector just to turn around and hand nearly half of the money over to the middle and lower class. If you aren't a military contractor or a banker, the next four years don't look too promising.

Michaels sums it up pretty well:

There is a real difference between Obama and McCain. But it is the difference between a neoliberalism of the centre and a neoliberalism of the right. Whoever wins, American inequality will be left essentially untouched. It is important to remember just how great that inequality is. A standard measure of economic inequality is through the Gini coefficient, where 0 represents perfect equality (everybody makes the same), and 1 perfect inequality (one person makes everything). The Gini coefficient for the us in 2006 was 0.470 (back in 1968 it was 0.386). That of Germany today is 0.283, that of France, 0.327. Americans still love to talk about the American Dream—as, in fact, do Europeans. But the Dream has never been less of a reality than it is today. Not just because inequality is so high, but also because social mobility is so low; indeed, lower than in both France and Germany. Anyone born poor in Chicago has a better chance of achieving the American Dream by learning German and moving to Berlin than by staying at home.

Meanwhile, Immortal Technique is more succinct:

And they might even have a black president but he's useless

Cuz he does not control the economy, stupid!"

Labels: Bailout of Finance Capitalists, Barack Obama, Credit Crunch, Housing Bubble, John McCain, Neoliberalism, New Left Review

The Baseline Scenario confirms what you already knew, with an emphasis upon three alarming concerns:

First, there are worrying signs that the credibility of the US authorities is on the decline. Despite passing the $700bn TARP program last Friday, and the Fed announcing it will potentially purchase even more in unsecured commercial paper, plus the provision of $450bn of additional liquidity to banks, credit and equity markets continue to decline. This pattern is reminiscent of the Asian crisis in 1998, when successive IMF programs provided briefer and briefer respite from market routs in emerging economies. . . .

Second, the ramifications of Iceland’s misery are probably more serious than people realize. With bank assets in the country at ten times GDP, and the banks obviously insolvent, the country clearly cannot afford to bail them out. This is going to be a large default, with many counterparties impacted. . . .

There is a broader concern here. When the Icelandic Prime Minister returned empty-handed from Europe on Monday, he commented that it was “now every nation for itself.” This smacks of the financial autarchy that characterized defaulters in the 1998 crisis. When Argentina defaulted on its debt in 2001-2002, the politicians faced enormous pressure to change the rule of law to benefit domestic property holders over foreigners, and they changed the bankruptcy law to give local debtors the upper hand. In Indonesia and Russia, local enterprises and banks took advantage of the confusion during default to grab property, and then found ways to ensure that courts sided with them. . . .

Our third concern is that we seem likely now to see substantially more defaults and credit panics in smaller countries and emerging markets. . . . Much of Eastern Europe, Turkey, and parts of Latin America are obvious risks. The difficulties in Russia show that seemingly solvent countries can be high risk: while the central bank has reserves of $556bn, the non-public sector has recently built up an estimated $450bn of debt. Creditors don’t want to roll over this debt, so the government is using its reserves to do this. The government has already ordered $200bn to be channelled through state banks to companies repaying debt. If the oil price falls further, a seemingly highly solvent country could quickly look near insolvent. Some other rising stars, such as Brazil, and even India, may have similar problems.

The authors of this report, well worth reading in its entirety, are Peter Boone, an associate at the Centre for Economic Performance, London School of Economics, and Simon Johnson, a former chief economist of the International Monetary Fund, currently a professor at the MIT Sloan School of Management as well as a senior fellow at the Peterson Institute for International Economics. One doubts that the US, Europe and Japan are capable of taking the kind of concerted action that Boone and Johnson describe as essential elsewhere in the article.

Even if these countries prove themselves capable of it, Boone and Johnson acknowledge that the immediate economic future remains gloomy:

Finally, it is important for everyone to recognize that we are well past the days where even dramatic steps could have stopped the repercussions of the panic and prevented a major recession. A successful program will not prevent recession, and we will still see many personal, corporate and perhaps even national bankruptcies.

No wonder several members of OPEC are concerned:

Almost half the members of the Opec oil cartel are considering an emergency meeting in Vienna next month as oil prices dropped to their lowest level in nearly a year.

Almost half the members of cartel have in the past few days called on the group to act to halt the slide before their next official meeting scheduled to take place in Algeria in late December.

Iran, Libya, Nigeria, Iraq, Venezuela and Ecuador, whose economies tend to be most dependent on high oil prices and whose ministers are among the most hawkish of the 13-member group, have all lobbied for the cartel to drop output.

Purchasers may also be having difficulty accessing short term credit to pay for their oil supplies.

While Boone and Johnson are mainstream economists, we should not summarily dismiss their insistence upon the urgency of collective action. Instead, as leftists, we should incorporate such a perspective into our own approach to social and political action. Accordingly, we should think seriously about how we are going to work together to help those in immediate need, and how to reach the people that this crisis has only begun to victimize,

Johnson and Boone, as economists, are focusing upon the financial institutions upon which the global economy is financially grounded. We need to emphasize the people that are going to suffer because of the greed and arrogance of the neoliberal generation. Otherwise, this crisis will consolidate the power of the most privileged members of it, subjecting the rest of us to even more insecurity, more impoverishment, more sharply curtailed liberties and political irrelevance. Or, to put it more starkly, a lot of people around the world are going to be pushed to precipice of starvation and death.

Labels: Activism, American Empire, Bailout of Finance Capitalists, Credit Crunch, Food Crisis, Housing Bubble, Neoliberalism

The International Monetary Fund crunches the numbers. As you might have guessed, the bursting of housing bubbles and the onset of credit crunchs tend to persist for quite awhile. For the short version, click on the link provided within the title, a good summary provided by naked capitalism.

For the complete version, check out the article by Claessens, Kose and Terrones of the IMF.

Contrary to the view of some commentators, the triple whammy of a house price bust, a credit crunch and an equity price bust has not always led to an eventual recession. What is true is that many recessions are indeed associated with credit crunches or asset price busts. In about one out of six recessions, there is also a credit crunch underway, and in about one out of four recessions a house price bust. Equity price busts overlap for about one-third of recession episodes. There can also be considerable lags between financial market disturbances and real activity. A recession, if one occurs, can start as late as four to five quarters after the onset of a credit crunch or a housing bust.

One of the key questions surrounding the current financial crisis is whether recessions associated with crunches and busts are worse than other recessions. Here, the international evidence is clear: these types of recessions are not just slightly longer on average, but also have much more output losses than others. In particular, although recessions accompanied with severe credit crunches or house price busts last only a quarter longer, they have typically result in output losses two to three times greater than recessions without such financial stresses. During recessions coinciding with financial stress, consumption and investment usually register much sharper declines leading to the more pronounced drops in overall output and unemployment.

Translation: if you are lucky, the interrelated bursting of a housing bubble, a credit crunch and a stock market crash don't necessarily result in a recession, but, if it does, look out below. Given that 159,000 Americans lost their jobs in September, and that employment has been dropping for 9 straight months, things don't look too good. I try to avoid financial hysteria, but I am beginning to understand why Southerners developed the practice of having money buried in the backyard after the trauma of the Civil War. You just never know what might happen, they'd tell their friends. And the others, shaking their heads wisely, would reply, No, you sure don't.

Labels: American Empire, Bailout of Finance Capitalists, Credit Crunch, Housing Bubble, Neoliberalism

I really should have known better. I guess that I still possess too much of that naive American optimism, an optimism that resists the harsh dialetical realities of European Marxism and anarchism. How else to explain my gullibility in believing that the House would resist the importunings of finance capital, and its seemingly ubiquitous political and social allies, and again refuse to move the bailout bill to the President's desk? Time for a moment of self-criticism and a rededicated resolve to avoid substituting wish fulfillment for hardened analysis.

With the requisite mea culpa out of the way, I can now offer assistance in the process of drawing a few conclusions as to what has just transpired. First, as I observed in my first post on the subject, the same processes of secrecy that have been developed for the Pentagon and the intelligence services are about to be extended to governmental involvement in the financial markets. The government developed the bailout proposal in closed door meetings, and it was modified as a consequence of equally covert meetings between the White House and congressional representatives. No meaningful hearings were held, with the only public testimony provided by Treasury Secretary Paulson and Federal Reserve Chairman Bernanke. Understanding the rules of the game, they politely sat through a couple of days of verbal abuse as the price for getting their plan approved.

Furthermore, there was little consideration of any alternatives to the plan put forward by Paulson, alternatives such as ones that would benefit lower and middle income Americans as well as the financial sector. Indeed, there was not even an attempt to explain how the bailout would address the current crisis, and thereby initiate a dialogue as to how to most effectively confront it, except by reference to day to day events in the financial markets. As with the invasion of Iraq, the bailout was marketed through hysteria, and the need to relieve it. Substance was irrelevant, as there is nothing in the plan that necessitates that the recipients of funds through debt purchases actually resume extending credit.

Accordingly, we should presume that the extension of such secrecy into the realm of economic policy will become more and more of a feature of our domestic politics, regardless of whom wins the November election. And, more disturbingly, we should also assume that, contrary to expectations, manipulation of public ignorance, fear and anxiety in the service of capital and conquest will become even more frequent than it was during the Bush presidency. With the media as willing accomplices, there is no reason for politicians, and the interests behind them, to conduct themselves otherwise.

Second, along these lines, the passage of the plan reveals the irrelevancy of the Congress in regard to serving as a constraint upon the President. It is pretty much acknowledged that the changes to the plan related to executive compensation and oversight were cosmetic ones so as to serve the purpose of enabling congressional Democrats to claim that they had improved it. As with the adoption of practices of unprecedented secrecy, this abandonment of responsibility first manifested itself within the confines of military and intelligence activities, and has now crossed the boundary into the realm of economic policy.

Just as with the war in Iraq, Congress has not only relinquished oversight, but has also, even more shockingly, allowed the President to assume the power of the purse. It is easy to forget that, even before the bailout, Congress permitted Paulson and Bernanke to loan hundreds of billions of dollars against distressed, low value securities without objection. It also permitted Paulson and Bernanke to implement their own restructuring of the US financial system by brokering deals, such as the J. P. Morgan purchases of Bear Stearns and Washington Mutual, and nationalizing Fannie Mae and Freddie Mac without any review.

The US is now subject to a de facto government by decree as part of a global trend that includes countries as disperate as France, Venezuela, the Russian Republic and Great Britain. We cannot ignore the possibility, as absurd as it sounds, that there is more diverse participation in policy development in the People's Republic of China, a Communist dictatorship, with its plurality of emerging national and local interests, than there is in the US. Or, to put it differently, the US may well have a more centralized form of government than the People's Republic.

Third, as invoked by Joseph Stiglitz, Naomi Klein and many others, the invasion and occupation of Iraq is an inescapable metaphor for what has happened and what is about to happen. Bush and his allies have used the occupation as an opportunity to direct billions of dollars, much of it free from public disclosure, to private contractors. Some have provided military and security services, others focused upon more mundane things like rebuilding schools, public utilities and roads. Contrary to the musings of liberal defense policy critics who have limited their evaluations of the occupation to its military effectiveness, it has been a tremendous success in terms of accelerating the redistribution of income within the US. The US, along with Great Britain, now has the greatest inequality, among rich countries, as measured by the Gini coefficient.

Now, Paulson has the power to purchase $700 billion in distressed debt securities between now and January 20, 2009. The debt will be borne by all of us, while the recipients . . . well, the recipients, if the Bush record is any indication, will be financial institutions aligned with both the Bush regime and its bipartisan Congress allies, just as many of the occupation contractors, like Bechtel and Blackwater are. Crony capitalism is now official state policy. Predictably, Barack Obama supported the bailout, with an assertion that we can fix the problem later, even though the Democrats, after two years in control of the Congress, still haven't fixed a single problem identified with the Bush presidency. Expect a lot of talk, but little action, on a Democratic agenda of regulatory reform if he wins the election.

Finally, as noted here, many have recognized that the $700 billion is insufficient to deal with the amount of distressed debt, with Spengler over at Asia Times Online being one of the most recent to acknowledge it. The interests of the public appear to be subordinate to the interests of US finance capital, which seeks to retain its dominance within the this country and the world beyond. We are living through an inexorable process of asset destruction and recalculation of risk in relation to the extension of credit, and it is hard to imagine how the bailout can stop this merciless process, unless it can somehow reflate the housing bubble, an achievement that would be akin to levitation. Even then, we would just be kicking the can down the road a few years, with more extreme consequences when it invariably burst as well.

If the bailout does fail, there will, of course, be scapegoats, and the right has already obligingly targeted them for us. I reiterate what I posted here on Wednesday, because it is important:

And if conditions deteriorate to an extent not seen since the mid-1970s, or, one shudders to say it, even the 1930s, then, there are always poor people, people of color and undocumented immigrants to blame. The willingness of the mortgage lending community to target the requirements of the Community Reinvestment Act as one of the causes of this crisis is not reassuring in this regard. It suggests that the financial sector will, if no alternative is perceived, manipulate the bigotries of racist and xenophobic elements to resist any progressive assault upon its autonomy.

We may be about to enter a period with much more frightening dimensions than people being foreclosed out of their houses and forced to go to food banks.

Labels: American Empire, Bailout of Finance Capitalists, Barack Obama, Bush, Credit Crunch, Democrats, Housing Bubble, Immigration, Imperial Presidency, Neoliberalism, Postmodernism, Racism