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Sunday, July 29, 2012

Privatized Gains, Socialized Losses (Part One)

(Note: This is the first segment in a two part series.)

Is the ordinary citizen capable of learning from history?  If so, how did the powerful forces of Wall Street “outsmart” the US government once again?  Do we progress from stage to stage on an upward course?  Or do we just ride the cycles of boom and bust, ascent and decline?

Change is an interesting concept, the need for change a provocative one.  Is “change” but a subtle deviation from the existing order, yet sufficient for the ordinary citizen to recognize some difference from what was seen before?  The reasons for change are sometimes not all that different than those articulated even in long bygone eras, dating back to the time of the Revolutionary War.

Take, for example, the Great Recession of 2008.  Innovative thinkers on Wall Street created new financial instruments, like private mortgage backed securities, which the ordinary citizen was told somehow fell outside the scope of federal regulation.  Through these financial derivatives, the phenomenon of sub-prime residential mortgage lending was born and proliferated.

The impact of these derivatives was also exaggerated by a new type of financial investment vehicle called a hedge fund, which used leveraged, long, short and derivative positions with the goal of generating high returns.  It was said that, unlike mutual funds, hedge funds were for the most part unregulated, because they cater to “sophisticated investors.”

The problem was compounded when federal regulators were found asleep at the switch.  The forces of Wall Street capitalism had finally figured a way to circumvent the protections which F.D.R.’s New Deal administration had painstakingly put in place.  Central protective measures, designed not only to counteract and consequently help pull us out of the Great Depression but also to ensure that it would never be able to occur again, were simply bypassed.

In simple terms, over the past 25 years the discipline of regulating financial companies had undergone a significant change.  A phenomenon which was politically bipartisan in nature, the culture permitted a gradual yet alarming relaxation of the safeguards from F.D.R.’s New Deal.  Seemingly, it had been the policy of the federal government that all citizens should be entitled to “own” a home, whether they could afford one, or not.

The phenomenon culminated with the policy of the Bush/“43” administration to let the financial industry do pretty much what it wanted.  When the bubble burst, the US was thrust into and we are told now emerging from what is being referred to as the Great Recession of 2008.  Statistically, it was the worst economic contraction since the time of the Great Depression of the 1930s.

Main Street is and remains hurting - in a big way, its businesses, or those that remain standing, largely depressed.  Belts are squeezed perilously tight.  The nation’s banks are not lending in abundance, although they appear to have an abundance of money to lend.  Demand is simply lacking.

Unemployment also is and remains high, inordinately high by historical standards, stubbornly around 8% of the available work force through May 2012.  Among certain groups, African Americans and the young in particular, the unemployment figures are significantly worse.  Generally, economists define “full” employment at an unemployment rate of 3% for persons 20 and older, 4% for person age 16 and over, of the available work force.  That puts the number of unemployed who are seeking work at somewhere between 15.5 million and 18.6 million.

The federal government’s solution was, in simplistic terms, to bail out and prop up the banks, insurance companies and the auto industry.  The rationales articulated were many.  It was said that these large institutions had become “too big to fail,” that if they failed, collectively, the economic fallout from refusing to act to “save” them would have produced a devastating ripple effect.  A financial bailout would produce less pain than allowing the natural market forces to otherwise work.  The chairman of the Federal Reserve, Ben Bernanke, an expert on the causes of the Great Depression, had stated so with great authority and urgency.

Mr. Bernanke is a very smart man, the bipartisan respect that he enjoys a testament to the wisdom of his policies.  Mr. Bernanke also seems to have a gift of plain speak, such that he relates and communicates well with ordinary citizens.  Consequently, Mr. Bernanke has earned the trust of ordinary citizens, who acquiesce to his policies, which do seem to be working.  Some progress is apparent but remains excruciatingly slow, especially for the millions of ordinary citizens who continue to be unemployed.

(Next week’s second and concluding segment in this series highlights the most sweeping financial regulatory reforms which the Obama administration and Congress have enacted since the Great Depression.  But the frustrations of ordinary citizens are seemingly compounded by a system which persists in treating the moneyed class with preferred status.  In addition to a bailout which is not the right of every citizen, why are financial gains said to be privatized while corresponding losses socialized among the American public?)

-Michael D’Angelo

Sunday, July 22, 2012

Swimming in a River of Wealth (Part Two)

(Note: This is the second segment in a two part series. The first segment traced wealth disparity to the inevitable forces of US capitalism. Since the end of the Great Depression, the precious few who are swimming in a river of wealth have consolidated and extended their gains smartly through greater and greater control of the various mechanisms of government, seemingly now in perpetuity...)

How and why did we let it happen again? What threats are posed by increased military spending or a fall in union membership? Why are an emphasis on individual initiative in concert with a deregulated business environment, and specifically financial deregulation, particularly hazardous to economic equality?

F.D.R.’s New Deal social safety net polices were embraced by ordinary citizens. The signature twin legislative triumphs included the 1935 National Labor Relations Act (NLRA) and Social Security Act (SSA). NLRA delivered the right of every worker to join a union of his or her own choosing and the corresponding obligation of employers to bargain collectively with that union in good faith. While SSA required the states to set up welfare funds from which money would be disbursed to the elderly, poor, the unemployed, unmarried mothers with dependent children, and the disabled. SSA was labeled a triumph of social legislation.

Following World War II, a Cold War “containment” policy was conceived to check the communist threat. This created fertile conditions for increased military spending on national defense and to discharge American commitments around the world. Perhaps more than any other single factor, federal military spending helped revive the economy of the Old South, which had been dormant for nearly eight decades dating back to the Civil War. The healthy effect on the domestic economy was palpable.

But by 1960 President Eisenhower's Farewell Address warned Americans about possible future problems. In particular, he pointed out the “military-industrial complex,” a new term in the lexicon of ordinary citizens. This complex, an alliance between government and business, had the potential to threaten the democratic process in the country.

Lyndon Johnson’s 1965 Great Society and War on Poverty, which championed government as the great provider, achieved admirable success as a high water mark of 20th century liberalism. But by 1980 the Reagan Revolution swept in. Almost overnight, American positivity and patriotism experienced a resurgence, President Reagan persuading Americans to rethink old attitudes about government as provider.

Popular rights asserted themselves on the federal union shop floor. However, statistics showed that as union membership decreased, wealth disparity between rich and poor increased. And so it came as little surprise to some that income inequality has worsened at a time when union membership has fallen to levels not seen since the 1920s.

Nonetheless a surge of individual spirit flourished, as federal government regulations were scaled back. In fact, in the last 30 years the US experienced a deregulated business environment which many agree is without parallel in US history. This was coupled with a massive military build up in declaration of a moral war against the Soviet Union. To speak against this foreign policy in the name of national defense was to receive the label of “un-American.” The river was healthy and well-stocked, and so the wealthy swimmers experienced an unprecedented level of prosperity. It was only a matter of time before they indulged in the grand feeding.

Wall Street minds are typically a step ahead of the government, innovating, devising new ways to facilitate the age old obsession with moneymaking. The law does its best just to keep up. Finally, with an assist from the US Congress the New Deal’s financial regulations came down and with them the walls to ensure that a Great Depression would not occur again. In theory, federal oversight was still present. But the regulators conveniently fell asleep at the switch.

The ordinary citizen is told that the federal government bail out of Wall Street and the large corporations in 2008 narrowly averted the phenomenon of another Great Depression. However, what phenomenon, if any, will provide the impetus to reverse and level the disparity of wealth between the very rich few and the mass of ordinary citizens this time around? Aren’t those in charge now the very same people who were in charge before the crisis? Perhaps this disparity in wealth as sanctioned by the federal government is but the essence of the Occupy Wall Street protest movement currently spreading to major US cities across the continent.

In an August 2010 New York Times Magazine article entitled “Income Inequality and Financial Crises,” author Louise Story cites to David A. Moss, an economic and policy historian at the Harvard Business School, who has spent years studying the phenomenon of income inequality. Mr. Moss has hypothesized that growing disparity between the rich and poor is not only harmful to the people on the bottom but also creates serious risks to the world of finance, where many of the richest earn their great fortunes.

In fact, as he studies the financial crisis of 2008, Mr. Moss says that another crisis may be brewing. When he accepted the suggestion of a colleague that he overlay two different graphs --- one plotting financial regulation and bank failures, and the other charting trends in income inequality --- he was surprised that the timelines danced in sync with each other. Specifically, income disparities between rich and poor widened, as government regulations eased and bank failures rose.

“I could hardly believe how tight the fit was --- it was a stunning correlation,” he said. “And it began to raise the question of whether there are causal links between financial deregulation, economic inequality and instability in the financial sector. Are all of these things connected?”

It’s a great question.

-Michael D’Angelo

Sunday, July 15, 2012

Swimming in a River of Wealth (Part One)

(Note: This is the first segment in a two part series.)

Does US capitalism have a soft, human face behind its tough exterior shield? In the mad rush to the top of the pile, does it allow for a safety net for those at the bottom, or for the elderly, or the sick? Do its rules of engagement provide the game’s participants with a level playing field in the land of opportunity?

Main Street is convinced that there are some on Wall Street, perhaps but a precious few, who are swimming in a river of wealth. Through the forces of our system of US capitalism, they have mastered the rules of the game, manipulating them both within and outside the bounds of the law where necessary. The consequences are an acute concentration of wealth in the hands of a few. As a result, they control American society.

The disparity in wealth in present day America is presently as great as at any time since the start of the carbon-based Industrial Revolution, more than a century ago. Over successive generations, these wealthy few have continued to devise new, creative ways to use their financial resources discreetly, subtly, even covertly. They exert a degree of influence over lawmakers and politicians to maintain their extremely powerful, yet artificial, status. To quote Yogi Berra, it seems like Hamilton vs. Jefferson, “déjà vu, all over again.”

These wealthy few are strong swimmers, controlling the flow of capital spending upon which the American economic structure is based. They control banking, including interest rates, money flow, equity and bond prices, debt service and derivative financial investment vehicles. They control taxation policies in their various forms, including income, property and estate taxes. They control insurance and financial services companies. They control spending on political candidates and campaigns and thus have a direct effect on the outcome of democratic elections. They control the media, what ordinary Americans see and don’t see on television stations like Fox News and CNN. They control energy use and energy “policy” and are virtually the invisible force behind a lack of a concerted national energy policy. All these factors are in play.

Since these wealthy swimmers control elected representatives, they also control the political appointment process. This includes judicial and law enforcement appointees. They also set the agenda and control both the enactment and enforcement of laws relating to all the institutions of daily life that ordinary Americans more or less take for granted.

Their reach extending to the laws of inheritance, they can even control human behavior from beyond the grave. Their wealth is cemented into the status quo, but only flashed to the masses. They build monuments to themselves. Ordinary citizens pejoratively label them McMansions, in a second Gilded Age that mirrors a familiar pattern from Mark Twain’s Industrial Revolution era. In short, the precious few who are swimming in a river of wealth control the myriad of rules and regulations which were designed to ensure a level playing field for all citizens.  They use their considerable power to prohibit the kind of change that would be their undoing.

Through the influence of “market” forces, the Great Depression itself reversed and leveled the disparity of wealth between the very rich few and the masses of the poor. Both were wiped out simultaneously, finding themselves on the same bread lines. Both sought warmth by the same smoky, trash bin fires and shelter in public common areas. Begun in 1929, the leveling process would take a full 10 years to run its painful course. But by 1939, the US economy had largely recovered, thanks to a sharp increase in the manufacture of munitions for the World War II combatants. Though dry for a decade, the river of wealth was slowly returning to normal, as were the swimmers, who were regaining their general health.

At the same time, the social safety net polices of F.D.R.’s New Deal positioned the government in an active role as the very agent of reform.  Ordinary citizens would come to expect the support of their government, especially in time of need.  With cornerstone examples like the 1935 Social Security Act and National Labor Relations Act, the New Deal restored America’s faith in its system of capitalism by making it seem more humane.  Additionally, it ensured, at least theoretically, that an economic calamity of the Great Depression’s magnitude would never happen again.

(The second segment in this two part series brings us forward from the time of the Great Depression to the current economic upheaval in the aftermath of the Great Recession of 2008. How did we let it happen again?)

-Michael D’Angelo

Sunday, July 8, 2012

The Organization of Labor (Part Three)

(Note: This is the final segment in a series introducing readers to the legacy of Theodore Roosevelt. Balancing the need for change against preserving the benefits of the status quo poses an intricate dilemma. T.R. believed under the concept of "noblesse oblige" (Part One) that citizens of wealth, power and privilege were balanced by public responsibilities to help those who lack such privilege or are less fortunate. The great issue was to reform the "unnatural alliance (Part Two) of politics and corporations” to enthrone privilege. "Conduct," not "size," was the overriding consideration. Labor was not only an economic, but also a moral, a human problem...)

Can a true, complex US industrial and political democracy exist, absent the ability for ordinary individuals to combine in a collective capacity to secure their basic human rights? Does the great entrepreneurial risk-taker who reaps large profits have any balancing obligations owed to American society and the law?

Individually, the worker was impotent to negotiate a wage contract with the great companies; they could make fair terms only by uniting into unions to bargain collectively.  Individual workers were thus forced to cooperate to secure their basic human rights, compelled to unite in unions of their industry or trade.  These unions “were bound to grow in size, in strength, and in power for good and evil as the industries in which the men were employed grew larger and larger.”

T.R. continued:

A democracy can be such in fact only if there is some rough approximation in similarity in stature among the men composing it.  One of us can deal in our private lives with the grocer or the butcher or the carpenter or the chicken raiser, or if we are the carpenter or butcher or farmer, we can deal with our customers, because /we are all of about the same size/.  Therefore a simple and poor society can exist as a democracy on a basis of sheer individualism.  But a rich and complex industrial society cannot so exist; for some individuals, and especially those artificial individuals called corporations, become so very big that the ordinary individual is utterly dwarfed beside them, and cannot deal with them on terms of equality.  It therefore becomes necessary for these ordinary individuals to combine in their turn, first in order to act in their collective capacity through that biggest of all combinations called the Government, and second, to act, also in their own self-defense, through private combinations, such as farmers’ associations and trade unions. (emphasis mine

A willingness to do equal and exact justice to all citizens did not, according to T.R., “imply a failure to recognize the enormous economic, political and moral possibilities of the trade union.”  T.R. concluded his discussion of the topic thus:

Just as democratic government cannot be condemned because of errors and even crimes committed by men democratically elected, so trade-unionism must not be condemned because of errors or crimes of occasional trade-union leaders.  The problem lies deeper.  While we must repress all illegalities and discourage all immoralities, whether of labor organizations or of corporations, we must recognize the fact that to-day the organization of labor into trade unions and federations is necessary, is beneficent, and is one of the greatest possible agencies in the attainment of a true industrial, as well as a true political, democracy in the United States. 

Not surprising, a balancing act, a weighing and mature contemplation of competing interests, was necessary.  The individual risk-taker took full advantage of the national security apparatus and the law of contracts, on the one hand, to protect and preserve his capital investment and vast profit potential.  Consequently, that same risk-taker had the resulting obligation, on the other hand, to permit the law to change to a sufficient degree to protect and improve the fundamental human rights of the workers who made those profits possible.

After completing two presidential terms featuring an agenda of activist, progressive reform along these lines, T.R. declined to run for a third term in the election of 1908.  He was maintaining the tradition of George Washington.  Instead, he threw his overwhelming popular support behind his then-Vice President and hand picked successor, William Howard Taft.

T.R. saw Mr. Taft as an able administrator under T.R.’s leadership and an extension of himself.  Essentially, it was understood that Mr. Taft would consolidate and expand T.R.’s activist, progressive agenda with all the necessary machinery of government already in place and smartly operating.

Unfortunately, events did unfold quite as T.R. had envisioned.  The powerful forces of conservatism fought back smartly, setting in motion an epic clash.  When the dust had finally settled, the political landscape had been transformed.  The ordinary citizen’s identification with the more familiar “Republicans vs. Democrats” of today had been born.

-Michael D’Angelo

Sunday, July 1, 2012

The "Unnatural Alliance" (Part Two)

(Note: This is the second segment in a three part series introducing readers to the legacy of Theodore Roosevelt.  The first segment acknowledged the intricate dilemma in balancing the need for change against preserving the benefits of the status quo.  T.R. believed under the concept of "noblesse oblige" that citizens of wealth, power and privilege were balanced by public responsibilities to help those who lack such privilege or are less fortunate...)

What was the great issue that motivated Theodore Roosevelt --- which remains unresolved even today?  Why was a business entity's conduct more important than its class or size?  Was labor merely an economic problem, absent a moral component?

As a member of what he called the “governing class” of practical politicians, T.R. frankly admitted that he was engaged in a “campaign against privilege” that was “fundamentally an ethical movement.”  He targeted stock gamblers “making large sales of what men do not possess,” writers who “act as the representatives of predatory wealth” and “men of wealth, who find in the purchased politician the most efficient instrument of corruption.”  He reserved his strongest warnings for these multimillionaires.

T.R.’s early 20th century policies sought to make ordinary citizens aware of what he considered the most ominous of the great fundamental questions before us.  The great issue was to reform the “unnatural alliance of politics and corporations” to enthrone privilege.

In this manner, he broadened the scope of the offensive conduct to be regulated.  His policies also flatly rejected the idea of “too big to fail,” which we read about all too often in the news today.  What was required was control and regulation in clear and unmistakable terms, drawing the line neither on class nor size, but the conduct and illegal business practices of business monopolies.  It did not matter that the business was large or small, the individual rich or poor, or a factory owner vs. a union leader.  The distinction was to be sharply drawn in moral judgment between those that do well vs. those that do ill.

T.R. understood that capitalists, as a product of human nature, desired free competition.  But, they desired it only insofar as free competition was necessary to wipe out their competitors.  The means employed were often all too questionable.  In the most “successful” situations, capitalists created business monopolies.  The scope and conduct of the entities they controlled were often in restraint of trade and, consequently, not always in the best interests of the public at large.  This, in particular, was where active government oversight and regulation were necessary:

These new conditions make it necessary to shackle cunning as in the past we have shackled force.  The vast individual and corporate fortunes, the vast combinations of capital, which have marked the development of our industrial system, create new conditions, and necessitate a change form the old attitude of the State and Nation toward the rules regulating the acquisition and untrammeled business use of property.

Likewise, T.R. recognized another anomaly which had developed, a crass inequality in the bargaining relation between the employer and the individual employee standing alone.  The great business organizations, which employed tens of thousands, could easily dispense with any single worker.

But what was the recourse of that worker?  He could not dispense with his job.  His wife and children would starve, if he did not have one.  The worker’s value, his labor, was a perishable commodity.  The labor of today, if not sold today, was lost forever.  But the labor was also part of a living, breathing human being.  Those who gave earnest thought to the matter saw that the labor problem was not only an economic, but also a moral, a human problem.

(The third and final segment of our series introducing readers to the legacy of Theodore Roosevelt concludes with a call for a balancing act between the big businesses and the labor of individual workers in the quest for profits.)

-Michael D'Angelo