Mr. Potter Has Won?

My perennial Christmas Missive, returns after a 4 year (can your believe it) hiatus. And who would have thought 5 years after the Great Meltdown produced the Great Recession, , 5 years into the age of Obama and a purported move away from supply-side economics pretty much nothing has changed to reign in the very things – excessive income inequality, unfettered financial speculation and moral hazard policies that reward the affluent investor over the struggling worker—that drove us to the brink Great Depression II, setting us up nicely for another round of financial mayhem within the decade.  Meanwhile 5 years into a recovery plan that has produced recovery for the richest  10% of the population who now take in more than half of all income (up by over 50%) and even more so the top 1% who raked in  over 90% of the gains from the recovery, middle class and working families are enduring stagnant or declining incomes that haven’t seen significant real increases since the dawn of 1980s supply side economics.    I was apparently naively optimistic when I wrote: Perhaps by Obama Christmas II the tides may turn. For now, let us at least raise a voice of prayer and a glass of cheer to the fact the Potters aren’t adding as much to their winning totals as they used to.Who knew Morning In America actually meant a sunset for  middle class expansion and an American Dream  deferred.. And yes, Virginia, income inequality DOES matter as any Feudal peasant or lord could have told you and as a brief glance at a map of global income inequality also tells you.  Excessive income inequality produces and exacerbates  poverty and  authoritarianism.  Period.  But at least there is hope in the coming year, what with that Marxist in The White House (as we always knew, thank you Fox News) and one now in the Vatican (thank you Rush Limbaugh for that bit of analysis), that national and global attention and conversation may actually turn to a meaningful discussion of inequality and—beyond the social justice issues and even bad for capitalism issues (true capitalism being antithetical to monopolies of power and wealth) the anti-democratic tendencies it fosters.  Until then,  let us hope that the Mister Potters haven’t won – for once they do it won’t be the same America we were born in.  Merry Christmas and best hopes for the future.  CL


I watched the perennial holiday chestnut, “It’s a Wonderful Life,” the other day. There was George Bailey, as he is every year, struggling to keep the old Savings and Loan afloat. There was the malicious Mr. Potter, a truly covetous old sinner, trying to put Bailey out of business.  There was Clarence the angel showing, once again, that our world is a better place for the George Bailey’s amongst us.  It’s too bad that in today’s world the Potters are beating the Baileys, hands down.

Old man Potter dismissed the Bailey Savings and Loan as a kind of privatized social welfare program for dumb poor workers who couldn’t cut it on their own. “And what does that  get us,” he asked?  “A discontented, lazy rabble instead of a thrifty working class.  And all because a few starry eyed dreamers stir them up and fill their heads with a lot of impossible ideas? Don’t the  Rush Limbaughs or Tom Delays say the same thing today?

Labor laws, social welfare, retirement benefits, guaranteed healthcare, workplace safety laws, consumer protection–all are dismissed by our modern Potters as so much misplaced sympathy offered to the undeserving by the foolishly starry eyed, thinking that is at best naïve and at worst dangerous.  Any mention of social welfare on AM radio is now associated with Bolshevik Socialism – want to give workers a guaranteed living wage or put any limits at all on the worst excesses of the market and you’re labeled as an advocate of Gulags and death camps.

George, of course, argued back.  “Just remember this, Mr. Potter,” he retorted, “that this rabble you’re talking about, they do most of the working and paying and living and dying in this community.  Well is it too much to have them work and pay and live and die in a couple of decent rooms and a bath?”  Today he could add: is it too much to have them work and pay and live and die with decent healthcare, affordable housing, quality education for their kids and the sure knowledge that when old age comes, there will be some comforts to look forward to?

We don’t have that many George Bailey’s today. Few stand up to our Potters when they tell us workers can’t expect job security, no one is entitled to healthcare and decent pay is whatever the most desperate amongst us is willing to work for.  Even the Democrats, the party of dreams for the working stiff, have fallen in line with the rhetoric of balanced budgets and smaller government (except, of course, if deficits are required to provide tax cuts to the richest Americans) even if the cost are reduced programs to help the disadvantaged.

Can’t anyone makes the simple point George made that helping the least amongst us is not simple altruism, it is Capitalist self interest at it’s best? “Your all business men here,” he reminded the S&L board members thinking of supporting Potter, “don’t it make them better citizens? Doesn’t it make them better customers?”  Heck, wasn’t it that old socialist Henry Ford’s idea to raise worker pay, not because it was the moral thing to do but because it made them better participants in the Capitalist market place?   Like Old Man Potter, much of American corporate business has become warped and frustrated by ruthless competition and now sees its workers only as cattle to be milked for as long as possible before being sent to the layoff slaughterhouse.

Frank Capra understood that the Potters amongst us seldom lose, though the more public-minded like old George could, on occasion, battle them to a draw. Notice that, while George Bailey ultimately survived his battle with Potter, the old man survived unscathed too, his own crime of theft of the Bailey’s deposits unpunished. There have always been the Potters amongst us, those who pursue personal gain at any cost, be they a grasping banker like fictitious  Potter or the greedy executives of a massive corporations like Enron or WorldCom. What’s regrettable is that there are fewer and fewer George Bailey’s speaking up for the little guy.

In the real world the Bailey S&L would have been bought out by the 1980s by PotterCorp, a huge transnational Financial Services leviathan. A PotterCorp holding company would have bought out Bedford Fall’s chief industry, the plastic’s factory old Hee-Haw Sam Wainwright had built at George’s urging and shipped the jobs to Third World sweatshops. Downtown Bedford Falls would now be a ghost town with shops shuttered by a massive PotterMart selling cheap slave-labor produced products to the town’s poorly paid service employees.   Yes, least be there any doubt, in the world of today Mister Potter would have won.  And, least there be any doubt, Mr. Potter voted Republican.


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Happy Holidays

Happy Holidays

Senator Barack Obama has the makings of a good idea with his call for a ninety-day national foreclosure moratorium.  Such an action would give homeowners and mortgage holders time to work out more equitable loans and keep homeowners in their houses, keep houses off the market, keep housing prices from sinking as fast and keep mortgage holders out of the red.  The only problem with the Senator’s plan is that it is not immediate, aggressive and audacious enough.  As Robert Skidelsky wrote two Sundays ago in the Washington Post, this is a crisis John Maynard Keynes would have seen coming a hundred miles and sixty-two years ago.  These economic problems confronting the nation call for a Keynesian solution.  Indeed, it’s practically screaming for Keynes on fiscal steroids.

So far the government’s response has been the antithesis of Keynesianism.   I recently wrote that the Reagan revolution amounted to a subversion of Keynesian demand-side economics (which originally called for using government borrowing and fiscal policy to push money into the hands of working families and consumers) into supply-side Keynesianism: using government borrowing and fiscal policy to push money into the hands of investors and producers.  The government cut trillions of dollars in taxes on the investment class by borrowing trillions of dollars to pay for the tax cuts, pure and simple.   Now the government is engaging in supply-side socialism, using over a trillion dollars to shore up the assets—buying them, as necessary—of the investment class.

Senator Obama has realized correctly that, ultimately, the American economy is not dependent on the health of Wall Street.  Rather, Wall Street is dependent on the health of Main Street, the place where the two thirds of economic activity driven by working consumers takes place.   The Senator has not, however, been able to fully and boldly shake the shackles a generation of faux-Laissez Faire Reaganomics has placed upon our collective public policy consciousness.  He has not advocated the Keynesian solution in its entirety.  What is needed is a massive program of historical scope to shore up the financial stability of average Americans and stimulate aggregate demand.

To this end I recommend his immediate advocacy of what I call the National Housing Holiday—a ninety-day national mortgage forbearance period which will allow time to return stability and credibility to both mortgage markets and household finance.

The Plan

The President, by executive order declares a ninety-day national foreclosure and mortgage holiday—a National Housing Holiday.  This order will be subsequently codified by national statute.  Ideally the NHH should begin effective November 1.  Politically, December 1 would be a more realistic date.  Waiting until after the inauguration will pretty much guarantee a long and deep recession.

All homeowners will be allowed to defer any mortgage payments due during this period.  Homeowners would, however, continue to receive tax deductions applied to the current tax year as if they’ve made the required payments for the period.

Mortgage holders, meanwhile, will be allowed to carry these loans as paid in full on their balance sheets for the Holiday period. Mortgage holders will also be allowed to write off from taxes due the value of the mortgages missed as a permanent loss and/or qualify for a federally issued or backed bridging loan in the amount of the forbearanced mortgages to alleviate/eliminate cash flow issues for these lending and investment institutions.  The amounts received will not be levied as taxable income.

During the ninety-day holiday every mortgage in America will be recalculated to a base fixed rate to be set by Federal statute under a National Fair Mortgage Act  (FMA).  Any loss on current mortgage income endured by mortgage holders is to be offset or mitigated by either applying it against future tax liabilities or by direct one-time Federal payment as set by Federal statute.   New regulations on future mortgages concerning allowable ARMs, loan qualification standards and such will be established under the FMA.  The FMA will also create requisite effective governmental oversight of the mortgage industry by either retasking existing Federal agencies and departments or by creating a new, integrated National Mortgage Authority (under the auspices of the Department of Treasury or Federal Reserve) to facilitate the provisions of the FMA.

Under new FMA rules, the three months of mortgage holiday will be amortized under the new loan conditions set for each mortgage across a loan period extended by the three-month non-payment history.   The tax credit received by homeowners over the three-month period will be in the form of a prebate against future taxes due:  its value will be repaid to the government over the remaining life of the loan.  Losses by mortgage holders (without reference to any government assistance during said period) recovered over the life of the loan will not constitute a tax obligation on future year taxes.


The NHH will accomplish three things directly.  First, by establishing a process to revalue mortgages under the FMA, confidence can be returned to investment and credit markets.  Uncertainty and risk are the twin demons of destruction in credit markets.  The resulting lack of confidence in credit institutions is the very devil of the system. At the heart of much of the global credit crunch is the uncertainty over the value—or lack thereof—of mortgage-associated investment instruments.  Establishing a stable, fixed value for the underlying mortgage assets will remove this uncertainty and the obstacles it presents to the normal function of credit markets thereby returning confidence to these markets.

Second, establishing a viable mortgage structure   will effectively end the current foreclosure crisis bringing greater stability to housing prices across the nation.  Housing prices significantly over-inflated during the housing bubble; a significant correction in prices to more sustainable and historic levels should and will happen.  A precipitous drop in price, however, runs the risks of both ultimately undervaluing houses and over-decapitalizing households.  Foreclosed properties not only drag down the bottom line of mortgage holders; they serve as a depressing factor on property values across the broader neighborhood, community and nation.  Factoring subprime-driven foreclosures out of the process should allow housing prices to reach a true median in a more orderly way with less collateral damage inflicted on the broader economy.  In particular, a more orderly transition in housing prices will have a less deleterious impact on state and local property tax revenues, in itself a significant concern in a weakening economy.

Third, redressing the fundamental imbalances that have been generated in household income flows because of massively inflated mortgage tied to predatory ARMs will provide significant demand-side stimulus.  The initial Housing Holiday will free up three months mortgage payments for millions of American homeowners.   Calculating roughly fifty million qualifying homeowners with an average mortgage of less than two thousand dollars, the stimulus would amount to $100 billion per month and over $300 billion over the period of the NHH.  That amount is double  the size of the tax credit passed last spring which itself accounted for perhaps up to a one percent boost in second quarter economic activity.

A large portion of the $300 billion will undoubtedly be used by households to pay off debt and/or shore up savings.  In doing so, however, millions of households will be provided the economic cushion needed to return to financial stability and credit worthiness once mortgage payments resume after the recalculation of mortgages and the end of the three month forbearance period.  Tens of billions of dollars, however, will still find their way into the consuming economy helping to keep retailers retailing across the nation and helping to keep this Holiday shopping season from being the grimmest in a generation or more.

The Cost

The public cost of the NHH stems from the cost of lost tax revenues from, and loans/direct payments to, mortgage holding institutions during and after the three-month period.  Even if the entirety of the mortgage forbearance costs during this period are ultimately absorbed by the Federal government, the cost of this immediate stimulus package would be, at $300 billion dollars, less than a third the amount of the trillion-dollars in Wall Street stabilization funding authorized to date.  Unlike the trickle-down bailout, which still has not resulted in a substantial, observable impact on average Americans, the NHH will have an immediate and direct stimulus impact.   The NHH will also be revenue neutral on household taxes.

Other costs associated from the plan will result from however the National Mortgage Act is ultimately structured and implemented.   Mortgage holders, even with government stabilization through the NHH and NMA, will undoubtedly see the value of a significant amount of mortgage assets decline.  This, however, amounts to paper losses that can be mitigated to some degree through tax write-offs and other fiscal mechanisms.  In any event, the value of many of the underlying mortgage assets—and not just those limited to subprime lending—is suspect and unsustainable under current conditions.  The gains in confidence achieved by establishing a solid valuation for all mortgage assets with the resulting return of more stability to investment and credit markets will offset, at both the macro and individual level, the costs of mortgage asset devaluation.   In other words, mortgage holders, having the choice of sucking it up and seeing some devaluation of assets under a NMA or risking the prospect of massive devaluation of said assets under foreseeable market conditions, would be wisely placed to, simply, suck it up.  There are more medium and long-term profits to be made in an economy returned to prosperity than one mired in recession. Or worse.

The Politics

Implementation of a National Housing Holiday and passage of a National Mortgage Act will be, by any measure, a particularly audacious political act.  Indeed, the NHH and NMA represent nothing less than a return to fiscal Keynesian economic and the first steps towards a systematic repudiation of the excesses of the Reagan revolution.   There will be pushback, to say the least.

The first objection to the proposed NHH is its potential cost to the Federal treasury.  As discussed above, the anticipated cost is significantly less than that already allocated to the current Wall Street bailout packages.  The United States is, however, already over ten trillion dollars in debt.  Additional Keynesian fiscal stimulus as provided for under the NHH will add another half-trillion or more dollars in debt to this mountainous pile.  Deficit hawks and average Americans alike stare in shock and awe at these almost incomprehensible amounts.

Debt, however, is not the issue here.  It is the ability to maintain and service that debt which is.  If borrowing an additional half trillion or so dollars from domestic and world markets helps keep the world’s largest economy from slipping into an economic downturn of generational proportions than it is money well-borrowed.   If the government does not borrow additional funds to stimulate the economy and the economy does then fall into a major downturn the domestic and global ramifications will truly be historical—and, potentially, unprecedentedly painful—in scope.

Slippage in the American economy is already translating into a softening of global demand resulting in a corresponding softening in global supply.  China’s economy is showing signs of declines.  As a result, global commodity prices are dipping rapidly.  Such economic rapid upheavals and deflationary pressures in the past have always been accompanied by more than their share of political mischief, instability and conflict.   Given the global challenges this economic situation presents, mitigating or avoiding entirely the worst potential impacts by accumulating an addition five to ten percent in national debt is a reasonable and, arguably, economical price to pay.  And, given the fact that in this crisis the world really has no other choice but to maintain its support of American borrowing, such funding will be made available to the American Treasury.

Ideology will play a major role in debating the NHH and NMA, to be sure.  Knee-jerk reaction from reactionary Reaganites is as certain as the next sunrise.  Witness how Senator Obama’s merest mention of any consideration of revisiting and revamping the progressively regressive tax structure of the past generation draws immediate declarations that he is a socialist.   The proposals will divide the nation directly down partisan ranks with a not small measure of Reagan Republicans opposing them if for no other reason than they are being advocated by Democrats.  And, more cynically, those politicians and pundits with an eye on 2012, whomever wins this November, may not want to see fast and effective solution to the economic problems that will bedevil America in 2009, 2010 and 2011.

Given the magnitude of the economic challenges confronting America, it can be argued that this nation is once again poised on the brink of a major trans-ideological moment when a new, national consensus may be created.  Such was the case in the 1930s when the 19th Century Laissez Faire orthodoxy collapsed into a Great Depression that gave rise to the almost half century dominance of Keynesianism and the political New Deal Coalition. Such was also the case when, by the 1970s, the excesses of New Deal politics and systematic changes in the global economy undercut Keynesianism.  The stagflation and recession of the late 1970s and early 1980s propelled the Reagan Revolution to economic pre-eminence and the Reagan Coalition to economic dominance. Now, a generation later, the excesses of the Reagan revolution and intensified structural changes to the global economy have undermined that paradigm as well.  We find ourselves in 2008, as in 1932 and 1980, once again on the doorstep of a fundamental, substantial and systemic change in economic paradigms.   Ideological and partisan challenges to a Keynesian shift are being eroded—and will, ultimately, be swept away—by the deluge of the current and growing economic downturn.

Fairness—both its reality and perception– is a major issue that must be addressed in any economic stimulus and recovery plan.  The great, national populist outcry against the so-called Wall Street bailout packages was driven directly by a common sense of unfairness.  This outcry almost derailed the attempt to bring short-term stability to American equity and credit markets.  For the more ambitious and audacious NHH and NMA to fly, all Americans—homeowners and non-homeowners, investors and workers—must be convinced that everyone will share in the cost and everyone will share in the benefits and that each individual and groups share will be equitable, if not equal, to that of others. To this end additional tweaks, incentives and sweeteners may, by necessity, be considered.

The approximately 46 million of Americans who rent housing or own homes without mortgages receive nothing, directly, by the proposed NHH.  To redress this, a tax credit/rebate/prebate   that could be claimed by such households and received in the form of direct money-transfers from the Treasury—as was done with the spring tax rebates—should be considered.  The more the amount might approximate the value of NHH to homeowners and mortgage holders the greater the cost (perhaps up to six undred billion dollars) such a program would be to the Treasury.  But so, to, the greater the fiscal stimulus and the greater the political acceptance of the overarching plan.  Additional fiscal offsets for investment institutions not directly benefiting from the NHH might need also be considered.  The point is to provide both as much fiscal stimulation as will be needed to keep the economy from deflating into depression and as much political  buy-in as will be needed to command rapid public assent.

Ultimately, the NHH and NMA is, to quote the oatmeal pitchman, the right thing to do and the right time to do it.  Redressing the fundamental inequities of the last generation that have left American households less well off in financial terms and with diminishing future prospects is both economically, politically, culturally and morally necessary.  At the end of the day, even if mom and dad knew they were buying more mortgage than they could really afford, there isn’t one child in America who is responsible for the ensuing problems.  And, as we head into the holiday season, is seems unfair, uncivilized and even un-Christian (not to mention un-Jewish, Un-Muslim, Un-Buddhist, Un-Hindu and Un-every religious and secular based system of morality) to lay the price of our national profligacy on our on progeny.

Immediate passage of the NHH means no child in America will be evicted from hearth and home this holiday.  It means no family in America will ring in the new year by losing their homes to face an uncertain winter  wandering the streets in search of shelter.  It means that we Americans really meant it when we put into the constitution that “We the People” will “provide for the common defense” and “promote the general welfare.” As we look to celebrate  the coming holidays with our families, let us remember that we are also an American family.  And, as residents of our 50th State now,  family means “Ohana”: no one gets left behind.

Next Steps

The National Housing Holiday is a stop gap measure to return stability and liquidity to both mortgage holding institutions and, more importantly, American households.   By itself the actions taken to establish clear value for mortgage-related investment  instruments and financial solvency for millions of working and consuming households will have a stabilizing impact  on the real economy significantly beyond what the current investor-driven  economic stabilization packages have had or will have.  Yet,  like the initial steps towards a New Deal taken by Franklin Roosevelt after his inauguration,  the proposed National Housing Holiday and Fair Mortgage Act are only the first steps towards a  21st Century American  Deal.  The ultimate goal of a Keynesian recovery is to not only stimulate the middle and consuming class incomes in the short term but to create an economic foundation guaranteeing expansion of these classes over  the long haul.  To that end, additional policies need be considered.

At the operational end of things would be programs like a National Fair Credit Act which would redress the usury terms lending institutions have been allowed to charge for revolving consumer credit—interest rates which in previous generations could only be charged by loan sharks and mobsters—and return them to a level that is fair and, even,  moral.  Credit relief would further enhance the buying power and standard of living of the tens of millions of American households significantly in consumer debt.   A National Housing Appraisal Standard should also be considered to prevent a return to predatory lending practices of recent years.  The task of providing greater accessible to homeownership without  compromising credit markets as occurred with the subprime debacle must also be redressed.

Of greater significance are the structural changes which need be made to an American economy.  For the last generation America has been transformed from a diamond-shaped income distribution (a broad middle class with narrower  upper and lower classes) into an hour glass economy (broad upper and lower classes and a diminishing middle class). In recent years,  as income and ownership have pooled upwards,  this hour-glass economy is giving signs of shifting into the more traditional pyramid economy, with all the potential social and political consequences such economies have engendered across history.  This transformation has been the result of twenty-seven  years of national fiscal, monetary and trade policies that have systematically favored investment classes over working and consuming classes,  capital over labor.  These policies must be reversed.  In the absence of a resurgent,  reinvigorated  middle class any economic recovery achieved over the next few years will prove to only be an expensive chimera leaving America  in an ever weakening position, domestically and globally,  over the balance  of the century.

We Americans, by sins of commission, omission or ignorance,  have dug ourselves into a very deep economic hole.  Climbing out will take time, cost money, and require sacrifice.  For a while all of us may find ourselves, to paraphrase former Federal Reserve chief Paul Volcker,  living less well.  Actions taken now, however,  can minimize this downturn and set the foundation for a true and lasting economic recovery.  A return to Keynesian policies will also be a return to the growingly prosperous Middle class America that dominated society and politics after World War II.  An economic  recovery  that economically recovers  an American middle class in decline for a generation will guarantee broad economic prosperity for the next generation—and beyond.  Staying the course with our supply-side Keynesian/socialist model,  however,  is a sure path to national economic deprivation.

And global economic irrelevance.

Supply-side Socialism

There’s a famous 19th century caricature of  capitalism called  “The Pyramid of Capitalism” that depicts the economic system of Adam Smith as tiered  economic cake.  The  workers on the bottom hold up the pyramid proclaiming “We feed all.”   The well-dressed and well feted rich form the next layer proclaiming “We eat for you.” Then there are the soldiers who “shoot at you” and the priests and ministers who “fool you.”  At the top are the lords and politicians who “rule you.”

All the bailouts and bankruptcies on Wall Street have given  that 19th century image new relevancy, though I’d modify the diagram by moving the rich investment class to the top of the pyramid, supported beneath by the politicians and prophets of pseudo-capitalism.   And I redraw the bottom tier to consist of the faces of middle and working class Americans with the heading: “We take out risky mortgages for you.” Then I’d relabel the diagram “The Pyramid of Supply-side Socialism.”

I’d do so because what has been happening on Wall Street and in Washington for the last thirty years is not Adam’s Smith’s Capitalism.  It’s been Marx meet’s Morgan Stanley.  Thirty years ago Ronald Reagan established the modern Republican credo that the scariest words in the English language are “I’m from the government and I’ve come to help you.” A generation later the subtext of Reagan’s mantra is now apparent.  The gipper apparently meant  that those ten words were scary in so much as they applied to the middle class.  As in the government helping the American middle class—or, better said, the American middle class helping itself.  These ten words were scary because, if the government was spending all that money on the drones of the middle class it wouldn’t have the money to lavish on the investment class.

Now, thirty years later, the Reagan Revolution is revealed to be both an unmitigated sham and an unimaginable success.  Its truth has won out.

Reagaonomics was sold as a plan to cut taxes, spending and regulation.  In return, new capital for investors would be turned into new jobs  (be it by a downwards trickle) for consumers and workers resulting in broad and permanent universal prosperity.

Not quite.

The Reagan revolution cut taxes disproportionately on the investment class, not the working class.  And the Reagan administration began the wholesale dismantling of the New Deal regulatory machine aimed at allowing the investment class to do whatever it wanted with all its new found money. These was by intention.  But the Reaganites had no intention of taking the political heat to cut social spending and had every intention of spending massive amounts of new monies on defense.  The result, as every Reagan insider knew, was going to be massive to be massive deficits.  But they didn’t care. The Reaganites had discovered the glories of supply-side Keynesianism.

Keynesian economics had been based on the government borrowing the monies the investment class was not investing because of uncertainties in the market (read “Depression”) and spending it on the working and middle classes to prime the pump off consumer demand.  Supply-side Keynesianism is a perversion of this doctrine.  Government massively cuts taxes on the investment class and then borrows massive amounts of money right back from the investment class to pay for the tax cuts.  What Government used to be able to take in as revenue by simple taxation it now took in by borrowing from the people it used to simply tax and paying them huge amounts of interest for the privilege.

Or, another way of looking at it, by pushing money

Meanwhile, the shooting of the regulatory watch dog by three successive Republican  administrations (to be fair, Bill Clinton—the darling of Wall Street himself—took more than a few shots at poor protective pooch, too)  basically turned the investment class and their foot soldiers on Wall Street into the financial equivalent of James Bond.  Given massive amounts of new monies with no strings attached, they were now licensed to kill.

And supply-side socialism was born.  The essence of the Reagan revolution has been to privatize profit but to socialize risk.  With so much money crammed into the investment sector, centers of capital—the handful of huge Wall Street Investment and Commercial banks and funding institutions that grew to dominate all aspects of financial life as quasi-monopolies of money management—the investment world became dominated by firms simply “too big to fail.”  No matter what risks they took, no matter how egregiously opaque and obtuse their derivative and hedge fund models became, no matter how outrageously bloated their bonuses and pay packages were, they knew they were golden.   Yea though they walked throught the shadow  of the valley of financial ruin they had no fear for the supply-side socialist state would have to intervene to protect them least they bring us all down into Dark Ages levels of ruin.

Tax cuts and deregulation gave the investment class the leverage it needed and desired to tip back another result of the New Deal era: the rise of labor.  Massive concentration of capital in huge corporations able to move capital and jobs anywhere in the world without domestic American consequence resulted in a hammering down of the preeminent position labor—and by this I don’t mean simply labor unions but, rather, any American who has the temerity to work for a living as opposed to living off of the accumulated value (capital) from the labor of those who do—enjoyed in the New Deal era as a direct consequence of determined pro-common man government intervention in the economy.

The upshot of all this: twenty years of stagnant household incomes while investment profits soared.  And from this sprang the subprime mortgage debacle.  In backing investors over average workers the Reagan Revolution set up a system where the investment class, having more capital than it knew what to effectively or efficiently do with, would make risky mortgage loans  to the working class which no longer had the capital on its own to afford its piece of the American dream.  Then the investment class bundled up these loans, burying them in derivatives and bond hedge portfolios around the globe, often without others in the investment class even aware that they had inadvertently bet a huge hunk of their supply-side haul on overleveraged, under-capitalized mortgages for unemployed auto workers in Detroit and living-on the-edge seniors seeking to retire in Las Vegas,.

If, for the last thirty years, we had simply continued an economy something akin to what had been the norm during the New Deal period—taxes that took some of the excess wealth (the kind that results in wild speculation in markets) of the investment class in redirected it into wages for everyone else—the American middle class could have afforded to continue buying homes with the same old staid, fixed, thirty year mortgages.  Wall Street profits would have continued to hover in the high single to low double digits (rather than the hyper and unstable double digits ups and downs that have been the case) and the American economy would be far more robust, stable and growing.

And now the full implications of supply-side socialism are apparent.  Having broken the national bank (and credit line)  funding thirty years of investment class tax cuts with massive borrowing, switching back to true demand-side Keynesianism may be well unattainable.  The neither the world’s nor the domestic American credit markets can realistically be called upon to found the trillions of dollars in demand side repair that need be done to salvage our economy.  This, by the way, is the ultimate triumph of the Reagan Revolution. As Reagan insiders admitted in their obligatory “I sat at the foot of Power” post-administration tomes, any one back in the early 1980s with an IQ higher than twelve knew that the supply-side tax cuts were going to result in massive government deficits and debt.  That was the point.  If you borrow all the money Americans can borrow and give it to the investment class, their won’t be any money left to borrow when the need comes to give to the working class.  Lacking government to help and protect them, the working class will be right back where they were before the New Deal: at the mercy of the investment class.  The 1980s meet the 1910s.  Check and mate.

So there we sit in the first decade of the 21st century with an economy poised to reenter the 19th.   And everything old (like the pyramid of capitalism) is new again.

And before knee-jerk supporters of the Reagan Revolution—who might as well be called fellow travelers on the road to supply-side socialism—write in to lambast yet another “Socialist/Communist professor (why is it in Bushian America anyone with a graduate degree is a suspected socialist)  I AM NOT A SOCIALIST.  As I’ve stated ad nausem in previous blogs and columns (for example, click herehere and here)  I am an uber-capitalist. I believe that, over the last three centuries, capitalism as a system of economic organization has done more to advance the material conditions of mankind than has all of the other economic paradigms across the entirety of history and prehistory combined.  But far too many of the people who sing hosannas to the ideal of Capitalist are closet supply-side socialists or financial feudalists who only like the free market in so much as the power of Government is used to rig the game on their behalf.  And these pseudo-capitalists who never read Adam Smith, let alone Keynes, Freidman or even Marx, are going to be the economic death of us all if we let them.

The War Between the States (of corporate desperation) and a Short History of American Economic Time (and if this title was any longer it could never make it as a bumper sticker.)

If you are a frequent flyers accumulator for any of the airlines you may have gotten this letter in your email inbox.  If not, I’ve linked it here. The letter, signed by all of the major airline CEOs, amounts to a political declaration of war by one side of American corporationality (the producers of goods and services) on another (the producers of finance and speculation.)  In short, the airlines are declaring political war on Wall Street over the issue of oil futures contracts speculation.  And asking you to be their foot soldiers in the assault on Washington.  I find the letter worthy of note as I’ve never seen anything quite like it. But then, the airlines have never been in anything quite like this.

The last time the bottom fell out of the economy and oil prices hit the sky the airlines will still in the transition from protective government regulation to bare knuckles free markets.  Given that airlines have hardly had stellar profits ever since they left Uncle Sam’s wing to solo on their own, the current economy and out of whack oil markets has been spelling gloom—and doom—for the heirs to the Wright Brothers. Many of the airlines are on the brink of bankruptcy–as many have been for years.  Out of desperation comes acts of desperation.  And this letter smacks of political desperation—and political anger—that comes form seeing ones very survival as an industry on the line.

Politically this may portend that, come November, yet another crack in the Reagan coalition will hurt John McCain and his fellow members of the GOP at the pools.  The RC of big business and heartland American social conservatives (which has always been an odd—and often contradictory—alchemy of Hamiltonian pro-big government, big finance and big business industrialists and Jeffersonian anti-big government, rural populists (giving the GOP the best of both worlds:  access to urban money and rural and suburban votes) is fracturing.  Social conservatives have finally woken up and realized they are the African Americans of the Republican party, being sweet-talked and wooed every election and then seeing every hollow promise hollowed out in between.  Just how many years have  Republicans controlled the Presidency, the Congress or both?  Just when did Roe v. Wade get overturned? (Or  an anti-Gay Marriage, Balanced Budget, Pro-Prayer in Schools, Term Limits, Pro-life amendment get passed?)

Now the façade of corporate America, seeing what is shaping up to be the worst economy since the 1970s—or earlier (which leaves only one other really rough patch to compare with, bucko) is splintering at the money—filled seems.  If corporations don’t pony up the big bucks and unified front as it has done to oppose Democrats (you remember them—pro labor, pro environment, pro progressive taxation, pro pro-consumer government regulation, or at least they used to be back in some primordial pre—Reagan time) historically, John McCain will be standing on a three-legged stool of political support sans two legs.  And the third—moderate GOP voters–aren’t strong enough to hold up the campaign increasingly swollen by its own incompetence.  (Of course, John McCain’s senior economic advisor, Phil “Let Them Eat Weight Watchers” Graham may be right and all of our problems may be reducible to whiny, fat, old people.  But don’t bet on it.)

E.J. Dione, speaking on NPR’s All Things Considered yesterday, said very concisely something I teach in my classes about economics.   He said that, just as the economic problems of the 1970s produced the supplyside Reagan Revolution  of the 1980s, the economic problems of the early double naughts  may produce a shift towards more government intervention in the economy to help average people.  That would be workers and consumers.  That would be demand-side economics, aka Kenyesian economics, aka New Deal economics.

In economics only two things matter:  supply and demand.  Government policy can try to affect one over the other—it can’t really effectively and successfully influence both significantly at the same time.  When one of these paradigms dominates but, then, crashes and burns, government can only—and must—shift to the other.

American economic history can be divided into three great epochs.  From the 19th Century—particularly after the Civil War—to 1932 that policy was Laissez-Faire industrialism.  Laissez –Faire has never meant “hands off” the economy, as many simplistically believe.  Adam Smith never wrote that it did nor believed it should.  Laissez-Faire means government hands of the decisions of supply and demand in the economy but it also, for Smith, meant active government in maintaining an efficient and—most importantly—fair free market.  Smith, a dower, Scottish moral philosopher, understood that people are people and, given the chance, they cheat.  Hence his famous admonition that “People of the same trade seldom
meet together, even for merriment or diversion, but the conversation ends in a conspiracy against the public,or in some contrivance to raise prices.”  The role of government was to prevent such “conspiracy” and “contrivance.”

In practice, however, whenever you hear someone advocating so called Laissez Faire policies for government, they are calling for pro-supplyside policies:  anti-labor, anti-consumer, pro-capital and a pro-producer.  These were the policies of the industrial revolution—and the gilded age. This model crashed and burned in the ravages of the Great Depression, ushering in the Keynesian, demand-side, New Deal model.

The American New Deal model ushered in the greatest period of economic prosperity affecting the broadest segments of a society in human history.  And, before you naively say the New Deal didn’t end the Depression, the War did, please understand that, economically, American policy during WWII amounted to Keynesianism on steroids, on crack, with the government not just stimulating labor and industrial markets but the government becoming the labor and industrial markets. What really drove American economic dominance in the post-war period, however, was a simple fact of geography: we had sent our boys “Over There” to fight, not them sending their boys “Over Here”. As a result, “Over There” got blown to hell in a handbasket and “Over Here” emerged from the war relatively unscathed.  In 1950 the US strode the world as a colossus with no real economic competition.  Britain and France were bankrupt by two successive world wars, so bankrupt that they would be forced to hold going-out-of-the-empire-business sales and dismantle, in a few years, the empires they had spent centuries assembling.  Germany and Russia were bankrupt and burned to the ground.  Japan was bankrupt, burned to the ground and glowed in places at night.  The rest of the world was what it had always been: poor.

In 1950 if you wanted to by a skilled-labor industrial product you had to buy it from us.  That would be U.S.  And the wealth of nations poured into our own.  So much wealth poured in to the U.S. that we could be magnanimous, giving billions of dollars of aid to Europe and the world to rebuild from the war and develop from poverty, confident in the knowledge that much of that money would flow right back into American accounts as the world bought our stuff.  John Maynard Keynes once said that the tailor would gladly lend you ten dollars every Friday if he was confident you would use that money to buy a ten dollar coat from him every Monday.  Such was the relationship between the US and the world (and, currently, is the relationship between China and the US, with China playing the role we once did.)   That prosperity party which today haunts us as the American Dream: the God-given–if historically unique—right if each generation to expect to live markedly better than the generation before.  From the 1941 to 1973 American standard of living doubled and almost doubled again.

Then in 1973,  as Don Mclean sang,  the music died.  The American prosperity party came to a stuporous conclusion.  Done in not by the excesses of government intervention in the marketplace but by global economic realities.  By the 1960s they—Europe and Japan—were back, with industries modernized, more efficient and cost-competitive (in part thanks to US aid) to challenge American producers on a global stage.  By the end of the 1960s the US was sending more money to the world than the world sent to us.  The resulting “Dollar Glut” caused the value of the dollar to tumble and the Bretton Woods dollar-tied to gold based global monetary standard collapse.  Arab oil producing nations, seeing the value of their dollarized-oil fall as a result, used the pretext of the Yom Kippur war in 1973 to inflate oil prices.  The result of all this: the American economic recession known as “stagflation” and, by the end of the 1970s, a global economic downturn.

The traditional Keynesian response to the “Stag” part of stagflation–driven by the loss of jobs in the face of rising energy costs and massive amounts of dollars leaving the economy to purchase said energy overseas–during the Carter years was to bump up social spending.  That, unfortunately only further inflated the “Flation” side of the problem, driven by the impact of high oil input costs on all segments of the society.    It would require massively supply-side monetary policy—the Federal Reserve jacking interest rates to almost twenty percent—to crush inflation and, with it, the American economy. Out of the worst recession since the 1930s supply-side II—Reagonomics with its pro business and capital tax cuts, labor policies, environmental policies and, perhaps most importantly, regulatory policies was born.

The result: three decades of strong to middling economic growth. (The last eight years hardly being the golden age of Reaganomics, hence all the nostalgia for all things Reagan and ‘80s in Republican pundit circles.  All that’s missing is for Dana Farino to start wearing big hair and padded shoulders to White House press conferences…) But also three decades of declining middle class fortunes.  Where the WWII generation saw standards of living double every generation, Baby Boomers and Gen Xers now need wait three generations for the same gain.  Perhaps this is why Baby Boomer attitudes towards the economy is so glum.  Throw in the Enroning of the economy as corporate America and Wall Street, shorn of true regulation and oversight, ran amuck, the Dot.Com bubble and, now, the subprime mortgage meltdown (all foreshadowed by the looting and collapse of the S&L industry in the 1980s, the first great manifestation of Reagonomic ubercapitalism gone astray) and the result is an overleveraged, unstable economy on the brink of the worst economic recession of the last seventy years and the possibility of a global recession to match it.  With all the geopolitical instabilities that would portend.

The Reagan Revolution.  Born: 1980; died: ?  You might start etching that date on the economic tombstone: 2008.  If Barack Obama—or John McCain, for that matter—are actually serious on changing economic course from the one charted by Reagan and followed by his three successors–including Bill Clinton—there is only one direction to tact towards.  Demand-Side II.  The Return of Keynes and Roosevelt.