College Daze

All you need to know about the disconnect between the scions of  Wall Street and us mere peons on Main Street can be found on  page 61 of Andrew Sorkin’s tome to moral torpidity, Too Big To Fail.

In talking about then New York Fed Chief Timothy Geithner contemplating whether or not to take the position of Citigroup’s CEO, Sorkin writes:

“For the following week, however, the prospect was practically all he could think about—the job, the money, the responsibilities. He talked it over with his wife, Carole, and pondered the offer as he walked their dog, Adobe, around Larchmont, a wealthy suburb about an hour from New York City.  They already lived a comfortable life—he was making $398,200 a year, an enormous sum for a regulator—but compared with their neighbors along Maple Hill Drive they were decidedly middle-of-the-pack.  His tastes weren’t that expensive, save for his monthly $80 haircut at Gjoko Spa & Salon., but with college coming up for his daughter, Elise, a junior in high school, and his son, Benjamin, an eighth grade behind her, he could certainly use the money.”

I’ve got four daughters,  two through college (one working on her second masters, the other on her first), one in college and one on the way.  If a man making $398,200  (let’s just say a tad—if tad means many factors—greater than my salary) a year has to worry about putting two kids through college, I must really be screwed.

And, given that my salary as a college professor is higher than the median income, that means most of the denizens of Main Street must be really, really screwed.  That is, if they want to send their kids to college which, we’ve been told for decades, is a must if you want your kids to enjoy a comfortable middle class life anymore.

When I went to USD thirty years ago the tuition was around $3k a year.  When my eldest went there four years ago it was more than twelve times that.  So, my daughter will have to pony up $500k + a year to send her kid there?  Just when will such college costs finally break the backs of the American middle class?  (And will it happen before or after our backs are broken by health care, retirement and housing costs?)

Meanwhile, it’s amazing that a person making $398,200 could worry about being middle of the pact anywhere.  No wonder the power elite of Wall Street and Washington, worried about making ends meet on their six, seven and eight figure incomes, haven’t been able to work up a decent sweat addressing the concerns of all the five digit income folk.

Viva la middle class devolution.

Bonus Round

So AIG took the public money ($170 billion worth) and then gave executive bonuses ($165 million.) So what else is new? Lee “I Did It My Way (With A Paltry $1.2 Billion Dollar Government Loan)” Iacocca and his band of brothers did the same back in 1980. Hey, corporate executives just took billions in the peoples’ money to clean up after your economic incompetence. What are you going to do next? Screw Disneyland. Millions in bonuses for being smart enough to ask government for billions in bailouts are due. Break out the 1907 Heidsieck champagne for one and all. Let the little people sip the Cool Aid.

Obama blasts them. Pundits punish them. Comedians ridicule them. And average people start thinking that a return of the guillotine might be a more timely retro moment than the comeback in ‘80s fashions. But, for all the chest beating and hand-wringing AIG executives simply claim their hands are tied—contracts (the kind Corporate America loves to shred when they involve workers or consumers) force them to pay those huge bonuses out. Contracts they negotiated with themselves to pay themselves huge amounts of money which they now claim they must pay—and receive–the taxpayer be damned.

OK, so be it. You pays your money you takes your chances, taxpayers. Chuck Schumer’s idea that we’ll just tax it back is so much bluster—tax increases aimed at a handful of people will never clear the Senate, let alone the courts. So hang up those angry-tax-payer-we-want-a –lynching-suits, everyone.

And put on your angry shareholder suits, instead.

We the People are now the 80% shareholders of AIG. We the People purchased those shares under false pretenses and assumptions (lack of full disclosure and transparency, fraud, lies, call it whatever legalese is needed.) The government should launch an immediate shareholders lawsuit on behalf of We the People against the AIG management, board and each individual recipient of these bonuses for gross managerial negligence or whatever the shareholder lawyers bash misanthropic managers with.

Hirer the best, highest paid Shareholder Shysters the Treasury can afford, give them 10% of the take and let them loose like the starved wolves Harvard and Yale trained them to be. Tie those bonuses up in court until their would-be recipients are little old derivative managers. Go after their personal assets as civil penalties—let them see what its like to be foreclosed on, to have their limos repoed, their kids told there’s no money to send them to that nice school or for band lessons. Force a Board shuffle that results in everyone at the top, from CEO Hank Greenberg to Chairman Edward Liddy on down being fired for cause. Let them spend a few months/years in the ranks of the unemployed and property-less. It would be a crueler punishment than prison.

You don’t even have to carry through on the lawsuits. The threat alone, properly delivered (if anyone has a few extra horse heads their not using and would like to contribute them to a good cause…) might well shake the AIG gurus of galloping gall out of their “We are the Lords of all we survey” complacency.

And if they are so totally detached from reality as not to realize just how close to a French Revolution moment they have come, then go ahead and sue ‘em. Sue ‘em ‘til their eyes bleed, their wallets implode and they become the most reviled symbols of greed gone bad since Marie Antoinette.

Cry havoc and release the sharks of righteous litigation.

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 here,  here 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.

Duh!

Duh

My two big “Duhs” of the week. (Part of my award-winning series of insightful journalistic excellence entitled “Duh!”):

First, the front page  article in the NY Times yesterday  morning on how the bonds markets has been gouging cities and states on bonds fees due to the significantly lower credit ratings Wall Street gives City Hall than Corporate Headquarters.

Duh.

Of course the Bonds Industry sticks it to local governments.  They do it for the same reason the best and the brightest of the Wharton School and the Harvard School of Business gave us the S&L debacle of the 1980s, the Dot.Com debacle of the 1990s and the Sub Prime Debacle of the 2000s.  They did it because they can.  Wall Street is all about money, of course, but it is all about short term money, with every bonds trader and fund manager dreaming of one thing:  hitting the big bonuses for moving the most paper, worthless or otherwise and getting to retire as a modern feudal lord to a summer house in the Hamptons.  If you can get there quicker by screwing Main Street USA, be it consumers with jumbo, “yeah you’re going to default on this sucker someday but by then I’ll be promoted and it won’t be my problem” loans or City Halls from east to west with higher borrowing costs on bonds.

Funny thing about that.  The free market says credit ratings and the cost of borrowing money should be a function of risk.  So who is more likely to default on a loan – a municipal government or a corporation?  That’s right, corporations.  So why do they get charged less for loans?  Because the Bonds markets figured out years ago that municipal politicians, playing with taxpayer money, would be less likely to kick up a fuss about being gauged at the Bonds spigot than corporate leaders held accountable by irate share holders.

They screwed the cities and states for the simplest of all reasons: they could.  And they did.

Duh.

And then comes this from the Center for Policy Initiatives report on campaign contributions to local political races.  Brace yourselves:  Real Estate developers ponied up around 20% of the million plus dollars contributed in 2007 to the 2008 Mayoral and council district races.

Who’d a thunk it?  Real Estate developers want to curry favor with the people who, if elected, would craft the ordinances and policies dictating how real estate can be developed in San Diego.

Duh.

The surprising thing to me in the CPI report is actually what a small percentage of the total  contributions the development industry constitutes.  I mean, come on developers.  You stand to make tens of millions of dollars by turning Otay factory lands into compacted housing developments and cramming in  thousands of additional  residential units into the I-15 & I-54 corridors.  At least have the good manners to contribute real money to the political campaigns and not a paltry few hundred Gs.

I mean,  I’d like to think that if San Diego government is for sale, it at least goes for a good, hefty price….

Duh.