From Signs of the Times
Gold closed at 681.90 dollars an ounce Friday, up 0.6% from $677.50 at the close of the previous week. The dollar closed at 0.7340 euros Friday, up 0.4% from 0.7312 at the close of the previous Friday. That put the euro at 1.3624 dollars compared to 1.3676 the Friday before. Gold in euros would be 500.51 euros an ounce, up 1.0% from 495.39 for the week. Oil closed at 74.04 dollars a barrel Friday, up 4.1% from $71.09 at the close of the week before. Oil in euros would be 54.35 euros a barrel, up 4.5% from 51.98 for the week. The gold/oil ratio closed at 9.21 Friday, down 3.5% from 9.53 at the end of the previous week. In U.S. stocks, the Dow closed at 13,357.74 Friday, down 0.2% from 13,378.87 for the week. The NASDAQ closed at 2,596.36 Friday, up 0.7% from 2,576.69 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.53, down nine basis points from 4.62 for the week.
While stocks were mixed overall for the week, with the Dow and the S&P 500 falling a little and the NASDAQ rising, the markets gained a lot on Friday, thanks to statements by the Great White Fathers in Washington, George Bush and Fed Chair, Ben Bernanke. Bernanke reassured investors that the Fed was willing to pump as much money as needed into the markets to avoid problems in the real economy. Bush, for his part, addressed the subprime housing crisis for the first time:
Stocks End Up After Bernanke, Bush Speak
Friday August 31, 4:42 pm ET
NEW YORK (AP) -- Wall Street closed out another erratic week with a big gain Friday after investors took comments from President Bush and Federal Reserve Chairman Ben Bernanke as reassuring signs Wall Street won't be left to deal with problems in the mortgage and credit markets on its own.
Investors balked early in Friday's session when comments from Bernanke didn't indicate a cut in the benchmark federal funds rate was imminent. However, they moved past some of their initial disappointment and appeared to concentrate on comments that the Fed would step in if needed.
Bernanke, speaking at the Fed's annual conference in Jackson Hole, Wyo., said the central bank will "act as needed" to prevent the credit crisis from hurting the national economy.
The major indexes fluctuated but by midday extended their gains after President Bush spoke about details of a plan to help borrowers facing trouble paying their mortgages.
"You've got all the speeches working for the market here," said Michael Church, portfolio manager at Church Capital Management in Philadelphia. "What we've seen in the last few weeks is that Ben Bernanke and the Federal Reserve are paying attention to what's going on. They will help correct the credit markets. For now, we're in a trading range and we have to sort through this mess."
According to preliminary calculations, the Dow rose 119.01, or 0.90 percent, to 13,357.74.
Broader stock indicators also rose. The Standard & Poor's 500 index rose 16.35, or 1.12 percent, to 1,473.99, and the Nasdaq composite index rose 31.06, or 1.21 percent, to 2,596.36.
Bond prices fell. The yield on the 10-year Treasury note, which moves inversely to its price, rose to 4.53 percent from 4.51 percent late Thursday. The U.S. bond market closed early ahead of the holiday weekend, and will be closed Monday along with the stock markets.
Since the stock market started tumbling in late July on fears that problems in mortgage and corporate lending would lead to a credit freeze and hurt the economy, the Fed has injected tens of billions of dollars into the banking system and lowered its discount rate -- the charge on its loans to commercial banks. But the Fed hasn't yet said it will lower the benchmark federal funds rate, and Wall Street's uncertainty over what the central bank will do next has kept the markets volatile. The Fed's next meeting is Sept. 18 and some investors had expected the central bank might hint at or even go through with a rate cut before then.
Bush's comments that the nation's economy can "weather any turbulence" in what he termed a period of transition for the financial markets appeared to help reassure investors. He outlined proposals to assist borrowers in trouble from a pullback in the housing market and credit problems.
Economic news, as Bernanke indicated Friday, appeared less relevant than normal as investors remained focused on upheaval in the credit market and mortgage concerns.
The Commerce Department reported on personal income and spending and the core personal consumption expenditures deflator, one of the Fed's preferred gauges of inflation. Personal incomes and spending edged up by 0.5 percent and 0.3 percent, respectively, and year-over-year core PCE stayed at 1.9 percent -- within the Fed's comfort range.
The Commerce Department also said orders to factories jumped by 3.7 percent in July, topping a 3.3 percent increase that had been expected. The rise, which came after three months of modest gains, followed an 11 percent jump in demand for transportation goods, including the biggest increase in orders for cars in more than four years.
Also, the Chicago purchasing managers index rose to 53.8 in August from 53.4 in July; the index, which measures manufacturing in the Midwest, is seen as a precursor to the Institute for Supply Management index, to be released on Tuesday.
Church said the market was helped by Friday's economic figures as well as a stronger-than-expected reading on second-quarter gross domestic product released Thursday.
"The consumer has been in the crosshairs of the bears for a while now," he said, referring to concerns that a pullback in consumer spending will upend economic growth. "I think this helps clarify a lot of the situation. The news from the consumer is good."
But despite relatively upbeat economic data, it is becoming increasingly clear that the Fed is going to have to lower interest rates to help the credit market turmoil from dragging down the economy, said Tom Higgins, chief economist at Payden & Rygel Investment Management in Los Angeles.
"The impact on economic growth in the coming quarter is going to be what we have to watch in order to gauge whether this is going to be a full on easing cycle at this point and what impact there is going to be on the financial markets.
"Volatility is going to be high in the coming weeks because the Fed's not sure what is going to happen due to these financial market interruptions and investors can't be sure either," Higgins said.
The dollar was mixed against other major currencies, while gold prices rose.
Light, sweet crude settled up 68 cents at $74.04 per barrel on the New York Mercantile Exchange.
Advancing issues outnumbered decliners by about 7 to 1 on the New York Stock Exchange, where volume came to a light 1.39 billion shares compared with 1.03 billion shares traded Thursday. Trading in late August often is light as investors take end-of-summer vacations.
The Russell 2000 index of smaller companies rose 9.75, or 1.25 percent, to 792.86.
In market action abroad, Japan's Nikkei stock average surged 2.57 percent, Hong Kong's key index jumped 2.13 percent, and China's Shanghai Composite Index rose 0.99 percent. In Europe, Britain's FTSE 100 rose 1.47 percent, Germany's DAX index rose 1.57 percent, and France's CAC-40 rose 1.25 percent.
Bernanke’s statements came in response, in part, to the sharp drop in stocks on Tuesday:
U.S. Stocks Fall Most in Three Weeks; Lehman Leads Banks Lower
Aug. 28 (Bloomberg) -- U.S. stocks posted their biggest drop in three weeks on weaker consumer confidence and speculation tighter credit markets will hurt bank earnings.
Citigroup Inc., Lehman Brothers Holdings Inc. and Bear Stearns Cos. led all 93 financial companies in the Standard & Poor's 500 Index lower after Merrill Lynch & Co. reduced its recommendation on the shares. Lennar Corp. and D.R. Horton Inc. sent homebuilders to the lowest level since May 2003.
The declines erased all of last week's gains. The S&P 500 decreased 34.43, or 2.4 percent, to 1,432.36, as 487 of its members fell. The Dow Jones Industrial Average lost 280.28, or 2.1 percent, to 13,041.85. The Nasdaq Composite Index slipped 60.61, or 2.4 percent, to 2,500.64.
The Conference Board reported today consumer confidence fell the most since 2005, while S&P/Case-Schiller said home values had the steepest tumble in at least five years in June. Financial shares have posted the biggest drop among 10 industry groups in the S&P 500 this year amid concern that higher borrowing costs sparked by subprime mortgage defaults will erode earnings from trading and debt underwriting.
"Our concern when we look out is with the U.S. consumer," said David Chalupnik, who helps manage about $100 billion as senior managing director at First American Funds in Minneapolis. "Are the housing issues that we're seeing going to finally depress the U.S. consumer? That's the risk that we see."
All 10 industry groups in the S&P 500 fell as the index wiped out last week's 2.3 percent gain that was spurred by speculation the Federal Reserve will take steps to stem losses in credit markets.
More than 20 stocks dropped for every one that rose on the New York Stock Exchange, the broadest retreat since Feb. 27.
Stocks extended their decline today after minutes from the Fed's Aug. 7 policy meeting showed central bankers put aside concerns about the rising cost of credit because they weren't convinced a slowdown in inflation would last.
Markets in Europe and Asia retreated, led by financial companies on concern the subprime mortgage rout is spreading and will erode global economic growth. The Morgan Stanley Capital International World Index slipped 1.8 percent to 1,520.88.
Consumer confidence fell this month by the most since just after Hurricane Katrina two years ago. The New York-based Conference Board's index declined to 105 from 111.9 in July. Economists surveyed by Bloomberg News forecast the index would slip to 104 from an originally reported July reading of 112.6.
Property values in 20 metropolitan areas decreased 3.5 percent in June from a year earlier, according to S&P/Case- Shiller.
The minutes from the Fed's last Open Market Committee meeting don't include the Aug. 16 emergency video conference when officials revamped their policy statement and cut the rate the Fed charges banks on direct loans. The benchmark lending rate was kept unchanged.
Bush’s statements were significant beyond the proposals they contained, since this is the first time he has acknowledged the seriousness of the problem.
Bush outlines aid for mortgage holders
Friday August 31
WASHINGTON (AP) -- President Bush on Friday outlined ways to help homeowners facing foreclosure — the administration's first effort to deal with an expected wave of defaults fueled by the mortgage crisis.
The initiatives, which are not aimed at bailing out lenders or speculators, are designed to help homeowners with risky mortgages keep their houses. In remarks in the Rose Garden, Bush also discussed efforts to keep the problems from arising in the future.
"The government's got a role to play, but it is limited," Bush said. "A federal bailout of lenders would only encourage a recurrence of the problem."
The president insisted that the U.S. economy was strong and could weather recent turbulence in the financial markets. He said the mortgage market, especially the subprime sector, has shown particular strain. One of the most troubling developments has been an increase in adjustable-rate mortgages, which start out with low interest rates, then reset to higher rates after a few years.
"This has led some homeowners to take out loans larger than they could afford based on overly optimistic assumptions about the future performance of the housing market," Bush said. "Others may have been confused by the terms of their loan, or misled by irresponsible lenders. Whatever the reason they chose this kind of mortgage, some borrowers are now unable to make their monthly payments, or facing foreclosure."
A key element of Bush's plan would allow homeowners with good credit histories, but who cannot afford their mortgage payments, to refinance into mortgages insured by the Federal Housing Administration to keep from defaulting.
Earlier this month, Bush predicted that the ongoing decline in the housing market wouldn't become precipitous, but would result in a "soft landing."
He rejected any direct government aid to homeowners losing their houses to foreclosures, saying he only supported federal government help that would encourage refinancing and educate prospective home buyers about risky mortgage terms
"Anybody who loses their home is somebody with whom we must show enormous empathy," the president said at an Aug. 9 news conference. "The word `bailout,' I'm not exactly sure what you mean. If you mean direct grants to homeowners, the answer would be no, I don't support that."
On Friday, Bush:
• Urged Congress to pass legislation that would give the Federal Housing Administration more flexibility to help mortgage holders with subprime mortgages.
• Pledged to work with Congress to reform the tax code to help troubled borrowers rework their loans.
• Called for rigorously enforcing predatory lending laws and strengthening lending practices.
Foreclosure and late payments have spiked, especially for so-called subprime borrowers with blemished credit histories or low incomes. Higher interest rates and weak home values have made it impossible for some to pay or to keep up with their monthly mortgage payments. Some overstretched homeowners can't afford to refinance or even sell their homes.
Mortgage foreclosures and late payments are expected to worsen. Some 2 million adjustable rate mortgages are to reset to higher rates this year and next. Steep penalties for prepaying mortgages have added to some homeowners' headaches.
The economy enjoyed a strong revival in the spring although growing troubles in housing and credit markets have darkened prospects considerably since then. The Commerce Department reported Thursday that the gross domestic product grew at an annual rate of 4 percent in the second quarter — the strongest showing in more than a year.
But that growth could be the best showing for some time as the economy continues to be battered by the worst housing slump in 16 years and a widening credit crisis that has sent financial markets on a roller-coaster ride in recent weeks.
That the administration has finally taken notice of the housing collapse is a sign both of the seriousness of the problem and that they know the people are becoming aware of it. Had they not tried to pull the wool over our eyes for so long, continually repeating how strong the economy was, they might have been able to prevent the problems. But their backers would make a lot less money by preventing the boom and bust cycle.
I even heard a lead-in for an NPR (National Public Radio in the United States) news story on the issue saying that “it now looks like the housing slump will be worse than predicted.” Predicted by whom? This has been the easiest thing in history to predict. It seems NPR took seriously the statements put out over the past several years intended to keep the boom going and to drive people further into debt.
Confident talk as credit crisis unfolds
August 27, 2007
Bob Hoye is a market historian and editor of Institutional Advisors, a provider of research to financial institutions, mining, and petroleum companies internationally at www.insitutionaladvisors.com.
“This is a liquidity driven market."
“Getting rid of M3 makes expansion invisible."
“Bernanke is closely attuned to the market and as to how much liquidity needs to be in the system for the market to be supported.”- Marty Chenard, StockTiming.com, July 20
That was not an isolated voice of confidence, as one usually critical and widely-followed observer on August 18 wrote, “Rather than the End of the World, credit markets will get back to normal, as there is a lot of money that needs to find a home.”
Then on August 21 someone at the Wall Street Journal less conditioned by wishful thinking reported, “Debt isn’t merely more expensive, it is scarcely available at any price or on any terms.” The latter is reality and it will likely be as severe as when Thomas Gresham was agent and advisor to the British government in Antwerp when it was the financial capital of the world. Elizabeth’s royal demands for funds were considered undeniable, but during the crisis of 1561 Gresham was obliged to report that there was no credit available, “even at double collateral.”
Being a trader he could accept fate in the market place. There have been many booms and panics since accompanied by generations of academics who all seem to have to do something about the crisis and over the centuries all come up with the same solutions to a credit contraction. Add more credit without understanding that the problem is directly due to the over-use of credit, and cut administered rates without understanding the short-dated market rates of interest plunge during the early stages of a contraction.
As the saying goes, “Nonsense so blatant that only an intellectual would fall for it”.
Stock Markets continue to be suspended by convictions about earnings, valuations, the miracles of policymaking and the soundness of the economy. This is the story that has worked since 2003 when the economy began to support the bull market that started in October 2002.
The point to be made is that the stock market leads major turns in the economy so there is little reason to use economic trends or, shudder, projections.
The next point is that changes in credit markets lead turns in the stock market, and central banks typically follow changes in the yield curve.
For some months now we’ve been trying to place orthodoxy in perspective and recently market forces are adding a practical instruction. A salient event was that the decline in bill yields, in Canada and the US, was not by any means anticipating a “managed” decline in administrative rates. The decline in bill rates is a classic “cash in a crash” rush, which is the next indelible step towards a cyclical credit contraction.
And as these pages repeat, credit is money of the mind and that mind has changed, from using any asset for the application of leverage to a revulsion for credit.
The truly sophisticated series in the play is once again the yield curve. Inversion shows a strong demand by speculators for short-term funds and the transition to steepening indicates a decline in speculative demand and all that that entails.
Of course, with the boom NYSE margin debt soared, exceeding the peak reached in 1Q 2000 by some 35%. On the big picture, this is nothing. In May the guys at Dominion Bond Rating Service (DBRS) provided a world-wide calculation on different positions and they go as follows:
10% Securities such as stocks, bonds and money market
11% Structured asset-backed product
This attempts to put some numbers on the most egregious house of cards in history. At the culmination of great manias, typically the reckless exposure is in fringe banks that are going to show traditional banks the “new” way to do business. In the 1772 bubble it was the Ayr Bank, which example was used by Adam Smith in The Wealth of Nations, published in 1776.
As noted in The Unholy Trinity of July 21 (www.institutionaladvisors.com) the corruption of fiduciary responsibility starts at the top with the Fed, which has been run far too long as an instrument of experimental economics. The next two corruptions have been math modeling of pricing and credit rating. This has enabled the penetration of fringe, or as described in the US during the calamities of 1837 and 1857 as “wildcat” banking, further into the realm of traditional banking than at any time in history.
In some religions repentance takes only a moment. In political-economy it takes a lot longer, with salvation much longer than that. It seems like changes in credit markets will continue to influence the stock market. In looking to the near term, there has been little change in traditional credit spreads over the past week and the BBB subprime bond price has improved from 41.42 last Thursday to 43.21. This has likely been the foundation of the rally since last Thursday.
The change in the credit markets has hit credit spreads from long to money market desks, and has done a huge number to the curve. The loss of liquidity has yet to hit long treasuries – it will, and it could be the last boot to fall.
Conditions remain hazardous.
[Wall Street is] “a colossal suction pump steadily draining the world of capital.”- Jesse Livermore, June 11, 1929
“If recession should threaten (as is not indicated at present) there is little doubt that the Reserve System would take steps to check [it].”- Harvard Economic Society, October, 1929d
The numbers Bob Hoye cited about percentages of total global investment holdings (highlighted in red) are startling. For a little background into what this means, here is Stephen Lendman
Economist Hyman Minsky was mostly ignored while he lived, but his star may be rising 11 years after his death in 1996. Some described him as a radical Keynesian based on the theories of economist John Maynard Keynes who taught economies operate best when mixed. He believed state and private sectors both play important roles with government stepping in to stimulate or constrain economic activity whenever private sector forces aren't able to do it best alone.
It's the opposite of "supply-side" Reaganomics and its illusory "trickle down" notion that economic growth works best through stimulative tax cuts its proponents claim promote investment that benefits everyone. It was Reagan-baloney then and now, and so is the notion markets are efficient and work best when left alone.
Minsky explained it, and people are now taking note in the wake of current market turbulence. His work showed financial market exuberance often becomes excessive, especially if no regulatory constraints are in place to curb it. He developed his theories in two books - "John Maynard Keynes" and "Stabilizing an Unstable Economy" as well as in numerous articles and essays.
In them, he constructed a "financial instability hypothesis" building on the work of Keynes' "General Theory of Employment, Interest and Money." He provided a framework for distinguishing between stabilizing and destabilizing free market debt structures he summarized as follows:"
Three distinct income-debt relations for economic units....labeled as hedge, speculative and Ponzi finance, can be identified."
-- "Hedge financing units are those which can fulfill all of their contractual payment obligations by their cash flows: the greater the weight of equity financing in the liability structure, the greater the likelihood that the unit is a hedge financing unit."
-- "Speculative finance units are units that can meet their payment commitments on 'income account' on their liabilities, even as they cannot repay the principle out of income cash flows. Such units need to 'roll over' their liabilities - issue new debt to meet commitments on maturing debt."
-- "For Ponzi units, the cash flows from operations are (insufficient)....either (to repay)....principle or interest on outstanding debts by their cash flows from operations. Such units can sell assets or borrow. Borrowing to pay interest....lowers the equity of a unit, even as it increases liabilities and the prior commitment of future incomes."
"....if hedge financing dominates....the economy may....be (in) equilibrium. In contrast, the greater the weight of speculative (and/or) Ponzi finance, the greater the likelihood that the economy is a deviation-amplifying system....(based on) the financial instability hypothesis (and) over periods of prolonged prosperity, the economy transits from financial relations (creating stability) to financial relations (creating) an unstable system."
"....over a protracted period of good times, capitalist economies (trend toward) a large weight (of) units engaged in speculative and Ponzi finance. (If this happens when) an economy is (experiencing inflation and the Federal Reserve tries) to exorcise (it) by monetary constraint....speculative units will become Ponzi (ones) and the net worth of previous Ponzi units will quickly evaporate. Consequently, units with cash flow shortfalls will be forced to (sell out). This is likely to lead to a collapse of asset values."
Minsky developed a seven stage framework showing how this works:
Stage One - Displacement
Disturbances of various kinds change investor perceptions and disrupt markets. It may be a tightened economic policy from higher interest rates or investors and lenders retrenching in reaction to:
-- a housing bubble, credit squeeze, and growing subprime mortgage delinquencies and defaults with spreading contagion affecting:
-- other mortgages, and the toxic waste derivative alchemy of:
-- collateralized debt obligation (CDO) instruments (packages of mostly risky junk and other debt), --commercial and residential mortgage-backed securities (CMBS and RBMS - asset backed by mortgage principle and interest payments), and even
-- commercial and AAA paper; plus
-- home equity loans harder to service after mortgage reset increases.
Stage Two - Prices start to rise
Following displacement, markets bottom and prices begin rising as fundamentals improve. Investors start noticing as it becomes evident and gains momentum.
Stage Three - Easy credit
Recovery needs help and plentiful easy credit provides it. As conditions improve, it fuels speculation enticing more investors to jump in for financial opportunities or to borrow for a new home or other consumer spending. The easier and more plentiful credit gets, the more willing lenders are to give it including to borrowers with questionable credit ratings. Yale Economist Robert Shiller shares the view that "booms....generate laxity in standards for loans because there a general sense of optimism (like) what we saw in the late 80s" preceding the 1987 crash that doesn't necessarily signal an imminent one now.
New type financial instruments and arrangements also arise as lenders find creative and risky ways to make more money. In recent years, sharply rising housing prices enticed more buyers, and lenders got sloppy and greedy by providing interest-only mortgages to marginal buyers unable to make a down payment.
Stage Four - Overtrading
The cheaper and easier credit is, the greater the incentive to overtrade to cash in. Trading volume rises and shortages emerge. Prices begin accelerating and easy profits are made creating more greed and foolish behavior.
Stage Five - Euphoria
This is the most dangerous phase. Cooler heads are worried but fraudsters prevail claiming this time is different, and markets have a long way to go before topping out. Greed trumps good sense and investors foolishly think they're safe and can get out in time. Stories of easy riches abound, so why miss out. Into the fire they go, often after the easy money was made, and the outcome is predictable. The fraudsters sell at the top to small investors mistakenly buying at the wrong time and getting burned.
Stage Six - Insider profit taking
The pros have seen it before, understand things have gone too far, and quietly sell to the greater fools buying all they can. It's the beginning of the end.
Stage Seven - Revulsion
When cheap credit ends, enough insiders sell, or an unexpected piece of bad news roils markets, it becomes infectious. It can happen quickly turning euphoria into revulsion panicking investors to sell. They begin outnumbering buyers and prices tumble. Downward momentum is far greater and faster than when heading up.
Sound familiar? It's a "Minsky Moment," and the irony is most investors know easy credit, overtrading and euphoria create bubbles that always burst. The internet and tech one did in March, 2000, and since mid-July, reality caught up with excess speculation in equity prices, the housing bubble, growing mortgage delinquencies and subprime defaults. Goldilocks awoke and sought shelter as lenders remembered how to say "no." This time, central banks rode to the rescue (they hope) with huge cash infusions, the Fed cut its discount rate a half point August 17, and it signaled lower "fed funds" rates ahead if markets remain tight.
If the numbers are right, then, 78% of all investment money in the world is in “Ponzi units.” Not good news.
Today is Labor Day in the United States. Yes, I know the rest of the world celebrates it on May 1, but here in the U.S. we don’t want to have it on the same day as all those foreign socialists and communists. It is a good time to look at the state of the labor movement. Last week we wrote a bit about the IWW (International Workers of the World) or “Wobblies.” So, too, did Stephen Lendman:
The War on Working Americans - Part I
As Labor Day approaches, what better time to assess the state of working America. It's under assault and weakened by decades of eroding rights in the richest country in the world once regarded as a model democratic state. It's pure nonsense in a nation always dedicated to wealth and power, but don't try finding that discussed in the mainstream. Today, it's truer than ever making the struggle for equity and justice all the harder. That's what ordinary working people now face making beating those odds formidable at the least.
In a globalized world, the law of supply and demand is in play with lots more workers around everywhere than enough jobs for them. It keeps corporate costs low and profits high and growing with Business Week (BW) magazine reporting in its April 9 issue "the share of (US) national income going to corporate profits (compared to labor) is hovering around a 50 year high." BW then quoted Harvard economist Richard Freeman's research paper saying only "a global pandemic that kills millions of people" could cause a labor shortage and elevate worker bargaining power.
There's little in sight, and the result is a huge reserve army of unemployed or underemployed working people creating an inevitable race to the bottom in a corporatized marketplace. It harms workers everywhere, including in developed nations. They're outsourcing good jobs abroad to lower wage countries and pressuring workers to do more for less because they've got little bargaining power to fight back. More on this below.
Organized Labor in the US - Its Rise and Decline
Organized labor's rise began modestly and was fragile in the earliest days of the republic. It gained strength in good economic times, then lost it in downturns like the depression in 1873. By the 1880s, things were better as the nation underwent rapid industrialization. With it came rising prosperity and workers wanting a share of the benefits. They turned to unions for help with skilled artisans leading the way helping the unskilled as well in their efforts to organize.
New labor organizations arose, older ones expanded, and as they did, they grew more active and militant. It led to the "great uprising of labor" in 1886, including the landmark Chicago May 4 Haymarket Riot protesting police violence against strikers the previous day. Its impact was hugely negative at first. It forced organized labor to regroup and settle in for a long period of recovery.
This was at a time the incipient labor movement was over two million and rising beginning with its organizing efforts launching it in the 1870s. By the 1880s, it had enough strength to stage huge strikes for better pay and working conditions like the struggle for an eight hour day that had 80,000 strikers parading peacefully down Chicago's main Michigan Avenue on May 1, 1886 in what's now regarded as the first ever May Day Parade.
Workers were helped from community-based emerging independent political parties sensitive to their rights. That's unheard of today in an age where no effective political party stands for working people despite Democrats and Republicans saying they do. Workers are now on their own. They're left to struggle in a global marketplace with pathetically little help weak unions can provide.
Earlier in the 19th century, the first national union arose as workers began asserting their rights. It was called the National Labor Union (NLU), emerged after the Civil War, but was short-lived. Next came the Knights of Labor in 1869 with a mandate to protect all workers including women and blacks after 1883. They were represented by industry groups rather than trade and skill level that was common until then. Its goals were high but achievements few at a time of widespread worker repression in the 1880s. It led to its decline as a more resilient union emerged the result of disaffection with the Knights.
It was called the American Federation of Labor (AFL) and was founded by Samuel Gompers in 1886 to replace its predecessor, the Federation of Organized Trades and Labor Unions. The ill-fated American Railway Union (ARU) followed in 1893, the largest industrial union of its day for a time, and the Industrial Workers of the World (IWW) that at its peak in the 1920s had 100,000 members.
The Wobblies are still around 102 years after Big Bill Haywood, Eugene Debs and others founded the union in 1905 as a commitment to working people in their struggle with corporate employers. It's motto was "an injury to one is an injury to all," its goal was revolutionary, and it's still true to its root ideology today as stated in the current IWW Constitution:
"The working class and the employing class have nothing in common. There can be no peace so long as hunger and want are found among millions of the working people.....Between (workers and employers) a struggle must go on until the workers of the world organize as a class, take possession of the means of production, abolish the (unfair) wage system, and live in harmony with the Earth....It is the historic mission of the working class to do away with capitalism....By organizing industrially we are forming the structure of the new society within the shell of the old."
That philosophy under dedicated men like Haywood, Debs and others set the Wobblies on a collision course with government and big business that tried to crush it. During WW I in 1917, it was vicious under Woodrow Wilson's Justice Department (DOJ). It used the repressive Espionage and Sedition Acts to raid and disrupt union meeting halls across the country. It's the same tactic used today against Latino immigrants and Muslims in the concocted "war on terrorism" and the one against undocumented workers.
In 1917 and later, Wilson's DOJ acted much the same way arresting 165 Wobbly leaders on the grounds they hindered the war effort by using their First Amendment right to speak out against it. They were tried near war's end in 1918, all convicted, and given long prison terms under a Democrat President thought of reverentially today. Bill Haywood was luckier. After conviction, he was released on bail and fled to the Soviet Union where he remained until his death, but the IWW was never again the same.
They were hammered again from 1918 - 21 during the infamous Palmer Raids under Wilson Attorney General Mitchell Palmer. He targeted radical left wing groups like the Wobblies at the time of the first "Red Scare" after the 1917 Russian Revolution.
It launched J. Edgar Hoover's career in the DOJ Bureau of Investigation's new General Intelligence Division that later became the FBI in 1935. The IWW is still around, still dedicated to its founding principles, but it's worldwide membership is only around 2000, mostly in the US.
The AFL fared much better. It became the largest union in the first half of the 20th century even after the founding of the Congress of Industrial Organizations (CIO) in 1935 with which it merged in 1955. Today, it's still the country's largest federation of unions. Its web site claims a membership of around 10 million workers, even after the Service Employees International Union (SEIU), Teamsters, UNITE-HERE and United Food and Commercial Workers (UFCW) broke away from the federation in 2005. The United Brotherhood of Carpenters and Joiners of America (UBC) did as well in 2001, and the Laborers International Union of North America (LIUNA) left in 2006. They formed a new Change to Win federation in September, 2005 representing about 5.5 million workers. It likely left AFL-CIO with fewer members than it claims with its true size closer to 8 million or less.
AFL-CIO's state is a metaphor for the times. Organized labor today is weak in the face of declining membership and corporate dominance with workers losing out in a globalized world. It's fall has been long-term and painful with worker rights hammered since the 1980s. It's a long way today from when the landmark Wagner Act passed in 1935 under Franklin Roosevelt. It established the National Labor Relations Board (NLRB) guaranteeing labor the right to bargain collectively on equal terms with management for the first time ever, but it wasn't an act of kindness.
It came at the height of The Great Depression when those in power feared the worst. FDR and Congress acted to save capitalism at a time they feared mass worker hostility might boil over like it did in 1917 Soviet Russia. Like all other worker victories, this one came through struggle. It was from organizing, pressing their demands, taking to the streets, going on strike, holding boycotts, battling police and National Guard forces supporting management against working people, paying with their blood and lives and finally achieving results. They got an eight-hour day, a living wage, and on-the-job benefits because strong unions went head-to-head with management and won. It's worlds different now with corporate giants in bed with friendly governments, and Democrats and Republicans vying to see which party can be more accommodative.
From the 19th century forward, it was never easy for labor from the height of the movement's strength to the present. Unions were always disadvantaged even at a time of reasonable labor-management harmony. The passage of the harsh 1947 Taft-Hartley Labor-Management Relations Act showed how tenuous their position always was. Harry Truman vetoed the bill but was overridden. He called it a "slave labor bill" and then hypocritically used it 10 times, the most ever by any President to this day. The law throttles organized labor by giving the President power to stop strikes by court-ordered injunction for 80 days. He can claim the national interest, some other one, or none at all that's always the same one - to help corporate management deny workers their rights.
Taft-Hartley is still the law and was last invoked by GW Bush in the summer of 2002 against 10,500 west coast dock workers "locked out" (not striking) by the Pacific Maritime Association representing shipping companies and terminal operators.
Earlier in 2001 and new in office, Bush showed his anti-labor stripes straightaway. He invoked the Railway Labor Act blocking a threatened strike by 10,000 mechanics, cleaners and custodians at Northwest Airlines set for March 12. He acted again against United Airlines' 15,000 mechanics in December. He also took management's side in August, 2006 against Northwest's 8700 flight attendants' planned job action against the bankrupt airline's unfair demands for huge wage cuts and increases in hours worked. Bill Clinton was just as unfriendly invoking the Railway Labor Act against American Airline's pilots and to prevent railroad strikes 13 times.
Laws like these, and Presidents' willingness to use them, crushed the spirit and letter of the Wagner Act. They greatly weakened or revoked hard won provisions, and as a consequence, diminished union clout. Taft-Hartley allows stiff penalties for union violations but minimal ones for companies. It enacted a list of "unfair (union) labor practices" prohibiting jurisdictional strikes (relating to worker job assignments), secondary boycotts (against firms doing business with others being struck), wildcat strikes, sit-downs, slow-downs, mass-picketing against scabs brought it, closed shops (in which employees must join unions), union contributions to federal political campaigns, and more while legalizing employer interventions aimed at preventing unionizing drives.
It began a process of gradual erosion of union power to bargain collectively. That's their weapon now weakened because of devious employer tactics. They can illegally fire union sympathizers (thousands each year) and get away with only minor wrist slap fines after years of expensive litigation to prove wrongdoing. Further, employers can fire workers for any lawful reason like incompetence or no stated reason at all. Even the right to strike is neutralized with employers able to hire replacements or threaten to ship jobs offshore. With government on their side, they're empowered to fire union workers and legally replace them with lower-paid scabs or Latino immigrants.
The Reagan administration marked the beginning of the current trend in its first year. He was contemptuous of organized labor while hypocritically saying "I support unions and the rights of workers to organize and bargain collectively." He showed it in August, 1981 by firing 11,000 striking PATCO air traffic controllers, jailing its leaders, fining the union millions of dollars, and effectively busting it in service to the monied interests backing him. It was a shot across organized labor's bow and a clear message to business and industry of what to expect from a friendly Republican President. Nothing changed since under Democrat or Republican administrations with workers unable to match the power and influence of capital. The toll ever since has been devastating.
Union membership has been in steady decline from its post-war high of 34.7% in the 1950s. It held fairly constant through most of the 1970s at around 24% where it stood in 1979. At the end of the Reagan era, it was down to 16.8% and is currently around 12% overall with about 36% of government workers unionized but only 7.4% of them in the private sector. It's the lowest it's been since the beginning of the mass unionization struggles of the 1930s and in the private sector in over 100 years. It's because of Democrat and Republican antipathy to organized labor and corporate threats to close plants and outsource jobs. It's forced workers to take pay cuts and fewer benefits that are dropping to where they'll be none, and they'll be on their own to live or die by market-based rules rigged against them….
It was no accident that the IWW declined and was supressed while the AFL (American Federation of Labor) succeeded. The Wobblies called for all workers everywhere to stop working until the employers gave up. The AFL maintained cozy relationships with employers. It represented mostly skilled workers and called strikes on individual companies for better pay and conditions for its members, but not for all workers. Here is Howard Zinn in A People’s History of the United States
The AFL was an exclusive union—almost all male, almost all white, almost all skilled workers. Although the number of women workers kept growing—it doubled from 4 million in 1890 to 8 million in 1910, and women were one-fifth of the labor force—only one in hundred belonged to a union.
…Racism was practical for the AFL. The exclusion of women and foreigners was also practical. These were mostly unskilled workers, and the AFL, confined mostly to skilled workers, was based on the philosophy of “business unionism” (in fact, the chief official of each AFL union was called the “business agent”), trying to match the monopoly of production by the employer with a monopoly of workers by the union. In this way it won better conditions for some workers, and left most workers out.
AFL officials drew large salaries, hobnobbed with employers, even moved in high society….
The well-paid leaders of the AFL were protected from criticism by tightly controlled meetings and by “goon” squads—hired toughs originally used against strikebreakers but after a while used to intimidate and beat up opponents inside the union. (pp.320-2)
That was a textbook case divide-and-conquer, raise-a-class-of-collaborators strategy by the ruling class. Very effective. The Wobblies, on the other hand, called for Direct Action. As an IWW pamphlet put it,
Shall I tell you what direct action means? The worker on the job shall tell the boss when and where he shall work, how long and for what wages and under what conditions. (Ibid., p. 323)
Direct action means industrial action directly by, for, and of the workers themselves, without the treacherous aid of labor misleaders or scheming politicians. A strike that is initiated, controlled, and settled by the workers directly affected is direct action… Direct action is industrial democracy. (Ibid.)
According to Zinn, the Wobblies,
… were attacked with all the weapons the system could put together: the newspapers, the courts, the police, the army, mob violence.
Let’s close, then, with a dedication to the Wobblies and a song by Patti Smith
People Have the Power
I was dreaming in my dreaming
of an aspect bright and fair
and my sleeping it was broken
but my dream it lingered near
in the form of shining valleys
where the pure air recognized
and my senses newly opened
I awakened to the cry
that the people / have the power
to redeem / the work of fools
upon the meek / the graces shower
it's decreed / the people rule
The people have the power
The people have the power
The people have the power
The people have the power
Vengeful aspects became suspect
and bending low as if to hear
and the armies ceased advancing
because the people had their ear
and the shepherds and the soldiers
lay beneath the stars
and laying arms
to waste / in the dust
in the form of / shining valleys
where the pure air / recognized
and my senses / newly opened I
awakened / to the cry
Where there were deserts
I saw fountains
like cream the waters rise
and we strolled there together
with none to laugh or criticize
and the leopard and the lamb
lay together truly bound
I was hoping in my hoping
to recall what I had found
I was dreaming in my dreaming
god knows / a purer view
as I surrender to my sleeping
I commit my dream to you
The power to dream / to rule
to wrestle the world from fools
it's decreed the people rule
it's decreed the people rule
LISTEN I believe everything we dream
can come to pass through our union
we can turn the world around
we can turn the earth's revolution
we have the power
People have the power ...