Monday, April 21, 2008

Signs of the Economic Apocalypse, 4-21-08


Gold closed at 915.20 dollars an ounce Friday, down 1.3% from $927.00 for the week. The dollar closed at 0.6322 dollars Friday, down less than 0.1% from 0.6325 at the close of the previous Friday. That put the euro at 1.5817 dollars compared to 1.5810 the week before. Gold in euros would be 578.62 euros an ounce, down 1.3% from 586.34 at the close of the previous week. Oil closed at 116.69 dollars a barrel Friday, up 5.9% from $110.14 for the week. Oil in euros would be 73.78 euros a barrel, up 5.9% from 69.66 at the close of the Friday before. The gold/oil ratio closed at 7.84 down 7.4% from 8.42 for the week. In U.S. stocks, the Dow closed at 12,849.36 Friday, up 4.3% from 12,325.42 at the close of the previous Friday. The NASDAQ closed at 2,402.97 Friday, up 4.9% from 2,290.24 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.71%, up 24 basis points from 3.47 for the week.

Stocks soared last week on higher than expected profits reported by some key corporations.
U.S. Stocks Advance on Earnings; Citigroup, Google Shares Climb

Elizabeth Stanton

April 18 (Bloomberg) -- U.S. stocks rallied, capping the best week since February for the Standard & Poor's 500 Index, after companies from Citigroup Inc. to Google Inc. to Caterpillar Inc. posted results that topped analysts' estimates.

The market, battered last week by General Electric Co.'s disappointing results, climbed today after Citigroup's loss was less than the most pessimistic projections and profits at Google and Caterpillar were boosted by overseas growth. Honeywell International Inc. and Xerox Corp. also advanced on better-than- forecast results. All 10 industry groups in the S&P 500 rose, extending its weekly gain to 4.3 percent.

“People are coming to the realization that, excluding the finance sector, the earnings profile looks pretty good,” said Michael Mullaney, a money manager at Fiduciary Trust Co., which oversees $10 billion in Boston. Google’s results “put a calming effect on the entire market, especially the technology sector.”

The S&P 500 added 24.77, or 1.8 percent, to 1,390.33, its highest level since Feb. 1. The Dow Jones Industrial Average rallied 228.87, or 1.8 percent, to 12,849.36, a three-month high. The Nasdaq Composite Index increased 61.14, or 2.6 percent, to 2,402.97. Four stocks rose for each that fell on the New York Stock Exchange. European shares advanced, while Asia’s benchmark index retreated.

Profits have exceeded analysts’ estimates at 58 percent of the 100 companies in the S&P 500 that released first-quarter results so far. Earnings are forecast to decline an average of 13.7 percent in the January-to-March period, according to estimates compiled by Bloomberg. Sixty-five percent of companies in the index topped analysts’ first-quarter expectations last year, when earnings climbed 10.3 percent.

S&P 500 Rebound

While the S&P 500 has rebounded 9.2 percent from a 19-month low on March 10, the benchmark for American equities is still down 5.3 percent in 2008.
Companies in the index trade for an average 14.8 times estimated profits, the cheapest in 18 years when prices are compared with historical earnings.

Citigroup increased $1.08, or 4.5 percent, to $25.11. The bank said revenue fell 48 percent to $13.2 billion, topping the average estimate of $11.1 billion from analysts surveyed by Bloomberg. The first-quarter net loss of $1.02 a share compared with the $1.66 loss predicted by Merrill Lynch & Co.’s Guy Moszkowksi, Institutional Investor’s top-rated brokerage analyst.

“A lot of people were worried that we’d have a big negative surprise,” Edgar Peters, chief investment officer at PanAgora Asset Management in Boston, which oversees $25 billion, said in a Bloomberg Television interview. “When we didn’t have a big negative surprise, that was a positive surprise.”

Citigroup helped carry the S&P 500 Financials Index to a 1.8 percent advance and extend the gauge’s weekly gain to 5.2 percent. Bank of America Corp., the largest U.S. bank by market value, rallied $1.09 to $38.56. JPMorgan Chase & Co. climbed 64 cents to $45.76.

Sensing the worst has passed, gold fell almost 3% in one day Friday. So does this mean the crisis is over? Of course not. The price of oil soared last week, adding more inflationary pressures. Meanwhile the United States, home to the world’s reserve currency, is mired in two expensive losing wars. And its political class has absolutely no answers for either the wars or the disastrous fiscal situation resulting from them. U.S. political leaders, having grown up like abused children in the past thirty years of right-wing reaction and disaster capitalism-style economic deregulation can’t even ask the right questions. And when one makes even the weakest step towards doing that, he is slapped down hard:

The Obama “mistake”: Breaking the taboo on discussing class in America

Patrick Martin

17 April 2008

Over the past five days, media commentary on the US presidential election campaign has focused on the supposedly disastrous “gaffe” made by Democrat Barack Obama in his comments earlier this month at a San Francisco fundraiser, where he remarked on the mood of anger and bitterness in small-town and rural America, and how this was expressed in various political and ideological forms.

It is worth restating again the offending words, since they have provoked an outpouring of denunciation, distortion and (in the case of Obama’s liberal supporters) lamentation:

“You go into these small towns in Pennsylvania and, like a lot of small towns in the Midwest, the jobs have been gone now for 25 years and nothing’s replaced them. And they fell through the Clinton administration, and the Bush administration, and each successive administration has said that somehow these communities are going to regenerate and they have not. And it’s not surprising then they get bitter, they cling to guns or religion or antipathy to people who aren’t like them or anti-immigrant sentiment or anti-trade sentiment as a way to explain their frustrations.”

It should be noted that Obama made these frank observations at a private meeting with presumably well-off potential contributors, not in a public forum. They came to light only when they were published by the Huffington Post some days later. Obama was attempting to answer a participant at the gathering who asked why his opponent, Hillary Clinton, retained a lead in the polls leading up to the April 22 Democratic primary in Pennsylvania.

Nevertheless, the candidate—more intelligent and observant than the average bourgeois politician—said a mouthful, and perhaps more than he intended. He violated the conventional rules of big business politics in the United States on at least three counts.

First, he touched on the reality of class alienation, noting that millions of working people face increasingly difficult economic circumstances and are bitter over the refusal of the political establishment, in both Democratic and Republican administrations, to help them.

Second, he suggested that working people are not only materially distressed, but also ideologically misled. Popular anger over vanishing jobs and falling wages has been diverted into various blind alleys by right-wing political campaigns over guns, abortion, immigration and trade (the first three mainly from Republicans, the last mainly from Democrats, including Obama himself).

Third (and worst, as far as Obama and his liberal supporters are concerned), he implicitly equated religion with the other nostrums used to misinform and confuse workers.

For this he has been denounced by the Republican presidential candidate John McCain and, even more vociferously, by his Democratic opponent, Hillary Clinton.

Right-wing and pro-Republican pundits have savaged Obama for the alleged slur on religion, while trying as much as possible to ignore the substance of his observations about the economic conditions facing the working class. Commentators like the Wall Street Journal editorial page and New York Times columnist William Kristol denounced Obama as a closet Marxist.

“As political psychoanalysis, this is what they believe in Cambridge and Hyde Park,” the Journal declared. “Guns and God are the opiate of the masses, who are being gulled by Karl Rove and rich Republicans. If only they embraced their true economic self-interest, these pure [presumably the editors meant “poor”] saps wouldn’t need religion and they wouldn’t dislike non-white immigrants.”

The liberal commentators are typified by E. J. Dionne of the Washington Post. They regard what Obama said as true, indeed almost a truism, but believe that to say it is a political blunder. Dionne bemoaned “Obama’s mistake,” but then devoted his column to criticizing Hillary Clinton for her attacks on Obama. “Something doesn’t parse when a Wellesley and Yale Law School graduate whose family made $109 million since 2001 relentlessly assails a former community organizer on the grounds that he is an elitist,” he wrote.

“It has been sickening over the years to watch Republicans, who always rally to the aid of the country’s wealthiest citizens, successfully cast themselves as pork-rind-eating, NASCAR-watching, gun-toting populists,” he concluded.” He did not, however, address the most important question—how this political burlesque has been enabled by the Democratic Party’s drastic shift to the right and abandonment of any program of social reform and wealth redistribution.

An alternate liberal perspective, if anything more reactionary, came from New York Times columnist Bob Herbert, who wrote Tuesday, “Senator Obama fouled up when he linked frustration and bitterness over economic hard times with America’s romance with guns and embrace of religion. But, please, let’s get a grip. What we ought to be worked up about is the racism that still prevents some people from giving a candidate a fair chance because of his skin color.”

Herbert, who is black, faulted Obama for ducking what the columnist regards as the central issue: the endemic racism of the white working class. In his view, racism, not religion, guns, immigration or trade, is the main means of diverting working-class anger and the main obstacle to the success of Obama’s candidacy.

What none of these commentators care to confront is the extraordinary scale of the economic disaster facing millions of working people, not only in the de-industrialized towns of Pennsylvania, Indiana and North Carolina, a focus of the current stage of the presidential campaign, but throughout the country, in large cities and their suburbs as well as rural and small-town America.

It is worth citing in this context the figures reported April 12 by a New York Times economics columnist, Floyd Norris, on the growth of unemployment. Norris examines the contrast between the official unemployment rate and other measures of joblessness, which show a far more difficult position facing working people.

For men aged 25 to 54, the prime working years, the official unemployment rate is 4.1 percent. This figure is artificially low since it does not count people who have given up looking for work. The US Labor Department reported that in March the actual proportion of men 25 to 54 without jobs stood at 13.1 percent. Norris observes, “Only once during a post-World War II recession did the rate ever get that high. It hit 13.3 percent in June 1982, the 12th month of the brutal 1981-82 recession.”

Norris cites another series of Labor Department statistics which calculate jobs lost based on a three-month moving average, a method that evens out fluctuations and suggests the longer-term trend. He notes: “The government breaks down the figures by race, and those figures show that over the last year almost all the jobs lost by men in the 25 to 54 age group have been lost by whites, with most of those losses affecting men ages 35 to 44.”

These figures suggest that while unemployment for black men has been and remains high, the biggest change in the past year has been a sharp increase in jobs lost by white men in the prime working years—precisely those who were the focus of Obama’s remarks in San Francisco.

There is thus a close connection between the semi-hysterical response in the political establishment and the corporate-controlled media to Obama’s statement, and the rapidly deepening economic crisis. The Democratic candidate’s too-candid comment is seen as dangerous, akin to throwing a lighted match on the social power keg that is 2008 America.

It is notable that while the “bitter” flap has roiled the Washington punditry, it has caused little stir in Pennsylvania itself. It has been difficult for bourgeois journalists to find workers who were outraged over being described as “bitter.”

USA Today, reporting from conservative York County, Pennsylvania, found that, “in more than a dozen interviews here, even conservative Republicans couldn’t muster the sort of outrage over Obama’s remarks that Clinton backers were expressing Sunday... nearly everyone allowed that, in fact, many small-town residents are indeed bitter” over the state of the economy. A retired telephone worker told the newspaper, “Hell, yeah, they’re bitter.”

When Clinton sought to use the issue at a forum in Pittsburgh attended by steelworkers, many audience members shouted, “No!” as she declared, referring to Obama, “Many of you, like me, were disappointed by recent remarks he made.” When she continued, saying that voters in Pennsylvania might find these remarks “offensive,” there were further shouts of “No!” according to press accounts.

Of course, Obama didn’t actually propose any solutions to the economic hollowing out of the United States. And Hillary Clinton’s solution is to hire back Alan Greenspan!

Resurrecting Greenspan: Hillary Joins the Vast, Rightwing Financial Conspiracy

Michael Hudson

Apri1 17, 2008

On Monday, March 24, presumably representing Wall Street--as any New York senator must do in view of its dominant financial role in the state's political campaigns--Hillary Clinton proposed that Congress show its bipartisan spirit by appointing an "emergency working group on foreclosures," to be led by none other than Alan Greenspan and earlier Federal Reserve Chairman Paul Volcker, and Clinton Treasury Secretary Robert Rubin. Her idea was for them to come up with a plan to alleviate the subprime and financial crisis. This seems like calling in arsonists to help put out the fire that they and their own constituency had set in the first place. Their lifelong interest, after all, had been to promote deregulation and special tax favoritism for their Wall Street constituency, highlighted by repeal of Glass-Steagall in 1999 under Pres. Clinton. Representing the banking sector and Wall Street (and hence being essentially Republicans in spirit), they were precisely the lobbyists most in favor of anti-labor, pro-creditor policies.

Even the Wall Street Journal expressed surprise. Jon Hilsenrath noted the seeming irony: "In August 1999, as the tech-stock bubble was worsening, Alan Greenspan stood before central-banking colleagues in Jackson Hole, Wyo., and argued it wasn't the central bank's job to prevent asset bubbles. All it could do was clean up the mess after the bubble had burst." On the contrary, the commentator noted, the Fed could have slowed the bubble by raising interest rates and boosting margin requirements on stock trading during the tech bubble. Mr. Greenspan could have heeded the advice of Fed Governor Ed Gramlich to slow and regulate subprime mortgage lending. Instead, Mr. Greenspan's--and Mr. Paulson's--idea was simply to clean up the bubble's debt aftermath by bailing out Wall Street.

Mrs. Clinton's logic, she explained on March 24, was simply that Mr. Greenspan had a "calming influence." Republican Presidential nominee John McCain certainly seemed glad to propose him to head a commission to overhaul the tax code. Barack Obama's spokesman Bill Burton said that her selection of Mr. Greenspan to head her working group featured "the same people who helped to create these problems or have a direct financial industry stake in the outcome." Sen. Obama himself said that her crypto-Republican plan lacked credibility in view of the heavy campaign donations she received from Wall Street financial lobbyists. (As of mid-April he had raised an almost identical sum from this source.)

Elaborating her views three days later, Sen. Clinton made it seem as if it were the job of the financial victims--the mortgage debtors--to solve the mortgage crisis. "In today's economy, trouble that starts on Wall Street often ends up on Main Street ... When there's a run on mortgage-backed securities and the bottom falls out for investment banks, the bottom falls out for families who see the value of their homes--their greatest source of wealth--decline." To cure the problem, she endorsed the spirit of Mr. Paulson's Wall Street bailout, including having the Federal Housing Administration, Fannie Mae and Freddie Mac "buy, restructure and resell these underwater mortgages." This is a far cry from debt forgiveness.

In an early 2008 presidential primary debate, Mrs. Clinton went so far as to cite the Democrats' acquiescence in the Greenspan Commission's 1983 tax shift off the high income brackets onto wage-earners--by increasing F.I.C.A. wage withholding for Social Security as a personal user fee rather than funding it out of the general budget--as a model of the bipartisan spirit she hoped to emulate if elected. She thus reflected the attitude of her husband, when as President, Bill Clinton appointed Mr. Greenspan to a new term as Fed Chairman, saying: "This chairman's leadership has been good, not just for the American economy and the mavens of finance on Wall Street. It has been good for ordinary Americans." Yet it was Greenspan that acted as a kind of economic Karl Rove in crafting anti-labor policies favoring the very rich, above all the Social Security tax-shift onto labor's shoulders to which Mrs. Clinton pointed. He welcomed recession as an excuse to cut taxes, ostensibly to "jump-start" economic growth but actually producing a benefit mainly for wealthy investors and property owners.

In her debate with Sen. Obama on April 16, Senator Clinton once again heaped praise on Mr. Greenspan's "bipartisan" commission that nearly doubled the tax rates that workers had to give up out of their paychecks. A token income-tax cut was offset by F.I.C.A. withholding that, for many workers, now exceeds their income-tax liability. And what certainly must be the most unmitigated gall rivaling even her notorious Yugoslavia-under-sniper-fire gaffe, Mrs. Clinton rejected Senator Obama's policy of raising the F.I.C.A. Withholding rate above the present $92,000 level, all the way up to hedge fund managers making billions of dollars per year. Mrs. Clinton said explicitly that there were fairer and more egalitarian ways to resolve the Social Security and Medicare tax problem.

More egalitarian? What on earth could be MORE fair than starting to reverse the tax shift onto labor that has been occurring ever since the Reagan and Greenspan regimes? And how indeed can deregulation of the financial markets be deemed fair? How indeed did the network news media neglect Hillary's outrageous statement?

A lifelong advocate of deregulation, in 1999 Mr. Greenspan "recommended to a Senate committee that economic regulations should all be 'sunsetted,' that is, given an expiration date." This was the policy into which the Bear Stearns and subprime mortgage crises were plugged. The financial ideology and self-interest of Wall Street has become more important in shaping American policy than the health of the economy at large.

Packaging deregulation as new, more efficient regulation

The Bush Administration's enormous commitment of public funds to support Wall Street prompted columnist Martin Wolf of the Financial Times to announce that the free market was dead. "Remember Friday March 14, 2008," he wrote; "it was the day the dream of global free-market capitalism died. Deregulation has reached its limits." The price for Treasury support would have to be an end to the deregulation that had permitted the debt crisis to reach such unprecedented proportions. As evidence of the new attitude Wolf cited "the remark by Joseph Ackermann, chief executive of Deutsche Bank, that 'I no longer believe in the market's self-healing power.'"

Although more extensive public regulation was the traditional aftermath of financial crisis, the debt bubble has provided the financial sector with unprecedented wealth to translate into political law-making policy to dismantle regulation. Financial lobbyists accordingly anticipate that "the coming fight will rival the storm leading up to the 1999 passage of the Gramm-Leach-Bliley Act [which repealed Glass-Steagall]. That law made it easier for securities firms and banks to be owned by the same company, dropping regulatory barriers in place since the Great Depression. In 1998 and 1999, when Congress was finalizing passage of that law, the financial-services industry spent a combined $417 million on lobbying, according to the Center for Responsive Politics. In 2007, financial-services companies spent more than $402 million on lobbying, led by $138 million from the insurance industry."

The focal point of this lobbying effort has been Mr. Paulson's Treasury working group to draw up a Blueprint for Financial Regulatory Reform. As he explained in his speech on March 31, the Treasury Department's Blueprint for Financial Regulatory Reform had been moving earnestly since June 2007 to "reform" the nation's regulatory structure. He concluded his speech with a paean to the repeal of Glass-Steagall under President Clinton: "We recognize that these ideas will generate some controversy and healthy debate. This is not unlike the circumstances surrounding the 1991 "Green Book," which after a period of constructive discussion resulted in the passage of the Gramm-Leach-Bliley Act, modernizing our financial services industry some eight years later."

Repeal of Glass-Steagall gave the subprime debacle its jump start by removing the Depression-era roadblock from bank merging with brokers. This permitted financial conglomerates to be formed and gave them the ability to securitize (that is package), loans as investments. Vertical financial conglomerates were formed, starting with Citibank's merger with Travelers Insurance, and leading up to the recent intention of Bank of America to acquire the troubled Countrywide Financial, the nation's leading subprime lender.

Rather than seeing this as the source of the subsequent subprime problems as Senators Paul Wellstone and Byron Dorgan did at the time, Mr. Paulson explained, "I am not suggesting that more regulation is the answer." Just the opposite. "A state-based regulatory system is quite burdensome. It allows price controls to create market distortions. It can hinder development of national products and can directly impact the competitiveness of US insurers." The aim is to dismantle what remains of public regulation.

Reflecting the financial interests behind him, Mr. Paulson's solution is to assign overall regulatory authority to the Federal Reserve. The Fed works for its owners, the commercial banking system, and its chairman is appointed by a government that believes in "central bank independence." The result is a financial sector regulated by its own leaders and lobbyists, not by elected officials--seemingly a clear conflict of interest. The lobbyists evidently have decided that the best public relations wrapping is to present deregulation as "simplification," and to claim that "streamlining" it will lower costs to investors and help prevent a loss of "competitiveness" to Europe, especially London. Especially annoying to Wall Street are the Sarbanes rules requiring full disclosure of information, passed in the aftermath of the Enron fraud. Upon taking office, Mr. Paulson claimed that these rules handicapped U.S. financial firms relative to their foreign counterparts. "In November 2006, the Committee on Capital Markets Regulation released a report concluding, 'It is the committee's view that in the shift of regulatory intensity balance has been lost to the competitive disadvantage of U.S. financial markets.'"

The implication is that anything that lowers costs to Wall Street--by rolling back regulatory bureaucracies and reporting requirements such as are called for by the Sarbanes-Oxley legislation--will be passed on to customers. Such presumptions ignore the fact that Wall Street prefers to pay out its profits as bonuses or dividends rather than pass on cost savings. What is passed onto its customers instead is runaway CEO compensation. "Market discipline" has not kept financial markets honest or low-priced. Deceptive subprime practices have made dollar investments a pariah in global financial markets. Investors have lost faith in the nation's investment bankers, mortgage brokers and credit-rating firms, drying up the market for U.S. mortgage-backed securities and leading to their being dumped across the board.

In sum, the mid-March crisis provided an opportunity for Mr. Paulson to pull out the deregulatory plan he proposed when he became Secretary of the Treasury in summer 2006, and paste a "regulatory" cover story on it. Mr. Paulson plan for deregulation anticipates "consolidating banking and insurance regulators and potentially merging the Securities and Exchange Commission with the Commodity Futures Trading Commission, then stripping the combined entity of much of its regulatory authority." A major aim is to prevent any repeat of state attorneys general or other regulators emulating Eliot Spitzer's $1.4 billion in fines against Wall Street companies for their improper behavior and close-down of Arthur Andersen.

Calling the federal power to annul state regulation or that of other agencies "regulation" is dependent on voters not understanding the bait-and-switch act going on. It needs the compliance of New York's Wall Street Democrats, senators, congressmen and presidential candidates, whose campaign funding after all comes mainly from the state's financial sector.

So where are the Democrats on this? Above all, Hillary would seem to be on the hot seat. Where was she at 3 o'clock in the morning on the day that Bill annulled Glass-Steagall?

What seems most remarkable in Mr. Paulson's and Dr. Bernanke's comments is the absence of quantitative discussion of just what the "systemic risk" is. The bailout is to be paid by the non-financial sector, above all labor ("consumers") to "save the system." But just what is the system? It certainly is not industrial production. It is more a faith that compound interest can keep on expanding ad infinitum. The reality is that the exponentially soaring debt overhead threatens to plunge the economy into chronic depression as interest and other financial charges eat further and further into the economy's ability to spend on consumption and tangible capital investment. To ignore this financial dynamic is to turn economics into a junk science.

For the past decade the banking system and its mortgage-broker affiliates have avoided the usual wave of defaults and insolvencies by lending debtors enough money to pay the interest charges. Adding the interest onto the debt in this way is known as a Ponzi scheme. It requires an exponentially growing influx of funds to pay investors and creditors, and hence cannot be sustained for long, because no economy in history has grown at the exponential rates needed to keep up with the debt overhead. This is the basic problem at the core of today's economic policy. It aims to save the "sanctity of debt," that is, the financial sector's claims on the rest of the economy. But this attempt only polarizes the economy between creditors at the top of the pyramid and an increasingly indebted base at the bottom.

A simple example may illustrate the debt treadmill. Consider a little brick home in a suburb of Cleveland, Ohio. There are two economic conditions under which you could own it. Choice One is to own the home free and clear of a mortgage, in an economy that values it at $100,000. Choice Two is to own it in a debt-fueled market that values it at $250,000, requiring the buyer to take on a $100,000 mortgage to afford it. This appears to maximize wealth creation inasmuch as the homeowner has $50,000 more net worth.

But the Choice Two homeowner owns only 60 percent of the property. At 6 percent interest the $100,000 mortgage absorbs $500 a month, not counting amortization payments. This $6,000 annual interest charge--plus $3,000 for self-amortization on the typical 30-year mortgage--absorbs 30 percent of gross income for a homeowner earning $30,000 per year. Net of about $10,000 in wage withholding for FICA and income tax, the homeowner must pay 45 percent of take-home pay even before property taxes, fuel and repairs.

So which homeowner is doing better: Choice Two with higher net worth on paper, or Choice One which is less debt-ridden and whose home therefore is more affordable?

The Federal Reserve's net worth statistics give the impression that all Choice Two has more wealth creation. But most families "own" less and less, and must pay heavier carrying charges that eat into their spending power. By the end of 2007, home equity fell below 50 percent for the U.S. economy on balance--down to 47.9 percent. This means that most Americans now have less of an ownership share in their most basic asset than their bankers. On top of this, they are obliged to place their retirement savings in the hands of money managers whose fees absorb most of the income. Many pension funds are now left with substantial losses on packaged mortgages such as Bear Stearns was selling.

Germany is an example of the Choice One economy. Housing absorbs only about 20 percent of its average household budget, less than half that of most American homebuyers today. Its lower debt and property overhead, along with national health care, helps explain its competitive power in international markets. America, by contrast, is burdened with the high proportion of the cost of labor reflecting the inflation of housing prices that has forced more and more buyers into debt, while the middle class has seen its stagnant wages exacerbated by wage withholding for Social Security and medical insurance. Many have been able to maintain their living standards only by borrowing against their home equity.

Making loans is how banks make their money. As long as the loans are used to bid up property, stock and bond prices, they can claim that they are "responding to the market" by getting homeowners, commercial real estate investors, corporate raiders and financial managers to pledge their assets as collateral for yet new loans in a process that seems to be self-sustaining. But at a point the carrying charges on this indebtedness absorb all the disposable income and corporate cash flow. All it takes to upset the applecart is a major default, embezzlement or fraud.

Real estate reached this state of affairs by summer 2006. Behind the property bubble was an increasing entry price to buying a home--an access price that had to be paid in extra years of the buyer's working life. Traditionally, economists have defined equilibrium pricing as the level at which the rental income just about covered an owner's carrying charges. But as real estate prices exceeded the rents that could be charged to cover debt service, speculators withdrew from the market. It became much less costly to rent than to own. New buyers had to pay for their operating deficits out of income earned elsewhere.

The magic was gone once carrying charges could not be lowered any further. Interest rates had been lowered as far as they could be, down payments had been lowered to near zero, amortization had been lowered to zero (so that the mortgage loan never would be paid off, but simply carried), and fraudulent property assessment had become commonplace. Adjustable-rate mortgages were resetting at higher levels. Fuel costs were rising, increasing operating expenses for electric power and gas. Local property taxes were catching up with soaring real estate prices.

The mortgage market thus was set for a downturn. Every mortgage banker with whom I spoke by 2006 saw it coming. But until the break came, Wall Street managers wanted to get every last added fraction of a percentage point in interest that could be squeezed out. So did fund managers, who are graded every three months against the norm. This short-termism obliges them to follow the herd. They hope to reverse course in a hurry when the break comes, but financial crashes occur much faster than it takes for prices to rise. The business cycle is basically a run-up of real estate mortgage debt growing slowly but ending in a fairly rapid crash.

Bank credit--that is, debt for mortgage borrowers--was created almost without cost as the Federal Reserve held short-term interest rates quite low. An increasingly large debt overhead fueled an asset-price inflation that Alan Greenspan celebrated as "wealth creation." Deregulated banks and other financial institutions packaged and sold mortgage loans to hedge funds, pension funds and other institutions. It seemed that a perpetual motion machine of financial wealth had been found. But it rested on the ability of the underlying "real" economy (production and consumption) to take on more and more debt and pay more and more interest.

The policies proposed by Republicans and Democrats alike treat strapped homeowners as deserving government aid only to the extent of enabling them to go pay the institutions that hold their mortgages. This fig leaf of humanitarian concern for debtors enables the government to provide public credit that ends up in the hands of the super-rich who own and manage the financial and property sector.

But one sees the dominant attitude in the vindictive rhetoric used by Sen. John McCain toward debtors he deems "undeserving" of government aid. He blames insolvent homebuyers for causing the problem for failing to calculate how deeply their adjustable-rate mortgages (ARMS) would eat into their stagnant disposable income or to anticipate how sharply property taxes, heating and electricity prices would rise as the dollar plunges in global markets.

Congress has proposed setting aside millions of dollars to provide mortgage counseling--a sanctimonious blame-the-victim re-education program to convince insolvent debtors at least that they should feel guilty if they walk away from properties worth less than the debts attached to them, as financial professionals do.

The kind of re-education program that really is needed would provide an understanding of the dynamic that threatens to lead to debt peonage. On paper, two thirds of Americans have seen their net worth grow mainly from the rising price of their homes--or more to the point, their land ("location, location, location," magnified by the failure of property taxes to keep up with market prices). As long as mortgage lending was pushing up prices more rapidly than debt was growing all was fine. At the Federal Reserve, Mr. Greenspan took credit for orchestrating this "wealth creation." It was a euphemism for asset-price inflation and debt creation.

It is a far cry from tangible capital formation. Instead of raising labor productivity and living standards, it is a purely mathematical dynamic that governments cannot rescue in the end. It is folly even to try to do so. Yet in March, Sec. Paulson mobilized the credit-creating power of the government's financial and housing agencies to support the price of mortgage securities--and the land valuations that back them. The aim was not to help strapped homeowners but to save creditors who imagined that they could get rich while most of the economy was being driven into debt peonage.

Given this perverse financial plan, it is irresistible not to finish with how Franklin Roosevelt addressed the spirit of today's proposed reforms:

These economic royalists complain that we seek to overthrow the institutions of America. What they really complain of is that we seek to take away their power. Our allegiance to American institutions requires the overthrow of this kind of power. In vain they seek to hide behind the flag and the Constitution. In their blindness they forget what the flag and the Constitution stand for. Now, as always, they stand for democracy, not tyranny; for freedom, not subjection; and against a dictatorship by mob rule and the over-privileged alike.

Today's financial sector would turn this rhetoric of economic democracy on its head. This raises the following question: If FDR were alive and running today, would Hillary and others denounce him as an off-the-wall radical? Would he be out of touch with today's voters? What would they say about his anger? How far would a presidential candidate get who announced at his Inauguration, as Roosevelt did on March 4, 1933, "The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit."

So let's start by discarding the inane propaganda about unmanaged (that is, deregulated) "free" economies, the faith-based belief that self-regulating economic systems exist that must not be "interfered with" by government bureaucrats, formerly known as regulatory agencies, attorneys general and state prosecutors, Congressional oversight committees and what remains of New Deal agencies. This anti-government, anti-regulatory propaganda has been pushed for decades so that public agencies and Congress, supposed to act as representatives of the people, remain only passive spectators to an economy left in private hands for financial profit.

The reality is that all economies are managed, either by the private sector or by government--usually by a combination of the two. Any successful economy engages in forward planning, and any well-balanced economy shapes how "the market" operates. Adam Smith's Wealth of Nations was all about how wise governments should shape--and tax--their markets. America's present-day economic system didn't evolve through natural forces, much less by divine intervention. Its industrial takeoff was subsidized by protective tariffs, internal improvements--that is, public infrastructure spending--and increasingly progressive taxation.

And conversely, the spate of tax laws, fiscal giveaways and Federal Reserve policies that helped inflate the real estate bubble since 2001 were man-made--and shaped specifically by real estate lobbyists and financial promoters. FDR fought the battle against high finance decades ago, explaining:

The royalists of the economic order have conceded that political freedom was the business of the government, but they have maintained that economic slavery was nobody's business. They granted that the government could protect the citizen in his right to vote, but they denied that the government could do anything to protect the citizen in his right to work and his right to live.

This is the dimension missing in today's election campaign. But is not democracy economic as well as political?

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