September 30, 2008

WHEN NO FAULT CAPITALISM MEETS LEMON SOCIALISM

Sam Smith
Progressive Review, August 1990

Click here for a chart comparing the 1990 S&L bailout with depression era rescue efforts

In the early days of the savings and loan crisis the joke was that in Texas if you bought a toaster oven they gave you a free S&L. It turns out not to have been much of a joke. The Resolution Trust Corporation - the government's misnamed S&L caretaker that is neither producing a resolution nor inspiring trust -- is engaged in a massive giveaway that may make Teapot Dome look like a demi-tasse cup,
The RTC is already the nation's largest operator of financial institutions and, according to the New York Times, "quickly becoming the biggest financial institution in the world, the largest single owner of real estate, the largest liquidation company and the largest auction firm." This ungainly monster of America's late empire period was established without meaningful public debate nor with any serious consideration of alternatives,
But official Washington is not alone in its odd indifference to the nature of the S&L solution. The media --even the op-ed pages and Sunday feature sections -- have largely ignored the question. The topic was not listed on the agenda of The Other Economic Summit ~ the progressive alternative to the meeting of economic ministers ~ even though TOES gathered this year at virtual ground zero of the crisis: Houston, Texas. And Ralph Nader's major concern seems to be which group of taxpayers will bear the fiscal burden of the scandal,

Cost estimates continue to soar - as high as $500 billion if you believe congressional analysts or $1.4 trillion (that's right between the (JNP of West Germany and Japan, folks) if you accept the calculation of a knowledgeable Wall Street Journal correspondent. But the press, the politicians and even the public interest groups seem far more concerned about how the crisis came about than what we are going to do about it.

One has to admit the former matter is enthralling and appalling. Put rather neatly by one former FBI fraud specialist to the Village Voice, the S&L crisis is perhaps the largest criminal conspiracy ever created. The FBI currently has some 8000 cases of S&L fraud before it, 1300 of them gathering dust for lack of funds to pursue them. Another 13,000 tips haven't even been followed up, according the Newsweek. According to Rep. John Conyers, to date the government has recovered less than 2% of the money lost through criminal fraud in thrift cases, even though fraud was involved in at least three-quarters of S&L insolvencies,

The sum of money involved is staggering,

Newsweek estimates that even at a conservative $250 billion cost, this is an amount that would pay for existing education programs for the next four years; or nearly pay for universal health insurance and long-term care for the next four years; or overhaul the nation's water systems, repair all bridges and have money left over to start fixing highways. There are currently some 40,000 law suits over all this money and the figure is expected to double by year's end,

But recounting neither the sum nor the sin involved leads to a solution. After all, the broad scandal have been known for some time yet in its wake the president and the Congress have fashioned an extraordinarily shoddy, dangerous, expensive and corrupt jury rig to correct the matter,

Not only is the government failing to solve the problem, it is creating massive new scandals, inequities and public deficits. Not the least of these is the likelihood that the major beneficiaries of the S&L bailout will be the very states responsible for it. . .

Among the other clear beneficiaries of the bailout are the quick-rich financiers who, with their soul brothers, helped to create the scandal. Small business and ordinary citizens are not invited to the RTC's extraordinary fire sales. You can't get a catalog and order by mail. Yet The New York Times reported on July 3 that RTC owns 35,908 properties and "though no specific list has been released, the agency's holdings include coal and uranium mines, ranches and pasture lands, 162 golf courses, oil fields, marinas and boat yards, athletic dubs, garages, parking lots and mobile home parks, 84% of the total inventory is residential - mainly in Texas." Public Citizen notes that the assets include "a buffalo sperm bank, a Nevada bordello, a windmill farm, a share of the Dallas Cowboys, [and] an entire town in Florida." With a few exceptions - such as the RTCs grudging, miserly and belated offering of housing to non-profit groups - the marketing of assets is what they call in the trade a private sale. As a result you may not heard about the satellite auction that will take place in September to sell 98 properties worth $341 million. The government reports that buyers in Japan, Britain and Canada are expressing the most interest. You won't be able to get it on cable,

Billions of dollars worth of assets are being traded at prices that challenge even Crazy Eddie's Emporium in the midst of a recession Memorial Day weekend, - but for the benefit only a handful of huge corporations and redundantly wealthy financial bustiers.

We know - or should know by now - that the crisis was created in no small part by the gluttony and stupidity of advocates of the so-called free market running rampant through America's fiscal countryside. What you may not realize is how far the government's acquiescence went. For example, until the deregulation of the 1980s, S&Ls had to have at least 400 shareholders. By 1981, the government had made it possible for there to be only one shareholder and that shareholder didn't have to have any hard equity in the institution. It was also possible for a S&L to have only one borrower. Further, Congress raised the limit of federal insurance from $40,000 to $100,000 - and that per account rather than per individual depositor. As Rep. Charles Schumer put it, "The government behaved like a fire insurance company that said to its customers, go ahead, play with matches. We'll cover you if anything goes wrong."

Although some Democrats are smugly blaming the Republicans for the S&L disaster, the truth is that this bill passed the House 380 to 13 and by a voice vote in the Senate. In another spate of misdirected bipartisanship, Senator Jake Garn and Rep. Ferdinand St. Germain introduced successful legislation which allowed S&Ls to get into such new activities as junk bonds, unsecured commercial loans and major real estate projects,

Thanks to recent revelations we now have a better idea of why Congress didn't look after our interests more assiduously. As just one small example, one study has found that S&Ls gave $45 million to congressional candidates during the past three elections, including more than $1 million to members of current congressional banking committees. The aforementioned St. Germain, according to the newsletter PACS & Lobbies, received nearly $150,000 in campaign contributions, over a six year period. In contrast, S&L and HUD prober Henry Gonzalez received only $1750 during the same time,

Such facts blast huge holes in arguments that S&Ls were largely victims of changing world economics, regional recessions and other macroeconomic rationalizations. They were, in fact, victims of the avarice of their owners, licensed in their greed by the United States Congress and the executive branch. And the media hardly said a mumblin' word. _ It is this same cast of characters that have given us - or are overseeing - the so-called S&L bailout. The same hidden agendas, the same fiscal fast shuffles, the same class of beneficiaries, the same lack of media concern for the import of public actions,

The drama is reminiscent of corporate reorganizations described many decades ago by Thurman Arnold in The Folklore of Capitalism: "In reality the struggle which attended the 'insolvency' of a great organization could be nothing other than a struggle for political control of that organization. The symbols were debts and credits and sales, and men had to plan their practical campaigns in those terms. This created a situation in which the rules of debts and credits became like the platforms in a political campaign,

"They didn't mean anything. They were full of contradictions. . . The conflict could only be resolved by a public drama where the rules paraded in dress clothes, while a political machine directed the play from behind the scenes."

Behind the public drama of the S&L solution is the most egregious example to date of no-fault capitalism and lemon socialism. The former is the remarkable principle that - notwithstanding all the fawning over the "free market economy" - our largest business institutions are philosophically, fiscally and criminally exempt from the ultimate consequences of laisse faire. The latter is the equally inconsistent principle that to maintain the free market the government is responsible for anything out of which private enterprise can't make a profit. It may not, however, help support this magnificent non sequitur through activities that might actually provide income for the government,

No, the rules of the game are that a major industry is allowed to make whatever mistakes it wishes in pursuit of the holy grail of free enterprise, the costs of which to be fully borne by the taxpayer,

Further, the S&L solution has the hidden goal of moving America towards increasing financial oligopoly. The government is prepared to guide, assist, regulate and tax to accomplish this goal. This sort of economic policy has been seen before in fully developed form and it has a name: fascism, described by Mussolini biographer Adrian Lyttelton as "the product of the transition from the market capitalism of the independent producer to the organized capitalism of the oligopoly." As Italian fascist economic theorist Alfredo Rocco put it, such an economy "is organized by the producers themselves, under the supreme direction and control of the state."

What has taken place certainly involves fraud, malfeasance, misfeasance and nonfeasance. But beyond that, what we are experiencing approaches a fiscal coup. Using the not unreasonable cost estimate of $500 billion we are talking about a sum the size of the combined 1986 assets of General Motors, Exxon, Ford, IBM, Mobil, General Electric, ATT, Texaco, Dupont, Chevron, Chrysler Philip Morris and Amoco,

Our last line of defense - the media - has been absorbed in the human interest and fraud aspects of the crisis, but woefully unskilled in reporting what is really going on. Reading separate stories about an RTC deal is unnerving. In one S&L case, The New York Times listed an institution's assets at $1.8 billion, while the Washington Post pegged them at $3.3 billion. Deposits were $2.1 billion in the Times and $52 billion in the Post. Remember now, we are talking billions. In another story, the Times put the government's annual assistance to an S&L deal at $250 million; the Post called it $250 thousand.

There has been a stunning lack of discussion of alternative approaches to the S&L problem. In fact, the plan represents an escalation in no-risk subsidization of big business even in comparison with such recent precedents as the Chrysler bailout, in which the government retrieved money through exercising stock warrants. Below are some alternatives:

o Provide for government profit-sharing. Although this has occurred to some degree, even in these cases it has been inadequate. After all, in private enterprise, if you put up the bulk of the money, you expect more than 20% of the profits,

o Wait for the market to improve. The sale of government-held assets at prices depressed by current economic conditions and further depressed by the urge to dump them is foolish and costly. The government is ideally positioned to wait for improved conditions,

o Keep a stake in the business. The government could take stock in companies buying failed thrifts as part of the deal,

o Don't pay off depositors who don't need their money. In some failed thrift cases, the government is writing checks to the depositors for the amount in their account. This is not necessary. The money will probably just be put into an account somewhere else. These are, after all, savings. The institution getting the new account will then go out and loan the money for a profit, thus providing another hidden subsidy to the financial industry. It could be cheaper, assuming a medium-term resolution of the problem, to keep accumulating the interest charges.

o Tax the S&L industry for its rip-off of the public. The argument that successful S&Ls should not be held accountable for the failures of their soul mates totters on the history of the crisis. Because of extraordinary lobbying and financial contributions, the entire industry is, in no small part, to blame for this crisis. A surtax on industry profits would be in order,

o Part of the losses could be recovered through a windfall profits tax on income and capital of gains of companies purchasing S&L assets from the government.

o Decentralize resolution of specific cases. Imagine, for example, that all bankruptcies in the country were handled through a central Washington bureaucracy and one can get an idea of the fallacy of the current approach to the S&Ls. It would probably be far better, to treat each situation on a more decentralized basis, using court appointed conservators to manage matters and to decide on the amount and nature of federal assistance to request. Among other things, this would reduce the political intrusion on these decisions,

o Lease rather than sell. Operate on the principle of shopping mall owners who know a sale is here today and gone tomorrow but a lease you can have forever.

o Use loans rather than loan guarantees. And get collateral. The shift towards loan guarantees by the government is a dangerous one with most of the benefits accruing to the no-fault capitalists. It represents yet another hidden subsidy to the financial industry, essentially providing it with no risk loan clients.

o Trade assets for stock in growing companies. Allow the taxpayer to enjoy capitalism, too. If the stock doubles, the government has, in effect, gotten twice what it would have gotten for selling the asset outright.

o Make a virtue of necessity. Depending on how you look at it, 20,000 units of real estate can be a burden - or it can be a housing program. Groups like ACORN would like to see the latter alternative, but have received little help from the administration. Similarly, office buildings could be used to relocate federal agencies, golf courses could become Job Corps centers and garages can be turned into homeless shelters. It's all a matter of how you look at it,

o Start a Bank: With many of the S&L failures concentrated in a few states, there is the opportunity to reorganize them as state banks, modeled on the North Dakota state bank established decades ago to aid farmers mistreated by eastern financial institutions. Some S&Ls could be turned into cooperative banks or credit unions,

S&L stories are relegated to the business pages despite their enormous effect on every American. As a result many readers may have missed, for example, a February 3, 1989, financial page story in the Washington Post. The story, just as the government started rushing pell-mell to dump S&Ls, began: "The head of the General Accounting Office yesterday criticized the government's year-end fire sale of 200 failing savings and loans, saying taxpayers would have paid less in the long run if the S&Ls had been turned over to the government or closed. The Federal Home Loan Bank Board, which oversees and regulates the thrift industry should have held onto the S&Ls rather than promising an estimated $60 billion in tax breaks to the investors who agreed to buy the ailing institutions." The GAO said the Federal Home Loan Bank Board weighted its assumptions in favor of sales by not including tax breaks and calculating unrealistic interest rate figures,

The GAO boss, Charles Bowsher, testifying before the Senate, said it would have been cheaper if the regulators had done nothing. Bowsher proposed that insolvent savings and loans be placed in receivership until regulators could figure out whether it would be cheaper to shut them down or merge them into other institutions.

In a more recent example, the media tended to regard as technical information the news that the Office of Thrift Supervision would temporarily allow the strongest S&Ls to lend up to 60% of their capital to a single developer for residential construction. This is four times the amount allowed under the bailout law. Most Americans remain unaware that its government is slipping back into practices that created the crisis in the first place. Does the media really believe it is too hard for the average person to understand the risks involved with a financial institution lending the majority of its money to one developer? Or does the media not understand it?

Certainly the developers understand what is going on. AP quoted the economist for a homebuilders association as saying, "This will give us some breathing room." Unasked questions Among the questions in which the media has generally been disinterested are these:

o How does each of these multi-billion dollar deals compare with what would happen in a normal business transaction? Or even in previous bids for the same company?

o Are purchasers paying fair price for deposits?

o Why are lists of assets for sale not readily available? Why has the media and Congress not demanded more prior information on these sales?

o Why has the media not done its own independent appraisals of various assets to check on the government's work? The rigging of appraisals was one of the causes of the S&L scandal. A 1985 study by the House consumer and monetary affairs subcommittee said, "Faulty and fraudulent real estate appraisals contributed directly to the insolvency of the nation's financial institutions and have helped cause billions of dollars of losses." There is no reason to believe this manipulation has ceased. As one small appraiser once told me: "There are different types of appraisals. There's an appraisal for an arms-length transaction. There's an appraisal for a deal between friends. There's an appraisal for a divorce settlement. There's an appraisal for insurance purposes and there's an appraisal for estate purposes. Depending on which appraisal you want, that table over there is worth anywhere from $50 to $500." Neither of us at the time had heard of appraisals for a government trying to get a $500 billion monkey off its back and keep campaign contributors happy at the same time,

o Are the government agencies involved in the bailout competent to do the job? Scattered reports from the field should raise far more concern than they have. For example, Rep. Bruce Vento tells of "growing reports of overpaid individuals running RTC-held institutions [and] of officers from failed institutions staying on the government payroll with six figure salaries." Newsweek says of the RTC: "Many of its 3000 employees have little experience in the field." True enough. The government has advertised for staffers in banking magazines and the like but, as one banker put it, "who are you going to get willing to leave" a stable situation "for an 18-month career?" But if this is the case, what does it say for the underlying approach government has taken towards the S&Ls?

If the approach is premised on staking the future of the worst financial crisis of our history on such people, what does it say about the premise? And why so little concern? One of the more extraordinary tales to come out of the S&L crisis is the GAO report that found that the Federal Savings & Loan Insurance Corporation had netted only $57,000 on more than $3 million in S&L assets. The government spent over $2 million with four firms for communications equipment, inventory and appraisal, moving and warehousing. It turns out all four firms had the same owner and competitive bidding had not been used. As New Jersey banking analyst James Marks notes, "When there's that much money flowing, there's always someone who figures out a way to stick his finger in and divert some of the flow."

o Who picked the real estate brokers, appraisers and outside lawyers involved in the bailout and how? We're talking $500 million in outside legal fees alone,

o How does the RTC - and Congress and the media -- determine the difference between bad assets and bad borrowers? The fact that a borrower is going bankrupt does not reveal much about the nature of a particular asset. The media and much of the public seems to have bought the idea that the assets owned by failed S&Ls are all dogs. This is highly unlikely but helps to justify fire sale prices,

On the other hand, the questions the media have asked often miss the mark. Because these questions are frequently planted by "official sources," however, they do reveal some of the hidden agenda behind the bailout. Here is an exquisite example from the Times in a recent weekend roundup of the news: "Does the nation need a specialized industry to finance housing when it now has an efficient mortgage market? Does the nation need 13,000 independent banks and 3000 independent thrifts, or should institutions be allowed to consolidate across state lines, which would also enable them to spread their risks by diversifying their sources of loans and deposits? Most important is ft time to consider changing the system for insuring deposits so that there is less of an incentive to gamble with taxpayer's money?

The clue to the source of such queries is the phrase "efficient mortgage market," one of those delightful terms of art used by economists and financiers which would never be used by the average homeowner or wistful would-be purchaser. The latter would be more incline to favor words like "gouging." In fact, the mortgage market is efficient only to the extent that it has made some people and some institutions a lot of money. It has also developed in such a way that the average age at which someone can afford their first home is rising rapidly, people are paying an exorbitant percentage of their income, and the standard home mortgage has been increasingly replaced by such economic Russian roulette techniques as variable rate financing . . .

In the first part of the 20th century, in the wake of the San Francisco earthquake, as other bankers watched their money disappear in fire and rubble, Amadeo Peter Giannini of the Bank of Italy walked 18 nines from his home to the bank where he retrieved some $80,000 in gold and silver from the vaults, loaded it on a wagon, and made his way to his brother's house in the hills. There he opened for business, loaning the money to San Franciscans so they could rebuild their homes and businesses. He gambled that hs action would encourage others to deposit funds they had been hoarding so he could loan still more. It worked and on this shaky foundation arose the Bank of America, later to become the largest banking house in the world.

In the last decade of the 20th century, in the wake of another great disaster, America has reversed the parable. The money of the taxpayers, needed for their homes and businesses, is being loaded on the wagons of the state for deposit in the vaults of those few who have the means, the political power and the gall to profit from the rubble of the fiscal crisis that has struck the S&L industry,

And America, its politicians, its captains of industry, its media, can think of little else to do about it except tacitly sanction the continued looting in the wake of the great capitalist riot of the 1980s.

THE BRADLEY & THE FORD EFFECT

There's a lot of talk about racism among the Obama crowd, with speculation that polls might be overrating Obama because of the so-called Bradley effect, Bradley being a black gubernatorial candidate in California who showed up much better in the polls than in the final count.

But the problem with the Bradley effect - or the Wilder or Dinkens effect - is that the examples being used are two decades old, since which American ethnic attitudes have evolved.

A far more instructive example is the case of Harold Ford who ran for the Senate from Tennessee two years ago and came within 3% of winning the southern state. He was defeated, many think, because of a GOP ad in which a white woman talks abut meeting the then unmarried Ford at a Playboy party.

Now look at how the pristine Obama is doing in Tennessee. He's down 12-24 points in the past month. Translated into votes that's about 150,00 to 350,000 people who were willing to vote for Ford who don't feel the same way about Obama. That's not race; it merely reflects the fact the Ford was a better politician and more effective at reaching those who didn't look like him.

The Obama campaign should stop worrying about the Bradley effect and try instead to learn the Ford effect.

September 28, 2008

WHERE WILL ALL THE MONEY GO?

Sam Smith

In Washington, for officials and media alike, numbers are treated like adjectives - created, inflated or diminished to serve the purpose of the moment. So instead of saying "awesome," one declares "$700 billion," as confirmed by the Treasury official who admitted to Forbes that the figure had been pulled out of the air.

Everyone just says it's a crisis and goes about their business resolving it with the same disinterest in solid information that got them into the mess in the first place.

Having been taught by Miss Darnell in high school that you can't add apples and pianos, I have been looking futilely for some hint of a budget for the $700 billion, some sign that the hard working negotiators had actually seen some hard spreadsheets and what was on them, some moderately detailed information on who will get the money and what it will be used for. It's what simpler folk call a budget.

I'm not questioning the existence of the crisis, only it's shape. For example, it is widely assumed that housing foreclosures are the central problem. Good, let's see the figures. How much of the $700 billion will go to cover bad housing loans and how much will go for things such as losses that multi-millionaire speculators experienced in wild business ventures or sneaky fiscal manipulations? How much is funny money, created out of leveraging by hedge funds and others? How much of the loss involves foreign speculators or foreign investments by American speculators?

Finally, how much involves the fiscal cleansing of criminal cash, such as from an illegal drug industry estimated to be as large as legal pharmaceutical trade? Bear in mind, for example, that last year the Coast Guard seized nearly $5 billion worth of cocaine. Yet, together, all of law enforcement grabs but a small percentage of the drugs that are out there, the rest generating huge amounts of cash yearning to be laundered.

Now let's take a closer look at those housing foreclosures. Consider this tale of a home's woe from the Washington Post:

"The most recent owner, Phyllis High Jones, refinanced the house through Countrywide Home Loans in 2006, taking out a $208,000 mortgage that would gradually inflate to $226,000. That same year, Fannie Mae bought the loan from Countrywide. Then the housing market collapsed in Prince William County. Jones defaulted this year. The townhouse went up for auction, but there were no takers. Fannie Mae had no choice but to become the buyer of record -- sale price $226,000. This summer, Fannie Mae tried to sell the townhouse for $149,000. Still no reasonable offers. The price has now been lowered to $69,900."

By current bookkeeping, that is a $226,000 loss added to the federal books. But did it have to be? Unless she was trying to sell her home, the fact that the housing market collapsed doesn't explain Jones' default. More likely the increase in the mortgage and/or some personal problems made it impossible for her to cover it. Thus what appears to be a $266,000 loss may in reality only have been one as small as $18,000 (the change in her mortgage) or the $266,000 minus whatever she still able to pay.

Instead of buying the mortgage for $226,000, Fannnie Mae could have become a passive equity partner with Jones in the amount of whatever Jones couldn't handled. Let's say Jones could have supported all but $69,900 of her mortgage; Fannie Mae would assume that portion. Today, Jones would still have her house, Fannie Mae would have saved itself $156,100 plus whatever profit it makes on its equity when the house is sold down the road, and there would be no fire sale going on - lowering other house prices in the neighborhood.

Multiply this approach by the 54,000 foreclosed homes Fannnie Mae had last June, and the national story changes dramatically.

But Washington doesn't deal with numbers that way. Here are a few examples of how numbers are really handled in the capital, with one of the most important facts being that you probably rightly don't recall the media making much of them.

For example, this from the Christian Science Monitor last April:

|||||| The Pentagon has gone hundreds of billions of dollars over budget in recent years on key weapons systems, including aircraft, ships, and satellite, said a government audit. The Government Accountability Office said for the sixth year in a row that the Pentagon had significantly gone over budget, but according to a report presented to Congress this week, the problem is getting worse.

The Washington Post reports: 'The Government Accountability Office found that 95 major systems have exceeded their original budgets by a total of $295 billion, bringing their total cost to $1.6 trillion, and are delivered almost two years late on average. . . Auditors said the Defense Department showed few signs of improvement since the GAO began issuing its annual assessments of selected weapons systems six years ago.

"Every dollar spent inefficiently in developing and procuring weapon systems is less money available for many other internal and external budget priorities – such as the global war on terror and growing entitlement programs (such as social security)," Gene Dodaro, the GAO's acting comptroller general, said in the report." ||||||

$1.6 trillion - double the amount of the current proposed bailout - and it's one day's news in a few papers and then forgotten.

And it's not a new problem. Back in 2002, CBS reported:

|||||||| According to some estimates we cannot track $2.3 trillion in transactions," [Defense Secretary] Rumsfeld admitted. $2.3 trillion - that's $8,000 for every man, woman and child in America. To understand how the Pentagon can lose track of trillions, consider the case of one military accountant who tried to find out what happened to a mere $300 million.

"We know it's gone. But we don't know what they spent it on," said Jim Minnery, Defense Finance and Accounting Service.

Minnery, a former Marine turned whistle-blower, is risking his job by speaking out for the first time about the millions he noticed were missing from one defense agency's balance sheets. Minnery tried to follow the money trail, even crisscrossing the country looking for records.

"The director looked at me and said 'Why do you care about this stuff?' It took me aback, you know? My supervisor asking me why I care about doing a good job," said Minnery.

He was reassigned and says officials then covered up the problem by just writing it off.

Twenty years ago, Department of Defense Analyst Franklin C. Spinney made headlines exposing what he calls the 'accounting games.' He's still there, and although he does not speak for the Pentagon, he believes the problem has gotten worse. 'Those numbers are pie in the sky. The books are cooked routinely year after year,' he said. |||||||||

Closer to the topic at hand, you probably also didn't know that $59 billion (twice what is expected to be needed to bail out Fannie Mae) couldn't even be accounted for when Andrew Cuomo left as head of Housing & Urban Development in 2001. Said a spokesman for the HUD inspector general: "There is no audit of the financial statements for 1999. The department said they decided not to reissue any of the stuff we mentioned that was problematic - they’re not going to give us what we went through. They simply said, ‘Fine, thanks.’ They said, ‘Okay that was 1999 - what a mess now - let’s move on.'"

There recently has been a lot of talk about earmarks - which used to be called pork barrel until the hog industry apparently sent its metaphor police to Washington. In fact, all the earmarks currently in the budget amount to less than one third of the money you didn't even know had been missing over at HUD.

Why are earmarks so important, then? In part because we know exactly how the money is being spent, whether to help fund needed medical research or build bridges to nowhere in Alaska. They are an odd sum in the national budget that everyone can understand. They are, in that sense, a rare virtue: an oasis of specificity in a desert of uncertainty.

In a sense, the mysterious $700 billion is completely in sync with Washington accounting. No one knows what's it is for, how it will be spent and, when it's gone, who will have gotten what and who will have benefited the most. So don't be surprised at all the surprises they forgot to tell you.

September 23, 2008

EMENDATION: SOCIALISM IS THE WRONG WORD

Brady Wiseman in Bozeman MT writes to note, "Bailing out the banks is not socialism. The government and the Fed are not becoming exactly the creditors of the banks. Because the numbers are so large, they are now partners. It's not a bailout so much as a merger. What do you call the merger of government and corporations? Mussolini called it fascism."

Wiseman is quite right. We let ourselves get caught in the rhetoric of the day in which you can call anything you don't like socialism, but god forbid you use the term fascism. In the past, however, we have addressed this matter:

Sam Smith, 2006 - One needs to look not at Hitler but at the founder of fascism, Mussolini. What Mussolini founded was the estato corporativo - the corporative state or corporatism. Writing in Economic Affairs in the mid 1970s, R.E. Pahl and J. T. Winkler described corporatism as a system under which government guides privately owned businesses towards order, unity, nationalism and success. They were quite clear as to what this system amounted to: "Let us not mince words. Corporatism is fascism with a human face. . . An acceptable face of fascism, indeed, a masked version of it, because so far the more repugnant political and social aspects of the German and Italian regimes are absent or only present in diluted forms.". . .

Adrian Lyttelton, describing the rise of Italian fascism in The Seizure of Power, writes: "A good example of Mussolini's new views is provided by his inaugural speech to the National Exports Institute on 8 July 1926. . . Industry was ordered to form 'a common front' in dealing with foreigners, to avoid 'ruinous competition,' and to eliminate inefficient enterprises. . . The values of competition were to be replaced by those of organization: Italian industry would be reshaped and modernized by the cartel and trust. . .There was a new philosophy here of state intervention for the technical modernization of the economy serving the ultimate political objectives of military strength and self-sufficiency; it was a return to the authoritarian and interventionist war economy."

Lyttelton writes that "fascism can be viewed as a product of the transition from the market capitalism of the independent producer to the organized capitalism of the oligopoly." It was a point that Orwell had noted when he described fascism as being but an extension of capitalism. Lyttelton quoted Nationalist theorist Affredo Rocco: "The Fascist economy is. . . an organized economy. It is organized by the producers themselves, under the supreme direction and control of the State.". . .

Article 48 of the constitution of the Weimar Republic stated, "In case public safety is seriously threatened or disturbed, the Reich President may take the measures necessary to reestablish law and order, if necessary using armed force. In the pursuit of this aim, he may suspend the civil rights described in articles 114, 115, 117, 118, 123, 124 and 153, partially or entirely. The Reich President must inform the Reichstag immediately about all measures undertaken . . . The measures must be suspended immediately if the Reichstag so demands."

It was this article that Hitler used to peacefully establish his dictatorship. And why was it so peaceful and easy? Because, according to Childers, the 'democratic" Weimar Republic had already used it 57 times prior to Hitler's ascendancy.

There are eerie similarities between Article 48 and George Bush's approach. When you add to this the remarkable incompetence of the current regime, the collapse of both traditional liberal and conservative politics, and the economic crises, it feels like a new Weimar Republic setting the stage for awful things we can not at this point even imagine. It may be that history has something to tell us after all.

LIVE ON IMAGINARY MONEY; DIE BY IMAGINARY MONEY

One of the important things not being discussed about the financial crisis is that the money that is gone was not real in the first place, something we have mentioned from time to time. . .

Sam Smith's Great American Political Repair Manual, 1994 - The total federal state, local and private debt in this country in 1996 was around $14 trillion. The actual money supply was just under $6 trillion. So what happened to the rest of the money? Most of it doesn't exist and never did. We call this imaginary money debt. This debt is money that we (as individuals, companies and government) have borrowed, primarily from private sources. As Bob Blain, a professor at Southern Illinois University, put it:

"Most debt is not the result of people borrowing money; it is the result of people not being able to repay what they owed [to banks or individuals] at some earlier time. Instead of declaring them bankrupt, creditors just add more to their debt."

This new debt is called interest. Many people think the idea of the government printing money is shameful, yet our laws permit private financial institutions to create money all the time. Every time you fail to pay off your credit card, you're letting a banker print some more money.

You're not the first, of course. For example, when the Congress met in February 1790 to figure out how to pay off the Revolutionary War debt of $75 million, Alexander Hamilton strongly advocated issuing debt certificates and using them as money. Congressman James Jackson of Georgia warned that this would "settle upon our posterity a burden which [citizens] can neither bear nor relieve themselves from. . . Though our present debt be but a few millions, in the course of a single century it may be multiplied to an extent we dare not think of."

An alternative to Congress borrowing money to pay off its debt would have been to have created the $75 million, using Congress's constitutional power to "coin money and regulate the value thereof." Instead Congress began a long tradition of borrowing the money that -- five trillion dollars of debt later -- many believe we can neither bear nor relieve ourselves from.

In the early 19th century, the little British Channel island of Guernsey faced a smaller but similar problem. Its sea walls were crumbling. its roads were too narrow, and it was already heavily in debt. There was little employment and people were leaving for elsewhere.

Instead of going still further into debt, the island government simply issued 4,000 pounds in state notes to start repairs on the sea walls as well as for other needed public works. More issues followed and twenty years later the island had, in effect, printed nearly 50,000 pounds. Guernsey had more than doubled its money supply without inflation.

A report of the island's States Office in June 1946 notes that island leaders frequently commented that these public works could not have been carried out without the issues, that they had been accomplished without interest costs, and that as a result "the influx of visitors was increased, commerce was stimulated, and the prosperity of the Island vastly improved." By 1943, nearly a half million pounds worth of notes belonged to the public and was so valued that much of it was being hoarded in people's homes, awaiting the island's liberation from the Germans.

About the same time that Guernsey started to fix its sea walls, the town of Glasgow, Scotland, borrowed 60,000 pounds to build a fruit market. The Guernsey sea walls were repaid in ten years, the fruit market loan took 139. In the first part of the 20th century, Glasgow paid over a quarter million pounds in interest alone on this ancient project.

How did Guernsey avoid the fiscal disaster that conventional economics prescribed for it? First and foremost by understanding that when you build roads or sea walls or colleges or houses, you are not reducing your society's wealth. In fact, if you do it right, you are creating something that will add to its wealth. The money that was created was simply backed by public works rather than gold or "full faith and credit." It was, in fact, based on something more solid than the dollar bills in our wallets today. In contrast, tacking on an interest charge to public works -- as we do in the US -- creates no new wealth, but merely transfers claims on existing wealth from debtors to creditors.

The privilege of creating and issuing money is not only the supreme prerogative of government, but is the government's greatest creative opportunity. By the adoption of these principles, the taxpayers will be saved immense sums of interest. -- Abraham Lincoln

THE NOT ALL THAT SMART GROWTH MOVEMENT

Sam Smith, Progressive Review - A movement to reduce the number of parking spaces in urban areas has attracted an odd coalition of developers and environmentalists. DC, one of the most developer abused cities in the country, is currently considering such a move. But, so far as one can see, developers are the only ones who will truly benefit from it, reducing their apartment/rental costs by $20-50k a unit from what it would be if they were required to provide parking for their clients.

To some environmentalists it has a nice anti-car ring to it, but on closer look a number of issues come up:

For example, if you don't want people to use their cars, give them less need to do so. I'm lucky to live in one of the best urban 'hoods you'll find - DC's Capitol Hill - one that owes a part of its charm and utility to the fact that much of it was built before automobiles yet provides - thanks to a lack of high rises and some of the biggest and best alleys you'll find - plenty of parking spaces for residences. It is one of the most dense parts of the city, achieved not with modern big boxes, but with attractive row dwellings, many with basement apartments. But that doesn't mean those on the Hill are excessively car dependent. In fact, thanks to the convenience and number of neighborhood commercial services available, it encourages walking in a big way. I could go to the gas station, hardware store, auto repair shop, UPS, Kinko's, Radio Shack, post office, fire and police station, public library, medical center and more than a dozen eating spots and never be more than ten blocks from my house. In addition, we have two convenience stores and two laundries within a three blocks walk.

This is in no small part thanks to places that were grandfathered into modern zoning - one of the major reasons we now use our cars so much. All over urban America are communities where it would be against the zoning law to emulate Capitol Hill. Little attention is paid to this issue by planners or environmentalists but it is far more important than reducing the number of parking spaces.

Further, people on Capitol Hill use their cars far, far less than the average person in the metropolitan area, yet it is precisely the sort of neighborhood the developers would like to densify, preferably without having to provide parking spaces for the their customers.

And who pays the price of this? The person buying or renting the apartment or condo adds it into the calculations when they move there in the first place. But the neighbors aren't consulted at all. They just find themselves with fewer places to park. Another neat developer trick.

These are the same folks who convinced the Washington area to build a subway that did far more for scattered suburban development than it did for real urban transportation. Meanwhile the bus system - which far more heavily serves poorer residents - is being short changed and the same government that claims to want people to leave their cars at home has also changed the taxi fare system in such a way as to drive many drivers out of the business.

Developers are also pushing for an end to the height limit that helps to give Washington its special character and for more high rise apartment cellblocks in the name of "smart growth."

Environmentalists would be wise to distance themselves from such cons, remembering that communities are ecologies, too. If, as DC has done, you close about a score of public schools (some undoubtedly to be sold to developers), you are hurting the community ecology. When you stuff a public library into a high rise as if it were just another Starbucks, you are hurting the community ecology. And when you dump cold, isolating high rises into an urban village you are harming that village's ecology. But few ever talk about things like that.

Here are a few far better ways for environmentalists to spend their time in our cities:

- Increase the amount of commercial services available within walking distance. This may mean some zoning changes, but it can still be kept attractive and pleasant through rules on signage etc.

- Oppose mass transit plans that are really development plans in drag. This was the great failing of the Washington Metro and there are lots of similar proposals around today. Favor truly urban transit plans that encourage people to stay with a reasonable area.

- Bring back the two or three story apartments over shops and offices that used to be common in America.

- Provide neighborhood business services - including copying facilities, desk space and teleconferencing - to help encourage telecommuting.

- Encourage large businesses to decentralize within an urban area.

- Follow the motto of Henry Thoreau who once said, "I have traveled widely. . . in Concord."

September 19, 2008

DEJA VU: NO FAULT CAPITALISM MEETS LEMON SOCIALISM

Sam Smith, Progressive Review - In 1990 I did a long report on the savings & loan bailout, which turned out to be the second S&L scandal. A few excerpts:

The sum of money involved is staggering, Newsweek estimates that even at a conservative $250 billion cost, this is an amount that would pay for existing education programs for the next four years; or nearly pay for universal health insurance and long-term care for the next four years; or overhaul the nation's water systems, repair all bridges and have money left over to start fixing highways. There are currently some 40,000 law suits over all this money and the figure is expected to double by year's end,

But recounting neither the sum nor the sin involved leads to a solution. After all, the broad outline of the S&L scandal have been known for some time yet in its wake the president and the Congress have fashioned an extraordinarily shoddy, dangerous, expensive and corrupt jury rig to correct the matter.

Not only is the government failing to solve the problem, it is creating massive new scandals, inequities and public deficits. . . Among the other clear beneficiaries of the bailout are the quick-rich financiers who, with their soul brothers, helped to create the scandal. . .

We know - or should know by now - that the crisis was created in no small part by the gluttony and stupidity of advocates of the so-called free market running rampant through America's fiscal countryside. What you may not realize is how far the government's acquiescence went. . . As Rep. Charles Schumer put it, "The government behaved like a fire insurance company that said to its customers, go ahead, play with matches. We'll cover you if anything goes wrong."

Thanks to recent revelations we now have a better idea of why Congress didn't look after our interests more assiduously. As just one small example, one study has found that S&Ls gave $45 million to congressional candidates during the past three elections, including more than $1 million to members of current congressional banking committees. . .

The questions the media have asked often miss the mark. Because these questions are frequently planted by "official sources," however, they do reveal some of the hidden agenda behind the bailout. Here is an exquisite example from the Times in a recent weekend roundup of the news:

"Does the nation need a specialized industry to finance housing when it now has an efficient mortgage market? Does the nation need 13,000 independent banks and 3000 independent thrifts, or should institutions be allowed to consolidate across state lines, which would also enable them to spread their risks by diversifying their sources of loans and deposits?". . .

The clue to the source of such queries is the phrase "efficient mortgage market," one of those delightful terms of art used by economists and financiers which would never be used by the average homeowner or wistful would-be purchaser. . . In fact, the mortgage market is efficient only to the extent that it has made some people and some institutions a lot of money. It has also developed in such a way that the average age at which someone can afford their first home is rising rapidly, people are paying an exorbitant percentage of their income and the former stability of the home mortgage has been increasingly replaced by such economic Russian roulette techniques as variable interest rates. . . .

In the first decade of [of the 20th] century, in the wake of the San Francisco earthquake, as other bankers helplessly watched their money disappear in fire and rubble, Amadeo Peter Giannini of the Bank of Italy walked 18 miles from his home to the bank where he retrieved some $80,000 in gold and silver from the vaults, loaded it on a wagon and made his way to his brother's house in the hills. There he opened for business loaning the money to San Franciscans so they could rebuild their homes and business. He gambled that his action would encourage others to deposit funds they had been hoarding so he could loan still more. It worked and on this shaky foundation there arose the Bank of America, later to become the largest banking house in the world.

In the last decade of the century, in the wake of another great disaster, America has reversed the parable. The money of the taxpayers, needed for their homes and businesses, is being loaded on the wagons of the state for deposit in the vaults of those few who have the means, the political power and the gall to profit from the rubble of the fiscal crisis . . . And America, its politicians, its captains of industry, its media, can think of little else to do about it except tacitly sanction the continued looting in the wake of the great capitalist riot of the 1980s.

INVISIBLE & UNAIDED VICTIMS OF THE FISCAL CRISIS

Sam Smith, Progressive Review - Barely a word of succor or solace, let alone any solutions, have been offered by the experts, media or candidates in either party on behalf of the most important victims of the fiscal crisis: ordinary citizens.

The silence has been stunning as those on top grapple with several decades of fiscal mismanagement, fraud, carelessness, greed and disarray. We have corporate gamblers bailed out, reckless companies loaned huge sums, avaricious banks saved, but no one seems to care about folks who bought houses they no longer can afford, communities which will now have to pay to help support them and states that will no longer receive their property taxes.

To get an idea of what is not being discussed, here is an exploratory calculation involving a quite different approach, one based on assuming that the first people to save are homeowners rather than their predatory lenders. The approach is shared equity, which the Review has pushed for some time. It involves the government being a passive equity partner with certain classes of homeowners, such as neophyte purchasers. But it could also be used in cases of pending foreclosures. And it would work well in the present crisis.

It has been estimated that there are up to a trillion dollars worth of bad loans. We don't know whether this is true or whether the government is deliberately hyping the crisis so it can do what it wishes. We further can't be sure that the home loans are as a big a factor in the crisis as the government claims. They may be being used to cover up fraud and rampant speculation. But let's accept the figure.

On second thought, let's not. After all, the trillion dollars represents the sum of the bad loans, not the amount that homeowners are unable to pay. If you're bailing out banks and other lenders you have to cover the whole loan. But if you are making it possible for homeowners to keep their property by just lowering the amount of their equity, the sum could be dramatically lower. Let's guess that $250 billion in shared equity would sufficiently lower the fiscal stress for homeowners so they could pay the rest of their loans without problems. That amounts to about three times what it has cost to bail out one failing insurance company, AIG.

Bingo. The banks have their money, the individuals have their homes, states have their property taxes, and communities don't have to worry about added social service costs for those losing their residences.

One more thing. The U.S. government has ownership in a large amount of real estate bought when prices were under stress. When these homes are sold five, ten, twenty years from now it is likely that they will be sold for a profit meaning that this bailout might ultimately bring money into the treasury.

Even if the shared equity decreased in value by thirty percent, the cost of bailing out tens of thousands of homeowners would be less than what has already been spent by the government on one corporation.

It's not a completely new idea. The government loaned Chrysler $1.2 billion and four years later had a profit of 300 million. It's hoping something similar will happen with AIG.

But of course, when you do it for real people it becomes socialism. And under the rules of the game as written by those who created this fiscal crisis, only large icons of the free market are allowed to benefit from socialism.

On the other hand, we may have reached the point where we're finally tired of the poor sportsmanship and are willing to send the predators to the bench. It certainly is long overdue.

September 16, 2008

HOW TO BEAT THE REPUBLICANS

Sam Smith



Stop talking like them. As Harry Truman said, "Give the people a choice between a Republican and a Democrat who talks like a Republican and they'll choose the Republican every time." Ever since closet conservative Bill Clinton conned his party into thinking that his narrow 1992 win thanks to Ross Perot 19% of the vote was some sort of triumph, the Democrats have been under the illusion that the way to win is to play Republican. It hasn't worked. Since then the number of Democratic governors, senators, representatives and state legislators have declined markedly. The biggest Democratic margins - under FDR and LBJ - have occurred when there was not the slightest doubt what Democrats were and what they were going to do for you.



Answer the important question: There were only two really important questions in politics: what have you done for me lately and what are you going to do for me? There is no major candidate running who can give a good answer to the first question but there is no reason why Obama can't give a better answer to the second than he has so far. The answer needs to be not grandiose and abstract - like $150 billion for alternative energy over the next decade - but specific and personally appealing and without a lot of ideological baggage:



Here are a few examples:



- Add to the Obama healthcare plan that nobody can really understand this simple proposal: lower the age of Medicare from 65 to 60. There are ten million people who will like this. If you want to try for more, add Medicare for children from birth to five and when the Republicans oppose it, just say that Democrats, unlike the GOP, don't believe that the sanctity of life ends when a baby leaves the birth canal. Where's the money going to come from? Well, we're getting out of Iraq aren't we?



- Come up with a major plan to revive passenger trains in America with particular emphasis on places that are currently short changed (like a lot of red states). Biden, the DC-Delaware Amtrak commuter, is the perfect guy to push this. Most people don't know much about solar collectors or wind farms, but they do know about trains and could easily appreciate how they could make moving things and people cheaper.

- Attack credit card usury. Sure, Biden is the Man from Mastercard but if he's vice president he won't need them so much. No issue would be more easily supported by more people than a proposal to return credit card interest rates to their 1980s single digit levels.



- Help homeowners rather than just lenders. Stunningly ignored in all the talk about the Fannie and Freddy bailout is that it grossly favors lenders over borrowers. If we can have socialism for the biggest and the richest, let's have it for the little ones as well. One plan: shared equity in which the feds help qualified first time homeowners and those facing foreclosure by taking over some of their house equity. You can reasonably bet that a decade from now the government would do better financially with such a plan than with lemon socialism for the big guys.



- Reduce National Guard exposure to overseas adventures. The abuse of the country's state militias in recent decades has been astounding. In Vietnam, for example, only 23,000 were called up but by the first American Iraq invasion, the number soared to 75,000. More than 270,000 National Guard troops taken part in George Bush's escapades in Iraq and Afghanistan, more elsewhere. one. Many have had their service extended beyond the original twelve months and many are subjected to double tours. Among other things, the foreign abuse of the National Guard reduces reenlistment and while the numbers directly affected is not that large, when you add in families, friends, fellow parishioners and co-workers who learn of the disruption being caused by the use of National Guard by politicians as political toy soldiers, it becomes a significant issue.



Speak United States - Obama needs to get out of the pulpit and give voters more than a crowd handshake. Speaking to 75,000 of the fully converted doesn't amount to much when you compare it with the number of undecided voters. Obama efforts often come off as haughty and above it all. He needs to stop talking so much and start listening more, to stop preaching and start chatting. He needs to toss around more basketballs and fewer bromides.



Get real. Perhaps by now Obama has learned that those of who live by spin can also die by it. His relatively benign con of the conventional parading as special and superior worked fine for the primaries but almost instantly deflated. One reason was even noted by Obama: the GOP is far better at campaigning than at governing. One reason for this: they are much more willing to lie. Watching the GOP convention was like being at a talent show of a mental institution. The theatrics were great but much was based on psychopathic, hypocritical and dishonest rhetoric. If you are going to try to outspin them without being a crook you're probably going to lose. The alternative is to keep steering the public back to reality such as constantly asking the question Ronald Reagan raised: are you better off than you were eight years ago? And Obama needs to dump the hope thing unless he starts giving specific reasons for the hope.



Forget law school - From the start, the image some of us got of Obama was not primarily that of a black man but of a law school graduate. One of the major problems with this is that lawyers can drain the life out of any topic and Obama has well developed this questionable skill. He tries to come across as thoughtful and balanced; instead too often his lawyerly equivocation raises concerns rather than answering them. This is not his problem alone. It is part of the culture of Washington which has been overwhelmed by the culture of lawyers, so much so it is highly like that Social Security, a minimum wage or Medicare could never be passed today. Washington's political lawyers would find too much wrong with them.



Give David Axelrod some help - As Mark Cunningham noted in the NY Post, neither Obama nor his campaign guru have much experience dealing with real GOP opposition: "Barack Obama has never run a campaign against a real Republican. And his main strategist, David Axelrod, is way out of his areas of expertise. Axelrod specializes in urban politics. He's run a bunch of mayoral races (usually in cities with lots of blacks), plus contests in true-blue states like Massachusetts and New York. . . Obama has lived a lot of places, but his adult life has been overwhelming anti-Palin country - urban and/or elite: here in New York as a Columbia undergrad, and later with NYPIRG; Cambridge, Mass., for Harvard; Chicago." Obama desperately needs some James Carville types to help him learn how to deal politicallyt and rhetorically with much of America.



Don't blame voters for the ethnic divide; cross it - Sure there's a lot of racism in America but most of it was already locked up for McCain long ago. And liberals do themselves no service by confusing the normal hesitancy of ethnic unfamiliarity with racism, implicitly blaming the very voters they're trying to reach. Black politicians have a particularly hard time because they have so long operated in the comfort of places with large black constituencies. It is amazing how few models of cross-ethnic black pols (Doug Wilder is a rare exception) that Obama has.



It is, however, a skill that Obama has to learn fast. Among the best models are the old Irish politicians who instinctively understood that the only way a minority could truly win was by leading the majority and to do that you had to turn one's own ethnicity into something everyone could share and enjoy. This is why since Martin Luther King Jr, the African-American figures who have been among the best at reaching into white culture have been black comedians.



Similarly, political scientist Milton L. Rakove, credits Irish dominance in Chicago partially to the fact that the Irish ran saloons that "became centers of social and political activity not only for the Irish but also for the Polish, Lithuanian, Bohemian and Italian immigrants. . . As a consequence of their control of these recreational centers of the neighborhoods, the Irish saloon keepers and bartenders became the political counselors of their customers, and the political bosses of the wards and, eventually, of the city." As one politician put it, "A Lithuanian won't vote for a Pole, and a Pole won't vote for a Lithuanian. A German won't vote for either of them -- but all three will vote for an Irishman."



Obama needs to act more like an old Irish pol or a black comedian.



Don't raise McCain and Palin's status; lower it - Abused Democratic candidates have a tendency to unintentionally increase their opponents status by the ponderousity of their outrage. The alternative is to steadily, gently and with humor lower that status by helping voters to not take them so seriously. One of the best examples of this was Earl Long when he ran against Fred Preaus, a church deacon, head of the chamber of commerce and a scrupulously honest car dealer. Earl would combat these virtues by saying: "Fred Preaus is an honest man. If I were buying a Ford car, I'd buy it from Fred Preaus. He would give me a good deal. If I had trouble with the car, he'd give me a loaner while he got it fixed -- that's just the kind of man he is. But if I was buying two Fords -- well, he's just not big enough to handle a deal that size."



Obama needs to make people understand what size deal McCain and Palin could truly handle which, at best, is somewhere between one and two Fords.