Origins of Business, Markets, and Money website

For the latest information on my book The Origins of Business, Markets, and Money published by Columbia University Press, check out this link.

Tax Deal

I have long argued that Obama’s pr people were failing him, and I speculated that because they plunged into the Presidency without any rest from the campaign, they were simply exhausted. Whatever the actual reason, it’s now clear that Obama and his team never heeded the good advice of people like George Lakoff and Drew Westen, who laid out excellent prescriptions for how to communicate about progressive policies. So we find ourselves today in the following economic position:
As a whole, the economy is slowly and weakly recovering from the Great Recession.
Large banks and wealthy investors are doing very well.
Unemployment rates remain near 10%, with the actual number probably closer to 20% and the hardship much worse for minorities and the young.
The savings and wealth of the American middle class has been decimated.
The Tea Party/Republican party will rule the House from January 1, and will use its position to impose fiscal blackmail on all federal programs other than defense spending, not to mention doing their best to foil government activity by holding non-stop hostile hearings.
The possibility of any further fiscal relief for States or for poor or middle class people during the next two years is nil. As is the possibility of any federal “stimulus” money.
The goals of the conservative are twofold: first, to defeat Obama in 2012; second, to return the federal government to its pre-civil war role in which virtually the only legitimate activities were considered to be national defense, the collection of geographic information, and the management of public property.

This is the context of the tax deal. What does the tax deal do? Of the 900 billion cost, three quarters go to direct economic stimulus, which not coincidentally also saves millions of people from desperate misery at a time when they cannot possibly help themselves. The remaining quarter does go to the billionaires, who will not spend any appreciable part of it for the national benefit, and is a dead loss. But it is the ransom they require, and what we get in exchange is really important. Without this deal, Obama’s loss in 2012 would be assured, as would the return of a Depression era like we have not seen in our lifetimes. Nor would any other significant legislation have a chance now, such as the START treaty, the HOPE bill, and the DADT bill. With this reform, some or all of those bills might pass, even though they stand no chance whatsoever in the new Congress.

My interpretation of Obama, as a result of this deal, is that he has his eye on the practical realities for people. He is completely pragmatic, and like any good negotiator or deal maker will trade off unpleasant concessions for what he really needs and wants.

Why Democrats Did so Badly

I have been trying to figure out why the Democratic majority in Congress proved to be such a failure. Here is what I conclude. The fundamental reason for the failure was the Senate's filibuster rule. Without 60 votes, the Democrats were essentially helpless to get anything passed. The result was the mishmash we all saw. So the question becomes, why didn't the Democrats change that rule when they came to power in 2008?

The answer, I think, is the same reason why people don't keep their kitchen knives under lock and key. The filibuster was a tool that had never received much use, except when a minority of senators was very deeply and strongly opposed to something, as in the case of Southerners opposed to integration. While the Republicans began using it more often after 2006, it remained only an occasional factor since it was very difficult to rally so many senators to an obdurate stance. 2008 brought about an enormous change. So many moderate Republicans lost, and the party became so dependent on a particular segment of wealthy donors, that the remaining Republican senators could be induced or bullied into total unanimity whenever the leadership required it. McConnell began using the filibuster in a totally new way, as a day to day tactic, and this proved remarkably successful since the Democratic majority included a considerable number of rather conservative "blue dogs," and it only took one of them to make the filibuster succeed. By the time this tactic emerged, the time period during which the rules could have been changed had passed, and therefore the Democrats could not prevent the filibusters.

What remains unclear to me, however, is why Reid did not force the Republicans to actually filibuster, instead of simply winning cloture votes.

The new US constitution

I think we are ignoring several enormous changes that have transformed the US from the hope of the world into a new form of corporate state: (1) since Eisenhower, if not before, the military has become a huge, wealthy, and independent power with its own rulers, its own priorities, and a lordly presence around the world. It will continue to absorb the lion's share of our wealth regardless of the economic and social consequences. (2) Beginning with Reagan, the rich have become vastly wealthier and more powerful compared to everyone else, while middle class and blue collar community and labor organizations have dwindled. Bottom line: wealth now dominates our politics. (3) The George W. Bush presidency destroyed something like $12 trillion of US wealth, mostly in the form of middle class home investments. This one time destruction of wealth vastly exceeds all the losses of all the European powers outside Russia during World War II, and because of other changes enumerated here it cannot be recovered. (4) The Supreme Court's decision in Citizens United definitively marks the end of democracy in the US. Sure, democratic forms remain, and occasionally a rich candidate loses, but with only occasional exceptions, wealth now determines election outcomes. This may be particularly pernicious at the level of judicial elections. Although the judiciary remains for now what it has long been, largely committed to the rule of law, Citizens United and the efforts of groups like the US Chamber of Commerce guarantee that it will become increasingly partisan and corrupt as honest judges are replaced by those compliant with wealth, power, and ideology. (5) A key feature of "globalization" is that the major political actors--the largest corporations--no longer dependent on the American consumer for their profits. They have a sharply reduced stake in the economic viability of the nation, and are therefore relatively free to pursue public policies that further impoverish most Americans. To put it another way, just because a firm is headquartered in the US doesn't mean that it cares much about US conditions. Its leaders are insulated by their personal wealth, and its economic prospects depend on a far larger base than the US.

These fundamental changes render impotent and irrelevant liberal objections to the misdeeds of the present system. Unless an extraordinary new leader emerges, the system cannot be changed back to what it was. We thought Obama would be such a leader, but for all his qualities he clearly lacks essential public leadership skills, and there is no better choice on the horizon. The Republicans are now the only viable political party on the national level, and as far as I can see the only hope for amelioration of the depressing prospects is dissension within their triumphant ranks. Improvement will take a long time if it can be done at all.

Tea Party

Who could fail to resonate with the Tea Party desire for less federal spending, a smaller government, and a balanced budget? Who would disagree that many of the elected officials in Washington are crooks, chiselers, beholden to special interests, or otherwise unworthy? Because of the widespread popular agreement with these views, and the strange inability of the Obama administration to present its own relatively sane programs coherently and persuasively, the officials who will be elected or retained in office with Tea Party support will constitute a majority of the House, and perhaps of the Senate as well. And then what will they do?

People like Kelly O'Donnell and Sharon Angle seem to have no ideas at all; those with ideas, like the "young blood" Republicans who sympathize with the Tea Party, have ideas that either cannot be implemented, or would destroy the country. The leading idea seems to be to repeal the healthcare reforms. Presumably over the dead bodies of the healthcare industry that crafted and supported them, not to mention the liberal Democrats. But for the most part, the "shrink the government" movement has no ideas at all. We all want to shrink the government. But how? There lies the rub.

"Our" Freedom

Most of those who follow the Wall St. Journal's editorial page, listen to Rush Limbaugh, or regularly watch Fox News seem to share a belief--no, actually a fact so obvious that it requires no proof--that liberals are constantly threatening "our freedoms," the freedoms that people like them--the salt of the earth--hold most dear. Liberals, those unworldly do-gooders, constantly advocate policies that increase the size and responsibility of government, and the required level of taxes. As opposed to people who live and work in the real world, this account believes that liberals generally come from academia, or pursue intellectual activities, and accordingly know nothing about the way the world actually works. Or at least that's what they think until they need someone who actually knows something, such as how the markets work, or how to improve a machine, or what motivates people. At that point, of course, these realistic folks are likely to seek out experts, aka liberals.

When we examine more closely just which of our freedoms are being attacked by the pointy-headed types, however, it turns out that the circle of "us" is rather small, and the "freedoms" for these few are rather harmful to the rest of us. "Our freedoms" include the freedom to spend what we want on political campaigns, a freedom treasured by more foreign corporations than American citizens, if you examine who will use that freedom. "Our freedoms" include the right of power plants and energy producers to heat the earth without paying the cost, indeed to receive enormous subsidies for doing so; the right of the top 1% of earners to have the lowest tax level since the Great Depression, the right of corporations to injure their workers or their neighbors without significant consequence to themselves, the right of financial firms to lie, cheat, and steal, and the right of people who negligently or deliberately harm the lives or property of others to be free of regulation or payment. To put it in other terms, "our freedoms," as the Republican base would have it, consist of the rights of feudal lords to act without regard to the welfare of the peasants.

The Afghan Leaks by Wikileaks

I think this leak and the blogosphere reaction to it highlights a crucial failing of the Obama administration. We need a coherent and honest explanation of some confusing and difficult circumstances here. We are dealing with murky and ambivalent governments in Afpak, and if we stop doing so their resources and people are likely to fall into the hands of Islamic extremists. Imagine the US nuke arsenal in the hands of the militias of Idaho, and American women subject to retrograde sexist strictures. It is also true that our own military has conflicting views on how to handle the guerilla warfare in Afpak, and many of the commanders still think that brute, brutal force is best.

But except when the President speaks in reaction to something like this leak, we don't get that kind of communication. It is not enough that Obama's intelligence and good will are widely respected. The people in charge of his political operation, such as David Axelrod, need to provide a stream of information about the situation, why we are there, what we are doing, and what the prospects are. Without it, they leave the public to the tender mercies of duplicitous self-aggrandizing groups and Fox News. The Wikileaks information would have a very different impact if the Obama Administration were paying more attention to keeping the public properly informed.

Prosecute the Scum

In two succeeding articles, the Wall St. Journal recently reported that the large banks at the heart of the current recession, Citibank, Bank of America, and so forth, all have followed the practice of falsifying their capital to loan ratios in the quarterly reports they are obliged to give to the federal banking authorities. They have done so, apparently, by using off-balance sheet maneuvers, like those that Lehman Brothers employed, to "move" many of their liabilities off their balance sheets. By doing so, they make their equity to debt ratio look healthy when in fact it is not.

They claim that in doing so they are adhering to the letter of the law, in that on the exact day in question, the last day of the quarter, they do not have the liability. They also claim that despite the uniformly favorable result for them, these maneuvers happen in the ordinary course of business.

I don't know the details, but on the surface, at least, they are violating criminal prohibitions against filing false reports and conspiring to defraud others (bank examiners, investors). Their technical defense should not hold water; plenty of people have claimed that they adhered to the letter of the law in avoiding taxes, only to have the courts invalidate their action because it had no legitimate business reason other than tax avoidance. I am sure there are many other examples in which the deliberate circumvention of a law and its goals have resulted in criminal prosecutions. As t their second claim, it is so preposterous that it calls out for investigation at the very least. I am waiting for Attorney General Holder to launch a criminal inquiry.

Tea Party: the New Black Panthers

As it happens I have been reading "White Dog," Romain Gary's memoir of 1968, when King and Robert Kennedy were assassinated, the Black Panthers were riding high, and students in Paris and elsewhere were revolting. Then, yesterday, I also read Mark Lilla's diatribe in the NY Review of Books, April 29 edition, against the Tea Party. There is a striking resemblance between the anarchic tendencies of the 1968 Left, and the 2010 Teaparty Right. Both think that nihilism is a productive response to the undeniable troubles they see around them. Both are ignorantly idealistic. The Black Panthers and the students of 1968 carried on for ideals of equality, justice, and an end to oppression; the Teaparty Right does so for individual autonomy, at least in Lilla's credible view. While both have been eye-catching and irresistably newsworthy, neither has ever enunciated a plausible program to achieve what they scream for. Each has seemed dangerous, but ultimately works as part of the ongoing parade of entertaining spectacles.

Dishonesty Today

One factor that has rarely been mentioned in the national discussion about the current recession is the rise of dishonesty. There have always been crooks and liars, of course, but for centuries if not longer, lies and thievery have been socially disapproved. In the 21st century United States, however, blatant dishonesty has become commonplace not only by people who are sociopathic, needy, or crazy, but also by society’s leaders—our most important politicians and businessmen, leading corporations, and others whose attainments formerly earned them public respect.

Although it may not be politically correct, I also observe that this normalization of dishonesty is taking place largely under Republican auspices. Obviously, Democrats have their usual complement of crooks and liars, just as Republicans do. But what we are seeing today is something extraordinary. A political scientist friend, deeply immersed in contemporary politics and a former liberal Republican, says that what has happened is the takeover of the Republican Party by the South, and with it the traditional Southern political style which is rooted in dishonesty. He's usually right about such things, but in any event the national success of dishonesty reflects its one-sided nature. If the Democrats used dishonesty as a normal tool of political competition the way Republicans do, they would not be reduced to ineffectual sputtering whenever the Republicans perpetrate another lie. Yet time and again, that has been their reaction to Republican lies. We have seen this with the Swift Boat ads, with Republican propaganda about the healthcare bill, and with their outlandish claims about President Obama, just to mention a few of the better known examples. The Democrats remain perpetually surprised and shocked by such lies, still taking honesty and honor as the norm.

The spread of blatant dishonesty to the highest reaches of private society, which traditionally consists largely of Republicans, has occurred in step with the Republican use of dishonesty for political ends. Republican policies have been highly influential in creating the current atmosphere in which dishonesty is accepted as a normal part of the “game.” For example, George W. Bush’s administration refused to pursue illegal offshore entities and practices that allowed corporations to avoid billions of dollars in taxes, and gutted the enforcement capabilities of the SEC as well as of the EPA, OSHA, the Bureau of Mine Safety, the FDA, the FCC, and the Consumer Product Regulatory Commission.

The current recession traces almost entirely to dishonesty practiced by the largely Republican financial establishment. At its base were the firms that extended mortgage loans to people they knew to be unqualified. They then sold those loans to highly respected financial intermediaries who, with little examination, packaged and sold them to professional investors with unfounded assurances that they were safe, supported by the lies of rating agencies that had examined them only formally, and in some cases hardly understood them. The investors, in turn, falsely assured the pensioners, workmen, and others who depended on their expertise that they were working hard to protect their assets. The investment advisers who got their institutions to buy these securities fought tooth and nail against regulatory requirements designed to provide transparency, and won important victories like preventing the Commodity Futures Trading Corp. from regulating the “shadow” financial structure that had become the largest of these institutions.

Finally, what prompted this note from me was a Wall St. Journal article of April 9, 2010, stating that according to a NY Federal Reserve Bank study, all the major banks have, for the last 5 quarters, submitted false statements about their loan levels, with the falsehood designed to make their riskiness seem less than it truly was. The article states that the false submissions were not criminal in nature since, at the moment of submission, they were technically true. But when Al Capone “proved” that he was not a crime boss because his tax returns showed only a small income, he was convicted of perjury if not of other crimes. Why, then, should a banker escape prosecution for perjury if he reports in a sworn statement that his hands are clean, simply by virtue of handing off his excessive loans for one or two days?

It is time that we start severely punishing the liars, cheats and thieves at the upper levels of society. Let’s make it once again socially disgraceful to engage in such behavior.

Why Congress Can't Act

The reason Congress cannot act is that bipartisanship is now a term for what happens within the Democratic Party. The Blue Dogs are the new Republicans, and those who call themselves Republicans constitute a new party, the Radicals. They cannot be reasoned with, so their presence in Congress is as though the voters had decided to elect 41 lunatics from an asylum to the Senate, and whatever their number is to the House. Before Reagan, or perhaps Bush I, a bill required just 50 or 60% of the members to pass; a bipartisan goal that was often attainable. Now, however, the bipartisan goal to pass a bill is virtual unanimity, since the Radicals are out of it entirely. What is now impossible in the Senate would become merely very difficult if Reid would restore the true filibuster, or change the rules to prevent it entirely. 50 Senate votes would still require 85% agreement among the liberal and conservative Democrats.

As Germany entered the Depression of the 1930s, angry voices began to blame the economic disaster on outsiders: Jews, Communists, foreign conspirators, bankers, and the like. They were increasingly strident; their stupid and incendiary claims were highly newsworthy; their appeal to military force resonated with German tradition; and the simple core message--that the ordinary, hardworking German volk were innocent victims of evil forces--was very attractive to people who never normally thought much about public affairs. So they elected a demagogue named Adolph Hitler.

In the United States today, a similar scenario has been shaping up. Without a tradition of anti-Semitism, or a serious threat from Communism, the alleged conspirators are somewhat different: Terrorists, Moslems the Chinese, liberals, immigrants, and of course bankers. But like their radical predecessors in Germany, America's radical right makes stupid and incendiary claims that capture the media's attention; their love of force appeals to traditional values; and their simple core message--that the ordinary, hardworking middle-class American is the innocent victim of it all--is wonderfully appealing, especially to those unaccustomed to thinking about public affairs.

There are, however, significant differences. Unlike in Germany, the radical right's perspective clashes with important American values. Despite repeated claims to love liberty, their programs obviously trample the Constitution and traditional commitments to human rights. And to a certain degree, the radical right in America had a much larger role in creating the current problems than did Germany's radical right. The current crisis is really the culmination of a decades-long trend that began in California under Ronald Reagan, when an anti-tax movement focused on cutting services to the poor and the lower middle class took hold. Since then, the radical right has repeatedly cut taxes and public services, including regulation, but at the same time ran up huge deficits by spending vastly more on armaments and wars.