How We Got in This Mess

By Anne Carr and Joe Weiss
Carr-Weiss Institute for Shallow Thinking

Franklin Roosevelt famously said that "We have nothing to fear but fear itself." It turns out that he's right. The financial journals (or at least Investors Business Daily) track Key Psychological Market Indicators in each issue. This seems to validate, as if it needed validation, the idea that the stock market has its irrational side, and how people are feeling has a profound effect on the health of the economy. How you feel about it depends on where you are on the food chain.

Now as always, there are the haves and the have nots. The have nots are feeling pretty crummy. They have either lost their jobs, or are worried that they will. They are without health insurance, and they know they are one major medical event away from total bankruptcy.

Following WWII, and until about 5 years ago, your employer gave you health insurance, and that system worked well for most of the middle class. Nobody cared about the lower class, mostly black. Today still, nobody cares about the traditional lower class. They are simply expendable because they don't contribute anything to upper class or to the large companies that have pretty much bought the Government. Besides, historically, they never voted. (OK, they were kept from voting, but that's a detail.)

What is new is that the middle class is shrinking, as the union movement was pretty much wiped out by the neo conservatives who really took over the Republican Party starting with Ronald Regan. Regan sent the message to big business to declare war on the unions when he dissolved the PATCO union, the union for air traffic controllers.

Most don't remember, but Regan began his run for the presidency in Philadelphia, Mississippi, site of site of one of the most infamous race-related crimes in American history whose aftermath inspired the 1988 movie Mississippi Burning. His message was (to paraphrase), "You don't want your hard-earned tax dollars to be given to lazy black folks who don't want to work and don't share our family values." That message engaged a generation of middle and lower-middle class white people who, until just now, were made to believe that the republicans, the party of family values, represented their interests. Only now is it ringing hollow, as more and more ordinary people who were able to hold onto a house and two cars only by having two incomes, working tremendous overtime and keeping out of the hospital, found themselves simply unable to keep up. Most were keeping their noses above water by accumulating increasing amounts of credit card debt. Now the average American has about $14,500 in credit card debt. It simply cannot go on.

That long ramble had a point. The middle class is shrinking. Those who were in the middle class are finding themselves unable to remain there. Companies are shedding people. The middle class is finding itself without heath insurance, and things are pretty tough. People who used to think black people deserved what they got are beginning to wake up, and realize that we are all in this together.

We as a people were sold (and we bought) a phony set of values stating that more stuff is the way to happiness. The value of a citizen is directly proportional to his ability to consume. The fly in the ointment is that if there are not enough jobs out there that pay enough money, this model doesn't work. God knows we tried to be good citizens and consumed as much as our credit limits allowed, but in the end, it just can't go on.

So much for the have nots.


Life is much different for the haves. First of all, they have not have had to pay much in taxes for a very long time. During the Roosevelt administration, the very wealthy were in the 90% tax bracket. Today we don't have a 90% tax bracket. Tops for us is about 30%, and if you have a good accountant you can avoid paying tax entirely. As Leona Helmsley said, "Taxes are for the little people." What the wealthy people do have is stock, and the collapse of the stock market is troubling to them. It should be said that losing a half or two-thirds of ten million dollars isn't a catastrophe in the usual sense, but it does get your attention. What the rich see now, which is not interesting to people who have just lost their jobs, is that the stock market is making a tremendous recovery. It's up about 35% since early March. So with recovery in sight, there is not so much dissatisfaction at the top. However there is some worry about the national accumulation of debt beyond that which was and is necessary to repair the banks and brokerage houses. All the people in the banks and brokerage houses think that federal rescue of the banks is absolutely necessary but it should end there.

If we give a bunch of money to the states to repair infrastructure, provide jobs, that's socialism and very bad. What you should understand about American politics is that the word "socialism" carries the same impact as saying "your mother is a heavily rented woman of the evening." That is what you are going to hear when Obama tries to get universal health care going in the US. It's socialism. It's socialized medicine. Your mother is a xxxx!!!

How did we get in this mess in the first place?

Well for starters, America doesn't have much industry any more. It's like Chrysler and GM, but worse. We used to have steel mills and textile mills and consumer electronics manufacturing. In the end, we were left with service industry, that is clerks and shopkeepers, and the financial industry. That's an oversimplification, we still do make airplanes, Caterpillar makes heavy machinery, the car companies until very recently made some cars, and there are a few other things going on, but relative to what it was, it's very small.

Henry Ford paid his line workers $5 a day in 1914, roughly double the going rate in Detroit. Why? Because he wanted every worker in his plant to be able to afford to buy his product. Sometime during or after the Reagan administration, we started believing that paying people as little as possible would be a good idea. Well, not quite. Companies started seriously worrying about profitability quarter over quarter-a-year-ago. Companies which did not show substantial growth were not competitive. In an effort to increase short term profitability, companies got serious about busting unions and reducing wages and benefits. They got serous about off-shoring the work. There was no discussion about the long term consequences of having large numbers of people falling out of the middle class and failing to be able to afford to be voracious consumers.

Somewhere along the line, urban planners started leaving out city and suburban parks, and putting in more malls. Now the only open public place for teens to congregate is the mall. This is perfect for the economy. Except for the fact that most kids don't have any money any more.

At the same time the Republicans had all but won the ideological war on unbridled capitalism. Alan Greenspan had been saying for a long time that capitalism is self-correcting. Implicit in this assumption is that people running companies would act reasonably rationally, and execute their fiduciary responsibilities faithfully. He never envisioned that these guys would eventually pay themselves so much money that they would let their companies fail because it would be so good for them personally.

This ramble has a point too. With manufacturing gone and people having increasingly less money to spend, the financial institutions were in trouble. How can they make money, when there is no money being generated by the usual honest ways of doing it? The banks started being creative. They started charging larger fees for checking, larger fees for using ATM machines, larger fees for returned checks, and most of all more interest on credit cards. When that wasn't enough, they started charging a handling fee for people who had the bad manners to pay off their credit cards each month. They instituted even higher fees for people with bad credit history. They pushed thru a law a few years ago which said that, even if you declare bankruptcy, you are still liable for your credit card debt. They were unrelenting in their efforts to find ways of generating more profit quarter over quarter. This is hard to do when the general public finds itself with smaller and smaller disposable income. But they persevered.

The big blunder they made was that in December of 2000, they pushed thru a law which repealed some of the safeguards put in place after the great depression. They made derivatives legal again.


In the 1920's, there were tents set up on the sidewalks of Wall Street. You could go in there and bet that the NYSE would go up today. Put down $5, and collect $6, if you're right at the end of the day. Or you could bet that the market would go down that day. Put down $1 and collect $5, if you're right. You could also bet that J.P. Morgan's bond fund would go up or down. These kinds of bets were called "derivatives", and they were outlawed at the same time the Security and Exchange commission was written into law. One reason it became law was that if a particular betting tent couldn't cover its losses, they just folded up their tent and went home. Very quickly and before 3 o'clock.

Because the bankers on Wall Street were desperate to find more ways of making money, in December of 2000 they pushed to repeal the prohibition against derivative investments. It was done by an adjourning Congress after the 2000 presidential election during the period when Bush and Gore were in court trying to figure out who won. But Clinton signed it as part of an overall budget continuing resolution. If you are charitable toward Clinton, you would say he didn't know it was in that budget bill. Charitable or not, it became law.

The Perfect Storm

Also brewing in this time period were the sub-prime loans. We all know what those are. It doesn't take a genius to figure out that these loans had to fail because each year the monthly payments increase by 20% or 30%. But for years the geniuses were wrong. The value of housing increased by 20 or 30% too. So if you had a sub prime mortgage and could hold onto it for 2 years or so, you could refinance. You could even take out a home equity loan, get $40,000 to buy a new car, and reset your home loan to a monthly payment you can afford! People were using their houses as ATM machines. Whoopee. What a country. As long as housing prices kept going up forever, we were good.

In the meantime back at the banks, the guys were hard at work moving paper around. They created bundles loans full of good loans, bad subprime loans, some bonds and other "instruments." The legal description of these documents was written by lawyers who intentionally used language which could not be deciphered by actual humans. And they got the rating agencies, who also could not decipher what the hell they were looking at, to declare these bundled packages to be AAA quality investments. These bundles moved around the world at light speed, bought up by central banks and governments all over the world including Iceland.

A few people, but as it turns out only a very few people actually understood what was going on. These people, by the way, did not include CEO's and CFO of most of the banks and investment houses on Wall Street. (Oddly enough, the entire Canadian Banking system understood exactly what was going on and had nothing to do with it.) But in the background other people who also understood what was going on bought tons of derivatives, paying $1 to bet that the subprime mortgages would collapse, and if they did they would collect $1000 on that $1 bet. The banks all offered these derivatives, and because the law was changed in Dec of 2000, it was not only legal, but ..... and here is the kicker..... the banks were not required to actually have money on hand to cover the bets. So overnight, many of the banks and brokerage houses found themselves bankrupt.

So Where are We Now?

The Bush administration gave the banks $350 billion dollars to start, but never asked what it would be used for. The banks took the money, and used it to buy other banks and pay themselves large bonuses. They used it for just about everything except what they were supposed to do with it. Fortunately we threw out the Bush crew and this new administration is at least trying to find out where the money is going, but the banks are doing a good job of just saying no.

One of the criticisms of the Obama administration lead by Paul Krugman is that they seem to be aimed at putting the financial institutions back together again, more or less the same way they were before this whole thing started. They will support laws to put back the safeguards that were repealed in December of 2000, but they will not ask for anybody's head on a plate, as they did for GM. Similarly the Congress is in a bind because they are heavily indebted to the banking and financial industry, as banking and finance have paid virtually all the campaign expenses for most of the members of the Senate. The following is lifted directly form the Huffington Post:

Sen. Dick Durbin (D-Ill.) has been battling the banks the last few weeks in an effort to get 60 votes lined up for bankruptcy reform. He's losing.

On Monday night in an interview with a radio host back home, he came to a stark conclusion: the banks own the Senate.

"And the banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the place," he said on WJJG 1530 AM's "Mornings with Ray Hanania

This is a problem. And we have a Democratic Congress! There is hope on the horizon, maybe. There is real honest-to-god seething anger among the general population, and it spans many different socioeconomic groups. The lower middle classes are losing their jobs, houses and dignity. They are over extended on credit and can't pay it back. They are shocked and sad today, but they will be mad as hell, once they figure out how to feed themselves. The upper middle classes and the old folks are already mad as hell. They have lost half of their lifetime saving on which they were supposed to retire. Many of the old are looking at having to go back to work. But the good news is that these groups vote. So the Congress is looking at losing their seats if they don't punish the banks, but they are looking at not getting money to fund their campaigns if they make the bankers mad. It's hard to know how they will react. I'm betting they will go with their friends, the banks. They will make a lot of noise about regulation, and they will wring their hands about the fact that the bankers are giving themselves more and more bonuses, now with tax payers' money. But they won't do much in the end.

It will be interesting to see if Obama can shame them into behaving better. There are flickers of hope. The congress has appointed an independent oversight panel which has some pretty good people on it. And there is mounting talk about appointing a new Pecora Committee. ( Ferdinand Pecora was appointed by the Congress in 1932 to see what caused the great depression.) Again from the Huffington Post:

Pecora's work led to several resignations of bank executives, but more importantly in created a climate for reform legislation. Pecora's findings helped inform the Glass Steagall Act of 1933 separating investment banking from government-insured commercial banking, the Securities Act of 1933 and the Securities Exchange Act of 1934. Most importantly, it functioned as a public shaming of Wall Street. It thus helped change the political climate so that radical reforms could proceed. President Roosevelt encouraged Pecora's work and he encouraged the public indignation. Pecora was subsequently appointed by Roosevelt as a commissioner of the newly created SEC.

Will all this work? Will the good guys win? Nah, we'll just go back to business as usual. Let's all move to New Zealand.

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