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Robert Borosage

 

By Robert L. Borosage
Co-Director Campaign for America’s Future

Last year we worried about homes below water; now it is the economy itself that is sinking. Warren Buffett says the US economy has “fallen off a cliff.” And, as bad as the US is, the rest of the world is worse. Germany’s exports have collapsed; Japan is in free fall; much of Eastern Europe may join Iceland in bankruptcy. The Asian Development Bank estimates the loss to financial assets worldwide at $50 trillion dollars – the equivalent of a full year of annual global output. It’s not for nothing that National Intelligence Director Dennis Blair announced that the economic collapse trumps terrorism and catastrophic climate change as the greatest threat to US security.

After slogging through the stimulus, the banking mess and the foreclosure crisis, our besieged president now must turn his attention to organizing global cooperation to lift the world economy. Finance ministers of the group of 20 countries (G-20) meet near London this week; the heads of state gather on April 2. The agenda: whether to expand national stimulus plans, how to forestall a banking collapse, and help for the weaker countries that can’t help themselves. Rhetoric won’t cut it; real commitments have to be made. As the anti-Bush, Obama has been celebrated by much of the world as if he walks on water. Now, we’ll see if they will follow the savior rather than crucify him.

We need every major economy – particularly those like Germany, Japan and China in the best position to do so – to help boost the global economy with bold national, deficit financed, recovery plans. We can’t do this alone. Our own stimulus – about 2% of GDP in 2009 – is too small even to lift this economy. Everyone has to grab a bucket and start bailing.

Moreover, gaining this consensus will help put the world on notice that the old ways are gone. We’re not going back to an economy in which the US borrows $2 billion a day from abroad, while serving as the world’s consumer of last resort. The Chinese, Japanese, Germans and other nations have to move away from export-led growth. The unsustainable trade imbalances – with the US absorbing 70% of the world’s savings – provided the flood of cheap capital that eventually capsized the global economy.

That world is over. US consumers are already tightening their belts. Exports have collapsed. If we ever begin a recovery, the US should seek more balanced trade. That means we will have to sell stuff beyond toxic financial paper to the rest of the world. Obama anticipates this with his drive for new energy, an industrial policy that may allow the US to gain an edge in the green markets of the future.

At the same time, China, Germany, Japan and the mercantilist nations will have to stop relying on exports for their growth. For Germany, the world’s largest exporter, exports made up an estimated 41% of GDP last year. That can’t go on. The first step is for the countries to stimulate internal demand to help get the global economy going once more, and thereby begin the wrenching journey they will have to make to more balanced growth.

Here as elsewhere in this economic debacle, the leaders remain behind the curve. On Monday, the European finance ministers announced that they had no plans to add to recent stimulus plans, dismissing US pleas for expansion as, in the words of the European Chair, “not to our liking.”

The Chinese initially trumpeted a large internal public works stimulus, much of which turned out to already be in the five year plan. Now Chen Deming, the commerce minister, declares China plans to subsidize exporters and lower export taxes, saying that we “should increase our share of the global market. We must transform ourselves from a big export nation to a strong export nation.” Nightmare.

G-20 conferences have generally been for show. The stakes are real this time – and the odds going in are against the president in gaining the bold action needed. And once more he’ll be out there virtually on his own, taking on the real deal in stark contrast with his opposition here at home. The conservative claque is ranting about socialism. Blue dog Democrats like Sen. Kent Conrad are mobilizing to defend agribusiness subsidies, while the Republican leaders simply don’t get it. Rep. John Boehner, the perpetually tanned House minority leader, last week called for a freeze on all spending over the next year, something like putting a pillow over the mouth of someone suffocating to death. And Sen. John McCain, the party’s nominee, woke to deliver one of his dyspeptic lectures against earmarks; the patient is hemorrhaging blood, but the Senator is worried about the pimples on his face.

The Europeans want to wait and see. The Chinese are subsidizing exporters. The Republicans are railing about earmarks and socialism. Obama’s call for a new responsibility hasn’t exactly taken hold.

Robyn E. Blumner

By Robyn E. Blumner
St. Petersburg Times Columnist

Our economy has driven off a cliff and most Americans have to be wondering how it happened. How did we go from a nation of growing 401(k)s to the financial abyss so fast?

We all know the story by now. How the people running Wall Street investment banks, commercial banks and hedge funds made gobs of money by leveraging their firms to the hilt in order to gamble on exotic securities backed by bad loans. Then their house of cards collapsed and brought our economy down with it.

But why wasn’t there regulation and oversight to restrain all the irresponsible bets?

Here’s a news bulletin for you: It was methodically bought off.

Over the last decade the financial sector spent more than $5 billion on influence peddling, $1.7 billion on political contributions and $3.4 billion on lobbying. And the industry got its money’s worth.

The details are contained in a blockbuster report by Essential Information and the Consumer Education Foundation, nonprofit groups that advocate MORE

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 This column was first published in the St. Petersburg Times on March 8, 2009

Leo W. Gerard: The likes of Alabama Sen. Richard C. Shelby and other “Toyota Republicans,” as I call them, contend that GM and its partners in the Big Three American auto makers are antiquated and irrelevant and should be euthanized. You’ve written a book, “Why GM  Matters” that refutes Shelby’s premise by establishing that GM has remade itself as a company and is crucial to the American economy. I believe you. Why do so few others?

William J. Holstein: One major problem is that so many attitudes were formed five, 10, 20 years ago-long before GM began its transformation in earnest. These people, out of ignorance of the facts, are recycling old myths like these: GM can’t design cars that Americans want to drive. GM can’t innovate. GM hasn’t been willing to reduce its cost structure to compete internationally. And so on.
Then there are other people who are consciously trying to destroy or further cripple GM by recycling those arguments. One is U.S. Sen. Richard Shelby, who has four transplant factories in his home state of Alabama. It turns out that the Southern Republicans are working on behalf of their home states, and their home states have given hundreds of millions of dollars in incentives to Toyota, Nissan, Honda, Hyundai, BMW, Mercedes and others.
There is another lobby, which I call the “Bankruptcy Lobby,” that is trying to push GM into Chapter 11 because these bankruptcy lawyers and their law school allies would profit handsomely from it.

Gerard: So, to quote the book, here’s what you actually say:
“Free marketers had felt obliged to go along with the $700 billion {bailout} for Wall Street because Treasury Secretary Henry Paulson (the CEO of Goldman Sachs at the very moment that it had become embroiled in Wall Street’s love affair with mega-leverage) had convinced them the entire financial system would shut down if they did not.
“But when it came to the auto industry and the UAW, they wanted to slam the brakes on. Part of it also was sheer spite: Republicans were reeling after one of their most devastating electoral losses in history. The auto industry, and particularly, the United Auto Workers, had helped get the Democratic vote out and deliver the crucial swing states of Michigan and Ohio to Barack Obama.”
Are you actually saying that Republicans were willing to vote against the good of the country out of spite?

Holstein: Sad to say, but true. They are not acting in the national interest. They are playing for their home states. They have the right to do that. But everyone should be able to understand what they’re doing, and why. I blame the media for picking up comments from Shelby and others (“GM is a dinosaur”) and printing them, without subjecting them to critical scrutiny.

Gerard: Then you go on to say that the presence of “transplant” factories, or manufacturers like Honda and Toyota from foreign countries located in states like Shelby’s Alabama made a difference for some of these senators. And you cite Shelby as an example, noting that Honda, Hyundai, Mercedes and Toyota all located plants in Alabama with the help of state funds, but then he refused to provide federal funds for an American company. So are you saying that these senators were willing to vote for something that was bad for the U.S. – the bankruptcy of the Big Three – because it might provide more business for their home states?

Holstein: As I’ve said, I think that’s exactly what they’re trying to do.

Gerard: Oddly, considering the treatment of the UAW in the press, you manage not to lay blame for GM’s situation on the union. In fact, you say that by last spring, “The Harbour Report,” which you call the bible of car-making statistics, said Toyota factories needed 30 hours to assemble a vehicle while GM required 32. So what does that mean in productivity and difference in labor cost per vehicle?

Holstein: GM and the UAW have made dramatic progress in improving the way the company’s cars are manufactured. They’ve done that by absorbing the Toyota lean production method. And by altering their own relationship, by transferring health care costs to the union’s VEBA and by implementing a two-tier wage system. It is estimated that GM will have stripped out $5,000 from the cost of each vehicle by 2010. The relationship between GM and the UAW is by no means perfect, but they have made big progress in helping the company begin to approach the cost structure that Toyota has at its Georgetown, Kentucky plant. This is truly an historic response to Toyota.

Gerard: You cite a fascinating statistic in your third chapter. You say that although the transplants like Honda and Toyota located factories in the U.S. and American manufacturers make some cars overseas and import some parts, GM’s chief economist estimates that Toyota’s U.S. content is 50 percent while GM’s is 75 percent. What does that mean in the long run to Americans, in terms of jobs and the economy, for each GM car made?

Holstein: I don’t think it’s too dramatic to say that we are in the process of defining what kind of economy we want to have as Americans. Do we want to have an economy where we have many higher-paying jobs in finance, design, engineering, management, marketing (and in GM’s case, those jobs all depend on the folks working on the line) or do we want to send our kids to work in foreign-owned factories where a majority of the higher-value added functions are performed in Japan or Korea or Germany? You have heard it said, no doubt, that it doesn’t make a difference whether it’s a GM job in Michigan or Ohio or a Hyundai job in Alabama. The impact is the same for the American economy, so they say. But that statement is based on a very superficial understanding of auto manufacturing. In fact, it’s plain stupid.

Gerard: What I found striking about your book is that it took a hard look at Toyota as well. Here is a company that the Republicans glorified all through those hearings. Some said let the Big Three fail and Toyota can pick up the slack. And yet, Toyota’s sales fell off dramatically last year, and it posted a loss too. Wasn’t it simply affected by the same market forces that GM was? And if so, why does it retain an aura of perfection?

Holstein: Yes, Toyota has almost had a Teflon coating. The media and political leaders who are so critical of GM seem to turn a blind eye to what Toyota is doing. They glorified its Prius hybrids, which were undeniably a good thing, but ignored the fact that Toyota’s much more important push was into full-sized pickup trucks, which hasn’t worked. Toyota’s design also has fallen behind GM’s. Their cars aren’t as sexy or as fun to drive. They’re like appliances on wheels. Toyota’s reputation for quality is even suffering, as they launch recalls in the United States and Japan. Consumer’s Reports no longer issues an automatic recommendation for every Toyota car. So yes, things are changing at Toyota. I think we’re seeing them go through a period of consolidation or doubt. No company can avoid making mistakes forever.

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William J. Holstein is an author, writer and magazine editor. Before “Why GM Matters: Inside the Race to Transform an American Icon,” (Walker and Co.), he wrote two other books, “Manage the Media” and “The Japanese Power Game.” He has written for “United Press International,” “Business Week,” “The New York Times” and “Fortune” magazine and served as an editor for a decade for “Business Week,” managing the magazine’s Asian coverage.  He covered the American economy and the auto industry for “U.S. News.”

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In a related matter, U.S. Rep. Tim Ryan, D-Niles, spoke with passion in Congress on March 10 about how crucial it is to sustain the U.S. auto industry. Watch him here:
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By Michael Hiltzik
Los Angeles Times Columnist

The industry claims to have had a change of heart, but its position hasn’t changed at all.

The genius of modern marketing is pouring old material into new packaging. Over the years this has given us yogurt in tubes, prechopped salad greens in cellophane bags and, most recently, the health insurance industry’s new image as a friend of reform.

In December, the industry’s trade group, AHIP (for America’s Health Insurance Plans) revealed that it had experienced an epiphany and decided for the first time to support the principle of universal healthcare — insuring everyone in America, regardless of health condition.

It described its change of heart as the product of three years of sedulous soul-searching by AHIP’s board of directors, who claimed to have “traveled the country and engaged in conversations about healthcare reform with people from all walks of life.”

As a connoisseur of health insurance lobbying practices, however, I withheld judgment until I could scan the fine print. What I found by reading AHIP’s 16-page policy brochure was that its position hadn’t changed at all. Its version of “reform” comprises the same wish list that the industry has been pushing for decades.

Briefly, the industry wants the government to assume the cost of treating the sickest, and therefore most expensive, Americans. It wants the government to clamp down hard on doctors’ and hospitals’ fees. And it wants permission to offer stripped-down, low-benefit policies freed from pesky state regulations MORE

Michael Hiltzik is a columnist for the Los Angeles Times, where this column was first published on March 9, 2009.

Leo W. Gerard

David M. Rubenstein

The United Steelworkers and the Carlyle Group don’t agree on everything, but on this we are in lock-step: the key to success of the stimulus is maximizing the economic activity generated by each tax dollar spent. The more money spent in the manufacturing sector, the greater the economic benefit. Manufacturing multiplies the spending because it has a ripple effect through the economy. That’s why it’s so important to concentrate the expenditures on products with significant domestic value added, which will more quickly generate more jobs and economic benefits.

Manufacturing is the bedrock of our nation’s gross domestic product, producing approximately $1.40 of additional economic activity for every $1 of direct spending in the sector – more than all other U.S. industries. Here’s how this “multiplier effect” works: Every dollar spent on a manufactured product pays wages and benefits to company employees, buys raw materials and purchases supporting products and services such as forklifts and shipping. The suppliers of the raw materials and supporting products, in turn, pay wages to their employees and purchase raw materials, supplies and services – and so on. And all along the way employees use some of their wages to buy products and services for themselves. Of the incremental spending generated by the multiplier, roughly 60 percent is spent in other sectors, meaning everyone from retailers to teachers to healthcare workers benefits from manufacturing activities.

Manufacturing has also been the engine of U.S. economic productivity. Since 1990, output per hours worked in the manufacturing sector has increased 94 percent, versus 49 percent for the economy as a whole. Greater productivity translates directly into higher pay. In 2006, wages and benefits for the average manufacturing position were 41 percent higher than the rest of the workforce.

But this critical part of our economy is now suffering terribly. While a serious recession is gripping most of the world, for U.S. manufacturing it’s the 1930s all over again. In 2008 alone, manufacturing jobs were cut by more than 540,000, an amount nearly equal to the population of our nation’s capital.

In the steel industry, for example, nearly 55 percent of capacity is currently idled, a level last seen in the Great Depression. Cumulative steel production for the first seven weeks of 2009 was down 52 percent compared to the same period last year.

The manufacturing collapse hurts our economy in two ways. First, layoffs create a vicious cycle of lower consumer spending, which leads to reduced manufacturing activity, which leads to still more lay-offs. Second, the multiplier effect cuts both ways. Just as a growing manufacturing sector lifts all boats, problems in the sector disproportionately ripple across the rest of the economy.

So, by ensuring spending flows to the manufacturing sector, the stimulus package can have a deep and lasting impact. And what’s more, results will come quickly. Job creation by supporting industries up and down the supply chain will begin as soon as infrastructure projects are awarded – even if the projects are not started immediately – due to lead time needed to support the new demand. For example, steel manufactures will begin relighting beam and bar capacity long before shovels are put to ground.

But stimulus spending can’t exist in a vacuum; as the President has said, it needs to be accompanied by action to loosen up credit markets and stem the tide of home foreclosures. Without access to credit, many manufacturers won’t be able to fund the inventory needed to address demand created by the stimulus program. This, in turn, will dampen and slow the program’s impact.

Secretary Geithner’s recent announcements include a number of important ideas and initiatives, but additional details need to be fleshed out. For example, a public-private partnership to purchase toxic assets is a positive step that sends a clear signal that we must find a way to attract private capital back to the markets. Before the private sector engages, however, the administration must identify who can sell assets, what type of assets can be sold and how the financing will work. In addition, the expansion of the TALF will provide additional liquidity to constricted markets, but policymakers should consider further broadening the class of asset-backed securities that are eligible for TALF support.

While jumpstarting credit markets is critical, it is equally important to take aggressive action to stabilize housing prices. The President’s recent announcement, which emphasized interest rate reductions through mortgage modifications, is a significant step in the right direction. However, we fear that homeowners will continue to lack incentives to stay in their homes unless the program places a greater emphasis on principal reduction. Interest rate reductions will help some homeowners, but those with significant negative equity may still have strong incentives to walk away from their homes. Stabilizing the housing markets is the most important action the government can take to revive consumer spending.

A well-implemented stimulus plan that focuses spending on manufacturing and industry, incentives for investment of new private capital and additional steps to prevent foreclosures will help to break the credit and investment logjam.

Leo W. Gerard is International President of the United Steelworkers and David M. Rubenstein is Co-founder of The Carlyle Group, a global private equity firm.

By Leo W. Gerard and David M. Rubenstein

Leo W. Gerard

By Leo W. Gerard
International President

Ever since President Obama announced his plan to forestall foreclosures, many of those lucky enough to have burned their mortgages have angrily suggested that less frugal homeowners get the Creep of the Week award.

While acknowledging such prodigal-neighbor-resentment, I am giving the award this week to a much more malevolent, seriously more depraved subprime creep: Stanford L. Kurland. This is a guy who profited from creation of the sub-prime mortgage crisis as former president of Countrywide Financial and who is now profiting from the wreckage caused by those sub-prime mortgages – both at the expense of taxpayers.

The best description of this appeared in the New York Times in a column by op-ed writer Gail Collins: “It’s like Jeffrey Dahmer selling body parts to a clinic.” Or this, in a Times story by Eric Lipton: “It is sort of like the arsonist who sets fire to the house and then buys up the charred remains and resells it.” That’s from Margo Saunders, a lawyer with the National Consumer Law Center. The center tried to stop abusive lending by the likes of Countrywide, which during the heyday of sub-prime was the largest mortgage lender in the nation but in the past nine months has been sued by several states contending it defrauded borrowers by hawking defective mortgages that quickly went to foreclosure.

The guy in the bungalow next door may have made some mistakes. He bought a house he couldn’t afford with a mortgage he couldn’t pay and then slid his credit card to get a big screen TV and a dirt bike for his kid. But here’s the thing, when Countrywide sold him on that loan, he just didn’t understand it. All the old fogies out there with their glorious fixed-rate mortgages can call him stupid. But he wasn’t. He was duped. There’s a reason these were called predatory loans. The prey was that guy in the bungalow next door.

The predator was Stanford L. Kurland and his ilk who all profited a plenty from little guys not understanding that the low “introductory” interest rate would balloon into one that made the monthly payments completely unaffordable. Yes, some applicants lied about their income to qualify for loans, but often that was encouraged by loan processors, who made money on each loan they sold. And in other cases, the loan processors provided those false wage figures themselves for what’s now known as liar loans.  Ultimately, it was the banks that weren’t requiring income verification or any income information at all.

The neighbor reaching for the American Dream isn’t at fault. It’s the bankers – Kurland and company – who urged dreamers to sign the dotted line knowing the loan would never work out, knowing a bank would never grant such a mortgage if it were going to remain on the books of a local institution.

That didn’t happen. Mortgage brokers like Kurland pushed these loans because they knew they were going to immediately dump that trash. These loans became that oxymoron: “toxic assets.” They were packaged and peddled on Wall Street in bundles as securities. Then companies like AIG sold insurance on them.

It all started falling apart when the real estate market slipped. That wasn’t supposed to happen. None of those Wall Street wizards who had made untold billions on this scheme had calculated a drop in the market. Suddenly, no one knew the value of the “bundles,” because each contained an unknown number of good and bad mortgages. Banks started to fail. Taxpayers provided $700 billion to prop them up – including Bank of America, after it bought the financially-sputtering Countrywide.

But Kurland’s not hurting. He cashed out of Countrywide before its stock tanked, taking $200 million with him. He used some of that money to set up a new company: PennyMac. For about 38 cents on the dollar, PennyMac buys bad mortgages from the federal government — which got them with taxpayer money from failing banks. Then PennyMac gives homeowners the opportunity to refinance at affordable rates – perhaps rates that Kurland, as president of Countrywide, should have been offering in the first place. Fine, Kurland’s PennyMac gives the guy in the bungalow next door payments low enough to let him stay.

But the cycle of mortgaging is costing taxpayers 62 cents on the dollar.

Kurland’s got taxpayers coming and going. And for that scam, far more than any poor homeowner, he richly deserves the Creep of the Week Award.

Robert Borosage

By Robert L. Borosage
Co-Director Campaign for America’s Future

It ain’t easy. No use jokin’. Everything’s broken.”
–Bob Dylan

We can’t go back to the old economy. That economy — marked by booms and busts, Gilded Age inequality, declining wages, growing household debts, and unsustainable trade deficits — didn’t work very well for most Americans. President Obama is faced with the difficult task of creating the structure for the new economy even as he works to lift us out of the collapse of the old.

That’s why his stunning budget calls for health care reform, ending our addiction to oil and investing in education as both a way out of the mess and a down payment on the future. His pace is as unrelenting as the crisis. Next up: reviving America’s middle class, insuring that once growth returns, its blessings are widely shared. And the centerpiece of that is the Employee Free Choice Act (EFCA).

EFCA helps revive the right of workers to organize in this country. Over the last decades, that basic right has been shredded, as companies waged open warfare on union organizing, and administrations often failed to enforce the laws protecting that right. The tactics were bare knuckle: fire the organizers; hold closed door meetings to threaten the workers. And if workers did vote for a union, one-third of employers simply refused to negotiate a contract with them.

The campaigns have been brutally successful. Today, over a majority of workers say that they would join a union if given a choice, but only about 7.5% of the private workforce is organized.

EFCA gives workers the right to choose a union, either in a closed election or with a majority signing pledge cards. It forces employers to negotiate in good faith, requiring arbitration if no agreement is reached. It stiffens penalties on employers for violating workers’ rights.

But EFCA isn’t just about worker rights. It’s about whether we can return to an economy with a broad middle class. When unions represented 30% of the private economy, they won family wages, health care, pensions, paid vacations — the basics of middle class existence. Rising union wages and benefits helped lift the wages of non-union workers as well. America has never done much redistribution through taxes. We built a middle class because workers were able to win a decent share of the profits and productivity that they helped to generate. Unions were central to that.

Naturally, as the unions have lost ground, so has America’s middle class. Over the eight years of the Bush recovery, we witnessed the extreme: an economy in which profits were up, CEO salaries soared, productivity was up, but workers lost ground. As a recent EPI statement notes, the median working household lost $2000 in annual income over that period. That reality contributed directly to the inequality, speculation, and household indebtedness that provided the kindling for the economic conflagration we now experience.

That’s why Obama was an early sponsor of EFCA as a Senator. Earlier this month, he noted that he saw unions as part of the solution, not part of the problem.

“We need to level the playing field for workers and the unions that represent their interests, because we know that you cannot have a strong middle class without a strong labor movement. ..”The American economy is not and has never been a zero-sum game. “When workers are prospering, they buy products that make businesses prosper. “We can be competitive and lean and mean and still create a situation where workers are thriving in this country.’

In her first appearance as Labor Secretary, Hilda Solis, the daughter of union workers, journeyed to Miami on Monday to speak at a union rally on the eve of the AFL-CIO Executive Council meetings and to listen to workers telling their stories. Hector Capoda, an AT&T worker and member of the Communications Workers of America, told how he’d been part of organizing a union with majority sign-up. His father, he said, had never had a union, never earned more than $13 an hour and didn’t have health care. But as he grew older and weaker, the family could survive because his brother, “a policeman and union,” his sister, “a nurse and union,” and he had the resources to keep the family together. Clearly moved, Solis confirmed that the president’s support for EFCA, and pledged to enforce the law, announcing that “there is a new sheriff in town.”

EFCA will be introduced into the House in the next couple weeks, where passage is guaranteed. The real donnybrook will be in the Senate where it has strong majority support but must overcome efforts by a conservative minority to block the vote with a filibuster. The Chamber of Commerce and various business lobbies have threatened to spend $200 million or more to stop EFCA, which Home Depot’s founder, Bernie Marcus, charges will lead to “the demise of civilization.” Unions are gearing up a major grassroots effort to pass the bill.

But this isn’t just a union fight. As the president suggests, this is a central fight for an economy that works. If workers are paid decently, families needn’t take on massive debts to educate their children or afford their home. Social Security remains secure if workers once more capture a fair share of the profits they produce. CEOs and speculators have a more difficult time cooking the books if they must negotiate with strong unions. To build an economy that works, strong unions aren’t the only answer, but they are central part of the answer.

The campaign on EFCA will be fierce. Gaining 60 votes won’t be easy. The business community will go all out, claiming that strong unions will ruin America, trample workers’ freedoms, drive jobs abroad. But we’ve tried an economy with weak unions — and that didn’t work out so well.

Obama is right to tee this up early even as he struggles to get the economy moving, to get the financial system reorganized, to move on health care and new energy. This is a fight that citizens across the country should join. It will be a critical building block of the new economy that we must construct from the ashes of the old.

Dean Baker

By Dean Baker
Co-Director, Center for Economic and Policy Research

Commodity trader Rick Santelli made himself into a national hero of sorts with his televised diatribe about being forced to pay the mortgages of “losers” who could not afford, or would not pay, the full cost of their mortgage. Santelli apparently hit a chord among those who want to blame deadbeat homeowners for the country’s economic woes.

At the risk of spoiling a promising artistic and commercial venture, people should know that Mr. Santelli is firing at the wrong target. The big gainers from the latest plan to help homeowners are not “loser” homeowners, but rather banks and investors, who will earn far more on their loser loans than would otherwise have been possible.

This is easy to see if we just adhere to the most basic rule in policy analysis: follow the money. When we follow the money, we see that the government checks do not go to homeowners.

The government checks are all made out to banks and loan servicers. In millions of cases where homeowners were not keeping up with their mortgages, the government will send checks to banks and investors that make up for much of the shortfall. In addition, the government could send them several thousand dollars more for their efforts in allowing people to stay in their homes.

While this policy is supposed to help homeowners, in many cases the best thing for these homeowners would be to move into one of the millions of vacant housing units. In most markets, they would pay a much lower share of their income for housing if they were renters rather than owners.

Furthermore, with house prices dropping at more than a 20 percent annual rate, the Cubs have a better chance of winning the World Series than these folks have of accumulating any equity in their home. Most of the homeowners who have their mortgages subsidized under this program are looking at short sales in two, three or four years.

Santelli’s screed is part of a continuing effort to blame the poor and minority communities for the economic meltdown. There are millions of people who think the Community Reinvestment Act (CRA) was responsible for bad mortgages, when most of these mortgages were either made by institutions that were not covered by the CRA or were loans that would not have been covered by the Act even if the institution was covered. Of course, the idea that government bureaucrats were forcing banks to make loans that were hugely profitable at the time is laughable on its face.

At some point Santelli and his followers are going to have to deal with reality. The problem is not poor and moderate-income homeowners or African-Americans or Latinos. The perps in this case where rich bankers, the vast majority of whom were white males.

Their enablers in policy circles were not the bleeding hearts trying to help the poor, but the Wall Street envoys from both political parties; people like Henry Paulson, Robert Rubin and, of course, Alan Greenspan. The people who sank the economy were the rich and powerful, not the poor and minorities.

If Santelli wants to really be the friend of hardworking homeowners struggling to pay their mortgages, he might try yelling about the bank bailouts. According to the latest news reports, the taxpayers just sent another $30 billion to AIG, almost half as much as President Obama set aside to subsidize mortgage payments.

The checks to AIG and other financial institutions may be necessary to keep the banking system operating, but we certainly have the right to demand that the shareholders and bank executives don’t profit from the bailouts. It would be great if Mr. Santelli would speak up about the real beneficiaries from these scams – the bank executives and wealthy shareholders. But the big-mouthed commodity trader probably doesn’t have the courage to attack anyone with real power.

Leo W. Gerard: Economist James K. Galbraith, the Lloyd M. Bentsen Jr. Chair in Government/Business Relations at the University of Texas, recently told Deborah Solomon of the New York Times that you are “the person with the most serious claim” for predicting the onslaught of the current credit disaster.

The promo for your most recent book, Plunder and Blunder: The Rise and Fall of the Bubble Economy (PoliPoint Press, 2009), says the fall of the bubble economy was “completely predictable.” But you were standing nearly alone out there for some time yelling, “The collapse is coming, the collapse is coming.”

When did you get the first inkling that the collapse was impending and what did that feel like?

Dean Baker: I learned from the stock bubble in the 90s that the timing was hard to predict but  I first became convinced that it was starting to burst in the fall of 2006, (house prices had begun to fall) and I wrote a forecast projecting a recession for 2007. It turned out that I was still somewhat premature. I was expecting the price decline to gain speed more quickly and to have a more immediate impact on the economy. However, according to the National Bureau of Economic Research, the official arbiter of recessions, the current recession did begin in 2007, so I was not too far off.

As a more general matter, I did feel somewhat vindicated, although it was striking to me, that even as the bubble was very much in the process of deflating in late 2007 or even early 2008, most economists were still convinced that it would have little consequence for the economy. I recall repeated pronouncements from former Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben Bernanke that the problems were contained in the subprime market.

Gerard: What were the clues you saw that others ignored or missed?

Baker: For most economists, the idea that a market would take leave from its senses – that it would be driven by speculation – is almost inconceivable. Given that we had just seen a massive bubble in the stock market, it really should not have surprised people to see one also develop in the housing market.

The main factor that attracted my attention was the sudden spurt in house prices beginning in the mid-90s. For the hundred years from the 1890s to the 1990s, house prices nationwide had just tracked the overall rate of inflation. Yet, from 1995 to 2002 (when I first noticed the bubble), house prices rose by 30 percent in excess of the rate of inflation.

There was no explanation for this sudden jump in prices based on the fundamentals of supply and demand. Income growth had been healthy in the late 90s, but not extraordinary by the standard of the early post-war years. Furthermore, income growth had largely stopped during the 2001 recession.

Population growth was slowing, which should have slowed housing demand. On the supply side, we were building houses at near record rates, so clearly there was no serious supply constraint.

If there is a big run-up in house prices and no obvious force driving it on either the demand or the supply side, then it sure looks like a bubble. Just as additional confirmation, I checked rents, which tend to more or less follow sale prices. Rents had increased only slightly more than the rate of inflation in the late 90s, and by this decade, they were falling behind inflation. There certainly was no evidence of growing demand pressure on the housing market there. 

Finally, I noticed the rise in vacancy rates. This is consistent with people buying homes for speculative purposes. Many investors were willing to gamble on a high price for a new home or condo, betting that it would go up even more in the future. Of course, this is not sustainable. Not many people can afford to keep a unit vacant for a long time, since it means that they are paying the mortgage and getting little or nothing back. The high vacancy rates of this era virtually guaranteed that the bubble would burst.

Gerard: Did you also see problems with subprime mortgages contributing to the bubble?

Baker: The problems in the mortgage market were hardly a secret. The subprime share of the market nearly tripled from 2002 to 2006. The Alt-A share, which are typically mortgages taken out by small business owners with variable income (and often in accurate tax returns), exploded from around 1 percent to 15 percent. This should have set off flashing red lights to any serious economist.

And, the stories about liar loans and phony documents were everywhere. I was getting e-mail from people around the country telling me about friends and relatives employed by mortgage banks who were told to put in fake numbers so that the banks could issue loans. Certainly the regulatory agencies must have known this was going on.

Gerard: But if you noticed those clues, and looking back on it, those clues are actually quite obvious, why did the vast majority of financial analysts and economists and managers for large investment funds including pensions and endowments, fail to see the bubble and its implications?

Baker: The bulk of financial analysts and economists largely repeat the conventional wisdom without ever seriously trying to assess whether it makes sense. They unthinkingly follow the conventional wisdom because of the structure of incentives in their profession. No one is going to get fired because they didn’t see the housing bubble. In fact, few people are likely to even miss a promotion because they didn’t see the bubble.

Economists and financial analysts are not like steelworkers or people in other occupations. They don’t get evaluated based on their performance. They can mess up every day of the week through their whole careers, and this would be just fine, as long as they messed up in the same way as their peers.

On the other hand, the few economists/analysts who spoke up to warn about the bubble were taking huge risks. Of course, we were all ridiculed at the time. If you were an economist working at a major investment bank and tried to tell them that all their big money-making deals were going to get them in trouble, they would probably tell you to shut up and fire you if you didn’t.

If the housing market stayed strong and house prices kept rising or just remained stable, then any economist who had warned of the bubble would be laughed off as a chicken little.

In short, the incentives are such that the overwhelming majority of economists will never challenge conventional wisdom even if they think it is wrong. They are there to hold on to their jobs, not to inform the public about the economy.  

Gerard: Did you know the collapse would be this bad? How bad will it get?

Baker: I knew that it could be very bad. I was trying to be contained in my pessimism (I couldn’t completely ignore the conventional wisdom either), but I did warn that the downturn could develop into a Japan-style financial crisis. This obviously is the case that we are looking at.  Of course, if the Fed and Treasury had moved more quickly, they could have prevented some of the damage that the financial system is now seeing.

The same applies to fiscal stimulus. It was painful sitting through the months of the election campaign and then the transition when the government was completely paralyzed. At that point, economists from across the political spectrum all recognized that the economy needed further stimulus, but the politics were such that nothing could move.

As it is, the stimulus package passed by Congress is a good start, but it is nowhere near big enough to turn the economy around. The unemployment rate is virtually certain to shoot past 8.0 percent in the February jobs report and is likely to hit 9.0 percent by summer. If we are lucky, the stimulus will provide enough of a boost to keep the unemployment rate from reaching 10 percent, although I would not take this for granted at this point.

In addition to higher unemployment, house prices will continue to fall at least until summer. The big question in my mind is whether house prices return to their pre-bubble level or they overshoot on the way down. At this point, I would bet on overshooting. This implies an even larger loss of wealth for homeowners, more foreclosures and more big losses for banks.

Gerard: Will the stimulus stop the free fall?

Baker: If we are to turn things around, we really need much more stimulus and we need it quickly. My favorite idea at this point is a tax credit to employers for giving workers paid time off. For example, if employers offer paid parental leave or sick leave, or paid vacation, or increase the days they already offer, then the tax credit would cover the lost work. This can be a quick way to get millions of people back to work.

The arithmetic on this is straightforward. Suppose that employers of 100 million people give their workers an amount of additional paid time off that is equal to 5 percent of their work time. These employers would suddenly have demand for 5 percent more workers, or 5 million workers. I can’t think of a quicker, less bureaucratic way to create jobs at this point, especially now that we have already funded most of the shovel-ready infrastructure projects.

Gerard: What must be done to prevent this from recurring?

Baker: There are two key points. First we must rein in the political and economic power of the financial sector. The financial sector must serve the real economy, not the other way around. There is a long list of reforms that are needed to ensure this outcome, but the main point is that an efficient financial sector is a small financial sector.

One way to keep it small is to tax it. If we had a very modest financial transactions tax, for example 0.25 percent on the purchase or sale of a share of stock, it would have very little impact on people who invest for the long-term. However, it would have a huge impact on people who are buying at 2:00 and selling at 3:00. This sort of tax would discourage such speculation, making the markets friendlier to long-term investors.

It would also reduce the size of the financial sector, since the industry makes much of its profit off this sort of speculation. In addition, such a tax could raise more than $100 billion a year. That’s real money even in Washington.

The other point is that a balanced economy, in which workers share in the gains of growth, is not conducive to financial bubbles. We didn’t have any major bubbles in the three decades following World War II. During this period, productivity gains were passed on in wage gains, which in turn fed consumption, which led firms to invest in expanded capacity. The basis for the bubble economy was created in the 80s when this virtuous circle broke down and workers could no longer count on seeing their wages rise in step with productivity.

In short, if we want to prevent another financial bubble and the sort of economic collapse caused by its bursting, we should support policies that allow workers to share in the gains of growth. That sort of world favors investment in the productive economy rather than financial speculation.

***

Dean Baker, co-director of the Center for Economic and Policy Research in Washington, DC., has written several books. His most recent, Plunder and Blunder: The Rise and Fall of the Bubble Economy (PoliPoint Press, 2009), chronicles the growth and collapse of the stock and housing bubbles and explains how policy blunders and greed led to the catastrophic market meltdowns. 

His analyses have appeared in many major publications, including the Atlantic Monthly, the Washington Post, the London Financial Times, and the New York Daily News. His blog, Beat the Press, features commentary on economic reporting. 

 He is a frequent guest on National Public Radio, Marketplace, CNN, CNBC and other news programs.