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Robert Borosage

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

Health care reform suffered the torments of partisan obstruction. Now gird yourself for financial reform and the perils of bipartisan blight.

In health care, lockstep Republican opposition caused months of delay, and empowered the likes of Connecticut’s embittered Senator Joe Lieberman and Nebraska’s compromised Ben Nelson to exact cankerous concessions to forge a super-majority.

So Washington pundits rail against bitter partisanship. Republican Senator John McCain charges that Obama is to blame for the partisan divide, even though the President wasted months while Max Baucus courted coy Republicans. Senator John Cornyn, the most rabid of Republican obstructionists, damns the partisan process as a reason to oppose the health care bill. This is akin to a gang of thieves lamenting crime in the streets.

Next year, assuming that this health care bill, like a large kidney stone, must eventually be passed, the Congress will turn to financial reform. In the House, Republicans remain in lockstep opposition, providing not one vote for a measure that would take the first steps towards limiting the ability of banks to fleece us again. But in the Senate, we may well witness not the price of partisan rancor, but the blight of bipartisan cooperation.

Senate Banking Committee Chair Chris Dodd put forth a strong legislative proposal, one far better than the administration’s plan. When the Committee’s senior Republican, Alabama’s Richard Shelby, scorned that in an extended rant, Dodd decided to pair up Democrats and Republicans on the committee to come up with bipartisan solutions. And now reports suggest that a bipartisan plan may well be unveiled in January, with Dodd pushing for an early vote.

Hold onto your wallets. We don’t yet know what is in the bipartisan bill, but we do know what has been kicked to the curb. Shelby announced one price for his cooperation: no new agency to protect consumers from financial fraud or abuse. Want Republican cooperation? Then the proposed Consumer Financial Protection Agency – with a mandate to police everything from mortgage fraud to preposterous bank overdraft charges – is verboten. Grateful banking lobbyists will insure him a lucrative retirement.

We continue to suffer a pandemic of bank fraud and abuse. In the housing bubble, mortgage companies rewarded brokers for peddling exotic mortgages to customers that the brokers knew couldn’t afford them and didn’t understand them. Now, banks are raking in record sums from overdraft charges, credit card fees, and preposterous ATM charges. Payday lenders are pocketing the equivalent of 1000% interest from the poorest working people.

The White House has sensibly championed a new agency devoted not to the health of the banks but to the protection of consumers. Already the banking lobby succeeded in weakening the proposal in the partisan House, exempting auto dealers – hell, we know they are honest, right? – and over 90% of all lending institutions, and eliminating the mandate to offer “wonder bread” or plain vanilla loans along with the exotica banks prefer to peddle.

But that was with House Republicans in opposition. In the Senate, the price of bipartisanship is to trash the whole concept. Caveat emptor, baby.

The bipartisan blight is not limited to banking reform. A bipartisan majority is now lining up in the Senate to confirm Ben Bernanke to a second term as head of the Federal Reserve, without demanding an audit of the Fed’s books to review the terms and conditions of the deals he made in shoveling literally trillions in public subsidies and guarantees and swaps to private financial institutions – here and abroad.

Similarly, bipartisan support will be arranged – although with Republicans supplying most of the votes – for the $50 billion supplemental to support the escalation in Afghanistan.

And most pernicious, Senators in both parties are lining up colleagues to support a bipartisan Commission to provide cover for cutting Social Security and Medicare.

Why is bipartisan blight so toxic? Because it generally means that more conservative Democrats will have made common cause with the less rabid reactionaries in the Republican Party. At best, the result reflects the views of powerful entrenched interests that buy into both parties. At worst, it reflects both parties seeking to avoid responsibility for undertaking measures the establishment wants and the vast majority of Americans oppose. The bank bailout stays secreted, while Bernanke gets confirmed. Consumers get ditched. The war gets funded. Seniors take a hit.

Partisan rancor is debilitating; stalemate fatal. But bipartisan accord is too often more affliction than antidote. We’d be far better off getting rid of the Senate filibuster and allowing majorities to rule. Hold them accountable if they fail; re-elect them if they deliver. But don’t give a minority the power either to obstruct or to set the price of bipartisan accord.

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Robert Borosage and Campaign for America’s Future Co-Director Roger Hickey are co-editors of the book, The Next Agenda: Blueprint for a New Progressive Movement.

The US manufacturing companies are making their products with increasing
amounts of foreign manufactured and imported parts, materials and assemblies
in order to reduce costs.  Very soon only the nameplates will be added in
the USA, and these products will still be labeled “Made in America.”

The U.S .manufacturing companies have to do this to reduce costs in order to
meet the U.S. consumers’ demand for the lowest possible price for the consumer
products that they purchase.

Import taxes are the only remaining way to re-create jobs and wealth for the
USA.

Borrowing U.S. dollars back from the industrial nations who make the products
that we consume, and then handing out these dollars to U.S. citizens for non-industrial projects
does not solve the problem.

Those projects are the likes of hiring citiznes to dig a hole today and
re-fill the same hole tomorrow, bridges to nowhere, increased government payrolls,
new infrastructure to enhance political contributor’s real estate values, government
retirement checks, courts, federal police, failed business bailouts, cash bonuses to the
various Wall Street forgers of SEC documents that contributed to various political
campaigns, foreclosed house mortgages for big spenders with bad
credit, new multi-million dollar French manufactured personal corporate jets
for political contributors’ bankrupt corporations, pork barrel projects,
research contracts, welfare, Social Security, Medicare, Medicaid, SSI,
expanded mental health services, more imported consumer goods and any other
thing that Congress and the president decide to use taxpayer money to
acquire, build or just give to their political contributors and various
other privileged individuals. 

These are cosmetic economic stimulation changes that stir the pot but do not
correct the economic structural foundation problem that is the foreign trade
deficit.  Borrowing money to pay for these expenses does nothing to
re-create the U.S. industrial economy that produced lasting jobs for U.S.
citizens.

Gerald R. Spencer, P.E., President
Spencer Engineers, Inc.
Houston, Texas

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Robert Reich

By Robert Reich
Former U.S. Secretary of Labor, Professor at Berkeley

In September 2008, as the worst of the financial crisis engulfed Wall Street, George W. Bush issued a warning: “This sucker could go down.” Around the same time, as Congress hashed out a bailout bill, New Hampshire Sen. Judd Gregg, the leading Republican negotiator of the bill, warned that “if we do not do this, the trauma, the chaos and the disruption to everyday Americans’ lives will be overwhelming, and that’s a price we can’t afford to risk paying.”

In less than a year, Wall Street was back. The five largest remaining banks are today larger, their executives and traders richer, their strategies of placing large bets with other people’s money no less bold than before the meltdown. The possibility of new regulations emanating from Congress has barely inhibited the Street’s exuberance.

But if Wall Street is back on top, the everyday lives of large numbers of Americans continue to be subject to overwhelming trauma, chaos and disruption.

It is commonplace among policymakers to fervently and sincerely believe that Wall Street’s financial health is not only a precondition for a prosperous real economy but that when the former thrives, the latter will necessarily follow. Few fictions of modern economic life are more assiduously defended than the central importance of the Street to the well-being of the rest of us, as has been proved in 2009.

Inhabitants of the real economy are dependent on the financial economy to borrow money. But their overwhelming reliance on Wall Street is a relatively recent phenomenon. Back when middle-class Americans earned enough to be able to save more of their incomes, they borrowed from one another, largely through local and regional banks. Small businesses also did.

It’s easy to understand economic policymakers being seduced by the great flows of wealth created among Wall Streeters, from whom they invariably seek advice. One of the basic assumptions of capitalism is that anyone paid huge sums of money must be very smart.

But if 2009 has proved anything, it’s that the bailout of Wall Street didn’t trickle down to Main Street. Mortgage delinquencies continue to rise. Small businesses can’t get credit. And people everywhere, it seems, are worried about losing their jobs. Wall Street is the only place where money is flowing and pay is escalating. Top executives and traders on the Street will soon be splitting about $25 billion in bonuses (despite Goldman Sachs’ decision, made with an eye toward public relations, to defer bonuses for its 30 top players).

The real locus of the problem was never the financial economy to begin with, and the bailout of Wall Street was a sideshow. The real problem was on Main Street, in the real economy. Before the crash, much of America had fallen deeply into unsustainable debt because it had no other way to maintain its standard of living. That’s because for so many years almost all the gains of economic growth had been going to a relatively small number of people at the top.

President Obama and his economic team have been telling Americans we’ll have to save more in future years, spend less and borrow less from the rest of the world, especially from China. This is necessary and inevitable, they say, in order to “rebalance” global financial flows. China has saved too much and consumed too little, while we have done the reverse.

In truth, most Americans did not spend too much in recent years, relative to the increasing size of the overall American economy. They spent too much only in relation to their declining portion of its gains. Had their portion kept up — had the people at the top of corporate America, Wall Street banks and hedge funds not taken a disproportionate share — most Americans would not have felt the necessity to borrow so much.

The year 2009 will be remembered as the year when Main Street got hit hard. Don’t expect 2010 to be much better — that is, if you live in the real economy. The administration is telling Americans that jobs will return next year, and we’ll be in a recovery. I hope they’re right. But I doubt it. Too many Americans have lost their jobs, incomes, homes and savings. That means most of us won’t have the purchasing power to buy nearly all the goods and services the economy is capable of producing. And without enough demand, the economy can’t get out of the doldrums.

As long as income and wealth keep concentrating at the top, and the great divide between America’s have-mores and have-lesses continues to widen, the Great Recession won’t end — at least not in the real economy.

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Cross-posted from Robert Reich’s Blog

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Robert Reich served as the nation’s 22nd Secretary of Labor and now is a professor of public policy at the University of California at Berkeley. His latest book, “Supercapitalism,” is out in paperback. For copies of his articles, books, and public radio commentaries, go to www.robertreich.org. 

David Sirota

 By David Sirota
Newspaper columnist, radio host, bestselling author 

This month, a British government report admitted that one of the major rationales for invading Iraq — the claim that Saddam could deploy WMDs in 45 minutes — probably came from a cab driver. Had the public originally been told about this sketchy sourcing, there may have been a more, ahem, forceful mass opposition to preemptive war in the Middle East.

It’s a good lesson about the need for transparency. We cannot fully snuff out spin, and we will never be able to guarantee perfect results from policy choices. But we can increase the chances for successful societal decision-making when we at least know the facts.

That’s the common sense rationale behind our sunshine laws. While courts say we can’t ban politicians from raising private money, we can force politicians to disclose who their benefactors are so that we know what they really represent. We may not bar sugary foods — but we do require nutrition labels so we can know what we are eating.

More often than not, this was the American compromise: We fought about regulations and mandates, but there had been consensus support for transparency.

“Had been,” mind you, is the key phrase — and the cab-driver-induced war is only the beginning.

In 2008, the New York Times’ David Barstow reported that 75 retired military officers regularly appearing on television “have ties to military contractors vested in the very war policies they are asked to assess on air.”

Collectively, the group represented “more than 150 military contractors either as lobbyists, senior executives, board members or consultants,” and here’s the kicker: “Those business relationships are hardly ever disclosed to viewers.”

Had networks reacted to Barstow’s blockbuster with better disclosure, we could have rested easy. Instead, the deceptions persist.

HuffPost recently showed how “major television networks continue to host retired generals as military analysts without alerting viewers to their extensive ties to defense contractors.”

Additionally, Wired magazine reports that neoconservative think-tankers who directly helped craft the Pentagon’s Afghan escalation are now appearing throughout the media as allegedly disinterested analysts of the escalation — again, without any mention of their concurrent work.

Considering the sometimes murky relationship between advertisers and newsrooms, it’s easy to think this opacity is the exclusive transgression of commercial media. Unfortunately, it’s not — it has bled into the country’s single most powerful economic institution, the Federal Reserve.

This is the bank currently lobbying against congressional oversight by arguing it must preserve its “independence” — the same institution whose regional board members are elected by the private banks they regulate and whose chairman, Ben Bernanke, quietly cavorts with the bank CEOs he’s supposed to be independent from. Even worse, the Fed is paying many of the ostensibly objective economists who sculpt the debate about Congress’s Fed policy.

HuffPost ace reporter Ryan Grim found that the Fed today doles out roughly $400 million a year for “research” — much of it to outside economists who then advocate for the Fed’s agenda without disclosing their Fed ties. For instance, seven of the eight economists on a recent anti-oversight letter to Congress failed to note they are or were on the Fed’s payroll.

That blatant chicanery, though, is not the worst of it. The real subterfuge is how the Fed’s shadowy pay scheme bakes an invisible pro-Fed consensus into our public discourse. Through its academic largesse, Grim notes the Fed “so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession.”

Ronald Reagan, of course, warned us to “trust, but verify.” It was good advice, except for one hitch: What happens when the verifiers are the ones who can no longer be trusted?

***

David Sirota is the author of the best-selling books “Hostile Takeover” and “The Uprising.” He hosts the morning show on AM760 in Colorado and blogs at OpenLeft.com. E-mail him at ds@davidsirota.com or follow him on Twitter @davidsirota.

Tom Croft and Leo Gerard

Leo W. Gerard: Tom, your new book, Up From Wall Street: The Responsible Investment Alternative, provides both cautionary tales for those responsible for investing workers’ pension funds and a field guide of practical assistance for institutional investors who want to use responsible investing (RI) techniques. Let’s start with the caution. Why should workers care how their pension funds are invested?

Thomas Croft:  As we discovered when we pulled together the original Heartland Labor/Capital Working Group in 1995, it’s incredible how much we don’t know when it comes to the investment practices and trends that affect workers’ retirement assets and other institutional savings.  Before the crash, workers owned over $9 trillion in pension trusts, and, if we added it all up, working families owned $24 trillion in all institutional savings.  So, steelworkers, teachers, insurance holders, students and college endowments, and the vast majority of our population have an interest in how these funds are invested.   

Since these funds control a majority of public stocks, we have an interest in how those corporations are governed.  In terms of the general economy, we have an interest in the general direction of investment flows.  The historian Kevin Phillips has written about the growing power of the financial services industry.  In the 1970s, manufacturing led financial services by a two-to-one margin.  By 2006, goods production had shrunk to just 12% of GDP while financial services jumped to a “swollen 20-21% of GDP.”   So, financial sector profits, as a percent of domestic corporate profits, rose from 16% in 1973 to 41% in 2000s.   That means that vast waves of our savings and assets—our money—has increasingly disappeared into a dark hole called financialization.  I’ll come back to financialization.

So, what it means in terms of the economy is that the country doesn’t build things anymore.  Remember Allentown, and the song by Billy Joel that described the shutdown of Beth Steel?  Bethlehem Steel was originally constructed to build the nation’s rail systems. And those workers helped build the skyscrapers in New York City, and they helped win WWII.   After the Beth Plant was closed, a new Las Vegas Casino was to be built on the former steel site.  Well, the casino couldn’t find the structural steel, at first, to build the casino.  Kind of ironic, but also tragic 

If we can’t find enough steel to build casinos today, how in the world will we build the green jobs industries of the future?   We need steel to build the Obama administration’s proposed new high-speed rail system, right?   And how will the Allentowns and Homesteads and Youngstowns and Flints of this country, and all of our other rust-towns ever fully recover?  We can’t depend on casino jobs, eds and meds, tourist and service jobs alone to replace the lost manufacturing jobs.   We need a robust domestic manufacturing economy if we are going to benefit from the green jobs boom.

As Lynn Williams once said, “The pension savings of American workers should not only guarantee good pensions.  They should guarantee American workers jobs to retire from.”  Beyond that, pension trusts were collectively bargained benefits that are long-term promises to workers so that they can retire with comfort and dignity.  People gave up wage increases and other current benefits to pay for that promise.  Before pensions, and before FDR created Social Security, older workers might be found scrounging through trash bins in the alley or living in poor houses.  Along with Social Security, pension funds are part of a three-legged stool, as it’s called, so that workers can retire without the constant fear of deprivation.   Do we want to go back to the days of the poor house? 

Gerard:  You documented here, and in your earlier work, Working Capital: The Power of Labor’s Pensions, that workers’ pension money could cruelly be used to injure them. Isn’t that investment practice perverse?

Croft:  It’s not only perverse, it should be illegal.  First, as our colleagues put it, there is a gigantic pension industrial complex that is centered on Wall Street that takes hundreds of billions of dollars in fees out of pension funds just to manage our pension funds.  Then, time after time, our money have been sucked and suckered into risky financial schemes that are unsustainable, and eventually crash, destroying the hard-earned savings of tens of millions of workers and their families.  As you have pointed out, before this crash, the country suffered through the savings and loans debacle and the dot-com bust, and similar made-on-Wall-Street catastrophes.  When we come to learn that the CEOs and other financial geniuses who devised these crash schemes all made off with billions in CEO compensation and bonuses, then it’s apparent that we are putting the wrong kind of people in jail.

I’d like to return to the concept of financialization.  A large driver of financialization is the shadow bank system.  The shadow banks include the large banks and investment houses that utilize un-regulated trading and derivative schemes to make immense profits.  They also include the largely unregulated investment funds that invest in the private economy, such as real estate funds, the mega-private equity funds and hedge funds.  These systems became so inter-related that the collapse of one sector then brought down many others.  For instance, when Lehman Brothers went under, the credit default insurance plans that theoretically insured the hedge funds vanished, and the hedge fund market tanked.  After AIG was nationalized, its business continued cratering due to its business selling these default swaps to Lehman and others.  And the pension funds that had invested in these massive hedge funds and the AIGs, etc., then lost tons 

Our pension funds were siphoned into these shadow bank markets.  When pensions invest in alternative investments—not stocks and bonds—there is a term for the ancillary benefits that might result from the investment.  For instance, if a pension fund invests in affordable or workforce housing, the main reason is to achieve a good return on the investment.  But the housing that is also built might be called a collateral benefit.  In Working Capital, Dean Baker and a co-author discovered how hundreds of billions of our trust funds were invested in schemes that caused “collateral damages” for pension beneficiaries, other workers and our society.  For example, our pensions were invested in off-shore sweat-shop corporations—many American owned — that not only exploited third-world workers but also then shipped cheap products back into the country, causing jobs to be ultimately lost here.  And the lure of investing in the dot-coms that never had realistic business plans contributed to the last crash.  

There’s lots of examples, but collateral damage investing continued after the crash.  We all know about the sub-prime mortgage and the housing bubble disasters.  Well, CalPERS, the California public employees pension fund, along with many other state pensions, lost $1 trillion in one case alone by investing in securities backed by sub-prime mortgages. 

A lot of my research went into hedge funds and mega-buyout funds.  Hedge funds were originally designed as an investment program for wealthy investors.   Then hedge assets boomed over the last decade, growing ten-fold from 1998 to 2008 (to over $2 trillion).  From 2002 to 2007, the share of dollars in hedge assets coughed up by institutional investors—including pensions, university endowments, foundations, and insurance funds, etc.–jumped from 2% to 50%.   That’s a lot of money for what became, in essence, a Wall Street game to short markets and firms.  

And the money pouring into private equity, climbing by 2006-2007 to $301 billion, came disproportionately from institutional investors.  In the case of the mega-private equity funds—which in reality looked like the large LBO funds in the 1980s—there’s ample evidence that many of the funds over-leveraged their portfolio firms, leading to firm failures and bankruptcies.  Or worse, they stripped and flipped their acquisitions.  That includes Simmons Bedding, a Steelworker-represented company that just filed for bankruptcy and closed plants.  That includes Mervyn’s, Linens ‘n Things, and many others.  The money that the Boston mega-fund used to destroy Simmons came from pension funds.   Why?

In addition, they have been privatizing many our longest-standing companies—firms that often had good labor relations.  These new Wall Street barons—like KKR, Blackstone Partners and Apollo Partners–now own many of the largest employers in America and Europe; in essence, they have achieved a new stage in corporate ownership.  What does that mean for those workers, communities and our economies?  We should be investing our money to build up companies, not tear them down.

They’ve also damaged many of our civic institutions.  I don’t have to look far to see the damage.  Here in Pittsburgh, CMU and the University of Pittsburgh recently filed fraud lawsuits against Westwood Capital —ostensibly a hedge fund– after their $114 million investment vanished.  And the Pennsylvania public pension fund lost an additional $2.5 billion (than they would have otherwise, according to some estimates) by betting on an extremely large hedge fund gamble (almost 1/3 of total portfolio).  Colleges, states and municipal pension funds are cash-strapped.  That’s no reason to bet the farm. 

Worse, Congress and the White House have not passed meaningful financial reforms that might have prevented or moderated the 2008 crash and the ones before it.  The author Tom Wolfe dubbed these new corporate owners the “New Masters of the Universe.”  I call them the Shadow Bank Robbers.   Not only should government and institutional investors force transparency, reasonable fees and prohibitions against practices that harm workers, companies and communities, we should re-regulate, bring back the New Deal protections that were discarded.  And it wouldn’t hurt if we put the shadow bank robbers behind bars.  Bernie Madoff got caught running what he called a hedge fund; thousands of uber-financiers are making off with billions running an even larger ponzi scheme that is perfectly legal.  It’s crack finance, and it should be illegal.

Gerard: What struck me in your book is these two sentences:

“This book tells the story of a group of responsible enterprise and real estate investors who are profitably investing pension and similar assets in good jobs, affordable housing, and a green future. This book shows how workers’ capital, endowments, and other institutional investors, through responsible investment principles, can do well and do good at the same time.”  

My emphasis added because I think most people would not believe you could do both. They would think that if you made socially-correct investments, you would lose money. What did your research show?

Croft:   When I started writing the book, I traveled to towns and cities all over North America.  I came to know some remarkable and innovative stewards of our capital…worker-friendly investors who have built projects and invested in ventures and companies in ways that make you proud.   These investors were managing about $35 billion.  And, in fund after fund, investment after investment, these responsible fund managers have been—for the most part–financially successful. 

None of the real estate funds that I surveyed in this field guide were investing in sub-prime scams.  And none of the private enterprise investors were investing, as far as I know, in the LBO over-leveraging strategies that failed so dramatically.  So, the book shows you can do well and do good.   How?  They’re making honest profits (for our pension funds) but also treating workers with respect, investing in affordable and multi-family housing, advanced manufacturing and green jobs. 

In Pittsburgh, for example, pensions invested some $3/4 billion in worker-friendly real estate funds that successfully built multi-family housing, revitalized brownfields and re-built new commercial workplaces all over the region.  And worker-friendly enterprise funds have, in fact, saved steelworker jobs of two manufacturing firms that were bankrupt.  So, thousands of jobs were created or saved just in this area.  And these investments were the tip of the iceberg, as I’m sure many of the large redevelopment investors in the region were capitalized by institutional investors.

So, my book shows that worker-friendly investment funds have indeed had singular and significant impacts on the regions, economic sectors, companies and projects in which they invest.  Most of the funds met or bested their respective investment benchmarks.  The portfolio investments showcased in the field guide yielded not just good returns-on-investment, but also collateral benefits for working people and the environment. 

Gerard:  So that is terrific news for workers. You’ve given me the big numbers. In the book, though, you provide specific examples where these investments worked out both for the investors and workers. Would you give one here?

Croft:   There are so many important examples.  The AFL-CIO Investment Trusts worked on efforts to rebuild New Orleans, including a factory making sustainable manufactured housing.  The MEPT Fund rebuilt a burned down hospital on the north tip of Roosevelt Island, New York, and converted it into an award-winning green housing community with 500 units, plus a daycare center and essential amenities.  The KPS Capital Partners Fund restructured a bankrupt transportation company with factories in towns like St. Cloud and Crookston, Minnesota, and Winnipeg, Manitoba, now employing 1,800 union workers making hybrid busses. 

And, let’s take a really big case that helped Steelworkers.  On May 14, 1999, in the largest union-led buyout in the country since 1994, KPS Special Situations Fund partnered with other investors and a minority ESOP formed by employees to buy a pulp and paper mill, an extruding plant, and five converting plants from Champion International (for $200 million), which was distressed.  The new company, Blue Ridge Paper Products, was launched with 2,200 new employee owners.  Blue Ridge is a leading integrated manufacturer of liquid packaging, envelope paper and coated bleachboard used in food service packaging. The Company also produces specialty uncoated and extrusion coated papers. 

The Company had eight manufacturing facilities located in seven states, including the paper mill in Canton, North Carolina, the extruding mill in Waynesville, North Carolina, and in five Dairy Pak converting plants in Georgia, Iowa, Texas, New Jersey & Olmsted Falls, Ohio. Blue Ridge subsequently acquired another Dairy Pak plant in Richmond, Virginia from MeadWestvaco.

And, this company became greener.  The Canton mill became a charter member of the EPA National Achievement Track Program in 1999.  Due to a $400 million investment in new technology over a decade, the facility is one of the most efficient and environmentally-friendly pulp mills in the world.

In July 2007, Blue Ridge was sold to Packaging Holdings Corp.  KPS returned approximately 2.5 times its invested capital to its investors—including pension funds– and employee-stockholders had approximately $30 million of cash deposited into their ESOP accounts.  What a huge success!

Gerard:  Let me press you a little bit, though, because everyone will be asking this question when pension funds have suffered so badly during this downturn in the economy.  Would responsible investing have made a differenc 

Croft:  In my travels, I watched as great states and communities buckled from the weight of the Great Recession: Downstate New York.  The auto towns of the Great Lakes states.  The strapped communities of California.  From years of working in Pennsylvania, I’ve come to understand what happens when investment markets red-line communities.   Boom towns go bust, and rust towns take their place.  When the economy falls as rapidly as it did, most sectors of the economy get dragged down.

This was the largest market crash and recession since the 1930s.  So, many of the investments by even good investors were bound to be weighed down.  But my point has been that irresponsible investment practices—using our money—were a large factor in the crash, as they have been over and over.  

Some of the worker-friendly investors will inevitably suffer because the firms they’ve invested in are now having a hard time.  Some of the real estate funds have suffered redemptions from pension funds having to re-balance their assets (since pension funds lost so much in the general markets).  But as I said, the responsible funds did more due diligence, so their investments were not as risky.  If they’ve had trouble, they’ll likely recover quickly. And some funds have actually done pretty well since the downturn started.

So, we also know that it’s time that our assets are put to work for the long-term, and not in ways to destroy our economy.  With the Obama Administration’s help and guarantees, for instance, we could co-invest real money to re-build our cities and towns, and re-grow and re-shape this economy.   And our money should be invested so that markets serve society—community, in other words– and not the other way around.   We indeed have the capacity to construct infrastructure, reinvigorate our cities, and create those highly-anticipated green jobs for our children.   We just have to re-claim control of our money.

Gerard:  Well, let’s talk for a minute about California Public Employees Retirement System, then, the nation’s largest pension fund. CalPERS did engage in some responsible investing, as noted in your book. But it has suffered terribly and is expected to fire some of its real estate investment managers. Is that simply a result of the market and could not have been avoided?  Or should they really, in your estimation, have been doing something else.

Croft:   For all the things that CalPERS did right in terms of double-bottom line investing, as it’s called—investing in green housing and buildings, urban investments, and clean technology– it may have been overly aggressive in alternative investments.  And CalPERS was caught up in the sub-prime and real estate bubble markets.  CalPERS is, in fact, suing Moody’s and other ratings agencies because the pension fund claims that it did not know that a $1 trillion investment in securities (that I mentioned earlier) were in fact backed by sub-prime mortgages.  And some of their high profile investments in large real estate projects and overly-risky private equity have been slammed.  But CalPERS has recovered to the $200 billion level, and, given the fiscal crisis in California, we’re all hopeful that recovery will continue.  Some of my labor friends are now concerned that CalPERS is going back into the “dark pool,” doubling down in hedge funds and the mega-LBO funds to make up for the losses.

Gerard: What kind of response have you gotten to the book and what do you hope will happen as a result. 

Croft:   It’s really been great.  We’ve started to get a lot of coverage, and the book is making the rounds.  I’d like to see Heartland be able to create an ongoing “Center for Responsible Capital” so that we can continue to push responsible investments and act as a watchdog for union members and communities against investment abuses.

Your earlier support and that of the union has allowed me to write this book.   And, your leadership in capital strategies, rebuilding manufacturing, and kicking off the green economy has provided a lot of inspiration for the book, and we actually quoted you a couple of times—simply because it could not have been stated better.   We’ve now come to understand that responsible investors have been, profitably, creating hundreds of thousands of good jobs, building hundreds of thousands of living spaces, and helping to rebuild cities and communities.  So, as you said, our capital stewards can indeed invest in a responsible future—our future, and that of our children—and invest in a vision of the economy that’s more humane and sustainable.

***

Thomas Croft is an international expert on innovative capital strategies and jobs-oriented economic revitalization policies. He serves as executive director of the Steel Valley Authority, a regional economic development organization for Pittsburgh and 11 municipalities in the Mon Valley. The authority uses creative techniques to preserve and revitalize companies in crisis. Croft also is director of the Heartland Network, a working group of responsible pension investment advocates in the U.S. and Canada. Croft was commissioned by the Heinz Endowments to write Up From Wall Street.

Dave Johnson

By Dave Johnson
Fellow with Campaign for America’s Future 

It is possible that there is going to be a “deficit commission” to look for ways to reduce our country’s budget deficits. I have some questions for them to ask to help get things started in the right direction:

1.) President Reagan increased Social Security taxes, but used that money to cut the very top tax rates that only the wealthiest pay. Now that the money borrowed from Social Security is coming due, which income group is better positioned to pay it back, wealthy people or the elderly to whom this money is owed?

2.) President Clinton left office with a huge budget surplus. Then, President Bush gave tax cuts to the wealthy, and his last budget had a $1.4 trillion deficit. How much of this change was because of those tax cuts for the rich?

3.) How large was the country’s yearly budget deficit and total debt in the “Eisenhower/Truman” decades when the top tax rate was 90%?

4.) Today we have an “infrastructure deficit” – the amount needed to repair our country’s roads, bridges, sewers, etc. – of somewhere upwards of $1.6 trillion. Was our infrastructure kept in good repair before the top tax rates were cut?

5.) Concentration of wealth is long recognized as a threat to democracy, and now we are seeing a low-wage, everything-to-the-top economy with the greatest ever concentration of wealth going to a few at the top. Was the problem of wealth concentration increasing or decreasing before the top tax rates were cut?

6.) When top rates were high people couldn’t take home vast fortunes in a single year. When it took several years to make a fortune did corporations depend on long-term or short-term thinking? Did the executives of corporations care if the infrastructure and communities their companies depended on were in good shape? Did large corporations fleece customers and exploit employees for quarterly returns as they do now?

7.) The military budget is the largest item in our country’s budget. Was the military budget larger or smaller when we faced the cold war threat from the Soviet Empire?

8.) Just how big is our military budget, if you add in veterans programs, nukes, intelligence and the military budget’s share of accumulated debt interest? How large is it in relation to all of the rest of the countries in the world, combined?

9.) Speaking of debt interest, how much debt interest do we pay on the debt that has added up since we cut tax rates at the top? Who gets all that interest?

10.) Some will say that proposals to bring back the tax rates of the Eisenhower administration are “socialist.” What was the name of the organization that accused President Eisenhower of being a Communist?

11.) Does the following chart stimulate any ideas about how we might solve the debt problem?

***

This post originally appeared at the Campaign for America’s Future (CAF) Blog.

Johnson also is a fellow at the Commonweal Institute and a Senior Fellow at the Institute for the Renewal of the California Dream.

Follow Dave Johnson on Twitter: www.twitter.com/dcjohnson

Robert Borosage

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

You know the Dickens: It’s a “tale of two cities,” “the best of times and the worst of times.” On Wall Street, the big banks, basted with public succor, are ladling out record bonuses. Their leaders are arrogant enough to stiff the president’s invitation to the woodshed. Even at AIG, still a ward of the government, the hubris is such that the executives that led the company into bankruptcy now are threatening to sue anyone who dares tamper with the million dollar bonuses that they once promised to return.

On Main Street, millions remain unemployed, foreclosures are rising, pain is spreading. Many of the best jobs that have gone are not coming back. The downturn has been particularly brutal on the young. As a New York Times editorial reports, the jobless rate for teenagers is the highest recorded since records began being kept after World War II. For low-income black students, only 4 in 100 found jobs this fall.

This is a social and human calamity. Without jobs, young people don’t develop skills or discipline that makes them employable in the future. Robbing a generation of hope provides the kindling for explosion or implosion. Neither is acceptable.

Two cities. The mansion on the hill; the sorrows in the valley. This is the central economic and political challenge facing the country, the administration, and the Democratic Congress (Republicans, frankly, don’t seem to give a damn. Early on, they cast their bet on failure and their strategy on obstruction. This seems to be working for them, so they are letting that bet ride. Not one Republican would even cast a vote for the mildest of financial reforms)

The economic challenge goes beyond recovery. In fact, Wall Street’s rescue, while necessary, now stands in the way of a prosperous economy. Banks are emerging from free fall more concentrated than ever, with an explicit promise that they are too big to fail. This is a guarantee of future financial catastrophe. They must be broken up or regulated like utilities. Banker’s bonuses are simply a leading indicator. Their return to record levels means exactly that we are headed into another mess.

The pain on Main Street is also not sustainable. The basic promises we make to one another — a good education for our children, an opportunity for those who work hard, security in the golden years — depend on an economy with a broad and vibrant middle class, where prosperity it widely shared. As the middle class struggles with declining wages and increasing insecurity, those promises can’t be kept.

Politically, this reality will frame the choice in 2010 and beyond. Voters will want to know: Which side are you on — Wall Street or Main Street? The myth that Wall Street’s riches benefit Main Street — that bankers are doing, in the words of Goldman Sachs CEO Lloyd C. Blankfein, “God’s work” — has been shattered.

The political practitioners in both parties, who tend to be allergic to populist class politics, get this. Newt Gingrich early on conflated the recovery plan with the bank bailout, and charged Democrats with running up record debts to bail out the limousine liberals on Wall Street while ignoring Main Street. The Democratic Congressional Campaign Committee is now rolling out robocalls blasting Republican legislators for pocketing financial industry money while voting “to let Wall Street continue the same risky practices that crippled retirement accounts and cost taxpayers $700 billion…”

On these questions, the White House has been, at best, behind the curve. The president’s economic team is understandably proud of having staved off financial collapse and global depression. They were slow to understand the scope of Americans’ justified fury at a recovery that worked for the big banks and not the small businesses, for the mansions but not the homeowners.

Worse, this team of Bob Rubin protégés echoes the caution of the financial establishment. Although the president says we can’t go back to an economy where Wall Street pockets 40% of corporate profits, his Treasury Secretary can’t imagine reorganizing the big banks. Although the president will make jobs his top priority in 2010, his economists have yet to forward a plan large enough to meet the size of the problem. A direct public service jobs program – the only conceivable way to address the rising unemployment among the young in our cities – seems like an administrative nightmare. A $400-500 billion dollar jobs program – the size likely needed to create jobs and forestall what many, including Nobel prize-winning economist Joe Stiglitz, fear will be a return to recession – runs counter to their desire to take credit for an economy in recovery, and to placate the hysteria about rising deficits.

And as the health care debate shows, any jobs program must get 60 votes in the Senate. We know what the Senate wants: less. Less than any program that comes from the White House or the Congress. Less than what the country needs. The president would be wise to fight for a bold program, challenging the inevitable naysayers like Joe Lieberman, Ben Nelson and Evan Bayh. Take on the deficit hawks, demand action on jobs. But having suffered through health care, does he have the stomach for another inter and intra-party brawl?

All this will rollout in the New Year. The president will make jobs and financial reform the centerpiece of his State of the Union. After the final spasms around health care reform, the Congress will focus on a jobs bill and on financial reform (beginning with the vote on whether Ben Bernanke – architect of both the financial collapse and Wall Street’s recovery – should be kept on as head of the Fed).

If Republicans continue to vote lockstep against everything, even a token jobs bill and cautious financial reforms like those passed by the House this month may well help Democrats frame the debate for the 2010 elections.

But neither will deal with the scope of the economic challenge we face. And inadequate reforms will truly risk, in the words of White House Chief of Staff Rahm Emanuel, letting this crisis go to waste.

So get some rest. Enjoy the holidays. Hug your families. The debate about America’s future has only started to heat up.

***

Robert Borosage and Campaign for America’s Future Co-Director Roger Hickey are co-editors of the book, The Next Agenda: Blueprint for a New Progressive Movement.

Some years ago I was a staff attorney for the USW. At that time, in the 70s, there was no private option for the legally-required purchase of workers compensation insurance. It was all, and may still be, public workers compensation insurance only, in West Virginia, and some other  states.  This may be worthy of mention as a talking point, at least, in our current fight for a public option for health care insurance.  

Alfred Lawson
Central City, PA

***

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Les Leopold

By Les Leopold
Author “The Looting of America”

Say goodbye to 2009, the worst economic year since the Great Depression.

Say hello to the billionaire bailout society in which the super-rich gamble, lose and get bailed out by the rest of us.

To save the system from total collapse we poured trillions of dollars into the financial sector. The result? Banks still are refusing to lend. Thirty million Americans are looking for full-time jobs and 49 million are skipping meals including one out of four children. But Wall Street again is reaping record profits and bonuses.

Not only are we richly rewarding those who wrecked our economy, but also, we have to put up with hundreds of fabrications about how the big banks got us here. Here is my biggest, fattest lies list for 2009:

1. “Government programs for low-income home buyers caused the financial crash.” Wall Street defenders were quick to blame the Community Reinvestment Act, which urges banks to loan money in minority communities. In fact, almost none of the CRA loans are sub-prime and the vast majority are doing well, thank you. Blaming government programs deflects us from the real cause: Wall Street’s incredibly reckless creation, marketing, selling and trading of “innovative” new securities that supposedly removed the risk from pools of risky debt. It didn’t work. Wall Street, not the poor, crashed our economy.

2. “Income inequality is good for everyone.” Lord Brian Griffiths, Vice-Chairman of Goldman Sachs at least had the nerve to say what so many of the super-rich really believe:

“We have to accept that inequality is a way of achieving greater opportunity and prosperity for all.”

Unfortunately, the facts suggest otherwise. There is a high correlation between the mal-distribution of income and economic crashes. The last time our wealth and income distribution was as skewed as it is today was 1929, and that’s not an accident. When too much money is in the hands of the few it runs out of real world investment and gravitates towards speculative investments. This inevitably creates asset bubbles and crashes. Record pay and bonuses on Wall Street and high unemployment are connected. (See The Looting of America Chapter 11).

3. “The rising number of billionaires is a sign of economic health.” It’s accepted media wisdom that the more billionaires the better. China with 130 billionaires now trails only the US, which has 359, according to Forbes magazine. But in our billionaire bailout society, the rising number of billionaires signals a collapsing middle class. Ponder this statistic: In 1970 the ratio of the compensation of the top 100 CEOs compared to the average production worker was 45 to 1. By 2006 it was an astounding 1,723 to one. Does that look healthy to you?

4. “Paying back TARP means banks are no longer on government welfare.” Bank after bank is rushing to repay TARP funds during the worst economic year since 1937. They want to get out from under the Pay Czar (not that he’s been sufficiently tough on the banks under his purview.) Banks that were insolvent only a few months ago now say they have the financial strength to refund tens of billions of dollars to the government. Where did all that money come from? Much of it comes from other government welfare programs for Wall Street (over $12 trillion worth) that aren’t publicized. (See Nomi Prins’s excellent accounting.) It may be the case that our banks are paying us back with our own money. Now that’s financial innovation.

5. “Wall Street’s freedom to innovate must be protected.” Congressional leaders are tripping all over themselves to say new regulations will not discourage Wall Street innovations, something they claim is vital to our economy. Oh really? Do those “innovations” add anything useful to our country other than new casino games for the super-rich? Former Federal Reserve Chairman, Paul Volker, recently blew the whistle on this fabrication:

“I hear about these wonderful innovations in the financial markets and they sure as hell need a lot of innovation. I can tell you of two – Credit Default Swaps and CDOs – which took us right to the brink of disaster: were they wonderful innovations that we want to create more of?
…. I wish that somebody would give me some shred of neutral evidence about the relationship between financial innovation recently and the growth of the economy, just one shred of information….

The most important financial innovation that I have seen in the past 20 years is the automatic teller machine… How many other innovations can you tell me of that have been as important to the individual?” (“What Has Financial Innovation Done for You?”)

6. “To retain critically needed talent, Wall Street must be free to pay top salaries and bonuses.” Where would they flee if they just got paid like normal people rather than like gods? The British are putting in place a 50 percent tax on bonuses. Also, compensation is much, much lower in the European Union. But the real lie is that we need such “talent” in the first place. That kind of “talent” just crashed our economy. That kind of “talent” is widely overpaid – no way should bond traders receive 10 to 100 times what is earned by the best neurosurgeons in the world. Something is really wrong and it starts with the lie of banking “talent.”

7. “Overpaid American workers are the real cause of unemployment.” The New York Times writers who concocted this argument didn’t think they were lying. But this is one of the most preposterous ideas put forth during 2009. (“American Wages out of Balance” New York Times November 11, 2009) Edward Hadas, Martin Huchinson and Antony Currie informed us that:

“American manufacturing workers should take average real wage cuts of as much as 20 percent to get into global balance.”

They don’t mention that the average non-supervisory worker has already taken an 18 percent cut in real wages between 1973 and 2007. What’s worse, they claim that if workers don’t take these additional cuts, these “overpaid” working stiffs will be the cause of another Great Depression. They write:

“But if American wages get stuck above global market-clearing levels, as in the 1930s, the result could well be something approaching Depression-era levels of unemployment.”

Not a word is mentioned about how Wall Street’s gambling caused all of this unemployment and how the continued failure of Wall Street banks to lend is stalling job growth, right now.

8. “I’m doing God’s Work.” Lloyd Blankfein, Chairman of Goldman Sachs said what too many Wall Street leaders truly believe: that they are so privileged and entitled that it seems as if the heavens bless their work. Why else are they earning hundreds of millions of dollars? Mr. Blankfein believes he is creating a virtuous circle by raising capital for corporations who create jobs and help our society prosper. But Goldman Sachs, JP Morgan Chase, Morgan Stanley and the rest of the apostles helped to bring the entire world economy to its knees. Does that mean God likes unemployment and widespread hunger?

9. “We’re out of money.” Who’s we? Yes, the middle class is tapped out but the super-rich haven’t even begun to pay their fair share for the mess they created. Yet the top 400 richest Americans alone are sitting on $1.27 trillion or so in wealth. Here’s a dangerous thought. What if we had a very steeply progressive wealth/income tax that reduced the net worth of the super-rich to “only” about $100 million each? You wouldn’t be suffering if you had $100 million kicking around. Now do the math: The 400 richest x $100 million each would equal $40 billion. That would leave about $1.23 trillion to help pay back the country for the Wall Street meltdown that we, our children and their children will be subsidizing.

10. “We are becoming a socialist economy.” Somewhere between 68 and 78 percent of the US GDP is private sector activity, the highest among developed nations. And much of the government expenditures go to private contractors as well. But there’s a kernel of truth in the socialist scare: What do you call a society that encourages the private accumulation of wealth without limit, and then when the super-wealthy get into serious trouble, we bail them out with taxpayer funds – largely from a declining middle-class? That’s not free-enterprise. That’s not socialism either. It’s something new and it deserves to be called the billionaire bailout society.

Here’s hoping that in 2010 we can begin to undo it.

***

Les Leopold is the author of The Looting of America: How Wall Street’s Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It, Chelsea Green Publishing, June 2009.

Leo W. Gerard

By Leo W. Gerard
USW International President 

In Columbus Ohio, a 5-year-old girl jumped onto Santa’s lap last month and asked if he could give her dad a job as an elf.

Mike Smith, who works the Santa station at the Polaris Fashion Place in Columbus, asked why, the Wall Street Journal reported. The little girl in the Dora-the-Explorer sweat shirt responded:

“Because my daddy’s out of work, and we’re about to lose our house.”

Happy Holidays America.

The gift this country needs most this holiday season is an economy built on a solid foundation, one that will provide middle class, family-supporting jobs now and into the future.

That present would not be another version of Monopoly for Wall Street wannabees. It would not be Barbie-goes-to-the-mall-credit-cards for youngsters in families already maxed out on their plastic and their mortgages.

The metaphorical gift our economy could really use is an Erector set – a strong steel construction kit from which the intrepid manufacture airplanes, automobiles, robots on motorized tracks, backhoes, helicopters, skyscrapers, cranes, even working Ferris wheels. 

That’s because, most of all, this economy needs manufacturing. Enthralled by the glitz, glamour and bogus bonuses of Wall Street, we’ve allowed multinationals to export our grit and grimy factories overseas. Factories that made clothing, sports shoes, large appliances, tire, glass and so much more in big and small U.S. towns and transferred to China and Indonesia and India, lured not just by cheap labor, but also by lavish government subsidies and absent environmental regulations. 

Manufacturing, the basis of any strong economy, has continuously declined as a percentage of the U.S. gross domestic product since its World War II peak, when it was 28.3 percent. Its new low is less than half of that — 12 percent.

Here’s the most obvious difference between an economy based on manufacturing and one based on Wall Street: You can hold the handlebars of Harley-Davidson in your hands, but just try grasping a derivative.

The paper traders on Wall Street bundle mortgages into exotic financial instruments called derivatives, sell those, buy pseudo-insurance to secure them, then engage in legal betting on whether the “instruments” will soar or fail. This kind of activity caused the financial collapse in 2008. Frankly, beyond being incredibly risky, these transactions don’t create true wealth; they just generate big bonuses. 

In manufacturing, an entrepreneur takes raw material and adds energy, ingenuity, tools and labor to create a product – like steel. That has real value and can be sold on the market to someone who needs it to combine with other materials to make finished merchandise like motorcycles or refrigerators. And those manufactured items are durable and valuable. 

In the process of manufacturing, many people are employed – to get the raw materials, whether it’s limestone or iron or trees, to transport it to a factory, to generate electricity to run the factory, to transform the raw material at the factory, to deliver the product to the buyer, to pave the roads and build the bridges and repair the railroads necessary for all that transportation, to design the highways and factories and overpasses, to feed all the workers lunch.

Tragically, the Great Recession caused by Wall Street has hit manufacturing hard. While unemployment is at a 25-year high of 10 percent, the unemployment in manufacturing has run a couple of percentage points higher than that. More than 2.1 million manufacturing workers have been thrown out of their jobs since the recession began in December 2007. 

These workers are the parents of children in Dora-the-Explorer sweat shirts who are asking Santa for elf jobs.

These are the workers who have cut back on doctor visits or medical treatments – although almost half are suffering from depression or anxiety, a New York Times/CBS poll of unemployed adults showed. 

These are the workers who told the pollsters that the frustration and stress of unemployment has provoked conflicts and arguments with family and friends.

These are the workers who have lost their homes or have been threatened with eviction or foreclosure, who have difficulty paying bills and have resorted to borrowing money from friends and relatives. These are the workers profiled by Anne Hull of the Washington Post in a story that began by describing desperate laid off Warren, Ohio residents in a pawn shop:

“At campaign time, they are celebrated as the people who built America. Now they just want to know how much they can get for a wedding band.”

These are workers selling their precious keepsakes to survive 15 percent unemployment in an area along the Mahoning River that once was the world’s fifth-largest steel producer – until it lost 50,000 of those family-supporting manufacturing jobs and another 11,500 middle-class jobs at the Lordstown General Motors plant all in a decade.

These workers could be holding good, steady factory jobs if the United States had implemented a manufacturing strategy, the way China, Japan, Germany, even The Netherlands did long ago.

Just last week, the Obama administration offered a gift to all those who believe in manufacturing. It is that strategy for America. Its formal name is the White House Plan to Revitalize American Manufacturing.

For that five year old girl in the Dora the Explorer sweat shirt. For her furloughed father and her family. For the future of this country, let’s give ourselves the gift of a future constructed on a solid economic foundation. Let’s implement that plan to revitalize American manufacturing immediately. Millions of unemployed workers can’t wait.