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Leo W. Gerard

By Leo W. Gerard
USW International President

The deficit commission report issued last week is another Saturday night special pressed to the temple of the American middle class.

“Turn over your money and your benefits or your country will die,” the report screams at workers. “You want your country to go bankrupt? No? Then you gotta delay retirement, get less from Social Security, pay more for health insurance and lose your precious few income tax breaks like the one that helps pay your mortgage while the banker is breathing down your neck right now.”

For 30 years, rich conservatives have successfully threatened the American middle class this way, ever since that rich conservative Ronald Reagan converted the White House into a castle.

The result is a country with greater income inequality than during the age of corporate robber barons at the turn of the 20^th century. It is a country whose 21^st century robber barons, the richest 1 percent of Americans, take nearly a quarter of all income and demand that politicians relieve them of their obligations. The rich — hedge fund owners who rake in billions, Wall Street banksters handed bonuses in the millions, CEOs paid eight-figure golden parachutes after they mess up — insist that politicians place government debt burdens on the middle class, the unemployed, the elderly, the struggling young, people whose income has stagnated for three decades.

The co-chairmen of the deficit commission complied with that mandate from the flush when they recommended the middle class bear the brunt of the cost of reducing the deficit. Simultaneously, conservatives in Congress are acquiescing by insisting on extending tax breaks for the nation’s wealthiest. Those are the very tax breaks that contributed dramatically to creating the debt – the one that the deficit commission now wants heaped on workers’ backs.

This will be the death of the nation’s strength — its successful working class. Without the slightest regret or hesitation, the rich are killing the great American middle, rendering it a casualty of their shirked social responsibilities. Their campaign has been abetted by Republicans since Ronald Reagan. The Gipper contended slashing taxes for the wealthy would increase revenues for the government. Republican George H. W. Bush rightly ridiculed Reaganomics as voodoo.

In the GOP years between the beginning of Reagan in 1981 and the end of Bush II in 2009, the federal deficit exploded as Republican presidents failed to control spending and repeatedly cut taxes for the rich.

Reagan reduced the rate on the richest first down to 50 percent, then to 28 percent. The resulting budget deficit converted the U.S. from the world’s largest international creditor to its largest debtor. And now, the deficit commission sends the bulk of the bill for voodoo economics to the middle class, not the rich.

While Reagan gave the rich those breaks, income inequality increased. The share of total income taken by the richest 5 percent grew from 16.5 percent the year before he took office to 18.3 percent the year before he left. In that same time, the share of total income that went to the poorest 20 percent of households fell from 4.2  to 3.8 percent.

Democrat Bill Clinton fulfilled a campaign promise by increasing taxes on the rich — to a 39.6 percent marginal rate. He balanced the federal budget and left Bush II with a surplus.

Then Bush II squandered it. He gave the rich more tax breaks, accumulated debts larger than all those created by previous presidents combined and worsened income inequality. During his administration, from 2002 to 2007, the pretax income of the richest 1 percent increased 10 percent every year.  Over that same period, the median income for working Americans declined and the poverty rate rose.

From Reagan through Bush II, more than four-fifths of the total increase in U.S. income went to the richest 1 percent. Hedge fund owners, whose income is literally in the billions, pay income taxes at 15 percent – lower than the rate paid by their secretaries, who earn far less in a year than any of the top 10 hedgers do in half an hour.

Wall Street recklessness crashed the U.S. economy, throwing millions of middle income earners out of their jobs and their homes. The banksters went to Washington and got politicians to hand them bailout billions, and now those Wall Streeters plan to increase their bonuses — while unemployment remains stuck at 9.6 percent in the Main Street economy.

It is those guys, bankers grabbing year end bonuses totaling two and three times what middle class earners get for a year’s labor; it is the five-home wealthy demanding that the foreclosed-on middle class suffer for the deficit. The rich, who have received the greatest benefits from this society, have no intention of paying their share of this national responsibility.

The deficit, the Social Security shortfall, difficulties with Medicare – they could all be solved if the nation returned to taxing policies that existed under Republican President Gen. Dwight D. Eisenhower, when the rate on top earners was 91 percent. That was not even the high point. In the mid-1940s it was 94 percent. Generally it fluctuated between 81 percent in 1940 and 70 percent when Reagan began slashing it in 1981.

Those rates may sound confiscatory now, but it’s not like the rich actually paid them after they subtracted out all of their exemptions, deductions, loopholes, special deals, tricks and wiles.

The dozen years in the 1950s and 1960s when the rate on the richest officially was 91 percent is a time considered by many Americans to be among the nation’s greatest for the middle class, a period when American workers could afford to buy homes, send their kids to college and travel across American on vacation.

There’s no talk of that now. Raising taxes on the rich now is considered ludicrous. Ridiculous. The whole Social Security shortfall could be solved if the rich paid taxes on their entire incomes, not just the first $110,000, a break that means the wealthy pay a smaller percentage if their income toward Social Security than the impoverished. But the deficit commission didn’t propose that.

No, the rich have succeeded in eliminating as a possibility their paying an increased tax share. Now, the only consideration is cutting their taxes. They didn’t hold an actual Saturday night special to anyone’s head. The rich are snake oil salesmen slick, Bernie Madoff-style schemers. They sold voodoo economics to America, and now they’re intent on making the middle class pay for what that policy has wrought in deficits.

Reagan’s re-election ad was wrong. He didn’t institute “Morning in America.” It was mourning for the once great American middle class.

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Leo W. Gerard also is a member of the AFL-CIO Executive Committee and chairs the labor federation’s Public Policy Committee. President Barack Obama recently appointed him to the President’s Advisory Committee on Trade Policy and Negotiations. He serves as co-chairman of the BlueGreen Alliance and on the boards of the Apollo Alliance, Campaign for America’s Future and the Economic Policy Institute.  He is a member of the IMF and ICEM global labor federations and was instrumental in creating Workers Uniting, the first global union.

Robert Borosage

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

Were the big banks all knowingly running Ponzi schemes? That’s the question that arises from the stunning hearings held this week by the Senate Permanent Committee on Investigations, chaired by Senator Carl Levin, on the collapse of Washington Mutual, the largest thrift failure in the U.S.

Faced with looking like fools or knaves, the barons of the big banks— from Robert Rubin to Lloyd Blankfein to WaMu’s Kerry Killinger—have chosen, not surprisingly, the fool. But the WaMu hearings—and Zach Carter’s stunning running commentary on them—suggest that while Bernie Madoff may have been the extreme, he wasn’t the exception. (Note: Carter blogs for the Campaign for America’s Future, which I co-direct.)

The Levin hearings show that WaMu systematically peddled loans to people it knew could not pay them back. This wasn’t an accident. Levin exposed a WaMu internal audit that reviewed 132 loans, and found 115 involved confirmed fraud, with 80 having “unreasonable” income—meaning the income listed on the loan was so preposterous that any reasonable person, much less a trained loan officer, would have called it into question. The audit resulted in no—zero, nada—changes in WaMu’s lending practices. Fraud wasn’t a problem; it was the business plan.

As Carter summarizes:

According to the FBI, 80% of mortgage fraud is committed by the lender. We’re not talking about stupid loan officers allowing borrowers to get away with something crazy that is bad for the bank. We’re talking about clever loan officers pushing fraudulent documents in order to score bigger paychecks, and bank executives looking the other way so that they can keep getting big paychecks from the securitization machine. This isn’t a problem unique to WaMu. This is how the U.S. mortgage system operated for half a decade.

WaMu particularly pushed predatory option-ARM loans, loans with an initial monthly payment so low that it often didn’t even pay off the interest on the loan. Then after a couple of years, the monthly payment explodes—and the loan becomes unaffordable.

WaMu actively trained its personnel to convince skeptical borrowers to take these loans because option ARMS received a very high yield when packaged into securities. So WaMu’s compensation schemes rewarded loan officers for the number of loans sold, not the quality of the loans. Stunningly, Levin cited internal memos showing that even loan officers under investigation for fraud were rewarded with trips to Hawaii and the Bahamas for their high production.

WaMu packaged the fraudulent loans into securities and sold them to investors, or peddled the loans to investment banks that did the same. Even after WaMu’s own internal audits reported that a high percentage of the loans were fraudulent, WaMu still sold them to investors. Worse, even after WaMu’s own study showed that the default rates on option ARMS were going to be staggering, WaMu rushed to peddle even more of these loans to investors on an “urgent” basis. As Carter reports, “They not only packaged existing option-ARM loans into securities, they issued as many new option ARMs as possible, in order to score securitization profits before the market collapsed.” CEO Kerry Killinger testifies that he doesn’t know if it would have been appropriate to tell investors what the company knew about default rates. “I don’t know what actually happened,” says Killinger.

As Carter summarizes, this was essentially a Ponzi scheme, similar to Madoff’s:

Making truckloads of fraudulent loans can only end in disaster, but WaMu [executives weren't] really interested in the long-term picture. They were only interested in their ability to book these loans for big, short-term profits. Even when those bad loans finally took the company under, it had been, in a sense, a success. Its executives had already made millions.

WaMu’s [executives were] in many ways operating a simple Ponzi scheme. Their risky loans were going bad, but the company was trying to counter those inevitable losses with the short-term profits from issuing more risky loans. That’s basically how Bernie Madoff’s scam worked, except he wasn’t using make-believe loan profits, he was using make believe stock returns. So long as the bubble keeps growing, the scam could keep moving. But when the bubble burst, there was no way to keep issuing lots of loans in an economy where home prices were plunging.

The one divergence from the Ponzi scheme is securitization — if WaMu could dump the bad loans off its books, then it wouldn’t have to eat the inevitable losses. But that doesn’t reflect well on WaMu– it means [the executives] were deceiving and abusing investors.

Why run this scheme that would lead to the ruin of the bank? Because the executives were making out like, well, like bandits. Killinger, the CEO of WaMu, was taking home $11 million to $20 million a year during the housing boom.

As Carter points out, what WaMu was doing in mortgages—originating mortgages that they knew would default, cutting them up into securities, and marketing them to investors without notice—isn’t much different than what Goldman Sachs was doing in synthetic subprime CDOs: creating securities that it knew would fail in order to bet against them, while selling them to investors without notice.

These guys weren’t fools. They knew what they were doing. They knew that the music would stop some day, and the reckoning would come, or more likely, the Feds would step in and bail them out. (Amazingly, Killinger is still outraged that WaMu wasn’t bailed out rather than put out of business.) But they kept dancing because they were cleaning up along the way.

In the last two weeks, the Financial Crisis Inquiry Commission and the Levin hearings provide a stunning picture of the industry. The good cop, FCIC, treats the bankers as experts, listens to their opinions, and lets them claim the role of fools. “We didn’t know.” “We didn’t realize housing prices wouldn’t always go up”. “We weren’t responsible.”

Then yesterday, the bad cop—the Levin committee—exposed the inner working of what former bank regulator William K. Black calls “control fraud,” a business model based upon fraud as central to its profitable operations. It is hard to believe that WaMu or Madoff is an exception. Levin should probe every major bank engaged in the securitization of mortgages.

Is it likely that their bank officers were fools? Or that they were prepared to turn their heads or hold their noses because the rewards were so great? Ignorance is their defense, not their condition. They knew what they were doing. The rest is for a prosecutor to sort out.

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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.

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This piece is re-posted from the blog site of Campaign for America’s Future – Blog for America’s Future.

Leo W. Gerard

By Leo W. Gerard
International President

For a brief moment, when Congress authorized that $700 billion bailout for the Wall Street wise guys whose recklessness caused the financial crisis that we’re all suffering, federal officials actually considered giving part of the money to foreign banks.

Really.

They quickly backed away from using American tax dollars to prop up overseas financial institutions.

But now, the same issue is at stake with the $825 billion economic recovery package. Fifteen groups including the U.S. Chamber of Commerce and the Business Roundtable want to give American tax dollars to foreign manufacturers to create jobs overseas.

That’s right. The U.S. Chamber of Commerce wants to spend the tax dollars of unemployed Americans to create jobs in China and Indonesia, Korea and India.

The 15 business groups sent a letter to Congress opposing provisions added to the recovery package that would strengthen existing laws requiring government agencies buy American steel and other products when building public works projects with tax dollars.

The recovery package would use American tax dollars to pull the United States out of a deep recessionary hole caused by a blind belief that business knows best and shouldn’t be regulated – from banks to pharmaceutical manufacturers.

The package is, essentially, Americans agreeing to increase their national debt to revive an economy sucker punched by greedy Wall Street gamblers. So when business interests want to spend those tax dollars overseas, to create jobs there at the expense of unemployed Americans, while at the same time increasing the U.S. trade deficit, frankly, it looks a bit like treason.

To survive this economic catastrophe, Americans must assert themselves as economic patriots. They must stand up to the likes of the Chamber and the Roundtable and call them out for being economic traitors to the United States of America.

The measures proposed in Congress to strengthen the existing laws requiring that American products be purchased are simple, inexpensive and would not delay construction projects. For example, Ohio Sen. Sherrod Brown wants requests for waivers to the federal “Buy America” requirements to be publicly posted on the Internet in a place where people with knowledge of the situation can comment on them. That way, a government agency will likely quickly find out about attempts to use the waiver process to circumvent the rules.

The Chamber and the other business groups whine in their letter to Congress that strengthening “Buy America” rules may violate international agreements.

That’s bogus and the groups know it. America can honor its international obligations while using U.S. tax dollars to employ American workers. For example, states that receive federal grants for highway and mass transit projects may specify that products for that construction be purchased from U.S.-based producers without violating international agreements.

The Chamber and the other business groups also contended they were worried that strengthening the “Buy America” rules would prompt retaliation from foreign countries, so that U.S. companies would be prohibited from providing materials for construction funded by foreign stimulus programs.

When other nations nurture their industries and employ their own countrymen with their tax dollars, it won’t be retaliation. It will be reasonable. It will make good economic sense.

French President Nicolas Sarkozy announced in December that he would do whatever it took to save his country’s auto industry. No big protest broke out from anyone contending France should buy the auto parts from some low-priced American competitor. No, it seemed logical that France’s president would “buy French” and strive to rescue the industry that employs 10 percent of his population.

India already employs many protectionist measures to shield its industries. China subsidizes its manufacturers and manipulates its currency. But, somehow, the U.S. Chamber of Commerce thinks it’s wrong if U.S. tax dollars are spent in America to employ Americans.

These are the guys who were behind George W. Bush’s tax breaks for the rich these past eight years. These are the very ones whose wrongheaded policies brought America to its economic knees. And they are the business hotshots who don’t see that they’ve done anything wrong that should change.

Those Wall Street business wizards felt so entitled to Americans’ $700 billion in tax dollars given to bail them out that they spent it on $18 billion in year-end bonuses, a $16,000 commode and a $50 million Dassault Falcon 7X manufactured-in-France corporate jet. (Well, the Obama administration did tell Citigroup it had to cancel that jet.)

Here’s the thing to remember about these business groups so worried about preserving “free” trade. A dozen of them put America or U.S. in their names, like the United States Council for International Business. But it’s not the U.S. they care about. Their focus is themselves.

Many of them long ago shipped manufacturing overseas, to benefit from tax breaks provided by the Bush administration, slave wages paid to third world workers and zero enforcement of safety and environmental regulations. That’s why they oppose “Buy America” regulations. They want to use American tax dollars to pay subsistence wages at their factories in foreign countries, then ship the steel or aluminum or rubber back to the U.S. at untold cost to the environment and the trade deficit.

You can trust ‘em same as you can Bernie Madoff.

What you can trust is that empty feeling in your stomach and your pocket, a pang that’s spreading quickly while the U.S. Chamber busies itself trying to thwart “Buy America.” More than 2.55 million Americans have been thrown out of work since Bush’s recession began. On Monday alone, companies announced they would cut 75,000 more jobs. Unemployment stands at 7.2 percent, and it is expected to rise to 10 percent before year’s end if drastic action isn’t taken.

Drastic action isn’t sending American tax dollars overseas to create jobs there.

Last year, the Government Accountability Office reported that “Buy America” policies are effective by “protecting domestic employment through national infrastructure improvements that can stimulate economic activity and create jobs; protecting against unfair competition from foreign firms as a result of foreign government subsidies; and maintaining national security interests through the continued use and development of certain industries within the U.S. economy, like the iron and steel industries.”

That sounds like a policy worth investing in. A policy good for America.