It appears that an economic muckstorm is about to hit the American people, one that will likely hurt most Americans, but may have outsized effects on the middle class, while the rich and well-connected will lose only "paper value." It appears that the sources of this muckstorm are related to deregulation, the lax oversight of regulators and the blatant crony corruption of the Bush administration. This economic muckstorm may wind up having effects far beyond everybody losing some money/value, it may also rearrange our political system.
Follow me over the jump...
Aside from the Krugman column I linked about, there's another Krugman column whose title just about says it all, "Subprime bill comes due and wrong people will have to pay." Krugman chronicles the bad decisions, driven by greed and abetted by an executive compensation system that encourages CEOs and their lackeys to create the false appearance of success. He notes the climate of lax goverment regulation even in the wake of scandals like Enron.
Now the bill is coming due, and almost everyone - except the people responsible - is having to pay.
The losses suffered by shareholders in Merrill, Citigroup, Bear Stearns and so on are the least of it. Far more important in human terms are the hundreds of thousands if not millions of American families lured into mortgage deals they didn't understand, who now face sharp increases in their payments - and, in many cases, the loss of their houses - as their interest rates reset.
And then there's the collateral damage to the economy.
Krugman goes on to point out that a nasty recession is likely to ensue, and while it's a good article, the one failure of it focuses on markets and doesn't point out that everyone who owns a home, whether they were subprime borrowers or regular, stable middle class homeowners is going to get screwed by the decline in value of their home. Folks who bought homes most recently are likely to be screwed the worst, because values were up during the bubble. Some other folks who are likely to get screwed are folks that borrowed against the soon-to-be-diminished equity in their homes as they find themselves "upside down" on their mortgages (owing more than the asset is worth). Folks who bought their homes years ago, paid down their mortgages and were counting on collecting the equity appreciation for retirement are going to get screwed as mortgage lending tightens and they find themselves unable to sell their homes.
There will likely be other fallout for average folks like the loss of value in pension funds which may have some exposure to mortgage backed debt - not to mention the loss of value of the dollars they've saved. The damage is already popping up in completely unexpected places:
Florida’s Local Government Investment Pool, which acts as a bank for the state’s school districts, was supposed to be risk-free; it wasn’t (and now schools don’t have the money to pay teachers). link
While the crookedness of the greedy people who did the dirty work of making this mess is important to note, the enablers of this should be called out. The climate created by deregulation, cronyism, revolving door appointments (pdf) and the failure of regulators to do their jobs, needs to be brought up when the public starts asking where their jobs, their home equity and their economy went.
This story ought to become the poster child narrative of how Bush's cronyism works:
While the mortgage company he founded is in shambles and many of its customers facing foreclosure, Roland Arnall continues to enjoy a life of prosperity as the United States ambassador to the Netherlands with an estimated fortune of $l.5 billion.
"If you're building a 'Mount Rushmore' of people who should be on the face of the mortgage lending crisis, I think Roland Arnall has a distinct place in that litany," said Ira Rheingold, executive director of the National Association of Consumer Advocates.
Gee, I wonder how Roland Arnall got the attention of the Bush administration? Maybe it had something to do with this:
Gov. Arnold Schwarzenegger has become the most prolific campaign fundraiser in California history, taking in more than $125 million for his various political committees... Mortgage lender Ameriquest Capital Corp. and its founders, Roland and Dawn Arnall, have given $1.5 million.
...or this:
In the 2003-2005 period, Arnall and his wife raised more than $12 million for George W. Bush's political efforts, including $5 million for the Progress for America Voter Fund, a self-proclaimed "conservative issue advocacy organization dedicated to keeping the issue record straight."
Mrs. Arnall also served as a co-chair for the 2004 Republican Convention and hosted a $1 million Bush-Cheney fund-raiser at the couple's 10-acre home in Holmby Hills, California. After Bush was reelected, The Arnalls contributed another $750,000 for inaugural balls in January 2005.
Gee, I guess if you are rich, connected and a major Republican donor it doesn't matter how crooked you are or how many people you've screwed - you're still their kind of guy.
The Bush administration is up to their eyeballs in corrupt crony dealing - Halliburton, KBR, Blackwater, etc., funnelling billions of dollars in contracts to their cronies. Their cronies in turn have shown Bush some love. Heck, cronyism works for lots of party members.
So, about now you astute readers are probably saying to yourselves, "Well, yeah I knew that. Looks like garden variety corruption in and out of the government to me. What's the big deal, and what does it have to do with rearranging our political system?" For you, dear reader, here comes the, um, fun part...
The economic policies, lax regulation, cronyism and corruption of the Bush administration all taken together are part of a trend of concentrating both wealth and power into an ever-smaller group of people and corporations. America is now experiencing unprecedented levels of economic inequality. Check this out - from an interesting speech by Janet Yellen, CEO of the San Francisco Federal Reserve Bank:
"Given these two developments — more macro stability and more rapid labor productivity growth — it is tempting to conclude that most Americans are feeling "better off." But a glance at the newspapers suggests that this is not necessarily the case. Indeed, poll after poll shows that many Americans feel dissatisfied with the long-term direction of the economy and are worried about the future. Recent polls by the Pew Charitable Trust, the New York Times and CBS News, and various labor organizations indicate that growing shares of respondents feel that they and their children will experience a diminished quality of life in coming years, and that, even today, working conditions are marked by more insecurity and stress than they were a generation ago.
Looking beyond the headline numbers on the macro economy provides some clues to the source of this discomfort. In particular, over the past three decades, much of the gain from excellent macroeconomic performance has gone to just a small segment of the population—those already in the upper part of the distribution. As a result, inequality has grown. This inequality, coupled with increased turbulence in family incomes associated with job displacement and restructuring, sheds substantial light on the sources of the disappointment and concern that show up in the opinion polls."
...
"Certainly some market-determined income differences are needed to create incentives to work, invest, and take risks. However, there are signs that rising inequality is intensifying resistance to globalization, impairing social cohesion, and could, ultimately, undermine American democracy."
Democracy and a relative economic equality among citizens are complementary; in a diary that I wrote the other day I quoted Tocqueville on the importance that a relative economic equality has to promoting democracy, I'll recycle it here because it is so applicable:
"Among the new objects that attracted my attention during my stay in the United States, none struck me with greater force than the equality of conditions. I easily perceived the enormous influence that this primary fact exercises on the workings of society. It gives a particular direction to the public mind, a particular turn to the laws, new maxims to those who govern, and particular habits to the governed.
I soon recognized that this same fact extends its influence far beyond political mores and laws, and that its empire extends over civil society as well as government: it creates opinions, gives rise to sentiments, inspires customs, and modifies everything it does not produce.
In this way, then, as I studied American society, I saw more and more, in the equality of conditions, the generative fact from which each particular fact seemed to flow, and I kept finding that fact before me again and again as a central point to which all of my observations were leading."
When the great mass of citizenry loses it's relative parity in terms of wealth and power with a small group in society, authoritarianism festers.
So, if an economic muckstorm of great strength (like a really nasty recession or a depression) occurs and "the little people" get uppity, the tendency of the wealthy and powerful will be to clamp down and aggressively take control. They will take advantage of middle class people who are desperately trying to hang on to the things and advantages that they used to enjoy. "The little people" will be whipsawed by conditions and feel like they have to support the corporate order, ignore environmental damage and demonize immigrants in order to keep their jobs. They will be encouraged to support the wars of aggression and imperial policies that bring them cheap goods, services and cheap oil and gas. In short, "the little people" will be shocked into obedience.
Wow, that's depressing. Perhaps there's a positive way to look at it though. If these sorts of occasions for opportunistic empire-builders are predictable, then a counter-response is possible. If there's an upside to all this, it's that precisely at the point that the social confusion is greatest, there is some opportunity for well-prepared groups of citizens (rather than master-of-the-universe wannabes) to assert authority.