03 November 2012

The US Elections: The Contrarian Perspective

I find the pre-election focus on polls rather boring.

In my contrarian universe, voting behavior is usually guided, manipulated and shaped by societal forces. Forces that can bring a specific narrative to the forefront, change the agenda, modify and enforce talking points. I pay attention to them.

I am not talking about people like Koch brothers and their crass attempt to influence the political preferences of their employees by threatening them with mass layoffs in case Obama wins. There are always a few cranky billionaires like Sheldon Adelson who will bankroll Newt Gingrinch or replenish the coffers of Karl Rove's Super P.A.C.

I am talking about the US business classes who managed to turn the American Dream into a massive scheme of income redistribution. You know, the famed 1 percent.

When people refer to 1 percent they don't realize the enormity of the disparity: do you know that the net worth of just 6 members of the Walmart family is larger than the entire bottom 30 percent of the US population? (Apparently, if you take the entire family that figure goes to 40 percent).

Can you say Banana Republic?

Warren Buffet famously said that "there has been class warfare waged and my class has won."

In my humble opinion, it is this class that wants to see Barack Obama back for a second term. And this is not idle contrarian speculation on my part. It is a rational choice as they have excellent reasons to want him win.

The First Obama Presidency: Income Redistribution Redux

You may be vaguely aware that, thus far, the Obama presidency was a resounding economic success for that  lovely class of 1 percent, as it solidified all the trends that began four decades ago.

When you read Hedrick Smith's new book "Who Stole the American Dream?" you  realize the scale of that income redistribution. (If you cannot read the book, take a look at this review by Dan Froomkin).

It is a simple story. Up until a few decades ago, the nest egg for middle class Americans meant two things, the equity built in their homes and their retirement funds (401(k)). With deregulation, Wall Street came looking for the built-in equity in real estate and convinced Americans to borrow against their homes.
"Instead of enabling ordinary Americans to achieve The Dream, they fashioned stratagems that stole the dream," Smith writes, describing what he calls the "New Mortgage Game." The sales pitch "was that homeowners should think of their houses not as nests … but as ATM machines," Smith writes. The goal was "perpetual hock" -- and correspondingly high fees.

The banks "seduced millions of middle-class families into draining the precious equity that they had painstakingly built up in their homes" and the result was "a monumental transfer of the absolute core of middle-class wealth from homeowners to banks. Trillions of dollars in accumulated middle-class wealth were shifted from average Americans to the big banks, their CEOs, and their main stockholders."
Then they came for their 401(k):
Get ready for waves of retirees who run out of money long before they die not just because they didn't put enough money into their 401(k)s but because of the huge bite taken by mutual fund managers, whose fees and transaction costs average 2 percent a year.

At 5 percent a year, $1 over 40 years becomes $7.04 -- but at 3 percent, it only comes to $3.26. Smith quotes Jack Bogle, founder and CEO of the Vanguard Group, explaining that "you the investor put up 100 percent of the capital. You take 100 percent of the risk. And you capture about 46 percent of the return. Wall Street puts up none of the capital, takes none of the risk, and takes out 54 percent of the return."
Until the 2008 crisis, no one paid any attention to these two trends and the resulting income redistribution. People kept borrowing against their homes and kept spending.

When the 2008 crisis hit, both corporate profits and home equity suffered. For the corporations, the government immediately put together a $750 billion TARP package and the Federal Reserve began lending to corporations and banks at 0 percent. By some accounts, the sums it injected and the loans it guaranteed were much higher than the official TARP fund and reached 15 trillion dollars.

Not surprisingly, Wall Street, banks and corporations recovered quickly and profits soared.

For the home equity side of the equation, people turned to government for a bailout, as they lost somewhere in the vicinity of $5-7 trillion in home equity. The first proposal was to empower bankruptcy judges to reduce the amount owing so that the "underwater" value of someone's home could be subtracted from the principal. It was known as the cram down provision. But it was vetoed by Obama:
In fact, during the transition itself, Bush’s Treasury Secretary Hank Paulson offered a deal to Barney Frank, to force banks to write down mortgages and stem foreclosures if Barney would speed up the release of TARP money. Paulson demanded, as a condition of the deal, that Obama sign off on it. Barney said fine, but to his surprise, the incoming president vetoed the deal. Yup, you heard that right — the Bush administration was willing to write down mortgages in response to Democratic pressure, but it was Obama who said no, we want a foreclosure crisis. And with Neil Barofsky’s book ”Bailout,” we see why. Tim Geithner said, in private meetings, that the foreclosure mitigation programs were not meant to mitigate foreclosures, but to spread out pain for the banks, the famous “foam the runway” comment.
The second idea was to create a TARP-like fund for home owners. Enter the Home Affordable Modification Program or HAMP. HAMP was and remains a disaster. It did not lead to loan modifications. Its funds were almost left unused. It helped very few people and it destroyed the lives of most applicants. And as The Economist put it, it is still HAMP'ering the recovery. Despite all that the Administration never made significant changes to HAMP.

To sum up, as the chart below shows, under Obama corporate profits recovered nicely. The $5-7 trillion lost in home equity: not so much.

There is more to this.
Under Bush, economic inequality was bad, as 65 cents of every dollar of income growth went to the top 1 percent. Under Obama, however, that number is 93 cents out of every dollar. That’s right, under Barack Obama there is more economic inequality than under George W. Bush. And if you look at the chart above, most of this shift happened in 2009-2010, when Democrats controlled Congress. This was not, in other words, the doing of the mean Republican Congress. And it’s not strictly a result of the financial crisis; after all, corporate profits did crash, like housing values did, but they also recovered, while housing values have not.
Not too shabby, isn't it? Take a look at this table:

When the housing bubble burst, it became clear that predatory lending schemes, fraudulent practices and wide scale misrepresentations were a large part of the final outcome. Yet the Obama Justice Department did not prosecute a single mortgage or banking executive, not even the infamous CEO of CountryWide, Angelo Mozilo. The only person ever to be put in jail for mortgage fraud was a not a banker or broker but a loan applicant who made a false statement in his loan application (or more correctly his mortgage broker lied on his behalf, without his knowledge). He got 16 months for that.

Joe Nocera, the guy who broke that story had this to say:
Think back to the last time the federal government went after corporate crooks. It was after the Internet bubble. Jeffrey Skilling and Kenneth Lay of Enron were prosecuted and found guilty. Bernard Ebbers, the former chief executive of WorldCom, went to jail. Dennis Kozlowski of Tyco was prosecuted and given a lengthy prison sentence. Now recall which Justice Department prosecuted those men.

Amazing, isn’t it? George W. Bush has turned out to be tougher on corporate crooks than Barack Obama.
Please note that I am not making the point that Obama has been a conservative President. That is obvious when you look at his positions on medical marijuana, due-process-free assassination of American citizens, his choices of Supreme Court nominees, the Plan B provision he put in Health Care bill, the way he gave away the single payer Health Care option to Big Pharma. I can cite a dozen other examples of his conservative instincts.

But that is not my concern here. I simply want point out that he was very successful in codifying and solidifying all the conservative policies that were designed to maintain the bottom-to-top income redistribution process.

If I were in the 1 percent, I would want him back, as he has more work to do in the second term.

The Second Term: The Grand Bargain

Now the question for the second term is this: Once the Wall Street siphoned off the equity in real estate and got themselves the lion's share in retirement funds, where else can they go to get more money?

If you know who Pete Peterson is, then you might guess the answer to this question.

Social Security and Medicare are the next targets. They tried it with George W. Bush, with the plan to privatize Social Security. It was a beautiful arrangement. From the perspective of Wall Street, it would have given mutual funds a lot more money than 401(k) plans to invest risk-free and get amazing fees on them.

From the perspective of the 1 percent (a.k.a. our Galtian overlords) it would also remove any kind of social safety net for middle and lower income Americans, leaving them vulnerable and consequently very malleable.

The Bush attempt failed because Social Security was (and is) very popular. But the people behind the scheme never stopped. The Standard Operating Procedure is to get on TV and insistently and indefatigably make the point that Social Security is insolvent and about to go bankrupt.

It is a boldface lie. It is estimated that Social Security might not be able to make full payments only in 2033 (but still pay out three quarters of benefits) if no changes were made to the fund. Even that is rubbish because as a government program it does not have to run out of money any more than defense procurement funds.

But by now, the question was posed with this doomsday premise on so many Sunday morning talk shows and Presidential debates that most people believe that the end is near and something needs to be done very quickly.

The second leg of their strategy was to claim that because of the huge US budget deficit, entitlement programs needed to be cut.

The perfect example of this discourse is provided by the venerable Chairman of Federal Reserve, Alan Greenspan. When there was a budget surplus, Randian Greenspan urged Congress to get rid of it through massive tax cuts for the wealthy and when there was a deficit, after two wars fought on borrowed money, he urged the same Congress to reduce entitlement programs and cut the money spent on social safety net. Which shows clearly how little the conservatives care about the deficit. It is a means towards a goal.

As part of this same strategy, the Republicans in Congress refused to raise the borrowing limit of the US government, unless these entitlement programs were slashed and/or privatized. And that led to the Obama-appointed Simpson-Bowles Commission and to the so-called Grand Bargain.

The basic idea was to cut most spending programs, reduce entitlement disbursements, raise retirement age, reduce marginal tax rate, allow Bush tax cuts to expire and raise payroll tax. As Krugman explained, Simpson Bowles plan is terrible. It would destroy most of the safety net put in place by the New Deal and negatively affect people who need that net the most.

Moreover, removing $4 trillion from the economy now would very likely lead to another recession and much higher unemployment (helped by a higher payroll tax). And this contraction of the economy would take place when entitlement programs were massively slashed.

The Grand Bargain is the name given to the S-B plan, because it entails tax increases (something the GOP vehemently opposes) and cuts to Social Security, Medicare and Medicaid (something the progressive wing of the Democratic Party opposes).

And right after the elections, the new President and Congress will face the mythical Fiscal Cliff, which entails automatic cuts to social programs, entitlement benefits, Defense procurement. And it will let some Bush tax cuts expire. Neither side likes this. And they need to find a big compromise.

So they are negotiating a Grand Bargain.

A Democratic President for a Faustian Bargain

You might think that everything I wrote so far can be handled much more efficiently by Romney and his fibbing-mate Paul Ryan than the second Obama-Biden administration.

I don't think so. Just like only Nixon could have gone to China, only a Democratic President can make deep cuts to such popular social programs. Bush tried it and he was handed one of the very few defeats of his presidency.
Obama intends to begin to unravel the safety net (Social Security, Medicare, and Medicaid) to convince the Republicans to enter into this Faustian bargain. Just as only a conservative Republican could visit “Red” China, only a Democrat can begin the destruction of the safety net. The difference, of course, is that normalizing relations with China was a good thing while unraveling the safety net is a terrible thing.
Krugman notes that these elections are a referendum for the kind of society Americans want to live in. A Democratic win will signal that they want social programs, entitlement benefits and the overall safety net to be left intact. A Republican win will herald a Galtian dystopia.

He fears that Obama will turn his back to Democratic voters and enter the Faustian Grand Bargain with Republicans.

Based on his record on HAMP, the union-unfriendly Detroit-bailout (which at the time was hailed as the death of UAW by conservatives who now call it a UAW bailout) and the very diluted Health Care Act, I believe he is ready to sign on to that Bargain. The terms may be altered to make them more palatable than the stark S-B plan but the basic idea is likely to be the same.

If you believe in the democratic process, you may find this outcome ironic. Especially if you consider this a referendum-election.

If you are cynical and believe in the power of the 1 percent, you may see it as a perfectly routine occurrence.

I am neither but my money -so to speak- is on the 1 percent.

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