Category: The Economy

What Went Wrong In The Economy

Posted by – March 30, 2009

I’ve had an email and a few message board posts asking me “what the…” is going on with the economy.  I’m not an economist (I was an English major) but I’m incredibly curious, and I read a lot.

Here’s my take:

A big part of this whole Wall Street collapse are something called “adjustable-rate mortgages” (ARMs).  Especially problematic are ARMs that “balloon” in cost two or three years down the line.  These mortgage companies sold this crap using the first few years’ “teaser rates” of 1% or 2% interest to lure in lots of new customers, many of whom didn’t read the fine print and didn’t see the 10% (or higher) price hike coming.  When so many borrowers couldn’t pay the ballooning interest, the house of cards fell down, taking the financial sector (and the world economy) down with it.

Yesterday I saw someone ask, “since interest rates have been low, why would anyone sell ARMs instead of fixed-rate mortgages?”  The answer has to do with projected revenues.  That is, these companies sold lots of “balloon” ARMs (mortgages that increase years later) so that they could bundle them into securities, go to Wall Street and brag about their securities’ “projected revenue,” which is a big part of what determines prices.
“Look!  In ’09, earnings on our securities will TRIPLE!!  BUY BUY BUY!!!”

A Dilbert cartoon from

A Dilbert cartoon from

Selling “balloon ARMs” was motivated by greed, and the market’s insatiable appetite for these mortgage-backed securities after Greenspan lowered interest during the post-9/11 slump, and thus the return on safe Treasury Bills, to 2%.  An unintended consequence of that was that it drove investors to desperately seek out another safe investment (with better return than 2%).  Pension funds, 401k managers, mutual funds, banking chains, investment banks and even New York City’s MTA, FLOCKED to mortgage-backed securities.  Moody’s rated them AAA!!  STRONG BUY!!  And hey, if something goes wrong, the losses were insured with credit default swaps from AIG!!   Why worry?  BUY BUY BUY!  Sell even more mortgages and create more and more and more securities to sell!  People made a fortune doing this.

Problem is, the “adjusted” rates led to THIS, too many mortgages defaulting.

Around 24% of subprime ARMs were delinquent in 2006… it’s likely much worse now.  The securities held up by these mortgages collapsed, becoming the “toxic assets” that are now all over the news and causing the economy to tank.   EPIC FAIL.

Yes, the Treasury Department is going to help finance the purchase of these worthless assets (congratulations, American taxpayer!)  The plan is to pull them off Corporate America’s balance sheets to try and keep the financial sector afloat.

But I think we’ve let the greedy elite build this particular Tower of Babel so high (a lot like Yertle the Turtle) that it crashing down is completely unavoidable, and we’re essentially screwed, no matter what the government does or doesn’t do.

What goes up, must come down.


Later this week in the “Nick’s Crusade” blog: federal regulators missed an awful lot of chicanery; what happened?

Observing The Economic Crisis First Hand

Posted by – March 28, 2009

From everything I see in the media, it looks grim, like we’re deep into a Great Recession. There are bread lines of sorts forming at food banks, and charities send 18-wheelers to small towns whose sole employers have closed shop.  At the same time, states like Georgia have all but ended assistance to the poor (Georgia TANF recipients fell nearly 90 percent between January 2002 and November 2007, even as unemployment climbed 30 percent). The private health care system seems to be about over, as hospital closures force more Americans into the few public hospitals and federally-backed community health centers around, and the uninsured balloon to 86.7 million.  Meanwhile, the government is pushing a bank bailout plan that probably won’t work.

But what have you observed first hand? Is it bad where you are? How do you think the economic crisis will effect you? How do you think it will effect people with disabilities?  Will we be the first thrown under the bus, as was proposed in California?

Here’s what I’ve observed first-hand. In New York, one of the pillars of our economy is the financial sector, and it has collapsed.  The crisis has forced the state to cut services. A lot of people are upset about the state and city budget cuts; a protest at city hall 25,000-people-strong definitely made my girlfriend’s travel more interesting. At the hospital I currently live in, they are clamping down on expenses to ride out the cuts.  For fiscal year 08-09 there is a hiring freeze (which means when my favorite person on staff moved to Canada, they can’t replace her), they made it harder to get overtime, supply orders have been scaled back, the employee uniform stipend was cut to nearly nothing, and their customary free Thanksgiving turkeys were canceled (the latter two don’t bother me, as they never would’ve existed in Alabama anyway).  My doctor thinks that the South Campus ultimately won’t survive.  And the doctors and nurses are buzzing about the startling hospital closures in Queens and wondering who’s next.

Granted, I’ve not seen outside the hospital walls (and I’m eager to check out the city and report back) but so far, what I’ve seen first hand hasn’t been that bad.   Not compared to the effect of the devastating cuts that I saw first-hand in Alabama in the late ’90s and early ’00s, that actually caused deaths (when the economy was booming and services should have been increasing).   Is it bad where you are?

As odd as this sounds, I think there are possible upsides to global economic collapse.

The Upsides

With Wall Street cratering, many in the finance and related industries have left the city for higher ground, leading to an unprecedented situation: for once in Manhattan, apartment vacancies are up and rents are down.

Shopping habits have definitely shifted, the era of wanton excess being cool (that should’ve never happened) is finally behind us, and more businesses, desperate for customers, have stopped treating us like crap.  Nothing is devoid of upsides.

What have you witnessed first hand?


Providing A Soft, Pillowy Landing For Stupid CEOs?

Posted by – September 29, 2008

AP: Economists see financial bailout as necessary


It’s hardly the soup kitchen for people at the very top.

The chairman of Lehman Brothers, Richard Fuld, still has his mansion in Greenwich, CT, his oceanfront estate on Jupiter Island in FL, and his Park Avenue co-op in Manhattan.

Many at Lehman blame Fuld for dallying while his investment bank went bust, taking risks with other people’s money while he cleared over $40 million in salary and stock in the last year alone.

Fuld could not be reached for comment by 20/20, but outside the Lehman offices this week, employees took glee in telling him off in pen on a portrait of Fuld.

“He made a lot of money and he lost a lot of money,” said Fox business news anchor Alexis Glick, “and he made dramatic mistakes, mistakes of the highest magnitude.”

Glick has been highly critical of Fuld, feeling the pain in a direct way. She has many friends at Lehman and her mother worked there for years.

“It’s just unbelievably shocking,” said Glick, speaking about the devastation felt by her family and friends. “So they’re crying, they’re sick, I mean guys have been telling me they’ve been throwing up because they just can’t stomach what has happened.”

Fuld isn’t the only top executive who remains well-off despite his firm’s collapse. Former Bear Stearns CEO Alan Schwartz collected more than $38 million in salary and bonuses in the last three years for which figures are available, though he and Lehman executives also saw their net worths drastically plummet as stock values crashed. Bear Stearns was on the brink of financial ruin when JP Morgan Chase bought it in March.

Full article:
The Fall of the Gilded Age


Shouldn’t we wait until their CEO had to sell one of his three luxury homes before bailing out Lehman?

It really seems like we’re rewarding these guys instead of letting them naturally get picked clean and displaced by smarter competitors.

Obviously we do need to do something to restore confidence in our banking system. I recently overheard nurses talking about pulling their money out of banks and hiding it at home (1930s-style) for fear it’d disappear in a bank collapse. That’s how serious the problem is getting. I’m not saying do nothing. I don’t have an issue with helping out banks like IndyMac or Washington Mutual, but bailing out rich Wall Street investment firms seems a whole ‘nother animal.

The $700 Billion financial “bail out” bill seems to be all about providing a soft, pillowy landing for stupid decision-makers at taxpayer expense. They keep their three luxury homes, and we pay the price for their idiocy.

And articles like this only highlight the unfairness:

7. Do the Wall Street executives get to keep their bonuses?
The Bush Administration says it needs to encourage executives to get their cooperation, and that clamping down on their pay would only hurt their willingness to get on board. Critics in both parties say the threat of the executives’ firms going belly-up should ensure their cooperation regardless of what restrictions are placed on their once golden parachutes. Mounting pressure from constituents on Main Street is likely to mean there will be some cap on compensation associated with the bailout. But corporate America usually finds a way around such limitations, and there are even legal questions about what kind of restrictions can be placed on the firms’ compensation structures.

Full article: 7 Questions About the $700 Billion Bailout

If this disaster really requires $700 BILLION worth of government intervention, who is paying for it? My first instinct when corporations harm us, is TRUST-BUSTING! And this meltdown is a screw up of unprecedented magnitude, with harm to the public of historic proportions.

Where are the CONSEQUENCES for bad, stupid leadership?

Can anyone tell me why, as part of this bill, the Treasury Department isn’t seizing CEO yachts and mansions to pay for this debacle? Why is demanding real consequences worse than paying nearly one trillion ourselves? We’d rather foot the bill in their stead? WHY??

If these idiotic decisions by Wall Street have no real consequences, and the dumbasses responsible keep their three estates and golden parachutes, no real lessons have been learned, we’re basically incentivizing even more stupidity down the line.

And now Congress has weighed in. They are saying:

I’m not saying do nothing. But clearly we have to do something different. The original Paulson plan isn’t going to fly. We can’t afford a cushy deal for the uber-rich.


Inexorable Cycle of History?

Posted by – May 4, 2007

“What has been will be again, what has been done will be done again; there is nothing new under the sun” —
Ecclesiastes 1:9-14

I’ve been thinking about this a lot lately. Are the events shaping the U.S. just a part of an inexorable repeating cycle of history?

In the 1920s the wealth inequality grew to the point where only a select few were comfortable, and then with the drought and widespread agricultural failures (and a myriad of very debatable factors), the American economy collapsed, and there was a certain natural resetting of wealth, and then the boom years following WWII created the modern middle class.

Now since the 1990s we’re experiencing a mini-Gilded Age. The Golden 300,000 control our politics lock, stock and barrel. Robber barons seem to be back, and according to all the studies wealth inequality is worse than at any time since the 1920s, and resentment of the rich and demand for change is higher than at any time since then as well (check out this new Gallup poll).

Inequality is very bad; the prophets rail against it. Inequality caused a mob of hungry French women to storm Versailles and put two Royal bodyguards’ heads on pikes. Inequality caused the bloody railroad strikes of 1877, when state troops broke the strike with bayonets and Gatling guns.

My question is: is the consolidation of wealth until the poor can no longer afford to buy products from the tycoons (though I know it’s more complex), then economic collapse results, then we restart the cycle–is this just the unstoppable track history is on?

Given this cycle of a major economic depression every 100 yeahs or so, should we expect a collapse around the 2020s? Because of the staggering level of personal debt in this country, combined with our insane trade deficits, it doesn’t exactly take Nostradamus to predict that we’re one more straw on the camel’s back (drought, terrorism, global downturn) away from falling off the economic cliff into a major collapse.

Can we ever stop this cycle?

Other things are also so similar and seem stuck on the 100 year cycle as well. The polarization, the razor-thin (possibly stolen) elections, the money dominating politics, the imperialism defining the dawn of the 20th century is eerily similar to Bush’s that defined the beginning of the 21st.

Back then they waved the bloody shirt and shouted “Remember the Maine!” to justify the Spanish-American War (which was also expansionist and directly or indirectly to benefit corporate America).
Now politicians wave the bloody shirt and yell “Remember 9/11!” and “you haven’t learned the lessons of 9/11!” to justify our current wars.

It’s so similar. We racked up just under 3,300 KIA in the Spanish-American War too. And President McKinley may’ve been motivated by religious fervor as well. And Karl Rove cited McKinley as a model to follow.

Is this just an unstoppable cycle? Can we ever jump the tracks?


A Philadelphia Press political cartoon “Ten Thousand Miles From Tip to Tip” meaning the extension of U.S. domination (symbolized by a bald eagle) from Puerto Rico to the Philippines. The cartoon contrasts this with a map of the smaller United States of 100 years earlier in 1798.

Growing Backlash Against Inequality

Posted by – November 16, 2006

Growing Backlash Against Inequality

Jim Webb Tackles The Problem of Inequality

In my last post, I talked about how Alabama shows that the lowest taxes don’t translate into the most wealth; we are one of the poorest states and at the bottom of nearly every category, nearly third-world. The huge, largely untaxed wealth at the top doesn’t trickle down, and we’re heading toward something anathema to our founding founders: a nation of poor, ruled by a few elites.

As real wages stagnate and costs rise, more Americans are being squeezed down out of the middle class. Over the past 30 years poverty has grown and the American way of life is eroding. While Rush Limbaugh roars about how great the economy is doing, entire towns have been abandoned in the Midwest “Rust Belt,” as their manufacturing jobs were outsourced to Asia. College graduates have more debt than ever and fewer jobs than ever. Life is incredibly hard for a lot of people, and, morally, we cannot close our eyes to this. With much of the manufacturing sector liquidated and sent overseas and many communities left wondering how to eke out a living, Republican arguments about the stock market and giveaways to corporations rang hollow. Lou Dobbs has been one of the few media people talking about these issues, and has been a Howard Beale-esque voice of the growing protectionist backlash against towns without jobs and unchecked corporate misrule. In 2004, John Edwards ran on a message about American policy valuing work over unearned wealth, and the growing gap between “two Americas,” and now he is working to fight poverty through his center at the University of North Carolina. This year, many candidates won on similar message, and Jim Webb in Virginia was one of them.

He wrote a piece that lays out the arguments and statistics well and explains the problem of growing inequality better than I can.

Here is his Wall Street Journal Op-Ed:

Class Struggle
American workers have a chance to be heard.

Wednesday, November 15, 2006 12:01 a.m. EST

The most important–and unfortunately the least debated–issue in politics today is our society’s steady drift toward a class-based system, the likes of which we have not seen since the 19th century. America’s top tier has grown infinitely richer and more removed over the past 25 years. It is not unfair to say that they are literally living in a different country. Few among them send their children to public schools; fewer still send their loved ones to fight our wars. They own most of our stocks, making the stock market an unreliable indicator of the economic health of working people. The top 1% now takes in an astounding 16% of national income, up from 8% in 1980. The tax codes protect them, just as they protect corporate America, through a vast system of loopholes.

Incestuous corporate boards regularly approve compensation packages for chief executives and others that are out of logic’s range. As this newspaper has reported, the average CEO of a sizeable corporation makes more than $10 million a year, while the minimum wage for workers amounts to about $10,000 a year, and has not been raised in nearly a decade. When I graduated from college in the 1960s, the average CEO made 20 times what the average worker made. Today, that CEO makes 400 times as much.

In the age of globalization and outsourcing, and with a vast underground labor pool from illegal immigration, the average American worker is seeing a different life and a troubling future. Trickle-down economics didn’t happen. Despite the vaunted all-time highs of the stock market, wages and salaries are at all-time lows as a percentage of the national wealth. At the same time, medical costs have risen 73% in the last six years alone. Half of that increase comes from wage-earners’ pockets rather than from insurance, and 47 million Americans have no medical insurance at all.

Manufacturing jobs are disappearing. Many earned pension programs have collapsed in the wake of corporate “reorganization.” And workers’ ability to negotiate their futures has been eviscerated by the twin threats of modern corporate America: If they complain too loudly, their jobs might either be outsourced overseas or given to illegal immigrants.

This ever-widening divide is too often ignored or downplayed by its beneficiaries. A sense of entitlement has set in among elites, bordering on hubris. When I raised this issue with corporate leaders during the recent political campaign, I was met repeatedly with denials, and, from some, an overt lack of concern for those who are falling behind. A troubling arrogance is in the air among the nation’s most fortunate. Some shrug off large-scale economic and social dislocations as the inevitable byproducts of the “rough road of capitalism.” Others claim that it’s the fault of the worker or the public education system, that the average American is simply not up to the international challenge, that our education system fails us, or that our workers have become spoiled by old notions of corporate paternalism.

Still others have gone so far as to argue that these divisions are the natural results of a competitive society. Furthermore, an unspoken insinuation seems to be inundating our national debate: Certain immigrant groups have the “right genetics” and thus are natural entrants to the “overclass,” while others, as well as those who come from stock that has been here for 200 years and have not made it to the top, simply don’t possess the necessary attributes.

Most Americans reject such notions. But the true challenge is for everyone to understand that the current economic divisions in society are harmful to our future. It should be the first order of business for the new Congress to begin addressing these divisions, and to work to bring true fairness back to economic life. Workers already understand this, as they see stagnant wages and disappearing jobs.

America’s elites need to understand this reality in terms of their own self-interest. A recent survey in the Economist warned that globalization was affecting the U.S. differently than other “First World” nations, and that white-collar jobs were in as much danger as the blue-collar positions which have thus far been ravaged by outsourcing and illegal immigration. That survey then warned that “unless a solution is found to sluggish real wages and rising inequality, there is a serious risk of a protectionist backlash” in America that would take us away from what they view to be the “biggest economic stimulus in world history.”

More troubling is this: If it remains unchecked, this bifurcation of opportunities and advantages along class lines has the potential to bring a period of political unrest. Up to now, most American workers have simply been worried about their job prospects. Once they understand that there are (and were) clear alternatives to the policies that have dislocated careers and altered futures, they will demand more accountability from the leaders who have failed to protect their interests. The “Wal-Marting” of cheap consumer products brought in from places like China, and the easy money from low-interest home mortgage refinancing, have softened the blows in recent years. But the balance point is tipping in both cases, away from the consumer and away from our national interest.

The politics of the Karl Rove era were designed to distract and divide the very people who would ordinarily be rebelling against the deterioration of their way of life. Working Americans have been repeatedly seduced at the polls by emotional issues such as the predictable mantra of “God, guns, gays, abortion and the flag” while their way of life shifted ineluctably beneath their feet. But this election cycle showed an electorate that intends to hold government leaders accountable for allowing every American a fair opportunity to succeed.

With this new Congress, and heading into an important presidential election in 2008, American workers have a chance to be heard in ways that have eluded them for more than a decade. Nothing is more important for the health of our society than to grant them the validity of their concerns. And our government leaders have no greater duty than to confront the growing unfairness in this age of globalization.

Mr. Webb is the Democratic senator-elect from Virginia.