Killer Politics (5 page)

Pillar #2: Establish a Sound Fiscal Policy

When, in the final days of his administration, President George W. Bush called on Congress to approve TARP (the Troubled Asset Relief Program), the elephantine $700 billion fund to steady the financial sector, I
supported the bill. My gut and Senator Kent Conrad (D-ND) both told me that if we didn't rescue the banks from their own bad behavior, it would be catastrophic, affecting
everyone,
at every economic level.

Conrad put it this way: “The patient was on the table, we had to do something and fast.” He acknowledged it was one of those deals where you operate with one hand and hold your nose with the other. When we secured all that bad debt, we
privatized
the profits of investment banks (the banks get to keep the profits) and
socialized
the losses (the American people get the losses).

An awful lot of true conservatives thought that we ought to let the banks go broke. As a former Republican and a guy who still likes a balanced checkbook, I was torn. But my instincts told me that the cost of bailing out these turkeys was less than letting them drag everyone else down, too. As it has played out, it seems these measures did save us from a far worse global meltdown.

However, Wall Street emerged as clueless and tone deaf as ever, lavishing extravagant pay on executives with government bailout money. The backlash hurt Democrats, and ironically so did efforts to oversee executive pay, which were seen as socialistic.

We were living in a pump-and-dump balloon economy, in which stocks and real estate are overvalued (and the crooks who set it up get out fast, just before a crash). And the dust hasn't settled yet. Plenty of smart people warned against rampant speculation in the housing market, and a whole lot of other smart people took advantage of it while the getting was good.

If you proposed the mortgage business model that American bankers were using before 2008 to any sane society, the people would either arrest you or drag you in for psychoanalysis. But here mortgage lenders earned
bonuses
for processing loans with escalating payments to people who could not afford the homes they were buying. (How is that not a crime?) In the days of old-fashioned banking, a banker was very motivated to do due diligence on his customers, because the bank's money was on the line. For
the bank to survive, most of the loans had to be good. But under the rules of the game that created this recent debacle, lenders were able to make these bad loans, bundle them with others, and sell them with a bogus Triple A rating to investors.

And what agency in its right mind would rate these toxic assets Triple A? Oh, enablers like Moody's, Standard & Poor's, and Fitch, all of which profited immensely from this ratings charade. Meanwhile, banks no longer had to wait thirty years to profit from a mortgage. They got a quick, clean score, and passed the bad loan off down the line like a hot potato. With the quick return on their investment, banks were eager to make even more bad loans. By 2006, there were $2.5 trillion in mortgages floating around Wall Street, and no one could tell the good from the bad because, hell, they all had the gold seal of approval from rating institutions. The rating institutions “made the market. Nobody would have been able to sell these bonds without the ratings,” Ohio attorney general Marc Dann told Jesse Eisinger for a piece in
Portfolio
magazine.

These false mortage ratings drove up real estate buying and artificially increased home values, so Americans did what they foolishly had been told was acceptable—they used the roof over their heads as collateral for more loans and for unsustainable consumer spending. Dumb. Instead of treating our homes as sanctuaries, we treated them as banks. There was greed on Wall Street and naïveté and ignorance in the suburbs.

This is the bad behavior we bailed out. You bet it was a tough pill to swallow. But my hope is that eventually, the market will recover and the American taxpayer will see a profit from the resale of these “toxic assets.” I expect this recovery to be a measured one because there will be less consumer spending—the American consumer can't or won't go further into personal debt to bail out the economy this time—and in some respects that's actually good news because the result of this fiasco is that Americans have begun to reduce personal debt and save more. However, to keep the economy from stalling, the Obama administration was forced to do what FDR did: spend stimulus money. It's another bitter pill
to swallow for a guy like me who hates too much debt, but I recognize that the cure is marginally less painful than the ailment.

Here's what is exasperating, though. George W. Bush ran up the debt to nosebleed levels. It really galls me to hear how Bush and Cheney made us safer! They left us with our asses hanging out in the wind is what they did. You can't have a strong country without a strong economy. They left us broke down and busted, critically weakened. They may as well have used all that red ink to paint a target on our backs. Bush and Cheney left Obama with no recourse other than to spend more to keep our economy moving. That is exactly what respected economists say must be done, even when deficit spending and lagging tax receipts have the country facing a trillion-dollar budget deficit for the first time in history.

Mark Thoma, an economist at the University of Oregon, expresses a common view on his personal website: “The question of how bad would economic conditions be right now if there had been no stimulus package and no financial bailout is receiving considerable attention. There's no way to know for sure, but I believe the economy would have been much worse off without these two policy interventions.”

I also agree with President Obama that we have to trim programs where we can as a matter of
efficiency,
a word not often mentioned in the same sentence as
government.
When it comes to social safety net programs, we must have a renewed, transparent effort to root out abuse and corruption. It's not so much that all conservatives aren't willing to lend a hand to those truly in need, it's that they pessimistically believe there are too many freeloaders. I agree. There probably are, but you don't want to throw the baby out with the bathwater. What's important is that we reassure the American taxpayer that our government is working hard to expose the cheaters in our social programs. And to do that, let's use the same attitudes and standards when we examine corporate welfare.

As for those Wall Street leeches we bailed out? Damn right we have a right to oversee executive pay. Stephen Lerner, of the Service Employees International Union, was quoted in
Newsweek
after Goldman Sachs
announced record bonuses less than a year after being bailed out by taxpayer dollars: “It's a combination of absurd and obscene that the same guys who crashed the economy…are now giving themselves even bigger bonuses.” In June 2009, Obama appointed an executive pay czar, Kenneth Feinberg, and gave him the authority to set the pay scale for executives at any company receiving government money. Some moaned about the constitutionality of the Feinberg appointment. But I think it is a reasonable strategy. Should we regulate the pay in other businesses? Of course not. What Obama is doing is simply providing oversight of a taxpayer investment, and the American people are behind him.

This is nowhere near as radical (or socialistic) as what Nixon did when he
twice
implemented national price and wage freezes in an attempt to address inflation. Nixon's strategy failed miserably, and Jimmy Carter and Fed chairman Paul Volcker were forced to address the problem with high interest rates—which cost Carter the election against Ronald Reagan. It could be déjà vu all over again. A Democrat has been left to clean up the Republican mess and take the blame from a voting public with a ridiculously short memory.

UNFAIR TRADE DEALS UNDERMINED AMERICA

So greedy banks leave our economy unsound. And bad trade deals do, too. Back when the world was a bigger place, before lopsided trade agreements began flooding our shelves with foreign-made goods, unions helped organize workers, leading to fair wages and better working conditions. America bloomed.

Now we are witness to wilting American cities. The steady attack from overseas weakened, then destroyed, industry after industry. As consumers, we have benefited, but in many ways we have sold our soul to Walmart.

As it expands its dominance as the world's largest retailer, Walmart continues to squeeze every penny of profit out of each sale, forcing manu
facturers to move factories to countries with cheap labor (and few labor or environmental standards) or die. Any U.S. factory hoping to compete must keep wages as low as possible. Meanwhile at home, to keep the competitive edge, Walmart seems to pay the lowest wages possible.

As long as you have a good job and can buy cheap goods, it's great. But, industry by industry, sector by sector, we are losing good jobs to China and India and Mexico in a race to the bottom line. When your number is up, things aren't so rosy, other than the color of the pink slip.

Many economists were shocked to see unemployment approach double digits in the summer of 2009, but I wasn't. For years, as I listened to my callers and traveled from city to city, I could see this coming. Good grief, unemployment in Detroit was pushing 30 percent in 2009, even as China officially became the world's largest auto market. What are the chances China will allow Detroit the same access to its marketplace that we allowed foreign car manufacturers in America?

One thing we have to do is to massage unfair trade agreements so that they become “more fair.” I've long exhausted hopes of
exact
fairness. I'm fine with cutting some Third World countries a little slack in trade deals to help lift them up, but we don't need to grant favors to countries like China, countries that have feasted on whole American industries. It's like Nadal and Federer at Wimbledon—Federer doesn't need to spot Nadal any points at this stage of the game.

In reworking these trade agreements with China, India, Mexico, Japan, South Korea, and others, we have to make changes in ways that don't shock their economies too hard. But we do need to recognize that those economies have matured and should be able to compete straight-up sooner rather than later.

It is unlikely, in my view, anyway, that the U.S. economy will be as dynamic as China's or India's in the coming years. Here's why: As our economy boomed in the last century, the nation quite rightfully began to take on some legacy costs. We have slowly made progress with social programs to make sure that the very lowest on the economic ladder have
some safety net. But we have not administrated wisely. As a nation we have not had the stomach to run these programs leaner or to fund them properly. Medicare, Medicaid, Social Security—these are good things, but with the baby boomers retiring, there is not nearly enough in the bank to fund those programs. And in addition, we need to move forward with health care reform. These are moral obligations—the things that must be done even though they are hard.

Economies tend to mature and level out with modest, predictable growth until the next technical innovation creates another spurt. Our rate of consumption when measured by our income as a nation is not sustainable. And we have to ask ourselves, Is the growth rate of our population—largely through immigration—sustainable?

As a nation we have to get these variables under control as best we can. I believe our economy will be less volatile in the future and might come to resemble those in Europe, with steady—not dramatic, but predictable—growth.

Meanwhile, we'll see China and India, and perhaps some other surprise players, make strong economic runs in the years ahead. There is great potential in South America, especially Brazil. If these nations are wise, they will apply some of their increasing largess to creating the social safety nets for their citizens that will decrease the distance between the top and bottom rungs of the economic ladder and lead to social order, which will lead to stability and peace.

THE IMPORTANCE OF UNIONS

On the home front, we need reenergized unions. I know, there are plenty of past negatives to overcome, but the principle is sound. If laborers are going to be treated like a commodity, they need to be organized. But I'd like to see a model in which union workers have real ownership and the prospect of substantial fiscal reward in years when the company is successful. A mistake some union negotiators made in the past was that
while they were able to negotiate favorable contracts for the union workers, they burdened corporations with unsustainable legacy costs. However, with “skin in the game,” unions would be much more willing to work for the success of the company and not just the success of the next labor agreement. It's the basic rule of capitalism.
Incentive.

With outsourcing, the legs have been cut from underneath labor unions. Corporations just walked away from the negotiating table and took their companies with them—to China. We see what that has done to the country and to the workingman. Nobody wins. Wages have stagnated for the common working man and woman, while the rich are getting richer and richer.

From 2000 to 2007, according to the U.S. Census, median household income fell 0.6 percent and poverty inched up to 12.5 percent, all during an otherwise robust economy. In short, the average worker was seeing a steadily decreasing slice of the pie, even before the Great Recession.

The American worker will not regain any sort of upward economic traction without organizing, without a fight. Post-Reagan and post–Bushes I and II, the anti-worker voices in our country are still loud and getting louder. In December 2009, Fox News anchor Juliet Huddy argued on the air that to solve unemployment the American worker just had to work cheaper. She wasn't talking about Wall Street executives. “One school of thought says lowering the minimum wage will actually create more jobs,” she said.