Politics, et Cetera
A publication from The Political Forum, LLC
Tuesday, April 16, 2013
They Said It:
A regime professing Sensate ideals will approve anything that increases the sum total of Sensate enjoyment; and that leads to man’s control over nature and over other men, as the means of satisfying ever-expanding needs. Of a special importance in such a state of society is the search for material objects which under the circumstances are particularly efficient in bringing satisfaction. As one of the most efficient means has always been material wealth, in a Sensate society it is the alpha and omega of comfort, of the satisfaction of all desires, of power, prestige, fame, happiness. With it everything can be bought, everything can be sold, and everything can be gratified. Therefore, it is quite comprehensible that the striving for wealth is inevitably one of the main activities of such a culture, that wealth is the standard by which almost all other values are judged, that it is , in fact, the supreme value of values.
Pitirim Sorokin, Social and Cultural Dynamics, 1957.
THE FIX IS IN.
The fix is in, gentle readers. And what is being fixed is so big, so important, so far-reaching, that it can and likely will affect every man, woman, and child in this country, and quite a few more in the other four corners of the world. We’re all being played for suckers, and you especially. You’ve been taken to the cleaners, duped, betrayed. Those whom Americans were supposed to be able to trust, who were supposed to do the right thing, to address iniquities and provide redress are, in fact, in on the game. Indeed, they’re the ones who’ve fixed it. YOU don’t stand a chance. No one, frankly, stands a chance. No one, that is, except for a fortunate few.
This is, of course, a complicated argument about a complicated con. And it has been complicated intentionally, as you shall see, for a reason, namely because those who are playing the con game want you, us, and everyone else to decide it’s not worth the effort to pay attention and therefore not worth the effort to do anything to correct. They want us to think that they are operating in our best interest, doing what they have to do, sacrificing on our behalf. But they’re not. They’re trying to get something for nothing, to leverage their power for personal gain, to ensure that they come out on top, no matter how the game ends. And they’re willing to destroy the foundations of the Republic in the process.
Longtime readers may well recall that we are fans of John Kenneth Galbraith’s short history of the pre-Great Depression markets, The Great Crash: 1929. As a general rule, we have very little use for the Canadian Keynesian. But his work on the Great Crash offers a handful of interesting observations. The first of these can be found in the book’s introduction. It describes the author’s understanding of the setting under which economic calamities generally take form and why they seem always to catch the key players unawares. To wit:
But it was plain that an increasing number of persons were coming to the conclusion – the conclusion that is the common denominator of all speculative episodes – that they were predestined by luck, an unbeatable system, divine favor, access to inside information or exceptional financial acumen to become rich without work.
Shortly thereafter, Galbraith expands on this thought:
The causes of the crash were all in the speculative orgy that preceded it. These speculative episodes have occurred at intervals throughout history, and the length of the interval is perhaps roughly related to the time that it takes for men to forget what happened before . . . No one was responsible for the Wall Street crash. No one engineered the speculation that preceded it. Both were the product of the free choice and decision of hundreds of thousands of individuals. The latter were not led to the slaughter. They were impelled to it by the seminal lunacy which has always seized people who are seized in turn with the notion that they can become very rich.
Galbraith’s point here, in both sections, is that “speculative orgies” – which is to say asset bubbles – and the crashes that inevitably follow them are rarely, if ever, caused by people intending to do harm. They are, rather, caused by people intending to do good, at least for themselves. This is, we think, a delicate yet important argument.
Obviously, capitalism thrives on enlightened self-interest, on the notion that doing well for oneself produces the beneficial side-effect of doing “good” for the markets more broadly. “Self-interest, properly understood,” – as Tocqueville put it – is the foundation both of Adam Smith’s invisible hand and of the American system in general.
The problem in the case of a bubble – and the subsequent crash – is that not everyone plays by the rules. Someone, somewhere bends the rules, changes them in the middle of the game and, in so doing, puts the entire game at risk. Someone allows enlightened self-interest and nominal greed to morph into benighted self-interest and interminable greed. As Smith and others, including Max Weber, warned, enlightened self-interest only functions as an adequate regulatory measure when capitalism exists within a proper moral framework. Outside of that framework, free markets inevitably degenerate into chaos, into a series of bubbles and crashes, from which and during which a handful prosper while the majority suffers tremendously.
Galbraith continues, of course, concluding that the markets’ protection from the rapid bubble-crash cycle generated by moral turpitude also lies in enlightened self-interest – on the part of investors, proprietors, and other suppliers of capital, all of whom have a stake in recovery and therefore have a stake in weeding out the morally questionable and their propensity for market-threatening behavior. This, you may recognize, is a passage we have quoted countless times in these pages:
In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle [described as “the inventory of undiscovered embezzlement”] increases rapidly. In depression all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks.
Good times, when money flows freely and is invested eagerly, tend to foster corruption. Hard times, by contrast, when money is tight and invested only reluctantly and carefully, tend to provide the antidote for corruption and to force the crooks into more honest pursuits.
But what happens when the money never stops flowing freely? What happens if scrutiny never increases because money never gets tight, is never invested reluctantly, and is always invested eagerly, even madly? What happens if there is never any antidote for the bubble’s corruption?
These are not, we should note, questions that we are asking for the first time. We asked them first almost five years ago in a piece about Fannie and Freddie. And how are Freddie and Fannie doing these days, you ask? Just splendidly, thanks for asking! Fannie is recording record profits, even as we speak. The Obama budget counts Fannie as a net plus by 2023. And the housing market is in full-on recovery! Hooray!
But then, why wouldn’t the housing market be in full-on recovery, given that the Fed is running the printing presses at full speed? We wonder, though, who’s borrowing in this post-crash “recovery.” Maybe USA Today has some answers:
In another sign of the housing market’s brightening outlook, more home buyers are discovering conventional loans with down payments well below the 20% or higher levels of recent years . . .
Loans with down payments between 5% and 10% accounted for almost a fifth of the conventional loan offers that lenders made on the LendingTree online exchange in the first quarter, according to LendingTree.
That’s up from just 6% of conventional loan offers in last year’s first quarter and only 1% of the offers in 2011’s first three months.
A similar trend shows up on the Zillow Mortgage Marketplace. The number of lenders quoting non-FHA loans with down payments of 5%-10% is almost double what it was two years ago, Zillow says.
Lenders generally don’t make home loans that they can’t resell to mortgage giants Fannie Mae or Freddie Mac.
While Fannie Mae will buy a loan with as little as 3% down, and Freddie Mac at 5% . . . The growth of lower-down-payment loans is also reflected in Fannie Mae’s portfolio.
In the first quarter of 2012, loans with down payments between 3% and 10% accounted for 15% of the home purchase loans owned by Fannie Mae. That rose to 18% in the third quarter, Fannie Mae says.
That’s great news, right? What could possibly go wrong?
Or are we just being silly? It’s not like the government folks are just randomly throwing money around, is it? They wouldn’t continue to throw good money after bad, encourage scams, and reward those who didn’t play by the rules the rest of us play by, would they? Even if the money they’re using is plentiful, freshly minted, and mostly imaginary? Let us check for answers with the Washington Post:
Federal housing regulators took a significant step on Wednesday toward helping borrowers who are falling behind on their mortgage payments — a move that will help more people but also introduce new risks that some homeowners could deliberately stop paying in order to become eligible for assistance.
The Federal Housing Finance Agency, which oversees mortgage finance giants Fannie Mae and Freddie Mac, announced that borrowers who are more than 90 days late on their mortgages will become automatically eligible for a modification to the terms of the home loan. The goal is to reduce monthly payments.
In the past, to be eligible for a mortgage modification, borrowers had to provide documentation they had a financial hardship. They will no longer be required to do so.
Oh. Well . . . we stand corrected.
We’ve never been particularly big fans of John Edwards, the former Senator from North Carolina and erstwhile porn star, but years ago, when he was running for president and trying to sleep his way to the top, he used to prattle on endlessly about how there were “two Americas.” As it turns out, he was almost right. At the time he made his pronouncements, of course, he was just full of it. But in the years since, he’s proven mostly prophetic. Why just “mostly”? Because he miscounted. There are actually THREE America’s: America for the average Americans; America for rich and connected Americans; and America for those who don’t believe that the rules should apply to them.
This first America, of course is not doing so hot. Indeed, one could say that it’s actually doing very poorly, worse than it has in decades. A sample, from Stuart Steve of Newsweek/The Daily Beast, (who also, by the way, mentioned John Edwards and his “two Americas” theme):
Today, 21 and a half million Americans are unemployed or underemployed—about twice as many as six years ago, according to NPR. Work-force participation, a fancy term for the number of Americans either working or looking for work, has dropped to “the lowest level since the malaise of the late 1970’s,” an era when far fewer women were working, according to MSNBC.
Yes, the unemployment rate dropped last month—but only because so many people simply gave up looking for work. The dirty little secret is that after only four weeks of not looking for a job, an unemployed worker stops being counted. So far as the jobless numbers are concerned, that person ceases to exist. But, of course, they do exist and continue to be counted in other, troubling statistics:
More than 16 million Americans have been added to the food stamps rolls since Barack Obama was first elected—a 46 percent increase and greater than the population of Ohio. More than 50 million Americans now live in poverty. That’s one in six Americans, and one in five American children.
As for the second America – the one that most of you and us inhabit – things are going pretty damn well. The Dow hits a few intraday highs here; the S&P hits a few all-time highs there. Money is dirt cheap, which is to say that Fed is doing its part. New millionaires and billionaires are minted every week, it seems. The boom times are back, ladies and gentlemen! How could life possibly be any better?
Well . . . you could be in the third America, which is like the second America in many ways – employed, educated, and making money – but which is distinguished by the fact that it doesn’t believe it has to play by the rules.
The crowd that comprises this “third America” is relatively small, but it possesses power that vastly belies its size. Members of this group have the power to oversee Fannie and Freddie, even as their partners get rich at the former of the two. They have the power to regulate banks, even as they get sweetheart mortgages and make out like bandits on investment tips. They have the power to do almost anything they like. And quite often, they do.
Nearly two years ago, in a piece on this third America, we ran through just a brief list of the most powerful and most recognizable members of this third class, mentioning some of the richest men and women never to have worked a real job. We wrote:
The level and volume of corruption in Washington are simply monstrous – immeasurable even. What we have in the country at this time is a small, entrenched political class that seeks very little other than its own comfort. As we noted last week, Newt Gingrich, now the marginal frontrunner for the GOP presidential nomination, came to Washington as a man of very modest means. He hasn’t left yet, of course, and may never leave. But certainly he has turned himself into a very rich man. Look at Bill and Hillary Clinton as well. They came to Washington never having owned a private residence and so frugal (with their own money, natch) that they took tax deductions for the donation of used underwear. (Our apologies, if you happened just to have eaten, for mentioning Bill and Hill’s skivvies.) Harry Reid? Rich now. Barney Frank? Rich now. John Kerry? Yikes. Richer than rich. And so it goes.
In that same piece, we quoted a variety of sources on the subject of “insider trading” by members of our exalted ruling class. The picture we (and they) painted was none too flattering, to put it mildly. Consider, for example, the following, which comes from Nancy Pelosi’s hometown newspaper, The San Francisco Chronicle, and which summarizes an interview with Pelosi and her Republican counterpart, Speaker of the House John Boehner, by Steve Croft of 60 Minutes:
House Minority Leader Nancy Pelosi is the subject of a report on the stock investments of members of Congress that is to air Sunday on CBS’ “60 Minutes.” . . .
The San Francisco Democrat and House Speaker John Boehner, R-Ohio, were questioned separately at their weekly news conferences Nov. 3 by reporter Steve Kroft. Neither had granted Kroft’s previous requests for interviews.
CBS’s Steve] Kroft asked both leaders about stock transactions they made while Congress was considering legislation that could affect the ﬁnancial and insurance industries. Pelosi and Boehner vigorously denied any connection. Laws against insider trading – making stock bets based on information the public doesn’t have – do not apply to Congress. Studies have shown that stock portfolios on Capitol Hill outperform the market. Legislation that would ban insider trading by members and staffers has languished.
Kroft asked Pelosi why she and her investor husband, Paul Pelosi, bought an initial public offering of stock in Visa, the San Francisco-based credit card company, in March of 2008. The same month, former House Judiciary Committee Chairman John Conyers, D-Mich., introduced the Credit Card Fair Fee Act, which would have given merchants the power to negotiate lower fees with credit card companies. The bill, hostile to the credit card industry, was passed by the committee but never brought to the ﬂoor. Pelosi was speaker at the time, and controlled which legislation came to a vote.
We continued with a brief bit by Peter Schweizer, a research fellow at Stanford University’s Hoover Institution, whose then-new book, Throw Them All Out: How Politicians and Their Friends Get Rich Off Insider Stock Tips, Land Deals, and Cronyism That Would Send the Rest of Us to Prison, was the impetus for Kroft’s CBS interview. Schweizer wanted no one to make the mistake of presuming that this type of corruption is limited only to the legislative branch of government, noting that the executive branch, with its vast, unchecked powers, is likely far shadier and far more successful in “spreading the wealth around” than the comparative pikers over on Capitol Hill. We quoted Schweizer as follows:
It would take an entire book to analyze every single grant and government backed loan doled out since Barack Obama became president. But an examination of grants and guaranteed loans offered by just one stimulus program run by the Department of Energy, for alternative-energy projects, is stunning. The so-called 1705 Loan Guarantee Program and the 1603 Grant Program channeled billions of dollars to all sorts of energy companies. The grants were earmarked for alternative-fuel and green-power projects, so it would not be a surprise to learn that those industries were led by liberals. Furthermore, these were highly competitive grant and loan programs—not usually a hallmark of cronyism. Often fewer than 10 percent of applicants were deemed worthy.
Nevertheless, a large proportion of the winners were companies with Obama campaign connections. Indeed, at least 10 members of Obama’s ﬁnance committee and more than a dozen of his campaign bundlers were big winners in getting your money. At the same time, several politicians who supported Obama managed to strike gold by launching alternative-energy companies and obtaining grants. How much did they get? According to the Department of Energy’s own numbers . . . a lot. In the 1705 government-backed-loan program, for example, $16.4 billion of the $20.5 billion in loans granted as of Sept. 15 went to companies either run by or primarily owned by Obama ﬁnancial backers—individuals who were bundlers, members of Obama’s National Finance Committee, or large donors to the Democratic Party. The grant and guaranteed-loan recipients were early backers of Obama before he ran for president, people who continued to give to his campaigns and exclusively to the Democratic Party in the years leading up to 2008. Their political largesse is probably the best investment they ever made in alternative energy. It brought them returns many times over.
Now, as we noted then (and in a previous piece), the one thing that could mitigate the corruption in Washington was the “Stop Trading on Congressional Knowledge Act,” also known as the STOCK ACT, which would prevent both Members of Congress and employees of Congress from trading on inside information gained during the performance of their official duties. The law had been introduced several times in Congress, but never gained much traction.
Well, lo and behold, Schweizer’s book cranked up the pressure, which led to the STOCK Act getting the attention it deserved. The Act was passed overwhelmingly by both houses of Congress last Spring and was signed into law by President Obama just over a year ago. And that, as they say, was that. As of last April, Congressional insider trading became a thing of the past. Right?
Wrong. To paraphrase Joseph Conrad: the Stock Act – it dead. As The Financial Times noted over the weekend:
The US Congress has severely scaled back the Stock Act, the law to stop lawmakers and their staff from trading on insider information, in under-the-radar votes that have been sharply criticised by advocates of political transparency.
The changes mean Congressional and White House staff members will not have to post details of their shareholdings online. They will also make online filing optional for the president, vice president, members of Congress and congressional candidates.
The Senate passed the changes with no debate, and only on a voice vote, late on Thursday night after many senators had left the Capitol for the weekend. The House followed with a voice vote on Friday.
The changes are now set to be signed into law by President Barack Obama.
Those changes were, in fact, signed into law by President Barack Obama yesterday. (No point in wasting time, is there?) The Sunlight Foundation, a non-partisan, non-profit government watchdog, explained what the changes, which is to say the NEW LAW, mean and how they will work to undermine the intent of the original law:
The bill enacted last year would require already public financial disclosures of senior congressional and executive branch officials to be put online in order to prevent or root out insider trading . . . Rather than craft narrow exemptions, or even delay implementation until proper protections could be created, the Senate decided instead to exclude legislative and executive staffers from the online disclosure requirements.
The sweeping exemption goes even farther than critics of the disclosure requirements requested. For those to whom online disclosure would still apply (the president, vice president, members of Congress, congressional candidates and individuals subject to Senate confirmation) the Senate bill made electronic filing of the information optional and struck the requirement that online information be searchable, sortable and downloadable, making even the disclosures that remain in the bill tepid and relatively unusable.
Not only does the change undermine the intent of the original bill to ensure government insiders are not profiting from non-public information (if anyone thinks high level congressional staffers don’t have as much or more insider information than their bosses, they should spend some time on Capitol Hill) but it sets an extraordinarily dangerous precedent suggesting that any risks stem not from information being public but from public information being online.
Sigh. Yeah, the “risk” here is from people having access to their representatives’ information, not from said representatives being able to do whatever the hell they want without it ever being discovered, much less anybody doing anything about it.
As you likely know, two weeks ago, the Fed “screwed up,” accidentally and selectively releasing the minutes of its last policy meeting 19 hours ahead of scheduled public release. You likely also know that this early release landed in the inboxes of some of the representatives of some the country’s biggest banks and investment groups, including Goldman, Barclays, Citigroup, Wells Fargo, UBS, and the Carlyle Group. The Wall Street Journal assures us that “there has been no obvious sign of early trading on the Fed’s minutes,” and that “A number of people at the banks and investment firms who received the release said they hadn’t noticed it until after it had been discovered by the Fed.” The paper also quoted Michael Feroli, chief U.S. economist at J.P. Morgan, who said “he heard no chatter in the markets about an early release of the minutes Tuesday.” Well, that’s a relief.
Of course, that doesn’t tell us a thing about the other recipients of the early release, a handful of Congressional staffers. What did they do with the information? What could they have done if the info had been a little juicier? And more to the point, what could anyone have done to stop them?
The answer to the first question is “nobody knows.” The answer to the second is “anything they damn well pleased.” And the answer to the third, of course, is “not a damned thing,” especially after the President’s signing ceremony yesterday. Anybody on the Hill and, frankly, throughout Washington, can do whatever he or she wants with inside information or pre-released information or . . . well . . . whatever. There’s nothing stopping any of these people. And they can AND DO get rich because of it.
You ever wonder why no one on Capitol Hill, save the whacky father-and-son team of Ron and Rand Paul, ever suggest that the Congress should exercise some oversight and perhaps try to rein in the Fed and its ability to target specific asset classes like securities or housing? You ever wonder why no one on Capitol Hill ever gets serious about cutting the budget or, at least, stopping the growth in federal corporate welfare? You ever wonder why the people who supposedly “run” this country are perfectly content to fight about guns and gay marriage and immigration, even as the majority of Americans continue to suffer through this “recovery” and even as the Fed pumps up asset bubble after asset bubble?
Three years ago, Stephen Bainbridge, a professor at the UCLA Law School, presented a paper on Washington’s insider trading and on the problems it creates for the broader economy. Bainbridge noted that the first problem created by Congress’s exemption is, obviously, one of fairness. They – anyone on the Hill – can trade on inside information, on information that would send lesser men to jail.
Would the SEC have come down hard on the Goldmans and Barclays of the world if they had traded on the Fed’s minutes flub? Probably not, though the “proper authorities” would have investigated for sure. And if something similar had been passed on by a private company, rather than a public entity, officials would have been crawling down the throats of everyone involved – everyone, that is, except Congressional staffers and their bosses. They can do things no one else can, with no repercussions whatsoever.
The second problem with Washington insider trading, according to Bainbridge, is the one we just detailed above, the creation of what the good professor calls “perverse incentives.” In short, Members of Congress are, to some or another extent, drawn to policy issues and solutions not simply because they pique their personal interests but because they can promote their ﬁnancial interests as well. Or as Bainbridge put it:
Congressional insider trading thus is undesirable, in the ﬁrst instance, because it creates incentives for members and staffers to steal proprietary information for personal gain. The massive increase in federal involvement in ﬁnancial markets and corporate governance as a result of the ﬁnancial crisis of 2008 has made opportunities to steal such information even more widely available to government ofﬁcials. Second, it gives members and staffers incentives to game the legislative process so as to maximize personal trading proﬁts. Third, inside information can be utilized as a pay-off device. Fourth, it gives members and staffers incentives to help or hurt ﬁrms, which distorts market competition.
All of this, of course, has been well known for years. Obviously, this is why so many people pushed for so long and so hard to see the STOCK Act become law. And just as obviously, this is why the Congress and President of the United States quietly and furtively overturned most of the STOCK Act just this past week. What point is there in being a big-shot Washington hero, if you can’t make a little cash on the side? And what risk is it to the country if you do?
As we noted at the top of this piece, the likes of Adam Smith and especially John Kenneth Galbraith have already given us the answers to these questions, not that anyone bothered to tell the denizens of this “third America.”
We could go on, we’re afraid. And maybe we will at some point. There’s a great article by Noam Schieber in the new issue of The New Republic documenting the big paydays that former Obama officials are finding as they move to the private sector and provide assistance and “expertise” to companies who are looking for advantages in the rent-seeking game. Perhaps we’ll revisit this subject from that perspective in the near future.
For the time being, though, we think you get the picture.
In his Wealth of Nations, Adam Smith famously wrote that “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” This tendency to conspire against the public, unfortunately, does not exempt the “trade” of politics. And when 535 people of that trade meet together, their conversation inevitably turns to kicking the rest of us in the teeth. And so they do.
Do they do so out of enlightened self-interest? We’d argue that they don’t, largely because they feel the need, when they conspire, to bend the rules to suit their purposes. And their purposes are hardly those that the Founders would have envisioned. Once upon a time, there were checks on the power of these 535, and on their counterparts in the executive branch. The modern administrative state, however, has rendered these checks rather ineffectual, meaning that the whole damn crowd of them now may be considered conspirators and not of the sort with benevolent intentions.
What we have then, in the end, is a political class – a “third America” – that genuinely believes that it can and should get rich, despite not producing any labor or product that would justify its wealth. Fortunately, the other two Americas produce enough to compensate for their deficiency. And what isn’t produced can be borrowed. The political class wants wealth without having to earn it. And there is still ample capital around to provide that wealth. In short, the bezzle continues to grow.
And if John Kenneth Galbraith is to be believed, that means only one thing: the real great crash of our time is still yet to come. The fix, as we said, is in.