The Society of the Owned

The Society of the Owned: Renters Owned

Terrance Heath — Wed, 16 Jul 2008 11:36:23 -0400

In a post-9/11 America that no longer "does" irony — or nuance, for that matter — it's not surprising that one of the significant ironies of the George W. Bush era went largely unnoticed. Six years after declaring the dawn of an "ownership society," intended to create more homeowners (who would theoretically support conservative economic policies), and in the same month that president Bush declared National Home Ownership Month we learned that increases in home ownership have been erased — particularly among minorities — as a direct result of conservative economic policy.

Driven largely by the surge in foreclosures and an unsettled housing market, Americans are renting apartments and houses at the highest level since President Bush started a campaign to expand homeownership in 2002.

The percentage of households headed by homeowners, which soared to a record 69.1 percent in 2005, fell to 67.8 percent this year, the sharpest decline in 20 years, according to census data through the end of March. By extension, the percentage of households headed by renters increased to 32.2 percent, from 30.9 percent.

The figures, while seemingly modest, reflect a significant shift in national housing trends, housing analysts say, with the notable gains in homeownership achieved under Mr. Bush all but vanishing over the last two years.

…The confluence of factors has largely derailed what Mr. Bush called "the ownership society," his campaign to give millions of people — particularly minority and lower-income families — a shot at homeownership by encouraging lenders to finance more home purchases.

"We're not going to see homeownership rates like that for a generation," said Mark Zandi, the chief economist at Moody's Economy.com, a research company.

(We'll address the full impact of the subprime mortgage debacle on minorities a bit later in this series.)

Plainly put, policies that were supposed to create more stakeholders in the U.S. economy have actually pushed more people to its margins, and many out of it entirely. Whether that was the intention probably depends on who you ask. But it raises some important questions, one of which was recently posed by New York Times columnist Paul Krugman.

“Owning a home lies at the heart of the American dream.” So declared President Bush in 2002, introducing his “Homeownership Challenge” — a set of policy initiatives that were supposed to sharply increase homeownership, especially for minority groups.

Oops. While homeownership rose as the housing bubble inflated, temporarily giving Mr. Bush something to boast about, it plunged — especially for African-Americans — when the bubble popped. Today, the percentage of American families owning their own homes is no higher than it was six years ago, and it’s a good bet that by the time Mr. Bush leaves the White House homeownership will be lower than it was when he moved in.

But here’s a question rarely asked, at least in Washington: Why should ever-increasing homeownership be a policy goal? How many people should own homes, anyway?

Deeper into a relatively short column, in which length is no reflection of depth, Krugman questions the very gospel of what Dean Baker terms the homeownership ideologues.

But there is one group that still needs to be singled out for their role in bringing about this disaster: The ideologues of homeownership. These are the folks who push the ideology of homeownership as an end itself. They insist on lavish government subsidies, even in situations where homeownership is not a good solution for the people affected.

To be clear, homeownership is often desirable. It can be a mechanism for providing good secure housing and, also, for accumulating wealth. It is, therefore, reasonable to have policies like a limited mortgage interest deduction or credit that make it easier for low- and middle-income people to become homeowners.

However, homeownership should not be viewed as an end in itself. One of the reasons millions of families face foreclosure and/or the loss of their life's savings is the ideologues of homeownership continued to promote homeownership even when it was clear buying a home would be financially detrimental.

There are indeed risks inherent in home ownership, as both Krugman and Baker point out, but not all of those risks are simply part of the "nature of the beast." Some of them were, to borrow a phrase from another conservative movement, intelligently designed. That intelligently designed reality, however, wasn't and could never be compatible with the essential core of the home ownership gospel.

For many minority and lower-income families who viewed homeownership as a stepping stone to building wealth and passing it on to their children, the transition from owning to renting has been the unraveling of a dream. Burdened now by debt and bad credit, some of these families are worse off than they were before they bought.

“The bloom is off of homeownership,” said William C. Apgar, a senior scholar at the Joint Center for Housing Studies at Harvard University who ran the Federal Housing Administration from 1997 to 2001. “We’re seeing more dramatic growth in renters and a decline in the number of owners. People are beginning to understand that homeownership can be a very risky venture.”

The bloom is off homeownership, alright; pruned, plucked, or wilted as a direct result of the policies that drove not just the subprime mortgage disaster, but various other aspects of our economy to a point where homeownership — risky as it is — became almost the only way to build wealth.

But how does one "create wealth" when the price of just about everything has gone up. Health care is cutting into already stagnant wages. (Even the Federal Reserve chairman has declared health care — health care costs specifically — to be our biggest economic challenge.) the cost of gas is driving up prices of fuel-related and fuel-dependent goods. In other words, almost all of them. The prices of milk and bread, for example, were up 14.7% and 13.3%, respectively, in April. Meanwhile, low- and middle-income families face utility costs that have increased by 40% in the past year, forcing some to between keeping the lights on and keeping food or the table, buying the medicines they need, and changing plans for their or their children's education. Gas prices alone are causing some families to move closer to work and shopping.

Here is another disadvantage of homeownership: it's renters who are moving, because it's easier to break a lease than it is to sell a house. That may be the only advantage renters enjoy, however. Though some "angry renters" — like those backed by Dick Armey's organzation, FreedomWorks — are railing against the foreclosure relief bill that now appears to be stalled in Congress, the subprime debacle and its wave of foreclosures have put renters is a tight spot as well. It turns our renters aren't immune to foreclosure. Responsible renters get eviction notices when their landlords end up in foreclosure.

Charles Nelson has paid about $30,000 in rent since moving into a spacious four-bedroom home in August. He was stunned when a real estate agent knocked on his door recently and said the home was in foreclosure.

His landlord had not paid the mortgage since he moved in and the bank is now demanding the house back. Nelson will also lose his $7,700 security deposit.

When he confronted the landlord, he says, he was given a terse response: "That's none of your business."

"I said, 'I beg your pardon. It is my business. I mean, is somebody going to knock at the door and throw me out -- throw my family out, or what?' " he said.

…More than 100 miles away in the working-class city of Palmdale, Fai Nomaaea -- a 35-year-old mother of eight -- can relate. The single mom was cleaning the yard when a man handed her a notice of foreclosure. Like Nelson, she had been paying her rent on time every month.

She now lives in fear every day.

"I don't know what's going to happen the next day," she said. "I don't know if they're going to come to the door and tell us that we have to move, and I don't have anywhere to go."

For Nomaaea, getting booted from the home presents another hardship: She lives on a fixed income and can afford about $1,200 a month in rent. It also means finding a new school for her children.

The ripple effect goes much further than a single eviction notice, of course.

The rise in foreclosures isn't just affecting homeowners, it's also putting pressure on renters, according to a report released Wednesday by the Joint Center for Housing Studies at Harvard University.

For one, the uptick in foreclosures is prompting more households to compete for low-cost rentals. Also significant is the number of renters who face sudden eviction when properties they're living in are foreclosed on, the report found.

…The number of renter households rose by nearly one million last year, which is more than four times the pace of renter growth between 2003 and 2006, according to the center's report, "America's Rental Housing: The Key to a Balanced National Policy." The U.S. median monthly gross rent reached a record high of $775 last year. Read the report.

Plus, the turmoil in the credit markets has raised the cost of financing rental-housing construction and preservation, causing completions of multifamily units to fall to 169,000 -- two-thirds of the number seen in 2002, according to the report.

In some areas, a "perfect storm" has hit the rental market. Foreclosures simultaneously increase the demand for rentals when homeowners and renters evicted from foreclosed properties enter the market, and reduce supply as rental properties are foreclosed. For renters, that means more difficulty finding vacant units and higher rents for those that are available. In places communities caught between the pincers of joblessness and foreclosures, it means more people are living in their cars.

Having lost her job and her three-bedroom house, Darlene Knoll has joined the legions of downwardly mobile who are four wheels away from homelessness.

She is living out of her shabby 1978 RV, and every night she has to look for a place to park where she won't get hassled by the cops or insulted by residents.

"I'm not a piece of trash," the former home health-care aide said as she stroked one of five dogs in her cramped quarters parked in the waterfront community of Marina del Rey.

Amid the foreclosure crisis and the shaky economy, some California cities are seeing an increase in the number of people living out of their cars, vans or RVs.

It means cities are now providing services such as parking lots reserved for homeless people, living in their cars.

Barbara Harvey climbs into the back of her small Honda sport utility vehicle and snuggles with her two golden retrievers, her head nestled on a pillow propped against the driver's seat.

A former loan processor, the 67-year-old mother of three grown children said she never thought she'd spend her golden years sleeping in her car in a parking lot.

"This is my bed, my dogs," she said. "This is my life in this car right now."

Harvey was forced into homelessness this year after being laid off. She said that three-quarters of her income went to paying rent in Santa Barbara, where the median house in the scenic oceanfront city costs more than $1 million. She lost her condo two months ago and had little savings as backup.

...There are 12 parking lots across Santa Barbara that have been set up to accommodate the growing middle-class homelessness. These lots are believed to be part of the first program of its kind in the United States, according to organizers.

The lots open at 7 p.m. and close at 7 a.m. and are run by New Beginnings Counseling Center, a homeless outreach organization.

It is illegal for people in California to sleep in their cars on streets. New Beginnings worked with the city to allow the parking lots as a safe place for the homeless to sleep in their vehicles without being harassed by people on the streets or ticketed by police.

Renters have reason to be angry, though not because of the possibility that some homeowners — perhaps some of their landlords — might avoid foreclosure if the government steps in, but because — as Krugman points out — while homeownership has been an article of faith, renting has been treated more as kind of agnosticism, if not heresy.

Listening to politicians, you’d think that every family should own its home — in fact, that you’re not a real American unless you’re a homeowner. “If you own something,” Mr. Bush once declared, “you have a vital stake in the future of our country.” Presumably, then, citizens who live in rented housing, and therefore lack that “vital stake,” can’t be properly patriotic. Bring back property qualifications for voting!

Even Democrats seem to share the sense that Americans who don’t own houses are second-class citizens. Early last year, just as the mortgage meltdown was beginning, Austan Goolsbee, a University of Chicago economist who is one of Barack Obama’s top advisers, warned against a crackdown on subprime lending. “For be it ever so humble,” he wrote, “there really is no place like home, even if it does come with a balloon payment mortgage.”

And the belief that you’re nothing if you don’t own a home is reflected in U.S. policy. Because the I.R.S. lets you deduct mortgage interest from your taxable income but doesn’t let you deduct rent, the federal tax system provides an enormous subsidy to owner-occupied housing. On top of that, government-sponsored enterprises — Fannie Mae, Freddie Mac and the Federal Home Loan Banks — provide cheap financing for home buyers; investors who want to provide rental housing are on their own.

And Dean Baker points out that the current foreclosure relief bill — the one all-but-written by the banking lobby, and that's now stalled in the house — will not only leave many of the homeowners it's supposed to help vulnerable to second foreclosure, but will essentially be paid for by renters. Kind of like a rent party in reverse.

It would be possible to prevent this problem by restricting the guarantee prices to some multiple of rents. Rents never got out of line with fundamentals even at the peak of the bubble. For example, if the guarantee price was set at a multiple of 15 times the appraised rent on a property, it would offer greater assurance the homeowner was not paying too much on their mortgage and might also accumulate some equity in their home.

Congress has shown little interest in ensuring the new guarantee prices reflect fundamentals, making it likely many of the people "helped" under the program will end up facing foreclosure a second time. However, to make matters worse, they came up with the idea of financing the plan by taking away a stream of funding that had been dedicated to help low-income renters.

That's right; Congress wants to take away money from low-income renters to help bankers that made bad loans in the housing bubble. As we all know, when the banks are in trouble, it is not the time to talk about the free market.

The real painful part of this story is it would be very easy to help the real victims in this story: the low- and moderate-income homeowners, who were suckered into buying homes at bubble-inflated prices with bad mortgages. Congress could just temporarily change the rules on foreclosure to allow moderate-income homeowners facing foreclosure the option to stay in their home paying the fair market rent.

One of the likely results will be more stories of renters caught up in a wave of foreclosures; a second wave.

Tamika Shears says she never missed a rent payment, but she was still forced out of her home.

Her situation reflects a growing number of renters facing eviction because of the widening foreclosure crisis gripping Charlotte along with the rest of the nation.

Shears and her two children had lived in a four-bedroom house in northwest Charlotte for more than a year when their landlord lost the house to foreclosure.

“My first thought was, ‘Where are we going to go?'” she recalled.

Homeowners displaced by foreclosures have received much attention. But legal and housing experts estimate at least one of every four homes in foreclosure in the Charlotte area is non-owner occupied.

Renters were similarly punished during the mortgage industry meltdown in the early 1990s, but this time problems are far more widespread, said Judith Liben, a lawyer with the Massachusetts Law Reform Institute. She testified before Congress last year about the issue.

“It's like you broke a dam,” Liben said.

The impact is swift. Often, evicted renters can't scrape together hundreds of dollars on short notice needed for first month's rent and security deposit for a new place. And the vacant houses they leave behind often become magnets for vandalism, drugs and other crime.

Some may be saved by the return of the boarding house.

When Barbara Terry fell behind on her mortgage payments earlier this year, she did the previously unthinkable. Through a local housing organization, she and her daughter, Imani, 9, rented part of their single-family house to a stranger.

“I had to do something,” said Miss Terry, 46, who helps formerly homeless people move into new housing. “I said, I am not going to lose this house. Thinking about having a stranger was not a pleasant thought. I have a daughter. But the positive part was that I needed extra help, and I wanted to help someone.”

With residential mortgage foreclosures still on the rise, more homeowners nationwide are considering Miss Terry’s choice: whether to take in a boarder to keep their homes. Modest but growing numbers are turning to agencies nationwide like the St. Ambrose Housing Aid Center Homesharing Program in Baltimore, which screen boarders to find appropriate matches and relieve some of the fear of strangers.

“We’re seeing greater numbers of marginal people,” said Kirby Dunn, executive director of HomeShare Vermont, one of several hundred programs around the country that have been formed since the 1980’s to help elderly or disabled homeowners exchange spare rooms for income or, more often, help around the house, but now being pressed to meet different needs.

“Historically,” Ms. Dunn said, “the people who come to us have been looking for someone to provide services in the home. But now, money is the bigger issue for folks. There’s definitely an increase in people looking for a revenue stream.”

Ms. Dunn said volume at the agency was up this year, with three or four times as many people seeking rooms as seeking boarders.

That may work, until we see the first wave of boarders displaced by foreclosure; something highly likely in a housing crisis that won't be resolved anytime soon. Beyond all of that, what happens in an economy where

the prices of basic necessities have steadily gone up,
wages have not kept pace with prices in more than a generation, and
the number of blue collar jobs with decent salaries and good benefits has plummeted?

How does one build wealth? By renting and saving? Or by owning a home?

In order for Krugman's suggestions to work, it has to be easier for people to save -- whether for home ownership or for retirement. But we live in an economy where the cost of simply getting by is higher, but wages haven't kept pace with price increases. Part of the result was a "perfect storm" of people wholly embraced the "gospel"of homeownership, but who couldn't afford to save for down-payments (or much of anything else). At the same time, the were no market incentives for building affordable rental housing.

Support for renting, and a renter-friendly economy is only part of the answer. What Krugman doesn't address is that the primary reason for the cult of homeownership is that it has been seen as the first step on the road to building wealth.

That's because in our economy wealth is built by owning assets that appreciate in value. In better economic times, home ownership allowed families to give young couples a leg-up by providing a down payment, or part of a down payment on a home. Parents drew on their home equity to pay for children's education, with the intention of increasing future earning power.

There is risk in homeownership, and there always has been. But there are known risks, unknown risks, and hidden risks. It's the last set of risks that grew more popular, more profitable — and more perilous, both for homeowners and for unsuspecting renters — under the Bush administration. And as a direct result of policies founded on bedrock conservative philosophy about "free markets" and deregulation.

How does one build wealth in an economy where saving is more difficult than ever before, renting has become as risky as homeownership, and the nature of homeownership has changed to the point that it's almost like renting?

The Society of the Owned: Hazardous Morals

Terrance Heath — Fri, 13 Jun 2008 12:00:40 -0400

Part Eight of a Series

Remember subprime mortgages? They've been nudged out of the headlines by gas prices lately, but they — and the crisis catalyzed by the collapse of the subprime market — are still news.

Bear Stearns (Remember them?) is finally, quietly sold to JP Morgan — to the tune of $2.2 billion, with taxpayers kicking in $29 billion via the Fed, to guarantee Stearns' subprime mortgage assets.

Bank of America has been cleared to buy Countrywide Financial (Remember them?), and apparently still wants to seal the deal. (BofA didn't want Countrywide's no. 2 executive, and it only took them about $28 million to get rid of him.)

Meanwhile, more than 1 million homes are now in foreclosure.

We all heard the outcry when, in the midst of rising foreclosures, our government moved to bail out one of the biggest (and most reckless) Wall Street players in the subprime debacle. We know that President Bush backed the move, though he's sworn to veto the supposed foreclosure relief bill that's heading his way after a Senate deal saved it from oblivion. The treasury secretary defended the Stearns bailout again in mid-May. (A "preemptive strike" in light of the impending final sale, perhaps?)

But do the defenses and explanations why the Fed had to bail out Bear Stears boil down to "love they neighbor"?

Bear Stearns
Headquarters
Let me point out that whatever you call the Fed's actions dealing with Bear Stearns, J.P. Morgan Chase Co. and the financial markets and whoever may appear to benefit directly from these steps, the fact remains that everyone (taxpayers and non-taxpayers alike) has a stake in keeping the markets running smoothly.

That said, in my view, it is wrong for the Times (or anyone else) to insinuate that using funds obtained from the general public via tax revenues to help prevent such an important sector of the economy as our financial system from seizing up benefits only a few: it actually helps everyone.

If you don't believe me, just consider what might have happened had Bear been allowed to go under. Although a relatively small player on Wall Street, Bear was heavily involved in the financial markets; its demise might well have brought other firms down as well.

And Wall Street's affliction might have spread to Main Street.

The same holds true for the ongoing decline in housing prices. Falling home values affect not just those who owe more than their home is worth or are being forced to sell at a loss, but everyone who owns a home.

For example, all homeowners in a neighborhood are hurt when many become vacant due to foreclosures. Falling property values will depress occupied and empty homes alike, so all homeowners have a stake in the government trying to avert this.

Now, don't get me wrong; I am no more in favor of the government rescuing people from unwise (or speculative) decisions than the next person. But I do believe that we should try to take care of our neighbors, for, in doing so, we will take care of ourselves

Or does that explanation really just trying to have it both ways? Who was more speculative or more unwise, and aggressively so? Homeowners who acquired loans they couldn't afford or didn't understand? Bear Stearns and other Wall Street players when it came to the mortgage securities market? Or conservative philosophy and political actors who's policy moves made the current crisis all but inevitable?

David Corn's article on former Senator — and current economic advisor to John McCain — Phill Gramm's role in the housing credit crisis is a prime example.

Who's to blame for the biggest financial catastrophe of our time? There are plenty of culprits, but one candidate for lead perp is former Sen. Phil Gramm. Eight years ago, as part of a decades-long anti-regulatory crusade, Gramm pulled a sly legislative maneuver that greased the way to the multibillion-dollar subprime meltdown. Yet has Gramm been banished from the corridors of power? Reviled as the villain who bankrupted Middle America? Hardly. Now a well-paid executive at a Swiss bank, Gramm cochairs Sen. John McCain's presidential campaign and advises the Republican candidate on economic matters. He's been mentioned as a possible Treasury secretary should McCain win. That's right: A guy who helped screw up the global financial system could end up in charge of US economic policy. Talk about a market failure.

…But Gramm's most cunning coup on behalf of his friends in the financial services industry—friends who gave him millions over his 24-year congressional career—came on December 15, 2000. It was an especially tense time in Washington. Only two days earlier, the Supreme Court had issued its decision on Bush v. Gore. President Bill Clinton and the Republican-controlled Congress were locked in a budget showdown. It was the perfect moment for a wily senator to game the system. As Congress and the White House were hurriedly hammering out a $384-billion omnibus spending bill, Gramm slipped in a 262-page measure called the Commodity Futures Modernization Act. Written with the help of financial industry lobbyists and cosponsored by Senator Richard Lugar (R-Ind.), the chairman of the agriculture committee, the measure had been considered dead—even by Gramm. Few lawmakers had either the opportunity or inclination to read the version of the bill Gramm inserted. "Nobody in either chamber had any knowledge of what was going on or what was in it," says a congressional aide familiar with the bill's history.

It's not exactly like Gramm hid his handiwork—far from it. The balding and bespectacled Texan strode onto the Senate floor to hail the act's inclusion into the must-pass budget package. But only an expert, or a lobbyist, could have followed what Gramm was saying. The act, he declared, would ensure that neither the sec nor the Commodity Futures Trading Commission (cftc) got into the business of regulating newfangled financial products called swaps—and would thus "protect financial institutions from overregulation" and "position our financial services industries to be world leaders into the new century."

…Credit default swaps are essentially insurance policies covering the losses on securities in the event of a default. Financial institutions buy them to protect themselves if an investment they hold goes south. It's like bookies trading bets, with banks and hedge funds gambling on whether an investment (say, a pile of subprime mortgages bundled into a security) will succeed or fail. Because of the swap-related provisions of Gramm's bill—which were supported by Fed chairman Alan Greenspan and Treasury secretary Larry Summers—a $62 trillion market (nearly four times the size of the entire US stock market) remained utterly unregulated, meaning no one made sure the banks and hedge funds had the assets to cover the losses they guaranteed.

In essence, Wall Street's biggest players (which, thanks to Gramm's earlier banking deregulation efforts, now incorporated everything from your checking account to your pension fund) ran a secret casino. "Tens of trillions of dollars of transactions were done in the dark," says University of San Diego law professor Frank Partnoy, an expert on financial markets and derivatives. "No one had a picture of where the risks were flowing." Betting on the risk of any given transaction became more important—and more lucrative—than the transactions themselves, Partnoy notes: "So there was more betting on the riskiest subprime mortgages than there were actual mortgages." Banks and hedge funds, notes Michael Greenberger, who directed the CFTC's division of trading and markets in the late 1990s, "were betting the subprimes would pay off and they would not need the capital to support their bets."

These unregulated swaps have been at "the heart of the subprime meltdown," says Greenberger. "I happen to think Gramm did not know what he was doing. I don't think a member in Congress had read the 262-page bill or had thought of the cataclysm it would cause." In 1998, Greenberger's division at the CFTC proposed applying regulations to the burgeoning derivatives market. But, he says, "all hell broke loose. The lobbyists for major commercial banks and investment banks and hedge funds went wild. They all wanted to be trading without the government looking over their shoulder."

Neither thought is particularly comforting — that the man who stands to direct U.S. economic policy in a McCain administration either (a) didn't know what he was doing when he kick started the engine of the subprime mortgage debacle, or (b) that he knew exactly what he was doing and proceeded anyway. Corn's article points out, however, that whether Gramm knew what he was doing or not, he went on to profit handsomely from what his legislative move eventually wrought.

With the U.S. economy now battered by a tsunami of mortgage foreclosures, the $30-billion Bear Stearns Companies bailout and spiking food and energy prices, many congressional leaders and Wall Street analysts are questioning the wisdom of the radical deregulation launched by Gramm’s legislative package. Financial wizard Warren Buffett has labeled the risky new investment instruments Gramm unleashed “financial weapons of mass destruction.” They have fed the subprime mortgage crisis like an accelerant. While his distracted peers probably finalized their Christmas gift lists, Gramm created what Wall Street analysts now refer to as the “shadow banking system,” an industry that operates outside any government oversight, but, as witnessed by the Bear Stearns debacle, requiring rescue by taxpayers to avert a national economic catastrophe.

While the nation’s investment bankers are paying a heavy price for their unbridled greed (in billions of dollars of write-offs), Gramm has fared quite nicely. He currently serves as a vice president at UBS AG, a colossal, Swiss-owned investment bank, the post, no doubt, a thank you for assiduously looking out for Wall Street interests during his 23 years in public office. Now, with the aid of his longtime friend Arizona Sen. John McCain, Gramm may be looking at a quantum leap in power and influence.

Indeed, after virtually cutting the ribbon on Wall Street's "secret casino," Gramm took a prime spot at the high rollers' table.

But it just defies belief that McCain would have, as his main economic advisor and one of the people responsible for his plan to deal with the mortgage crisis, someone who was a paid lobbyist for a bank that was heavily involved in that crisis, a firm that has just advised some of its employees not to travel to the U.S. for legal reasons, and that stands to gain or lose a lot depending on what the federal government decides to do about it. What's next: the revelation that McCain's policy on Iran is being written by a lobbyist for the makers of cruise missiles? Or that he has outsourced his health care policy to a lobbyist for the National Funeral Directors Association?

And he may not be done wreaking economic havoc either, for in our debt-driven economy — in which everything from gas and groceries, to health care is bought on credit — the buying and selling of credit is essentially the buying and selling of our lives. Homes, after all, can be foreclosed upon, but much of what we buy on credit is either gone by the time the bill comes due — like gas and groceries — or intangibles like health care services, so there's nothing left to repossess.

On the economy, McCain's most daring manifesto is his healthcare plan. Not surprisingly, it bears the Gramm imprint. In fact, McCain has been heeding Gramm's "power-to-the-consumer" approach for more than a decade. The two senators bonded when they linked arms to fight Hillary Clinton's ill-fated healthcare program in 1993. "We couldn't get any press coverage in Washington, DC, so we traveled all over the country, to the regional media markets," says Gramm. In 150 meetings at hospitals and clinics, McCain and Gramm relentlessly pounded the Clinton plan, helping fire the voter outrage that killed the plan in 1994.

Today, McCain is advocating a plan that's radically different from those of Clinton and Barack Obama, and - if he goes all the way by following Gramm - could revolutionize America's healthcare system. For McCain and Gramm, the problem with our healthcare system - and the reason why over 47 million Americans are uninsured - is that it's excessively, scandalously expensive. The solution, they say, is to let Americans shop for healthcare with their own money. McCain advocates giving tax rebates of $2500 per individual or $5000 per family. With that money, families could purchase policies on their own. What's truly radical about the plan is that it eliminates the tax exclusion for healthcare benefits offered by companies to their employees, and replaces it with the $2500 to $5000 rebates.

Consumers could then use that cash to buy their own insurance in what Gramm foresees as a vibrant, consumer-driven marketplace for healthcare packages.

Add to the mix that hospitals are now putting patient debt up for auction, peering into patients' credit reports, and demanding cash before treatment, and it's not hard to predict what might result from the American's increasing reliance on credit to secure health care. Especially when you take in to consideration that health care is the fastest growing industry in America, health care costs are only going up, securitized debt is making a comeback, and the solutions proposed by Treasury Secretary Henry Paulson, does nothing to regulate the financial institutions and inventions that drove the current crisis.

But it was never conservatism's intention to regulate in the first place. I've noted earlier in this series that authorities like Alan Greenspan simply ignored warnings of impending financial disaster if the subprime boomtime was allowed to continue. Now it's being reported that — under the leadership of the now deposed and disgraced Alphonso Jackson— HUD ignored similar warnings and helped drive the subprime and credit crisis, by labeling subprime mortgages as "affordable loans," and requiring Fannie Mae and Freddie Mac— two government-run mortgage finance firms — to purchase more of these loans made to minority and low-income borrowers as a means of putting more of those borrowers in their own homes.

HUD

Eager to put more low-income and minority families into their own homes, the agency required that two government-chartered mortgage finance firms purchase far more "affordable" loans made to these borrowers. HUD stuck with an outdated policy that allowed Freddie Mac and Fannie Mae to count billions of dollars they invested in subprime loans as a public good that would foster affordable housing.

Housing experts and some congressional leaders now view those decisions as mistakes that contributed to an escalation of subprime lending that is roiling the U.S. economy.

The agency neglected to examine whether borrowers could make the payments on the loans that Freddie and Fannie classified as affordable. From 2004 to 2006, the two purchased $434 billion in securities backed by subprime loans, creating a market for more such lending. Subprime loans are targeted toward borrowers with poor credit, and they generally carry higher interest rates than conventional loans.

Today, 3 million to 4 million families are expected to lose their homes to foreclosure because they cannot afford their high-interest subprime loans. Lower-income and minority home buyers -- those who were supposed to benefit from HUD's actions -- are falling into default at a rate at least three times that of other borrowers.

"For HUD to be indifferent as to whether these loans were hurting people or helping them is really an abject failure to regulate," said Michael Barr, a University of Michigan law professor who is advising Congress. "It was just irresponsible."

In an upcoming edition of this series, we'll look in more at how this has all worked out for those minority and low-income borrowers, but the point is that whether it was irresponsible or not depends on your point of view. Or, in the case of HUD and its conservative leadership, it depends on who you're responsible to.

The result, as a professor quoted in the Washington Post story above put it, was to "pump more capital into a very unregulated market." Not just that, but a market that conservatives made sure was unregulated. How and why has been described in detail by John Atlas and Peter Deier in their article on the conservative origins of the subprime mortgage crisis, as well as our own Bill Scher in his "The Mortgage Crisis: Yet Another Conservative Failure" post. And Rick Perlstein's "Mythbusting the Right's Subprime Excuses" and "The Foreclosing of America" (parts one, two, three, and four) are must-reads on the subject of how conservatism created the current crisis.

But that's only one part of the story. The other is conservatives' efforts to preserve the consequences of the current crisis, by making arguments about "moral hazards" that are really a cover for their hazardous morals that drove and continue to drive the current crisis.

In a recent Financial Times column, Ian Morley provides a definition of "moral hazard" in the context of the subprime crisis.

Foreclosure
In the recent case of subprime mortgages, bankers lent money to anyone, irrespective of their credit history, because the risk was securitised and the financial equivalent of explosive pass-the-parcel ensued. When the game ended, bankers walked away with much of the gains while the parcel exploded in all our faces. The paper gains disappeared and the losses were added to our tax bill.

This is real moral hazard. It just happens more quickly in bear markets. In the midst of this the regulators tinker with the safety rules of the Titanic (it always sinks, regardless). What they cannot change is greed and stupidity.

Moral hazard is when risk and reward have an asymmetrical relationship - usually a lot of reward for one person and most of the risk for the other. This is the root cause of the subprime and credit crisis. And it is at the heart of most financial meltdowns. They just manifest themselves differently and therefore catch us unawares. It is like generals planning for the next war based on the experience of the last one; and just as failed generals get medals, bankers get bailed out.

John McCain, advised by an architects of the subprime debacle and former employee of one of the biggest risk takers in the subprime market, just a few months ago opined that "it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers." Yet, he didn't see anything wrong with the Fed financing the Bear Stearns buyoutone of the most irresponsible actors in the subrime bonanza. Just a month before that statement, his own campaign finessed a bailout its own — via public funds, of course — if the campaign tanked.

The hazardous "bailouts for me, but not for thee" conservative morality that deregulates financial markets, but protects the biggest financial players from the consequences of their irresponsible, reckless, and often deceptive finaicial practices, means that those players will live to roll the dice another day in their "secret casino." Conservatism will make sure it's always open, and that the players never lose.

Their gambling debts will be paid by the rest of us, both in the form of bailouts, and in what happens to our communities. That's something we'll explore in the next part of this series.

[Photos via C R, respress, and Ryan Orr.]

The Society of the Owned: Moral Hazards

Terrance Heath — Tue, 25 Mar 2008 11:43:42 -0400

Part Seven of a Series

Imagine that you've come upon two people who have somehow fallen into a very deep hole, which neither of them can climb out of on their own. (Nor, for some reason, can they help one another climb out.) In the course of figuring out what to do, you learn how they each came to be in that hole.

One of them fell in because he either didn't see the hole or should have seen it but wasn't paying attention. OK, so he could have avoided falling into the hole if he'd been more careful. The other person, you find out, apparently dug the hole for the one who fell in first, and then fell in himself.

Which one do you help out of the hole? The careless one who fell in first? Or the one who dug the hole in the first place? Which one do you leave in the hole? Which one do you help out first?

Conservatism says you definitely help the guy who dug the hole in the first place climb out of it. Not only that but you give him a brand new shovel and send him on his way. Maybe you leave the other guy in the hole, and maybe you don't. In the latter case, there are serious moral questions to consider.

At least that's what the experts say.

The arguments against a bailout are powerful. It would mostly benefit banks and Wall Street firms that earned huge fees by packaging trillions of dollars in risky mortgages, often without documenting the incomes of borrowers and often turning a blind eye to clear fraud by borrowers or mortgage brokers.

A rescue would also create a “moral hazard,” many experts contend, by encouraging banks and home buyers to take outsize risks in the future, in the expectation of another government bailout if things go wrong again.

And, as noted in an earlier installment, some citizens are saying pretty much the same thing.

Some of these municipal and state efforts have met resistance from people who consider the assistance undeserved and adamantly oppose anything that resembles a taxpayer bailout.

Seattle, which has nowhere near the kind of foreclosure problem other cities have, began a modest program last month offering loans of up to $5,000 to help a few dozen homeowners avoid losing their homes.

Not only are people in Seattle relatively prosperous, but they have a reputation for being nice, too. Yet no sooner had Mayor Greg Nickels announced the program than opposition surfaced.

“Just can’t agree with using taxpayer dollars to bail out private homeowners, no matter how the mayor tries to justify it,” read a complaint posted on the “Soundoff” section of The Seattle Post-Intelligencer’s Web site.

But moral hazards become something else when applied Wall Street firms that have gotten into trouble due to unwise or unsound financial dealings, like Bear Stearns.

The global credit crunch claimed its biggest victim yet yesterday when the US Federal Reserve orchestrated an emergency bail-out for Bear Stearns after a cash crisis prompted a run on America's fifth biggest investment bank.

In a move that eclipsed the enforced rescue of Northern Rock six months ago, the 85-year-old Wall Street institution admitted it was looking for a buyer after being thrown a temporary lifeline by rival bank JP Morgan Chase guaranteed by the US central bank.

By now, the details are known. Bear Stearns ened up being worth not much more than my five-year-old has in his piggy bank. So, in a move designed to keep the network of "credit swaps" that link various banks and investment firms intact, and keep the hedge funds trading that rely on Stearns, the Fed — after repeatedly lowering rates, making $200 billion available to lenders — the Federal Reserve guaranteed a 28-day line of credit to Bear Stearns via JP Morgan, only to end up shortly afterwards providing $30 billion in emergency funding — essentially buying, with that amount, Bear Stearns' mortgage-backed securities, which may not be worth the paper they're written on now — to JPMorgan's purchase of Bear Stearns.

This is happening at the same time that, an increasing number of American home owners face foreclosure, the same government that's bailing out Bear Stearns has — up until now — been more interested in preventing future crises than addressing the current one, or providing much real relief for home owners in crisis.

After months of watching a growing credit crisis made worse by steadily eroding home prices, the Bush administration responded on Thursday with the outlines of a plan that officials emphasized is meant more to prevent future crises than to address the current one.

The plan, which relies primarily on state regulators and private industry to tighten their oversight of financial markets, calls on states to issue nationwide licensing standards for mortgage brokers.

...But in many ways, the plan relies on the same market participants — from mortgage brokers to credit-rating agencies and Wall Street firms — that government officials and other experts blame for the current crisis.

It gets even more interesting when Treasury Secretary Henry Paulson chimes in with what he thinks led to the current crisis.

At the news conference, Mr. Paulson said growing market problems were caused by a series of factors, including mortgage brokers who pushed risky loans on homeowners, conflicts of interest at credit-rating agencies, bond underwriters that loosened standards, and financial institutions that failed to adequately grasp the riskiness of the instruments they were buying and selling.

A report issued by an interagency group headed by Mr. Paulson also said that regulatory policies undertaken by the Bush administration had failed to adequately supervise the way financial institutions manage risk.

Well then, what is wrong with remedying the current crisis? What is wrong with keeping people in their homes? It can't be because they made poor financial decisions that make bailing them out a "moral hazard, because there was no "moral hazard for bailing out Bear Stearns for failing to "adequately grasp the riskiness," of the bundled bad debts they made bundles buying and selling for a while.. We have apparently become a society that cannot afford to let banks fail, but can afford to let people fail.

Though it still seems to apply to Main Street, there's no moral hazard in bailing out Wall Street.

Consider the phrase that has been popping up all over the Bear Stearns debacle: “moral hazard.” No, Moral Hazard is not the name of a country and western singer. It’s the phrase economists use to explain why people shouldn’t be protected from the consequences of their actions. In The Wall Street Journal’s definition, moral hazards are “the distortions introduced by the prospect of not having to pay for your sins.”

...The same language of morality has been used by economic fundamentalists who don’t want to help homeowners who got subprime mortgage loans and found find themselves in deep foreclosure weeds. Mike Huckabee once said that it “is not the purpose of government to prop people up from every poor decision they make. ... It creates an enabling co-dependency.” And as recently as last weekend, Treasury Secretary Henry Paulson insisted that government actions to prevent foreclosures would “do more harm than they would do good.”

The problem is that, given all of the above, no one seemed the obvious question.

But why save Bear Stearns? The beneficiary of this bailout, remember, has often operated in the gray areas of Wall Street and with an aggressive, brass-knuckles approach. Until regulators came along in 1996, Bear Stearns was happy to provide its balance sheet and imprimatur to bucket-shop brokerages like Stratton Oakmont and A.R. Baron, clearing dubious stock trades.

And as one of the biggest players in the mortgage securities business on Wall Street, Bear provided munificent lines of credit to public-spirited subprime lenders like New Century (now bankrupt). It is also the owner of EMC Mortgage Servicing, one of the most aggressive subprime mortgage servicers out there.

And what brought Bear Stearns to the point where this big Wall Street firm could basically be bought for $2? That old often mentioned bugbear of the current crisis: bad judgement.

Bear's default rates on so-called Alt-A mortgages that it underwrote also indicates that its lending practices were especially lax during the real estate boom. As of February, according to Bloomberg data, 15 percent of these loans in its underwritten securities were delinquent by more than 60 days or in foreclosure.

That compares with an industry average of 8.4 percent.

Let's not forget that Bear Stearns lost billions for its clients last summer, when two hedge funds investing heavily in mortgage securities collapsed. And the firm tried to dump toxic mortgage securities it held in its own vaults onto the public last summer in an initial public offering of a financial company called Everquest Financial. Thankfully, that deal never got done.

But another deal did get done, one that bails out Bear Stearns from its bad — and in some cases dishonest — decisions.

Bear Stearns, one of the longstanding giants of Wall Street investment banking, is now on life support, the victim of its own excessive greed and bad judgment. Apparently, the wizards who run the show at Bear Stearns (I will resist the temptation to use initials) somehow couldn't see an $8 trillion housing bubble in the US economy. They made highly leveraged bets on assets backed by mortgages.

These bets have turned bad in a big way. Bear Stearns would now have less value than a corner lemonade stand, if not for the generosity of the Federal Reserve Board. The Fed lent money to Bear Stearns under terms no private lender would have agreed to. The risk it will end up with a substantial loss on its loans to Bear Stearns is quite large, with no prospect for any real return on its investment.

Bear Stearns will be bought by JPMorgan, and its mortgage securities will be successfully unloaded. But JPMorgan won't own them. We will. Corporate entities can apparently make bad judgments without suffering the consequence of failure. As with inflation and oil prices, etc., they pass also the cost of their mistakes on to the rest of us.

The Fed, on behalf of Bear Stearns, has turned the government into the ultimate subprime lender, in a sense. And we are all its investors. We will not likely see return on that investment. But, then, it wasn't an investment we chose. It was chosen for us. For the good of Bear Stearns.

Of course, that's not what the administration or the Fed would say. Bailing out Bear Stearns, whatever its financial sins, is necessary (a necessary evil?), because to let them fail could lead to disaster.

After years of never allowing any of our financial institutions to fail, they have become so enormous that nobody will be allowed to sink beneath the waves. Otherwise, a tsunami would swamp the hedge funds, banks and other brokerage firms that remain afloat.

If Bear Stearns failed, for example, it would result in a wholesale dumping of mortgage securities and other assets onto a market that is frozen and where buyers are in hiding. This fire sale would force surviving institutions carrying the same types of securities on their books to mark down their positions, generating more margin calls and creating more failures.

As of Nov. 30, Bear Stearns had on its books about $46 billion of mortgages, mortgage-backed and asset-backed securities. Jettisoning such a portfolio onto a mortgage market that is not operative would, it is plain to see, be a disaster.

So, as distasteful as it might be to bail out Wall Street, it's really for the good of us all.

Bear Stearns’s collapse, similarly, could easily have provoked market chaos. Bear wasn’t among the largest Wall Street banks, but it was a major clearinghouse for stock trades and played a central role in hundreds of billions of dollars of credit deals. If not too big, it was too important to fail.

...But what [the bailout of Bear Stearns] really underscores is how badly Wall Street has managed its business in recent years. Because investment banks’ trades and investments are typically very highly leveraged—Bear Stearns, for instance, had borrowed thirty dollars for every dollar of its own—the banks need to be exceptionally good at managing risk, and they need to insure that people trust them enough to lend them huge sums of money against very little collateral.

Sound familiar yet? What would happen to the average person who borrowed thirty dollars for every one dollar of his or her own to, say, purchase a home? It gets better.

You’d expect, then, that Wall Street firms would be especially rigorous about balancing risk against reward, and about earning and keeping the trust of customers, clients, and lenders. Instead, most of these firms have taken on spectacular amounts of risk without acknowledging the scale of their bets to the outside world, or even, it now seems, to themselves.

You may be excused for suspecting that a certain degree of self-deception was going on. You'd be right, about the deception part, but — like Alan Greenspan himself — some firms were informed of the reality of their mortgage-securities bets by the people they hired to audit them. And some not only ignored warnings, but hid the truth from their investors.

They could see the meltdown coming.

Freelance financial watchdogs who examined the paperwork on sub-prime home loans being sold to Wall Street had an inside view of the boom in easy-money lending this decade. The reviewers say they raised plenty of red flags about flaws so serious that mortgages should have been rejected outright -- such as borrowers' incomes that seemed inflated or documents that looked fake -- but the problems were glossed over, ignored or stricken from reports.

The loan reviewers' role was just one of several safeguards -- including home appraisals, lending standards and ratings on mortgage-backed bonds -- that were built into the country's complex mortgage-financing system. But in the chain of brokers, lenders and investment banks that transformed mortgages into securities sold worldwide, no one seemed to care about loans that looked bad from the start. Yet profit abounded -- until defaults spawned hundreds of billions of dollars in losses on mortgage-backed securities.

This is similar to the way that some homeowners say that brokers and lending agents tricked them by changing terms at the last minute, or hiding the details about rates, or other costs in addition to their mortgages.

It's similar to something else too. Much in the same way that the Bush administration edits out or ignores anything that doesn't jibe with its beliefs, so did the great minds of Wall Street. But that's just what fundamentalists do.

True believers, though, don't quietly dump $20 million in stock months before disaster becomes obvious.

Bear Stearns executives sold stock in the firm worth more than $20 million in December, although they remain big shareholders in the beleaguered broker, according to Thomson Financial data.

James Cayne, chairman of Bear, sold 172,621 shares in December worth $15.4 million, while President Alan Schwartz sold 67,900 shares worth just over $6 million, Thomson data show.

Alan Greenberg, chairman of Bear's executive committee, sold 99,293 shares worth $8.8 million in December, while Chief Executive Officer Samuel Molinaro sold 27,726 shares worth almost $2.5 million, according to Thomson.

(Schwartz, by the way, was on television as late as March 12 telling the world every thing was fine, just four days before breaking the bad news to Bear Stearns employees.)

Granted, $20 million is probably like 20 cents to Bear's executives, but executives in an investment firm selling off stock in great quantities is bound to raise eyebrows. (Bear's executives remained major shareholders despite selling stock.) So, these guys most likely sold as much as they thought they could without raising alarm among other shareholders, like Bear Stearns' employees who were encouraged to own stock in the firm.

More so than other firms on Wall Street, Bear had encouraged its employees, from secretaries to top executives, to be long-term holders in the company's stock, and the employees own over 30 percent of the company.

...Across the firm, executives and employees declined to speak publicly, a reflection of the fluid events as well as a reluctance to anger their prospective bosses from JPMorgan who were already on the premises Monday, appraising their new investment.

But privately they expressed raw dismay, their voices heavy with sadness and shock.

"My life has been flushed down the drain," said one person. There was talk Monday that with their life savings nearly depleted, some executives had moved quickly, putting their weekend homes on the market.

Sounding familiar yet? Of course, those major stockholders (called "a collection of wealthy investment bankers and billionaire investors" by one columnist) will also benefit from JPMorgan's decision to raise the purchase price from $2 a share to $10 a share.

Here is where the dividing line between the ownership society and the rest of us, and even between Bear Stearns employees, becomes visible. Executives may be putting their weekend home on the market, but several hundred of them are getting offers of cash and stock from JPMorgan to make up their for their losses. They'll probably keep their jobs too, or land in jobs that pay as well or even better. So, the golden parachutes have come out. (And, for the former chief Jimmy Cayne, an armed body guard is on duty.) Several hundred senior managing directors will be "made whole" with new jobs and stock offers, but about 8,000 employees will pack their desks. And there are no jobs on Wall Street.

More than 8,000 staff will face the axe at Bear Stearns worldwide once the stricken US investment bank is acquired by JP Morgan next month, as fears mount that the credit crunch could keep downward pressure on share prices throughout 2008.

Wall Street analysts believe well over half of Bear Stearns's employees will be made redundant, with around 600 jobs at risk in London, where the company employs 1,350 people. JP Morgan declined to comment.

There's tremendous value and wealth being lost in our neighborhoods and on our Main Streets too, but no one is rushing to ameliorate "shareholders" in those ventures. Even though the wealth lost on Main Street will not be as easily rebuilt, because people in that neighborhood have far fewer assets than those on Wall Street in the first place.

Despite quickly as Wall Street got its bailout last week, Main Street's bailout will be a long time coming, if it comes at all.

Now that the Federal Reserve has pledged billions of dollars to rescue Wall Street bankers from possible default, lawmakers and regulators are turning their attention to helping average citizens -- from homeowners in danger of foreclosure to people who want to buy a home.

But unlike the Fed's rapid moves last week to stabilize financial markets, the consumer benefits are likely to progress slowly as they face resistance from the Bush administration on some broad issues and from special interests on some narrow ones.

...The House, meanwhile, plans to move within weeks to approve a multibillion-dollar program to prevent hundreds of thousands of home foreclosures. The outlook for the plan, the most ambitious of several proposals, is uncertain; President Bush continues to resist large-scale legislation to bail out homeowners in distress.

It is the one of the (many) sad ironies of conservatism that any suggestion the the government might do anything to help most (clearly not all) citizens brings cries of "socialization," yet the transfer of public wealth (in the form of your tax dollars and mine) into private hands — thus socializing Wall Street" — raises none of the "moral hazards" that supposedly block the way to helping homeowners facing foreclosure.

The Federal Reserve's announcement of an open-ended bail-out for Wall Street's endangered financial firms and banks opens an ominous new chapter in what might be called "market socialism with American characteristics." If Washington tries to do something for "losers" who are ordinary citizens, financial titans complain about violating free-market principles. When the titans themselves are going down, they rush to their patrons at the central bank and demand extraordinary relief. Government must save the big money, we are told, for the overall good of the economy. Thus, the financial system's reckless losses--approaching $1 trillion but probably far more--are being "socialized," dumped on the public, the very people victimized by its snares and falsified valuations.

"Socialized health care" scares the bejeezus out of conservatives. Socialized wealth-care — which apparently means shared risk for American tax-payers, but no shared responsibility on the other side — is getting more popular by the day. On top of everything else, the Fed has started a new discount lending program for Wall Street, to the tune of $28.8 billion for 20 undisclosed borrowers.

Investment banks and broker dealers borrowed $28.8 billion from the Federal Reserve on Wednesday under the new lending program set up on Sunday, the Fed announced Thursday.

The new lending program gives the 20 primary dealers of Treasury securities special access to the Fed's discount window. The overnight loans are overcollateralized and pay the prevailing discount rate, currently 2.50%.

Three investment banks -- Morgan Stanley, Goldman Sachs and Lehman Bros. -- have publicly announced they borrowed from the Fed. Others may also have done so, but the names of the borrowers are not announced by the Fed.

It's easy, at this point to lose track of the billions in tax-payer dollars have have been dedicated to propping up Wall Street and keeping its investors happy, in the past few weeks. Meanwhile, ordinary Americans, without the resources of a financial firm, must face the consequences of their financial decisions alone (even though often those decisions were made under duress and/or deception). But big financial firms and their investors? They must be shielded from their mistakes.

It all raises, or ought to raise, some questions asked by a columnist quoted earlier in this post.

"What are the consequences of a world in which regulators rescue even the financial institutions whose recklessness and greed helped create the titanic credit mess we are in? Will the consequences be an even weaker currency, rampant inflation, a continuation of the slow bleed that we have witnessed at banks and brokerage firms for the past year?"

And there are, our ought to be, questions about how effective the Fed's actions so far are likely to be.

Nobody knows if these remedies will blow off the hysteria and restore a modicum of order. Nor do we know who is being saved by our panicky federal officials. Are they saving some millions of jobs and homes, which may be in danger from the fallout stemming from this train of financial disasters? Or are they saving some of the most despicable rich guys to make an appearance in our society since the 1870s, when Jim Fisk, Commodore Vanderbilt and Jay Gould roamed the earth?

Well, what do your eyes tell you? Moral hazards do not get in the way of bailing out the Bear Stearns of the world, but then you have to understand why those entities (and the individuals who run them) are far more valued than the every day American family. I'll refer you to George Lakoff for that, whose assertion that the worship of the wealthy is based on the tenet that material wealth is a sign of strength and virtue.

If you believe the market place is like a natural environment, then economic "might" makes right, in terms of "survival of the fittest." However, markets are not natural environments or organic entities. They are man made. They operate according to the rules people make. A natural organism that made the decisions Bear Stearns and any number of financial giants have made would probably not be long for this world, but we change or suspend the rules of the market place to prop them up. Of course, the consequence is that we change also change the rules to the detriment of another species.

Effectiveness depends on intention. David Sirota mentioned Naomi Campbell's book, The Shock Doctrine, in a previous post, and made a good point about how the current financial crisis has apparently become an opportunity to practice "disaster capitalism" by transferring billions in public wealth into the privates hands of the very wealthy.

In upcoming installments, we'll look at what's happening at the other end of that transfer, and the various ways it's been facilitated. For now, suffice it to say, that what's really playing out in headlines about "moral hazards," is as much about the hazardous morality undergirding "disaster capitalism," and its consequences

The Society of the Owned, Pt. 6: Just Drop Off the Key

Terrance Heath — Fri, 14 Mar 2008 11:36:25 -0400

When free market fundamentalists like those in the Bush administration start at federal government action, after two interest rate cuts didn't do much to stall stop the economy sliding into recession, you know things have reached a crisis point. By the time they start taking baby steps towards a bailout, you can bet that — as with another disaster — many people are well underwater, some have drowned, and some aren't so much saving themselves as letting the tide carry them.

In the past week, the Bush administration and Federal Reserve chair Ben Bernanke have been making vague gestures that open the possibility an increased government intervention in the aftermath of the subprime debacle. That may be due to a trend which suggests some people caught in the crises spawned by the subprime disaster have found a outlet for their anger that, if number of those who chose that option reaches critical mass, could have consequences beyond what most of us could ever imagine.

It was when Fed Chairman Ben Bernanke mentioned the other "f-word" — after twice tinkering with interest rate reductions, and a handful of additional interventions met with roadblocks in Congress — that I began to think that maybe the full implications of the crises had dawned on the administration, as well as the potential consequences.

However much they might oppose it on ideological grounds, the Bush administration and the U.S. Federal Reserve are inching closer toward a government rescue of distressed homeowners and mortgage lenders.

Ben Bernanke, the Fed chairman, told a group of bankers in Florida on Tuesday that "more can and should be done" to help millions of people with mortgages that are often bigger than the value of their homes.

Though Bernanke stopped well short of calling for a government bailout, he used his bully pulpit to try to push the banking industry into forgiving portions of many mortgages and signaled his concern that market forces would not be enough to prevent a broader economic calamity.

And the news that the Bush administration — packed with deregulation devotees as it is — has started taking baby steps toward tighter regulations (accompanied by headlines that the the subprime mortgage crisis has touched the Carlyle Group) merely confirms it.

A presidential working group issued a broad set of proposals Thursday to correct weaknesses in the way homes are financed so that the sort of problems now crippling the nation's housing sector won't recur.

The President's Working Group on Financial Markets recommended changes in virtually every area of mortgage finance. It called for tougher state and federal regulation of mortgage lending and mortgage brokers. It also supported creating a national licensing standard for anyone who originates mortgages.

Its report is notable, however, for its restraint in expanding federal regulation: the national licensing scheme, for example, still would depend on enforcement by states. Weak local enforcement is one major reason that the housing market grew into a bubble and then burst.

The report also didn't propose putting the non-bank lenders, who underwrote about three-fourths of the now-toxic sub-prime mortgages, under federal regulation. Non-bank lenders, the largest of which are now in bankruptcy, must follow federal principles that are enforced by states, which often lack the capacity to do so.

You may judge for yourself, based on the above, how serious the administration is or is not. The point is now that some really important people — the actual ownership society — are in trouble, it's finally time for action.

That's the "broader calamity" that — and how far it might spread — that's making the Bush administration and the Republican party nervous about this election year. (And not merely that the subprime crisis has finally hit the Bush family, when the Carlyle Group began getting margin calls on mortgage-backed securities) The calamity may not hit before the ballots are counted come November, but it's already underway. And in some places it's not called a calamity. It's called a revolution.

It starts when people look at their own numbers and see no way to come out on top, and no reason to keep trying, because they realize that they are among those Americans who are poorer than they were a year ago.

Considering the impact of higher prices, a bigger debt burden and sagging home prices, Americans were poorer at the end of 2007 than they were the year before, the Federal Reserve reported Thursday.

The net worth of U.S. households fell by $533 billion, or a 3.6% annual rate, in the fourth quarter of 2007, the first time total wealth has fallen since late 2002, the Fed said.

For all of 2007, household net worth rose 3.4% to $57.7 trillion, the slowest growth in five years. After the effects of 4.1% inflation are included, real net worth fell for the year.

That loss of wealth is due to a record decline in home equity.

Americans' percentage of equity in their homes fell below 50 percent for the first time on record since 1945, the Federal Reserve said Thursday

Home equity, which is equal to the percentage of a home's market value minus mortgage-related debt, has steadily decreased even as home prices jumped earlier this decade due to a surge in cash-out refinances, home equity loans and lines of credit and an increase in 100 percent or more home financing.

Economists expect this figure to drop even further as declining home prices eat into the value of most Americans' single largest asset.

Moody's Economy.com estimates that 8.8 million homeowners, or about 10.3 percent of homes, will have zero or negative equity by the end of the month. Even more disturbing, about 13.8 million households, or 15.9 percent, will be "upside down" if prices fall 20 percent from their peak.

"Upside down" is another way of saying that some 13.8 million will be saddled with
"under water" mortgages. Upside down or under water, these middle class homeowners do the math and find themselves in an untenable position. They may, however, also be in a position to take some major financial institutions down with them.

All they have to do is get just a little angry. That's not a stretch for people who've bought into the long-standing notion — and some economists would say myth — of what homeownership is supposed to mean in America, only to learn too late what it actually means.

Home ownership is the American dream. Most everyone aspires to owning one. Some 69 percent of us do. For many of us, moreover, the equity value of the home represents the greater part of retirement savings. Why is home ownership so important to us?

One obvious reason is our culture. Ownership reflects permanence, stability, success and pride. Generally, people who own something take better care of it. No one tries to save the hotel when there is a fire. Rental car drivers don’t stop at the car wash. Renting seems so impersonal and temporary. These are emotional factors.

Another seeming attraction is economics. Homes are viewed as an investment. Renting is “just throwing money away.” But here’s where we get it wrong. The dirty little secret: most of the time, home ownership is a lousy investment.

For the middle class homeownership was almost a birthright, taken for granted, and a sign of middle class stability.

Home ownership used to be taken for granted by the American middle class. No longer. Rising home prices have made ownership impossible for many middle-class families, while easy credit and the pressure to overreach during the recent housing run-up have left America with a nasty housing-bubble hangover. Video: How much for this apartment?

The urge to have our own bit of land is etched in the American DNA. As settlers pushed west during the mid-1800s, President Lincoln's Homestead Act granted land to anyone willing to farm on it. After World War II, Americans streamed into new bedroom communities complete with a garage, a front porch and a Labrador retriever that dug holes in the fenced backyard.

But the homes our parents took for granted are slipping out of reach.

It signifies entrance into the ownership society, or at least a firm foothold from which to start that climb. It's a sign of having arrived; of having achieved an upward mobility most Americans are taught to desire and aspire to. (Subprime borrowers in economically disadvantaged communities are no less affected, which combines with other factors to make them susceptible to the apparent opportunity to finally attain what would otherwise always be out of reach. That's something we'll address later in the series.)

Some who thought they had achieved, the dream of homeownership are discovering that dream has not just slipped out of reach, but slipped right from under them. They're doing the the math, adding up stagnant wages, rising inflation, plummeting home values, and disappearing equity, and waking up from the American dream, and walking away from the American dream.

What used to be a last resort in economic hard times is now the first course of action. They're walking away from their homes, first.

In the more innocent days before the debt bubble popped, vulnerable borrowers tended to do everything they could to hang on to their houses. The result was that they would stop paying off their credit cards first, the car loans second and only last would they default on their mortgages.

But for many Americans in the credit bust, especially an overburdened minority, that set of priorities has been turned upside down.

"It's the American way of deleveraging," said Jochen Felsenheimer, a credit strategist at Unicredit in Munich. "First you sell your house, second you sell your car and in the end you also sell your TV set."

The numbers bear him out. Subprime housing loans started to go bad first, followed with a lag by subprime auto loans and now credit cards.

(But living in your car, if you give up your house, isn't an option like it was in those "more innocent days," because — as the article points out — cars are the next on the credit crisis hit parade.)

It's a relatively new phenomenon, but it's been around long enough to earn a catchy name, "jingle mail." (That's the sound of keys, mailed in by fleeing homeowners). And it's spawned a whole new line of business.

When Raymond Zulueta went into default on his mortgage last year, he did what a lot of people do. He worried.

In a declining housing market, he owed more than the house was worth, and his mortgage payments, even on an interest-only loan, had shot up to $2,600, more than he could afford. "I was terrified," said Zulueta, who services automated teller machines for an armored car company in the San Francisco area.

Then in January he learned about a new company in San Diego called You Walk Away that does just what its name says. For $995, it helps people walk away from their homes, ceding them to the banks in foreclosure.

Last week he moved into a three-bedroom rental home for $1,200 a month, less than half the cost of his mortgage. The old house is now the lender's problem. "They took the negativity out of my life," Zulueta said of You Walk Away. "I was stressing over nothing."

You Walk Away is a small sign of broad changes in the way many Americans look at housing. In an era in which new types of loans allowed many home buyers to move in with little or no down payment, and to cash out any equity by refinancing, the meaning of homeownership and foreclosure has changed, economists and housing experts say.

The Zuluetas aren't "speculators," who purchased a house intending to "flip" it, gambling that rising home prices would yield a profit. They're a working family that wanted a home and bought one with the help of an exotic breed of mortgage. (Whether they should have "known better" or how many of the rest of us "know better" is something we'll explore in another installment.) They've taken what would usually be considered a step backwards, moving from owning to renting.

The Zuluetas are also lucky to have found a home to rent. In some areas hit hard by the subprime crises, renters are facing eviction, even if they've always paid their rent on time. As properties go into foreclosure, and owners "drop off the key," banks are taking over ownership and seeking to unload properties as quickly as possible. The new "owners" are following a "clear it, clean it, and sell it" procedure, which means renters get the boot because an empty place is easier to sell. The result is steeper rents and a shortage of rentals, as foreclosed former homeowners enter the rental market themselves.

But, in some ways, those homeowners were really renters like all along.

Carrie Newhouse, a real estate agent who also works as a loss mitigation consultant for mortgage lenders in Minneapolis-St. Paul, said she saw many homeowners who looked at foreclosure as a first option, preferable to dealing with their lender. "I've had people say to me, 'My house isn't worth what I owe, why should I continue to make payments on it?' " Newhouse said.

"You bought an adjustable rate mortgage and you're mad the bank is adjusting the rate," she said. "And sometimes the bank people who call these consumers aren't really nice. Not that the bank has the responsibility to be your friend, but a lot are just so uncooperative."

The same sorts of loans that drove the real estate boom are now changing the nature of foreclosure, giving borrowers incentives to walk away, said Todd Sinai, an associate professor of real estate at the Wharton School of Business at the University of Pennsylvania.

"There's a whole lot of people who would've been stuck as renters without these exotic loan products," Sinai said. "Now it's like they can do their renting from the bank, and if house values go up, they become the owner. If they go down, you have the choice to give the house back to the bank. You aren't any worse off than renting, and you got a chance to do extremely well. If it's heads I win, tails the bank loses, it's worth the gamble."

And — like the Zuluetas — they drop their keys in the mail after doing the math, even though they can afford to pay, sticking the banks with the property.

In some places, hard hit by the subprime crisis, there's an undercurrent of anger that's finding expression in what I call the "trash 'n' dash revolution," in which fleeing homeowners not only drop off their keys in the mail, but stick the lender with the task of cleaning up.

On the lookout for disturbing trends? Here's one for your pile: According to a recent article in Fortune, there has been a noticeable increase in not just fraud but arson that has kept pace with the housing depression. Professionals in the insurance and lending industry are bracing themselves for all manner of similar situations, as homeowners either trash or simply leave their trash lying around their houses, often taking off without even claiming their furniture. This is already a dirty problem in the housing business, with owners, lenders and banks having to figure out a way to stick each other with the check when tenants destroy their property on their way out the door. Woe is the person left behind to clean up the chaos.

"We just estimated a trashout yesterday where we're going to have to drain the pool," one Fontana, Calif., resident posted on AgentsOnline.Net, a resource and idea site for realtors, "and the stench from it when you enter the backyard is overwhelming. Then, of course, there are mosquitoes all over the top, and it's been sitting so long without chemicals that it's green on top and murky black on the bottom. We've already had to refuse one pool because of its really creepy condition and I'm not so sure about this one either. [I] just hope we don't find the previous homeowner at the bottom when we drain it."

...As if it were that easy. Especially for those homeowners, including those with good and bad credit, who have seen the light at the end of our current economic crisis only to decide there isn't a house in it. In fact, one could almost see the Wall Street Journal frown with disapproval upon reading the title of their December 2007 piece, "Now Even Borrowers With Good Credit Pose Risks." But the title no doubt was influenced by the comments of Bank of America CEO Kenneth Lewis in the piece itself. It seems that Lewis, whose company recently bought the housing meltdown's poster boy for bad lending, Countrywide, for $4 billion in stock, nevertheless feels confounded that customers of questionable loans would simply choose to abandon ship, er, house. "There's been a change in social attitudes toward default," Mr. Lewis told the Journal. "We're seeing people who are current on their credit cards but are defaulting on their mortgages. I'm astonished that people would walk away from their homes." While Lewis may scratch his head in disbelief, employees of the bank Wachovia have an explanation that might work for him: Homeowners have crunched the numbers and decided their houses are worth less than their mortgages. According to a recent conference call, many of Wachovia's current losses in California are originating not from subprime buyers fallen on financial hardship, but from homeowners who can pay their cleverly structured loans but are just choosing a different fate. "They've been from people that have otherwise had the capacity to pay," a Wachovia spokesperson said on the call, "but have basically just decided not to, because they feel like they've lost equity, value in their properties. It's hard to know right now, but we may have seen somewhat of an acceleration problem … as people have reached that conclusion."

Here again is the perpetual transfer of wealth. These home owners have done the math and realize that they are never going to come out on the winning end. They will never have a house worth what they paid for it. But they must continue to pay for it. Like sharecroppers of old — who realized they were never going to break even, let alone get out of debt, and escaped by slipping away in the middle of the night — these homeowners are walking away from a losing venture.

In a telling moment, a HUD public affairs officer speaks of lenders and homeowners in terms that seem more suitable for landlords and tenants.

"We strongly encourage homeowners facing a financial crisis to stay in close touch with the lender holding the mortgage on their home," advised Larry Bush, public affairs officer for HUD's California network. "Because of the number of foreclosures, many lenders would prefer not to add to the inventory of foreclosed homes but instead work out an agreement with the homeowner. Lenders likely have higher costs for a vacant home than a homeowner has for living in the home. They have to make certain the property is kept in good condition; in most jurisdictions this means keeping the electricity and water hookups active, security monitoring to ensure there are no squatters or break-ins, and new appraisal and inspection. Homeowners absorb many of those costs."

Last I checked, utility bills, lawn services, etc., don't cost the lender any more than it did the homeowner. Of course, the homeowner is paying for the upkeep of one home. The lender maybe doing the same thing hundreds of times over, as more homes are foreclosed or more homeowners walk away from their properties. Homeowners — invested ones, anyway — do not just absorb costs. They are not just caretakers for the bank's property. The whole idea of ownership is that they are making an investment, not absorbing costs.

But that's all that's left now; absorbing costs. It's all that, in the end, trickles down. And that's where the anger comes from, as with those people find out too late that they've bought into a Ponzi scheme or the bottom level of a pyramid scheme, or that they're left in the middle of the mess after a bubble bursts.

It's the same anger that follows a broken promise, or a betrayal, when people have followed the rules, or simply done the same what everyone around them: bought into the idea of the ownership society, only to find that the rules have changed, and the door was never opened anyway.

Today, the basic promises of the ownership society have been broken. First the dot-com bubble burst; then employees watched their stock-heavy pensions melt away with Enron and WorldCom. Now we have the subprime mortgage crisis, with more than 2 million homeowners facing foreclosure on their homes. Many are raiding their 401(k)s--their piece of the stock market--to pay their mortgage. Wall Street, meanwhile, has fallen out of love with Main Street. To avoid regulatory scrutiny, the new trend is away from publicly traded stocks and toward private equity. In November Nasdaq joined forces with several private banks, including Goldman Sachs, to form Portal Alliance, a private equity stock market open only to investors with assets upward of $100 million. In short order yesterday's ownership society has morphed into today's members-only society.

The mass eviction from the ownership society has profound political implications. According to a September Pew Research poll, 48 percent of Americans say they live in a society carved into haves and have-nots--nearly twice the number of 1988. Only 45 percent see themselves as part of the haves. In other words, we are seeing a return of the very class consciousness that the ownership society was supposed to erase. The free-market ideologues have lost an extremely potent psychological tool--and progressives have gained one. Now that John Edwards is out of the presidential race, the question is, will anyone dare to use it?

Will anyone? Will anyone who's able to use it, still have the will to use it? Will anyone with the will to use it still be able to use it? Corporate interests own shares in the remaining presidential candidates. The Supreme Court — which includes two justices appointed by George W. Bush — shut the door on any hope of justice for Enron's victims. Can anyone with the will to use it and the ability to use it still afford to use that weapon?

Yes, of course: those with little to nothing left to lose. Their numbers are growing, thanks in part the very financial institution now threatened by a weapon they created, loaded and left on millions of coffee tables and kitchen tables across the country, where almost anyone can pick it up.

And that's why even the "free market ideologues" in the Bush administration are making noises about government intervention. Because now there's a loaded weapon in the room, loaded by and pointed at the citizens they must protect.

The Society of the Owned: The Rage of a Middle Class

Terrance Heath — Thu, 06 Mar 2008 11:30:30 -0500

Part Five of a series.

Something's happening out there. It's happening quietly in some places and not-so-quietly in others. It's happening around kitchen tables and in living rooms across the country, as Americans come to grips with new — or, to them, newly-revealed — economic realities. For some, it's just impossible to deny or ignore what most have known for weeks about the economy. Even the Bush administration — famous for simply ignoring reality (see part two of this series), as the president himself recently demonstrated by denying we're in a recession — is showing vague signs of concern.

Maybe someone in the White House has been reading the news over the last several days, and maybe even reading it to the president. (Though until a reporter asked him about it, Bush hadn't heard that gas might soon cost $4 per gallon.) But even the president might not have needed his news predigested this time, because even a perusal of the headlines in the last few days indicates that something — like that middle class anger in the last post — is building, and it's reaching a point where more and more people have almost nothing left. And, it follows, nothing left to lose.

Every other day, it seems there's a report on just how bad the economic news is, and particularly for precariously perched members of the middle class, who are landing on the ground of their new economic status with a resounding thud. First came the news that foreclosures were up 57% in January. That was followed news that last month bankruptcies reached their highest level since 2005, driven by (surprise, surprise) the huge increase in foreclosures

Personal bankruptcy filings climbed last month to their highest level since 2005, when Congress enacted laws aimed at discouraging such filings, and experts predicted more than a million Americans will seek bankruptcy protection this year.

...The numbers highlighted the rising toll of the U.S. housing slump and the credit crunch it precipitated. Those developments have brought the economy to the brink of recession and led to a surge in home foreclosures. In response, the U.S. central bank has cut interest rates at the fastest clip in more than two decades, but the economy has remained sluggish.

..."I don't see a problem reaching one million," said consumer bankruptcy attorney Brian J. Small of Thav Gross Steinway & Bennett in Michigan. "I would be surprised if...we don't exceed it."
Small said home foreclosures have been "the leading impetus" for the increase in personal bankruptcy filings. That's because by the time homeowners face foreclosure "they've already borrowed every penny that they could; they already spent everything in their savings. They're at the point where there's nothing left," he said.

What's interesting is that the borrowers Small describes doesn't fit the profile of the "typical" subprime borrowers who are, in some places at least, partially blamed for the crisis. Small goes on to describe people with "credit card debt between $30,000 and $50,000," who've "borrowed every penny that they could," which doesn't sound like people who can't get a loan that isn't a payday loan and couldn't get credit before subprime loans. (Though, when it comes to credit they may have more in common with those subprime borrowers than they know or would care to admit. That's something we'll explore a bit later in this series.)

If the people Smalls speaks of have nothing left, it's because they've had very little left for months now, and their spending shows it.

Ben Bernanke, the Federal Reserve chairman, told Congress last week that fighting off a possible recession in the United States was Job 1 for his crew. But a consumer-led recession has already begun, according to a new index that reflects how much money Americans can actually spend right now.

The new indicator comes courtesy of Charles Biderman, the founder and chief executive of TrimTabs Investment Research, a proprietary research firm in Santa Rosa, California. "The big picture is: The amount of money people have to spend, which includes money on real-estate transactions, is plummeting, and it started to break down in October," he said.

Of course, none of that's going to come as news to middle class Americans who learned not long ago that subprime isn't the only mortgage crisis. Many prime borrowers who opted for low down payments or mortgages with adjustable interest rates, or who refinanced their homes or took out home equity loans with adjustable rates, now find their rates increasing at the same time that home values are the lowest they've been since 2004; and at the same time that — in no small part, due to the subprime crisis — banks have $900 billion less to loan, and as a result are cutting off equity lines of credit.

Those who have jobs will lose ground, because rising costs are eating up their stagnant wages, but at least have a chance of not going into free fall — as long as they have jobs. January saw a loss of 17,000 jobs, and while the Bush administration pointed to 4.9 percent unemployment rate as evidence that there's no recession going on, the numbers hide the reality that Americans are looking longer for work, and many are just not finding it. Among the latter, a growing number are highly skilled and educated workers who can't find work, or can't find work that pays as well as their previous jobs, or comes with the comparable benefits. (For what it's worth, a college degree won't guarantee you a job in China either.)

February's unemployment numbers remain to be seen, but the ADP employment index says that the private sector dropped 23,000 jobs in February. Some economists take that as a sign of the labor market deteriorating even further, which is probably no surprise to anyone whose unemployed or underemployed and looking for work. But the real significance for middle class workers is in which sectors also lost jobs and which sector gained jobs.

Employment in the service-producing sector rose by a net 47,000 jobs, but employment in the goods-producing sector lost 70,000 jobs, the ADP survey showed. And factory employment fell for the 18th straight month, dropping a further 40,000 jobs.

As factory jobs and goods-producing jobs disappear, the possibility of earning middle class wages for blue collar work goes with them. As one labor expert (sounding like the foreman in Springsteen's "My Hometown") said, "These jobs are going and they're not coming back." The only sector that's experiencing job growth (besides government, ironically enough, given the current administration) is the service industry — where wages are lower and benefits fewer — and even that growth is outpaced by job losses in other sectors, where does that leave the laid-off middle class homeowner whose mortgage payment just went up at the same time that the value of her home plummeted and her bank cut off access to the home equity loan that many like her would might otherwise draw upon?

In the leaner, meaner economy of the present — in which the job market as worsened for everyone, including those with college degrees, and some employers now require credit checks of applicants — some of them may find themselves competing with teenagers for jobs at fast food establishments.

So, there's a whole population who thought that in buying a home they'd at least bought their tickets to middle class stability, if not to the first stop on the way to building wealth. Now, they're finding that they're traveling in the opposite direction, their tickets punched for a very different destination. And their mortgage applications (much like their credit card applications) have turned out not to be membership applications for the ownership society after all. In fact, they own less, make less, and can't get any more. They can't buy, borrow, work, or educate themselves up the economic ladder anymore.

You might think that all of the above would cause a good deal of anger in that population, and that it might be directed towards the top of the economic heap. You'd be half right. At least some of that anger is actually being directed sideways and downward.

Now that the supbrime crises has roused the very same administration that slept through its beginnings to the point of maybe even doing something about it, we must pause to debate the morality of a bailout, lest somehow the "wrong people" get help keeping their homes. At the local level, the terms of the dissent against foreclosure aid has grown more blunt,

As the Bush administration and Congress consider proposals to ease the home foreclosure crisis, local governments across the country have been lending money to imperiled homeowners and confronting some opposition

Some of these municipal and state efforts have met resistance from people who consider the assistance undeserved and adamantly oppose anything that resembles a taxpayer bailout.

...The goal of these programs is not just to keep people from losing their homes, but also to limit broader economic fallout, including plummeting property tax revenues and widespread declines in home values. Still, they pit what some government officials say are practical economic solutions for the common good against individual ideals of fairness and personal responsibility.

The opposition may be rooted in “this ancient notion of deserving versus undeserving, and you’re undeserving if you made a bad decision,” said Nicolas P. Retsinas, the director of the Joint Center for Housing Studies at Harvard University.

While the negative reactions have not stopped the assistance efforts, it has put some local officials on the defensive and forced them to try to sell the programs to the general public, not just to the intended recipients.

Yet, this dissent is happening against the backdrop of cities struggle to cope with vacant homes, foreclosed and abandoned by subprime borrowers, attracting crime, blighting neighborhoods and further destroying home values. Local budgets are impacted to the point where schools are bracing for cuts as the housing crisis eats away at funding. Meanwhile governors turn to Washington for infrastructure funding — to repair roads, bridges, and water systems — only to be rebuffed by President Bush, who prefers the same "wait and see" approach Alan Greenspan took to the development of the current crisis. (And who, by the way, wants to take millions of dollars from the states, for the federal government, in the form of mineral royalties that could fund infrastructure in the states.)

Sound familiar?

The hesitation to bail out subprime borrowers who were either "speculators" or "should have known better" is a reflection to some degree of the success of the ownership society myth. Even as they are drowning in the very same waters as subprime borrowers, prime borrowing members of the middle class cling to the conservative idea that some people shouldn't be rescued. Some people should be left to drown, and they can be identified by their lack of economic resources.

This is not happening to a few people who "deserve it." It's happening to all of us. There is no way to separate the lambs from the goats. If my neighbor goes into foreclosure and his house stands vacant, the value of my house goes down, and my neighborhood becomes a less desirable place to live, and perhaps a more dangerous one given the problems that come with having vacant houses standing in a community.

In the midst of the hand wringing over bailing out the "wrong" people, what's forgotten is that the subprime crisis has long since metastasized and spread to the suburbs, where families who believe themselves safely ensconced in the middle class, who've borrowed on the equity in their homes, find themselves sitting in houses now worth less than they're paying for them. And the "wealth" that their homes supposedly represented, which in reality was merely credit (debt masquerading as money), has disappeared, or become much harder to access.

One of the illusions of the ownership class, for those who aspire to join it, is that they ceased to be one of "those" people, who got themselves into trouble by living beyond their means — pretending to a class they don't belong to, getting ideas above their standing, etc. — even as they borrow against the credit-based "wealth" in their homes to finance everything from vacations to retirement to college tuitions.

What will happen when, or if, they realize that they never really joined the ownership class, and that they weren't even close?

Some already have, and next we'll look at what they're doing about it right now.

The Society of the Owned: Caught in the Middle

Terrance Heath — Tue, 04 Mar 2008 11:54:41 -0500

Part Four of a series.

Let's return, once more, to our metaphorical intersection from parts two and three of the series. Except, where we once imagined a doomed pedestrian just preparing to cross the intersection, let's imagine a group of pedestrians stuck in the middle of the intersection. When they started across the intersection, they had the green light. As far as they knew, it was safe to cross. But — as luck would have it — they were just halfway across when the signal changed. Now, traffic whizzes by them, on both sides, heedless to their plight as they find it impossible to finish the journey to the other side of the street, and difficult to go back whence they came.

It's not a stretch to imagine those pedestrians as representing the middle-class, buffeted by the credit crisis on one side and the subprime crisis on the other, and finding themselves caught in the middle, with no real options except to hope the signal changes again, so they can either scramble to the other side of the street, or make a hasty retreat.

Upward mobility in the American economy has always been something like the popular 1980s computer game, "Frogger," in which players had to maneuver their frogs across a busy street. Doing so successfully often meant taking two hops backward of sideways for every one hop forward. Failure to move fast enough meant getting squashed flat by oncoming traffic. Today, after hopping sideways for as long as possible, America's middle class is getting flattened, or — for the lucky — taking several hops backwards.

Some may find themselves standing in line for payday loans alongside some of the people from the previous post, as the wreckage spreads ouwtward from the subprime mortgage implosion.

We're talking to doctors, attorneys, and businesspeople," says Carol Freeland, a partner at PRM Financial. "Just because you make a lot of money doesn't mean you don't end up in trouble."

That may be why payday lenders, which advance customers money on their paychecks at rates of up to 500%, are migrating to more affluent neighborhoods. According to a recent Brookings Institution study, there were only a few hundred payday lenders in the U.S. in the 1990s; now there are more than 23,000, with 37% located in Zip Codes where the median income is at least $48,000. "People who never dreamed they'd go to a payday lender are going," says Gail Cunningham of the nonprofit National Foundation for Credit Counseling.

The payday lenders may just be their next stop after the pawn shop, in an effort to keep from defaulting on their pawns shop loans.

Dave Adelman, president of the 2,400-member association, said that people are taking longer to pay back their loans and are more often taking the cash and never coming back for their goods.

...Some pawn shops say they are also seeing a new group of more affluent customers coming into their stores.

"People are rummaging through the jewelry boxes, and stuff they are not wearing they are turning into cash," said Adelman, who also owns two pawn shops in Atlanta.

He said it is the same story from members across the country.

These nascent and supposedly established members of the middle class are finding themselves caught between the subprime crisis and its effects in a way that wasn't supposed to happen to people like them. (Though not necessarily in a way that was entirely unforeseen, as we explored in part two.) As these alleged members of the ownership society find themselves actually owning less — whether it's never-reclaimed pawn shop fodder or the house that went from money pot to money pit with a simple rate adjustment — it's not clearly exactly how they will respond, but there are signs. The middle class frustrations Isaiah Poole noted are one. The 180-plus comments on this MSN Money post — which says of the collision of the housing slump and the credit crisis, "This is a good thing." — are another.

They are, as least in their own minds, people who did the right things; or, at least, nothing their neighbors, family members and friends weren't doing: pursuing the "American dream" of home ownership. As a former Wall Street executive noted, the "everyone a home owner" of the present is closely related to the "chicken in every pot" sentiment of the 1930s. "Home ownership" and "American Dream" are pretty much synonymous, and have been since at least the post-WWII era

And most of them bought it, literally. Just as their parents did, but since the post-WWII building boom middle class reality has not kept pace with the "American dream." Baby boomers worried about retirement might have seen the handwriting on the wall in their smaller-than-expected inheritance from the "greatest generation." That may be disappointing enough, but when paired with the declining value of the homes intended to secure their retirement, and finance their children's education, it's devastating enough that Congress and the White House are now arguing about a stimulus package to bail out "prime borrowers" dealing with a perfect storm of rising mortgage rates, falling home values, and a dearth of credit which all have their roots in the subprime crisis to some degree.

Now add to the mix the growing ranks of highly skilled and out of work, educated, white collar workers who are spending more time looking for work and not finding it, and whose who — if they reenter the workforce will do so for less pay and fewer benefits.

Once concentrated among manufacturing workers and those with little work history, education or skills, long-term unemployment is growing most rapidly among white-collar and college-educated workers with long work experience, studies have found, making the problem difficult for policymakers to address even as it grows more urgent.

"What has happened is a polarization of the labor market. It was very strong at the very top and very strong until recently at the bottom," said Lawrence F. Katz, a labor economist at Harvard University. "But in the recent weak recovery, and now recession, demand has been very weak" for jobs in the middle.

...The growth in long-term unemployment has occurred even as displaced workers have taken bigger pay cuts to reenter the job market. A 2004 study found that workers who lost a job in 2001 to 2003 took an average pay cut of 17 percent in their new jobs, more than double the average cut of those displaced in the late 1990s.

"When people are losing good jobs these days, they have a very hard time getting back to the type of job they had before," said Andrew Stettner, deputy director of the National Employment Law Project, an advocacy group that presses for more generous unemployment benefits.

While strong corporate profits, low inflation and record manufacturing output characterized the extended recovery that followed the 2001 recession, some economists call that period of expansion a "CEO's recovery." Real wages were mostly flat, poverty ticked upward and an unusual number of people had a hard time finding work — a fact masked by relatively low overall unemployment rates.

(Then consider that many of them may find themselves locked in the vicious cycle joblessness and underemployment that Michael Kwiatkowski describes in an excellent post about stumbling blocks on his path towards employment and economic stability.)

Add it all up, and you have the perfect recipe for the kind of middle-class anger expressed in the comments on the MSN Money post and the comments that Isaiah referenced in his post. We'll take a look at a couple of aspects of that anger, and where it might be directed, next in this series.

The Society of the Owned: Deeper In Debt

Terrance Heath — Wed, 27 Feb 2008 11:45:05 -0500

Part Three of a series.

Let's return to our metaphorical street corner from the previous post, because to understand the current economic crisis it might help to consider how many have been run down at that economic intersection, as conservatism stands by and watches. There's another lending crisis that's gone on for a while now, making far fewer headlines than the subprime crisis, the credit crunch, or the housing slump—because of the people it affected. But as those crises intensify and affect more and more people, this one may become even bigger news than it has been so far.

Back in December 2006, when the subprime crisis was just getting started, The New York Times ran a story about short-term "payday" loans and their devastating impact on the poor, who get caught in a never ending cycle of debt.

While such lending is effectively banned in 11 states, including New York, through usury or other laws, it is flourishing in 39 others. The practice is unusually rampant and unregulated in New Mexico, where it has become a contentious political issue. The Center for Responsible Lending, a private consumer group based in Durham, N.C., calculates that nationally payday loans totaled at least $28 billion in 2005, doubling in five years.

The loans are quick and easy. Customers are usually required to leave a predated personal check that the lender can cash on the next payday, two or four weeks later. They must show a pay stub or proof of regular income, like Social Security, but there is no credit check, which leads to some defaults but, more often, continued extension of the loan, with repeated fees.

Drive through any low-income neighborhood and you'll see as many of them as you will banks, if not more, with signs advertising cash checking services and short-term loans, money wiring service, and phone cards.

The article focused on the effect payday lenders have had on a Native American community near Gallup, NM. Since then, payday lenders have spread to a wide range of communities, ostensibly to serve a new and growing demographic of customers. Their tactics have changed, too. Earlier this month, an article in The Wall Street Journal revealed that payday lenders are targeting the elderly and disabled now, tapping into their bank accounts, taking control of their Social Security and disability benefits, and giving them "allowances" after the lenders subtract their chunk.

One recent morning, dozens of elderly and disabled people, some propped on walkers and canes, gathered at Small Loans Inc. Many had borrowed money from Small Loans and turned over their Social Security benefits to pay back the high-interest lender. Now they were waiting for their "allowance"—their monthly check, minus Small Loans' cut.

The crowd represents the newest twist for a fast-growing industry—lenders that make high-interest loans, often called "payday" loans, that are secured by upcoming paychecks. Such lenders are increasingly targeting recipients of Social Security and other government benefits, including disability and veteran's benefits. "These people always get paid, rain or shine," says William Harrod, a former manager of payday loan stores in suburban Virginia and Washington, D.C. Government beneficiaries "will always have money, every 30 days."

The law bars the government from sending a recipient's benefits directly to lenders. But many of these lenders are forging relationships with banks and arranging for prospective borrowers to have their benefits checks deposited directly into bank accounts. The banks immediately transfer government funds to the lenders. The lender then subtracts debt repayments, plus fees and interest, before giving the recipients a dime.

In the first post in this series, I referred to the long dead practice of sharecropping. In many the images of people lined up outside a lender's storefront reminds me of sharecroppers lined up to get their pay after harvest, usually getting less than they had coming to them, and finding themselves still in debt with little hope of getting out.

According to the article, the elderly and disabled are actively targeted by payday lenders.

An analysis of data from the U.S. Department of Housing and Urban Development shows many payday lenders are clustered around government-subsidized housing for seniors and the disabled. The research was done by Steven Graves, a geographer at California State University at Northridge, at The Wall Street Journal's request. His previous work was cited by the Department of Defense in its effort to cap the amounts lenders can charge military personnel.

...But some industry critics say fixed-income borrowers are not only more reliable, they are also more lucrative. Often elderly or disabled, they are typically dependent on smaller fixed incomes and are rarely able to pay off their loans quickly. "It's not like they can work more hours," says David Rothstein, an analyst at Policy Matters Ohio, an economic research group in Cleveland. "They're trapped."

The stories of some of the people interviewed for the article include Harrod, the former manager who quit after supervisors encouraged him to recruit the elderly, a 80-year-old man who lives off of $180 a month after payday lenders take their cut of his Social Security benefits, and single mother who actually spent a few hours in jail as a result of entanglement with payday lenders. Their decisions to apply for short-term loans were usually linked to needs to pay unexpected bills—a car repair here, a vet bill there, etc. But in the cases of the elderly and disabled, who come bearing regular Social Security benefits, the lenders go the extra mile of setting up bank accounts and direct deposit.

Mr. Bevels, who can't read, says a clerk helped him fill out papers that instructed Social Security to send Mr. Bevels's $565 monthly benefits to an account at an out-of-state bank, which transferred the money back to Small Loans or its parent, usually within a day. As is often the case, Mr. Bevels's bank earned no interest and didn't come with either ATM cards or checks.

Every month for nearly four years, Mr. Bevels, who is known around town as "Buckwheat" because of his thatch of yellow-white hair, rode his motorized mobility scooter to Small Loans to pick up his "allowance," which was sometimes as little as $180 a month, he says.

...The company had Ms. Rumph, 43, sign documents directing her teenage son's Social Security disability check, which is $623 a month, to the company by way of an intermediary bank—a condition for getting the loan, she says. The Social Security Administration says it doesn't have a problem with lenders capturing Social Security checks of disabled or orphaned children as long as the benefits money ultimately goes to the "current needs" of the child.

Like Mr. Bevels, Ms. Rumph didn't receive an ATM card or a checkbook. Each month she would go to Miracle Finance 30 miles away in Abbeville, Ala., to pick up what remained of her son Jeremiah's benefits after the company subtracted fees, interest and loan repayments, usually leaving her with less than $300 of her son's check.

This is all made possible by the absence of regulations. Back in 1990, the government required Social Security beneficiaries to receive their benefits via direct deposit, unless they opt out. That made it easier for recipients to pledge their benefit payments as collateral for short term loans. But privacy rules prohibit the government from monitoring beneficiaries' bank accounts, and no regulatory agency tracks how much money, in Social Security benefits, is going to payday lenders.

That relationship to non-existent or lax regulations continues on the state level, but with an interesting twist. Eleven states have effectively banned payday loans through usury laws and other measures, but it is a growing industry in the other 39 states. (Last year the District of Columbia capped payday loans at 24%, virtually banning them, and now Virginia is considering a similar measure.)

According to a new study by the two researchers who previously found geographic evidence of payday lenders targeting the military, there's a correlation between conservative Christian legislative power and the proliferation of payday lenders.

We conclude that there is a strong correlation between the density of payday lending industry and the political power of conservative Christians.

In an interview with Newsweek researcher Christopher Pederson talked about the surprising results of the study.

What's interesting and surprising to us is that we found a strong correlation between the number of payday lenders within a geographic area and the political power of conservative Christians within a state. It's a surprising result to us because the natural hypothesis would have been to assume that given biblical condemnation of usury, there would be aggressive regulation and less demand for payday loans in those types of states. I think it's ironic that we actually found that the opposite tended to be true.

States throughout the Bible Belt and in the Mormon west, Pederson said, tend to have very little regulation of short-term or payday lending. He offered a possible reason why.

I don't think anybody's going to come up with a study that answers that. That's more a matter of political speculation, but here's what I suspect may be part of the story: in the 1980s and continuing perhaps even stronger in the 1990s, I think it's fair to say that the Christian right and conservative Christians came to align themselves with conservative Wall Street big-business interests...

...I think that part of the explanation is that the alliance between social-values conservatives and big-business conservatives was a big change in the balance of power with respect to consumer protection law or limits on usury. Once that happened, around the country a lot of states started to deregulate, started to less aggressively prevent usurious loans.

That may change, given recent economic trends. The mortgage crisis is spreading beyond subprime now, touching people who have thus far been prime borrowers, with good credit, but who are finding themselves squeezed between falling house values and climbing mortgage payments — including some who have tapped into their equity and used credit to "keep up the facade of wealth," and perhaps to convince others and themselves of their membership in the ownership class.

Those same "former members" of the ownership class are now heading to the nearest pawn shop, selling off what they do own, in order to continue making ends meet. From there, they won't have far to travel to get to the nearest payday loan shop, because payday loans are moving to the suburbs, and homeowners are starting to spend big bucks on these little loans.

What happens when people who thought they were members of the ownership society find out they're not, and find out which club they really belong to?

We'll look more closely at them next in the series.

The Society of the Owned: Under the Bus

Terrance Heath — Mon, 25 Feb 2008 10:20:35 -0500

Part Two of a series.

Consider this scenario. You're standing at a busy street corner when you see someone about to step off the curb right into the path of an oncoming bus. You have just enough time and you're close enough to reach out and stop them before it's too late. Do you? Conservatism says, no.

Now consider this scenario. You're standing at a busy street corner when you see someone about to step in front of a speeding bus. Someone else beside you is about to reach out and stop the other person from becoming roadkill. Even if you don't attempt to stop the person from stepping in front of the bus, would you actually stop the would-be rescuer from stopping them? Even if the driver was deliberately aiming for the would-be victim? Conservatism says, yes.

Conservatism apparently holds that some people should end up under the bus, or at the very least no one should try to keep them from ending up there.

In a Washington Post editorial, New York Governor Eliot Spitzer writes of how the Bush administration blocked states' efforts to protect subprime borrowers. When Spitzer and officials in 49 other states attempted to stop predatory lending practices, the Bush administration stepped in to stop states from taking any such action.

Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.

Let me explain: The administration accomplished this feat through an obscure federal agency called the Office of the Comptroller of the Currency (OCC). The OCC has been in existence since the Civil War. Its mission is to ensure the fiscal soundness of national banks. For 140 years, the OCC examined the books of national banks to make sure they were balanced, an important but uncontroversial function. But a few years ago, for the first time in its history, the OCC was used as a tool against consumers.

In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government's actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules.

In fact, when Spitzer's office opened investigations into possible discrimination in mortgage lending, the OCC under the Bush administration filed a federal lawsuit to stop the investigations.

The full significance of what Gov. Spitzer is saying really becomes evident when you remember, as Bill Scher pointed out earlier, that when people who saw the hand writing on the subprime-mortgaged wall alerted the Bush administration to the impending disaster, they were ignored. Specifically, Alan Greenspan himself received direct warning about the coming subprime crisis, and did nothing to stop it.

And leaders of a housing advocacy group in California, meeting with Mr. Greenspan in 2004, warned that deception was increasing and unscrupulous practices were spreading.

John C. Gamboa and Robert L. Gnaizda of the Greenlining Institute implored Mr. Greenspan to use his bully pulpit and press for a voluntary code of conduct.

“He never gave us a good reason, but he didn’t want to do it,” Mr. Gnaizda said last week. “He just wasn’t interested.”

Today, as the mortgage crisis of 2007 worsens and threatens to tip the economy into a recession, many are asking: where was Washington?

Where was Washington? Well. Like Rip Van Winkle finally waking up from a long nap, Greenspan delivered astounding pronouncement that the U.S. economy is "on the edge of recession" due in part to the crisis of falling home values, set in motion by the very scourge he declined to do anything about even when the looming disaster was pointed out to him.

Where was Washington? Well. Dean Baker points out that, like the Federal Reserve's very own Mr. Magoo, Ben Bernanke failed to even see the housing bubble, and then once it finally burst failed to see the "financial tsunami" (as Baker calls it) that was about to hit our economy.

Baker's right when he says that there's really no excuse for not seeing disaster about to strike, when (a) it's your job to see it, and (b) people are going out of their way to point it out to you.

Allowing the housing bubble to grow unchecked was a mistake of monumental proportions. It was inevitable that it would end badly. There is absolutely no excuse for a competent macro economist to have missed the growth of this bubble. The country had never seen this sort of run-up in house prices. Furthermore, there was no explanation for this run-up, based on the fundamentals of supply and demand in the housing market, that passed the laugh test.

Yet, the Fed chairmen either did not see the bubble or chose to ignore it. As Greenspan said repeatedly in reference to the stock bubble, he thought it was best just to let the bubble run its course and then pick up the pieces after it burst. Well, it is not easy to pick up the pieces after bubbles burst, and that is going to be even more true with the housing bubble than with the stock bubble.

But there's a third possibility, besides the two Baker mentions. First, you have to take into consideration that we're dealing with an administration that got the memo about potential terrorist hijackings in August 2001, and didn't classify warnings about Bin Laden's network as "urgent." We're dealing with an administration that declined to study how to protect New Orleans from a hurricane, despite government agency reports in 2001 that such a catastrophe was highly likely. We're dealing with an administration that ignored and then squelched intelligence suggesting that Iraq had no WMD.

So, where was Washington? Washington was standing on the street corner where we started this post. Washington saw the speeding bus coming, saw someone about to walk into the path of that speeding bus, and declined to stop them. Far from ignoring the impending crash, Washington saw the states about to stop the people from stepping in front of the subprime bus, and instead stopped the states from averting disaster.

In a previous post, I wrote that there are people who look on the disaster and see things as they should be. It's important to remember that Greenspan "didn't want to do it" when urged to stop the subprime debacle from happening, and "thought it best to let the bubble burst and pick up the pieces later." Put that in the context of a remark that will be significant later in this series — that there's nothing fundamentally wrong with financial system that made it all possible — and it's clear that there are those who don't see anything fundamentally wrong with some people ending up under the economic bus, don't particularly want to stop them ending up there, and think it's best to just let it happen.

Three guesses as to who's a member of the ownership society and who's not — the economic roadkill or the bystanders who watch it all happen and "pick up the pieces later" — and the first two don't count.

Washington stood on that street corner, watched people go under the bus, and now that a crowd has gathered and at the scene of the accident, now Washington is concerned. Now Washington is declaring an emergency. This, after Washington saw the whole thing coming, watched it happen, and did nothing about it.

Maybe Washington just thinks it's inevitable that someone will end up under the bus, and that some people just belong under the bus, however they get there.

It seems inherent in conservative philosophy to see disaster approaching, to know where and whom it will strike, and to simply stand out of its way. The problem is that the person stepping into that intersection, about to get mowed down, is all of us. Or at least the 99.2% of us who are not, have never been, and never will be members of the ownership society.

Even if that disaster can be averted, it shouldn't be. That's the heart of both the conservative love of deregulation and reluctance to intervene that makes economic disasters like this likely to happen, and to happen on large scales like the metastasizing subprime crisis, and on the small scale of millions of personal stories ranging from foreclosure to bankruptcy to never-ending debt.

There's a motive for letting simply letting it all happen, though. It's very simple. As easy as it might be to write off that kind of "devout neglect" to the plain old mean-spirited notion that survival — economic or otherwise — "is a matter of privilege," the bottom line is actually the bottom line. None of this would have happened, or been permitted to happen, unless somebody — and not just anybody, but people already significantly privileged when it comes to economic survival — stood to profit from it.

The Society of the Owned

Terrance Heath — Tue, 19 Feb 2008 10:30:33 -0500

Part One of a series.

When George W. Bush first spoke of "the ownership society," he led most Americans to believe, and many did believe, that he was talking about them. Now, four years later, it's easy to conclude that the president, his party and conservatism itself has failed to deliver the ownership society.

But the very crises now described and decried in both the new media and the old can actually be taken as signs of conservatism's success, depending on one thing: identifying who really belongs to the ownership society. Conservatism, depending on how you look at it, has successfully built the ownership society — a very small, narrowly defined one — and strengthened it by building or expanding its essential support: the society of the owned.

The term "owned" has its origins in the realms of hacking and gaming, but I'm only partly borrowing the slang definitions — "To dominate another person or thing so completely as to humiliate them" and "To be made a fool of; To make a fool of" — here.

As the grandson of sharecroppers, I grew up hearing stories about how the system of sharecropping worked. Farmers worked all season, buying the goods they needed — food and clothing for their families — from the plantation owner, always on credit and always at high interest. By harvest, they always owed more than their work ended up being worth, often due to the various adjustments of the plantation owner.

The bottom line was, as long as they were in debt they couldn't leave. And the system all but assured they never got out of debt. Sharecropping was post-slavery, so they weren't literally owned; just nearly so. They worked hard, but in the end had nothing to show for it; nothing of their own, at least, because they owned almost nothing. Sharecropping itself died with the the advent of farm machinery, but there's a lot going on in America today that looks an awful lot like it.

After the State of the Union Address, Naomi Klein noted that the "ownership society"—so often mentioned at the beginning of Bush's presidency—didn't even rate a mention in the final address of his presidency. "Bush," Klein wrote, "has turned out to be ownership society's undertaker." Again, that depends on how you define the ownership society, and how you identify the owners; something Bush did as early as the 2000 campaign when he addressed a fundraiser audience, saying, "This is an impressive crowd of the haves and have mores. Some people call you the elite, I call you my base."

Whether or not, in that particular incident, Bush was "mocking" his image of catering to the wealthy, Paul Krugman pointed out — in a 2006 Rolling Stone article, "The Great Wealth Transfer" — that the wealthiest are truly Bush's "base," as they are at every juncture the main beneficiaries of the Bush administration's economic policies and the economic philosophy of conservatism itself.

During the 2000 election campaign, George W. Bush joked that his base consisted of the "haves and the have mores." But it wasn't much of a joke. Not only has the Bush administration favored the interests of the wealthiest few Americans over those of the middle class, it has consistently shown a preference for people who get their income from dividends and capital gains, rather than those who work for a living.

After rattling off the various ways the Bush administration has favored the economic interests of the wealthiest few while ignoring or opposing the interests working Americans, Krugman spotlighted what might be the cut-off point for membership in the ownership society or, more precisely, the ownership class.

Finally, there's the government's most direct method of affecting incomes: taxes. In this arena, Bush has made sure that the rich pay lower taxes than they have in decades. According to the latest estimates, once the Bush tax cuts have taken full effect, more than a third of the cash will go to people making more than $500,000 a year -- a mere 0.8 percent of the population.

We'll meet a few of them later in this series, but if their numbers are so small and their economic class so narrowly defined, how can most people be convinced or expect that they can join the ranks of "the ownership society"? Klein wrote:

The idea was simple: if working-class people owned a small piece of the market--a home mortgage, a stock portfolio, a private pension--they would cease to identify as workers and start to see themselves as owners, with the same interests as their bosses. That meant they could vote for politicians promising to improve stock performance rather than job conditions. Class consciousness would be a relic.

It was always tempting to dismiss the ownership society as an empty slogan--"hokum" as former Labor Secretary Robert Reich put it. But the ownership society was quite real. It was the answer to a roadblock long faced by politicians favoring policies to benefit the wealthy. The problem boiled down to this: people tend to vote their economic interests. Even in the wealthy United States, most people earn less than the average income. That means it is in the interest of the majority to vote for politicians promising to redistribute wealth from the top down.

Except, the reality is that it is in the interest of the real ownership society to vote for (and write checks to), and have rest of us to vote for politicians who will, if not actively redistribute wealth from the bottom to the top, at least stand out of the way while the ownership society itself implements that transfer of wealth. It goes without saying, of course, that it's in the interest of the ownership society to get the rest of us to vote the same way. That's accomplished by making us think we've joined the ranks of the ownership class, until we find out otherwise, at which point it might be too late anyway.

In every system in which a narrow few live and grow wealthy on the work and worries of many, from slavery to sharecropping, it is always a great benefit to get the many to identify with the few. In this case, urging them to forget, as F.Scott Fitzgerald said, the rich really are "different from you and me."

The shift is psychological, but not intended to actually shift the economic realities of those targeted. Just our loyalties, which would shift to politicians who would actually vote in the interests of the members of the real ownership society. Membership has its privileges, and also its price. Entry into the ownership society comes not when you buy a house, but when you buy a member of the House or the Senate, or even an occupant of the White House.

The bifurcation is merely a dissolution of the mirage of belonging to the "ownership society." Remember, the attendant who hands out towels in the executive restroom also has a key to the executive restroom. But that doesn't make him/her and executive. It never has.

The ownership society that has always been is simply more clearly identified than before, as is the society of the owned now. The trick, and it worked for a while, was to convince the society of the owned that it too was part of the ownership society. But when bubbles inevitably burst, we remember (too late, in many cases) what we'd been convinced to forget: that the rich really are different from you and me. This becomes clear as the curtain falls away and the ownership society itself is glimpsed.

Crossposted from The Republic of T.