Thursday, June 14, 2012

Foreclosure Activity Jumps In Troubling Sign For Housing Recovery

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The housing market has shown some promising signs of late, but a fresh batch of foreclosure data offers a reminder that any recovery from the housing bust will likely be slow, spotty and painful.

RealtyTrac reported Thursday that foreclosure filings rose by 9 percent in May from a month earlier, to 205,990 total properties that were subject to default notices, scheduled auctions or bank repossessions.

The jump in foreclosure activity was likely because lenders are finally getting to a backlog of homes they might have started foreclosing on last year if they weren’t facing criticism for cutting corners and pushing foreclosures through too quickly and without adequate controls, said Daren Blomquist, a vice president with RealtyTrac.

He noted that the major increases came from properties that are just starting the foreclosure process.

Still, the figures for May are down 4 percent from a year ago. In addition, the report noted, recent sales data suggests that not all homes with foreclosure filings will result in the bank taking the property.

“Based on the rise in pre-foreclosure sales we’ve seen so far this year, a higher percentage of these new foreclosure starts will likely end up as short sales or auction sales to third parties rather than bank repossessions going forward,” Brandon Moore, RealtyTrac’s CEO, said in a statement.

That’s important because bank-owned homes tend to sell for less than homes in earlier stages of foreclosure.

RealtyTrac’s data shows that a home that is in pre-foreclosure sells for 21 percent less than a non-distressed home, on average. A bank-owned home sells for 33 percent less on average.

Blomquist cautioned that some of these houses entering the foreclosure process will end up being repossessed by the bank. In addition, the increase in foreclosure activity that is expected as banks work through their backlog could put a damper on housing prices once again, at least in some parts of the country.

“I actually think the stabilization in home prices and home sales is, in part, a result of the foreclosure inventory being artificially restricted over the past year and a half,” he said.

The National Association of Realtors reported last month that existing-home sales rose 3.4 percent from March to April and were up 10 percent from a year earlier.

Median home prices also were up about 10 percent in April from a year earlier. May data is due out next week.

Record-low mortgage rates also could be providing a boost for the housing market. Freddie Mac said last week that the average rate on a 30-year loan dropped to 3.67 percent.

Of course, with real estate it’s always all about location, and the foreclosure report showed that while some pockets of the country have seen some improvement others are still struggling. Georgia posted the highest foreclosure rate for the month, overtaking traditionally foreclosure-plagued states such as Florida, California, Nevada and Arizona.

Blomquist said while some cities seem to have broken the housing-bust cycle and at least stabilized, the data from Georgia illustrates the uneven nature of the market.

“Georgia is still caught in the downward spiral of decreasing home prices, and that in turn is helping to fuel more foreclosures,” he said.

Global Crisis Deepens After Spanish Bailout

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Rising interest rates in bond markets demonstrate that the €100 billion Spanish bailout last weekend has done nothing to resolve the euro zone crisis and may well have made it even worse. The rate on Spanish 10-year bonds climbed to the danger level of 6.8 percent Wednesday, while interest rates on Italian one-year government debt reached their highest levels since last December.

The latest turmoil came as the World Bank issued a report warning that so-called “emerging markets” face heightened risks from the European crisis. The World Bank’s latest Global Economic Prospects report predicted that growth in developing countries would fall to 5.3 percent in 2012, down from 6.1 percent. The forecast for overall world growth was cut to 3 percent for 2013, down by 0.1 percent from the estimate in January.

The bank said that developing countries should prepare for a long period of volatility, warning that Eastern Europe and Central Asia were particularly vulnerable because of their trade and financial ties with the major European economies.

The director of economic prospects at the World Bank, Hans Timmer, said the volatility of financial markets made policy making difficult, adding that there was “no silver bullet” and that “you cannot solve problems over a weekend.”

The rapid shift in market sentiment following the Spanish bailout prompted a desperate plea by Spanish Prime Minister Mariano Rajoy for the launching of a “battle” to ensure the survival of the euro. He released a letter he wrote on June 6, three days before the bailout, warning that the European Union was facing the “gravest crisis since its creation” and that the “euro is at risk.”

Rajoy added his voice to calls both from within Europe and internationally for the European Central Bank to intervene and “guarantee the financial stability of the euro zone”. He wrote, “The only institution which today has the capacity to ensure these conditions of stability and liquidity that we need is the ECB.”

But calls for greater ECB intervention, which are supported by Britain and the US in order to safeguard the financial interests of their banks, continue to be opposed by German Chancellor Angela Merkel. She fears such a policy could endanger the German financial system unless there is more centralized control of national budgets.

“Germany is prepared to do more on integration”, she said, “but we cannot get involved in things which I am convinced will lead to an even bigger disaster than the situation we are in today.”

Rises in interest rates on the debt of so-called “core” countries, Germany and France, were interpreted as evidence that concerns were spreading about the stability of the entire system. Normally, when interest rates in the “periphery” rise, those in the “core” decline. One financial trader told the Financial Times that if there was a simultaneous sell-off of bonds [leading to a rise in interest rates] “we’d move from concern to alarm.”

Far from alleviating the crisis, the Spanish bailout has only turned the focus of international financial markets on to the next target, Italy.

Italian Prime Minister Mario Monti denied that his country would be next in line and said comments by the Austrian finance minister that it would need a rescue were “inappropriate”. He was joined by the Italian industry minister, who rejected the idea that Italy would need assistance. Such denials, however, cut no ice as exactly the same kind of comments were being made by the Spanish government right up until last weekend.

The growing Italian crisis is being driven by the same contradictions that have resulted in the bailouts of Greece and Spain. The adoption of the euro has led to Italian exports becoming increasingly uncompetitive because of the higher value of the single currency compared to the lira and because it is no longer possible to alleviate the situation through a currency devaluation.

Italy is now entering its fourth recession in the past decade, with a consequent decline is tax receipts, causing an increase in its deficit and worsening of its debt position. Analysts from Citigroup are warning that the country “will experience a deeper recession this year and next than most forecasters predict.”

Australian economic commentator Alan Kohler noted in the Business Spectator that while attention had been focused on Spain, “the bigger problem for Europe is Italy, and it has been since the euro began. Like Spain, Italy is now in a fully-fledged debt trap, where economic growth is less than the national cost of capital. Without the ability to devalue, Italy has no hope of turning this around.”

The Italian situation highlights the fact that, far from arising from the so-called “profligacy” of the Greeks or other such superficial explanations, the euro crisis is rooted in a fundamental contradiction of the capitalist economy: that between the global character of production and the system of rival nation states.

The necessity for increasing the integration of Europe in order to promote economic growth was one of the driving forces behind the establishment of the euro. But the national states of Europe have continued to pursue independent, and in some cases, conflicting economic policies.

These contradictions could be covered over to some extent while the global financial bubble continued. But when this came to an end in 2007-2008, the disintegration of the euro zone was set in motion. Now it is on the point of collapse, with incalculable consequences not only for the peoples of Europe, but for the global economy as a whole.

The ruling elites have no answer, except further economic devastation—a fact underscored by International Monetary Fund director Christine Lagarde. Speaking at an economic conference on Tuesday, she said financial stability risks had returned with a vengeance. “Tensions are on the rise again”, she said in a speech at the Center for Global Development, “and financial stability risks have once more moved front and center. Great uncertainty hangs over global prospects.”

The Obama Administration Is Criminalizing Investigative Reporting

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Criminally investigating the kinds of leaks that are the bread and butter of national security investigative reporting is a noxious overreaction by hyper-controlling government officials who don't want us to know what's being done in our name.

Attorney General Eric Holder announced last week that he has assigned two U.S. attorneys to lead criminal leak investigations into recent media reports about topics including how drone attacks are approved at the White House and how a computer virus attack was launched against Iran's nuclear program.

There is such a thing as a criminal leak -- for instance, when an administration official intentionally outs a covert CIA operative in an attempt to discredit an administration critic.

But leaks that expose secrets that have momentous public policy implications need to be treated differently, because they are a critical part of our nation's system of checks and balances. Knowledge is essential to the public's ability to restrain executive (and legislative) power.

In this case, part of the pressure for an investigation came from Congress -- from Sen. John McCain, who accused the Obama administration of leaking for political gain, and from the bipartisan leaders of the House and Senate intelligence committees, whose most righteous anger seems to be reserved not for violations of international law, torture statutes or civil liberties, but for those occasions when the public, thanks to aggressive reporting by journalists, knows more than they do about something.

If President Obama is truly concerned about these leaks -- which I'm not at all sure he is -- there's a very simple solution. He can call in top national security staffers and other top officials and demand to know what role they played in these stories. If they leaked, and did so without his implicit or explicit approval, and he really thinks that was the wrong thing to do, he can fire them. If they lie to him (like Karl Rove did to George Bush about his role in the Valerie Plame leak) then Obama has bigger problems with his staff than leaks.

Outsourcing the investigation to the Department of Justice instead is a cowardly ducking of responsibility -- with tremendously dangerous potential. This is especially the case because under Obama and Holder, the DOJ -- presumably to build up good will with the intelligence community -- has taken to charging such leaks as violations of the draconian Espionage Act, a 1917 law intended for the prosecution of people who are aiding the enemy. Furthermore, the official DOJ position now seems to be that there is no reporter's privilege at all in such maters, and therefore no need to even consider the nature of the leak, how much if any damage it actually caused, what the intentions of the leaker were, and how much it served the public interest.

The six previous times the Obama administration has charged government officials who leaked to the press with Espionage Act violations -- more than all previous presidents combined -- have already sent a chilling message to investigative reporters and the whistleblowers they depend on.

That is ultimately not a good thing for our democracy. And one would have hoped that a president ostensibly devoted to transparency would recognize that.

Myth of Perpetual Growth is Killing America

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Yes, everything you know about economics is wrong. Dead wrong. Everything. The conclusions of economists are based on a fiction that distorts everything else. As a result economics is as real as one of the summer blockbusters like “Battleship,” “The Avenger” or “Prometheus.”

The difference is that the economic profession is a genuine threat, not entertainment. Economics dogma is on track to destroy the world with a misleading ideology.

Why? Because all economics is based on the absurd Myth of Perpetual Growth. Yes, all theories and business plans based on growth are mythological.

Economists are master illusionists who rely on a set of fictions, fantasies and forecasts that emanate from a core magical mantra of Perpetual Growth that goes untested year after year.

And yet it’s used to manipulate the public into a set of policies and decisions that are leading the American and the world economy down a path of unsustainable globalization and GDP growth assumptions that will self-destruct the planet.

Denial? We’re all addicted to the Myth of Perpetual Growth

Yes, economists are addicted to this ideology. Trapped deep in their denial, can’t see the problem, or admit it, or if they do, they are unable to stop themselves, see past their own myopic world view. They’re mercenaries working for capitalists who pay their salaries, and expect them to support the capitalist’s bizarre Myth of Perpetual Growth.

Worse, the public also bought into the myth. Yes, you believe everything you learned in college about economic theories, all the textbooks, everything you read in the daily press, the government reports, all those Wall Street analysts’ predictions relying on studies prepared by economists with credentials.

But everything you think you know about economics … is wrong. Dead wrong. And until economics acknowledge this, the discipline is on a self-destruct path.

Why? The science of economics is not science. Yes, it looks scientific with all the fancy math algorithms and computer models that economists use, but all that’s just window dressing to make the economist look scientific and rational.

They’re not. Their conclusions are pre-ordained, fabricated, based on their biases, personal ideologies and whatever their employer wants to prove to manipulate consumers, voters or investors to buy what they’re selling.

‘What do you call an economist with a prediction? Wrong’

Don’t believe me? Go look at USA Today’s quarterly surveys of 50 economists projections of GDP growth. Invariably off by a large margin. And Barron’s Big Money poll? In past reviews we’ve seen a wide gap in forecasts by the bulls and bears.

Bottom line: Whether it’s Roubini or Roach, Kudlow or Krugman, you can’t trust the predictions of any economist. Ever. Best warning: That famous BusinessWeek editorial several years ago headlined: “What Do You Call an Economist with a Prediction? Wrong.”

Unfortunately, we live in a world of capitalists who thrive on the great Myth of Perpetual Growth, endless growth, ad infinitum, forever, till the end of time.

But driving the economists’ growth myth is population growth. It’s the independent variable in their equation. Population growth drives all other derivative projections, forecasts and predictions. All GDP growth, income growth, wealth growth, production growth, everything. These unscientific growth assumptions fit into the overall left-brain, logical, mind-set of western leaders, all the corporate CEOs, Wall Street bankers and government leaders who run America and the world.

But just because a large group collectively believes in something doesn’t make it true. Perpetual growth is still a myth no matter how many economists, CEOs, bankers and politicians believe it. It’s still an illusion trapped in the brains of all these irrational, biased and uncritical folks.

No-win scenario: Damned if we grow? Damned it we don’t grow?

Capitalism itself is at a crossroads. Growth is capitalism’s sacred cow but it’s “grow or die” theory doesn’t work anymore. With us since 1776, it’s being challenged by a “new god of reality” that’s flashing warnings of an emerging new reality from critics, contrarians and eco-economists. This war is pitting old and new economists:

Grow OR Die. Traditional economists (pro-capitalism): We’re told we need 3% GDP growth to support the next batch of 100 million Americans. We believe it on faith. Drill Baby Drill. Buy stuff. Get new jobs to fuel growth. We’re out of control. Exploding growth fuels demands as the rest of the world adds 2.9 billion new humans, all chasing their “American dream.”

Grow AND Die. New eco-economists (environmentalists): They see Big Oil’s destruction of our coastal economies, the rape of West Virginia’s coal mountains, the unintended consequences of uncontrolled carbon emissions and they ask: “When will economists, politicians and corporate leaders stop pretending Earth’s resources are infinitely renewable?”

Yes, our world is at a crossroads, facing a dilemma, confronting the ultimate no-win scenario, because the “Myth of Perpetual Growth” is essential to support the global population explosion. But all this “Growth” is also killing our world, wasting our planet’s non-renewable natural resources. “Eternal Growth” is suicidal, will eventually destroy Earth. We’re damned if we grow. Damned if we don’t.

Future economists will be forced into a No-Growth Economics

But will economists change as long as they’re mercenaries in the employ of Perpetual Growth Capitalists? No. It will take a new mind-set. The difference between the mind-set of traditional economists and the new eco-economists is simple: Traditional economists think short-term, react short-term, pursue short-term goals. New eco-economists think long-term.

Initially this may seem overly simplistic, but fits perfectly. Here’s why:

Old traditional economists — short-term thinkers: Traditional economists are employees and consultants for organizations with short-term views — banks, big corporations, institutional investors, think-tanks, government. They all think in lock-step, driven by daily returns, quarterly earnings, annual bonuses. Short business and election cycles are more important than what happens a decade in the future. Their brains are convinced: If we can’t survive the short, long-term is irrelevant.

Environmental economists — long-term thinkers: New eco-economists see, think and plan for the long-term. They know traditional economists’ and capitalists’ thinking is setting America up for more and bigger catastrophes than the Gulf oil spill and the last meltdown. The “Avatar” film is a perfect metaphor: Soon capitalism will exhaust Earth’s resources forcing us to invade distant planets searching for new energy resources.

Actually something more immediate will force change much sooner. You are not going to like it: United Nations and Pentagon studies predict population growth (the main driver of all economic growth) will create unsustainable natural-resources demands as early as 2020 with global population exploding from seven to 10 billion by 2050. So expect Depression Era austerity, unemployment and a new no-growth economy.

Will we change? In time? Plan ahead? No, we won’t wake up without a collapse. We know the Myth of Perpetual Growth is pure fiction. But we also know our leaders, capitalists, economists and politicians all live in a collective conscience that must believe in this bizarre myth in order to justify everything they believe about the future, about progress, about income and wealth increasing, about a better life.

So we will all hang on … until a catastrophe shocks our world, forces us to wake up and let go, newly aware of the absurdity of the Myth of Perpetual Growth on a planet of finite resources. And it will happen sooner than you think.

This Time, Europe Really Is on the Brink

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People line up outside the Postscheckamt in Berlin to withdraw their deposits in July 1931. The 1931 European banking crisis contributed directly to the breakdown of democracy.

The European Union was created to avoid repeating the disasters of the 1930s, but Germany, of all countries, has failed to learn from history. As the euro crisis escalates, Berlin should remember how the banking crisis of 1931 contributed to the breakdown of democracy across Europe. Action is urgently needed to stop history from repeating itself.

June 13, 2012 "Spiegel"Is it one minute to midnight in Europe?

The failure of German public opinion to grasp the dire state of affairs in Europe today is inviting a repeat of precisely the crisis of the mid 20th century that European integration was designed to avoid.

With every increase in the probability of a disorderly Greek exit from the monetary union, the pressure on the Spanish banks increases and with it the danger of a Mediterranean-wide bank run so big that it would overwhelm the European Central Bank. Already there has been a substantial re-nationalization of the European financial system. This centrifugal process could easily continue to the point of complete disintegration.

We find it extraordinary that it should be Germany, of all countries, that is failing to learn from history. Fixated on the non-threat of inflation, today's Germans appear to attach more importance to the year 1923 (the year of hyperinflation) than to the year 1933 (the year democracy died). They would do well to remember how a European banking crisis two years before 1933 contributed directly to the breakdown of democracy not just in their own country but right across the European continent.

Astonishingly few Europeans (including bankers) seem to remember what happened in May 1931 when Creditanstalt, the biggest Austrian bank, had to be bailed out by a government that was itself on the brink of insolvency. The ensuing European bank crisis, which saw the failure of two of Germany's biggest banks, ushered in the second half of the Great Depression. If the first half had been dominated by the American stock market crash, the second was all about European banks going bust.

What happened next? The banking crisis was followed by President Hoover's one-year moratorium on payment of World War I war debts and reparations. Nearly all sovereign borrowers subsequently defaulted on all or part of their external debts, beginning with Germany. Unemployment in Europe reached an agonizing peak in 1932: In July of that year, 49 per cent of German trade union members were out of work.

The political consequences are well known. But the Nazis were only the worst of a large number of extremist movements to benefit politically from the crisis. "Anti-system" parties in Germany -- including Communists as well as fascists -- had won 13 percent of votes in 1928. By November 1932, they won nearly 60 percent. The far right also fared well in Austria, Belgium, Czechoslovakia, Hungary and Romania. Communists gained in Bulgaria, France and Greece.

The result was the death of democracy in much of Europe. While 24 European regimes had been democratic in 1920, the number was down to 11 in 1939. Even bankers know what happened that year.

Those of us who repeatedly warned in the 1990s that the experiment of monetary union would end badly would be gloating now -- if we were not so troubled by the prospect of history repeating itself.

Losing Faith

What is the situation today? Europe's periphery is in depression. According to the IMF, gross domestic product will contract this year by 4.7 percent in Greece and 3.3 percent in Portugal. Unemployment is 24 percent in Spain, 22 percent in Greece and 15 percent in Portugal. Public debt already exceeds 100 percent of GDP in Greece, Ireland, Italy and Portugal. These countries, along with Spain, are now effectively shut out of the bond market.

Now comes the banking crisis. We have warned for more than three years that continental Europe needed to clean up its banks' woeful balance sheets. Next to nothing was done. In the meanwhile, a silent run on the banks of the euro zone periphery has been underway for two years now: cross-border, interbank and wholesale funding has rolled off and been substituted with ECB financing; and "smart money" -- large uninsured deposits of high net worth individuals -- has quietly exited Greek and other "Club Med" banks.

But now the public is finally losing faith and the silent run may spread to smaller insured deposits. Indeed, if Greece were to exit, a deposit freeze would occur and euro deposits would be converted into new drachmas: so a euro in a Greek bank really is not equivalent to a euro in a German bank. Greeks have withdrawn more than €700 million ($875 million) from their banks in the past month.

More worryingly, there was also a surge of withdrawals from some Spanish banks last month. On a recent visit to Barcelona, one of us was repeatedly asked if it was safe to leave money in a Spanish bank. This kind of process is potentially explosive. What today is a leisurely "bank jog" could easily become a sprint for the exits. Indeed, a full run on other PIIGS banks would be impossible to avoid in the event of a Greek exit. Rational people would ask: Who is next?

In the meantime, the credit crunch in the euro-zone banks on the periphery remains severe as banks -- unable to achieve the new 9 percent capital targets by raising private capital -- are selling assets and contracting credit, thus making the euro-zone recession more severe. Fragmentation and balkanization of banking in the euro zone, together with domestication of public debt, is now well underway.

The process of political fragmentation is also speeding up. In the last Greek elections, seven in 10 voters cast their ballots for smaller parties opposed to the austerity program imposed on Greece in return for two EU-led bailouts. Established parties are also losing out to splinter parties in Italy, where the comedian Beppe Grillo's Five Star Movement has just won control of the city of Parma, and in Germany, where a maverick party called the Pirates is all the rage. Less frivolous populists now have substantial support in France, the Netherlands and Norway. This trend is ominous.

Reducing Moral Hazard

The way out of this crisis seems clear.

First, there needs to be a program of direct recapitalization -- via preferred non-voting shares -- of euro-zone banks both in the periphery and the core by the European Financial Stability Facility (EFSF) and its successor the European Stability Mechanism (ESM). The model should be the US's successful Troubled Asset Relief Program (TARP).

The current approach of recapping the banks by the sovereigns borrowing from domestic bond markets -- and/or the EFSF -- has been a disaster in Ireland and Greece. It has led to a surge of public debt and made the sovereign even more insolvent while making banks more risky as an increasing amount of the debt is in their hands.

Direct capital injections would bypass the sovereign and avoid the surge in public debt. In practice, the euro-zone taxpayer would become a shareholder in euro-zone banks and the current balkanization of banking would be partially reversed. This might also help overcome the political resistance to cross-border mergers and acquisitions in coddled domestic banking systems.

Of course, over time, sound banks that restore capital through earnings would be able to buy back the public preferred shares. So this partial nationalization would be temporary.

Second, to avoid a run on euro-zone banks -- a certainty in the case of a "Grexit" and likely in any case -- a EU-wide system of deposit insurance needs to be created.

To reduce moral hazard (and the equity and credit risk undertaken by euro-zone taxpayers through the recap and the deposit insurance scheme), several additional measures should also be implemented:

  • The deposit insurance scheme has to be funded by appropriate bank levies: This could be a financial transaction tax or, better, a levy on all bank liabilities -- both deposits and other debt claims.

  • To limit the potential losses for euro-zone taxpayers, there needs to be a bank resolution scheme in which unsecured creditors of banks -- both junior and senior -- would take a hit before taxpayer money is used to cover bank losses.

  • Measures to limit the size of banks to avoid the too-big-to-fail problem need to be undertaken. In the case of Bankia, the merger of seven smaller caixas merely created a bank that was too big to fail.

  • We also favor an EU-wide system of supervision and regulation. If the euro-zone taxpayer backstops the capital and deposits of euro-zone banks, then supervision and regulation cannot remain at the national level, where political distortions lead to less than optimal oversight of banks.

True, European-wide deposit insurance will not work if there is a continued risk of a country leaving the euro zone. Guaranteeing deposits in euros would be very expensive as the exiting country would need to convert all euro claims into a new national currency, which would swiftly depreciate against the euro. On the other side, if the deposit insurance holds only if a country doesn't exit, it will be incapable of stopping a bank run. So more needs to be done to reduce the probability of euro zone exits.

No Alternative to Debt Mutualization

Specifically, three actions are needed:

  • Fiscal austerity policies should not be excessively front-loaded while structural reforms that accelerate productivity growth should be sped up.

  • Economic growth needs to be jump-started in the euro zone. Without growth, the social and political backlash against austerity will be overwhelming. Repaying debt cannot be sustainable without growth.

  • The policies to achieve this include further monetary easing by the ECB, a weaker euro, some fiscal stimulus in the core, more bottleneck-reducing and supply-stimulating infrastructure spending in the periphery (preferably with some kind of "golden rule" for public investment), and wage increases above productivity in the core to boost income and consumption.

Finally, given the unsustainably high public debts and borrowing costs of certain member states, we see no alternative to some kind of debt mutualization.

There are currently a number of different proposals for euro bonds. Among them, the German Council of Economic Experts' proposal for a European Redemption Fund (ERF) is to be preferred -- not because it is the optimal one but rather because it is the only one that can assuage German concerns about taking on too much credit risk.

The ERF is a temporary program that does not lead to permanent euro bonds. It is supported by appropriate collateral and seniority for the fund and has strong conditionality. The main risk is that any proposal that is acceptable to Germany would imply such a loss of national fiscal policy sovereignty that it would be unacceptable to the euro-zone periphery, particularly Italy and Spain.

Giving up some sovereignty is inevitable. However, becoming subject to a "neo-colonial" submission of one's fiscal policy to Germany -- as a senior periphery leader put it to us at a recent meeting of the Nicolas Berggruen Institute (NBI) in Rome -- is not acceptable.

Not Optional

Until recently, the German position has been relentlessly negative on all such proposals. German officials have repeatedly opposed the direct recapitalization of troubled banks. Chancellor Merkel has consistently ruled out euro bonds. Some German spokesmen have made it sound as if they actually want a Greek exit from the euro zone. Others have been over-eager to impose the same fiscal regime on Spain as has already been imposed on Portugal.

We understand German concerns about moral hazard. Putting German taxpayers' money on the line will be hard to justify if meaningful reforms do not materialize on the periphery. But such reforms are bound to take time. Structural reform of the German labor market was hardly an overnight success. By contrast, the European banking crisis is a financial hazard that could escalate in a matter of days.

We have tried to come up with proposals that address German anxieties. But we want to emphasize that action is urgently needed. Germans must understand that bank recapitalization, European deposit insurance and debt mutualization are not optional. They are essential steps to avoid an irreversible disintegration of Europe's monetary union. If Germans are still not convinced, they must understand that the costs of a breakup of the euro zone would be astronomically high -- for themselves as much as for anyone.

After all, Germany's current prosperity is in large measure a consequence of monetary union. The euro has given German exporters a far more competitive exchange rate than the old deutsche mark would have. And the rest of the euro zone remains the destination for 42 percent of German exports. Plunging half of that market into a new Depression can hardly be good for Germany.

Ultimately, as Chancellor Merkel herself acknowledged last week, monetary union always implied further integration into a fiscal and political union.

But before Europe gets anywhere near taking this historical step, it must first of all show that it has learned the lessons of the past. The EU was created to avoid repeating the disasters of the 1930s. It is time Europe's leaders -- and especially Germany's -- understood how perilously close they are to doing just that.

Hubris as the Evil Force in History

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I have always been intrigued by the Battle of Bull Run, the opening battle of the US Civil War, known to southerners as the War of Northern Aggression. Extreme hubris characterized both sides, the North before the battle and the South afterwards.

Republican politicians and their ladies in their finery road out to Manassas, the Virginia town through which the stream, Bull Run, flowed, in carriages to watch the Union Army end the “Southern Rebellion” in one fell swoop. What they witnessed instead was the Union Army fleeing back to Washington with its tail between its legs. The flight of the northern troops promoted some southern wags to name the battle, the Battle of Yankee Run.

The outcome of the battle, left the South infected with the hubris that had so abruptly departed the North. The southerners concluded that they had nothing to fear from cowards who ran away from a fight. “We have nothing to worry about from them,” decided the South. It was precisely at this point that hubris defeated the South.

Historians report that the flight back to Washington left the Union Army and the US capital in a state of disorganization for three weeks, during which time even a small army could have taken the capital. Historians inclined not to see the battle as a victory for the South claim that the southerners were exhausted by the effort it took to put the yankees to flight and simply hadn’t the energy to pursue them, take Washington, hang the traitor Lincoln and all the Republicans, and end the war.

Exhausted troops or not, if Napoleon had been the southern general, the still organized southern army would have been in Washington as fast as the disorganized Union. Possibly the southerners would have engaged in ethnic cleansing by enslaving the yankees and selling them to Africans, thus ejecting from the country the greed-driven northern imperialists who, in the southern view, did not know how to behave either in private or in public.

It was not southern exhaustion that saved the day for the North. It was southern hubris. The Battle of Bull Run convinced the South that the citified northerners simply could not fight and were not a military threat.

Perhaps the South was right about the North. However, the Irish immigrants, who were met at the docks and sent straight to the front, could fight. The South was dramatically outnumbered and had no supply of immigrants to fill the ranks vacated by casualties. Moreover, the South had no industry and no navy. And, of course, the South was demonized because of slavery, although the slaves never revolted even when all southern men were at the front. When the South failed to take advantage of its victory at Bull Run and occupy Washington, the South lost the war.

An examination of hubris casts a great deal of light on wars, their causes and outcomes. Napoleon undid himself, as Hitler was to do later, by marching off into Russia. British hubris caused both world wars. The second world war began when the British, incomprehensibly gave a “guarantee” to the Polish colonels, who were on the verge of returning that part of Germany that Poland had acquired from the Versailles Treaty. The colonels, not understanding that the British had no way of making the guarantee good, gave Hitler the finger, an act of defiance that was too much for Hitler who had declared Germans to be the exceptional people.

Hitler smacked Poland, and the British and French declared war.

Hitler made short work of the French and British armies. But the British in their hubris, hiding behind the English channel, wouldn’t surrender or even agree to a favorable peace settlement. Hitler concluded that the British were counting on Russia to enter the war on their side. Hitler decided that if he knocked off Russia, the British hope would evaporate and they would come to peace terms. So Hitler turned on his Russian partner with whom he had just dismembered Poland. Stalin, in his own hubris, had recently purged almost every officer in the Red Army, thus making Hitler’s decision easy.

The outcome of all this hubris was the rise of the US military/security complex and more than four decades of cold war and the threat of nuclear destruction, a period that lasted from the end of world war two until Reagan and Gorbachev, two leaders not consumed by hubris, agreed to end the cold war.

Alas, hubris returned to America with the neoconservative ascendency. Americans have become “the indispensable people.” Like the Jacobins of the French Revolution who intended to impose “liberty, equality, fraternity” upon all of Europe, Washington asserts the superiority of the American way and the right to impose it on the rest of the world. Hubris is in full flower despite its defeats. The “three week” Iraq war lasted eight years, and after 11 years the Taliban control more of Afghanistan than the “world’s only superpower.”

Sooner or later American hubris is going to run up against Russia and China, neither of which will give way. Either the US, like Napoleon and Hitler, will have its Russian (or Chinese) moment, or the world will go up in thermonuclear smoke.

The only solution for humanity is to immediately impeach and imprison warmongers when first sighted before their hubris leads us yet again into the death and destruction of war.

Iceland Shows Bailing out Middle Class Works, Not Bailing Out banks

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On The Young Turks yesterday, Cenk Uygur spoke about two different approaches to the economic bailout.

There's the US m.o., where we gave "everything to the banks, and nothing to the homeowners" and are, predictably, still struggling. Then there's the divergent example of Iceland, where initial efforts at complete deregulation failed and the government switched course by indicting those who had "caused the mess" and bailing out the middle class instead.

Take a look at what they did, and how it worked.

Why The Economy Can’t Get Out of First Gear

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Rarely in history has the cause of a major economic problem been so clear yet have so few been willing to see it.

The major reason this recovery has been so anemic is not Europe’s debt crisis. It’s not Japan’s tsumami. It’s not Wall Street’s continuing excesses. It’s not, as right-wing economists tell us, because taxes are too high on corporations and the rich, and safety nets are too generous to the needy. It’s not even, as some liberals contend, because the Obama administration hasn’t spent enough on a temporary Keynesian stimulus.

The answer is in front of our faces. It’s because American consumers, whose spending is 70 percent of economic activity, don’t have the dough to buy enough to boost the economy – and they can no longer borrow like they could before the crash of 2008.

If you have any doubt, just take a look at the Survey of Consumer Finances, released Monday by the Federal Reserve. Median family income was $49,600 in 2007. By 2010 it was $45,800 – a drop of 7.7%.

All of the gains from economic growth have been going to the richest 1 percent – who, because they’re so rich, spend no more than half what they take in.

Can I say this any more simply? The earnings of the great American middle class fueled the great American expansion for three decades after World War II. Their relative lack of earnings in more recent years set us up for the great American bust.

Starting around 1980, globalization and automation began exerting downward pressure on median wages. Employers began busting unions in order to make more profits. And increasingly deregulated financial markets began taking over the real economy.

The result was slower wage growth for most households. Women surged into paid work in order to prop up family incomes – which helped for a time. But the median wage kept flattening, and then, after 2001, began to decline.

Households tried to keep up by going deeply into debt, using the rising values of their homes as collateral. This also helped – for a time. But then the housing bubble popped.

The Fed’s latest report shows how loud that pop was. Between 2007 and 2010 (the latest data available) American families’ median net worth fell almost 40 percent – down to levels last seen in 1992. The typical family’s wealth is their home, not their stock portfolio – and housing values have dropped by a third since 2006.

Families have also become less confident about how much income they can expect in the future. In 2010, over 35% of American families said they did not “have a good idea of what their income would be for the next year.” That’s up from 31.4% in 2007.

But because their incomes and their net worth have both dropped, families are saving less. The proportion of families that said they had saved in the preceding year fell from 56.4% in 2007 to 52% in 2010, the lowest level since the Fed began collecting that information in 1992.

Bottom line: The American economy is still struggling because the vast American middle class can’t spend more to get it out of first gear.

What to do? There’s no simple answer in the short term except to hope we stay in first gear and don’t slide backwards.

Over the longer term the answer is to make sure the middle class gets far more of the gains from economic growth.

How? We might learn something from history. During the 1920s, income concentrated at the top. By 1928, the top 1 percent was raking in an astounding 23.94 percent of the total (close to the 23.5 percent the top 1 percent got in 2007) according to analyses of tax records by my colleague Emmanuel Saez and Thomas Piketty. At that point the bubble popped and we fell into the Great Depression.

But then came the Wagner Act, requiring employers to bargain in good faith with organized labor. Social Security and unemployment insurance. The Works Projects Administration and Civilian Conservation Corps. A national minimum wage. And to contain Wall Street: The Securities Act and Glass-Steagall Act.

In 1941 America went to war – a vast mobilization that employed every able-bodied adult American, and put money in their pockets. And after the war, the GI Bill, sending millions of returning veterans to college. A vast expansion of public higher education. And huge infrastructure investments, such as the National Defense Highway Act. Taxes on the rich remained at least 70 percent until 1981.

The result: By 1957, the top 1 percent of Americans raked in only 10.1 percent of total income. Most of the rest went to a growing middle class – whose members fueled the greatest economic boom in the history of the world.

Get it? We won’t get out of first gear until the middle class regains the bargaining power it had in the first three decades after World War II to claim a much larger share of the gains from productivity growth.

Laying the Foundation for a North American Security Perimeter

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The Department of Homeland Security (DHS) recently unveiled a northern border strategy which seeks to address security concerns, while at the same time facilitating the flow of lawful travel and trade. The new plan promotes enhanced shared intelligence and joint law enforcement integration with Canada. It further builds on initiatives included in the Beyond the Border agreement and is part of ongoing efforts to lay the foundation for a North American security perimeter.

On June 5, DHS Secretary Janet Napolitano announced the Northern Border Strategy (NBS) aimed at deterring and preventing terrorism, smuggling, trafficking and illegal immigration. In a press release she explained how the new plan, “provides a unifying framework for the Department’s work focused on enhancing the security and resiliency along our northern border while expediting legitimate travel and trade with Canada.” In order to accomplish these objectives, the NBS seeks to, “improve information sharing and analysis within DHS, as well as with key partners. The Department will also enhance coordination of U.S.-Canada joint interdictions and investigations, deploy technologies to aid joint security efforts along the border, and continue to update infrastructure.” The NBS parallels the National Northern Border Counternarcotics Strategy issued in January. It also supports goals outlined in the U.S.-Canada Beyond the Border action plan which focuses on addressing security threats early, facilitating trade, economic growth and jobs, integrating cross-border law enforcement, as well as improving infrastructure and cyber-security.

Another facet of the perimeter security deal is the U.S.-Canada Regulatory Cooperation Council (RCC) action plan. It seeks greater regulatory alignment in the areas of agriculture and food, transportation, the environment, health, along with consumer products. In January, government representatives, as well as industry officials held regulatory meetings in Washington. The RCC has now published work plans in some of the specific areas noting that the rest of them will be posted when they are finalized. The whole process of regulatory reform has received more attention with President Barack Obama signing an Executive Order in early May, Promoting International Regulatory Cooperation. This will build on the work already underway by the RCC. In Canada, there are fears that deepening regulatory integration with the U.S. could weaken and erode any independent regulatory capacity, thus threatening its sovereignty. Further harmonization could result in Canada losing control over its ability to regulate food safety. This could also lead to a race to the bottom with respect to other regulatory standards.

As part of the Beyond the Border agreement, the U.S. and Canada are also working towards an integrated cargo security strategy. In May, they agreed to a new mutual recognition initiative whereby, “cargo shipped on passenger aircraft will now be screened only once for transportation security reasons, at the point of origin and will not need to be rescreened prior to upload on an aircraft in the other country.” Deputy Chief of Mission at the U.S. Embassy James Nealon proclaimed that, “Through this program, we will be able to move goods between U.S. and Canada faster, more efficiently, and most securely.” A Transport Canada backgrounder acknowledged that, “Air cargo is just the start. Canada and the U.S. are working together to strengthen co-ordination, co-operation and timely decision-making at the border for cargo shipped by sea or land with a view to increasing two-way trade, and reducing travel and commercial disruptions. When the Action Plan is fully implemented, the principle of ‘screened once, accepted twice’ is intended to apply to all modes of shipping cargo.” In order to keep trade flowing across the northern border, Canada is being pressured to further take on U.S. security priorities.

Last month, there were a series of U.S.-Canada joint consultation sessions with stakeholders regarding facilitating cross-border business. In addition, Public Safety Canada and the DHS issued the document, Considerations for United States-Canada Border Traffic Disruption Management. According to a news release it, “fulfils one of the first commitments under the Canada-U.S. Action Plan on Perimeter Security and Economic Competitiveness.” The joint emergency guide, “outlines best practices and identifies critical issues to consider when developing or updating traffic management plans to ensure they are tailored to address regional requirements and individual border crossings.” Minister of Public Safety Vic Toews stated that, “This plan is the result of close collaboration with a wide range of stakeholders, including government officials from the local, state, and provincial/territorial level, to manage the flow of traffic near the border during a disruption.” He went on to say, “Implementation of this guide will help maintain economic stability and ensure that priority traffic moves freely towards and away from the secure Canada-U.S. border during times of crisis.”

Through various initiatives, NAFTA partners are laying the foundation for a fully integrated North American security perimeter. In the advent of a terrorist attack, disaster or any other perceived threat to the continent, the U.S. could then execute control over the security perimeter. The global elite are not ones to let a serious crisis go to waste. Such a scenario would also provide the perfect cover needed to officially usher in a North American Union.

Fed Report Shows: Crisis Has Thrown Back Us Families 20 Years

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The financial crisis of the past four years has thrown American families back two decades, according to figures provided by the Federal Reserve Board in its triennial Survey of Consumer Finances.

The median net worth of US families—the combined value of homes, bank accounts and other assets, minus mortgages and other debts—fell 38.9 percent between 2007 and 2010, from $126,400 to $77,300, approximately the level recorded in 1992. Median income also fell over the three-year period, down 7.7 percent before taxes, adjusting for inflation.

chartSource: Federal Reserve
Credit: Lam Thuy Vo

The survey, based on interviews conducted in 2010 and early 2011, understates the impact of the ongoing economic slump, which has continued since then. Its figures on the distribution of wealth and income lag behind even more, since there has been a substantial rebound in the position of the wealthiest US households because of soaring corporate profits and rising stock prices.

Nonetheless, the clinically written 80-page document released Monday paints a devastating picture of the impact of four years of financial crisis and economic slump on working class families.

Some of the findings are like the tips of so many icebergs: they give only the barest glimpse of the profound suffering and exploitation experienced by tens of millions of people struggling to survive:

  • Nearly two-thirds of all young families—those headed by someone under 35—owed installment payments on education debt, up from 53 percent in 2007.
  • The proportion of families making use of so-called payday loans rose from 2.4 percent in 2007 to 3.9 percent in 2010, an increase of 65 percent.
  • More than 10 percent of families with a 401(k) or other retirement account in 2007 had been compelled to liquidate it by 2010.
  • The value of small businesses fell by an average of 20.5 percent from 2007 to 2010, with the steepest fall in the West and Northeast.
  • Families headed by someone 75 or older sharply increased their use of credit card borrowing and carried larger balances.
  • The proportion of families that reported they had been able to save any money during the previous year fell from 56.4 percent in 2007 to 52 percent in 2010.

Each one of these data points deserves exploration. In each case, investigation would illuminate an area of American social life ignored by the media and the candidates of the corporate-controlled Democratic and Republican parties.

The headline number of the Fed report, and deservedly so, is the dramatic fall in median net worth. This is the byproduct of the housing collapse, which has devastated the principal asset of working class and middle class families.

The median value of a US home fell by 42 percent between 2007 and 2010, from $95,300 to $55,000. At the same time, the burden of mortgage debt actually rose, from 51.3 percent of median home value to 64.6 percent, and 11.6 percent of homeowners with mortgages were under water, owing more on their homes than their present value.

In terms of income groups, the bottom 25 percent of households experienced a decline of 100 percent in median net worth, from a miniscule $1,300 per household in 2007 to zero in 2010. The second and third quartiles of the population saw decreases of 40 to 50 percent, while median net worth for the top 10 percent fell by only 6.4 percent (and has risen considerably since the end of 2010).

In other demographics, the biggest drops came in the West, the focal point of the housing collapse, where median net worth plunged 55.3 percent; for families headed by someone 35 to 44 years old, (down 54.4 percent); and for workers in white collar technical, sales or service occupations (down 57.7 percent).

The report details the enormous efforts by working people to survive financially by making sacrifices and cutting back on expenditures. Fewer families are carrying credit cards, the proportion carrying a balance dropped from 46.1 percent to 39.4 percent, and the median balance on those cards fell 16 percent from 2007 to 2010. Despite ever-greater repayments, however, debt as a percentage of family assets actually rose, from 14.8 percent to 16.4 percent, and the proportion of families behind on paying bills increased substantially.

In sum, these figures document a vast social retrogression, in which the financial position of the overwhelming majority of the American people is getting worse. This is not merely the result of impersonal economic processes, however. It is the direct consequence of decisions made in corporate boardrooms and in Washington that have exclusively benefited the super-rich at the expense of working people.

The Bush and Obama administrations and the Federal Reserve itself made countless trillions in public funds available to bail out the banks and billionaire investors, whose speculative manipulation drove the mortgage bubble and resulted in the greatest financial collapse since 1929. By comparison, only derisory sums were offered to hard-pressed homeowners faced with foreclosure, and not a penny has been allocated to directly create jobs for the tens of millions of unemployed.

The social crisis, which is today even deeper than in 2008, is a demonstration of two interconnected failures: the failure of capitalism as an economic system, and the failure of the two-party system, which is incapable of responding in any way to the growth of mass deprivation on a scale not seen since the 1930s.

How Wall Street Hustles America's Cities and States Out of Billions

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We all know that America’s cities and towns are in the throes of a deep financial crisis. And are told, over and over, what’s supposedly behind it: unreasonable demands by grasping state and municipal workers for pay and pensions. The diagnosis is a grotesque cartoon. Many of the biggest budget busters are on Wall Street, not Main Street.

In a country as big and locally diverse as the U.S., any number of wacky pay and pension schemes are likely to flourish, though some of the most outrageous turn out to cover not workers, but legislators. But overall state and local pay has not been growing faster than in the private sector for equivalent work for many years now.

What has driven cities and towns to the brink is not demands from their workforce but the collapse of national income and the ensuing fall in tax collections. Or, in other words, the Great Recession itself, for which Wall Street and the financial sector are principally to blame. But many powerful interests have jumped at the opportunity to use the crisis to eviscerate what’s left of the welfare state, roll back unionization to pre-New Deal levels, and keep cutting taxes on the wealthy. The litany of horror stories that now fills the media is ideal for their purposes.

The selective character of this press campaign became obvious last week. As the latest wave of stories started rolling in the wake of elections in California and Wisconsin, a striking piece of evidence surfaced that flies in the face of the conventional narrative. The Refund Transit Coalition, a coalition of unions and public interest groups, put out a study that documented in stunning detail how Wall Street banks have for years been hustling American cities, states, and regional authorities out of billions of dollars. But save for Gretchen Morgenson’s “Fair Game” column for the New York Times, the study drew almost no attention.

At a time when cities and states are taking hatchets to services and manically raising fees and fares, the group’s analysis merits a closer look and a much, much wider audience.

Its starting point will be familiar to anyone who recalls the debate over financial “reform” of the last few years. In the bad old days of pre-2008 deregulated finance, bankers started pedaling hot new “structured finance” products that they claimed were perfect for the needs of clients who had thrived for decades using cheaper, plain vanilla bonds and loans. The new marvels – swaps and other forms of so-called “derivatives” whose values changed as other securities they referenced fluctuated in value – were often complex and frequently not priced in any actual market. Their buyers thus had difficulty understanding how they really worked or how they might be hurt by purchasing them.

In many documented cases, buyers also had only faint ideas about how profitable these products were to the houses selling them. One befuddled Pennsylvania school board, for example, diffidently quizzed J.P. Morgan Chase: “The school-board official knew they were getting $750,000 for entering into a ‘swaption’ with J.P. Morgan Chase & Co. They wanted to know what was in it for the bank. They wanted to know the price. They seem like reasonable requests. ‘I can’t quantify that to you,’ the banker told them. ‘It is not a typical underwriting and I can’t quantify that for you and there’s no way that I can be specific on that.’”

One popular product involved an “interest rate” swap built into a bond deal. In these, as the Transit study explains, some hapless municipal authority brings out a bond and commits to making fixed payments to buyers. That sounds like any other old fashioned bond offer. But here’s the twist. In the swap version, the bank offers, for a handsome charge, to pay a variable fee to the issuer of the bonds. The idea was that the money could be used to make payments owed to the bond buyers. Payments were supposed to vary with the course of interest rates. The contrivances were heralded as protecting issuers against a rise in rates and saving them money on their payments.

But there was a catch: If rates fell, then banks could make out big, while issuers faced disaster, because the latter still had to make the fixed payments on their bonds, while the banks’ payments would shrink as rates fell. In effect, issuers were gambling on interest rates and betting they somehow knew better than the banks what was going to happen. And, ah, yes, the final touch: With old style bonds, you could refinance if rates fell; with the new fangled derivatives, the banks made sure to impose huge termination fees.

The result, for years now, has been literally billions of dollars of losses for cities, states, and other local authorities, including school boards and state college loan agencies. Locked in by the termination fees, they can stay in the swaps and pay and pay as the banks’ payments to them dwindle. Or they can buy their way out of the swaps at preposterous prices – Morgenson indicated that New York State recently paid $243 million dollars to get out of some swaps, of which $191 million had to be borrowed.

The Refund Transit study concentrated on local transit systems. Some of its numbers are stunning. The study pegged annual swap losses at the Massachusetts Bay Transportation Authority (Boston area) at $25.8 million and suggested that the MBTA will “lose another $254 million on these swaps” before they lapse. The study added that the MBTA was losing money on swaps even before the crisis, with total losses running in the “hundreds of millions” of dollars.

In Charlotte, site of the Democratic Convention, the study suggests that swaps with Bank of America and Wells Fargo cost the area transit system almost $20 million a year – something to think about as the President gives his scheduled acceptance speech at Bank of America Stadium.

Other localities that the study suggests are wracking up big annual losses include Chicago ($88 million), Detroit ($54 million), frugal Chris Christie’s State of New Jersey ($83 million), New York City ($113.9 million), Philadelphia ($39 million), and San Francisco ($48 million).

The study includes a useful table of the main banks benefiting from these arrangements. They include all the usual suspects: Besides Bank of America and Wells Fargo: Citigroup, Morgan Stanley, Goldman Sachs, J. P. Morgan Chase, UBS, and AIG, among others. Most were recipients of TARP funds, while all have profited from super cheap Federal Reserve financing, Fed, Freddie, and Fannie purchases of mortgage backed securities, and extended deposit guarantees as well as tax concessions granted by the Treasury in the wake of the 2008 disaster.

Given all the other advantages conferred on our Too Big To Fail Banks by the government and both major political parties, it would be a stretch to argue that the toleration of these swaps by federal, state, and local authorities – and the press, which in virtually all areas has defaulted on reporting the basic facts – constitutes the greatest outrage of all. But it is high time that they came in for full public scrutiny. These products were obviously very risky; few agencies that bought them appear to have understood this.

Despite some reforms aimed at eliminating crude “pay for play” deals, state and local finance remains a area rife with conflicts of interest. The whole series of deals needs to be investigated, the advisers who recommended them to the authorities need to be identified, the full losses added up, and responsibility fixed for the continuing series of bad decisions. Many State Attorneys General and general counsels also need to explain why they have not more aggressively publicized these arrangements and challenged them in court. (A New York court ruled that such deals were private contracts, not securities; that should have brought forth howls of protests and immediate legal fixes.) It is high time citizens, instead of banks, start occupying the transit authorities, school boards, and other state and local entities that are so vital to communities and real people.

Why Conservatives Wrongly Blame Single Moms for Failures of the Right-Wing Economic Model

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We should view lower-income single moms as heroes. Most of them make enormous sacrifices to raise their kids -- trying to balance work and parenthood in a society that offers them very little support. Many are forced to forgo opportunity to advance, working multiple jobs just to scrape by. But too often, they're villified – blamed not only for failing to “keep their man,” but also for America's persistently high poverty rate and dramatic inequality.

The idea that the decline of “traditional marriage” is the root cause of all manner of social problems is especially prominent on the political Right. Serious research into the causes of wealth and income inequality has not been kind to the cultural narratives conservatives tend to favor, but they nonetheless persist because such explanations have immense value for the Right. They offer an opportunity to shift focus from the damage corporate America's preferred economic policies have wrought on working people – union-busting, defunding social programs in order to slash taxes for those at the top and trade deals that make it easy for multinationals to move production to low-wage countries and still sell their goods at home – and onto their traditional bogeymen: feminism, secularism and whatever else those dirty hippies are up to.

The single mother, especially the black or brown single mother, plays an outsized-role in this discourse. A compelling body of research suggests that economic insecurity leads to more single-parent “broken homes,” yet the Right clings tirelessly to the myth that the causal relationship is the other way around.

Writing favorably of Charles Murray's Coming Apart: The State of White America, 1960–2010, Kay Hymowitz – a fellow at the conservative Manhattan Institute and author of Marriage and Caste in America – set up a rather obvious straw-man when describing what she calls the “single-mother revolution.”

Defenders of the single-mother revolution often describe it as empowering for women, who can now free themselves from unhappy unions and live independent lives. That’s one way to look at it. Another is that it has been an economic catastrophe for those women. Poverty remains relatively rare among married couples with children; the U.S. Census puts only 8.8 percent of them in that category, up from 6.7 percent since the start of the Great Recession. But over 40 percent of single-mother families are poor, up from 37 percent before the downturn.

I have yet to encounter a “defender” of single-parent households who would suggest that they “empower” poorer women. For affluent women heading a household, the story is very different. The fact that she may not be stigmatized as she once was may indeed be empowering. But that's because studies have found that they don’t lose economic status at all—they maintain their position. That wouldn't be the case if there was something about being a single mother that inherently led to poorer economic outcomes – if that were the case, single-moms at every income level would fare worse than other women.

We tend to see wealthier single mothers as strong and heroic, juggling work and kids. And they are, but the reason they can do so is that they can afford whatever help they might need -- hiring nannies and tutors, or enrolling their kids in after-school programs.

But as Jean Hardisty, the author of Marriage as a Cure for Poverty: A Bogus Formula for Women, notes, it’s a different story for those without means. “Single mothers who are low-income... are constantly criticized by the general public,” she wrote, “and are held accountable for their single status rather than praised for finding self-fulfillment in motherhood. They are usually judged to be irresponsible, or simply unable to meet the child’s needs, including the supposed need for a father or father figure.”

Here, we also need to acknowledge the role of public- and corporate policies that make it harder for women without the means to hire help to juggle work and family life. American workplaces are uniquely inflexible. According to Harvard's Project on Global Working Families, the United States is one of only four countries out of 173 studied that doesn't mandate some form of paid maternal leave. The others – Liberia, Papua New Guinea and Swaziland – are all developing states. When faced with an illness, or a sick child, 145 countries offer some form of paid leave, and the United States is among the stingiest. The authors note that we offer “only unpaid leave for serious illnesses through the [Family Medical Leave Act], which does not cover all workers.” This is, in part, a result of conservative complaints that mandated leave to deal with family emergencies is an unacceptable infringement on the “free market” – an argument made by the same people who would have us believe that poor single moms earned their poverty by raising kids alone.

The crux of the issue is that while it’s pretty self-evident that having one breadwinner instead of two (or one breadwinner and one parent to raise the kids) is an economic disadvantage -- and any number of studies have found that single-parent households (especially single-mother families) are more likely to be poor -- this “culture of poverty” narrative confuses correlation with causation.

Hardisty, writing specifically about poor people of color, notes that those living in poverty face tangible barriers to setting up and maintaining a stable, two-parent home:

Race accounts for several barriers to marriage in low-income communities of color. The disparate incarceration of men of color, job discrimination, and police harassment are three barriers that are race-specific. Other barriers are universally present for low-income people: low-quality and unsafe housing, a decrepit and underfunded educational system; joblessness; poor health care; and flat-funded day care . . . are some of the challenges faced by low-income women and men. These burdens make it difficult to set up stable, economically viable households, and also put stresses on couples that do marry.

In 1998, the Fragile Families Study looked at 3,700 low-income unmarried couples in 20 U.S. cities. The authors found that nine in 10 of the couples living together wanted to tie the knot, but only 15 percent had actually done so by the end of the one-year study period.

Yet here’s a key finding: for every dollar a man’s hourly wages increased, the odds that he’d get hitched by the end of the year rose by 5 percent. Men earning more than $25,000 during the year had twice the marriage rates of those making less than $25,000. Writing up the findings for the Nation, Sharon Lerner noted that poverty “also seems to make people feel less entitled to marry.”

As one father in the survey put it, marriage means “not living from check to check.” Thus, since he was still scraping bottom, he wasn’t ready for it. “There’s an identity associated with marriage that they don’t feel they can achieve,” [Princeton sociology professor Sara] McLanahan says of her interviewees. (Ironically, romantic ideas about weddings—the limos, cakes and gowns of bridal magazines—seem to stand in the way of marriage in this context. Many in the study said they were holding off until they could afford a big wedding bash.)

And economic insecurity – and lack of education – also make it more likely that two-parent households will split, creating single moms and dads. In a review of the literature about the primary causes of divorce, Pennsylvania State University scholars Paul Amato and Denise Previti write that “studies indicate that education and income facilitate marital success. Education promotes more effective communication between couples, thus helping them to resolve differences. In contrast, the stress generated by economic hardship increases disagreements over finances, makes spouses irritable, and decreases expressions of emotional support.” Partly for these reasons, they write, socio-economic status “is inversely associated with the risk of divorce.”

Perhaps the most compelling reason to reject the cultural hypothesis pushed by people like Kay Hymowitz is that people with little money have the same attitudes about marriage as those with big bucks. Hardisty cited studies showing that “a large percentage of single low-income mothers would like to be married at some time. They seek marriages that are financially stable, with a loving, supportive husband.”

Poor women have the same dream as everyone else; Hardisty notes that they “often aspire to a romantic notion of marriage and family that features a white picket fence in the suburbs.” But the insecure economic status wrought by three decades of business-friendly “free market” policies leads to fewer stable marriages, not the other way around.