naked capitalism

By Paul Jay, the CEO and Senior Editor of The Real News Network; originally posted at New Deal 2.0

Police brutality at the G-20 protests in Toronto targeted freedom of speech and assembly, putting the world’s poor and working people on notice.

The Toronto G-20 summit sent a message to poor and working people in Europe and North America. “You will pay for the global financial crisis through cuts to your social safety nets. There will be no taxing of those who actually caused the crisis and made fortunes in the various bubbles over the last decades.”

Of course not in so many words — what they said was they had committed to fiscal plans that will at least halve deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016. That means austerity plans, which was pretty much what was on the agenda before the countries got there.

This was bad enough. But there was another message, too, sent through the Canadian police: “If you don’t like it, how about a rubber bullet?” It looks like G-20 countries will deal with opposition to their plans through martial law and police brutality.

I was there in Toronto, where police turned the downtown center into something resembling martial law. The invocation of an archaic piece of legislation called the “Public Works Protection Act” at the G20 site essentially suspended probable cause, giving police the rights of search and seizure to anyone, anywhere in the area. In other parts of the city peaceful demonstrators were charged with “conspiracy to commit mischief” and “disturbing the Queen’s peace”.

Canadians learned that there was no right to freedom of assembly and no freedom of speech as long as extraordinary measures could be rationalized.

And what were the circumstances? Well, in the midst of twenty thousand peaceful demonstrators were around one hundred people dressed in black (known as the Black Bloc tactic). At a certain point on Saturday afternoon, they broke away from the main protest march, and ran up and down Yonge Street breaking windows. Four police cars were trashed and burned. There is evidence a few of the cars were abandoned by police for hours before they were set upon. On one such car, protesters painted the words “bait”.

There was nothing very secret about the Black Bloc’s intentions or plans. There is evidence that the police had infiltrated the group, but in any case, they actually published most of their plans on a public web site. Yet in footage captured by a freelance journalist and dozens of cams posted on YouTube, police can be seen standing by for as long as an hour or more while the rampage occurred.

Was it a deliberate plan by the security forces (led by the RCMP), or a lack of resources as police claimed? When you try to answer that, keep in mind the Canadian government spent close to a billion dollars on security that included around 19,000 police on the streets.

In any case, television images of burning police cars became the rationale for almost a thousand arrests, mostly not of people wearing black, but of ordinary demonstrators. We know of times when people sat cross-legged holding up peace signs had rubber bullets fired at them. Journalists were manhandled, thrown to the ground, beaten with batons or punched in the face or gut, which happened to Jesse Rosenfeld (writing for the British paper The Guardian) and our own Jesse Freeston at The Real News.

The public has a right to know whether police are or are not abusing their powers. And the public can’t know this without professional journalists with the courage to report from the centre of the storm. These journalists must be able to stand their ground if police try to move them, and the law must protect their right to do so. Without this, we are on our way to a police state.

Canadians are still processing the Toronto protest. What happened with the $1 billion the federal government is spending on security? Are the people of Ontario going to put up with the Public Works Protection Act, implemented quietly for the G-20? Will they accept the principle that the police can declare any protest or demonstration an illegal assembly? Will they demand full accountability from politicians and the police?

If the protest marked a turning point for the city, then it also marked a turning point for the world. If the Toronto G-20 is the shape of things to come, then people faced with drastic reductions in their living standards will be denied their freedom of speech and assembly at the snap of a police officer’s or politician’s fingers.

The firing of those rubber bullets should be a shot heard round the world.

You can watch a collection of G-20 video reports, including “Doves on finance reform, hawks on austerity” with Rob Johnson, at the Real News Network.

A well placed Washington contact wrote:

I was in a discussion with the staff at one of the Federal agencies involved in housing to ask them about the new policies on strategic defaults. It became clear almost immediately that regulators obviously have no idea how to identify strategic defaulters except by asking big banks. They cited the Oliver Wyman study, which is garbage, and other than that had NO evidence except anecdotal reports from ABC News that strategic defaults are happening. Strategic defaulters, they said, are people who won’t even contact their servicer to renegotiate their mortgage. Now, a lot of people are saying that they can’t get in touch with their servicer, so I put the question about whether servicers would tell the truth about strategic defaulters, and they were just shocked that anyone could believe servicers might lie. In other words, the agencies and regulators are simply taking the word of Bank of America and Citigroup that people are strategic defaulters rather than the victims of predatory loans or abusive service.

But what was shocking was the extreme anger they showed. These are bureaucrats, so I expected a kind of boring process-talk. Not so. The guy in charge frequently dropped in lines like, ‘back when people used to actually PAY their mortgages and follow through on their promises.’

It was weird. People in Congress, except certain safe seat powerful Democrats, are afraid of touching the issue, because of the fear of being associated with deadbeats, but also because it is the explicit policy of the leadership of both parties and the administration to continue to squeeze as much blood from a stone as possible.

Yves here. What continues to amaze me is how fast the disinformation is being shoveled out:

1. The strategic default “trend” is almost without a doubt wildly exaggerated. First, while foreclosures are rising, it’s the result of banks finally starting to move on a seriously clogged pipeline. There hasn’t been an increase in the rate of serious delinquencies, despite the continued slide in home prices, to support this idea.

Second, the costs of default are high: a trashed credit record (which limits access to jobs, not just access to loans), having to move, and probably a tax bill if the home has negative equity. If the defaulter wants to rent, a landlord will generally seek a much higher deposit given the concerns raised by his credit history. These are all considerable offsets to the supposed economic advantages of a strategic default

2. There isn’t any clean neat way to determine if someone has made a strategic default. Colloquially, it is supposed to mean someone who is capable of paying the mortgage but suddenly defaults. The problem is I suspect that the alleged strategic defaulters are in the vast majority of cases anticipatory defaulters: they can, by dint of great struggle, make their mortgage payments, but they are falling further and further behind (say escalating fees and charges on credit cards), anticipate a fall in their income (they can read the tea leaves at work), or are so close to the edge they know even a minor spell of bad luck (say the need for car repairs) will put them over the edge, and they decide to exit what is certain to become an untenable situation now.

One reader argued that, as with student loans, one could easily get IRS data and determine ability to pay. That’s rubbish. Student loans cannot be discharged, even in bankruptcy, which makes them senior. And most people need a car to work (and in extremis, can live in a car) so auto loans will be given priority in payment over mortgages by many borrowers. So to determine whether someone can afford their house, you need to look at their total debt burden, not simply their mortgage payments.

A credit report similarly gives an inaccurate picture of debt loads. they merely show balances, not interest charges, so you cannot determine debt servicing costs. For small businesspeople, credit reports also do not show loans to their company, even though they usually have to guarantee them;

3. Fannie, Freddie, and their friends and allies in DC labor under the delusion that the push that the GSEs have announced to pursue deficiency judgments (as in, where state law allows, to try to collect from defaulting borrowers where the proceeds from the sale of the house fails to cover the mortgage balance) is something new. Au contraire. In bankruptcies, any shortfall is presented to the court to obtain a recovery from other assets. In other types of foreclosures, the bank (or foreclosure mill hired by the servicer on behalf of the trust that owns the note and mortgage) will use a debt collector to go after any shortfall

4. The misguided targeting of this effort is certain to backfire. To the extent the authorities try anything new (per 3 above, I’m skeptical, but we’ll at least see an aggressive push to find examples of bad behavior to put in stocks in the town square), their misguided targeting is almost certain to backfire. People do not trust their servicers. Why call them if something has changed or you have come to the conclusion that eventual default is inevitable? Moreover, many borrowers might be loath to try to work out a deal because the media has reported numerous cases where borrowers complied with servicer instructions, made higher payments to get a temporary mod, and failed to get a permanent mod, with the net result that their cash was even more depleted had they defaulted when they had determined they could no longer afford their mortgage. Moreover as the DC expert noted, servicers are often very hard to reach. So contact with the servicer is a ridiculous proxy for borrower intent and condition.

Moreover, anyone who is a true strategic defaulter (as I define it, can afford the mortgage but abandons it) is likely to have the savvy to hide financial assets from debt collectors, and given that the GSEs are letting people know that they are using contact with the servicer as the proxy for “good borrowers”, a savvy strategic defaulter will be sure to contact his servicer with a charming tale of why he is a hopeless goner financially.

So why all this hysteria about strategic defaulters? If I were conspiracy-minded, I’d say this is a very clever push to stoke jealousy among what is left of the middle class to keep the focus off the way the banksters wrecked the economy, got lots of cash and prizes, and have every reason to repeat that profitable exercise. So focus public ire instead about the commies in our midst, um, the new welfare queens, aka various forms of alleged housing deadbeats. The immediate reason is that the more people are made to resent the breaks they fantasize their neighbors are getting, the more they will oppose deep principal mods, which historically is what banks always did when they had a borrower get in trouble who still had a remotely viable income.

Why would the banks oppose principal mods? It will force an end to extend and pretend, and when THAT happens, a lot of financial firms will be shown to be undercapitalized and in need of rescue or resolution (as we and others have pointed out repeatedly, Mike Konczal’s conservative analysis of second mortgage portfolios at the four biggest US banks, Bank of America, JP Morgan, Citigroup, and Wells Fargo, shows that they probably need another $150 billion in equity among them, and others contend the writedowns on seconds should be much more aggressive than Konczal assumed).

This push could also be an effort by the GSEs to shift blame, Whocouldanode 2.0: “whocouldanode prime borrowers would default at such high rates?” It wasn’t our crappy procedures and unduly optimistic assumptions, it was the black swan of a change in values!

Now let us say I am wrong and the banks and GSEs are about to embark on new tactics versus defaulting borrowers, say by getting more aggressive in trying to garnish wages when recoveries fall short. That has the potential to backfire massively.

Right now, contrary to popular opinion, virtually the only parties fighting foreclosure are either people who think they can afford the house but are the victims of massive servicing mistakes (I could write a separate post on this, trust me) or people who have filed for Chapter 13 bankruptcies where the servicer (acting on behalf of the trust) tries to block the bankruptcy stay. In 45 of 50 states (this is a simplification but pretty accurate), the mortgage (which is a lien, in some states called a deed of trust) can only be enforced by the legitimate owner of the note (the IOU). Mortgage securitizations had very specific requirements as to what the trust (the securitization entity) needed to do to obtain the note. Trust are very brain dead vehicles, they can only do what their governing agreements permit them to do, nothing more. In short form, it appears to be widespread, if not endemic, that securitizations starting around 2004 began not bothering to do what they needed to do so that the trust had clear ownership of the note (the key item being proper endorsement of the note by all the parties in the ownership chain of the securitization prior to or on the day of closing. Limited fixes were permitted post closing, generally up to 90 days, but they were designed to be narrow and apply only to a small percentage of the notes in a pool).

Increasingly people who are fighting foreclosures are having good results by questioning whether the party who shows up in court to foreclose is entitled to do so (the legal concept is “standing” and is fundamental). Note the person fighting the foreclosure is NOT arguing that they don’t owe the money but whether the party who wants to take the house has the right to. And this is not a theoretical objection; there have been cases where the same note has been sold to multiple securitizations. If the wrong party forecloses, the borrower is at risk that ANOTHER trust will show up, and again demand that he pay the mortgage debt in full. Although decisions vary (usually by state, based both on state law considerations and the temperament of the judiciary), many judges are ruling for borrowers, typically dismissing cases without prejudice (meaning the lender can try foreclosing again if he can get his act together, but typically the issues that led to the unfavorable ruling are insurmountable).

So if the banks and Freddie and Fannie start on a big, and very badly aimed push to go after defaulting borrowers to extract more blood from stones, one outcome may be that they don’t get the headlines they want. Instead of “Greedy guy reneged on his mortgage when he has plenty of dough (be sure to include photo of deadbeat with luxury car or in front of very fancy new residence)” you will get “Cancer victim who had to abandon beloved home harassed by greedy banks.”

But more important, this sort of move will lead incorrectly targeted “strategic defaulters” who willingly gave up their houses to fight the efforts to extract more cash from them. That in turn has the potential to increase awareness of the widespread problems with mortgage securitizations, with the potential to shift to dynamic. What if the owners of private label mortgage bonds come to realize that in many cases, the instruments are effectively unsecured? What happens if Fannie and Freddie’s strategic defaulter push backfires from a financial standpoint (the cost of a badly-targeted collection effort exceeds any increased recoveries?)

And most important, what happens if the public comes to understand the hypocrisy of the banks’ stance, that they are demonizing borrowers for failing to live up to contracts, when they couldn’t be bothered to comply with the terms of their own contracts, which set up procedures for conveying notes to the securitization entity, and in many cases foreclosure mills have forged documents to cover up that fact? Whoever is behind the “strategic defaulter” push may well wind up hoist on his own petard.

By Wallace C. Turbeville, the former CEO of VMAC LLC and a former Vice President of Goldman, Sachs & Co. who writes at New Deal 2.0

William D. Cohan’s op-ed piece in the July 7th New York Times had the same title as this article, but for the word “Don’t.”

At first glance, I thought the Times piece might be a report on New Age self actualization for investment banks. But the title suggests something more troubling. The whole point of financial reform is that Goldman (and the others) should no longer be permitted to be Goldman. A return to business as usual is the last thing we need.

Mr. Cohan is a student of Goldman, but he profoundly misreads the firm’s role in the Wagnerian drama we know as “The Great Recession.” He begins by imploring us all to “fess up” to the fact that financial reform would have been impossible had the Administration and Congress not “demonized” Goldman.

“Demonization” is a popular word in today’s political discourse. It suggests unfairness. Mr. Cohan does not dispute the facts asserted by the Administration and Congress. Instead, he points out that underlying ethical flaws were shared throughout Wall Street. They arose from the shift toward a business model that rewards taking imprudent risks with other people’s money. Mr. Cohan says that “Goldman Sachs did nothing differently in the years leading up to the crisis than did other firms of its stature.”

Anyone who has raised a child is familiar with a common excuse for bad behavior. The proper response to “Everyone else is doing it” is a stern demeanor and the answer: “Maybe, but so what?”

But let’s give the article a generous interpretation. While the casual reader might interpret the shared lapse in ethics as an excuse, perhaps it is not intended to be read this way. We will assume that Mr. Cohan intended not to excuse Goldman but to find fault with political leaders who unfairly singled out the firm.

It seems obvious that the example of a single firm is a more effective rhetorical device than calling out generalized bad behavior. Politicians used this device and public opinion was successfully mobilized. The job got done. I believe that the public understood that the bad behavior was widespread, and that Goldman was merely one example.

Was it unfair to make Goldman the example? The article argues that Goldman was just like all the other firms. It was not.

Goldman was actually better at executing a certain investment banking business model than anyone else. It became a leader in the industry, admired by competitors, the media and politicians. The problem was that the business model, so effectively executed by Goldman, turned out to be bad for America. The model inherently risks the survival of critically important institutions. It is also nearly impossible to use the model and, at the same time, maintain business ethics conforming to the shared values of the society.

Goldman historically promoted its commitment to ethics when soliciting clients. I am convinced that Goldman people genuinely believed this commitment to be true. It may even be the case that ethics were taken more seriously at Goldman than at its competitors. But seeking business based on ethics carries with it a responsibility. Pursuit of a business model with inherent ethical challenges has consequences that are unavoidable, especially to a firm which has held itself out to clients as particularly ethical.

Goldman’s success was envied up and down Wall Street. The pressure to keep pace with Goldman’s earnings drove other firms to emulate its model. At a minimum, managers at other banks were driven to take greater risks hoping for greater rewards as proof to shareholders that they measured up to the Goldman team.

It is ironic that Goldman was first to foresee risks of a deteriorating market and acted to defend itself. Goldman’s aggressive preparations, including the extraordinary demands to AIG for collateral, may have actually contributed to the intensity of the panic. Goldman was so prepared that, when the tsunami finally hit, the only real threat to it was a total systemic collapse. Congress and the Fed stepped in with cash to avoid catastrophe and Goldman, now even more powerful compared with competitors, immediately prospered. The real irony is that Goldman was greatly responsible for the problematic business model; yet, because management pulled the plug so effectively, the value of the bailout to Goldman shareholders was disproportionately large.

Mr. Cohan suggests that it was unfair to use Goldman as an example because of its relative ethics and its effective response to the danger. Those points may be relevant if the real issues were incompetence and larcenous intent. Instead, the core concern was and is the dysfunctional business model that generated massive profits for the firms but devastated the society.

Goldman was not just like all of the others. It was the leader. Becoming the leader involves a trade that should be well understood at the highest levels of Wall Street. Investment bankers often engage in businesses with underdeveloped rules of conduct. Pushing the envelope may be risky, but the rewards are more than worth it. If a firm is a leader, its profits and the wealth and power of its managers are virtually limitless. If it turns out that the business has consequences to society that are intolerable, even if the consequences were unforeseen, the leader will be the example held out to the public. Management is held to a high standard, but the pay scale more than reflects the level of difficulty.

Is this an unfair trade? I don’t think so.

Finally, Mr. Cohan concludes that we should “lay off the firm and allow Goldman and the rest of Wall Street to return to some semblance of normalcy.” Besides unfairly demeaning the entire financial reform effort, this statement suggests that our problems have been solved.

In fact, it would be a monumental error if financial reform ends with the passage of the legislation this month. James K. Galbraith points out in testimony to the Commission on Deficit Reduction that focusing on Medicare and Social Security as a means to reducing deficits is misguided. Economic growth is the only sensible solution. He cites the need to restore the financial sector’s role of capital formation for productive purposes, i.e., commercial lending and equity investment. The current legislation focuses on curbing dangerous behaviors and on procedures to deal with financial panics. It does not reconnect Wall Street capital to the engine of economic growth: productive and innovative businesses which employ American workers.

No one wants to drive Wall Street out of business, certainly not politicians whose campaigns rely on it as a source of funds. But the economy will not prosper unless Wall Street reengages with the broader economy. Current bankers will keep their Hamptons estates under the new regulations. But their successors may not be able to afford mansions if 10-20% unemployment is the new American reality. Wall Street’s attention must turn away from churning derivatives on existing products and instruments and toward growth of the economy and jobs. If more government intervention is needed to force this turn, so be it. Neither the public nor its political representatives should feel regret if this means Goldman and the other banks must fundamentally change.

One has to be cautious in invoking cultural stereotypes. However, when the subject of defaults or mortgage mods comes up here and in other forums, almost inevitably some readers will start off on a bit of a rant: “I pay my mortgage/rent, why should these people get a break?” And these discussions often take a personal tone, as in they resent neighbors getting a break, or they claim to know someone who went hog wild spending on their home ATM and have now had their comeuppance (having never met anyone like that, I cannot verify if this pattern is anywhere near as prevalent as it is alleged to be). The problem is that their willingness to see their neighbors suffer, when it really is their neighbors, is cutting off their nose to spite their face, since foreclosures, particularly when homes sit vacant, drag all property values nearby down.

The perverse part is a New York Times article today indicates that the affluent are far less burdened by consideration of morality in their financial decisions, including their mortgages: “’The rich are different: they are more ruthless,’ said Sam Khater, CoreLogic’s senior economist.”

Default rates are highest among plus million dollar properties. The problem with the NYT account is that it discussion of defaults at the high end mixes apples and oranges. Defaults on second homes are mingled with defaults on primary residences. Second homes are the first to go when financial stresses become acute. And because a lot of borrowers claimed that vacation digs were primary residences to borrow on better terms, there isn’t an easy and obvious way to construct clean data sets (as in defaults on primary residences by income level or home price v. those on second homes).

But another factor is at work during the cycle is that the rich both borrowed more than in past cycles and took on more risk to boot. From a March 2007 article by Robert Frank:

Today’s rich have expanded their fortunes and lifestyles in large part by turning to highly risky investments. In the search for ever-higher returns, they’ve doubled their holdings in hedge funds and other “alternative investments,” and poured their money into stocks while draining down cash. At the same time, they’ve dramatically increased their debt.

“The wealthy have taken on much more risk than they had 10 or 20 years ago,” says Steve Henningsen, a partner at Wealth Conservancy, a Colorado wealth-management firm. “They’re probably more exposed to more risk than the average investor because they’ve been the ones buying all these fancy debt products, hedge funds and other investments that their advisers told them to buy.”….

Today’s wealthy also rely more on borrowed money. The nation’s richest 5% held $1.67 trillion in debt, up fourfold from 1989. A large part of that is mortgage debt, but wealth experts say some of the funds have also gone into risky and higher-yielding investments, such as hedge funds. Since hedge-funds themselves are highly leveraged, the double-borrowing could make for a rapid fall should hedge funds start to implode.

While the rich employ sophisticated advisers, sometimes they don’t steer their clients to the safest investments. “A lot of the wealthy have leveraged up their house to put money into hedge funds or do the Japan carry-trade because they could make more than their costs of borrowing,” Mr. Henningsen said. “That desire for yield could come back to haunt them.”

Looks like it did. From the New York Times:

Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population.

More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.

By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent…

“I’ve never seen the wealthy hit like this before,” Mr. [Ken] Lowman [a real estate agent in Las Vegas] said. “They made their plans based on the best of all possible scenarios — that their incomes would continue to grow, that real estate would never drop. Not many had a plan B.”….

The CoreLogic data suggest that the rich do not seem to have concerns about the civic good uppermost in their mind, especially when it comes to investment and second homes. Nor do they appear to be particularly worried about being sued by their lender or frozen out of future loans by Fannie Mae, possible consequences of default….

“Those with high net worth have other resources to lean on if they get in trouble,” said Mr. Khater, the analyst. “If they’re going delinquent faster than anyone else, that tells me they are doing so willingly.

Yves here. Another message here is that high income borrowers aren’t taking the Freddie/Fannie/bank bluster about strategic defaults seriously. Recall that the latest threat was that they would pursue deficiency judgments, as in sue borrowers who defaulted where the proceeds from the sale of the home, net of expenses, did not cover the mortgage debt. Now in some states that is not permitted (purchase money mortgages in many states are non-recourse, but refis never are). But independent of that, it is expensive to pursue defaulting borrowers, and if the borrower really is broke (say he had medical emergency, a business failure, or a costly divorce) litigation is just a costly wild goose chase. The most obvious group to pursue, nevertheless, would be defaulted owners of big ticket homes in affluent areas. They clearly regard the odds of legal action as low.

The Financial Times had a forward-thinking comment by Richard Florida, director of the Martin Prosperity Institute at the University of Toronto’s Rotman School of Management. It argues that investment in technology and better management can turn many now low end service sector jobs into better paid and higher quality work.

One key aspect, which the piece glosses over a bit, is that though the 1970s, the benefits of productivity gains were shared among workers, management, and investors. Increasingly, from the 1980s onward, they have increasingly been diverted to upper management and investors/financiers. For Florida’s suggestions to have their intended effect, we need a shift in practice on how profits resulting from productivity gains are whacked up.

From the Financial Times:

Consider this simple fact: the US economy remains on track to generate 15m new jobs over the next decade… half of 15m newly created jobs – 7.1m of them – will be much lower-paying, low-skill work in the routine service sector: among them are 835,000 home health and personal care aides, 400,000 new customer service positions, 400,000 food preparation workers and 375,000 retail sales clerks. More than 60m American workers already do this kind of work, or 45 per cent of the workforce.

Although some such jobs, at call centres for example, have proven vulnerable to offshoring, a great many are not: it is impossible to cut hair, serve food or care for the elderly from Bangalore or Mexico. The problem is that on average, service workers earn only half of what factory workers make – and only a third of what professional, technical and knowledge workers are paid. The key is to upgrade these jobs and turn them into adequate replacements for the higher-paying blue-collar jobs that have been destroyed.

It has happened before. Yet the blue-collar jobs we pine for were not always good jobs: we made them good jobs. When my father came back from the second world war, his poorly paid factory job had been transformed. He was able to buy a house, put his two sons through college and participate fully in the American dream. Some of this was due to the power of unions. Most of it was because of the enormous improvements in productivity wrought by improved technologies and management techniques.

The same thing can and must happen in the service sector. It is starting already. Companies such as Wegmans, Whole Foods, the Container Store, Best Buy and Zappos already account for a fifth of the top 100 best places to work in America. A typical hourly worker at the Container Store earns about $30,000 a year, not nearly as much as a GM factory worker but about 50 per cent more than the average for hourly-wage retail workers. Retail outlet Trader Joe’s mandates that full-time workers earn at least their community’s median household income, while its “store captains” can make six-figure salaries. These companies recognise that better conditions lead to better customer experiences – and an improved bottom line….

In our own day programmes such as the Malcolm Baldridge Award for Quality and ISO certification initiatives help to spread ideas throughout the manufacturing sector. Service jobs are the last frontier of inefficiency, providing abundant low-hanging fruit for the innovation and productivity improvements that can undergird higher wages. Yet they have no comparable assistance.

Thousands upon thousands of corner stores, dry cleaning shops, day care centres, restaurants and hair salons open and close every year. But while governments bend over backwards to help high-tech start-ups and university spin-offs, they do next to nothing for new service companies. This is part of the reason such companies have a high rate of failure.

Last fall, the City of Toronto and the Martin Prosperity Institute organised a summit with representatives from the public, private and non-profit sectors to develop new strategies for upgrading service work. President Barack Obama should now do the same thing on a national scale. Such an agenda could push measures that would help service businesses learn what it takes to succeed – from advice about business planning, to budgeting and sales, to quality management and marketing, to efforts to engage employees and develop their skills. Such a movement is badly needed. Without it, those who warn of a jobless future in America are much more likely to be proved right.

Yves here. When I lived in Australia, the minimum wage there (A$13 an hour) was a living wage. Frankly, it produced a much more pleasant society to live in, and workers at low-end retail jobs seemed much happier about their work. And prices were not out of line either in local currency terms (except for technology, don’t get me started on that, but that was largely a function of a cheap Australian dollar then). So this isn’t as crazy an idea as it sounds, but investing in productivity and improved business operation will make it far more viable to blaze a path to higher quality jobs.

By Richard Kline, a Seattle-based polymath and poet

1 Whispers 3 Summering 10

The idea of America is . . . tremendous. Few as good; fewer better. Freedom. Equality. The room to strive. Justice in equal measure. Live and let live, and do harm to none. In our day, it is the execution that is wanting; which effort is slack miserable, misaimed, selfish, deranged. A failure to live up to our best and a purveyance of all the worst we have to offer.

And the worst part in this execration of the ideals which we claim to profess, and at times have embodied in part and whole, is that it is we who fail ourselves. Our delusion, our venality, our lies, forced on us by nothing and no one else. No foreign master or occupation, though we bring such to others thoughtless. No leaden obligation to another folk or failed cause which drags us down. No shortage of wealth, of resource, of enterprise, of education, of alternative. No; unforced we err, we cringe, we accuse falsely, we embrace the worse and leave the best undone; double failure, redoubled down: of ourselves and all around. We are in a Hell of our own devise, some few think it Heaven; some few who profit midst the misery of others, all the rest . . . .

On the 4th day of July, I stood on a high place and watched explosions in the sky; bright, pretty things to look up to, live up to. I looked down and saw a rat in darkness venture out for supper and for fortune. That rat and its kindred: they’re social and intelligent creatures, full of enterprise, who care for their own let the world or some putative God(s) think what they will. Those rats, they treat each other better than do we Americans each other; better far than do we treat others who never asked for the receipt of our unwisdom. They only eat the dead, not make them so.

What we need, we Americans, is to look down and learn from these least beings; to leave others to make their own way untormented by our avarice and self-deceptions; to love wealth less and each other more. That is the one, the only revolution worth having. My brothers and sisters, be it soon; make it now.

—from the daybook
for my fellow citizens
Richard Wyndbourne Kline

For those who did not catch wind of it, the Peterson Foundation, which has long had Social Security and Medicare in its crosshairs, held a bizarre set of 19 faux town hall meetings over the previous weekend to scare participants into compliance and then collect the resulting distorted survey data, presumably to use in a wider PR campaign. It’s important to keep tabs on this propaganda effort, since its big budget (the Foundation has a billion dollars to its name), means it will keep hammering away on this topic. But it appears that they overestimated how much public opinion expensively produced and stage-managed presentations can buy.

The brazenness and ham handedness of these so-called “America Speaks” sessions, which have garnered well deserved criticism on the Internet, is probably due to at least two factors: deluded confidence that the average person will fall into line when a confident and well-credentialed presenter makes a pitch and a stunningly naive belief that aggressive efforts to manipulate opinion and mislabel it as polling would not be called out.

Anyone who has come within hailing distance of any kind of polling or survey development or implementation knows well how susceptible the results are to subtle, much the less overt, influence. People are extremely suggestible; that’s why drug trials are double-blind, placebo controlled: the mere knowledge by a researcher that a study participant is getting real meds instead of a placebo is too often signaled to the patient, and the placebo effect (which varies tremendously, but seems to average around 30%) greatly distorts findings. For surveys, a small change in question wording can a surprisingly large impact on results. For instance, “How do you rate the job Obama is doing” will elicit markedly lower marks than “How do you rate the job Obama is doing as President.” Apparently, the second version of the question elevates Obama’s status and reminds respondents of the difficulty of his role. No doubt the “AmericaSpeaks” designers were confident they could use this suggestibility to their advantage.

Several Web accounts by participants have discussed the format of the meetings and the various ways the Peterson crowd tried to stack the deck : David Dayen at FireDogLake (hat tip reader Doug Smith), letsgetitdone at Corrente (here, here, here, and here), and Suzie Madrak. But the most serious salvo came from Benjamin Page and Lawrence Jacobs, who produced a working paper discussing the considerable shortcomings of “deliberative forums” like AmericaSpeaks. From its abstract:

Deliberative forums – including the America Speaks version — are subject to serious pitfalls that make them unreliable as measures of “true” public opinion or as guides to future opinion. Expert analysis of evidence from many sources makes clear that large majorities of Americans strongly support Social Security, oppose benefit cuts (even for the sake of deficit reduction), and prefer to strengthen Social Security finances by raising the payroll tax “cap” or otherwise using progressive taxes. Officials who ignore these views will do so at their peril.

I suggest you read some of these posts, but to give you a flavor, some excerpts, first from FireDogLake:

The entire event was absolutely designed to create a panic about the deficit among the participants.

Slickly produced scare videos talking about the dire straits of the budget were prevalent. Multiple charts and graphs without precise numbers or percentages were handed out. Speakers discussed how “most Americans are concerned about the deficits and debt,” and how we cannot grow our way out of the problem. The current state of the economy, which needs an increase in aggregate demand, mostly in the form of government spending, to avoid a relapse into recession, got a short mention at the beginning of the discussion, an inclusion which seemed forced and tacked-on. Overall, there was about 15 minutes of discussion of the current economic problems, and 5 hours on the deficit. Organizers stressed that their solutions are designed to kick in after the country hits recovery, but the compounded effect of stressing deficits over and over is undeniable. There was no slick video about the need for economic recovery, put it that way….

“Everything must be on the table,” …But all the solutions were very prescribed and very narrow. An authoritative “Options Workbook” sets out potential budget solutions, on the spending and revenue side. 28 pages cover spending cuts, 15 pages cover revenue solutions. And the very first pages of the workbook talk about cuts to Medicare, Medicaid and Social Security.

While the workbook has pages and pages describing the health care system, the final menu of solutions simply list amounts of percentage cuts to Medicare and Medicaid, without mentioning how to achieve those cuts. The options to “achieve savings” in the program include means-testing, raising deductibles and co-pays, increasing the Medicare eligibility age, limiting Medicaid eligibility and voucher-izing Medicare. There are no progressive solutions nor is there anything close to the potential savings achieved in the Affordable Care Act, things like health IT and bundled payments and increased efficiency.

Letsgetitdone pointed to bias at all levels of the process:

The framing of exercises in the decision process continually restricted choices to ones that bring participants back to the supposed problem of a deficit and debt crisis. The web-streamed talks about national conference proceedings and orientations, and the brief constricted discussions of major values issues all worked to fit participants’ thinking to the ideas and frames presented in worksheets and the Federal Budget 101 presentations. Lines of discussion that would have led outside of the intended framing were politely aborted by the facilitators, pleading limited time, and the need to get through the agenda, and give everyone a chance to speak, so that any person developing counter-themes to the major narrative did not have a chance to develop these counter-themes and counter-narratives in the context of the supposedly unbiased process.

He also described them in detail. For instance:

The meeting began in earnest with the facilitator asking the participants:

”Share your name, where you are from, and complete the phrase: And in a sentence, I’d like you to share your greatest hope for the future of the country that your children, grandchildren and future generations will inherit.”

….The question served to orient everyone to think in terms of the future, and also to think of others and the country rather than of themselves. The bias in the question toward collective rather than individual concerns is palpable. But also the question connects up easily to one of the favorite arguments of deficit hawkism, namely that deficits lead to accumulating debts that our children and grandchildren will have to pay off. This proposition is a myth, but clearly, AmericaSpeaks, was trying to connect up to it here.

The amusing part is that the event moderators had trouble force feeding the geese they had thought to stuff with their message. For instance, from Letsgetitdone:

When the primary facilitator stated the agenda and explained its purpose, a number of people immediately called for a discussion of the purpose of the event and questioned whether there really was a fiscal crisis. I pointed to the Government’s option to deficit spend without issuing debt and pointed out that doing this would save nearly $1.4 Trillion in interest costs in 2025, alone, and that, the cumulative effect of a no debt issuance policy would be to eliminate a good part of the deficits projected between now and then. Another participant, active, in the DC non-profit world, mentioned the continuing recession and high levels of unemployment. She pointed out that SS had no immediate fiscal problems, and that the “crisis” was caused by people in the financial industry, who are not the ones being asked to sacrifice, but who are now asking others to do so. Yet another, an economist at the Bureau of Labor Statistics, talked about most of the difficulties being due to health care cost increases and the current recession. He denied that there was any long-term fiscal problem. Still others also questioned whether the topic of the meeting was appropriate.

From Suzie Madrak:

For the first time in a long time, I might have some faith in America. Because no matter how many times the facilitators of this event (which was funded heavily by Pete Peterson, the conservative billionaire who wants to cut Social Security) tried to steer us toward cutting Social Security and Medicare, the 3500 or so people who took part in this national town hall weren’t buying it. Sure, there were Fox News junkies here and there, and some cautious, low-information voters who kinda-sorta disagreed, but the majority who attended seemed to have their own ideas about how to solve the deficit “problem.”

You know what most of them wanted to do? Soak the rich — and cut defense spending. (Are you listening, President Obama?)

A post by Page and Jacobs made clear that any objective research on the questions of Social Security and Medicare would find rock-solid support among Americans:

Remarkably, however, AmericaSpeaks got lucky (or perhaps, from Peterson’s point of view, unlucky.) Despite all the biases, on several issues town hall participants came up with opinions not very different from those that have been expressed by majorities of Americans in dozens of well-designed national surveys. Participants opposed cuts in Social Security benefits, insisting that benefits must be preserved when balancing the budget. They wanted to strengthen the economy, favoring the current stimulus bill (stalled in the Senate) by a margin of 51% to 38%. In order to reduce budget deficits, most favored cutting defense spending and enacting progressive tax measures: raising the payroll tax “cap” so that incomes over $106,800 are subject to the tax (85% in favor); raising high-end corporate and personal income taxes; and imposing new taxes on carbon and on securities transactions. Only on the Social Security retirement age did the results conspicuously stray from actual public opinion…

Support for Social Security is found in virtually all segments of the American population. The opinion that “too little” is being spent on Social Security is shared by majorities of Republicans, Democrats, and Independents; by majorities of men as well as women; by whites as well as African Americans or Latinos; by people with a lot of formal education as well as people with little. Most important, support is very strong among young (age 18-29) Americans, fully 63% of whom told the most recent GSS that we are spending “too little” on Social Security. The supposed generation gap on Social Security is mostly a myth. There is no intergenerational war between “greedy geezers” and the young.

Yves here. It is refreshing that this effort failed, but it is a given that the Peterson crowd will go back to the drawing board and figure out a way to credibly produce the answer it wants.

Andy Grove, who lead Intel to dominance of an extremely competitive, risky industry, has a very important opinion piece at Bloomberg (several readers pointed to it, including John M, dr, Crocodile Chuck). He makes a series of points that are the polar opposite of the de facto US industrial policy, of the naive view that the US can have a viable society based on “knowledge workers”, rentiers, and service industries that depend on their earnings. Sadly, my Washington contacts tell me that the belief that the US cannot compete in anything other than financial services is deeply entrenched there, no doubt fed by media stories that draw misleading inferences from appealing-seeming case studies (see this New York Times story and Richard Kline’s able shredding in comments yesterday here and here for an example)

One thing American businessmen have utterly lost sight of is the importance of providing employment. The focus on “maximizing shareholder value” when shareholders are on the very bottom of the liability side of the balance sheet, not merely legitimates but extols screwing other stakeholders to the extent management can pull it off (and management, suborned via stock-related compensation, has gotten very good at doing just that). By contrast, in Japan, entrepreneurs like Konosuke Matsushita are revered not because they got rich, but because they created good jobs for many people.

Only some of Grove’s stature could poke such a stick in the eye of visibly floundering conventional wisdom that nevertheless remains firmly entrenched because it serves those at the top of the food chain very well (it doesn’t hurt that his piece is exceptionally well argued). My only quibble is that he unintentionally supports the fiction that we don’t have industrial policy in America. Following the money demonstrates the reverse; tax breaks, subsidies, tariffs, and what issues are front and center tell you who the favored children are, including financial services, Big Pharma, the sugar industry, and real estate. And this isn’t as radical an idea as he intimates. Australia, which ranks above the US in the Heritage Foundation’s dubious Economic Freedom Index (the Heritage Foundation clearly never had an encounter with the ATO, which makes the IRS look like pussycats), has very clear priority industries. For instance, its Commonwealth Scientific and Industrial Research Organisation (CSIRO) is one of the world’s biggest science organization and is focused around priority industries for Australia, with its main divisions being information sciences, energy sciences, agribusiness, manufacturing and minerals, and environment (the latter is involved both in new tech and minimizing adverse consequences of current industrial activities).

Please do read this thoughtful article in full and discuss in comments (if you have trouble with the Bloomberg link, as I did, please try here).

This blog warned a few weeks ago of a coming campaign by the officialdom against so-called “strategic defaulters”. It has arrived even sooner than we expected.

We warned that this development was the inevitable result of financial firms, taking an increasingly predatory posture toward their customers. Borrowers are responding in kind, by taking a cold-blooded and legalistic look at their agreements with lenders.

Now having said that, it is well nigh impossible to determine how frequently “strategic” or “ruthless” defaults are taking place. Even though it is in theory an appealing option for borrowers with severely underwater mortgages, it nevertheless comes with a lot of costs: moving and a trashed credit rating. And note that a bad credit report does not merely mean restricted access to borrowing, but it it is a big negative in the job market, now that many employers routinely pull credit reports. So I suspect the talk of strategic defaults greatly exceeds the reality.

In addition, the “strategic default” label presupposes that the borrower is under no financial stress and the default was purely elective. I suspect, instead, that the “strategic” defaults are instead anticipatory, that the borrower sees that he will wind up defaulting at some point and has decided to cut his losses.

Cynically, I must note a paper on this very topic by Luigi Guiso, Paola Sapienza, and Luigi Zingales appeared the very same week that Fannie announced its plan to Get Tough with the miscreants. And mirabile dictu, it does tell us what proportion of defaults are strategic (26%) and attributes it to the perception that the bank won’t pursue them.

Yet the authors admit it is difficult to identify which defaults are strategic defaulters:

It is difficult to study the strategic default decision, because it is de facto an unobservable event. While we do observe defaults, we cannot observe whether a default is strategic. Strategic defaulters have all the incentives to disguise themselves as people who cannot afford to pay and so they will appear as non strategic defaulters in all the data.

Yves here. So what did they do? They conducted a survey of “representative sample of US households” in December 2008 and March 2009:

We asked the respondents information about their home ownership and the date when they bought or refinanced their house. Moreover, we asked the following questions: ―If the value of your mortgage exceeded the value of your house by 50K would you walk away from your house (that is, default on your mortgage) even if you could afford to pay your monthly mortgage? where people could answer ―yes,‖ ―no,‖ or ―I do not know.‖ For people who answered negatively, we repeated the same question with a negative equity of 100K. For people who answered negatively, we repeated the same question with a negative equity of 200K (March survey) or 300K (December survey). In addition, we asked whether the respondent thought it was morally wrong to walk away from a house when one can afford to pay the monthly mortgage. Finally, we asked a list of questions about their political views and their views about recent economic policies and current events.

Yves here. I know this may sound terribly logical, but this is actually rubbish. I’ve done a tremendous amount of survey research. In general, you need to do a great deal of validation of the survey to make sure the question order or phrasing is not biasing answers. Businesses who have real money decisions hanging in the balance almost never do this, and I doubt these academics took this step either.

And more important, surveys on possible future actions involving money are notoriously unreliable. It is routine that consumers in a survey will say they will make a certain purchase in the next six months or buy a new product when in fact they do not. This approach is so notoriously useless that people involved in new product design have been using other approaches like conjoint analysis for over fifteen years.

Nevertheless, these suspect surveys (an update claims the percentage of strategic defauters is now 31%) appear to have provided the impetus for Fannies’ new aggressive announcements

The first is that the borrowers that the agency deemed to be able to make mortgage payments but nevertheless defaulted will not be eligible for a Fannie-backed mortgage for seven years after the foreclosure. Second is Fannie announcing it will start pursuing “deficiency judgments” in jurisdictions that permit it:

Fannie will instruct its servicers in an announcement next month to monitor delinquent loans on the verge of foreclosure. They will recommend cases for Fannie to pursue deficiency judgments.

Terence Edwards, executive vice president for credit portfolio management at Fannie, said these steps are meant to urge borrowers to work with the servicers.

“Walking away from a mortgage is bad for borrowers and bad for communities and our approach is meant to deter the disturbing trend toward strategic defaulting,” Edwards said. “On the flip side, borrowers facing hardship who make a good faith effort to resolve their situation with their servicer will preserve the option to be considered for a future Fannie Mae loan in a shorter period of time.”

Yves here. Let’s parse this: if you don’t talk to your servicer and then default, it presumably increases the odds greatly of being deemed a strategic defaulter. But the flip side is I can see plenty of instances where a sudden change in circumstances (job loss, medical emergency) could lead a borrower to conclude that he was now destined to default, and he needed to preserve whatever cash reserves he has, and talking to the servicer would be pointless. And of course, if you DO talk to your servicer, you will have to provide information about your finances, which might be used against you later if you default.

But more broadly, how credible is the threat of Fannie going after defaulters? Given the economics, this is mainly bluster, although I expect the agency to pursue some cases that appear obvious (to the extent it can judge “obvious” ex ante). collect a few scalps, and then run a very loud campaign about the cases it won in the hopes of deterring others.

Let’s consider some of the many problems Fannie faces:

1. It is going to have a very hard time determining who is a strategic defaulter. A credit report is not a complete picture. Small businesspeople often have corporate borrowings that are guaranteed personally; per above, a borrower could have had a sudden change in income or expenses. So it will be launching lawsuits with incomplete information

2. Litigation is expensive. If the borrower fights, legal costs will mount quickly. Fannie has the burden of proof and will likely need to do discovery (get the borrower to provide various financial records) and bring in an expert witness to make its case that the borrower was able to make payments for more than a short period beyond the default.

3. You can’t collect blood from a turnip. Even in those cases Fannie wins, the borrower may not be able to satisfy the damages and could file bankruptcy.

4. Fannie may lack standing. Recall that foreclosures are increasingly being challenged successfully because the party pursuing the foreclosure, usually the servicer, cannot act on his own, as an agent. The party bringing the action has to be the owner of the note, which is a specific trust. In many cases, the servicer or the foreclosure mill cannot establish that the trust it claims owns the note really is the owner.

A lot of these cases of “who really owns the note?” involve private label (non Fannie/Freddie) deals, but some important precedents also involve cases where the mortgage (which is the lien, and is separate from the note, which is the debt) was assigned to the electronic mortgage recording system, MERS. Recall that in all states except five, the note is the critical instrument, and must be correctly endorsed by all the intervening parties (a minimum of two between the originator and the trust, so a minimum of three endorsements are needed). It appears in many cases when MERS was used that the parties in the securitization chain instead relied upon it and fell down on endorsing the notes. I won’t bore you with details, but doing it ex post facto is not kosher. Since Fannie and Freddie required the use of MERS (IIRC starting in 2000), the same failures may have occurred, and as a result, the same arguments that have been perfected in some states to contest foreclosures may be applicable here.

Of course, this announcement also means that anyone who is a real strategic defaulter will need to be a bit cagier just in case (for instance, no e-mails or talks to friends or colleagues about strategic defaulting; in fact, having a document trail of current or expected financial stress would be advisable).

But either way, have no doubt the PR and threats of action to combat this trend will become more and more visible in the coming months.

Gulf resident and fisherman’s wife Kindra Arnesen took advantage of the offer extended to her to visit cleanup sites and staff meetings:

At any rate, I was invited the following week to go behind “enemy lines.” They gave me, of all people, security clearance to go into the base of operations meetings in Venice, Louisiana eight days in. Open door invitation to sit like a fly on the wall. Can you believe it? It’s really going on. They also gave me security clearance to go up to the Homer Incident Command Post which is over the entire region of Louisiana. I’ve been in Coast Guard planes all the way out to the site itself. Helicopters. Boat rides. I have been everywhere that anybody could ever want to go to get an inside look at what’s really going on.

Arensen appears to have been invited in because she got media coverage earlier in June when CNN covered her efforts to organize wives of Gulf fisherman over concerns about the safety of working on oil cleanup:

Arnesen believes it was vapors from the oil and the dispersants from the BP Gulf oil disaster that made her husband and the other shrimpers sick. She says they were downwind of it, and the smell was “so strong they could almost taste it.”

For several weeks, she hesitated to talk publicly about it. Like many fishermen who can no longer fish in the Gulf, her husband has signed a contract to work with BP to clean up the oil, and she doesn’t want to bite the hand that puts food on her family’s table.

But now Arnesen, a 32-year-old “uneducated housewife” — her words — is breaking her silence and is encouraging others in her community do the same. After attending a lecture by Rikki Ott, a toxicologist who’s worked with families affected by the Exxon Valdez oil spill in Alaska, Arnesen decided to organize other wives to ask questions about the safety of working near the oil.

Apparently embedding is more successful with journalists than with people who have a stake in the events they are witnessing. Her report indicates (transcript via Suburban Guerilla, courtesy Democratic Underground):

1. BP is playing down concerns over the safety of exposure to oil and chemical fumes, and attributing ailments and symptoms to causes that strain credulity. In addition, it is, as we reported earlier, making it well nigh impossible for responders to obtain respirators (the method is bureaucratic impediments: they not only need to prepare an OSHA form, but need an evaluation by “a medical professional”. Pray tell, how many people have the time and money to do that? (The detail of the interview indicates a Catch 22 in action). And again as reported here, BP is refusing to employ workers who bring their own respirators, even those OSHA rules workers to provide them.

2. Cleanup measures are far less aggressive than depicted to the media and visiting politicians:

So basically, this whole “ponies and balloons” act — if someone does not come in and properly oversee this response — our marsh now is being used as a boom. an overworked (?) boom, a big, giant sponge. It’s on both sides of us. It will fill up, it is filling up, constantly. We have heavy, heavy crude penetrating our marsh right now as we speak. They deploy , and then they pull ‘em back in when the politicians leave and this is not acceptable!

They’re not cleaning it up; they’re covering it up! This is, we’re barely into this. This could go on for years and years and they are already cutting costs! Cutting costs, cutting corners, taking shortcuts is why we are all sittin’ in this room today.

Enough is enough!

Now, as far as EPA, OSHA, NOAA, BP, and the federal government , they every one of them’s in collaboration with each other. That comes from someone at the top of NOAA. That’s who I’ve been talking to. They gave me someone at the top of NOAA. But, they’re all in collaboration with BP.

Please watch this video (hat tip Lambert Strether and Frank A):

Update 6:40 PM. Wow, talk about censorship! If you click on the video above, you will see it has been “removed by the user.” Michael Panzner kindly provided a current link per below: