Former Michigan Congressman and Reagan Budget Director David Stockmanâ€™s new book â€œThe Great Deformationâ€ provoked a flurry of insult and ridicule when it first came out back in April. Iâ€™m late to the party because as a law school graduate I spend all of my spare cash on liquor; in fact, I have not yet read the book. Fortunately for me, book tour promotional speeches are readily available on Youtube, and Stockman has no instinct for holding back.
Here is the gist; the Bretton Woods Conference made the dollar the reserve currency of the world, it was gold-based until 1971 when Nixon decided to let it float free, allowing the US to run endless trade deficits with mercantilist, export-led industrializing countries in East Asia. Along the way, the US ran up an enormous government debt – selling bonds to the East Asian economies that were gradually undermining American industry – to expand the welfare state, fight a half-dozen wars, fund some peanut farmerâ€™s idea of Synfuels, wind power, weapons systems that werenâ€™t even used in the half-dozen wars, and what Stockman refers to as the HES – Healthcare, Education, and Social Services employment sectors – government jobs funding the consumers of Chinese goods.
Calling the Federal Reserve a â€œBubble Machine,â€ Stockman digs into their low-interest rate policies and attempts to fine-tune capital allocation through the Tech Bubble, the Housing Bubble, and the Government Bubble that is, according to Stockman, about to pop.
I see no reason to doubt Stockmanâ€™s basic assertions; the stock market is playing with new highs even as the labor participation rate slips – only about 47 percent of adult Americans have full time jobs – and a full 100 million Americans receive some kind of food aid from the federal government.
What remains of American prosperity is Crony Capitalism in Stockmanâ€™s terms, where politically-connected operators get all the benefits of cheap money from the Fed, tax breaks only they can claim, and bailouts when things go bad; and the bulk of the people get nothing, not even jobs.
There is no escape, either. Stockman doesnâ€™t hold back regarding Social Security, Medicare, the massive debt already on the books, and the massive tax hikes that will be required to keep the grist mill turning, assuming the next generation of tax oxen can even earn income – and Stockman doesnâ€™t seem to think that they will.
The stunning loss of what he calls â€œBreadwinner Jobs,â€ which are jobs that actually pay the bills, has gone hand-in-hand with the loss of sound money and the growth of the welfare state.
The middle classes have been the main patrons of sectors ranging from real estate, insurance, retail, and even my field, the law. The nobility of Europe could commission artists for grand portraits and sculptures, but it took a growing bourgeois class with the money to buy houses worth decorating to spur the great easel painters of the Dutch Golden Age or the salons of 19th Century Paris. From art to coffee, the principle is inescapable; the indulgences might exist in some form regardless, but their proliferation takes middle class aspiration.
I think that our middle class is in trouble; Stockman believes this, too. With bills that we cannot pay, debts we cannot service, interest rates that cannot stay low forever, a large population of labor rendered unemployable by circumstances, and no indications of growth beyond the rather disturbing rise in the number of coffee shops around the Des Moines Metro area – patronized by students and a handful of investors who â€œfeel wealthierâ€ because the Dow is up – then the next meltdown will be far worse.
Do you deny that the middle class is shrinking? I have an exercise for you – right now, get in your car and take a drive through the nearest urban area. Count the number of times you see the following scene:
A super-discount retailer (Family Dollar, Dollar Tree, etcâ€¦) sharing a parking lot with a payday loan outlet, and a bucket-shop tax preparation shop (they specialize in helping low-income people claim the Earned Income Tax Credit) and some sort of no-frills dining. Depending on where you are, you might even see a blood plasma collection company and in the near vicinity there will be a â€œbuy here pay hereâ€ auto lot, where used cars are sold on credit to people who cannot get formal bank loans.
Hardly the commercial trappings of a wealthy economy.
It is axiomatic in history that the new worlds of the revolutionaries tend to resemble the social systems of the past. Tsar Alexander II freed 60 million serfs with the stroke of a pen, and seventy years later Joseph Stalin would re-impose serfdom under the guise of collective farms. He used bullets instead of ink. Similar stories can be told of the French Revolution, the Chinese Civil War, Oliver Cromwell, and probably all revolutions in some respect.
Alexander Hamilton wanted America to copy the British system, complete with political elites, state-supported monopoly corporations like the British East India Company, and all-powerful central government. It took two hundred years to overcome Jeffersonian resistance, but Hamilton finally won when TARP was implemented.
Perhaps it is no surprise that Barack Obamaâ€™s career-building commitment to the rhetoric of egalitarianism would lead to a stratified-by-force society resembling the old feudal model.
Get Fewer Hours, for Less Pay, and No Benefits
A friend of mine is facing the situation that has been making headlines lately; employers are cutting hours and eliminating their existing health care programs. Her employer (a farm-and-country retail chain) currently provides their employees with monthly cash payments earmarked for employee healthcare needs.
The company has been considering eliminating the cash payment, because paying the Obamacare penalty will be cheaper. Now, letâ€™s examine this with the incredulous and caustic clarity that is my trademark – the company will stop giving money to employees for their healthcare needs, and give it to the government instead.
The employees lose their health program and are now individually liable for the Obamacare penalty if they fail to obtain health insurance on their own – fewer resources and greater obligations, a pincer strike on their standard of living.
Obamacare minstrels have been pointing out that the law goes into effect for companies with over 50 full-time equivalents – or â€œFTEâ€™s,â€ so a company with 10 full-time employees and 100 part-time employees would have 60 FTEâ€™s and would have to provide insurance but only for employees that work over 30 hours a week – in this case, 10 employees.
Fewer benefits, fewer hours, less income, and more obligations; employees lose at every bloody turn. To make up the difference, employees will scrounge for second and third jobs, as well as government support.
It used to be that you found a job and worked hard, so you would not have to rely on public support. Now, you will be dependent on the government whether you have a job or not.
Weâ€™re All Day Laborers Now
Corporate America is in a process of firing all of their employees and replacing them with temps. Much like some serfs were Villeins and some were Cottagers (the difference was that some retained land and others were landless laborers providing service to the lords for subsistence), there are several types of temp employee.
Some are just like standard employees, except that they have to reapply for their job every 3 to 6 months, while others are full-fledged employees of a temp agency, and are sent out on contracts to whatever employer has engaged them.
Check the job boards for your home town; temp agency jobs might be the bulk of what is available.
Causing strain on social and economic relationships has been a tactic of ideological struggle between countries, factions, movements, religions, and all radicals since the beginning of time.
Causing stress within families can justify enormous social work bureaucracies; causing stress within the workplace can break down the economy and make employers and employees view each other as enemies and potential litigants; and so on with teachers and students, citizens and police, and any thing else you can think of to insert more arbitrators, sensitivity counselors, HR consultants, labor activists, and social workers into the workings of the nation.
I havenâ€™t even included the doctors opting for early retirement. So, what will the part-time employee with no health coverage whose tax refund was eaten up by the Obamacare penalty and has no spare cash because scheduled hours were reduced do for healthcare? There will be Medicaid, and emergency rooms – but hospitals will be understaffed.
Perhaps you should become good friends with your local veterinarian; it helped on â€œThe Walking Dead,â€ and it might come in handy as we slide into post-industrial feudalism.
A sizeable chunk of my legal career has been spent neck-deep in the morass of the foreclosure wave that has wreaked havoc across the land several years ago. If you wonder what has made me cynical about both the economy and the competency of government, it was my year doing foreclosures.
First of all, I am not the big expert, and this is in no way legal advice; I worked long enough to learn how the process works and how it ties in to real estate market and the economy as a whole. I think I have put the picture together reasonably well, and I have learned a few things about our national obsession with real estate.
Banks Do Not Hold Mortgages
The fact that mortgages are syndicated and securitized – a high-end way of saying that they are sold off and bundled into bonds, because I have the diplomas and still harbor an urge to use them – has reached public knowledge for the most part.
The bank might sell the note and mortgage to a mortgage servicing company or hold them in their own servicing division, but either way the â€œbeneficial ownershipâ€ is sold off, often to Fannie Mae, Freddie Mac, or into an Asset-Backed Pass Through assembled by an investment bank – the mortgage-backed securities which made headlines in 2008 and are now being bought up by the Federal Reserve at $45 billion per month. The banks stay involved only as servicing agents.
This is why a foreclosure caseâ€™s name is so long; things like â€œXYZ Bank NA, as Trustee under agreement dated May 1, 2004 for Asset Backed Certificates Series C-2004 v. Joe and Jill Serfdomfaller,â€ are common.
Because the banks have no real stake in the mortgages any more, it is financially beneficial to them to cut costs in their servicing departments. This has driven massive outsourcing in the sector, and there is no real incentive to actually deal with anybody. Like chess pieces protecting the king, the bankâ€™s employees are there to prevent you from getting to someone who can actually help you.
There is No Free Market in Home Mortgages
The government has busied itself with housing programs since the 1930â€™s, and if you attended public school you are probably inclined to believe that these efforts were all for the benefit of the populace themselves. I briefly believed that back in college, but working as a foreclosure attorney snapped me back to reality.
Congress chartered the Federal National Mortgage Association (FNMA), commonly called Fannie Mae, to purchase mortgages from banks. The idea being that by buying the mortgages, the banks would be re-capitalized immediately and could write more mortgages.
Originally, Fannie Mae was a government-owned enterprise, but was privatized to pay for the Vietnam War. Of course, a privatized, government-sponsored mortgage buying company would look a bit monopolistic, so Congress chartered Freddie Mac as a companion company, to buy conforming loans as well as mortgage-backed securities.
Alongside the two Congressionally-chartered government-sponsored enterprises (GSEâ€™s), were other programs like the Federal Housing Administration, or the FHA, and it provides insurance to both home builders and home buyers.
Most importantly, FHA provides mortgage insurance at a cheaper rate and with easier terms than private mortgage insurance, requiring less than 4 percent down payments, and thus skewing towards higher-risk borrowers.
If a mortgage goes into default during the mortgage insurance period, then the bank will foreclose, and then deed the house to HUD (FHAâ€™s parent department) in exchange for the entire balance of the bad loan. That is how HUD gets so much real estate.
The Federal Reserve Pushes Debt
Not only do we have two government-sponsored companies buying mortgages, along with a government agency designed to encourage higher risk lending, we also have the Federal Reserve pumping the system full of cash, both with a very low Funds rate, but also now by directly purchasing both US Treasuries and mortgage-backed securities at a combined level of $85 billion per month.
The structure of the mortgage industry – mostly assembled by government action – was thus inflated by the Fed in the last decade with low interest rates and is now being re-inflated with lower interest rates and asset purchases. Altogether, bank depositors arenâ€™t that important in the housing market any more. So long George Bailey.
Modifications Were a Joke
Think about it this way; if a mortgage for $200,000 goes bad, and the house is only worth $100,000 at the time, then the bank, FNMA, the investors, or the FHA is likely to lose $100,000 almost instantly in the foreclosure – they lose the â€œassetâ€ of the $200,000 mortgage on their books, and replace it with a $100,000 house.
Because of this, any cash they can squeeze out of a borrower before the inevitable foreclosure on these bad loans (mostly written off already by this point) would go straight to the bottom line, saving money for the banks, the investors, FNMA, or the FHA as the case may be.
HARP, or the Home Affordable Refinance Program, had more success. It was designed to help underwater borrowers refinance without having to default. This would help them take advantage of the lower interest rates, and avoid the loss of asset equity that was hitting the financial system so hard.
In Defense of Strategic Foreclosure
In almost all circumstances, borrowers would have been better off defaulting rather than modifying. Instead of paying their $200,000 mortgage on their $100,000 house at 8 percent, they could pay a modified 3 percent, but still would have to throw money into the black hole without acquiring any equity from it.
I had a case like that; it was a couple in their mid-fifties, with no savings left, and their modified mortgage payment was still about $1,300 a month. This, in southern Iowa where a 2-bedroom apartment can be had for $600 a month. That was $8,400 a year they could have saved in cold, hard cash, to use to begin rebuilding their lives and avoid living so tenuously – especially at their age.
When you are under that much financial strain, guilt and sentimentality will do no good for anybody. If you are broke, admit it. If – or more likely when – they default again, with no cash reserves they are very likely to fall permanently into the dependent classes, in terms of housing, food, income support, and medical care.
Debt, on Top of Debt
That sums up the American economy in the words of David Stockman, and I see no reason to doubt him at this point. The idea that we donâ€™t have to manufacture, mine, drill, or grow more in order to produce more wealth, but can simply purchase more assets with borrowed money, is a dangerous mindset that cannot last forever, a lesson we should have learned in 2008 but apparently havenâ€™t.
If you think this is a glorious recovery, then answer me this: Where is all the wealth being produced by our allegedly recovering economy? The prices of inflation-sensitive assets are going up, but so are trade deficits, food stamp rolls, and the number of people outside of the workforce entirely. I think I am currently a â€œfreelancer,â€ but that is just a white-collar unemployed guy.
This former foreclosure lawyer is more likely to live in a shack and raise goats than buy a mortgaged suburban house, because debt and freedom cannot harmoniously coexist. Maybe we should pay members of Congress in goats instead of moneyâ€¦
Well, another class of high school graduates are killing time until they begin their college experience. In four, five, or six years, many of them will graduate from college, and move to Dallas County so they can work as temps at Wells Fargo.
Meanwhile, town squares across Iowa are emptying out. Iâ€™ve spent some time exploring small towns in rural Iowa, and there are common threads that threaten to further damage the prospects of the young, and may even threaten the existence of many towns across the state.
And so it goes; young people leave to try and buy jobs that donâ€™t matter (and often donâ€™t exist in large numbers), buildings stand unused, and eventually the towns just collapse into stagnant malaise.
What Muscatine Has To Say
Muscatine is a unique town; the downtown fell into disuse as businesses moved to the ring road, but Muscatine kept some relatively large manufacturing and agribusiness installations, as well as banking and insurance industries. This meant that there was cheap, unused store space downtown, and a population with enough disposable income to support a restaurant culture which is unique in my experience.
Italian, Mexican, and Korean (called the Yakky Shack, it was a personal favorite of mine) can be on the menu for any given meal. Avenue Subs, just around the block from my former law office, is truly unique. Their sandwiches cost more than the chain sandwich restaurants, but the place was always busy at lunch time.
If you can re-create their menu reasonably well, you could open up in any mid-sized Iowa town and Iâ€™d bet you would do very well – if you can keep start-up costs down.
What Can Communities Do?
I am often accused of â€œhaving no answers,â€ and â€œbeing negative and critical,â€ and â€œbeing mean.â€ Well, I am an intensely unpleasant person in many ways, pessimism is the lubricant of victory, and I donâ€™t believe in the governmentâ€™s ability to solve social or economic problems – which translates into â€œhaving no answersâ€ when you live in a society enamored by Statism.
In towns and counties across the state there are established businesses, and many of them have working relationships with chambers of commerce or local economic development corporations.
Some of these business interests and organizations have either direct control of vacant retail space or contacts with property owners with retail, warehouse or light-industrial space to offer but with no available takers.
So, how about a community-level angel investor network? Why donâ€™t we put young entrepreneurs together with established business owners or property owners to help them raise start-up capital – cash, space, or equipment – for their own small businesses.
What businesses? Thatâ€™s the beauty of it – I donâ€™t know. I think the sandwich shop idea would work well in any town of about 5,000 + people, especially if you can get space within walking distance of the largest employer in town, the school, or the college.
Maybe internet commerce, custom clothing, fresh foods, computer game design, who knows.
But, College is Important for Jobs Skillsâ€¦..
No, it is not. The idea that your young go-getter will be more entrepreneurial after spending half a decade with tenured academics is laughable. If you need to learn accounting, take accounting at community college part-time for a fraction of the cost.
Why canâ€™t Iowa become the youth start-up capital of the country? Why must we continue to shuffle the young and the (presumably) ambitious into expensive colleges only to graduate with the pressure of debt and depleted financial resources pushing them towards the work-a-day life that could disappear in the next round of layoffs?
Iâ€™m Just a Lawyer, butâ€¦
Now, I am perfectly willing to admit that I am not the exemplar of my own advice – think of me as the desert hermit the protagonist seeks out for guidance. That is probably why I was attracted to the law, and most ofÂ my legal career has involved debtor-creditor law, so I know how debt can screw up a life or a business venture.
This is how the Chamber of Commerce can help. They can assemble angel investors with cash, equipment, or space available. They can arrange discounts for accounting and legal services for things like taxation and payroll. They can send experienced businesspeople into the schools to speak on business creation, promote self-employment, and whatever else they can think of to encourage young Iowans to consider independent livelihoods without the need for debt financing.
If you fail, then start over with a different idea. If you succeed, then you owe me lunch.
Having nothing better to do, I decided to spend Monday morning on the DMACC campus for a spring career fair. I wanted to wander around and ask questions to people to try and gauge their perception of the job market, but I had no intention of simply administering a poll. No, I was going to make people defend their statements by asking why they held that belief, like Socrates but without the profoundness.
I asked jobseekers if they were feeling optimistic or pessimistic. I asked recruiters about what kind of people they are looking for, both in terms of skills and personality.
Optimistic, They Think
Personally, I believe that optimism is stupid and should be hated, but I appear to be alone in this sentiment. Not one person admitted feeling pessimistic when asked directly, but when asked why they felt optimistic the responses were not very convincing. Most of them professed to be â€œupbeatâ€ people, none of them based their professed optimism on confidence in finding employment.
One guy challenged me to explain how a person could get out of bed without being optimistic; I explained that getting out of bed has more to do with an urgent need for urination than a sunny disposition.
With only minimal coaxing I got a number of people to divulge some worries they held about finding work that paid sufficient wages to get on with their lives. This was the sentiment from some cosmetologists and a video store clerk who found my line of questioning strange but entertaining.
One young lady had experience in call center collections. I always wondered what people with lip rings ended up doing for a living, and now I know.
One quite profound comment I received was from a jobseeker who was leaving when I spoke to him. He was feeling pretty good about the day, and explained that it was because he actually got to speak with real-life people about getting a job, which is a novelty in a world where everything is now done online.
What the Recruiters Had to Say
Not just wanting to badger the jobseekers, as lunch approached and the crowd thinned out I began focusing on the recruiters – I was willing to be obnoxious but did not want to be disruptive, so waiting until the recruiters had nothing to do seemed like the polite way to go about things.
I asked the recruiters about what kind of people they are looking for, both in terms of job skills and personality.
In terms of available jobs, IT professionals, nursing at all levels, and financial advisors appear to be in growing demand in Iowa; I would speculate that this is due to the aging population needing health care and financial services in greater numbers.
Sales positions were a bit harder to come by, warehousing and light manufacturing appear to be evening out, and accounting positions are open but require some specific knowledge of one area of accounting, which could make job hunting difficult for some of the accounting professionals.
I spoke at some length with a recruiter about what sort of personality her company seeks. Her comments boiled down to â€œa networking, outgoing, team player with a Type A personality.â€ It sounded to me that everyone needs to be a sales rep even if they arenâ€™t a sales rep. She agreed with that sentiment.
Sorting personalities is largely bull wash, but there are clear differences between people who prefer boisterous activity to pensive reflection. I vaguely remember going to some sort of leadership conference in college where we were sorted into Blue, Orange, Gold and Green personalities. I donâ€™t remember the test, but I do remember being in the smallest group.
I ran the Introvert-Extrovert angle by some other recruiters. They all agreed with the first recruiter, which I found annoying because I am the more pensive, less diplomatic, scowling type who prefers libraries to call centers – â€œan atmosphere as restful as an undiscovered tomb,â€ as Professor Henry Higgins put it.
The National Career Readiness Certificate Strikes Again
Iowa Workforce Development was there to push the NCRC, which I didnâ€™t expect although it didnâ€™t surprise me. The NCRC is being rolled out through the Skilled Iowa Initiative under the supervision of the Lieutenant Governor.
The effort is two-pronged, in that they must convince people to take the test, as well as convince employers to value the results in their hiring efforts – not to mention informing employers that the NCRC is a thing that exists, because most of them still donâ€™t.
Perhaps the whole thing was absolutely pointless. Maybe all I did was waste time, irritate many, and perhaps amuse a few people who arenâ€™t used to being accosted by a random guy asking inane questions, but I encourage all of you to try it sometime because it is sort of fun.
The people I spoke with seemed intelligent, capable people who were eager to work. The recruiters seemed happy to speak to me as well as to jobseekers. Whether it will translate into actual people obtaining actual jobs, I may never know.
Nobody seemed terribly confident. People professed to be optimistic but didnâ€™t know why, recruiters thought people should be optimistic but couldnâ€™t explain why, and the various workforce organizations thought that they had the answers – new tests, new skills, and new strategies – but couldnâ€™t explain why these medicines would work in the actual economy.
I left more convinced than ever of one thing; the American economy doesnâ€™t work for a large number of people. In such an economy, the only real opportunities are the ones you make yourself. There was a time when most Americans had independent livelihoods, and I think it is time to re-examine self-employment.
Despite what you hear from politicians, the government hates self-sufficient people – they are too difficult to tax. It is much easier to tax a Bud Fox (Wall Street) than a Charles Ingalls (Little House on the Prairie,) which explains so much about our nation if you stop and about it.
We need as many people as possible to be as independent as possible from the mainstream economy; not just independent from government support, but people who donâ€™t need to work for others to earn a living. In such a world, the career fair becomes absurd as a concept, not just made absurd by a little Socratic questioning.