All the green shoots on Wall Street won't gain a single seat in the House come next November if something more effective is not done in public policy. Demand Side believes a rebound is likely next year, and will in fact generate a larger majority for Democrats. Despite the current weakness, elections are not decided during the autumn of the previous year.

We suspect Mr. Obama will demonstrate the same election year skill on behalf of Congress and the Republican slide will continue. That said, we note we are not so good at forecasting elections as we are at the economy. Robert Kuttner is better.

It's the Unemployment, Stupid
by Robert Kuttner
Huffington Post
October 4, 2009

If the unemployment numbers keep rising into 2010, the Republicans are primed to pick up dozens of seats in the House, crippling the Obama administration's capacity to recoup in the second half of the president's first term. Obama would lose his very tenuous working majority and would confront a situation very much like the one Bill Clinton faced after the Republican gains of 1994, when he worked even more closely with Republicans in order to save his own skin. If you liked triangulation Clinton-style, wait for Rahm Emanuel's version of it.

The most recent employment numbers were bad enough on their face -- 263,000 job losses in September, and a measured increase in payroll employment to 9.8 percent. But the real numbers are much worse. The nominal rate conceals the fact that the labor force is 615,000 workers smaller than it was a year ago, even though the working age population continues to grow. People who can't find jobs and quit looking are no longer counted as part of the labor force. If normal labor force growth had continued, the unemployment rate would be close to 12 percent. See the analysis of the numbers by the good people at the >Economic Policy Institute and the estimable Dean Baker. The administration's people know this reality, and they are aware of the political risks. So what are they doing? Precious little.

I had a conversation with a senior administration economic official last week and I asked him to suspend disbelief and consider a large increase in public spending to create more jobs. What would he spend the money on? We discussed the pro's and con's of emergency fiscal aid to the states versus a tax credit for job creation in the private sector, subsidized job-sharing, and direct public works employment. But it was clear that the administration considers a Stimulus II a non-starter. The view is shared by Fed Chairman Ben Bernanke, who testified last week that there was not much we could do about rising unemployment except wait it out.

This is economically deplorable and politically self-defeating. When the administration considered its $787 billion stimulus bill last winter, its projection was that unemployment would peak at 8.9 percent. It's clear that joblessness is going to be a lot worse, and nobody has a convincing story about where the new jobs are going to come from once economic growth turns positive. Time magazine recently ran a cover story suggesting that we might just have to get used to a new reality of persistently high joblessness, and compensate with other policies such as more heroic job training (but for non-existent jobs?)

But that view is malarkey. Economists were making the same argument in 1938 and 1939. The economy, supposedly, had reached a level of maturity and technological sophistication that there just weren't enough jobs. Unemployment was just stuck around 15 percent. Then along came World War II. The federal deficit rose to 29 percent of GDP (this year it will be about 11 percent) and unemployment disappeared.

The president should be making the case for increased deficit spending on job-creation in 2010 and 2011, followed by a program of deficit reduction financed by progressive taxation. Public opinion on these issues is not static, and in fact a recent poll done by Hart Research Associates for EPI shows that the public cares a lot more about joblessness than it does about the deficit. 53 percent of respondents said lack of jobs was the most important issue, but only 27 percent said the deficit was. Fully 83 percent sand that unemployment was a big problem, and just two percent said it was not a problem. Presidential leadership could make a huge difference in translating these attitudes into action.

The Blue Dog Democrats in Congress are opposed to larger deficits, but many of them would support a ten-year program of more public outlay now coupled with deficit reduction after recovery comes. Unfortunately, a lot of Washington's centrist savants are skipping directly to the deficit reduction, overlooking the fact that we are still a long way from recovery. As EPI was holding a conference releasing the results of its research, the more moderate Center for American Progress (CAP) was holding a big event on alarm about the national debt. CAP President John Podesta, former director of the Obama transition team, is an enthusiast of value-added taxes as deficit-reduction medicine.

My own view is that VAT's are highly regressive taxes on consumption. I could go along with them if they were part of a deal that included progressive taxes such as a tax on financial transactions and if some of the money went to expanding public services rather than just reducing deficits. But this is only half of the conversation, and the less urgent half. Unless we get a bigger recovery going, and get unemployment down well before the 2010 mid-term elections, all this center-left policy wonkery will be beside the point because the Republicans will be running the country.

Kuttner putting in perspective the European electoral defeat of Center Left parties

Robert Kuttner of the American Prospect and Demos gives us the context of the political part of political economy of the next few years.

Left Out in Europe
by Robert Kuttner

The European left, such as it is, got clobbered in the recent elections for the European parliament. In the next parliament, center-right parties will have almost twice as many seats as social democrats. Of left parties, only the Greens gained slightly. Far-right nationalistic parties picked up strength.

This should hardly come as a surprise. Over the past generation, especially in places like Britain, Germany, and the Netherlands, Europe's center-left has worked hard to neuter itself as an opposition force, rivaling free market parties in an embrace of high finance and heedless globalization.

In the late 1990s and early in the present century, Gerhardt Schroeder of the Social Democrats, then the German Chancellor, was a leading sponsor of financial market liberalization. He also went to great lengths to weaken labor protections. His British counterpart, Britain's Tony Blair, went Schroeder one better in putting all of his economic eggs in the basket of Britain's financial elite. Blair intensified the financial policies of Tory Margaret Thatcher. As in the US, the seeds of the current financial collapse were sown under nominally left-of-center governments.

The Italian left has vanished almost entirely. In France, factional and personal disputes have prevented the Socialist Party from offering a coherent alternative to President Nicolas Sarkozy, who offers a characteristically French, paradoxical combination of nationalism and social protection.

For a generation, the European center-left has embraced essentially the same version of global laissez-faire and liberated finance as the center-right parties, tempered by only a marginally better version of the welfare state. The common formula is: liberalized capital markets; freer global trade; reduced protections for workers; flatter taxes. The very phrase, "center-left" is an emblem of the capitulation to global finance. Thus, leading moderately left parties have scant alternatives to offer voters at a time when free market capitalism has thoroughly disgraced itself.

Alienated voters either stay home or vote for the far right. It's an old story--and given what we know of twentieth century European history, a terrifying one.

The ideological lines are further blurred because the center-right also defends the welfare state. But everywhere, the cost of paying for the failures of capitalism is rising, leaving all of the mainstream parties with a fiscal crisis. Because of these costs, the welfare state in much of Europe has become a defensive fortress--a society of insiders and outsiders. The insiders are civil servants and a dwindling number of workers with secure jobs. The outsiders are increasing numbers young people, women, and immigrants, who cannot find good jobs and do not enjoy the full social protections. This bargain is not stable, either economically or politically.

The short term winners are the center-right parties, which form the governing party in most of the nations of the European Union. But they hardly offer the voters much either. The leader of the British opposition, Tory David Cameron, hasn't a clue how to help Britain recover from economic collapse. But he is likely to win the next election. The ruling coalitions in France, Germany, and Italy are not delivering economic recovery. But absent a believable left, they will continue to govern.

The EU, once a possible instrument of social democracy on one continent, itself has become something of a Trojan Horse. Its basic document, the Maastricht Treaty, makes free movement of capital, goods, services, and persons a core constitutional doctrine. Social protections are secondary.

Thus, the European Court of Justice has recently issued rulings defending the rights of nations such as Poland, Estonia and Latvia, with lower social protections, to impose their standards on the core nations of the EU. German contractors can end-run Germany's good labor standards by hiring Polish sub-contractors. Construction and transport firms from the Baltics can undermine Sweden's system of collective bargaining. Hedge funds based in London can buy Scandinavian firms and erode the local social compact. This has become Europe's version of a race to the bottom.

The politics of the EU compound the constitutional problem. The Commission of the EU, based in Brussels, could adopt stronger social defenses if it so chose. But center-right parties currently have a strong majority of governments of Europe's 27 member states. So policies to constrain the regime of global finance cannot win support. The British Labour government, nominally part of the center-left, invariably votes newer member states that have center-right governments, against anything that could be considered a restraint on free capital movements.

The exceptions to this sorry picture are the Social Democratic parties of Scandinavia and to some extent of Spain. The Nordic Social Democrats have insisted on a social model that spends enough money to provide security combined with flexibility. Denmark supports liberal trade, but there are powerful quid pro quos. When a Danish worker changes jobs, it is usually to move to a better job, with the mobility subsidized by the state. There are hardly any low-wage workers in Denmark, and no welfare state of insiders and outsiders, except for some immigrant groups. And Denmark did not suffer a financial collapse because it did not abandon bank regulation.

There are currently conservative governments in Stockholm and Copenhagen, but they don't dare tamper with the basic formula. The former Danish Social Democratic Prime Minister, Poul Nyrup Rasmussen, is currently Europe's leading advocate of much tougher regulation of financial capital.

Rasmussen might have been the next president of the Commission of the EU, had the left not been trounced. And so the vicious circle continues. The left offers little to voters, and the right keeps being elected.

This is surely a moment for a compelling program to constrain capital in the broad public interest. Capitalism has demonstrated once again why it is not capable of being self-regulating. American progressives used to look longingly to Europe, with its stronger trade unions and its more comprehensive social protections. Those are still there, but unraveling under assault. What's missing on most of the continent is political leadership, vision, and nerve.

Robert Kuttner

The Home Owners Loan Corporation
and other real answers to the impending crisis

Listen to this episode

Today we have audio from Robert Kuttner, then I’ll give you some details on the Home Owners Loan Corporation, a New Deal model we could use today to clear the housing market. Kuttner will be back with observations on the political dangers to Democrats.

Remember to change your subscription on iTunes to demandside reborn one word lowercase. That link offers you the serialized version of Demand Side, the book, all at no cost or obligation. We’re moving through the history chapter and should be into economic performance by president, Chapter 4, by the first of next week. Look forward to consistent high marks for Democrats across the range of economic measures — growth, employment, investment AND profitability, all while borrowing trillions less.

Now Robert Kuttner, excerpted from an interview with Amy Goodman at Democracy Now on January 23.

ROBERT KUTTNER: ... the place to start is to recognize why this recession is different from all other recessions. This began and is continuing with a collapse in credit markets, and the collapse in credit markets is, in turn, the result of deregulation gone nuts. And it’s a repeat of a lot of things that happened in the 1920s, where there was too much speculation with too much borrowed money and a complete lack of transparency. The regulators, the public had no idea of what these bonds that had been created out of subprime mortgages really contained, what they were worth. The people who packaged them were not subject to any kind of regulatory scrutiny.

And when it turned out that a lot of these loans were never going to be paid back, the layer upon layer upon layer of bonds and then securities based on the bonds—you know, if you can picture the World Trade Center collapsing floor by floor or you can picture the collapse of the Ponzi schemes of the 1920s, that’s a good—or horrible—analogy. And when you have a credit contraction, it means that banks have less capital against which to make loans, and lowering interest rates doesn’t fix that.

There are two other things that lowering interest rates and an ordinary stimulus package won’t fix. One, you alluded to in your opening comments, Amy, and that’s the collapse in housing prices. At the current rate of decline in housing values, American homeowners—and that’s about 70 percent of Americans—are going to lose $2.2 trillion of net worth this year alone. Well, when you lose $2.2 trillion of savings, you’re not inclined to rush out and do home improvements, you’re not inclined to rush out and buy durable goods. And again, compared to that kind of a loss, a stimulus—and they’re talking about $140–$145 billion, that’s one percent of GDP—that’s a drop in the bucket.

Lastly, this occurs on top of thirty years of increasing insecurity on a whole bunch of fronts: the greater risk of losing your job, the greater risk of having your paycheck not keep pace with inflation, rising energy costs, rising tuition costs, rising health insurance costs. All of the things that make you middle class have become more difficult to attain in the past thirty years. So you’ve got a three-layer cake here. You’ve got this thirty-year history of flat or declining living standards for most Americans, you’ve got this terrible weakness in financial markets, and you’ve got this housing collapse.

....

the great experiment in deregulation really started under Carter in the late 1970s. It was Carter who started the deregulation of trucking and natural gas and broadcasting. And the whole ideology of deregulation and the practice of deregulation was unfortunately bipartisan.

That’s Robert Kuttner, co-founder of the American Prospect, once an investigator for the Senate Banking Committee, and as good an economist as exists in Washington.

Let’s take the mortgage crisis. What is a way to clear the markets and keep people in their homes?

Kuttner suggests a resurrection of the Home Owners Loan Corporation of the New Deal era.

Information from Answers dot com was provided under the sponsor:

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During the 1920s a typical down-payment was 35 percent for mortgage loans lasting up to only ten years at interest of 8 percent. At the end of that period, borrowers had to hope they could refinance or somehow in some other way come up with the remaining cost of the property. The lending institutions did not offer loan mortgage insurance and were often dangerously under-funded.

The number of mortgages issued nationwide dropped from 5,778 in 1928 to a mere 864 in 1933, and many banks went under, dragging homeowners down with them.

There were three choices:

Marrner Eccles at the Fed urged the policies of the great John Maynard Keynes, public programs operating directly, shoring up the lagging building trades and producing the badly needed housing.

Herbert Hoover preferred to support the banks, the lenders in the private market. In 1932 he created the Federal Home Loan Bank. The number of mortgages let was nationwide under Hoover’s programs was fewer than ten. Total.

Franklin Roosevelt, in his New Deal, in the summer of July 1933, created the Home Owners Loan Corporation, which was authorized to issue new loans to replace the existing liens of homeowners in default.

Of the almost two million applicants, half were accepted, those who could demonstrate a determination to meet their financial obligations and a history of doing so. Existing lenders had to accept losses from lower appraisals, and they were happy to do it. A government guarantee of four percent interest was worth far more than the zero percent they were getting, even if the zero percent applied to a higher valuation.

The HOLC was short-term. It actively issued loans for only three years, between 1933 and 1936. It was liquidated in 1951 at a small profit.

The situation is starkly similar to adjustable rate mortgages of today, which like the short-term loans of the 1920s, are tenable only when refinancing is available on favorable terms.

The HOLC offered full amortization, meaning when the last payment was made the house was owned free and clear. This was built into most future mortgage instruments, until recently. It offered below market interest rates and close counseling and assistance for borrowers. The result was extremely low default rates for what were the subprime borrowers of the day.

As envisioned by Kuttner, the 2008 HOLC would purchase at a deep discount, perhaps 30 to 40 cents on the dollar, the securities that hold the mortgages. At present many of these securities m are valued at zero, since there is no other market for them. There may be tens of billions at the Fed, however, which has taken the shakiest paper as collateral in its special auction facility.

The HOLC program would repopulate homes by offering below market terms. It seems to us that these terms ought to include adjustments should market prices fall further. One very understandable reason for softness in the current market is that would-be buyers are on the sidelines. If these buyers could be insulated from the risk of falling prices, they would come into the market. If they came into the market sufficiently, prices would cease to fall.

We should be clear, falling equity values in the presence of a federal program to rescue the housing market is going to create stresses among those who behaved responsibly over the past half dozen years.

We should also be clear that this just clears up part of the mess. Regulation of the financial sector is likewise essential, as is a forward-looking recovery program — built on infrastructure, green technology and jobs — not one-time, short-term stimulus.

ROBERT KUTTNER:

....

.. let’s bring this back to politics. There’s a big risk that the Democrats, trying to be realists, trying to help out in a crisis, enact something that President Bush can sign, and then their fingerprints are on a piece of legislation that is obviously not going to solve the problem. There’s a time for bipartisanship, and there’s a time for a partisan difference. It seems to me the duty of an opposition party is to oppose, and this is one of those moments when the Democrats would be well-advised to really clarify the differences between themselves and President Bush.

But I want to bring it back to politics in a broader sense. This did not just happen. This was not an accident. This was the agenda of business, particularly Wall Street, going back thirty years. And if you look at the history of this, the Great Depression discredited free-market ideology, because it was such a colossal practical failure. Nobody in the 1930s could argue with a straight face that free markets worked. And so, we had a whole mixed economy, a regulatory structure invented during the New Deal, that really lasted thirty or forty years. By the ’70s, for a variety of reasons, big business had recovered a lot of the political power that it had lost in the Depression. And both parties, beginning with Carter, continuing with Clinton, became enablers of the kind of deregulation that finally has come home to roost in this crisis.

So now we’re learning, painfully, for a second time a lesson that we never should have had to learn twice, that markets don’t regulate themselves. Markets, left to their own devices, create grotesque inequality, ruin the environment and ruin the economy. And we’re seeing that unfold.

Robert Kuttner, American Prospect, author of The Squandering of America, once a chief assistant to Senator William Proxmire.

The political dangers are real. It will be a sad day for Democrats if they underestimate the potential of current slowing to become a real and deep recession. Stagflation. Or if they overestimate the effectiveness of the Fed and its interest rates or their own economists and the stimulus package.

We will need the crisis to unfold, of course, in order to offer the conditions needed to mobilize public support, but a crisis will not provide other necessary elements — like competent political leadership and workable strategies. We’re hoping Democrats spend their political capital to put in place the reconstruction of the middle class economy, to spend it on success, rather than watching it erode through failure.

Tomorrow is five minutes with Bush One in the next section of Demand Side, the book, and we’re back on Wednesday, with a parable from Luke chapter 18, about a man whose debt ran into millions and who was on his way to being sold into slavery when his master relented. The same man went to a person who owed him only a few denarii, and the man would not relent, but had him put into prison until he should pay. It reminds me of certain banks, Bank of America, for example, who have been getting below zero real interest rates from the Fed and have now turned on their cash-strapped borrowers with new and steeply higher rates. In the Bible and the parable, when the master finds out about this, there is hell to pay for the hypocrite. We’ll discuss the terms on Wednesday.

Until then, this is Alan Harvey, from the Demand Side.


The full interview with Kuttner by Amy Goodman

More is available below

AMY GOODMAN: And what could the Democrats do right now as an opposition party?

ROBERT KUTTNER: Well, I think there are three things they ought to be doing. First of all, there’s the housing mess. We need something like the Home Owners’ Loan Corporation of the 1930s, where a government agency, financed by government bonds, would buy these bonds back from Citigroup and Merrill and whoever at a steep discount, maybe thirty or forty cents on the dollar—they’ve already been written down to zero, because nobody wants to buy them—and turn them back into affordable mortgages, turn them into mortgages that would have a rate below market instead of the kind of predatory rate that subprime mortgages had. And you could then repopulate these houses. People on the brink of foreclosure would be able to keep their houses. Other people could become homeowners. So you need a much bolder approach to the housing crisis.

Secondly, I don’t even think “stimulus” is a good word. You need a recovery program. And a recovery program means not just a quick shot in the arm, it means reversing all of the things that make it harder to be middle class in this country. It means everything from a massive program of infrastructure repair to energy independence to good jobs in the service sector, reversing the whole thirty-year trajectory of ordinary people finding that their personal economic situation is insecure, they can’t keep up with the cost of living. And a “stimulus” implies a kind of a quick jolt to get us out of a temporary problem. This is not a temporary problem, this is a long-term problem. It’s going to require long-term solutions. And that doesn’t even get at some of the harder stuff, like the dependency on foreign borrowing that was caused by chronic trade deficits that in turn were the result of bad trade policies.