June 25 radio show posted
June 25 radio show posted to archives. Alyssa Katz, author of Our Lot, on the homeownership fetish and the housing bubble/bust • Liza Featherstone (author of this article, and, it should be disclosed, wife/beloved of the host) and Adolph Reed on the burdens of college tuition and how the problem can be solved by making it free.
Radio commentary, May 23, 2009
[WBAI’s still fundraising; if you haven’t, please think of donating here, specifying Behind the News as your favorite show. Management changes at the station are the most hopeful thing that’s happened there in years. This week’s show ran only on KPFA, thus the Saturday date. Full audio of show here.]
Mostly a mixed bag of economic news lately.
First-time claims for unemployment insurance fell by 12,000 last week, but the count of those continuing to draw benefits, which comes with a week’s delay, rose by 75,000. This continues the pattern we’ve been seeing recently, which suggests that the pace of job loss continues to slow, but hiring has yet to pick up.
In other labor market news, it’s not often appreciated how the monthly job gain or loss figures are merely the rather placid-seeming surface of a very turbulent underlying reality. That is, the monthly gain or loss of a few hundred thousand si the product of millions of job gains and losses. The Bureau of Labor Statistics surveys this every quarter. Early in the week, we learned that in the third quarter, there were 6.8 million new jobs created and 7.7 million destroyed, for a loss of over 900,000. That net loss was the product of over 14 million gross gains an losses—a furious pace of turnover, though actually rather modest by historical standards.. Though there was little change from the previous quarter in the number of jobs destroyed, there was a 400,000 decrease in the number created. It’s reassuring that the rate of job loss didn’t accelerate, but the rate of hiring has to pick up if the job market is ever going to recover.
Leading indexes—indicators that have a pretty good record in calling turns in the economy three to six months out—continue to report some cheering news, though. The Economic Cycles Research Institute’s weekly index rose last week for the fifth consecutive week, and it’s now 3% higher than where it was six months ago. That may not sound like much, but we haven’t seen anything that good in almost three years. The less sensitive, though still highly respectable, monthly leading index from the Conference Board rose 1% from March to April, its best showing since the economy took a turn for the worse last fall. So, this gives us reason to hope that not only has the economic slide slowed down, but we might even start seeing some positive numbers in the fall.
A money manager from BlackRock was quoted by Bloomberg—the financial wire service, not New York City’s mayor—the other day saying that “We need good numbers as opposed to less-bad numbers.” Exactly. We’ve been getting the less bad; let’s hope some better ones are on the way.
That aside, I’m sticking to my prediction that the job market will be the last to get the good news, should we start seeing some of that in a few months. My guess is that the unemployment rate will top out slightly north of 10%, and we’re going to lose something like another 2 million jobs. Then the job market will start turning around, though slowly. Perhaps very slowly.
Speaking of BlackRock, as I did just a moment ago, all the government’s efforts to rescue the financial system still have a bad odor about them. There’s the problem that I’ve pointed to many times that the government has hired advisors like BlackRock on how to handle toxic assets—at the same time that firms like BlackRock and their clients own very similar toxic assets. The polite way the New York Times, which I feel a little guilty about making fun of given its dwindling life expectancy, would describe this relationship as “raising questions.” It doesn’t really raise questions—it screams profound conflict of interest. But if there’s ever doubt about the class nature of the state, especially its executive branch, moments like these clarify things immensely. No, the relationship doesn’t raise questions. It answers them, if anyone’s asking.
But we’ve been there before. In the realm of new news, it’s looking like the FDIC is selling off banks to the usual gang of sharpies at fire sale prices. (And in what follows, I should say I’m drawing on a piece by Robert Cyran on the financial website breakingviews.com.) One problem is that the FDIC is underfinanced and overworked. It’s being called on to fund high-profile bailouts of name-brand banks, as well as more routine rescues of institutions no one within a 50 mile radius of their headquarters is likely to have heard of. An example of the first was the January sale of IndyMac to a consortium of private equity, or PE, firms. And now it’s selling Florida’s BankUnited to a PE syndicate including such stars of the field as Wilbur Ross, Carlyle Group, Blackstone, and Centerbridge.
(A quick parenthetical definition of private equity: PE funds are large pools of capital contributed by big institutions and rich individuals, devoted mainly to taking over companies, cutting costs, taking out as much cash as they can get away with, and ultimately selling the firms off to someone else, like another company or to public stock investors. They’re supposed to “unlock hidden value” or some such, but mostly they seem like asset strippers crossed with alchemists. The managers of PE firms make lots of money for themselves; it’s not clear how much they make for their outside investors.)
The terms of the BankUnited sale are very favorable to the PE firms. They’ll get almost $13 billion in troubled assets for just $900 million. And the FDIC will assume almost $5 billion in the bank’s losses. Most of the bank’s assets are in wretched subprime loans in South Florida, some of the most toxic assets of all. Still, it looks like the PE guys are buying the assets for less than 30 cents on the dollar, with not all that much downside risk. Yes, the FDIC is very short of funds. But, really, this is not the way to turn the page on the Second Gilded Age. It’s to write a new chapter—in a different style from what went before, but with the narrative still distinctly recognizable.
And there’s more. A Bloomberg analysis—again, the news service, not the billionaire mayor—shows that the banks that are looking to buy their way out of the Troubled Assets Relief Program, so they can get out from those onerous pay restrictions and all that public scrutiny, may do so at very favorable prices, if the first such transaction is any kind of model. When the government provided the TARP funds, it did so by buying warrants on the banks. (Warrants are rights to buy stock at some time in the future. If the stock’s price rose, the gov could have made some money as the value of the warrants rose in tandem. But warrants grant no voting rights, which is what the gov wanted. Fear of nationalization, you know.) To get out of the TARP, it has to buy back that stock, with the approval of the Treasury. Old National Bancorp, an Indiana institution, gave the Treasury $1.2 million to buy back its stock. Private analyses suggest that the price should have been five times higher, based on standard, first-year MBA financial formulas. If that sort of pricing prevails for other banks interested in freeing themselves of The Man, the gov will be shortchanged by about $10 billion, according to Bloomberg. That would give the banks about 80% of the profits the Treasury could have claimed, should this kind of pricing be a model. There’s no reason for this at all except kindness to the banks. None.
Raises questions, eh?
Support WBAI, and my show
WBAI is fundraising, and I’m doing my major stint from 4-6 tomorrow (Thursday). If you like the show, and you’ve got some spare change, please make a pledge during my time slot.
I’ve got some good news about WBAI, for a change. The station was been under a mix of toxic and ineffectual leadership since the death of Samori Marksman in 1999. Morale sank, listenership dwindled, the airwaves were filled with drivel, and fundraising sagged badly. The station fell months behind on studio and transmitter rent. It was years behind on its payments to Pacifica, the network that owns the license, and threatened to drag the whole five-station network down.
Finally, Pacifica’s new executive director, Grace Aaron, decided it was time to intervene. She fired the station manager, Tony Riddle, a likable fellow who nonetheless did next to nothing, and suspended and banned from the air the dreadful program director, Bernard White. White’s politics are a crude sort of black nationalism, and he’s been surrounded by a gang of acolytes calling itself the Justice and Unity Coalition (JUC), who’ve dismissed any criticism of White’s disastrous reign as racist. (Among its many offenses, the JUC is in tight with the Workers World Party.) White and some of his JUC cronies denounced their critics as “pieces of fecal matter” and “CIA agents” on the air. Aaron decided there’d been enough of this, and has essentially taken control of the station. The JUC hacks are on the run, and it’s a beautiful sight.
Enough internal politics. The bottom line is that this is the most hopeful thing that’s happened at WBAI in at least a decade and there’s a real chance of turning the thing around. Which is why I feel much more enthusiastic about fundraising tomorrow, and why I can urge everyone reading this to contribute generously. You can pledge online—and be sure to mention “Behind the News” as your favorite show—but it’d be best if you called in a pledge during my time slot, between 4 and 6 PM Thursday, NYC time, and tell them how much you’d like to hear more. Assuming you would, of course. The pledge line is 212-209-2950.
The UAW’s Chrysler stake: how 55% = 0%
A friend sent me a copy of a brochure (click here for a copy) that the UAW is circulating to its Chrysler workers, or those of them that remain, offering details on the proposed deal with Fiat and the U.S. government. The pay and benefit cuts are nasty, but hardly a surprise. What is a surprise is that the UAW’s equity stake is even less impressive a thing than it seemed on first glance. And the first glance wasn’t all that impressive to start with.
Before proceeding, a reminder: the stock would not be owned directly by the union, but by a trust, known as a VEBA, established to pay medical benefits to retirees. That already puts a layer of distance between the union and the company (with the union already serving as a layer of distance between the workers and the company). Even with that in mind, the terms of the deal suck out loud.
Two points.
• Chrysler stock hasn’t traded publicly since Daimler took it over in 1998. Cerberus, a private equity firm, bought 80% of Daimler’s stake in 2007, keeping the stock in private hands. But should Chrysler recover and offer its stock to the public, and should that stock appreciate in value, and should the UAW ever choose to sell those shares for cash, it would have to turn any amount in excess of $4.25 billion to the U.S. government. The terms of the Cerberus deal valued the firm at $9.25 billion just two years ago. Obviously that was an inflated price, but it does give some idea of what a recovered Chrysler might be worth. At that level, the VEBA’s 55% stake would be worth $5.1 billion. So, basically the VEBA would be denied any serious participation in Chrysler’s recovery.
• So instead of looking to make a buck, might the UAW be able to exercise some control over the company for the longer term? Ha, of course not. As I’ve already pointed out here, the VEBA’s 55% stake in the firm would give it just one seat on the nine-member board, the same as the government of Canada, which would have a 2% stake. And, in a particularly lovely touch (quoting the brochure), “the VEBA will be required to vote its Chrysler shares in accordance with the direction of the Independent Directors on Chrysler Board [sic].”
A headline on this section of the UAW brochure reads, “New funding structure aids company viability.” And the governance structure—assuming the bankruptcy court goes along with it—gives management a blank check, despite more than half the shares being held in the name of the workers. Ah, pension-fund socialism.
LBO News asked one of the VEBA trustees how they ended up with such a stinky deal. The answer: “Negotiation.”
MinnPost interview
Steve Perry interviews me about the green shoots of recovery, EFCA, liberal austerity, grading the stimulus/bailout, contrasts with the New Deal, etc.: “Stabilization is a good thing, but it doesn’t equal recovery.”
LF on WSJ
Liza Featherstone’s piece on the Murdoch–Thompson Wall Street Journal that I mentioned yesterday is up: Identity Crisis.
More government by Goldman
Under a very wussy, New York Times-y headline, “New York Fed Chairman’s Ties to Goldman Raise Questions,” the Wall Street Journal reports that the chair of the New York Fed, Stephen Friedman, added to his already large stock position in Goldman Sachs, a firm he once headed. (Thanks, Paul Whalen, for the pointer.) Friedman’s purchase of the shares came after Goldman turned itself into a bank holding company, a transition that brought it under the direct supervision of the New York Fed. Earlier, of course, Goldman had gotten a $10 billion capital injection from Washington. But even before Goldman became a commercial bank, it had deep and intimate relations with the New York Fed, as does the rest of Wall Street.
Friedman, unsurprisingly, says there’s no conflict of interest. In a deep sense, he’s right: there’s a perfect harmony of interest between Goldman and the U.S. government.
Not that the New York Fed is exactly part of the U.S. government. The regional Feds are formally owned by the member banks in their districts, and their executives, while appointed by the Federal Reserve Board in Washington, aren’t subject to Senate confirmation. Yet they perform regulatory and other functions as if they were government agencies.
Returning to the micro-level of personal ethics: Friedman’s holdings in Goldman were against Fed rules. He asked for, and got a waiver from the Fed to allow his holdings—and he added to his position while the waiver was being deliberated. According to the WSJ piece: “Because he was wasn’t [sic] allowed to own the stock he had, the Fed doesn’t consider his additional December purchase to be at odds with its rules at the time.” Beautiful.
[That “was wasn’t” is in the original. See Liza Featherstone’s piece on the new WSJ forthcoming in the Columbia Journalism Review, which takes the new Journal to task for axing its copy-editors.]
UAW revisited
Steve Diamond makes an excellent point in his comment on this post. The UAW isn’t the direct owner of the Chrysler shares (nor will it be of the GM shares). The owner is the Voluntary Employee Beneficiary Association, or VEBA, which was set up to pay benefits to the retirees. So the retirees are now dependent on the success of Chrysler and its stock. As Diamond points out, the VEBA’s first duty is to retirees, which puts it at odds with the active workers in the UAW. The structure also makes the retirees utterly dependent on the success of a corporation in which the union has no voice in running.
As Sam Gindin, who was for many years the top economist at the Canadian Auto Workers, pointed out to me, the UAW has bet everything on maintaining health care benefits. That bet looks shakier than ever.
A word on the UAW itself: this is not a poor union. As of 2006, it had assets of almost $1.3 billion, and annual receipts of $304 million. (I wish I could provide a link to the UAW’s own financial statements, but if they’re on their website, I can’t find them. I had to go to the anti-union site, UnionFacts.com, to find this basic financial info. And I learned that there that the AFL-CIO had successfully lobbied the Obama administration to loosen financial disclosure requirements for unions.) It could have easily financed serious research into a better strategic direction for the auto industry than the idiot management has been able to—cleaner cars, better modes of work organization. Its PAC spent $13 million on campaign contributions during the 2008 election cycle; it could have spent a few mil of that on campaigning for national health insurance.
But they didn’t. And now they’re pretty well screwed.
Radio commentary, April 30, 2009
A review of some of the headlines before hitting some big-picture stuff.
unemployment claims: easing a tad
More tentative signs of some slight gloom-lifting in the job market. First-time claims for unemployment insurance filed by people who’ve just lost their jobs fell by 14,000 last week, and the four-week average is now about 20,000 below its high, set last March. As I’ve noted here before, the yearly percentage change in these weekly initial claims figures has proven a pretty reliable early warning sign that a recession is drawing to a close, and that peaked in February. So this is suggesting that the worst may over. But, and this is a very big fat “but,” that doesn’t mean that the good is about to begin. The number of people continuing to draw unemployment insurance benefits—continuing claims in the jargon—rose last week, and has been drifting steadily higher. In fact, the behavior of continuing claims suggests that when the Bureau of Labor Statistics releases the April employment data next Friday, the unemployment rate is likely to rise towards the neighborhood of 9%, from March’s 8.5%. Putting all this together, I’d say that while the pace of job loss is probably slowing, hiring remains in the doldrums, and is likely to stay there for many months to come. It could be a year before we start to see plus signs in the monthly employment figures.
GDP: down hard
U.S. GDP for the first quarter fell at a 6.1% annual rate, adjusting for inflation, only slightly less than the 6.3% fall at the end of 2008. The first quarter decline was the sixth-worst in the nearly 250 quarters since the figures begin in 1947, and the two quarters together are the second-worst back-to-back performance over the same period. The only worse stretch was in 1958, in the midst of a short, sharp recession. This one is sharp, but it isn’t short. So, in other words, quite bad.
Under the headline number, there were some awful figures. Real investment fell by over 50% at an annualized rate. (Annualized means the total change were the quarter’s rate sustained for an entire year.) Business investment in machinery and equipment, the motor of economic growth over the long term in a capitalist economy, fell at a 34% annual rate. Investment in new housing was off 38%. Exports were off 30%; imports, 34%. For some reason, consumers bought a lot of durable goods, things like cars and appliances; that gain kept the headline figure from being even worse than it was. But consumption had been falling very dramatically, so this looks a bit like what Wall Street calls a dead cat bounce.
the crisis in auto—and in the UAW
Speaking of car sales—which were astonishingly up around 20% in the first quarter, after falling almost twice that much in the previous three months—news that Chrysler will file for bankrupcy, while hardly surprising, is still arresting. Once an iconic industrial corporation, it became the beneficiary of the first modern bailout, in 1979. That one involved a billion and a half in loan guarantees on which the Treasury actually made money; the company recovered, and its CEO, Lee Iacocca, became a celebrity. This crisis is a lot deeper and more structural.
For a while it looked like the Obama administration had gotten Chrysler’s creditors to agree to a restructuring of the firm that would have kept it out of bankruptcy court. Fiat would have gained operational control of the company, and the United Autoworkers would have owned just over half the stock.
(An aside: it’s amazing to see Fiat in the role of the savior of an American auto company, and the source of advanced engine and manufacturing technology. Americans used to laugh at Italian industry. Who’s the laugh on now, paesani?)
In any case, the speculation is that Chrysler will emerge from the bankruptcy process looking pretty much like the deal the administration had arranged for. We’ll see. Sometimes the process is unpredictable.
At the same time, GM is going through a similar restructuring that could well end in bankruptcy court as well. If that happens, the firm’s bondholders would see their paper turn into stock, making them, in partnership with the UAW and the government, the company’s new owners.
Let’s bracket all the details of this for now and focus on one thing: the United Auto Workers is likely to become a large, and perhaps controlling stockholder in two major industrial enterprises. What will it do with them?
Sad to say, probably nothing. It’s likely that the courts and the government will assure that the union’s stockholdings are largely on paper, with no actual rights of ownership to be exercised. Will the UAW complain about this muzzling? Probably not. Which is a sign of just how braindead the American labor movement is.
Here would be a wonderful opportunity to reshape a crucial industry. The UAW, had it anything like vision or a public spirit, could have spearheaded the development of new, earth-friendly kinds of cars, and new, worker-friendly ways of making them. It has given no sign of ever having thought about anything remotely like this. Here it is, with two enormous potential gifts dropped into its lap, and it doesn’t know what to do. Tragic.
And I see a lot of labor radicals can do little but lament how the workers are giving up wages and benefits and the retirees are being screwed—and all because of decades of management mistakes. All very true. But the companies are broke. There’s just no money to pay wages or benefits. The bourgeoisie isn’t making this up as part of a big con game. The UAW sat quietly by during the deceptively fat years of the 1990s, when low oil prices encouraged the sale of high-profit SUVs, and the domestic car industry ignored its underlying rot. For more than 60 years, it’s paid no attention to the strategic direction of the industry, which has been in varying stages of crisis for almost half that time. And now, the union is badly, perhaps terminally screwed.
What will it take to rouse the American working class from its torpor?
The quest for recognition
Just got the murkiest plug in more than two decades of cruising for plugs: Henwood and Hollywood. Thanks, I think.
April 23 radio show up
April 23rd radio show, featuring William Robinson (on being persecuted by Abe Foxman), Richard Seymour (on the U.S. left and imperialism, Obama-style), and Paul Mason (on The Crisis), now up in my radio archives.
Silver lining
In the course of a pretty wonky piece on CDOs, Felix Salmon points out that the modern financial environment weakens the political position of creditors. Back in 1975, when New York City was on the verge of default, its bonds were uninsured, and held mostly by the city’s rich and its biggest banks. Both sets of bondholders were relatively few in number and invested in the city’s long-term survival. The creditors were able to come together and speak with one voice to force wage cuts and layoffs on the unions and service cuts on city residents. Today, bondholdings are dispersed around the world, so it’s hard to imagine a similar workout in 2009.
There’s an interesting parallel with Argentina’s deliberate default early this decade (a default which followed the script laid out in this LBO article “How to default.”). Because Argentina’s debts were held mostly by bondholders all over the place, many with rather small holdings, the creditors were in a very weak bargaining position. The contrast with the debt crisis of the early 1980s was stark. Then, a dozen bankers, backed by the IMF, could face down a finance minister in a conference room and demand the concessions for which neoliberalism became famous. But that was no longer possible in a world dominated by bond finance.
And in today’s securitized, derivatized world, mortgage holders often don’t know who their creditors are. In fact, it could even be easier for debtors in a single neighborhood to organize than their creditors, who could be anywhere from Frankfurt to Abu Dhabi.
LBO News from Doug Henwood 
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Posted on June 26, 2009 by Doug Henwood
Radio commentary, June 25, 2009
In the economic news, the mixed bag theme continues. On Thursday morning, the Labor Department reported reported some deterioration in the unemployment claims figures, contrary to a recent trend of improvement. First-time claims, filed by people who’ve just lost their jobs, rose by 15,000, to where they were about a month ago. The four-week average, a better way to look at this often volatile series, rose by 1,000. The year-to-year change in this series, which as I’ve been emphasizing here for some time has proved an excellent guide to the end of recessions, is still in a downtrend. But this surprising uptick isn’t a good sign. Neither is the 29,000 increase in the number of continuing claims—that is, the number of people still drawing benefits. Most of last week’s sharp decline is still intact, but this increase is also unwelcome news. These weekly figures are very hard to adjust for seasonal variation, and are also pretty noisy, so it’d be too much to say that the slight improvement in the job market has gone into reverse. But this is worrisome, and bears close watching.
On Wednesday, the Federal Reserve decided to keep interest rates unchanged, with its target for the rate under the Fed’s most direct control, the federal funds rate, still effectively zero. The statement reporting the decision, while noting some slowing in the rate of economic decline—less bad news, but still not good news—still characterized the U.S. economy as “weak” and likely to stay that way “for a time.” They also expect inflation to remain subdued, and anticipate that they will keep interest rates at “exceptionally low levels…for an extended period.” Because they removed some end-of-the-worldish language they’d used in previous statements, some people in the financial markets took this as a hawkish statement suggestive of a tightening soon, but that strikes me as demented. The economy remains very fragile, and the Fed knows it and will remain indulgent for as long as they can.
Since we’ll be discussing housing in a few minutes, some words on the state of that market. Sales of existing houses rose modestly in May, while sales of new houses fell. Since the market for existing houses is four or five times as big as the new house market, the overall conclusion was slightly upbeat—but the levels of both are still down from a year ago. There’s little doubt that sales of foreclosed properties are lifting the sales of existing houses, which isn’t really a sign of returning health. The average new house that sold in May had been on the market for almost a year, more than twice the long-term average, and an all-time record. Prices are also looking weak, with the average existing house price off 16% from May 2008, up slightly from April’s all-time low. The new house market showed a little more lift, with prices down just 3% from a year earlier, compared with almost 14% in April—but sales are down over 30% from a year earlier. So, on balance, the familiar theme: some less bad news, but not yet good news.
One bit of good news, though: sales of durable goods, items designed to last three years or more, rose almost 2% in May—and for capital goods (meaning the machines that businesses invest in, which are the principal motor of long-term economic growth), rose almost 5%. Additionally, the Kansas City Fed’s surve of manufacturing in its neighborhood was up for the first time since August. Maybe the bloodletting in manufacturing is coming to an end. Maybe.
And the Economic Cycles Research Institute’s weekly leading index, designed to forecast changes in the broad economy three to six months out, continues its improvement, suggesting that we could be exiting the recession by fall. That doesn’t mean that happy days are here again, but it does mean that this is not 1931 all over again.
Turning to the outside world, 40 of the world’s governments convenining under the auspices of the Organization for Economic Cooperation and Development, the Paris-based think tank and chat shop dominated by the rich countries, agreed that what they’re calling “green growth” is the way out of the economic crisis. The 40 countries represented account for about 80% of world economic activity, and included, aside from the rich countries of the North, the so-called BRICs, Brazil, Russia, India, and China. The OECD’s secretary general, Angel Gurría of Mexico, said that participants “have made a solemn pledge to promote environmentally friendly green growth policies in favour of sustainable economic growth based on low carbon energy use,” Two cliches come to mind on reading this: “let’s hope so,” and “we’ll see.” This meeting was in part preparation for the UN climate change conference to be held in Cophenhagen in December; you do have to wonder whether the pretty words will translate into any actual commitments. Changing the prevailing discourse from going green as a cost, in narrowly economic terms, to a potential benefit, would make a big difference, especially in a time of recession when it’s tempting to cut corners.
And finally, a rather telling quote from conservative Democratic Senator Ben Nelson of Nebraska. Explaining why he was opposed to the so-called public option—including in a health insurance overhaul a government-run scheme open to all, which is about all that’s left of any half-“progressive” position in Obama’s Washington—Nelson said: “It would be too attractive and would hurt the private insurance plans.” Well, yeah. Let’s hurt those private plans so bad they die, eh?
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