Damage squared

From the early 1970's on, the social inequity induced by the growing practice of disproportionate executive self-entitlement insidiously undermined the economic vigor of the nation from two sides. On the one hand, it distorted the psychology of value behind the cost of essential goods and services - most importantly, rentals, home mortgages, vehicle ownership and health care - as businesses of every kind strove to appeal more to the upscale side of the market than those in the middle to bottom. On the other hand, it eroded the spending power that, in a better world, would have gone to millions obliged by geography to play in the same socio-economic sandbox as their better paid contemporaries. With that erosion in personal spending power, came a shrinking of the demand side of the economy that, in turn, obliged the supply side to stunt wage advancement and replace workers with smart machinery. Apologists for the trend touted resulting increases in productivity without adequately explaining how such increases would translate into greater happiness for the average American who wasn't one of the immediate beneficiaries of such productivity.
Even after the spate of criticism that errupted in the wake of the Great Credit Correction of 2008, the basic rationale that had been used to justify such grievous disparities in pay did not undergo significant revision. Those same disparities persist four years later.
The current phase of distribution problems we are attempting to grapple with now started sometime back in the mid 1970's. Like tectonic plates, the two basic realities of median price and median means began to move away from one another, leaving a deep rift between them. Compounding the problem was the fact that the ratio between the median wage and the average wage - a reliable indicator of how well earnings are distributed across society - began to drop, signaling a migration of pay away from the middle toward the top. This gradually widening gulf in means was a space that the financial services industry thought it could capitalize on by offering to bridge with credit. The thinking of the day was that such a bridge could yield a handsome return in interest payments, over time, paid out of the aggregate earnings of those soliciting such help in order to stay afloat financially and included in the life of society. I don't fault that they chose to do business meeting an obvious need. What I fault was the fatal miscalculation (based on the kind of folkloric optimism for which Americans are renowned among nations) that it would all just work out in the end. Any educated realist could see that such casual lending was bound to end in financial calamity, but the industry pursued the option with reckless abandon anyway, mainly because the people who were in that business were making very good money and, almost to a man, believed they would know when to jump ship.
Why did the top people in the financial services sector err so badly? Perhaps it was because the super-successful had so divorced themselves from the daily struggles of more average Americans, financial and otherwise, that they lacked the subjective immersion required to realize that they were expecting blood to flow from a turnip, that, regardless of how hard they squeezed, the result would always only be turnip juice. For a few, no doubt, it was that old game of financial chicken; the trick being to know when your luck had peaked and to get out before you got caught with your financial (or ethical) pants down.

Compounding the whole picture of the crazy runup in property prices fueling lending was the fact that, once they got into their homes, those who had bought them would want nothing more than for prices to rise as quickly as possible - forever, preferably - so they could put a whole lot of distance between where they had come from and where they wanted to get to. The inflation in value would allow them to supplement their incomes with equity extraction while still maintaining a cash-out fall-back position greater than what they owed on paper. It was like getting money out of fresh air, without raising a finger, and altogether too many bought into the heady magic of it, with nary a peep of concern from government, at any level. Somehow, the possibility of a run on the market, that would rip the very guts out of the demand side and send prices tumbling, though talked about, never really took hold until it was too late for most overstretched purchasers to sell their houses for what it would take to expunge their debts. Once underwater, they became instant prisoners of their mortgages. Real estate companies, for their part, were happy to pull out all the stops to make the deals keep coming. Everybody was in it for the money and while this giant scam was on a roll, for those who cashed out soon enough, the winnings were exceedingly good.

Calls from below for moderating the rise in home prices through government action so that homes would not be priced out of the reach of potential first-time buyers fell on deaf ears. People in industries connected with real estate, and those eager to see the held equity in their homes grow, were adamantly opposed to the idea of any kind of government intervention designed to preserve a sustainable form of affordability. Any who dared express misgivings were characterized as alarmists and their concerns deemed nothing more than the whining of losers. Among those who thought they were doing so very well, it was a classic case of "I'm OK, Jack; pull up the gangplank. Full speed ahead and damn the torpedoes!"
Under normal circumstances, buyer restraint would have held prices from going up faster than market realities could support, but these weren't normal times. The rampant extension of credit, with too few prerequisites, gave people an inflated sense of prosperity and the resulting lack of reasoned caution, nationwide, encouraged prices to rise faster than a technical analysis of general disposable income could justify, even with the so-called "help" of credit.
All the while, as a result of the credit industry's subsidization of personal purchasing ability, people felt less compelled to negotiate for pay increases or scrounge for better home-buying deals. Instead, they were encouraged to believe that they could get ahead without such wage/price concessions. Between the two options - trying to persuade your boss to pay you more or just getting a home-equity loan - taking advantage of readily proffered, apparently cut-rate, credit seemed a lot easier, psychologically speaking, than negotiating with management for better compensation. That fewer workers saw fit to join unions to press for better pay and working conditions in the last couple of decades, can be attributed, in large part, to a false sense of rising financial capability engendered by incrementally easing credit terms.

When it comes to improving one's lot, ducking the issue and taking the easy way out rarely proves to be the wisest path in the long run. This case was no exception. Quietly, the financial approaches that people were taking to make ends meet were gnawing away at the nation's storehouse of owner-held home equity - a figure that rested, in large measure, upon people's confidence in the general economy - until, in the beginning of 2008, the nation awoke one day to the scary news that homeowners held less in equity in their homes, as a bloc, than they owed for the combination of first having purchased and then borrowed against those homes for every kind of other expense imaginable - an unprecedented situation in the history of the nation. Not just that, mind you, but the dread prediction that equity values would fall in the not-too-distant future and significantly increase the unfavorable ratio between indebtedness and held equity. The stage was now set for the dark events that were soon to commence. It was just a question of where the first crack would appear; after that all hell would break loose.

At the same time real doubts were beginning to be voiced, it was reported that the earnings of the richest quintile had risen 34% in the years between 2001 and 2006 alone, effectively allowing that group to pay out-of-pocket for whatever they needed, free of the inconvenient extra sting of attached interest - yet one more factor contributing to the pace at which the financially privileged were pulling away from the huge bulk of their fellow citizens. Those at the very tip of this gilded class had seen a meteoric rise in compensation - up 300% since 1979 for the top 1%, compared to only a rise of 1% for the bottom quintile whose basic life costs quadrupled during that time.

This striking difference between how most people were having to manage their financial affairs and how the richest of Americans were able to go about it fed the dichotomy that opened up during the second term of the Clinton administration and the first years of the new century. By the end of 2007, the richest one hundredth of the population owned fully a quarter of all the wealth in the country and the trend feeding that imbalance was accelerating, pushing prices up on one side and lower-end earnings down on the other.

It was never a case of whether the struts supporting that gigantic, overloaded credit bridge would give way (financial inventiveness notwithstanding), just when. On that fateful day, the standard thought forms feeding general confidence about what homes were actually worth would go too, turning the securities based on the values of a significant fraction of those homes into junk that brought down top-flight investment houses and their insurers, along with a good chunk of the main-street economy across the nation that had grown fat on spending based on the extraction of imaginary wealth from homes across fifty states, courtesy of banks, large and small; banks who would suddenly reverse course on the bullish propaganda they'd been disseminating, get cold feet and freeze nearly all lending while they came to grips with what was happening. But before it actually happened, not many people wanted to talk about the possibility of that kind of collapse occurring. The imagination reeled in the face of it. So many, at so many levels, were so deeply invested in this grand, nationwide illusion of being able to get rich through real estate that they found it preferable not to be informed, let alone discuss how they would deal with it should things happen to go sour.

The coup-de-gras and final insult to prudence was the stunning magnification of losses created by unregulated credit default swaps - a nest of bogus financial assurances that made a complete mockery of what combined purpose the American dollar and law ought be put to in a civilized country.

In one case, in an effort to dress perfidy up in prudence, the federal government kept the main purveyor of credit default swaps, American International Group, a private insurance house that had greatly over-leveraged itself, afloat to the tune of $180 billion. To be fair, when one considers the alternative, they could hardly have done otherwise, and yet, ordinary working people everywhere are hard put to understand how this giant row of financial dominoes could possibly have been allowed to be set up. To say that it's made them cynical about how the government they sponsor exercises oversight is something of an understatement.

The ultimate cost of such public cynicism should not be underestimated. There are certain grand initiatives the nation badly needs to undertake. The tenor of public opinion could spell the difference between victory or defeat in the one war we really do need to win - not the War on Terror, but the war against catastrophic climate change driven by increased economic activity on the part of the many nations competing to develop their economies. Lose that one, and none of this will matter.

Revisiting old assumptions in assessing how to dig ourselves out of this mess

OK, so now profound upheaval in that credit bridge is proceding apace. Millions of abandoned and ailing mortgages are still clogging the system and a large part of the still performing ones represent upside-down assets - houses whose current market worth is less than the principle still owed on them - effectively chaining owners to homes in areas from which they can't move.
Long-term economic damage - caused mostly by a severe dirth in available credit, formerly based on presumptions of increases in home equity, now debunked - has spread to most economies of the world where that kind of bank activity took place. In many cities and towns, nearly five years after the demise of Lehman Brothers, the bottom in home values hasn't been reached yet. The knock-on effect has been a significant drop in consumer demand. The lower levels of the world's work forces have been hit the hardest by this, in no small way because management in many businesses has adapted to the slack off in demand by investing in initiatives and equipment that allow reductions the number people on payroll, even as net profits rise. The resulting drag on levels of gainful employment has had blow-back effect on many of who invested in large amounts of high-risk mortgage-based securities - individuals, funds, banks, even nations. With respect to financial institutions, more than a few did not survive. Though the worst of the initial wave of failures may be over, the situation in the general economy is still pretty dicey.
Here at home, the Obama campaign's erstwhile rallying cry of "Yes, we can!" now rings somewhat hollow against the persistent tide of economic distress. Taking a page out of King Canute's book, President Obama now acknowledges he doesn't have a definitive way of waving a wand and stopping the overall tide of economic gloom. Nor does he pretend to know how much more of the general economy the tide of financial gloom will ultimately drown. What he does know is that there is little that he - or anyone else - can do to effect a quick repair and that it will have to run its course before things can improve. But doing "little" is not the same as doing "nothing", and to the extent that doing "little" amounts to doing "something', whatever "something" happens to amount to, he should do it.

While the bulk of the damage was first concentrated in the world of large and sophisticated financial organizations, it has now spread to the humblest corners of life and the furthest ends of the planet. Greece groans under draconian austerity measures. Spain lists toward the tipping point. Portugal hangs on by its fingernails. Italy trembles in dread. What will happen to purveyors of other kinds of credit is anybody's guess. No doubt, there'll be challenges to the sector as people attempt to keep up with the combined cost of their monthly mortgage payments and life's other critical needs at precisely the same time that businesses are looking to be less dependent on labor and putting the squeeze on so many people's earning prospects. In particular, there is the issue of the tertiary education debt that many people (mainly younger adults, but not exclusively) now take on in an effort to maximize their chances of staying out of the ranks of the unemployed or the underpaid. School loans can easily excede what it would take to buy a serviceable home in any one of a thousand economically depressed urban communities across the country. Once they graduate, it's a fair bet that the number of jobs available in the disciplines they studied for will be fewer than those seeking them. How will those who fail to find the work they were aiming to get repay those loans? And what kind of displacement effect will the repayment load of school loans have on the credit-worthiness of the nation's next generation of potential first-time home buyers? Will the price of homes have to drop even further to be able to tempt them into taking the plunge? Add to that, the imposition of mandated health insurance premiums and the prospects for another great slump seem possible, if not probable. There are many other unknowns, but if past consumer crises are anything to go on, these new developments are likely to generate a lot of personal hardship. Only so much belt-tightening can be done. And if belt-tightening doesn't work, there's not much more a person can do other than turn to the last resort of bankruptcy protection.
Chapter 11 is no magic wand, however; it simply distributes one person's difficulties among those to whom that person owes money. This works with the occasional individual who gets into trouble owing to circumstances peculiarly his/her own. But when a great many are experiencing roughly the same type of hardship, the widespread use of bankruptcy protection can act like an avalanche that precipitates ever widening circles of ruin.

There's always quantitative easing of the currency supply but the reflexive traditional opposition to it is deeply entrenched. The fact that a certain rate of quantitative easing is a necessary ongoing function of the central bank of any economy in which the gross value of all forms of property is growing seems to have been overlooked by many who rail against the issuance of new money. In fact, the failure to inject sufficient money to keep the wheels of commerce rolling in a growing economy can be just as harmful as injecting too much. For the while, however, it is unlikely that further top-down cash infusion (essentially, government assistance to banks) will work to prime the uptick in economic activity that a true recovery would require. Banks have long ago abandoned the kind of micro lending that new businesses need to other, mostly smaller, economic entities, ranging from friends and family to credit unions. The years of high-roller lending cultivated an appetite for big returns that has made it almost impossible for banks to return to the business practices of yesteryear, and given the new rigor (and expense) banks are applying to assessing creditworthiness, smaller principles just don't seem worth lending.

Selective bottom-up infusion by government would be better than top-down but it's rather late in the game for that now. The government's wad is too depleted and too impeded by congress for it to be of much help to the national economy.

Essentially, from the administration's point of view, they're still in triage mode, trying to decide what needs to be saved with what they have and what they have to abandon for dead.

As for the lowering of interest rates by the Federal Reserve to encourage mortgage payers and their banks to arrange for lower monthly payments, it will be of help to some, no doubt, but as far as the more troubled mortgages are concerned, it will do little more than defer the day of reckoning. Social justice notwithstanding, the math, the state of the economy and time are all against them. Moreover, ill-advised moves of that nature could actually deepen the malaise by kicking the can down the road where the means to correct the overall economic situation may be even less available. The long-term effects of this recession seem to be worse than most economists were willing to predict. As loathe as they may be to do it, many are going to have to let go of what they thought they owned, take their losses and retreat to more tenable financial positions that they can more easily service.

While many of those so affected may have been imprudent in their choices, there is, nonetheless, a great injustice in the way these circumstances befell them. By and large, it will be the hapless, the gullible and the naive who are punished the worst for the snow job that was done on them by people they were encouraged to trust - people they believed were helping them but who, as we see now, weren't at all.

What to do about it?
No approach is going to be perfect. Still, there are ways of softening the ultimate social impact by spreading the burden of absorption among all the parties who were responsible for letting this giant train wreck occur. None should be let off the hook in helping to make better what went wrong. They include:
1.) the people who were beguiled into thinking they could afford what relatively simple logic and math showed they could not;
2.) the companies that encouraged mortgage agents to go out and find anyone willing to sign on to home-purchase contracts deliberately structured to create the illusion of affordability without the substance thereof so that these intermediaries could build portfolios of this kind of debt to sell to larger investment outfits;
3.) the companies who bought those bundles of mortgage in order to repackage them as shares for sale on the stock market, thinking they could make money, in the balance, by trading such debt;
4.) the shareholders who bought into the operations of those companies without really examining the fundamental mechanics of those instruments;
5.) government across the breadth of the nation that had every resource needed to be able to assess that the present and future earnings bases that were supposed to support the housing market were wholly insufficient to sustaining the mortgages being cooked up to get people into those properties; government that failed to act because it was so taken with the more immediate gains derived from property taxes on soaring real estate values and excise taxes from purchases fueled by home equity extraction that its representatives couldn't resist being breathless cheerleaders in the march toward disaster; government that has consistently failed in its constitutional obligation to serve the renting public's interests as conscientiously as it serves the owning public's and thus, was clearly complicit in driving unhappy renters into the cut-throat clutches of industry operatives peddling mortgages that buyers had little chance of carrying to completion; government that, though alerted to the danger looming from unregulated derivative trading and mixing ordinary banking with financial speculation, willfully acted to prohibit government regulation of that market, setting the stage for the staggering collapse that subsequently occurred;
6.) real estate professionals who, for personal gain, knowingly did things they knew to be unwise, unethical or just plain illegal;
7.) not least, by any means, those whose relentless diversion of this society's product away from their subordinates and into their own pockets laid the ground for all of the above by forcing the compensationally shorted classes to adapt to a life based on debt and financial risk.

Each of the above has a part to own in the final reconciliation of this mess, either through direct involvement or indirectly, through tax-based support of remediative action; and to the extent this new government can find ways for them to be held accountable, they should oblige them to chip in for what must be done to stop this train, take it back to where it got off course, and get it going on the right track again. The greater part of the responsibility for doing so must not be allowed to fall on the shoulders of our children or our grandchildren, while, in the interim, a massive public debt obligation and failure to serve steals their prospects and bleeds them white.

So what to do about it? As mentioned, holding all parties responsible for the home credit meltdown to account would be a fitting first step but it should not be mistaken for a longterm or comprehensive fix of any kind nor is it of substantive help to what we might need to do. For that to be the case, those responsible would need to be made to contribute financially to the cause.

An excellent place to start, I think, would be for us to formally resolve that one epoch of mistakes will not be allowed to lead to another of a similar nature. This will require making tough choices (one of President Obama's more frequently used sentences).

As much as we might like to be compassionate toward Americans with home mortgage problems, where fully justifiable and reliable loan restructuring cannot be done, we should not waste public money pretending to do so, purely for the sake of political appearances. Going too far in trying to keep failing purchasers in their homes could well create instability in other areas. Nor should we undermine credibility in our government by giving people false assurances that they will be rescued, only to disappoint them even worse later. Let's not forget the many millions of still renting Americans who have long yearned to get into a home of their own but could never quite afford the financial leap required. How long would it be before they too demanded a comparable level of financial assistance from the government? After all, do they not pay taxes, as well?
At the very least, those whom we can help with loan restructuring should not be able to emerge from the process with 100% of the purchased equity in their homes. Whatever agency helps them should own a portion of the total equity in the property for which the part owner/occupant would pay a cut-rate rent, over and above the morgage payment on the balnce of the equity. If the house were sold, the assisting agency would hold a first position lien that would have to be satisfied for the sale to go through. If we don't reduce the equity stake of rescued home buyers, we will be tipping the wealth odds against the other half of the public that, for one good reason or other, has opted to continue putting up with renting and resisted the urge to act imprudently. If we can show show that those who receive public aid in hanging on to their mortgages will have to wait longer to be free-and-clear, it will help to restore normalcy in market conditions and blunt charges of favoritism toward a prominent sector for political purposes. The elimination of such bias would reduce opposition and allow rescue programs to go forward more easily.
One way we can restructure loans without writing down the original principle amounts is by inducing lenders to void existing contracts, go back to the original date of sale, and retro-actively offer low fixed-interest mortgages over terms longer than thirty years. This would lower buyers' monthly payments but it would also slow the rate at which they accrued equity, putting them somewhere between a conventional buyer and a renter and defusing criticism on the part of those who held back. Payments already made would be applied to the new regimen.
Another way would be for the government to assume temporary responsibility for the unaffordable, inflated portion of the mortgage contracts that government was a principle party in encouraging and allow homeowners to pay off that portion at an interest rate close to zero or below zero, over an extended term, while designating the balance to be dealt with under new terms by the original mortgage servicer. The owners would not be allowed to receive money from the sale of such properties without first paying off the balance of what they owed the government. By this method, net monthly mortgage rates for the country’s most overpriced homes could be significantly lowered, saving many from foreclosure. With an astute piece of gentle arm-twisting, the Obama administration might even be able to get America’s richest to help sponsor the fund needed to make such a system operational through the sale of very low-yield bonds. We should not be oblivious to the fact that many of those richest made an enormous amount of money, not just through real estate, but also through short-selling and credit default cash-outs in recent months.

We also have to keep in mind that the only way most financially-astute renters who have been waiting in the wings will ever have of owning a home of their own in the context of a functioning economy will be when the cost of buying home real estate drops to less than around 30% of what they earn (the FHA's standard 29/41 ratio, the front end denoting a recommended percentage-of-income limit on housing expenses and the back end, the limit on total debt servicing - reader, if you don't know it, look it up). We have seen the costs to the mainstreet economy of a bigger bite being taken out of individual earnings for housing costs and we can't go back there. So how are renters supposed to make that jump into home ownership if Congress uses public money to, in effect, keep real estate values propped up artificially, while doing nothing to lift the ordinary person's take-home pay?
Making plans to aid millions who were ill-advised to buy in a way that effectively stiffs tens of millions still patiently waiting for their own shot at more justifiable opportunities may be a tempting PR move but, in reality, it would just be more junk policy adding fuel to the fire of our general dissatisfaction with the state of things.

Not that the distressed, whoever they may be or however they came to be that way, should be left to sink and drown once the consequences of their decisions have played out. At that point, society's safety net should be helping them stay materially and psychologically stable and safe in a condition that is sustainable so that those who still have it within to lift themselves up once again may have a shot at doing so. That's part of a conscionable country's obligations to those under its wing when it gives its citizens a risk-fraught society to live in, and if any money is to be spent addressing this terrible housing disaster, that is where a decent portion of it should be going.
Even then, it would be naive - if not downright disingenuous - to suggest that the bulk of those forced to go through such a jarring rearrangement of their hopes and dreams will be able to get back to where they were before the great meltdown. Take it from someone who went through much the same process in the early 1990's; once brutalized on the losing side of the social see-saw like this, most never regain the same sense of exciting life potential they had when they entered the world of adult realities. From that point on, the average person lives on the defensive, plagued by shadows of uncertainty that dog each and every prospect of a better future. If there is such a thing as a reliably faithful life companion, PTSD, occasioned by personal ruin, has to be it and PTSD in the wake of having lost one's home (or livelihood) to the designs and dealings of people more powerful or more circumspect than oneself is all too common a mental condition.

To have a true recovery, we will have to have new blood in the economy, new generations of graduates into adulthood whose dreams can fly without ever having been burdened by the baggage of past trauma.
In light of the above then, it may sound counter-intuitive for me to say that we ought to allow some social damage to occur before stepping in to help with public money. Nevertheless, for the reasons I've outlined above, I'm firmly convinced that keeping people in material situations that their financial circumstances can't justify would ultimately hurt more people worse, especially the young who now face the added hurdle of having to apply for credit under the harsher loan conditions of a chastened financial industry in a world of downsized dreams.

Over the past months of crisis, we have seen the federal government almost randomly pump huge amounts of public money into troubled banks and insurance houses. A great deal of that money went straight into the hands of investment firms and insurers whose dealings with banks and hedge funds were in danger of total implosion.
Many who are more in-the-know than I am are on record as saying that, while these interventions may have been sold as being in the longterm public interest, they may yet prove to do less than was hoped for to improve the general economic picture. Such large-scale help from the government rarely occurs without the introduction of unpleasant side effects.
A shortlist of the kinds of setback that can ensue includes:
1.) a weakening of the market processes that control the cost of vital consumer commodities (such as petroleum-based fuels and products, natural gas, manufactured goods, staples like rice, coffee and tea and housing),
2.) an accompanying inflation-driven erosion of both the effective yield and purchasing power of interest-supported retirement annuities, leading to even more strain on government services forced to respond to a corresponding rise in levels of social distress among retired people and the elderly,
3.) a bald-faced exacerbation of the wealth divide as the luck of the richest Americans is artificially propped up while those at the bottom are left to absorb the grittier impacts of economic contraction.

Significant devaluation of the dollar, caused by pumping money into the economy, would also make it even harder than predicted for generations of adults yet to come to grapple with future fiscal responsibilities that will, almost certainly, be passed on to them by today's baby boomers for ultimate reconciliation.

These interconnected impacts and the ways we might tackle them are complex to understand, tricky to predict and difficult to lay out on paper. There are so many present and future unknowns. But one thing is for sure: they are not something we should think we can indefinitely put off coming to grips with. The population's future prospects wobble on a knife edge right now and, given some new shock, conditions could deteriorate faster than most could ever imagine, let alone deal with.
For some, economic Armageddon has already arrived, very often in the form of an ostensibly helping hand. When people have difficulty obtaining even the most basic goods and amenities, as is the case in some areas of the country right now, it becomes that much easier for profiteers, hucksters and opportunists to fleece them in their hour of difficulty.

A word needs be said about the Bush administration's tax give-back economic stimulus approach at this point. While it was clearly an ad hoc measure taken on the fly without a whole lot of consideration as to how it could have been more specifically targeted to stimulate consumer spending, it did at least reach the bottom and, as such, may well have been a superior stimulus instrument than the top-down infusions conducted by the Obama administration, a large share of which was simply absorbed into the asset bases and bottom lines of very big companies in the financial sector.

Such infusions, done very occasionally and very astutely can provide a vital assist to the momentum of the general economy in the wake of some massive setback but, almost invariably, they come at a price of some kind.
If the source is borrowed money, public infusions levy a longterm drain on future budget capability and saddle future generations with having to pay off that debt. Further, by obviating widespread damage, they also preclude the kind of opportunity space that a revolutionary upgrade in social conditions so often appears to need in order to be given a chance to work. The danger is that the useful and the harmful are simply patched together again, with nothing systemic having been done to preclude similar cycles of ruinous activity (like real estate speculation) from reoccurring in the future.
If, on the other hand, the source is the national mint, and the money printed fails to create a broad base of lasting real value, inflation will result.

Lest I leave the impression that I think that failed homebuyers should simply be left to their fate because that's the name of the game in our system, let's remember, people were told, ad nauseum, that there was little by way of a dependable public back-up behind them for the years ahead and that they should do anything they could to build equity that would act as a hedge against being wiped out. Over the past decade, it was general consensus among wonks and pundits that banks should pull out all the stops to help buyers achieve home ownership and those interested in a more secure future should do whatever it took to find a mortgage provider that would accept them.
"There's a mortgage plan for everyone!" went the old saw. It was the mantra of the century for the real estate industry, along with such gems as, "Houses will only get more expensive in the future." The implication, of course, was that if you had reached 35, or so, and still didn't own a home of your own, you had to be some kind of deadbeat or chump. I know; it was what my wife and I were told when we were dumped out of our rental home so the landlord could capitalize on the improvements we had made over seven years of living there by selling the property out from under us. He made a cool $200,000 profit from selling the house. Our protestations that perhaps we deserved something for our pains were met with incredulity that quickly turned to sustained hostility on his part and passive complicity on the part of participating real estate agents. The position we found ourselves in, they said, was ultimately our own fault for not having bought our own house: anyone who really wanted a home could afford one. The math, however, showed us we could not.

Given that kind of social pressure, should they who betted so badly then be saddled with the lion's share of the blame and the material misfortunes for having taken the advice of the experts, gambled on a purportedly sure thing and lost everything as a result? I think not. A part, yes, but the whole blame, no.

Actually, with this writing, I'm much less interested in who should be faulted for this mess than in how the system could be fixed to produce more middle-class earners (with the exception, perhaps, of this feckless system of government that has so consistently under-performed in defending social equity, relative to other developed countries - a government that seems all but incapable of building safety net systems worthy of the nation it is charged to serve and protect from harm).

One important point worth remembering is this: Once the dust has settled, as long as those causal earning differentials I'm concerned about remain in place, what better option will people have than going right back to gambling on high-priced real estate, fueled by debt, to secure their futures, all over again?anks

NEW OPTIONS - Two prospective anti-poverty programs government could implement to pre-emp a return of property bubblemania and reckless speculation

None of the preceding amounts to rare insight, except perhaps, for this: my contention that it was point-of-pay inequity that laid the initial groundwork for the credit bubble and its subsequent collapse, and that it will do so again for another round of boom and bust if government does nothing to induce the private sector to correct the ongoing maldistribution of company pay. Not until late in 2009 did I begin to hear of others coming to the same general conclusion. My hope is that this line of thinking will gain more traction, not just among policymakers, but with those for whom it matters most - the ordinary working men and women of America who make up the bulk of the electorate.
Accordingly, the first option I would like to propose is a system of incentives I believe would go a long way toward incrementally fixing America's workplace pay inequities after the effects of the ongoing correction fade from the front pages of the nation's newspapers, so that, with the passage of time, people may find it easier to cover their many day-to-day expenses with what they earn, as opposed to relying on credit. (This may be a somewhat novel concept, I'll admit, to the staggering multitude who have known little else during their adult lives than being in a constantly revolving state of debt, just to survive.)
The strategy I envision would trade easy access to public capital for moderation within the pay structures of corporations. Through the use of mathematically controlled reciprocity, presumptuousness and avarice in the workplace, with respect to compensation psychology (and the disparities and social problems that follow) could be significantly tempered. Acting in concert with one another, these mathematical tools comprise a system that would integrate payroll graphs into the broader struggle to improve social equity in America.
In return for their participation, companies that signed on to participate in this effort would be afforded access to substantial capital assistance at far-below-market rates, in proportion to their accrued social equity performance scores and the size of their respective payrolls. These figures would be computed with each quarterly payroll report and added to an accrual account managed under government authority.

I call the proposed program Point-of-Pay Equity - POPE, for short.

OPTION ONE: THE POINT-OF-PAY EQUITY SYSTEM

Briefly summarized, the POPE System seeks to bring greater social equity to how people are paid and how they are taxed over the full course of their lives, relative to one another. This part of the essay describes three points of action, or "legs", where constructive government participation can induce positive changes in these areas. Though I have limited the scope of this essay to three such legs, it would be a mistake for the reader to construe that I believe them to be the limit for what could be included under the POPE System. Optimally, the reader would consider these ideas to be more of a good beginning than a complete and finished product.

Section A: The First Leg of the POPE System

The First Leg of the plan is to tempt financially sound companies to voluntarily participate in making their pay graphs reflect greater point-of-pay equity by making those payroll graphs less concave. In doing so, they would gain calibrated access to very cheap capital, depending on how well they scored in that regard, as measured under the program's formulas. The hope here is that, in time, as thousands of companies continued to participate, the sum of all the gross profits of their collective enterprise would become more evenly distributed over a broader swath of earning levels all across the nation, giving Main Street more access to that money before it floats off to Wall Street and other destinations in the financial sector via the bank accounts of the rich. The secondary effect of this gradual strengthening of the middle class would be an incremental escape from the surcharge in interest attached to things purchased, allowing more take-home pay to be spent on other forms of retail activity, along with gradual growth in the demand side of the economy.
The nut of this approach boils down to making that access to cheap capital dependent upon a mathematical measure of how well each company performs in the distribution of its gross payroll set-aside. This we can do quite simply by comparing the area under the actual pay graph of each quarter to the area under an imaginary straight-line graph of ideal distribution drawn from the lowest paid to the highest paid.
If pay were perfectly distributed, this imaginary line would be the payroll graph of the company and the area under the graph, in terms of the units used in the vertical and horizontal axes, would equal the company gross payroll. The more the actual gross payroll falls short of the imaginary payroll, the smaller the ratio of the actual sub-graph area to the imaginary and the lower the resulting social equity score; the rationale being that, in making top end pay higher (and the graph swoop upward), money (area) had been moved out of the middle ranks to pad the upper ranks, most notably the few highest paid - precisely what we don't need if we are to rebuild America's economic core and the root cause, in my opinion, for the recent past's explosion in credit assistance sought by middle class earners.
In this manner, as the quarters rolled by and social equity performance points were earned, the company would gradually increase the limit it could borrow at rock-bottom rates (pending a verifiable good cause to lend on the part of the fund's loan management staff).
If the company redeemed points earned, and took out the money represented by those points, the company's Social Equity Credit Access (SECA) account would be drawn down by the number of points extracted.
Irrespective of points gained, companies would still have to demonstrate good repayment capability, on a case-by-case basis, for such loans. The points accrued would simply establish how much cheap credit the company in question was qualified to borrow, relative to how much pay it had disbursed among employees in earning those points.

As long as participating firms continued to exist, unredeemed credit access points would not be lost if the option to use them were not exercised. They could be cashed in at some rational fraction of the unused (or unusable) credit access earned over time under POPE requirements (or, perhaps, sold to another company desirous of points, subject to regulatory requirements similar to those behind carbon credits).

In the First Leg of the POPE system, the figures that are needed to rate the equity performance of any given payroll are the highest pay, the lowest pay, the total payroll of the company and the number of employees (including officers). That's it.

The gradient of the pay graph, relative to the number of employees involved, would not affect how much capital could be borrowed, though it would have relevance in determining how much of their pay the top three earners in the company could actually take home - a concern dealt with in the supplementary Second Leg. That is because, for the account to be truly effective in promoting social equity, we have to prevent company executives from trying to meet the goals of the First Leg by reducing pay at the bottom to make the pay graph straight. The Second Leg's corrective action is exerted by customizing a membership fee top earners must pay in order for their company to be in "The POPE Club", so to speak. In deriving a socially equitable custom membership rate for each of the three top earners, the calculations of the Second Leg take into account job context factors that are relevant. Those factors are the following: 1.) what the best-paid receives, 2.) what the least-paid receives, and 3.) how many other people have to be considered in the payroll.

The math here is pretty basic. For the sake of preserving such readability as this rather dry topic may have, I've relegated the actual formulas to a separate addendum, which genuinely interested parties may get on request.

Again, it cannot be overstated that such loans would still have to be justified against projected repayment capability after the loaned money had been deployed in whatever manner the company intended. From society's point of view, this program would not be an extension of charity; it would be the collective interest at work in the form of a mutually-beneficial partnership.

Very simple and doable, in principle, and, I'm prepared to bet, potentially very useful to meeting the employment challenges of the foreseeable future through stimulation of the demand side of the economy.

With the appropriate organization and outreach in place, the First Leg, alone, would be a very significant step towards narrowing the gap between the rich and the middle earners of the country. It would be useful in reversing our recent slide, in the eyes of the world, with respect to quality-of-life issues and our ability to govern for our own social benefit.

On a cautionary note, in the years ahead, it is very probable that more than a few companies that have under-performed in both the financial and social equity arenas will be turning to the People's government for help to get them through the time of protracted structural adjustment we have just entered. To make it fair for those who had entered the program in prior years, new inductees would not be eligible for help on an upfront basis. Any help given should be predicated on at least a year's worth of quarters having gone toward the accrual of account points.
The People, through their government representatives on the management team of the fund, would need to see sustained progress before rendering any assistance extended under this program. When I say, "the People," I don't mean some select group within the government; I mean the whole 300 million person taxpaying, news-reading society from which such cheap credit had been solicited - the People of these United States.
Failing some better reciprocal of an alternative nature (I can't imagine what that might be), it is only right that the price for being given access to cheap credit should be a company's willingness to participate in a productive way in both the First and Second Legs of the POPE system for a full financial year, minimum.

Section B: Beyond the First Leg - Why we need to focus more pointedly on top-end corporate compensation with a Second Leg

As I reflected on the implications of the First Leg of the POPE system, it became apparent that, while straightening pay graphs would be a useful start to mending the mal-distribution of means in the middle of the American financial spectrum, it only addressed half of the problem of inequity - namely, stealing from the middle.
By itself, the First Leg - the program that rewards straightening of company pay graphs - could only go so far toward the overall goal of improving social equity in America. Though it would help to regularize the distribution of pay within any given company's pay structure, the perceptive reader might note that it would do nothing to discourage executives shifting pay from the very lowest paid to the middle, in an effort to meet program requirements without reducing their own pay, which would create an even worse condition of pay inequity. That would be a catastrophe! Nor would it do anything to level the playing field between cash-rich companies and companies on a tight financial leash or go to bat for companies that provide higher levels of employment opportunity for the income they bring in, versus those who opt to replace workers with mechanized production so that shareholders and executives can fatten their take, while their laid-off workers deal with the challenges and terrors of losing their livelihoods.
While I have nothing against companies trying to become more efficient when not doing so threatens their ability to stay afloat, I draw the line when it is done for no better purpose than cutting some people out of sharing in the general providence for the sole purpose of inflating the wallets of top dogs and shareholders. I stand by this even though I'm just as capable as the next guy of feeling good when the stocks I own rise in value. Social gain trumps personal gain.
For that reason, I knew that I had to add a Second Leg to work in concert with the First Leg to reduce the concentration of pay at the top and shift more pay to the bottom. Straightening the graph would not be enough: the high end had to be pulled down and the low end up, as well. In order to make that happen, the system would need a much more pointed stick than any associated with POPE's First Leg. This stick would have to be directed very specifically at the rump of the pay packages accorded the top three in the pay hierarchy of each company electing to participate in POPE. I settled on the idea of making eligibility for POPE back-up being contingent on the top three positions agreeing to pay an equity-responsive membership fee. The fee would be a percentage of their pay, determined by a complex formula applied to their total compensation package, minus the amount of federal income tax they had paid. In the interests of reasonability, the formula would factor in the context in which that pay was earned.
Once I had an acceptable Second Leg, I would have a persuasive companion measure to the initiative to straighten company pay graphs that might coax the more stupendously compensated into thinking that the American economy, at heart, was really more about sharing than about shaving.

Too radical? Or simply stating what's been conveniently overlooked?

If you're contemplating this for the first time, you might be somewhat taken aback by the boldness of this approach; but please don't blink. If getting the executive class to board the same train into the future as the rest of us is what we're really after (which, I believe, it should be), we - the rest of the nation - need to get serious about what will have to be done to make that happen. It's clear, the magnificently paid aren't getting there on their own and crunch time is fast approaching for the demand side of the economy.
Keep in mind: as long as other Americans are doing their patriotic duty somewhere in the world on behalf of all of us, and showing that they care enough about the common good to risk losing all to protect it, some comparable reciprocal of a nobler nature is demanded of each of us, in whatever capacity we happen to find ourselves, as civilians. That particular quid pro quo pertains more specificly to those who would embody roles of responsibility and authority in society.
If you happen to be one of the above, at the very least, that means rendering faithful service to those who trust in you to protect the one thing most central to their day-to-day survival – their livelihoods. Given that fact, if that role of responsibility and authority happens to be as an executive in a corporation, the first in order under that mandate are your fellow workers serving under the aegis accorded you, even as they protect your interests in the faithful discharge of their own responsibilities. Notice: I did not say shareholders. Shareholders (yes, I am one such) take potluck because they're wagering, for better or worse, with what is essentially surplus to them (or should be) on the outcome of events in which they play no active role. They're essentially little more than economic hitchhikers going along for the gamble. There's nothing surplus about a working person's livelihood.
The growing quest to find a sustainable, sharable future for humans on planet Earth is a matter of life and death for billions who have yet to grow up. As such, it is the moral equivalent of the greatest war this nation has ever fought - World War Three, if you will. It's time to get with the program and quit making excuses.
Consumer demand - and the natural resources required to meet that demand - have finite limits. The gross domestic income that arises out of that equally finite process called the GDP must suffice for ALL the financial needs of the American populace. It may be a big pie, but it is not an infinitely expandable one. Other nations are clamoring for their own piece of it on the world stage, even as the non-renewable sources entrained in powering all of these economic systems grow more strained by the day. So, as far as the U.S. is concerned, that part of the pie that depends on offshore natural resources is gradually shrinking. Even the might of America's financial and military sectors cannot prevent that. The only alternative to intelligent apportionment and disciplined use is naked dispossession by force of arms - an option that Americans, to their credit, have repeatedly rejected as inherently alien to the nature of their deepest convictions about themselves.
Increasingly, it will become a co-trust between government, management and labor to see that whatever economic activity the nation can envision, initiate, supply and fuel suffices to keep all boats afloat, all beds sheltered and all stomachs adequately fed; and do so without helping to cave in Earth's faltering life-support systems, already shown to be falling short of replenishment against mankind's extraction rate by approximately 30% - a situation that is obviously unsustainable.

Some, without thinking, will characterize these proposals as punitive. Be assured, I'm not the slightest bit interested in punishing anything or anyone. That would be pointless and counterproductive.
Actually, these proposals are far more structure-providing - toward the goal of promoting fairness within a sustainable economy - than anything else. Their reason for being is to bring huge amounts of benefit to tens of millions of hard-working Americans. There's nothing punitive about that!
When given a structure to help support the best exercise of conscience, with no exemptions for favoritism's sake, people are remarkably ready to do what is right and good, regardless of where they happen to live. It's the government's job to show leadership in that regard, not just with a bunch of feel-good rhetoric or vague pointing in the general direction of what they'd like the private sector to fix, but by taking concrete steps to provide the structure required.

In building the justificational groundwork for this approach, an important point we need to keep in mind is that corporations aren't private in the same pure sense that sole proprietorships are. In the past, Congress saw fit to extend a blanket of protection under which people doing business could operate free of the shadow of full personal accountability hanging over the heads of their principal officers. Without such protections, companies of size also became sizeable liability risks to those who owned and managed them. One could lose everything. The prospect of such unlimited financial exposure was an impediment to the general growth of commerce and discouraging to the kind of company size that would allow the discharge of the very large contracts the country depended on to develop properly; like railways, big buildings, factories and large public contracts, for instance.
Accordingly, Congress legalized the framework for a type of business where the assets of company officers would be immune from what creditors could seize to remedy financial liabilities created by the miscalculations of said officers. Thus, the American corporation model was born. Sole proprietorships have simpler reporting requirements, greater operating freedom and greater private earning potential, but the downside for them is that their owners do not enjoy the immunities against financial setbacks extended to the chief officers of corporations (who often earn huge salaries even as the companies they manage run up huge losses).
Another aspect of corporate identity that makes corporations beholden to the society they're sheltered by derives from the fact that they readily avail themselves of various forms of assistance proferred by federal agencies sponsored by the American taxpayer.
The fact that most share-held corporations could not grow, or even effectively operate, without the constant protective partnership and background sponsorship of the public sector seems to have escaped the comprehension of many corporate compensation boards. They seem to take these special public protections for granted, as if the sponsors of such protections - we, the People of this country - owed as much to them and expected no conscionable quid pro quo from them in the planning of their payrolls.
Well, guess what? In most cases, even when you're owed, if you ask for nothing in return, nothing is exactly what you’ll get.
It's time for the People of the United States to stand up and demand their rightful due from the corporations their money protects and helps, namely, pay scales that are conducive to the establishment of the kind of social equity that Americans have fought for, died for and made lay-away payments on for the past two hundred and forty-two years!
It isn't absolute measures of pay that we're talking about here. Absolute measures of pay, by themselves, mean nothing. When it comes to preserving amity in the family of the American People, the only thing that counts is relative pay. When people see a large difference between what they're able to earn and what someone else no better at his job is bringing in (as in a whole lot more), they want to know that the difference can be justified without credulity being stretched. Too often, these days, there is no justification that can suffice.
While pay differences are necessary, without a clearly justifiable basis for such differences, overt disproportionality creates poisonous feelings between individuals - resentment, envy, outrage and even outright hatred. But the picture of lost felicity doesn't stop there.
There are also social impacts to consider – as in law and order. Any form of glaring disproportion in means between people who share any kind of connection - a family, a workplace, a neighborhood, a city, a state, a country or a planet - that is arguably unfair to the lesser paid parties, will, inevitably, fuel negative consequences of every shape and size and the combined drag of those consequences will leave that collective falling short of the security they might otherwise have enjoyed.
Just ask those who have lived in deeply dichotomized societies for any length of time. The countries in question may differ in language, culture and resources but, without exception, they all exhibit similar afflictions - economic backwardness, educational regression, disease, widespread deprivation-based suffering, official corruption, high levels of crime and environmental despoilation.
My own experience in this regard, as I mentioned, comes out of growing up in South Africa and living in South America. South Africa, currently considered by many to be one of the most crime-plagued industrialized nations in the world today, is a textbook case of what happens when social equity is ignored by government over a protracted period of time. Few Americans realize that the primary impetus behind the establishment of apartheid was not racial psychology but, rather, an attempt to protect the privileged economic status of whites just as increasing numbers of the country's Bantu and mixed-race people were finding ways to get the kind of education that would provide access to professional careers and more equitable measures of pay.
The blind hatred that resulted in the tragic and senseless death of American aid worker, Amy Biehl, was a direct result of apartheid closing the door to reducing the disparity between the prospects for whites versus those left open to non-whites. By the time she arrived to do social work in the townships of the Cape, that hatred was at a fever pitch. She wasn't killed for who she was, but for the systemic inequity her white skin represented and because she failed to fully comprehend that being American and noble-hearted alone would not indemnify her against that kind of unreasoning rage.
Ironically today, a different version of that same bad blood is being directed at black refugees from Zimbabwe and Congo by South African blacks. The newcomers are considered job stealers by natives whose relative lot is still inexcusably dire more than a decade after apartheid was abolished.
The lessons Americans need to learn from the example of South African apartheid are these: one, relative disparity is deeply destructive of everything people hold dear in civil society and two, once the damage has been done, the better part of society has to work very hard for a very long time before social improvement of any kind can be realized.
By continuing to be largely oblivious to the worsening wealth dichotomy in our own country, we are definitely pushing our luck toward a socio-economic tipping point, after which things go downhill fast.
So why hasn't improvement come earlier?
For one thing, up until now, no one has managed to come up with, and popularize, the necessary snappy syntax Americans tend to respond to best drive home why such disparities in personal circumstance are, in essence, demonstrably anti-American. There needs to be a buzz in the air before we can come together as one and act.
As a result, each of us in the struggling classes must rest content, feebly clinging to the outside chance that somehow, someday, one's ship will finally come in and all one's money-related troubles will go away, opening the door to living as one has always yearned to live - truly free and financially secure. Fat chance.
That's precisely the sort of never-never rationalization they - the controlling elite - want the working masses to subscribe to (and be complicit in reinforcing) so that more inclusive social policy never gathers enough steam to force its way into the domain of the entrenched privilege they’ve worked for two centuries to create, ever since Cornelius Vanderbilt laid the groundwork for it. Over the years, they've done a pretty good job of characterizing progress toward greater inclusiveness in such a way that it remains indefinitely tabled under the suspect banner of "socialism" (as if the principal agents protecting their state of material privilege - the armed forces, the U.S. Postal Service, the Social Security Administration, Medicaid, Medicare, primary education, the judicial system, the interstate system and any government department you care to name, including the Federal Trade Commission and The Securities and Exchange Commission, and now, the Federal Treasury itself - were not basically socialist in structure, financing and operation).
So far, that approach of pretending to deplore something while discreetly welcoming all the advantages it can provide, has proven to be a very useful, albeit disingenuous, strategy for America's wealthiest and most successful. On the other hand, the knee-jerk support of the would’ve-if-they-could’ve-been rich (once the political infantry of those opposed to all things socialistic in structure), can no longer be counted on in the wake of that contingent's gut-wrenching discovery that they’d shot themselves in the economic foot with their unquestioning sponsorship of neo-liberal economic policy. Too late, they realized they'd been duped by Wall Street. Worse, they were being ditched by the thousand by companies who no longer deemed their services essential to the making of a profit, now that IT had made automated service, robotization and off-shoring so accessible.
In addition, as other more socialistically organized countries have begun to outperform us in key areas of demographic importance, such as healthcare, the electorate has begun to tire of hearing "Wolf!" every time anything remotely collectivist in nature comes up for debate.
We, the public, may be a little slow in separating truth from hypocrisy but, in the end, our collective thinking process tends to cancel out the usual pitfalls of personal bias and show itself more astute than any panel of spinmeisters or policy wonks could ever hope to be. Therein lies the intent of democracy, after all.
For anyone who cares to see it, the writing is on the wall for the status quo of recent years. The younger and more burdened half of the population finally found its way to the polls and delivered a drubbing of historic proportions at the ballot box to those who gave us what we must now fix.
This spontaneous movement - the campaign to elect and support Barack Obama - owed its strength not as much to its apparent assets as it did to the outgoing opposition's proven flaws and spectacular high-handedness in the use of national assets when they had the helm of our ship of state. The public was not just dissatisfied; it was fuming. The state of the nation was deplorable and the public was itching for change representative of purposes it could be proud of paying taxes to support. We would hear it expressed firsthand several times a day - ordinary people, sick and tired of the same old political shenanigans and looking to the prospect of a new political order that would usher in a more benign and enlightened form of governance that could not be corrupted, intimidated or distracted from taking on the work of creating a more positive and inclusive substructure to the common life of our nation.
As a result of these powerful yearnings among citizens, the Obama campaign enjoyed the provisional ideological backing of a preponderance of Americans of independent mind and generous heart who had no declared party affiliation, as well as a good many of those once affiliated who had finally broken with past habit and refused to be told what to think by the party machinery of opinion grooming.
I say "provisional" because, as we have seen, these people could easily get a bad case of voter’s remorse if what they were getting wasn’t exactly what they had had in mind. The support of the independent voter constituency should not be considered in the bag but, rather, in a state of waiting to see how things play out.

Being able to advance a politically discomforting option over a foolish one with facile public appeal is the mark of the kind of leader the country needs right now. Leaders who have to wait for public opinion to show them where to lead before they'll go there are not actually leading; they're just managing. Right now, we’re going to need a lot more than simple management expertise.