Richard Trumka of Blog For Our Future has a nice article stressing the challenges we face in thinking big again.  In having that “can do” attitude which we seem to collectively lost as manufacturing jobs were shipped en mass overseas and productivity came at the expense of jobs.

“To our nation’s peril, the free trade orthodoxy continues to ignore a fundamental economic fact: It matters where things are made.

Over the past decade the U.S. industrial base has suffered an unprecedented decline. The loss of more than 5 million manufacturing jobs and the closure of more than 50,000 manufacturing facilities have undermined our nation’s technical capacity to innovate and to make things, while at the same time decimating our middle class.

Flawed trade and tax policies and a financial system focused on short-term profits drove good jobs offshore, led to record trade deficits, and left the economy in ruins. With the manufacturing share of gross domestic product withering to 12 percent (from 15.9 percent in 1995) and the financial sector growing to 22 percent, the structure of the U.S. economy looks more like Monaco than Germany. This growth model of asset bubbles, low wages, credit pyramids, toxic assets and unregulated out-of-control global capital has been a recipe for disaster.

There is a reason every other developed and advanced developing nation has a manufacturing strategy. Most governments see manufacturing as key to long-term growth, and they target investment in industries and technology. In contrast, our government abandoned strategy to market forces and left workers and communities hanging without a safety net.

There was a time this nation thought big—investing in its people, infrastructure, technology and manufacturing. We must do so again, but we need to recognize that the world has changed. For example, the rest of the world leads in mass transit technology and the U.S. is home to only two of the 10 largest solar photovoltaic producers, one of the top 10 advanced battery manufacturers and two of the top 10 wind turbine producers. If we want to be world leaders in clean technology and have transportation systems to match then we must think strategically and at scale.

Over the next decade our nation is poised to invest $2 trillion in health care, infrastructure and a greener economy. The nation must take tough and strategic steps to create good jobs, fix our trade and tax laws and rebuild our productive capacity. Governments must restructure and regulate financial systems so that long-term investment is rewarded and gambling is not subsidized. We must use our financial resources to develop and deploy domestically produced technology and, if there is better technology overseas, use our financial leverage to get those production systems located here. We must think strategically and regionally about industry development so that we utilize existing pools of displaced skilled workers, engineering talent and idled plants.

And, finally, we must never again lose sight of the fact that it matters where things are made.”

Beezer here.  We need to stress making things again, instead of shuffling money around on Wall Street and making short term “bucket shop bets” on what used to be an investible stock market but has now turned into little more than a casino.

There’s a lot to do.  Now if the Republican Party will at least acknowledge that we have a lot to do.

Purportedly, President Obama admires all the intense action Franklin Delano Roosevelt took in his first term as he fought against the Great Depression.  It’s still not too late for him to re-read FDR’s first inaugural address of March 4, 1933.

Three days after making this address Congress convened, in special session called for by FDR.  Within eight hours Congress passed the Emergency Banking Act.  Banks took the famous “holiday” and were closed temporarily with the solvent ones allowed to re-open.  One month later FDR took the US off the gold standard, allowing the currency to “float” against other currencies. 

In March he launched the Civilian Conservation Corps (CCC) aimed at employing young men between the ages of 18 to 25, most from poor urban families.  More than 3 million young men worked for the CCC over several years. 

In May the Federal Securities Act was enacted to regulate the stock and bond markets.  He launched the Agricultural Adjustment Act to raise food prices.  He formed the Tennessee Valley Authority (TVA) a massive operation covering 7 states; its success continues to this day.  He launched the Public Works Administration putting people to work on major building projects such as dams, hospitals, schools, city pools, and even aircraft carriers. 

In his second year FDR started the FDIC, the Securities and Exchange Commission, the National Labor Relations Board and the Social Security Act.

But there was one particular group of people FDR signaled in his inaugural address as needing quick improvement, both in the way they were doing business and in their ethics:  Banking and finance.

Here is the pertinent excerpt.

Robert Reich, economics professor and former Secy. of Labor under President Clinton, has written a blog post complaining about the lack of true financial reform when it comes to those too big to fail (TBTF) Wall Street banks.

For Reich the basic reform needed is a restoration of some form of the Glass-Stegall act, a Depression inspired law that separated investment banking from traditional commercial banking.   Glass-Steagall was undone in 1999, Clinton’s last year in office.

Glass-Steagall had the effect of protecting taxpayers from being used as insurors for investment banking losses.  It’s important to understand that investment banking is quite different than commercial banking.   Investment bankers are in the trading businesses (stock, bond, currency, food and oil are main trading arenas) and in raising capital for existing companies and new ventures.   Their bread and butter is much riskier than commercial banking.  And they use leverage, borrowing to finance their operations.  When times are good, investment banks can be real money machines for their shareholders and partners.  But when risks go bad, they can also get into financial trouble fast.

It was the investment banking world where derivatives thrived.  Investment banks created credit default obligations and credit default swaps, derivatives that traded in the hard-to-regulate over the counter market which froze up when real estate values they were based upon plummeted.  It was here that a local real estate bubble crash rippled out into a world wide financial debacle.

While Glass-Steagall was in effect, such bad bets would not have created a “call” on taxpayers to bail out the investment banks.  Commercial banks hurt by a real estate collapse would be hurt as well even with Glass-Steagall, but in their case the Federal Deposit Insurance Corporation (FDIC) would have taken over the worst and sold them off thus protecting depositors and limiting losses to shareholders and bondholders of the insolvent commercial banks.  This process has worked well even during this crisis where a large number of commercial banks have been closed and sold by the FDIC.

Reich is not alone here.  None other than former Fed Chairs Alan Greenspan and Paul Volcker have also called for a reinstatement of laws separating investment banking from commercial banking. 

But such reforms means firms like Bear Stearns and Merrill Lynch would have to be sold by JP Morgan Chase and Bank of America respectively.  And Goldman Sachs, an investment bank declared a commercial bank one Sunday night during the crisis, would have to revert to being an investment bank again and lose its access to Federal Reserve funds as well as its access to FDIC insurance.

Needless to say, Wall Street doesn’t want anything to do with this idea.  Right now the TBTF holding companies have the explicit backing of taxpayer funds to bail them out when the investment bank functions go sour.  That’s what the bailout told them and the rest of the world.  This gives TBTF firms several advantages, among which is the ability to borrow money at lower rates than their competitors.

As things are now, there’s a real fear that as it was before may be true right now: TBTF holding companies dominated by investment bankers are running risks once again and putting the taxpayer on the hook for losses once again. 

Wall Street, particularly Goldman Sachs (“government sachs” to its detractors), in true Oligopoly form has its former employees sprinkled liberally throughout this administration.  And its lobbyists are legion in Congress.

Sadly, their power over this administration and Congress is obvious.  The fundamental reform of once again separating investment bank and commercial bank functions isn’t even being seriously discussed in Washington DC.   

Reich concludes in his article:

“The Street obviously detests the notion that its behemoths should be broken up. That’s why the idea isn’t even on the table. But it should be. No important public interest is served by allowing giant banks to grow too big to fail. Winding them down after they get into trouble is no answer. By then the damage will already have been done.

Whether it’s using the antitrust laws or enacting a new Glass-Steagall Act, the Wall Street giants should be split up — and soon.”

Late last week CNBC host/reporter Maria Bartiromo had two guests on to discuss Obama “Pay Czar” Kenneth Feinberg’s various decisions to limit pay and bonuses in those corporations that have received taxpayer subsidies, most of them financial corporations like Wall Street banks or American International Group, an insurance conglomerate.

The thrust of Bartiromo’s argument was that all the smart guys will leave the taxpayer subsidized companies for better paying jobs at non-subsidized companies and, thusly, will weaken the subsidized companies’ chances of getting back on their feet.    This, she concluded, would hurt the taxpayers’ chances of getting their money back.

What was never discussed was the underlying problem:  These highly paid risk takers are still in the enviable position of claiming their winnings when good bets pay off, but pushing off their losses to taxpayers when the bad bet bills come due.  Yet when the Obama administration makes regulatory proposals aimed at ending this game of “tails I win, heads you lose”  CNBC and Bartiromo scream bloody murder about the administration playing “class war” politics and proposing “socialism” regulatory schemes–unless, of course, it’s socialism for the rich when they place bad, risky bets.

If Bartiromo and CNBC were really interested in protecting big pay/big bonus for risk taking, they’d have panels discussing how to end the taxpayer backstops for risk taker losses.   Like that’s going to happen.

The pay czar exists because, lacking any real way to protect taxpayers from picking up the bad bet bills (and they do happen in spades, as we’ve just seen), one technique is to dampen risk taking by lowering the rewards for doing so:  If taxpayers have to pay the bad bet bills, discourage risk taking in the first place.

Before the government exposed taxpayers to these losses (by bringing down the Depression era regulations in Glass Steagall and lifting leverage limits), the risk takers were on the hook for losses as well as enjoying risk’s rewards.  That situation controlled risk taking better than anything.

When CNBC and Bartiromo start pushing for this kind of reform, they can legitimately call for eliminating  a pay czar.   But CNBC is bought and paid for by Wall Street, so this common sense “note” can’t be “heard” by CNBC and Bartiromo. 

It’s tough to have taxpayer sympathy for big bonuses when the recipients also possess the biggest “tin cup” for taxpayer bailouts when things don’t go so well.

Bob Herbert writes for the New York Times and in an article Monday, Oct. 19, he wrote in his own way about what I discussed in my previous post about the “unintended consequences” of Ronald Reagan’s populist, anti-government theme.   As almost always, thanks to economist’s view for providing the link.

Mr. Herbert wrote:

“The headlines that ran side by side on the front page of Saturday’s New York Times summed up, inadvertently, the terrible fix that we’ve allowed our country to fall into.

The lead headline, in the upper right-hand corner, said: “U.S. Deficit Rises to $1.4 Trillion; Biggest Since ’45.”

The headline next to it said: “Bailout Helps Revive Banks, And Bonuses.”

We’ve spent the last few decades shoveling money at the rich like there was no tomorrow. We abandoned the poor, put an economic stranglehold on the middle class and all but bankrupted the federal government — while giving the banks and megacorporations and the rest of the swells at the top of the economic pyramid just about everything they’ve wanted.

And we still don’t seem to have learned the proper lessons. We’ve allowed so many people to fall into the terrible abyss of unemployment that no one — not the Obama administration, not the labor unions and most certainly no one in the Republican Party — has a clue about how to put them back to work.

Meanwhile, Wall Street is living it up. I’m amazed at how passive the population has remained in the face of this sustained outrage.

Even as tens of millions of working Americans are struggling to hang onto their jobs and keep a roof over their families’ heads, the wise guys of Wall Street are licking their fat-cat chops over yet another round of obscene multibillion-dollar bonuses — this time thanks to the bailout billions that were sent their way by Uncle Sam, with very little in the way of strings attached.

Nevermind that the economy remains deeply troubled. As The Times pointed out on Saturday, much of Wall Street “is minting money.”

Call it déjà voodoo. I wrote a column that ran three days before Christmas in 2007 that focused on the deeply disturbing disconnect between Wall Streeters harvesting a record crop of bonuses — billions on top of billions — while working families were having a very hard time making ends meet.

We would later learn that December 2007 was the very month that the Great Recession began. I wrote in that column: “Even as the Wall Streeters are high-fiving and ordering up record shipments of Champagne and caviar, the American dream is on life support.”

So we had an orgy of bonuses just as the recession was taking hold and now another orgy (with taxpayers as the enablers) that is nothing short of an arrogantly pointed finger in the eye of everyone who suffered, and continues to suffer, in this downturn.

Whether P.T. Barnum actually said it or not, there is a sucker born every minute. American taxpayers might want to take a look in the mirror. If the epithet fits…

We need to make some fundamental changes in the way we do things in this country. The gamblers and con artists of the financial sector, the very same clowns who did so much to bring the economy down in the first place, are howling self-righteously over the prospect of regulations aimed at curbing the worst aspects of their excessively risky behavior and preventing them from causing yet another economic meltdown.

We should be going even further. We’ve institutionalized the idea that there are firms that are too big to fail and, therefore, “we, the people” are obliged to see that they don’t — even if that means bankrupting the national treasury and undermining the living standards of ordinary people. What sense does that make?

If some company is too big to fail, then it’s too big to exist. Break it up.

Why should the general public have to constantly worry that a misstep by the high-wire artists at Goldman Sachs (to take the most obvious example) would put the entire economy in peril? These financial acrobats get the extraordinary benefits of their outlandish risk-taking — multimillion-dollar paychecks, homes the size of castles — but the public has to be there to absorb the worst of the pain when they take a terrible fall.

Enough! Goldman Sachs is thriving while the combined rates of unemployment and underemployment are creeping toward a mind-boggling 20 percent. Two-thirds of all the income gains from the years 2002 to 2007 — two-thirds! — went to the top 1 percent of Americans.

We cannot continue transferring the nation’s wealth to those at the apex of the economic pyramid — which is what we have been doing for the past three decades or so — while hoping that someday, maybe, the benefits of that transfer will trickle down in the form of steady employment and improved living standards for the many millions of families struggling to make it from day to day.

That money is never going to trickle down. It’s a fairy tale. We’re crazy to continue believing it.”

President Ronald Reagan famously said “government is not a solution to our problem, government is the problem.”  The 40th president (1981-1989), Reagan made this famous quote during his first inaugural address.  

Dubbed the “Great Communicator,” Reagan played upon a strong populist theme against big government generally and specifically against the “elites” who run government for their own benefit.    He is one of the most quoted political figures in Western Democratic history, possibly second only to Winston Churchill of Great Britain.

As for successes, Regan’s greatest is generally agreed to have been that on his watch, the Soviet Union collapsed ending the long Cold War.  But his populist anti-government theme, over the past 30 years, has had serious unintended negative consequences.

Combined with the subsequent development of neo classical economics and its belief that “free markets” were the best answer for everyone’s future, Reagan’s anti-government policy morphed into an abandonment of government regulation and government planning. 

This abandonment crested in 2007 when America’s financial system, and most of Europe’s, came near total collapse, surviving only after massive taxpayer subsidies (more than $14 trillion just in the United States) to major banks on both sides of the Atlantic.

It was more than a lack of regulatory supervision.  Reagan’s populist meme had evolved into one where the common belief against government included an active abandonment of long term national planning as well.

National needs such as transportation and energy infrastructure were ignored long after Reagan left office.  The growing income inequality which accelerated during and after Reagan was ignored.  The growing gaps in health care coverage were ignored.

Combined with the belief that free markets would solve all our problems, if only they were left alone from government or other meddling, America developed ”deficits” not only in its national budget, but also in  almost every aspect of its economic life.  

By the time 2007 came along, America had deficits in income, health care availability, energy and transportation infrastructures, household indebtedness and manufacturing, to name just a few. 

And instead of eliminating those “elites” Reagan vilified, the unrestrained power of private industry became starkly apparent in Washington DC with the collapse of too big to fail (TBTF) Wall Street banks in 2007 and their subsequent trillion dollar taxpayer subsidies.  

Instead of wise government, America discovered Reagan’s populism led to a government controlled by private industry oligopolies.  Regulations controlling risk taking by banks, established during the Great Depression, were abandoned almost completely.  Income disparities widened dramatically, just as they had in the 1920s leading into the Great Depression.  Since 1970 80% of citizens saw no real growth in their incomes relative to inflation, whereas the top 20% enjoyed income growth of 60% in real terms.  Industrial manufacturing collapsed with high paying union jobs and skills transferred to foreign countries under poor trade agreements and enforcement.  

Health care costs rose at rates far above inflation, much less income growth, leaving more and more citizens vulnerable to the financial effects of sickness:  An estimated 60% of bankruptcies were being caused by medical bills.   Forty million Americans were without health care coverage. 

Instead of a healthy economy, America’s trust in private markets and distrust of all things government resulted in a thorough, systemic weakening of its economy.

The “unintended consequences” of the belief crystalized by Reagan’s populism were everywhere visible once an oligopolic Wall Street collapsed in 2007. 

The result politically was inevitable.  Republicans, the party of Reagan and his unrestrained faith in free markets, were thrown out of the White House and both houses of Congress.  This hadn’t been done since 1932 when the Great Depression began to widen in America.  Voters did then exactly the same thing when they elected Franklin Delano Roosevelt as President and his Democrat party to majorities in Congress.

The question now becomes, “Will the American voter demand real reform, as they did in the Great Depression?  Or will they succumb once again to the siren call of Ronald Reagan, that their misery is caused by government?”