“Oh, yes, we have class warfare in America. My class is winning.”

                                                                              Warren Buffet

In our current financial crisis, the activity of significant lending by banks to those who wanted to own a home was followed by those banks selling off the mortgage loans to investors. This had two consequences: the banks no longer were responsible for their loans (the loans were not on their balance sheets); thus, the banks became incredibly irresponsible about whom they would loan money; and two, once the mortgages were sold, the investors bundled those loans, and, thus, no one was able to keep track of who’s got what and to whom. This bundling is called securitization.

Of course we can change this. We can regulate the banks. We used to do that . It was called the the 1933 Glass-Steagall Act and it prevented banks from being so irresponsible that they could sell mortgages. Over time the Glass-Steagall Act’s powers were eroded by both Republicans and Democrats. (Yes, the Democrats were also responsible, not everything can be blamed on Ronald Reagan.)

Not only did Congress eroded the Act so did the Federal Reserve Board which has regulatory jurisdiction over banking, but not the stock market. Therein lies the rub. The banks were increasingly losing profits to nonbanking institutions who were intruding on banking territory. Congress got so nervous that in 1994, when Congress was still under Democratic rule, Congress passed the Home Owners Equity Protection Act. It empowered the Federal Reserve board to make rules for mortgages even for institutions that were not banks.  (I say this in case you think it doesn’t matter which party wins – it does matter).

Wonderful! Except Mr. Greenspan, head of the Federal Reserve, did not enforce the regulation. Remember Mr. Greenspan, he believed in the power of the market to self-regulate. We didn’t need regulation.

Now we are at the point where most sensible people say – we need regulation, let’s figure out what that will be.  However, we have the Republicans saying we have too much regulation and since the minority is running the Senate, we could end up with no new regulation to address this financial crisis.  What a country!

There are three major credit rating agencies: Standard & Poor’s, Moody’s Investors Services, and Fitch.  These three agencies assign risk to corporate investment.  They can deliver a top-tier rating of AAA to a corporate investment that they consider an excellent investment.

The shock to Americans who relied upon their credit ratings was that these three agencies assigned “AAA” ratings to investments that were backed by subprime mortgages. Of course, their response is that they were fooled just like you and me, although unlike you and me, they had a stable full of bright well educated MBAs to conduct in-depth analysis of these investments. Of course, if that excuse doesn’t work, they fall back on credit ratings are constitutionally protected free speech and are thus protected from lawsuits.

Fortunately, a federal judge in New York, Shira Scheindlin, stopped such excuses in their tracks and said that indeed companies that provided credit ratings are indeed liable from investors who were burned by their ratings.

How could credit rating agencies be so wrong? They are paid by those who are issuing the investment, and the better the rating, the higher the fee. Talk about incentives. Of course with such incentives the credit rating agencies lack objectivity. Time to go to court!

I bet you have never heard of the Depository Institutions Deregulatory and Monetary Control Act of 1980 (DIDMCA) or the Garn-St. Germain act of 1982. Those acts, one signed by President Carter and the other signed by President Reagan, helped create the financial mess in which we find ourselves.

The DIDMCA effectively ended all the states usury laws. It meant that if a state decided that interest rates on mortgages and credit cards should be capped at 5%, that state was stopped from doing so.  The Garn-St. Germain Act permitted a “shadow banking system” to develop without any of the regulations required of banks.  In effect the Garn-St.Germain Act cut the savings and loan institutions loose from any regulation.

There are other Congressional acts as the financial elites slowly carved their way out of Glass-Steagall Act of the Great Depression (which required commercial and investment banks to be separate and required insurance and brokerage houses to be separate) until banking regulation disappeared.  What a country!

There are solutions for the credit crunch that too few policymakers are talking about. Here is the list:

Short term: Federally insure subprime mortgages, restructure troubled mortgages, extend unemployment insurance benefits, provide funding to state governments for infrastructure.

Long term: Limit subprime mortgages or outlaw them, require transparency in all mortgage dealings, pass legislation regulating financial markets to prevent highly leveraged deals, stop predatory lending.

So when are we going to see such solutions debated in Congress. Don’t hold your breath. Solutions offered by our federal government so far rescue financial markets but not people. If it weren’t for Gordon Brown of Britain, we would not even be talking about the federal government buying prepared stocks in banks. Buying stocks in banks may be beneficial to the taxpayer, we might even make money on it.

Eliot Spitzer was a dynamite Attorney General. He wrote a column in the Washington Post on February 14, 2008 (see http://www.washingtonpost.com/wp-dyn/content/article/

2008/02/13/AR2008021302783.html in which he said that “In 2003, during the height of the predatory lending crisis, the OCC (office of the Controller of the Currency) [under the direction of President Bush] invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government’s actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules.”

The states attempted to stop predatory lending and the Bush administration stopped them. After all, we don’t want states to over regulate. When this sorry tale of taking advantage of the poorest of our citizens is told, the Bush administration will once again be demonstrated to be a disaster. Meanwhile good government groups try to get this administration to focus on people rather than financial markets. It is an uphill battle.

We made a choice. We voted for Obama and get a rational, thoughtful, educated politician who believes in federal regulation to deal with this crisis instead of McCain, an emotional, impulsive, politician who believes in less government. But Obama has to deliver and so far when dealing with the financial crisis, he is listening to the same people who created it.

New York City has been a city of progressive thought and provider of generous social services for its citizens beginning with the Great Depression of 1929. The Great Depression was the opportunity for progressive elected officials to construct a safety net of social services for citizens. New York City did so by embracing redistributive policies. During the Depression, Mayor Fiorello La Guardia, with financial support from President Franklin Roosevelt, established extensive governmental services for city residents – public housing, new public schools, rent control, expansion of public health services and public hospitals, to name some of the most important actions. The Great Depression brought substantial progressive services for citizens of the city for over 40 years until the fiscal crises of the 1970s unraveled the progressive social services safety net of that earlier period.[1]

Today, the city retains a semblance of rent control, to the consternation of the powerful real estate lobby, and is one of the few remaining cities to do so. It supports 11 public hospitals, the only city in the nation to do so. It also has the largest public housing authority in the country. It retains the third largest public university in the country which, until 1975, required no tuition.[2]

Nevertheless, the city has also lost a great deal. The 1975 fiscal crisis sparked the end of an era in the history of New York City and in the history of America. In 1975 the city had a $1.5 billion deficit out of a $12 billion budget as well as $11.3 billion in debt of which $4.5 billion was in short term notes maturing within a year.[3] There is no question that the city needed rescue. The city, in effect, would run out of cash, unless the banks bought their bonds, and this, in 1975, was what the banks refused to do. They declined to buy any more NYC bonds. “The terms of the financial rescue put the city in a budgetary straitjacket that made it impossible to sustain the high level of social activism and income redistribution that had characterized the Lindsay and Beame mayoral years.”[4] In secret meetings with Mayor Abraham Beame, the Financial Community Liaison Group (FCLG), consisting of officials from the largest New York banks, insisted the Mayor slash services and end free tuition at the City University system.[5] Faced with the worst fiscal crisis since the Depression and under enormous pressure from the combined forces of Governor Carey and the FCLG, Mayor Beame agreed to charge tuition at the City University system (CUNY) and to lay off 40,000 workers, disrupting vital city services.

The cutbacks were devastating. The schools were in chaos as over 10,000 teachers were laid off; park maintenance was abandoned; crime increased as the police force was reduced; fire stations and health clinics were closed, and a third of CUNY’s faculty were terminated. Tuition was established which has now increased dramatically to $2,000 a semester.

The schools were beleaguered. Over a two-year period, 1975 to 1977, over 5,700 classroom teachers were lost in the elementary schools; over 2,000 in the junior high schools, and over 1,800 in the high schools. The impact of these layoffs was a loss of 1 in 5 teachers in elementary schools and about 1 in 6 on the upper levels. [6] It was not simply teachers -assistant principals were gone; guidance counselors were lost – 1 out of every 2 at the elementary school level, school secretaries were laid off, thousands of paraprofessionals lost their jobs, as well as school crossing guards and security guards. The schools were in chaos from loss of staff resources and from teacher transfers as seniority rights of teachers took precedent, and teachers were transferred all over the city in recognition of their seniority.

Public health was compromised for years to come. In 1977, the NYC Department of Health (DOH) lost 1,700 staff members, 28% of its 1974 workforce.[7] The agency lost seven of its district health centers, dramatically cut its methadone program, terminated the employment of 14 of 19 health educators, and closed 20 of 75 child health centers (responsible for TB screening and diagnosis). At the NYC Health and Hospitals Corporation (HHC), the city payroll was cut by 17% between 1975 and 1978. In 1975, HHC cut all of its 50 community-based clinics. John Holloman, president of HHC from 1974 to 1976, fought the cuts and was fired. These budget cuts played an important role in the resurgence of TB in the 1980s and the city’s lack of preparation to deal with the AIDS crisis.[8]

The Parks Department lost 1,440 employees in those two years. The green lawn in Sheeps Meadow became a dust bowl. The Parks Department has never recovered from the drastic cutbacks in 1975-77. NYC now spends the least dollars for parks of all high density cities. Chicago spends more on its parks than NYC with only one-third of the people. Among high density cities, NYC ranks last in the number of swimming pools and recreation centers. Philadelphia has twice as many pools than NYC and four times as many recreation centers for a population one fifth NYC’s size.[9]

The housing stock was equally devastated. NYC had “the first program in the United States which transferred ownership of privately held buildings to low-income tenants. The program expanded rapidly so that by 1973 there were 136 properties, which included a total of 286 buildings, at various stages of the process. However, only 42 of these properties had completed rehabilitation and conversion when the program was aborted as a result of the New York City fiscal crisis in 1975.” [10]

The subway system underwent radical reduction in services and a rapid increase in crime. The subway fare was increased 43%. Ridership dropped 27 percent between 1965 and 1982. Unmanageable graffiti, track fires and frequent train breakdowns became nationally recognized symbols of the degradation of a once-great transit system.[11] And the Second Avenue subway dig was stopped.

Public safety suffered the devastating loss by the Police Department of 20% of its workforce. In 1972, the NYC police force numbered 31,000; by 1980 it had shrunk to 22,000. Robberies increased by 15% by 1983 while murders saw a slight rise of 2%. The Fire Department had undergone cuts before the fiscal crisis which were exacerbated during the fiscal crisis. Ladder companies were reduced from six to five people; engines were reduced from five to four people in 1975. “By 1976, and in rapid succession, some 35 fire companies had been removed from primarily high fire-incidence areas and fire department personnel had decreased from about 14,700 in 1970 to about 10,200 in 1976.”[12] The “burning of the Bronx” was found to be closely related to the reduction in fire protection in the 1970s.

Another disappointing trend was the migration out. Whites fled the city – almost two million left between 1975 and 1983. Although the methodology counting ethnicity changed somewhat between 1970 and 1980, still the drop in the white population was quite serious. Both African-Americans and Hispanics had slight increases, but New York City’s population was in serious decline from 7.9 million to 7.1 million by 1983.[13] In addition, the median family income dropped from $43,952 in 1969 to $38,593 in 1979 as the more educated left for the suburbs. The percent of households with low income increased by almost 10% while medium and high income households decreased 3.3% and 5.4% respectively.[14] New York City was no longer perceived as an attractive place to live.

City residents were infuriated at the ravaging of city services. Abe Beame, a former NYC Comptroller, who had won his job on a platform of financial responsibility, lost all credibility with the voters and became a one-term mayor. No one denies that the city spent more than its revenues. What is open for interpretation was why the only solution was drastic cutbacks that created miserable living conditions in the city, resulting in, for those who could afford it, a mass exodus to the suburbs. Why did conservative forces demand cutbacks before helping the city regain its financial stability? Could Mayor Beame have adopted different strategies to avoid this devastation? Could anyone?

The fiscal crisis did not end with Mayor Beame’s tenure – the Municipal Assistance Corporation (MAC), Emergency Financial Control Board (EFCB), and the NYS Special Deputy Comptroller for New York City, all institutions created by the combined forces of New York State officials and bankers during the fiscal crisis – constrained the fiscal policy choices of subsequent mayors to this day, more than thirty years after the fiscal crisis.

Each subsequent mayor underwent sizeable fiscal crises. From 1975 to the present, New York City has undergone cycles of economic strength and decline – fat surpluses followed by huge deficits breaking over the city. These cycles are closely related to national and regional economic trends.[15] And in each of these subsequent crises, the financial structures established during the 1975 fiscal crisis dominated New York City fiscal policy. These institutions call upon the city to reduce taxes and cut back government services based upon the theory that private business will be stimulated by the tax reductions and that less government spending means more capital for the private sector. However, at some point fewer government services works against the city being attractive enough for business.

Through this case study of New York City’s fiscal crises, we consider the strength of the financial elites in their relationships with elected officials. Is it possible for mayors to oppose business interests, or is the influence of the financial elites indomitable? If states are in close alliance with financial elites, what kinds of options do urban mayors have in developing local fiscal policy? Elkin maintains that “political leaders have choices in how to respond to this economic context.”[16] As the world center of financial services, New York City is an informative case study of the power financial elites exert over the political leadership, and how mayors can push back to assert their own political agendas. In the final analysis, although some mayors do achieve their own policy initiatives, their choices are significantly limited by the powers of the financial interests.

[1] Inman (1995) defines crisis as anytime when the city is unable to raise sufficient revenues to cover the city’s expenditures. Also see Wolff, G. B. 2004.

[2] The City University of New York (CUNY) is third in population behind the State University of New York (SUNY) and California State University system.

[3] Shalala & Bellamy, 1976, page 1125.

[4] Rockefeller 2003, 196.

[5] Ibid.

[6] Weikart, 1983, page.167.

[7] Freudenberg, etc. 2006, p. 425.

[8] Ibid. p. 416.

[9] Croft, 2006, page.2.

[10] Lawson, 1998, page 61.

[11] Schaller, 2003, page 1.

[12] Wallace, 1981, page 433.

[13] New York Times, 1983, B1.

[14] U.S. Census SOCDS Data.

[15] Forsythe, 1997, 15.

[16] Elkin 1987, 8.

The history of the United States can be examined through several lenses. It is the history of the power of ideas centering upon the natural rights of the individual. It is a history of our military power, fledging at first in Concord and Lexington, and later the supreme military power in the world in the destruction of Hiroshima. It is a history of the power of creditors over debtors as recession after recession demonstrated the struggle between the two.

When Americans declared their freedom from Britain, they did so in part because of the struggle between British creditors and American debtors. In 1777, the Virginia legislature passed an act to sequester British property. Virginia citizens could nullify their debts to the British by paying the amount they owed to the Virginia’s treasury.[1] Of course payments could be made in Virginia’s paper currency, not British pounds, and the paper currency was worth only a tenth of the British pounds.

Shay’s Rebellion (named after Daniel Shay, a revolutionary war hero) is another example of creditors and debtors at war with one another. After the Revolutionary War, in 1786, Massachusetts farmers protested the seizing of the farms for debts. The farmers, revolutionary retired soldiers, who returned home with government certificates treated as worthless paper money, found their land taxes horribly burdensome and were unable to pay their debts. Farms were seized by creditors (merchants and government officials). Over 4,000 farmers organized, marched on debtors’ courts to stop foreclosures.[2] The rebellion was over by 1787 when the Massachusetts Governor James Bowdoin organized a militia that fired upon the farmers and routed them. Shay’s Rebellion convinced the merchant class that a stronger national government was a must.

In 1819, the nation’s economic expansion ended as the Second Bank of the United States tightened credit due to western land speculation. The Bank called in its loans which meant that state banks tightened credit upon land speculators who could not repay. State banks failed and with them, farmers and merchants lost needed credit. As a consequence, banks foreclosed on farms and the nation’s prosperity was curtailed.[3] Struggles between creditors and debtors continued through the 19th century culminating in the success of the “robber barons,” such as James Hill and J. P. Morgan, in the late 19th century.[4]

Who controls the twenty first century financial interests? The creditors now are commercial and investment banks, individual American and foreign investors, pension funds, mutual funds, insurance companies and overseas countries. The financial interests who provide the support for financial services are the commercial and investment bankers. These financial leaders in the United States provide financial services to all levels of government – they buy and sell bonds. These financial leaders profit from the need for all levels of government to borrow funds for long-term capital improvements (bonds) and/or short term revenue needs (revenue anticipation notes or tax anticipation notes). Government bonds represent a promise by government to pay back lenders both the principal and interest of the amount borrowed. The borrowed funds are used for a vast array of projects.

Does there still remain tension between creditors and debtors? Indeed there does. Today, these creditors control our local and state governments through the issuing of government bonds and the creditors’ willingness to deny loans to local and state governments that are considered risky investments. These creditors are, indeed, very powerful.

[1] Smith, John. 1996. John Marshall, page 153.

[2] For a detailed account of Shay’s Rebellion, see Richards, Leonard, Shay’s Rebellion, The American Revolution’s Final Battle.

[3] For a detailed amount of the Panic of 1819, read Frederick Jackson Turner’s book, Rise of the New West,

[4] For a radical interpretation, see Matthew Josephson’s The Robber Barons, and for a more conservative interpretation of industrial statesmen, see Allan Nevins, John D. Rockefeller, The Heroic Age of American Enterprise.

Much of Lower Manhattan has been rebuilt with little concern for input from the city’s residents. Although the 9/11 families have had input into the World Trade Center (WTC) site, citizens have been shut out of the rest of Lower Manhattan.

Only a few weeks after 9/11, a group of highly organized business men called for the creation of a public authority that would be responsible for the reconstruction of Lower Manhattan. Who were these business and real estate leaders? – The Partnership for the City of New York and Chamber of Commerce, the Real Estate Board, and the Alliance for Downtown New York.

The Governor and State Legislature created the state Lower Manhattan Development Corporation (LMDC). LMDC’s territory runs from Houston Street to the tip of Manhattan, from the East River to the Hudson, and oversees the revitalization and rebuilding of all businesses and housing except for those areas that are governed by other authorities; namely, WTC site governed by the Port Authority, and Battery Park City governed by the Battery Park City Authority.

The people appointed by Governor Pataki were from the financial and real estate industry with few appointees from local residents. Other than the chair of Community Board 1 and a representative from the construction trades, the list reads like the who’s who from a night at Lincoln Center.

With the establishment of LMDC, developers no longer had to worry about the City’s urban planning process, (ULURP), nor did developers have to worry about the City’s building codes. After all, the City no longer has jurisdiction. Most importantly, what the City Council thinks is no longer relevant including the City Council’s call for more affordable housing in Lower Manhattan.

The creation of state authorities has always been used to cut elected officials and city residents out of the decision making process. The City has lost a huge chunk of real estate to the State and developers. Lower Manhattan is becoming a playground for the rich as one luxury building after another is built.

Red Hook is a neighborhood in Brooklyn right on the water with an incredibly active port on the East River of New York City. Red Hook has a rich maritime tradition – the movie, “On the Waterfront,” was filmed there, and the docks still bustle with container cargo from dozens of large ships. One of the few industrial zones left in the City, many Brooklynites are fighting against high-end real estate developers who see luxury housing rather than shipping docks in Red Hook. Why waste their beautiful views with jobs?

The Red Hook port is owned by the Port Authority, not by the City of New York. The city has tried to acquire the waterfront in Red Hook. City officials would like to see high-end real estate developed on the waterfront in Red Hook; in their minds, container shipping simpy doesn’t provide enough jobs.

City officials may lose out to saner heads, particularly Congressman Jerry Nadler. Congressman Nadler would like to see the city’s economic base far more diversified than it is now. We are far too dependent upon Wall Street, and we are all too familiar with the fact that Wall Street is cyclical economy. Keeping the one remaining port in New York City has become a high priority to many in Brooklyn and to the Congressman. The Congressman has worked to change the view of local officials – “They are warming to maritime uses, I definitely feel that.” (1) Nadler sees the rapid growth in shipping industry throughout the world influencing city officials to recognize the need in the city to maintain and strengthen the city’s shipping industry. The Daily News issued a stinging editorial against the city’s handling of Red Hook’s docks: “If these geniuses had devoted as much energy to eliminating vermin as they have to getting rid of American Stevedoring Inc. (ASI), New York would be rat-free.” (2) A week earlier, 20 elected officals, including Reps. Jerry Nadler and Anthony Weiner, Senator Chuck Schumer, City Council Speaker Christine Quinn and City Controller Bill Thompson, wrote to the Port Authority and Governor Spitzer who controls half of the votes on the Port Authority’s board urging that ASI get a 10 year lease.

Several of these politicians are planning on running for mayor. With the changing political landscape, Congressman Nadler may yet win a 10-year struggle to make the city understand the importance of diversification.

(1) Brown, Elliot. 11/1/07. In Shift, City is Promoting Expansion of Maritime Industry. New York Sun.

(2) New York Daily News editorial, 10/7/07. A Waterfront that Works, page 40.

We have the worst financial crisis since the Great Depression of 1929. And who do we put in charge – investment bankers who started it.Let’s look at how this got started. There is a MIT professor, Thomas Kochan, who demonstrates that in the last quarter of a century, productivity in U.S. manufacturing rose by 70% but real wages remained flat (see http://kochan.lerablog.org/). At the same time as wages remained flat, half of the income gains went to the top 10% of the income distribution. Top that off with inflation rising over 400% since the 1970s and that means those who make a median income in this country are being squeezed – they work harder, earn less and watch while the rich take the bulk of the money. What a country! Obama wins and guess what – he surrounds himself with investment bankers. Way to go! What are Democrats to do? Long ago, a friend of mine who was an Assemblyman said the influence of the rich was quite seductive. He gets home from a long night of meetings and he has several phone calls to return. Most of those phone calls are from ordinary citizens, one is from a donor. He’s tired. Who does he call? the donor. What does President-elect Obama do? How can he resist the seduction that is now going on? I don’t know. But the Democrats have a real problem. They promised to help the middle class but the middle class is not in the room.For those of you who wish to understand the financial crunch we are now enduring, you should read Wallace Roberts, a Vermont journalist.

Globalization and Education

Dani Rodrik is a Professor of International Political Economy at the John F Kennedy School of Government at Harvard University, writes “the revolutions in transportation, communications and information technologies have considerably increased the speed with which global markets react to changing realities and procedures. But the flows of goods, services, and capital across national boundaries are not significantly larger today- in relation to national product – than they were during the classical gold standard.”

There are 3 potential sources of tension between global markets and social stability. First, globalization makes large segments of the working population more easily substitutable across national boundaries, and, therefore, it fundamentally transforms the employment relationship. The post-World War II social bargain between workers and employers, under which the former received a steady increase in wages and benefits and a degree of job security in return for labor complacency is thereby undermined. The result is a widening rift between groups that have the skills and mobility to flourish in global markets and those who do not have these advantages.

Second, globalization creates strains both within and among countries by engendering conflicts over domestic norms and the social institutions that embody them. … (What happens when) child labor in Honduras replaces workers in South Carolina or when French pension benefits are called in response to the requirements of the Maastricht Treaty. (This is what the calls for Fair Trade are all about).

Third, globalization makes it more difficult for governments to accomplish one of its central functions: the provision of social insurance that served throughout the post-World War II period to maintain social cohesion and domestic political support for ongoing liberalization.

International trade may be a major contributor to prosperity in the advanced industrial countries but it is also responsible for some of the social and distributional costs. International trade can generate sizeable economic benefits only be restructuring economies and when doing so, some people are hurt – someone bears the costs.

Capital is mobile; labor is not.

What Rodrik reminds us is that global economic integration needs an infrastructure of popular support and legitimacy in order to survive. The inherent tensions between markets and democracy must be recognized. Democracy follows an egalitarian logic while markets follow an inegalitarian one. Global capitalism must be complemented by domestic social policies if we want to maintain political legitimacy – that means investments in safety nets, education and training, and social programs.