Post-Peak Liberal: Madoff, Cramer vs. Stewart, and Other "Shenanigans"

Post-Peak Liberal

....... Life on the Downslope

Madoff, Cramer vs. Stewart, and Other "Shenanigans"

Man, what a week! We had the beloved Bernie Madoff pleading guilty to about a million counts of fraud, with the media obsessing over important things like whether or not he'll be able to stay in his luxurious pad while awaiting sentencing. We had the DOW creep back up a few hundred points, prompting desperate, breathless talking heads to wonder if this is finally the "turning point" for our shattered economy. And then, of course, we had the quasi-epic smackdown that Jon Stewart gave to Jim Cramer on the Daily Show, a non-showdown showdown that is now reverberating across the media landscape with surprising alacrity.

One the surface, these events give the appearance that the tide may be turning, that the guilty and reckless are finally being held to account, and that the market is adjusting to new realities and gearing up for an inclined push. And we can certainly hope that the general public mood will push the media and the political authorities to call the bankers' bluff: i.e., prosecute past financial misconduct at places like AIG, BOA, and the like, doling out real justice to the fattest of the fatcats; nationalize BOA and Citibank, and possibly others, allowing for profits from recovery to be returned to the taxpayers who funded the bailouts in the first place; put aggressive rules and oversight in place for bailout money that has already been given out, forcing the banks to either start lending the money to productive pursuits like railway upgrades, or give it back to the government; temporarily or possibly permanently ban certain kinds of hyper-leveraged derivatives (future futures, credit default swaps) and excessive interest rates on credit cards and other loan instruments. Might we get real reform like this? Hard to say. The Obama administration is really kind of straddling the fence right now, hoping to placate both the financial sector and the regular people who are being thrown out of work and home onto their asses. As usual, there is a robust allergy to actually telling the truth about the long-term, systemic origins of our predicament. And until we engage in that reality check, we'll be fence-straddling our way back to the Middle Ages.

For the most part, I have not paid much attention to the Madoff thing. I know the basics, that he ran the largest ponzi scheme in history, bilking thousands of investors to the tune of $65 billion or so. Bad dude, deserving of everything that is coming to him. And yes, a tougher federal regulatory apparatus might have spotted his fake business and nipped it in the bud, saving the fortunes of retired couples, charities, and even Kevin Bacon. After all, the SEC was alerted to the Madoff scam in 2005, but no action was taken. But in the larger picture, Madoff's stupendous returns were able to fly under the radar due to the overall financial landscape. Large returns were coming in from everywhere in the financial world, from the dazzling array of new leverage instruments, from swaps to double futures to mortgage-backed securities. Banks and other institutions were getting 25 to 30% on all manner of gambit, and the computer-based explosion of sophisticated derivative activity, which allowed for millions of transactions for trillions of dollars to zip around the globe every day, was essentially an unregulatable mess. In this overall picture, it is not surprising that Madoff's malfeasance was fully camouflaged, helped along by some elitist nepotism, I'm sure. Financial "wealth" was flying around everywhere. We'll see below that this was part of a more fundamental legal failure, concerning usury and labor laws.

This brings us to the Jon Stewart-Jim Cramer interview from the Daily Show this past week. The whole thing can be seen on the Comedy Central website (www.comedycentral.com). I do agree with most general punditocracy perception that Stewart essentially cleaned Cramer's clock (one commentator indicated that if it had been a fight, the ref would have stopped it). And watching the whole thing, it was clear that Stewart had exhaustively prepared for the confrontation. His remarks were eloquent and outraged at the same time, but tempered just enough by an expansion of the discussion beyond Cramer per se. Yes, Cramer was hoisted on his own petard, with some scummy and damning video from 2006, which had him spouting forth on some of his devious hedge fund tactics. Stewart also painted an excellent and vivid overall narrative on the whole situation. There have essentially been two different market models in play: the one that is depicted to the public as a safe place to put your retirement money for a modest gain over the long haul, and the actual market of backroom wheeling and dealing, lying and manipulating, as represented by Jim Cramer. Stewart took Cramer and his ilk to task for pretending that the safe market was the reality, while enabling the devious, evil assholes to gamble away everyone's retirement money on casino-grade bullshit. Stewart repeatedly questioned whose side CNBC was on, the righteous regular folk, or the cackling, Cayman Island investor crowd.

Cramer, for his part, did the best he could, under the circumstances. As he was on Stewart's territory, he was in no position to know what hand-picked, terrible video clips Stewart would roll. As Cramer said, when you have to fill 17 hours of air time a day, every day, you're bound to say anything at some point. And I thought that Cramer was fairly genuine in admitting his sins and failures, acknowledging his bad calls and overall bad judgment. And he also did a great job of explaining what he was trying to do to help things, continually bringing up specific discussions he had taken up with CEOs, regulators, and even Congress, to try and hold the guilty responsible for their crimes and lies. But Stewart kept shrugging off discussion of Cramer's specific actions, drawing attention back to the overall responsibility of a financial network like CNBC to report the truth about the economy, so that the little guy doesn't get taken to the cleaners.

Here, we are at an interesting point in the Stewart-Cramer dust-up. And it relates to the word "shenanigans." Over and over, Cramer and Stewart (the former more so) kept referring to the behavior of the financial industry and the banks as "shenanigans." The overall idea, which seems to float around all over the mainstream media, is that we have come to this moment of economic collapse because of some bad seeds. Granted, these are amazingly powerful bad seeds, allowed to grow into mighty oaks of corruption via cronyism and the lack of federal oversight. But still, the talking heads are all of the opinion that a great catastrophe must be traceable to great malfeasance. In TV Land, everything has to be dramatic and personal, since systemic and historical analyses don't sell razors (more on this blame game and faux outrage here). And while this search for the guilty feels good (who doesn't want Madoff locked away for a thousand years?), and while we certainly should pursue legal action against the most obviously criminal offenders, the danger in this whodunit approach to our economic collapse is that we are missing the most important, non-personal forces involved.

So yes, Stewart was right in demanding that financial networks like CNBC watch out for the little guy. He was right to skewer Cramer for coming too late to his mea culpa on how bad he felt peddling bullshit. And yes, Madoff should never get out of jail. But these "shenanigans" were not the driving forces of the last 40 years. For this, let's turn to an amazing article from the newest issue of Harper's Magazine: "Infinite Debt," by Thomas Geoghegan (Harper's April 2009 Issue -- not available online without a subscription, but Harper's website is here).

Geoghegan is a Chicago labor lawyer, with several books under his belt, including See You in Court: How the Right Made America a Lawsuit Nation, and Which Side are You On? Trying to be for Labor When It's Flat on Its Back. Geoghegan's thesis is very simple, but sweeping. His point is that a few legal mechanisms have driven the macro-condition of our economy and overall social structure, creating the utterly bankrupt condition we are in right now. Here's how it happened:

Labor Law Gutted: Employers have been steadily given carte blanche to dump union contracts, to abandon pension commitments, and to fire employees at will for collective action. Companies can declare bankruptcy, jettison their unfavorable employee baggage, and then reorganize under better circumstances. Laws against firing pro-union employees have not been enforced. The result of this is that skilled employees cannot sustain unions, and thus cannot force wage increases. This downward pressure on skilled workers ripples out across the whole economy, driving down the more vulnerable sectors. As Geoghegan points out, we thus have people working longer hours and working more productively, but making less money: "(T)he wage stagnation that resulted from from the inability to organize goes a long way toward explaining the current ssituation. People took their 'cut' of productivity by going into debt. You may object: "Why did people have to go into debt? After all, family income went up." That's true, but only because more family members were working -- and working longer hours. The income "gain" was illusory. The more hours people worked, the more they had to pay out in day care, in transportation, in eating at fast-food restaurants; that is, in outsourcing their private lives to vendors. I could go on about this: how we need more cars to get more family members to work, and so on. Let's just say that the longer we're away from home, the less we really take home at the end of the day. This growing gap between how much we produced and how much we earned led to a bizarre paradox: as the economy grew, individual people were actually becoming worse off. Even people who were making more money were living in a way that put them deeper into debt." (pg. 34)
"Legalization of Usury": Hand in hand with the crushing of labor power in courts and boardrooms, and the declining wages that resulted, was the opening of the floodgates on outrageous interest rates. Geoghegan highlights the landmark 1978 Supreme Court ruling in Marquette National Bank v. First of Omaha Service Corp, wherein the wise robed ones decided that no state could limit interest charged to its residents by financial institutions chartered other states. So declining-fortune workers could be gouged for whatever the market could bear on credit card and other consumer debt. "Now we're all shoveling billions into the banks, and there's no way working people who can't get a raise will ever climb out of debt" (pg. 35).

Geoghegan goes on to detail how these relatively simple legal issues give rise to a national economy that trades in manufacturing for finance, and a secure citizenry for a zombie army of debtors. With legalized usury, the financial sector "bloats up," as he puts it. "With no law capping interest, the evil is not that banks prey on the poor (they have always done so) but that capital gushes out of manufacturing and into banking. When bankers get 25 percent to 30 percent on credit cards, and 500 percent or more on payday loans, capital flees from honest pursuits, like auto manufacturing....What is history, really, but a turf war between manufacturing, labor, and the banks? In the United States, we shrank manufacturing. We got rid of labor. Now it's just the banks" (pg. 32). One key statistic is that by 2003, the financial sector accounted for 40% of overall US corporate profits, up from 18% at the end of Reagan's reign.

The whole thing is a self-reinforcing process. The courts strip labor of its power to organize for better wages. Workers thus need to borrow more money to make ends meet. The banks, free to charge whatever interest they want, are there to loan consumers that money at outrageous rates. The fantastic profit margins thus attract capital away from the paltry three or four percent that might come from financing infrastructure or other hard industry projects, and funnel it into the financial sector. The best and brightest young people. seeing the declining fortunes of skilled labor, go into careers that prop up the hallucinated "wealth" of investment banks and hedge funds. Everything is predicated on shuffling around that unrealistic and unsustainable 25 to 35 percent interest rate that ultimately rests on regular people having to continually borrow money to live their daily lives -- something made necessary by the courts stripping them of the rights to organize for better wages and preserved pension funds. A vicious cycle indeed.

This brings me back to Stewart and Cramer. At one point, Stewart asked Cramer on what basis he and other financial commentators thought that it was realistic for the market to return astronomical profits on essentially non-productive debt, derivative and other nebulous instruments. Cramer answered that the market had been returning those numbers steadily for seven to eight years. Exactly. The whole thing was really one giant ponzi scheme, in which Bernie Madoff was simply a more egregious example. The rest of the economic landscape was created out of squashed labor, legalized usury, and consumer debt that moved wealth from manufacturing to finance. I highly recommend Geoghegan's article to everyone. He says all this in a much better way than I ever could (thus the liberal use of direct quotations above).