If the economic numbers are to be believed the plunge of this downturn is over.  That precipitous fall that began in late August, accelerated through September, and continued unabated.   However, the consensus is that this is not merely a pause in the plunge; but it is also not a bottom.  We are not in a downturn that has a sharp bounce upwards, the consensus argues; but will, as with the last two downturns in the US, have a long period where the economy will scrape along the bottom.

For the average person, however, it is not going to feel like that at all.  Every indicator is that jobs are being destroyed at a record pace; and that the month of April, like the string of months before it, will see 500,000 to 700,000 payroll positions lost on a seasonally adjusted basis.  For the average American the economy is the labor market, and that is not about to see a roaring back the way the stock market has.  What the consensus is talking about is that the financial system’s willingness to do business with itself has been restored, and that the deep liquidity is willing to invest shiftable funds in the equity markets and into resources.

However, almost none of this is reaching down into the rest of the economy.  Credit cards are offering interest rates that are between 800 and 3000 basis points over the cost of funds.  Nor is there any relief for mortgage holders: cram down is dead in the Senate.  Nor is the price of health care dropping, and the price of education continues to march upwards.  These are not isolated: they are the rents that the middle class pays to be middle class: home, health care, education.

This reality, that the rent required of the middle class is going up  while their opportunities are stagnant, has been the theme of many writers.  It was the theme of Hacker’s The Great Risk Shift, the growing era of unease and insecurity.  An era where the "shared prosperity" of the past was at an end.  Daniel Gross has been arguing for years that by systematically underfunding the future, the United States had become a "Cram Down Nation."  While Senator Tester may say "A deal’s a deal," the reality is that blades are already being sharpened to axe the deals made with the middle and working class.  You are expected to pay the Chinese and Arabs back, in full, in the same coin lent.  However, your pension and social security and health care in retirement are negotiable.  Very, very negotiable.  And you aren’t at the table, but on it.

Now for the Catch-22 of these realities.  To get the economy moving again, there needs to be a return of credit to the consuming classes.  There needs to be, as Prof. Solow notes in his typically dry fashion, a willing lender and a credible borrower for that to happen.  To get credit flowing there need to be more credible borrowers; but with home equity collapsed and jobs continuing to evaporate, and with no final bottom yet established, there are fewer, not more, credible borrowers every day.  To get people back to work means pulling the unpayable loans off the books, and lowering interest rates.  To get credit flowing, there need to be more willing lenders.  But lenders are willing to lend right now precisely because they are getting enormous spreads.  To create more borrowers means cramming down loans; but then those loans have been securitized, and if the securities default, then the government will have to pay out on the Credit Default Swaps that will be triggered.  This is why there is public resistance to cramming down: people are already stretched by a generation of ever mounting middle class rents, rents that have run ahead of inflation for that generation.  While the public feels they might benefit by reorganizing loans, they know they will pay; and they have no ability to do so.  One of the best indicators of how little margin the middle class has, is the shrinkage of income which is truly discretionary: money that does not have to go to bills, taxes, and debt service.  The same thing has happened to the Federal government, and to state governments.  More and more, we must pay rent on money that was already lent — and spent.

So far the financial industry has gotten everything it has wanted: bailouts, free money, an end to mark-to-market.  The bankruptcy bill has been left untouched, regulation is stalled, the dollar is going to be kept strong, and there is no cram down coming.  It is a winning streak almost unparalleled in American politics: never have a group of people so reviled been so able to move their agenda through what is supposedly a hostile climate.  It has led one staffer on the Hill I know to remark that it is almost as if Wall Street executed a leveraged buyout of the Democratic Party.  But that’s an exaggeration, there has been a financial wing of the Democratic Party since the "Gold Democrats" of Grover Cleveland’s day.

But the financial forces are taking no chances.  Not only have they been lobbying with bailout money, two of the most visible thorns in their sides have been under almost perpetual attack.  One is FDIC chief Sheila Bair, the other is TARP overseer Elizabeth Warren.

Warren was appointed to TARP as part of a five member Congressional oversight group.  She came to the position with impeccable credentials — a public face and even some blogging cachet.  Out in the chattering classes, she was popular almost from the start.

In a world used to mealy-mouthed apology and weak statements, even on issues such as torture, Warren proceeded with a take- no-prisoners, tell-no-tales, and split-no-infinitives combination of law professorial precision, and populist bluntness.  She told the Secretary of the Treasury "People are angry."  She warned Congress that its moral authority rested on action.  Warren has not backed off even as questions about whether top Democrats have her back have surfaced.  Business Insider, sensing a political opening, accused her of "politicizing" her position and being a shadow Treasury Secretary.  Obviously what Warren did in a political sense is clearly worse than what, for example, Yoo and Bybee did in backing torture at the behest of their employer, the previous chief executive.

There have been no tea parties celebrating Elizabeth Warren, and she does not have a major network supporting her the way Rick Santelli and the Paulcolytes did in arguing that Americans should never-no-how pay for anything ever.  Warren’s credo is not divorced from fiscal or legal reality, the way that torture and tax cuts, the great gifts of the Bush administration to American life, were divorced from law and mathematics.  However, as lauded as she has been by those who know her work, she is almost invisible to the public, and to the Congress who she nominally is working to inform of the massive imbalance in the way the bailout has been handled.

Every post people ask me what they can do.  Well here is one thing that can be done right now.  Call up your Congresscritter on Monday, and ask "Where are you on Elizabeth Warren?  She’s helping us out here, you need to help her."  Just that.  Not much more, yet.  But at least that much.  Because if the forces of financial status quo know that they can mess with the tribunes of the middle class, they will inevitably exact more tribute from the middle class.

Elizabeth Warren didn’t just read the books about how the middle class is being crammed down, she wrote one.  She isn’t just talking about the problem, she put her professional neck on the block to do something about it.  Isn’t it time a few more people did the same for her?


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  3. Warren Buffett: Economy Needs Another Stimulus to Get It Up
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