America’s bubble economy has burst. No big deal. Not, at least, to politicos like Eric Cantor, the U.S. House of Representatives Republican whip. After all, as Rep. Cantor intimated last week, all good things must end, and this one hasn’t ended all that badly. In fact, he noted, 93 percent of America’s families are still running “current on their mortgages.”

Feeling better? Or do you crave the straight scoop, not happy talk, on the challenges ahead? Some of the straightest numbers we have, on the economy, come from researchers at the Federal Reserve. They’ve just released their latest. We have that story — and lots more — in this week’s Too Much.

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The Obama economic stimulus — complete with new limits on pay for execs at bailed-out banks — has now become law. But the bailout pay battle may have only just begun. Wall Streeters are already moving, behind the scenes, to water down the stimulus pay restrictions, and they’re counting on help from Treasury Secretary Tim Geithner, who opposed the stimulus pay limits in the first place. The stimulus, as enacted, gives Geithner “a year-long window” to write specific regulations to enforce the executive pay principles that Congress adopted. That creates some opportunity for mischief. The stimulus, for instance, bans “incentive pay” in certain bailout situations. But Treasury could gut this ban by defining “incentive pay” so narrowly that most “incentive” windfalls would go uncovered . . .

At least one key corporate lobbying group is warning business leaders that the executive pay limits now in place for bailed-out banks and corporations “could set a pattern for other companies at some future point.” The House-Senate stimulus negotiations, the Center on Executive Compensation noted last week, did strip out of the final stimulus a provision that would have capped all pay at bailed-out enterprises at $400,000, but that concept of capping executive pay remains “clearly in play.” Especially in Connecticut. Three state lawmakers there are cosponsoring a new piece of legislation that would deny “state assistance” to any corporation that pays executives over 25 times what the company's lowest-paid worker is making . . .

Meanwhile, over in the mutual fund industry, fund managers are grabbing everything they can while the grabbing's still good. Mutual fund executives aren't collecting any bailout dollars. But they are collecting big paydays — despite the huge losses that average Americans with investments in mutual funds are suffering. One Boston firm with 30 different mutual funds, Eaton Vance, ended fiscal 2008 batting zero. Every one of its mutual funds ended the year in the red. But Duncan Richardson, the firm’s chief investment officer, still walked off with $3.7 million. How can mutual fund managers be doing so well while mutual fund investors are doing so poorly? Mutual fund firms make their money off the fees they charge investors. Fee revenue keeps coming even when stocks tank . . .

Move over, Bernie Madoff. Make room for America’s latest billionaire con artist, “Sir” Allen Stanford, the Texas-born financier who ranked, just two years ago, 239th on the annual Forbes list of America’s 400 richest. Now Stanford is facing charges that he defrauded investors out of $8 billion. Can he beat the rap? Maybe. Look for Stanford’s lawyers to paint him as a soft-touch with a heart of gold. A case in point: Stanford, after dumping his girlfriend and two kids, shelled out $850,000 a year to make sure the children maintained their “privileged and luxurious lifestyle.” He even spent $6,000 on Christmas gifts for the children’s private school teachers . . .

The globe’s “gigayachts” have been streaming into the Persian Gulf the last few weeks, getting set for next month’s annual Abu Dhabi Yacht Show. The show's star? That figures to be the Alysia, a four-year-old “floating palace” that stretches the length of a football field. The proud owner: Dion Liveras, the top exec at Liveras Yachts, a Monaco-based firm that specializes in leasing vessels of distinction to seafarers of means. The five-deck Alysia, available for a mere $127,000 a day, comes with a crew of 34 and a five-star chef ready and able to whip up sit-down dinners for up to 36. Owner Liveras is predicting a big year for the Alysia in 2009. The world’s still teeming with people, he noted last week, who “have money and are willing to spend it.” Added the yachting exec: “Alysia was built before the recession, and she will be here long after it is over.”

Quote of the Week

“At a time when millions of Americans are losing their jobs, their homes and their health care, it is appalling that more than 50,000 of the wealthiest among us have actively sought to evade their civic and legal duty to pay taxes.”
John DiCicco, U.S. Justice Department, February 19, 2009, as he filed suit to gain the names of Americans who have stashed over $14.8 billion in secret accounts with Swiss banking giant UBS

New Wisdom
on Wealth

Nomi Prins, Bonus Bull, Mother Jones, February 17, 2009. Why the Wall Street argument against bonus caps holds no water.

Larry Adelman, Is inequality making us sick? San Francisco Bay Guardian, February 18, 2009

Gretchen Morgenson, After Losses, a Move to Reclaim Executives’ Pay, New York Times, February 22, 2009. An analysis of the $464 million in “performance pay” execs at seven failed financial institutions have collected just since 2005.

America's Bubble Economy: A Last Look Back

Every three years, researchers from the Federal Reserve Board fan out all across the United States to figure out just how well America’s families are doing financially. The researchers knock on about 4,500 doors — and conduct incredibly detailed interviews that probe every facet of what families make and what families own.

Eventually, the data from these interviews go public as the Federal Reserve’s Survey of Consumer Finances, the nation’s best statistical snapshot — by far — of economic life as families actually live it.

The latest edition of this always fascinating Fed survey, released just over a week ago, covers 2007. A great deal, of course, has changed economically since 2007, the last full year before the U.S. economy plunged over the cliff. Has this nose-dive left the Fed’s new 2007 data hopelessly outdated? Should we just stick this new Fed survey release up on a shelf someplace and forget it?

Not so fast. We now have an economy that desperately needs fixing. But we can’t fix anything if we don’t understand what went wrong. The Fed numbers from 2007 can help in that understanding.

So what can we learn from the new Fed data? Simply this: In a deeply unequal society, with income and wealth concentrating ever more furiously at the top, debts will mount and speculative bubbles will inflate. In the end, the bubbles will pop. The inequality will always pop them.

The United States, the Fed data make exhaustively plain, entered the 21st century as an undeniably unequal place and proceeded to become even more unequal.

In 2007, families in the middle of the U.S. income distribution — households taking home between $36,500 and $59,600 — averaged $400 less in income, after inflation, than they collected in 2004.

Families on the upper rung of America's economic ladder, by contrast, realized a significant income uptick over that same time span. The nation’s most affluent 10 percent — families making over $140,900 —  saw their incomes jump $65,800, on average, to $397,700.

The Fed’s new figures on family wealth don’t appear, at first glance, to tell the same story.

The Fed, to be sure, did find a substantial increase in net worth — that’s the sum total of assets minus debts — among America’s most affluent. In 2007, the highest-income 10 percent of U.S. families held nearly double, after inflation, the wealth they held in 1998. Over nine years, these high-income families saw their median net worth jump 94 percent to $1.2 million.

The net worths of average American families didn’t come close to matching that increase. But middle class net worths did jump, and significantly so. In 2007, the typical American middle-class family had a net worth of $88,100, 30 percent more, after inflation, than that family's net worth in 1998 and 12 percent more than that family’s net worth in 2004.

And that raises an obvious question. How could average family net worth be rising at the same time income — for average families — was stagnating? No mystery here. Net worths were rising because the assets average families owned, most notably homes and stocks, were bubbling up in value.

Share price, by one key measure, rose 41.7 percent from 2004 to 2007. Home prices, in these three years, did drop in some states — Michigan homes, for instance, lost 8 percent of their value in 2007 — but, on a national basis, home values were still sprinting along.

Thanks especially to this bubble in home prices, nearly three-quarters of U.S. families, 72.4 percent to be exact, ended 2007 sitting on “unrealized capital gains” that added, for the typical family in this bubbling cohort, $75,000 to family net worth.

These tens of thousands masked a far more significant economic reality: Average American families may have been becoming “richer” on paper. But numbers on paper don’t pay the bills. Only real dollars pay bills, and average families, their incomes stagnating, didn’t have them.

So average families borrowed, the new Fed data show, at record rates. Between 2004 and 2007, the average unpaid balance for families with credit card debt soared 30.4 percent, to $7,300.

Economists have a yardstick they use to identify at what level debt becomes dangerous. If your debt payments total over 40 percent of your income, they posit, you’re risking big-time trouble.

In 2007, over one in four households in the nation’s poorest fifth of families — households making less than $20,600 — faced debt payments that equaled over 40 percent of income.

Fed researchers, in 2007, found dangerously high debt levels even among presumably “comfortable” families. Among families making between $59,600 and $98,200, over one in eight, 12.7 percent, were devoting over 40 percent of their incomes to paying off debt.

We now know how the rest of this debt story played out. Crushing debt burdens would go on to overwhelm American families by the millions. Their subsequent defaults on mortgage payments knocked down Wall Street’s highly leveraged house of securitized cards — and crashed the economy.

The average net worth of American families, the Fed estimates, has dropped 22.7 percent since 2007, more than enough to erase virtually every dollar in net worth gain average families have registered over the last decade.

And families at the top, how are they faring? We won’t have a Fed perspective on how America’s truly rich are doing until later this winter. Survey of Consumer Finances researchers typically don’t release any analysis of top 1 percent family fortunes until weeks after their initial report appears.  

This year, even more than most, that top-end analysis will be eagerly awaited.

Repeating History, Reversing History

Mandate for Change: Policies and Leadership for 2009 and Beyond, edited by Chester Hartman. Introduction by Robert Borosage and Katrina vanden Heuvel. Lexington Books, 473 pp.

No one will ever be able to pinpoint the exact moment, a generation ago, when the United States started becoming staggeringly unequal. But we can identify several key episodes that shoved America's emerging inequality into overdrive.

One came in 1980, right after Ronald Reagan’s election as President, when the nation’s top right-wing think tank, the Heritage Foundation, flooded Washington with a 1,100-page paperback compendium of public policy ideas, a “magnum opus of wonkery” that furnished, as one news report put it, “a blueprint for grabbing the government by its frayed New Deal lapels and shaking out 48 years of liberal policy.”

And shake the incoming Reagan administration did. The Reagan White House would put into play nearly two-thirds of the recommendations this blueprint — entitled Mandate for Leadership — advanced. By 1989, the New Deal would never be deader. Taxes on the rich would never be lower.

Today, decades later, we have a promising new President — and a new administration with the unenviable task of picking up the pieces from an economic collapse that inequality made inevitable. This administration now has some help: a new think tank magnum opus, a blueprint for getting the United States back on a progressive, substantially more egalitarian track.

This new volume, produced by the Institute for Policy Studies in Washington, D.C. and not so coincidentally entitled Mandate for Change, covers nearly every major element of domestic and foreign public policy. Over 70 different activists and academics have contributed chapters, with each contribution offering specific policy prescriptions for change, a rationale for those changes, and resources for readers interested in learning — and doing — more.

Several of the chapters, including one co-authored by the editor of Too Much, directly address the importance of slicing America’s preposterously wealthy down to more democratic size.

Our new President, Mandate for Change at one point notes, “will clearly face enormous resistance from the rich and powerful should he make a serious move to reverse our national slide into extreme inequality.”

The good news? President Obama, notes Mandate for Change, won’t have to hope for the support of the American people. He “will have it.”

And if the proposals in Mandate for Change have as much of an impact on Obama's White House as Mandate for Leadership, three decades ago, had on Reagan's, we’ll have a new nation.

Stat of the Week

The individual and corporate tax provisions in the economic stimulus package signed into law last week, says a Tax Policy Center analysis, will mean lower taxes for 96.9 percent of America’s taxpayers. The biggest savings — in percentage terms — will go to low-income households. In 2009, taxpayers in the nation’s poorest fifth will see their overall federal taxes drop 4.4 percent. The nation’s highest-income taxpayers — households in the top 0.1 percent — will see their average tax bill drop 0.4 percent. But this tiny percentage cut will translate into appreciable dollars, a tax savings of $39,350.

Too Much is published by the Council on International and Public Affairs, a nonprofit research and education group founded in 1954. Office: Suite 3C, 777 United Nations Plaza, New York, NY 10017. E-mail: editor@toomuchonline.org.