About that commodities bubble…

Two weeks ago I regretted, with some relief actually, that my earlier predictions about a bubble in commodities derivatives seemed to have been inaccurate. More to the point, the oil price collapse triggered by the Saudis had not led to a broader avalanche in other commodity prices or the failure of any big hedge funds.

I may have jumped the gun.

Collapsing oil prices may be starting to kick off just the kind of broader financial crisis that I had worried about. The first evidence is beginning to show up in prices of food, aluminum, copper and other goods. This could get ugly, but it might yet fizzle out.

The problem has been evident for a long time. Commodities prices have been on a steady upward swing since we expanded speculators’ access to the market fifteen years ago. This inflation has happened in spite of steadily rising surpluses and modest demand in almost all of these commodity categories. As I wrote three and half years ago:

We aren’t talking about our supply problem because our economic reasoning says that it must not exist.  But we have an oil glut, just like we did the last time prices spiked in 2008.  So if the world has more oil than it can burn, why are prices so high?  You could have asked that same question in 2008, and you could ask it about any number of commodities that were bubbling then from iron to houses.  The answer then is the answer now.

The gist of the original argument was that efforts to open up commodities markets to broader participation by speculators had created some perverse effects. Basically, it had tamped down the notorious beta of those markets (the vast, rapid value swings), but in the process had created extraordinary risk.

Sloppy efforts at deregulation in 2000, and again across the Bush years, had made the markets more accessible to institutional traders and derivatives speculation. This had, as predicted, flattened out some of the previously troublesome unpredictability of those markets.

The problem was that the new structure of those markets created an inflationary bias. Big institutional traders don’t have the freedom to take heavy short-bets. They had a bias toward long trades that prop up asset prices long past the point when the market fundamentals have shifted away from them.

My argument, basically, was that 20th century regulators were right. Commodities markets are too inherently volatile to be opened up to speculation by day traders, pensions, banks, and sovereign wealth funds. If they are going to participate, they should not be publically insured and they should have no access to derivatives.

When combined with the rise of derivatives, CDO’s, CDS’s and other largely unregulated forms of investment insurance, commodities deregulation created three conditions:

1) A market that can’t react quickly to changes in supply and demand, which means prices tend to balloon long after real value has disappeared.

2) Forms of leverage that create no economic value while exponentially magnifying the cost of a bad trade.

3) Publicly insured institutions participating both in inflated commodities markets and hyper-dangerous derivatives trades based on those markets.

Once again, just like the last decade, we’re left with financial institutions critical to the survival of global capitalism risking their solvency on trades they don’t understand based on commodities they don’t intend to use. At least this time the exposure is slightly smaller. Nearly every American family was affected by home prices and the mortgage market. This crisis is modestly more limited in scope.

If my predictions were right then the collapse of one broadly owned commodity should create losses that force investors to sell off others as well, without any connection to a broader economic change. That’s pretty clearly happening as every commodity, even food, has started a decline.

The next step should be a collection of moderate to large hedge funds collapsing under their investment losses. That hasn’t happened yet. If we don’t see some headline-grabbing fund failures by about the end of February then this whole mess may prove to be relatively localized and I may be wrong.

Even if broader institutional failures materialize, a few firewalls might hold. For the theory to hold, then the failure of a few hedge funds should be followed by the failure of one or two major financial institutions. Their collapse should be due to the size of their CDO obligations against failed commodities bets. Again, if these institutions have figured out how to manage and regulate their derivatives trading better than they did in the last decade then I was wrong and this might not materialize. Maybe they will just experience a couple of bad quarters before stabilizing.

If commodities derivatives create yet another economic crisis, then we deserve it. We had every opportunity to shut down the perfectly pointless though lucrative speculation that created the last crash. Blame Wall Street all you want, but they don’t make the laws. Merrill Lynch doesn’t cast a single vote.

By the way, the budget bill passed by Congress last week contained a minor provision, pointed out by Senator Warren, which strips the Dodd-Frank financial regulations of just about the only meaningful provision it contained. Once the law takes effect then publicly insured banks can resume derivatives trading on their own books. America, you’re welcome.

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Posted in Economics

Did Ted Cruz just lock up the nomination?

Ted Cruz is officially the most hated man in Washington. His effort to hijack the budget deal was doomed from the start, but that didn’t deter him from engineering a high-profile political stunt to obstruct the process and gain a few minutes of attention.

What really pushed matters over the top was the way he did it. His procedural move not only opened the door for Sen. Reid to get several of the President’s most controversial appointees approved, it blocked the Senators from leaving for the Christmas recess. Instead of taking off with their work completed, they got to experience nine grueling hours of non-stop procedural votes – for nothing, on a holiday weekend.

Why would someone with Presidential ambitions deliberately piss off every influential person in Washington? Because Ted Cruz doesn’t care whether our Federal government ever accomplishes anything constructive again. He’s betting that Republican voters don’t either. He’s probably right.

This may have been the most frighteningly clever thing the man has done so far in his career. It was destructive of Republican goals, personally insulting to his colleagues, and soullessly self-interested. It was a perfect representation of the forces that threaten to end our experiment in self-government. Come next fall no Republican candidate will be able to say a word about it.

The base wants a confrontation with President Obama, who might or might not be the the Anti-Christ in their view. Next fall when twenty or so random nutjobs stand on a debate stage, only one of them will be able to say with absolute, photographic proof that he laid everything on the line to stop Obama from opening a pipeline of dirty, disease-ridden, criminal, terrorist Mexicans to your neighborhood.

His opponents will be forced to claim that they are more “reasonable” than Cruz. They will have to convince primary voters that they are more “electable” than Ted Cruz. They will have to agree that they support Cruz’s policies while trying to convince a frothing grassroots base that their methods of achieving those policies will be more “effective.”

None of them will have the balls to claim that Cruz is wrong, dangerous, and more than slightly nuts. They will have to try to attract more Republican voters by offering to be just like Ted Cruz, except more reasonable, electable, and effective. Snoooozzze.

Meanwhile Cruz can say that he went to Washington and did exactly what his batshit crazy supporters asked him to do. And unlike any other candidate on that stage he will be able to prove his claims. While other candidates try to reason with, pacify, or educate Republican primary voters, Cruz gets to say that he pissed off every powerful figure in Washington to fulfill his promises. This is what might have happened if Huey Long had lived a bit longer.

Never once has Cruz compromised his “principles” to make anything function properly. Here is a man who will do what the base wants no matter how stupid or catastrophic it may be. Come next fall we’ll get our chance to see what Cruz was trying to accomplish this weekend. Barring some major personal meltdown it’s tough to see how any Republican can hope to challenge Cruz to become the standard-bearer for the Neo-Confederate renaissance.

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Posted in Election 2016, Neo-Confederate, Republican Party

What looting looks like

Fox News on crack

Fox News on crack

Over the past few weeks Fox News has been crammed with images of looting. Only one kind of looting by only one kind of looter will show up there – the kind that has the least effect on society, committed by our least powerful citizens that nonetheless generate the deepest innate fear in old white people.

Images of black men taking stuff work like crack on certain brains. Many of us have evolved to see an entire movie in that one picture, and it’s a racist horror flick.

The emotional response to those pictures plays a vital role in obscuring the obvious truth behind them, the reality we must grapple with if we want to accomplish anything useful over the course of our generation. America has a serious, long-term problem with looting and we are utterly obvious to its shape and its implications.

One picture more than any other summarizes the looting that limits our economic potential, undermines the social compact, and leaves us struggling to compete in a globalized economy driven by human capital. Real looting, the kind that reshapes our communities and blunts our national potential looks like this:

From Vox and the Pew Research Center

From Vox and the Pew Center

The spectacular wealth gap between white and minority households is the lingering fingerprint of generations of systematic, legally sanctioned looting. That looting has not ended. We are no closer to acknowledging it or doing anything about it than we were a generation ago.

Capitalism does not thrive in an atmosphere tainted by violence and extortion. Wherever the parties to a potential transaction are operating at a permanent, systematic power disadvantage that cannot be remedied by personal efforts to improve the value they bring to the transaction, capitalism will fail to deliver the best potential outcomes. That’s what is reflected in our statistics on wealth accumulation. From Ferguson to Cleveland to Staten Island we are seeing outcomes that reflect the realities in that graph.

What would the American economy look like if there were no wealth gap between white and minority households. When we think about that this country needs in order to produce greater economic growth and prosperity, that should be the first idea that comes to mind.

We have made progress in dismantling the legal and political infrastructure constructed across hundreds of years in this country for the purpose of looting wealth from minorities. Our future potential will be defined by our continuing progress toward that goal. Whoever claims to care about business, innovation, economic dynamism, and America’s continuing global leadership is blowing hot air unless they are aggressively committed to dismantling the institutions that loot minority communities and thwart their efforts to participate freely in our economic and political life.

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Posted in Civil Rights

The unemployment rate is overrated

This month’s unemployment report was essentially the same as the last few dozen before it. Unemployment ticked slightly downward again, but much of that decline came from people “leaving” the labor force.

Labor force participation peaked in the ’90’s and has been in decline ever since, but the aggregate numbers hide a long secular trend. We should be re-evaluating the emphasis we place on that metric as the meaning and significance of employment, both culturally and economically, has been changing for a very long time.

When you look at employment statistics over the long term you see modern post-industrial capitalism at work, or perhaps more accurately – not at work. We’ve been measuring labor participation since the ’50’s. White males are the only segment of the workforce that has had full access to labor markets across that period, so looking at their participation rates gives the only indication of long term trends.

Labor market participation by white males has been in steady decline for as long as we have measured it. Our workforce is shrinking because of a relentless rise of affluence and automation that has been in motion for centuries now. Menial work is steadily disappearing. The careers that remain available are generally much more highly compensated, start later and end earlier in life. In short, the most successful people in the work force are working less than ever. Fewer and fewer job options of any kind remain for those who do not snag one of those careers.

The Graph:

US. Bureau of Labor Statistics, Civilian Labor Force Participation Rate [CIVPART], retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/CIVPART/, December 10, 2014.

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Posted in Economics

Predicting the 2016 GOP nominee

For more than half a century the Republican nominating process has been the avenue through which the party chooses the nominee for the next election. This year’s nominee is never in doubt. Whoever finished second last time is this season’s nominee.

If no such person is running, as in ’68 and ‘00, the nominee is appointed by the party leadership and presented for ratification in the primary process. This is no historical accident, but rather a product of the institutional structure of the party.

That institutional structure is breaking down. Priorities and practices that took hold when the party was organized around northern commercial interests are being dismantled as the Dixiefication of the party intensifies. Republicans will enter the next nominating cycle without a presumed nominee for the first time in half a century.

Technically, the second place finisher in 2012 was Rick Santorum, but he was little more than the last clown out of the car. It’s not clear he’ll even be able to muster a challenge in ’16. No frontrunner is emerging from the party’s elite as both Bush and Christie have failed to assemble the support they would need to overcome massive resistance from the Southern rank and file.

In 2016, for the first time since 1964, the Republican grassroots will probably choose the party’s nominee for the White House. Get ready for an ugly campaign.

Handicapping the field in such a complex race isn’t easy. Adding to the complexity is the fact that Republicans will likely be running on two tracks that will not join up until late in the spring.

Track one, which we’ll call “the Gray Round,” will pit the party’s remaining credible governing figures against each other. The Gray Round is likely to include Chris Christie, Jeb Bush, Rob Portman and John Kasich.

Their job is to lay low and ride out the early stages of the campaign. Whichever one of them can consistently poll in the high teens or low 20’s while retaining enough money to stay in the race until March will outlast the others and face off in the late spring against whoever wins the other track.

There has never been a Gray Round competition in the primaries before and there might not be one this cycle. The candidate in that role always started the race in that role and has never been forced to compete for it. There will only be a Gray Round campaign if Christie and Bush choose to run, which remains in doubt.

Track two will be the Race for the Base. There could be fifteen or more candidates in this TLC reality show, including Cruz, Paul, Perry, Walker, Huckabee and a rotating cast of Fox News guests and AM radio hosts. The central question of the 2016 nominating race is this – Can the base select a leadership figure that won’t self-destruct across two whole weeks of media scrutiny?

Anyone from the Gray Round is capable of becoming the nominee. Their strategy is to outlast the other flavorless old white guys while counting on the Fox News zombies in the party base to split their votes among a rotating series of incompetent clowns.

Across the coming year and through the first few months of the primaries, the Gray Round candidates will be competing for the support of major donors, Republican Governors, and pundits. Getting to March in the Gray Round isn’t about votes, it’s about organization.

A successful Gray Round winner will have consistently finished second or third all the way through Super Tuesday on March 1. He will have lost to a rotating series of first place finishers, half of whom will be out of the race by March 8.

Gray Rounders are counting on each one of the successive Race for the Base challengers to disqualify themselves with nasty racist comments, abortion gaffes, comparing Democrats to the Nazis, or that thing they may or may not have done with that woman that time. That strategy may not work this time.

First, without a clear leader going into the campaign, Gray Rounders may be forced to split too much of their energy. Unless Bush is the sole competitor there as Romney was in ’12, the strategy may collapse.

Worse, none of the Grays have any hope of reconciling with the base. No matter how nutty or incompetent the base favorites prove to be, the grassroots is screaming for a candidate that represents their worse impulses. They are unlikely to settle for another Romney.

Second, for the first time ever there are some minimally competent political figures competing to lead the party’s loony wing. Ted Cruz may be the smartest Republican to ever go after the paranoid bloc. He is as disciplined and determined as he is dangerous.

Rand Paul, if he can assume control of his father’s political organization, will have a potent body of grassroots support to take him through the campaign. And Scott Walker has just survived his third close campaign in three years in a solidly blue state. This corps is a cut above the Ron Paul, Bachmann, Cain rabble that Romney faced in 2012.

The Gray Round strategy has probably run its course. This is the cycle in which the new base, Southern, rural, fundamentalist and aging, may finally displace the old northern commercial base that defined the Republican Party for a century.

There is a narrow way that Jeb Bush could take to win the nomination and give the Republicans a credible shot at the White House, but he is unlikely to go that route. It runs against his personal temperament and every value that shapes a traditional Republican outlook.

He could do what Jon Huntsman refused to do in 2012, and combine it with an unprecedented outreach in minority communities. That’s a strategy that could win while changing American politics, but he’s probably not that guy.

Barring some bizarre breakdown on the Democratic side the ’16 Republican nominee has virtually no shot at the White House. Nevertheless, this race matters. Winning the 2016 nomination will probably grant the nominee powerful influence over the party structure at a critical moment.

A winner from the base could acquire enough leverage to squelch efforts to broaden the party’s appeal, instead accelerating the concentration of the party’s power in Dixie and further divesting the party from any interest in national politics. A base winner will put the party on the fast track to some kind of regional split. As dangerous as that sounds, it’s probably inevitable. It’s probably best that it happen sooner rather than later.

Given all of the forces at play, I’ll go out on a limb and say that Cruz is the most likely nominee. What do you think?

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Posted in Election 2016

Will oil prices pop a derivatives bubble

It’s time to revisit an old prediction. Years ago I speculated that the structure of the derivatives market was inherently inflationary. The premise was that the massive run up in commodities prices between 2002-07 and right after the crash was a function of the market structure not market forces.

If I was right, then the collapse in oil prices we are experiencing now should be enough to cause an economic avalanche as over-leveraged derivatives reverse that inflationary trend very suddenly. In other words, over the next couple of months we should see a surprising collection of otherwise healthy major financial institutions announcing losses that start relatively minor and keep adjusting higher and higher until they become incalculable.

At first glance it looks like I was probably wrong. For starters, the collapse in gold prices this year should have been enough to expose this problem, though gold is certainly a more niche market with fewer broad economic implications.

Also, there are no early warning signs of trouble. No banks adjusting their earnings projections or major hedge fund collapses. At least not yet.

We have seen a remarkable increase in hedge fund failures, but those appear to have more to do with consolidation than bad bets. It looks like lots of people are abandoning smaller hedge funds for larger ones.

We’ll see, but at first glance it looks like my take on the structure of the derivatives market may have been off.

Posted in Uncategorized

How Bruce Rauner could “Shake up Springfield”

raunerCongratulations, Governor Rauner. Having gained barely 50% of the vote, you are about to become Illinois’ first Republican Governor in more than a decade. That’s the good news for the Illinois GOP…all of it. Here’s the rest of the picture.

You were the only Republican to win statewide. Democrats retained their veto-proof majority in the State Assembly. You have no political leverage, no established constituency in either party or in any geography, and no experience in Springfield.

Investing heavily in an effort to gain a foothold in Chicago’s black neighborhoods was a great idea for the 2014 campaign, but it failed. Your support in the black wards was about as close to zero as it is possible to get in politics. Remember Rev. Meeks? You won 3% in his home ward. Earning black votes will take more than showing up. To be credible, you will have to change the Republican narrative in a meaningful way.

Your opponent in the last election was astoundingly unpopular and ineffective. As the second most vulnerable Republican Governor in the country (that guy in Maryland is out in front by a mile), you can be certain to draw a strong challenger in 2018. Unless you can figure out what failed in Chicago, and do it soon, it is difficult to imagine how you can hope to influence Illinois politics in the slightest manner before prematurely returning to private life in 2019.

Perhaps what Illinois Republicans need is a man with nothing to lose.

What if there was one move that might fix what failed in your 2014 campaign? What if that move could also scramble the poles of Illinois’ partisan alignments so dramatically that the whole structure might crack? What if that one move cost $0 and bypassed Madigan and Cullerton entirely, requiring no action by the State Assembly? Would you be willing to do something honest, courageous and impossibly bold that might change everything for Illinois, reshape partisan politics, and brighten your fortunes in Chicago and Springfield while costing you nothing?

Gov. Rauner, do I have your attention?

Within a few weeks of the inauguration and prior to the debut of your legislative agenda, go to Chicago’s Lawndale neighborhood. Stand up in front of the cameras and tell the truth about what happened to that neighborhood. Speak honestly about blockbusting, redlining, the Contract Buyers League, and the institutional racism that looted an entire generation of black wealth, turned working class whites into suburban refugees, and transformed a thriving Chicago neighborhood into a war zone.

That’s all. No need to use that platform to announce a policy initiative or donate money to a credit union. No need for an awkward apology. You did not commit the acts that ruined Lawndale and you can’t change what happened. Just say what everyone in Chicago already knows but no Republican, and few white Democrats, will openly acknowledge.

It sounds like a small thing, but if it was a small thing the idea wouldn’t make you so uneasy. In fact, such a move would be huge, so huge that it could recast everything you propose to do in Springfield and change the basic premise that defines partisan alignments in Illinois.

Republican orthodoxy states that Chicago’s black wards are poor because of government anti-poverty programs and a “culture” that “traps” them in poverty. This is convenient, false and insulting. It is convenient because it implies a policy response that fits wider Republican priorities. It is insulting because it blames the victims for conditions we placed them in. It is false because only a lie can shield us from confronting a shameful history.

Needless to say, it is a dead appeal and standing next to Rev. Meeks will not cover its odor. Whether you embrace that ideology or not, it will hang around your neck next to your Republican label unless you reject it explicitly.

Any plan you may have to impose fiscal discipline in Springfield will require you to weaken the power of public employee unions. Any plan you may have to bring hope and economic progress to Chicago will force you to confront an entrenched city bureaucracy that traps Chicago’s low income families in permanently under-performing schools.

In both battles you will be cast as the disinterested wealthy tourist threatening to destroy institutions that protect the livelihoods of working class union households. Fail to change the narrative and you will accomplish nothing and return promptly to the private sector.

Unions provide workers with higher incomes and job security. They impose costs not only in wages, but in inertia, making it difficult for a unionized industry to adapt to changing conditions and serve its customers Traditionally the costs of a union are born by wealthy capital owners and the benefits flow to lower income workers who otherwise have little access to power and limited opportunities to support their families.

Now turn those conditions around. What happens when the beneficiaries of the union are college educated, sophisticated white collar workers and the people bearing the cost of unionization are politically powerless and economically exploited? What happens now is what happened then. African-Americans and other low-income, under-represented constituencies find themselves on the losing end of the bargain.

Telling the truth about what happened in Lawndale and elsewhere across Chicago in the age of blockbusting opens the door to a very different narrative about the challenges Chicago faces now. Back then African-Americans with no reliable access to justice were systematically looted by cynical realtors and lenders. Working white families with little money and little access to justice were victimized right along with them as their racist fears were exploited and their neighborhoods torn apart.

The culprit back then was conventional racism, aided by laws and institutions that blocked African-Americans from gaining access to justice. Talking about what happened in Lawndale half a century ago opens the door to understanding one of the most miserably frustrating political and economic problems of our time – racism without racists.

What traps minority students in underperforming Chicago public schools is best understood as institutional racism. There might not be one person in the entire Chicago bureaucracy who possesses a deliberate intention to victimize black students, yet those students are smothered under the weight of institutions that devalue and disenfranchise them for their race while serving the interests of others.

Every family in Chicago’s collar counties takes for granted the influence they possess over their local schools. They can select and replace school board members from their neighborhoods. A Chicago family has no similar influence over their schools. Board members are all appointed by the Mayor of America’s third-largest city. No ordinary Chicago family is going to influence a board member’s replacement by hosting a candidate coffee in their living room as their suburban peers regularly do.

Black families in Lawndale in the Fifties and Sixties had their capital and power drained away to serve the interests of real estate speculators. Black families in Lawndale today have their access to the lowest rungs of our economic ladder lifted away from them to protect the interests of bureaucratic institutions that feed on their disenfranchisement. What happened in Lawndale then is what’s happening in Lawndale now. So why do Republicans find this so difficult to discuss?

Comedian Chris Rock once said that black Americans have a very complex relationship to patriotism. America for them is like the uncle who paid their way through college, but molested them. For too many years Republicans have been like the family who invites the rapist to Thanksgiving while hushing up what happened. It helps everyone avoid an ugly confrontation, but the truth seethes and the victims continue to suffer.

Republicans do not need this legacy. Democrats bear far more direct responsibility for discrimination and its aftermath. Here in Illinois they still benefit from that heritage. Tell the truth and break the cycle.

Let’s be clear, you need not mention unions or CPS or any specific policy position in your Lawndale speech. It is better that you don’t. The theme of that speech can be both historical and forward looking without tying it to a specific agenda. The gravity of the moment will come from seeing a wealthy white Republican finally stand up in broad daylight and acknowledge that systematic looting, not welfare or rap music, decimated Chicago’s old black middle class.

When Reagan visited the Berlin Wall he didn’t introduce any radical new policy positions or make any threats. The simple observations he shared were only remarkable for the refusal of so many others in power to candidly acknowledge them.

Let others connect the dots. Such a speech could gain national attention while laying the groundwork for a new narrative. In a State Assembly over which you have no influence and lack the power to even carry a veto, you could effectively challenge Speaker Madigan to “tear down this wall.” In so doing, you might open up new avenues for credible Republican urban policy and transform the political relationship between minority groups and the dense, unaccountable bureaucracies that “serve” them.

Governor Rauner, in your campaign you promised to “Shake up Springfield.” You earned your shot, just barely. Go big or go home.

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Posted in Civil Rights, Race, Republican Party, Welfare State

A vicious cycle of looting in America’s cities

How did Washington DC’s Anacostia neighborhood become a festering slum and why has it become trendy again? What can that cycle tell us about events in Ferguson, Missouri?

Almost sixty years after the murder of Emmitt Till we continue to murder young black men for reasons we barely understand and seem powerless to stop. We are in broad, national agreement on our desire to free ourselves from racism, yet racist ideology still distorts our best efforts at political and economic progress. Only by confronting this history and recognizing its continuing hold on our culture can we neutralize it and move on.

Blight-ridden stretches of our inner cities are being restored to their former splendor, but those burned out hulks have a crucial story to tell. Before the last crack house in Chicago’s West Town becomes a yoga studio we should stop to bear witness. The history of these troubled battleground neighborhoods holds clues that could help us understand our illness and its cure.

Picture if you will, a thriving working class neighborhood in a busy northern city. The year is 1950 and the Supreme Court has recently struck down deed restrictions that block African-Americans from purchasing homes in this neighborhood. An opportunity looms. Someone is going to seize it.

Black neighborhoods are severely overcrowded due to a history of racist restrictions and informal practices that prevent them from buying outside their neighborhoods or building new ones. The most affluent black families are ready to take advantage of the new opportunity, but banks still will not lend to them and very few realtors in white neighborhoods will broker a sale.

A new business model emerges. It requires a very small capital investment and a nasty streak of cynicism. It works like this.

First you purchase a home in a white neighborhood and resell it to a black family. The black buyer is forced to buy the home at a steep premium, sometimes referred to as the “black tax,” necessary because their access to brokers and capital is blocked.

Since banks will not finance the transaction, the seller can further profit by self-financing. The black family regularly brings a 10-20% down-payment, but they do not receive a conventional mortgage. They obtain no ownership interest and gain no equity in the property until (unless) they complete their 30 years of mortgage payments on time. They have no access to foreclosure protections or redress beyond what is available to renters.

If that’s where the grift ended then the story of African-Americans’ progress into the middle and upper classes might be completely different. We would recall a tough, but generally successful climb against long odds as a formerly oppressed group made their way into the American mainstream. That’s not where the grift ended.

There was good money to be made helping the most affluent black families find new homes in better neighborhoods. There was spectacular money to be made by extorting those vulnerable families, shaking down powerless low-income white families, and converting successful working neighborhoods into smoking holes of blight, crime and misery.

After moving one successful black family into a financially precarious new existence in a white neighborhood, the grift entered a new phase often called “blockbusting.” With the arrival of a black family on the block, nervous whites worried that blacks would ruin their neighborhood. The blockbusters worked hard to exacerbate and capitalize on those fears.

In some cases they would hire African-Americans to walk the block, dressing and behaving in ways meant to feed cultural stereotypes. A poorly dressed black woman would walk down the sidewalk with several crying children. A black man would cruise the street playing loud music. The blockbusters would then go door to door at the white homes explaining that black families were moving in and making low-ball offers for their houses.

What followed was a kind of Dutch auction for the remaining homes on the block. Whoever responded to the racist appeal first got the best price. As the process continued prices of white-owned homes on the block would plummet. White families faced a stark choice. Get out fast or see your investment in your most valuable asset ruined. As the process peaked, there are examples of brokers buying an undervalued home from a terrified white owner for $10K and selling to a black family for $25K in the same week.

Ironically, the black families moving in were the most educated, affluent and successful members of their communities. Generally, they were far more educated and accomplished than the people they were replacing. That dynamic wouldn’t last long. As the grift continued it exacted a toll.

Black families with no opportunity to gain justice through the courts and few economic options poured every available resource into a desperate bid to gain access to solid neighborhoods and schools for their children. Some would survive the machine of piracy and exploitation into which they were being fed, but they were the exceptions.

If they were able to make their very steep payments, they would soon be presented with “code violations,” which would render their homes legally uninhabitable if not repaired. Often these were outright frauds. In other cases they were organized in collusion with local authorities in a misguided effort to stop the blockbusting. Families that had strained and borrowed to the very limit had few resources available to deal with any eventuality. Repairs faltered. Both spouses took multiple jobs. The fabric of a vulnerable community unraveled.

Default rates were high. With no legal recourse, black families consistently lost their homes along with capital carefully accumulated across multiple generations. The broker simply removed the family, retained for himself whatever equity had accumulated and repeated the process.

By the mid-‘60’s the prime opportunity to profit from this scheme had passed. Most of the black families with enough resources to be looted had been looted. In the turned neighborhoods, a few survivors kept making payments and working hard to hold their homes. The rest had reverted to being renters, sometimes in the very same home they had originally “purchased.” Remaining properties that could no longer be flipped to vulnerable buyers with a little money became slum rentals or were often simply abandoned.

By the mid to late ‘60’s when the Federal government finally intervened to give African-Americans protection from housing discrimination this cycle had largely completed. Discriminatory lending practices still would not be outlawed for another decade. After they were finally barred by law, discriminatory lending would still linger in practice for at least another decade and a half.

Chicago’s Lawndale with its beautiful stone mansions was by the ‘70’s a dangerous ghetto. Black families who invested their savings in the neighborhood were once again trapped in a slum. The accumulated wealth of an emerging generation of black elites had been systematically and legally looted.

The working class whites targeted in the scheme had lost their communities and much of their savings. A Saturday Evening Post article from 1962 poignantly describes their experience:

Some white owners simply stare, almost dumbfounded, as we draw up sale papers for them. Others break down and cry. Some say, “It’s OK to show the place to Negroes before we move, but we don’t want to be in the house to watch it when you do.”

What little protection they enjoyed came as a perk of their racial identity. Being white did not save them from extortion, but it gave them the opportunity to start over in new suburban communities with access to legitimate financing, legal protections, police support, and full public capital for schools, parks and libraries. A financial reversal caused by blockbusting was often compensated over time with appreciating suburban home values.

Lessons were learned. Those with the keenest ear for a racist appeal suffered and lost the least. In a great American irony, working whites’ experience of being victimized by their own racism and by the racist exploitation of their black neighbors actually reinforced and hardened their racism.

When they returned to visit the neighborhoods they had left, their eyes told them that their prejudices were valid. As those neighborhoods burned in the late ’60’s, whites congratulated themselves on their inherent superiority. After all, as was so often said, what kind of people would “burn down their own neighborhood”? A racist assumption filled the gap in whites’ understanding. If black families would just work as hard as “we” did, their neighborhoods would not be burning.

Aided by the slightest compassion or curiosity, those white families might have discovered that black residents by that time owned virtually nothing in those neighborhoods. Everything around them from the homes to the liquor stores was part of an infrastructure engineered to extract every penny they earned before it could be converted to capital or power. Looting that occurred in the riots of the ‘60’s was as much a metaphor as a reality, the only avenue by which African-Americans could participate in a legal and economic model constructed for organized extortion.

The entire cycle would be repeated in a refined and far more sophisticated form in the subprime lending boom of the early ‘aughts. Once again, black families who had managed to accumulate a little capital were systematically looted, leading to a broader economic meltdown. As in the ‘50’s and ‘60’s, none of the perpetrators would be prosecuted because the process was entirely legal.

Today in places like Brooklyn, Washington DC, Chicago and elsewhere, white residents are taking advantage of depressed prices to move closer to a newly vibrant urban core. Many of these white residents see themselves as progressive pioneers, converting swaths of burned-out ghetto into gleaming urban playgrounds.

Victims and survivors of a generation of racial extortion are displaced as the process comes full circle. Elaborate beards and skinny jeans are to them what a black woman with a crying baby was to a previous generation of white residents. Black residents priced out of what’s left of their homes rightly see the new influx as the final step in a cycle of exploitation. A vicious circle is closing. Now that their neighborhood has some renewed promise it’s time for the black survivors to get out of the way.

They are shipped off to suburbs like Ferguson, Missouri that are the suppurating new focus of American poverty, where struggling blue collar whites will once again greet them as a portent. Their influence is contained through aggressive, discriminatory police tactics, their little accumulated wealth siphoned away by selective law enforcement and political tactics designed to dilute their influence.

Ferguson is the depressing postlude to blockbusting. The wheel keeps turning.

Young white progressives ignorant of the process that turned Chicago’s Near North or DC’s Anacostia into slums, react with righteous frustration to the hostility of black residents. Similarly, a thin, emerging class of successful African-Americans whose families narrowly survived the urban meat grinder sometimes look back on those whose families were destroyed with a complex blend of emotions.

A lucrative new niche industry has emerged for black figures willing to cast themselves as Horatio Alger, confirm white racist stereotypes, and help Americans hide from our past. They assure audiences that America has no obligation to blacks. After all, if Dr. Ben Carson can become a surgeon then any African-American could be just like him if they would stop wearing hoodies, pull up their pants, and speak properly. Insult is added to injury as blacks are told to take “personal responsibility” for the wholesale expropriation of their capital and the disintegration of their communities.

History denied is history repeated. America’s great Achilles Heel is her racial mythology. The damage has never been limited to the black community, yet we relentlessly resist an honest reckoning. Over the last half-century we have very nearly exhausted the capacity of legislation to combat our own racism. Younger Americans are less invested in the myths of white supremacy that define the shape of the world for older Americans. Yet, judging from the shape of the arguments over gentrification, they are only marginally more aware of our history and its continuing impact.

Truth is powerful. Perhaps we can muster the courage to confront our history honestly and honorably, and thereby begin to escape the political distortions created by lingering racism. Our national debate over the murders of Michael Brown and Trayvon Martin might offer glimmer of hope. By openly wrestling with the demons of our past we might begin to recognize their fingerprints on our present and break their hold on our future.

Resources:

The Saturday Evening Post, 1962, Confessions of a Block-Buster

Edward Orser, 1997, Blockbusting in Baltimore

The Atlantic, 2014, The Case for Reparations

New York Times, 2014, In Ferguson, Black Town, White Power

The Atlantic, 1972, The Story of the Contract Buyers’ League

 

 

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Posted in Civil Rights, Race

What Reagan said about a border wall

For those who wonder why I’m a Republican, let’s take a look at what the term used to mean back when I was a kid.

This is what Ronald Reagan said about immigration and border security when running for President in 1980:

Rather than talking about putting up a fence, why don’t we work out some recognition of our mutual problems? Make it possible for them to come here legally with a work permit, and then, while they’re working and earning here, they’d pay taxes here. And when they want to go back, they can go back. They can cross. Open the borders both ways.

That’s right. Reagan’s approach to working with Mexico was to “open the border both ways.”

While reviewing Reagan’s comments, look at what George Bush, the senior Republican in the state of Texas at the time was saying about how to treat those here illegally:

If they’re living here, I don’t want to see…six- and eight-year-old kids being made, one, totally uneducated, and made to feel like they’re living outside the law. Let’s address ourselves to the fundamentals. These are good people, strong people. Part of my family is Mexican.

What makes these comments even more striking is the context. Reagan and Bush made these statements when they were competing for the Republican nomination in 1980.  Better yet, this exchange happened during a debate in Texas just before the Texas primary. Freer borders and providing an education for undocumented immigrants was the platform that both Republican candidates thought they needed in order win over Texas Republicans.

A generation later, why such a stark change? Back then, Dixiecrats like Rick Perry were still Democrats while the Elizabeth Warrens of the world were still Republicans. That’s what’s changed.

More detail and the actual footage from the debate where that occurred is available from our good friends at Reason online.

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Posted in Immigration

A thought to ponder for the weekend

25 years ago, Rick Perry was a Democrat and Elizabeth Warren was a Republican.

That is all. Have a great weekend.

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Posted in Republican Party
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