(Lavverrue, Flickr)

An unprecedented number of bills has been introduced this legislative session that would grant same-sex couples legal status similar to that of married couples. But the five bills have died quiet deaths, as leaders say they don’t have the votes to pass them, even out of DFL-dominated committees.

Advocates say the energy around marriage equality this session is new. “We went from fighting a constitutional amendment just three years ago to now seeing marriage equality bills being introduced … and instead of having a ‘defeat the constitutional amendment’ rally there was a ‘Freedom to Marry’ day rally,” said Jo Marsicano, communications director for OutFront Minnesota.

“This has clearly been made possible by the election in 2006 of a fair-minded majority with the majority being fortified in 2008.”

But for many, this session has been a disappointment. All bills in the Legislature must make it through a committee by deadline in order to stay alive. None of the marriage equality bills made it that far.

One measure, HF 1655, SF 1988 would have created a study group to “determine the extent to which structural barriers exist that negatively impact single people, same-sex couples, and co-habitating couples.” Another, HF1740, SF1732, would have allowed marriages performed in states where same-sex marriage is legal to be recognized by Minnesota. HF0999, meanwhile, would create civil union contracts as the standard across the state by removing the religious-based “marriage” from statutes.

HF893, SF120, the Marriage and Family Protection Act, would make marriage a gender-neutral institution in Minnesota, and
HF1644, SF1210 would beef up that language by specifically exempting religious leaders from having to perform or participate in any marriage for any reason.

Rep. Joe Mullery, DFL-Minneapolis, is the chair of the Civil Justice Committee, the first hurdle for the bills. He is also chief author of the civil unions bill. He had scheduled informational hearings for the bills — but not a vote — which left the bills sitting in committee. Advocates said they had enough votes to pass the bills, but Mullery insisted they didn’t.

Rep. Phyllis Kahn, DFL-Minneapolis, the chief author of the Marriage and Family Protection Act, agreed with Mullery.

“I strongly support Joe Mullery and his decision to have an informational hearing only. Why? The votes do not exist in that committee at this time to pass these bills. Many supporters believe that a vote to defeat the bills is more harmful than no vote.”

David Strand, one of dozens of citizens who have been lobbying legislators almost daily for marriage equality this session, said, “We learned that we and Mullery were counting the votes differently as one of the votes in favor has vascilated back and forth,” he said. “Without certainty whether the votes were there to pass the bills, he didn’t want the bills to be killed for the biennium by a tie vote.”

Doug Benson, a citizen who wrote the Marriage and Family Protection Act and lobbied heavily for its consideration, was disappointed that the bill is technically dead for the session.

“I naively assumed that huge DFL margins in both houses of the Legislature in a non-election year would provide a secure enough environment for the DFL leadership to allow some effort to end state sponsored discrimination against our families to progress this session,” he said. “My education continues.”

But he says they will continue to work on the issue next year. “There is a lot of outdated thinking, fear-mongering and passive anti-gay bigotry that must be dealt with at the Capitol in order for us to move forward. Those obstacles will be overcome.”

Marsicano of OutFront Minnesota agreed that marriage equality still faces serious roadblocks. “We know that marriage equality won’t become a reality under the current governor,” she said. “So we’re looking ahead to the election of a pro-equality governor as one of the vital steps in this campaign.”

That’s the message DFL state Sen. Ann Rest and Republican state Rep. Laura Brod had on MPR today for the breed of voters whose enigmatically marked ballots were on display during the recent Senate recount. Their cramped scribbles drew widespread derision from observers who apparently always colored inside the lines. State Canvassing Board members were often left scratching their heads at chicken-scratch markings as they tried to determine voter intent — a concept held sacred in state law.

But the ovals are apparently secure. The two state leaders, each with electoral reforms on her mind, sounded nonplussed unenthusiastic about the idea of changing ballot design to help more voters cast clear votes.

“I don’t think that the ballot itself is necessarily the problem,” Brod said. “It’s a pretty clear ballot. We’ve just got to get people to fill the circle in and do it right. That’s just a matter of education.”

For her part, Rest acknowledged that ”it is our obligation to find ways to make it easier for Minnesotans to vote in an election,” but said the solution to errant ballot markings is “increased and more sophisticated training of election judges.”

The currently prescribed two to three hours of training don’t prepare workers to handle a rush of voters, who, because “they’re very young or very old, are not paying attention and mark an X in a box rather than filling in an oval, she said.

“As we gain more experience with our paper ballot, that will become less of an issue,” Rest assured the radio audience.

In our first post-election installment of the Schultz Report, David Schultz talks about the mixed bag that last night brought for Minnesota Democrats–handing a 10-point margin to Barack Obama on one hand, but failing to net any congressional pickups and falling short of the five-seat increase needed to give the party a 2/3 majority in the Minnesota House.

“For all of those [down-ticket Minnesota] races,” notes Schultz, “you have Democrats coming in on average about 10 points behind where Obama was. It might be simply that the Obama coattails were not coattails at all — that a lot of Obama people may have voted for Barack Obama and nobody else. There’s a little bit of evidence of that occurring, much like 1998 when a lot of people voted for Jesse Ventura and nobody else.

“But a lot of people did vote, and they didn’t necessarily vote straight Democratic lines. So the question is, why, in a year where the Democrats did spectacularly well across the country, why did they so underperform here?”

Listen: David Schultz talks about Obama’s big Minnesota win and its failure to yield congressional seat pickups (13:58)

Speaker of the U.S. House Nancy Pelosi (shown), U.S. Sen. Amy Klobuchar and Minnesota House Speaker Margaret Anderson Kelliher will kick off an apparently new Women for Madia campaign in Bloomington Monday morning. Photo: house.gov

Two indications that the tight 3rd Congressional District race remains in the nation’s crosshairs, even as U.S. Rep. Michele Bachmann’s antics in the 6th District grab headlines.

First, the big guns keep coming: Speaker of the House Nancy Pelosi, D-Calif., whose very name and title are enough to spur derisive jeers at Republican rallies, will campaign in person with DFL 3rd District candidate Ashwin Madia today. (Republican House Minority Leader John Boehner visited the state on Paulsen’s behalf last week.)

And the national media continue to turn attention to the Twin Cities’ western suburbs. (Today it’s a profile of the contest with focus on Madia in the Washington Post — whose Chris Cillizza, keeper of The Fix blog, on Friday abruptly and inexplicably left the 3rd District race off his list of the 25 races for U.S. House where parties are most likely to lose seats, to the consternation of commenters.)

But in a sign that the spectacle in the 6th is drawing focus and donation dollars, Madia released a statement this morning, saying, “Bachmann’s comments represent the very worst in American politics.”

‘Disturbing’ Paulsen ad
Over the weekend, Republican state Sen. Erik Paulsen released a new ad called “Disturbing” that stays warm and fuzzy for about two seconds before turning on the attack graphics and low-register voice-over delivering (disputed) warnings about who Madia will tax and how often he has lied about it:

Three-way debate
KSTP-TV hosted a debate with all three candidates Friday evening. Here is the full hourlong video:

Dillon speaks!
Earlier on Friday, Independence Party candidate David Dillon took his turn in the U of M Humphrey Institute’s series of noontime events with the 3rd District contenders. (Madia and Paulsen appeared earlier in the week.) Here is a liveblog of the Dillon event, courtesy of the Humphrey Institute’s Smart Politics blog, which also profiled the race over the weekend. And here is audio from Dillon’s appearance, courtesy of MPR’s Polinaut blog (if audio player doesn’t appear below, visit the Polinaut page:

A CNN poll earlier this week said that 60 percent of Americans believe we are headed for a depression.

Yesterday afternoon I talked with MnIndy’s favorite business/economics journalist, Doug Henwood of Left Business Observer (who also hosts a weekly radio show on WBAI in New York and KPFA in Berkeley that’s archived at the LBO site), to see what he’s thinking about the economy and about the panic in credit markets, which so far seems unfazed by the bailout bill or by any of the other measures the Fed and the Treasury have undertaken. (We last spoke with Henwood about the economy in September, a day after Lehman Brothers went under and AIG got bailed out; that interview is here.)

“I think there’s certainly the risk of a severe recession,” Henwood tells MnIndy. “I don’t know where you put the dividing line between a severe recession and a depression. An unemployment rate of 10 percent is a severe recession. An unemployment rate of 15 percent starts looking like a depression. But that’s kind of arbitrary.

“Certainly the risk of something really nasty looks the highest it’s been since the end of World War II. There have been a couple of instances in the past where it looked like we were teetering at the edge and then managed to avoid it.

“The fact that the level of panic in the markets looks so high despite all these extraordinary interventions is a little scary. Now, on the other hand, if you want to draw some comfort from that, sometimes when people are thinking the world is coming to an end, that can be a sign that we’re close to the bottom. Or that we’re closer to the bottom than we are to the beginning.”

There’s a transcript of the interview below.

Listen: Doug Henwood on the troubles (15:21)

Minnesota Independent: I wanted to start by hearkening back to the last time we talked, a day or so after Lehman Brothers went down. You said at the time that the bad scenario–the situation we needed to watch out for–was one in which the credit markets, bank-to-bank and bank-to-business lending, dried up. That seems to be happening now as I read Nouriel Roubini and others on the crisis. What is going on with the credit markets?

Doug Henwood: They’re pretty much frozen up. The inter-bank market is virtually completely frozen. They quote interest rates, but they’re pretty meaningless because there’s no loan volume. Banks are basically refusing to deal with each other because they don’t trust each other. They’re just hoarding their cash and putting it into government securities. We’re also seeing signs that lending to business is drying up — the commercial paper market is contracting very rapidly. Commercial paper is a form of unsecured borrowing by large corporations, financial and non-financial, that is usually a very large market. And it’s usually blue-chip corporations who normally would not have a difficult time borrowing. But that market is contracting.

The Federal Reserve has just announced some support facility for the commercial paper market, so we’ll see if that does anything to kick-start the market. But it looks like there’s just a general atmosphere of panic that’s causing anybody with money to hold on to it. And it doesn’t appear that there’s any change in that psychology imminent.

MnIndy: Are people rushing to get out of credit markets part of the problem here?

Henwood: Yeah, at some point this becomes self-fulfilling, because everyone gets scared and they run away, and the running away drives down the prices and drives up interest rates and drives down stock prices. And people look at that and say, “Oh my god, it’s falling apart.” It’s a vicious cycle that keeps feeding on itself.

The whole point of government intervention in situations like this is to break that cycle — to put some sort of floor under prices and also some floor under the decline in confidence. So far, despite very extraordinary measures — not just the bailout that passed last week, but all the central bank activities around the world — to pump money into the markets, pump reassurance into the markets, very innovative lending by the Federal Reserve and other central banks … They’re clearly pulling out all stops, and have made it clear they will continue to pull out all stops, and maybe even find more stops to pull out if they haven’t exhausted the supply completely.

That has not yet put a floor under prices or provided much foundation for confidence. It may; historically, for the last couple of decades, government bailouts have always succeeded. They haven’t necessarily been able to prevent recessions, but they have been able to prevent panics from just completely unwinding everything.

But so far, not so good.

MnIndy: Why are banks freezing up in their lending to each other, in simple terms? Because they’re afraid of each other’s solvency, of all the bad paper on their books?

Henwood: Yeah … This is all really uncharted territory. The original problem, as everyone knows now, was a lot of bad mortgage debt. But on top of all those bad mortgage debts, the investment banks built an enormous structure of very heavily leveraged and opaque instruments. Now that is coming undone, and very rapidly. And nobody knows, really, how bad it is. The danger of leverage, which is a fancy word for borrowed money, is that it’s wonderful on the way up. The borrowed money can really juice things up on the upside. But when things turn down, it accelerates things as they head back down to earth.

That’s what’s happened. I think a lot of these very heavily leveraged structures are imploding. A lot of progressives who opposed the bailout, for example, say that if we just get money to the mortgage borrowers who can’t meet their obligations, then that would protect everything else. But in fact there are all these other leveraged structures that are imploding as well, and that’s what the bailout and all the other extraordinary gestures are intended to address.

But the scale is so huge, and the level of panic is so high, and the possibility of disaster is so frightening, that people are just — it’s everyone for themselves.

MnIndy: Why does the bailout package that was passed last week, and for that matter, the $630 billion in new funds that the Fed injected earlier in the week, to less notice — why have they had so little impact on this?

Henwood: It’s been a short period of time, for one. I’ve noticed that people, even as sophisticated as Paul Krugman, have been saying the bailout is a failure. Well, the thing is less than a week old, so it’s a little early to judge.

The history of past banking crises and government bailouts is that these sometimes take years to work out. Our own savings and loan rescue took several years. The Nordic banking crises of the early ’90s took several years to work out. The Japanese banking crises of the ’90s, which were never really adequately addressed with any kind of government package, took more than a decade to work out.

So we don’t really know. The whole idea is that this is supposed to make things less bad. But it can’t make things good, and it certainly can’t do anything overnight. But I think it’s also just the scale of the problem. There’s just so much leverage in the system, and this is where the regulators — the central banks, our Federal Reserve, the Treasury, independent regulatory agencies — just failed so miserably. They let this borrowing, this leveraging, all these opaque instruments, get so out of control. They could have stopped this five years ago, but they didn’t. Especially back during the Greenspan years. Greenspan thought that whatever the markets do is okay. Who is he, a mere human, to doubt the collective wisdom of the market? So he stood back and even cheerled onward as all these structures were being laid on. Now they’re being undone.

The best hope is that they can be undone at a reasonable pace so it doesn’t all come crashing down overnight, [instead] it gets spread over the course of several years. That would, I think, mitigate the economic impact somewhat.

But we’re already in a recession, I think, and it looks like it’s only going to get deeper in the coming months. We haven’t really had a deep recession in the United States since the early 1980s. We had a fairly mild one in the early ’90s, a fairly mild one in the early ’00s. We did have slow recoveries from those recessions; it took awhile to get out of them. But they were not deep. The economy did not contract greatly and the unemployment rate did not rise all that dramatically. For consumer markets in the early ’00s, there was virtually no consumer recession at all. The housing markets, which are usually hit in a recession, barreled ahead. Car sales, which are also usually hit hard in recessions, and durable goods purchases, also usually hit in recessions — that didn’t happen.

So we haven’t had a consumer recession of any kind in this country for about 17, 18 years, and we haven’t had a really broad, deep recession in about 25, 26 years. It looks like we’re overdue for one of those. It could be a shock to many people.

MnIndy: During the debate that led to the passage of the bailout bill last week, there were a lot of words of assurance that the taxpayers will do all right in the long run. The Treasury will get most of this money back, might even make money. And yet, as far as I can tell, very few concrete protections were written into the bill. What’s your understanding of the protections we have for the public investment here?

Henwood: They look — at least in the language of the bill, they don’t look all that reassuring. But one thing about the whole structure is that the bill gave the secretary of the Treasury very broad discretion to do what he wants to. Barney Frank said the other day that it also means the secretary of the Treasury can buy stock in corporations, in banks that are in trouble.

Now, the history of these bailouts — there’s a very interesting review of the history of these banking crises and bailouts that came out a couple of weeks ago from a couple of IMF economists. Their conclusion was that buying bad assets, which was Paulson’s original proposal, doesn’t work as well as just directly injecting fresh capital into banks. That certainly wasn’t Paulson’s original intention, but apparently the way Congress wrote the legislation, they can do that.

The thinking on Wall Street, as far as I can tell, is that while Paulson might not do that, Paulson will be history in a few months, and it’s highly likely that if we happen to have a new Democratic administration and a new secretary of the Treasury, they will take that equity route. It’s not only more effective, according to a survey of the historical evidence, but it also offers the taxpayers an upside. If they manage to stem the crisis, or limit its effects, the banking sector will eventually recover and the stocks of the banks will rise again.

Looking at the history of some comparable bailouts in the Nordic countries and Japan, we see that stock markets continue to fall for a year or two after a banking crisis begins, but then they begin to rise, often rather dramatically. So there is a good possibility that if the government buys stock in these troubled institutions, and they manage to turn themselves around, then the Treasury can — if not make money in this deal, at least recoup a lot of what it spent. So I think there’s a good chance that this $700 billion price tag is a ceiling, and we may actually get away with less than that. We don’t know, but that is a possibility, and a not completely outlandish possibility.

MnIndy: Doug, last question. And again, I’ll go back to our talk in September. You said then that you thought the chance this would descend to something catastrophic for the real economy, something like a depression — which, according to a CNN poll this week, 60 percent of the public thinks we’re headed for — was not a terribly near possibility. Three weeks down the road, would you still say that, or is all the panic likelier to be self-perpetuating at this point?

Henwood: You know, it’s really hard to say. I think there’s certainly the risk of a severe recession. I don’t know where you put the dividing line between a severe recession and a depression. An unemployment rate of 10 percent is a severe recession. An unemployment rate of 15 percent starts looking like a depression. But that’s kind of arbitrary.

Certainly the risk of something really nasty looks the highest it’s been since the end of World War II. There have been a couple of instances in the past where it looked like we were teetering at the edge and then managed to avoid it.

The fact that the level of panic in the markets looks so high despite all these extraordinary interventions is a little scary. Now, on the other hand, if you want to draw some comfort from that, sometimes when people are thinking the world is coming to an end, that can be a sign that we’re close to the bottom. Or that we’re closer to the bottom than we are to the beginning.

So some of the signs of panic are suggesting that maybe people are getting a little carried away with the worry. I don’t know. It’s very risky. There’s a possibility that those high levels of anxiety are actually contrary indicators.

But on the other hand, there’s a serious risk that things could come unraveled. There’s just a whole lot of problems out there, and we may not have the luxury of dealing with them in a comfortable fashion at a time we choose. They may just come crashing down all at once. If enough people think we’re heading into a depression and they stop spending money, that runs the risk of becoming self-fulfilling. It’s a scary time. There’s no doubt about it.

UPDATED The knives are out in the 3rd Congressional District race: A new Ashwin Madia attack ad answers Republican state Rep. Erik Paulsen’s; a Democratic Congressional Campaign Committee mailing reaches with a strip-club charge; and a Paulsen stand-in plays up Madia’s marital and residential status (single, renter).

The Madia ad, titled “Everyone Else,” responds to a Paulsen commercial from late last week that attacked Madia on taxes. “Everyone Else” knocks down Paulsen’s charges with the same spinning graphics Paulsen’s ad used and throws in punches on education cuts, offshore corporations and political appointee pay raises for good measure.

In the first parry of a news conference duel, Paulsen stand-in state Sen. Geoff Michel, R-Edina, attacked Madia as a carpet-bagging, childless, apartment-dwelling un-suburban bachelor. Play the 17-minute MPR audio and read transcript excerpts at the bottom of this post. (Madia will appear at his own news conference this afternoon. See more MnIndy coverage to come: story and video.)

Meanwhile, a pair of glossy Democratic Congression Campaign Commitee mailings earned a failing grade from KSTP’s Tom Hauser, who called their charges of strip-club funds seeping into Paulsen campaign coffers “among the most over the top and outrageous we’ve seen.”

Transcript excerpts from state Sen. Geoff Michel’s Sept. 30 press conference (MPR’s audio player should appear at the end of this post; if not, click here):

MICHEL: … I come before you today as a supporter of Erik Paulsen. … I will admit I thought long and hard about running for this seat … I care about this seat. It’s where I live. It’s where I’m raising four daughters [like Paulsen] …

My sense of the 3rd District and the people that I talk to, my neighbors, the people that I run into at the door as I doorknock for my friends and colleagues — they want the newest member from the 3^rd Congressional District to be someone who is grounded in the suburbs, someone with suburban life experience. And there is a huge contrast in this race. For lack of a better term, Ashwin Madia is a carpetbagger. He does not have this grounding of suburban life experiences, in stark contrast to Erik Paulsen. Now “carpetbagger” — that’s kind of an old — I’m not even sure if it’s a 19th-century term. And I’m not sure how it was first used. …

So what do we look to when people knock on our door, saying, “Hey, I want to be your member of Congress?” … Voters in the 3rd District are looking for more than party. … They want to know: What’s in your background? What have you done? …

As far as our records can tell, Ashwin Madia has never, never even owned a home. I would like my next member of Congress to have owned a home and to know what it’s like to pay a mortgage. … That’s one indicia of a suburban life experience. Raising a family in the district. Sending your kids to the public school. Owning a home. Working in the 3rd District. Paying property taxes in the 3rd District. Erik Paulsen has done all these things, and Ashwin Madia has not. …

Have you paid taxes in the 3rd District? That’s what people will ask you at the door. They’ll ask you: Where do you live? Or where do you work? He worked in Minneapolis, for a law firm. He served in the Marines, and I thank him. I honor him for that service. That is certainly something to be applauded. But it’s not a shortcut to Congress. And the voters in the 3rd District are going to have a lot more questions.

Do you feel what my family feels, trying to save for college? Do you feel what my family feels, sending our kids to public schools? When you talk about No Child Left Behind and the growth of the federal government’s role in education, do you feel that as a father? These are all important, kind of minimum requirements for a member of Congress from the 3rd District. And again, it’s a huge contrast between Erik Paulsen and Ashwin Madia. I think Mr. Madia has great energy and certainly great ambition, but he’s got some major holes in his resume. Erik has done all of these things. He has served the 3rd District. He has led in the 3rd District. He is raising four beautiful daughters in the 3rd District — not as beautiful as mine. …

So that’s our main message today. There are Paulsen campaign staffers here for additional follow up or questions. I’m happy to stand for any questions at this time. …

QUESTION: So if you’re a renter, if you don’t have kids, you’re not qualified to serve in Congress.

MICHEL: I think that’s a little strong. But I’d say this: I’d say you are more qualified to serve in Congress if you’ve done some of those things that I have listed off. Because that will give the voters of the 3rd District something to hang on to, something to hang on to other than party. “Yeah, he’s done a little bit of what I’m doing. He’s felt some of my pain. He’s gone to a parent-teacher conference at school. He’s coached some rambunctious soccer teams on the fields of Eden Prairie.”

Mr. Madia is legally qualified to run for Congress. He has met all the minimum legal qualifications. But I’m telling you what I hear on the streets of places like Edina and Bloomington. People have a much higher bar than just that. People ask me, as a state senator, not just, “Well, have you rented?” People ask me as a state senator, these kinds of questions: Where do you live? What have you done in your life? Where do your kids go to school? I think those are the qualifications that voters of the 3^rd District has [sic], and each of these candidates will have to answer to them.

QUESTION: His campaign has released a statement, Senator, that says the reason he hasn’t owned a home is he lived at his parents’ home while he was going to the U of M, and then he enlisted in the military.   Certainly military experience would come to bear in voting in Congress — [question cut off by Michel's response]

MICHEL: Absolutely … Again, we want to honor Mr. Madia’s service. Boy, you know, I thank God that there are people like him that will raise their hand and serve. But if you’re only 29 years old and you decide that you want to run for Congress, you might feel like there’s some holes in your resume. … If we send someone to Washington D.C. from the 3rd District, let’s send someone who has lived there and felt the issues of the 3rd Congressional District.

QUESTION: Rep. Ramstad, who probably represented the district pretty well, but he didn’t raise a family there. He was a bachelor— [question cut off by Michel’s response]

MICHEL: You’re right. He represented the Wayzata-Plymouth-Minnetonka area in the state senate. He did what — he worked just down the hallway here for over a decade. So Rep. Ramstad and the state Sen. Ramstad did a great job and spent — He was prolific in the number of doors he knocked on, over the years. There wasn’t anybody in Minnetonka who hadn’t personally shaken Jim Ramstad’s hand. It’s a great role model, great example. [complete answer]

QUESTION: Aren’t there a bunch of different kinds of people who live in the 3rd District? It’s a big district. It’s not just people who own homes, and it’s not just people with kids. There’s a whole bunch of different kinds of people. How can you say you have to be this kind of person to represent that district? What if you come from another part of the district, an immigrant community, for instance? Are you not qualified for some reason?

MICHEL: Well, I’m — you’re — that’s your second question about being qualified. Again, this comes to me from my experience of the past six years, from my own campaigns. These are the things that suburban constituents ask me. These are the expectations that they have. No — is he — he’s not unqualified. And I wouldn’t disqualify him. Yes, we’re blessed in the 3rd District. There’s more diversity than ever. There’s demographic diversity, there’s economic, socioeconomic diversity. And yeah, you need to be able to represent every one of those people. But if you are coming to this campaign with a lack of experience — of life experience — you’re going to feel that at the door. …

[Where it's indicated in bold, emphasis is added. Emphasis in italics is the speaker's.]

Not included in the excerpt above is considerable discussion of Madia’s home address. Michel said Madia’s use of his parents’ Plymouth address on the form to file for office constituted one the “holes in his resume.” But in the end Michel conceded that he didn’t know where Madia had lived around the time of the filing, and that in any case it isn’t a legal requirement to live in the district.

MPR audio player

The Paulson plan: He gets $700 billion to dispense, you get the tab.

This week in the Schultz Report, we discuss the only issue that matters at the moment–the financial meltdown on Wall Street and the Paulson plan that’s currently being bum-rushed through Congress, which would give the US Treasury secretary absolutely unprecedented power to buy up bad debt with public dollars, and without any public oversight or future public benefit in the form of equity in the companies we’re bailing out.

David Schultz

“There’s really no precedent in American history for anything like this,” says Schultz. “You don’t say that we’re going to pass the largest bailout in American history, one of the largest financial commitments we’ve ever made, and say you’re going to rush it through in five days without any serious examination. We have too many stories in American history where huge bills have been pushed through and later we find out they’re full of problems for down the line.

“We’re seeing stories emerge already about a lot of Wall Street types, on top of the already huge bonanza here, who are lobbying heavily to get other debt of theirs that is not related to the subprime crisis thrown in here. This is turning into one of the great pieces of pork barrel legislation of all time. It’s going to help out the people who caused the problem, and do absolutely nothing to stem the problems of foreclosure and falling equity for homeowners.

“Compare this bailout to what Sweden did when its banks were in crisis back in the 1980s. They too did a bailout, to the tune of 3-4 percent of their GDP. Ours is about 5 percent. But one of the things Sweden did was to demand equity from the banks. It got assets in return. It also got shares in those banks that it was eventually able to sell off to recoup its investment. We’re getting nothing. The taxpayers are only getting the bill, along with no guarantees and no equity. And no restructuring of the banks.”

Regarding the “muted” response of the presidential campaigns to this epochal turn of events, Schultz notes, “One sort of expects McCain to be dumbfounded about what to do here. The economy is not his strong suit, and he’s admitted that. More importantly, the problems of this economy are in part a result of a massive deregulatory movement that’s been going on since the start of the Reagan era. John McCain has been there voting for all this deregulation. He’s stuck in the sense that he’s got a voting record that’s helped produce this kind of problem. And his response in the last few days–saying, for example, he’d have fired SEC chairman [Christopher] Cox for not acting fast enough–has been very tepid.

“Barack Obama is a little more surprising. He wasn’t there; he wasn’t voting for this stuff for the past 20 years. The economy was supposed to be one of his strengths. And on his webpage, he has some fairly harsh criticisms of the past 20 years. But he also isn’t making any serious proposals in terms of where to go in the future. He says he supports the bailout but would like to see some caps on salaries for executives. That’s kind of nice, but it doesn’t solve anything down the line. He has a golden opportunity to make some serious criticisms of the Republicans and McCain, and to open it up and make some arguments about what to do.

“McCain doesn’t have much of an opportunity here. But Obama does. And it’s surprising that the two candidates have both been so muted. On first blush, this ought to be an issue [the Democrats] are jumping on. But when you step back a little more, you need to understand where the Democrats are getting their money from. Barack Obama, for example, is far outraising John McCain in Wall Street contributions. To a large extent, Wall Street’s driving part of his campaign. I suspect if we were to go through and look at the political contributions coming to the Democrats–I’m speculating on this, but I think you’d see a lot more money coming in from banks and Wall Street. I think they’re being pressured by their constituencies to go in this direction also.

“I also think at this point, Congress–and it’s happened several times under the Bush administration–gets buffaloed. They just don’t exert the backbone, and instead feel like they’ve got to give in to the Bush administration and to the political urgency [of the moment] instead of taking a breath and saying, no, there’s a process here of vetting legislation and looking at counter-proposals. The best thing that could happen in the next few days is for the whole process to slow down, so that you can see more criticisms coming out from economists, both mainstream and non-mainstream, and more introspection about the proposals. That might build up political capital that the Democrats need to be able to criticize.

“But at this point, because they’ve been totally reactive in dealing with this crisis, and because of the political contributions, I think they’re just not in a position to act at this point. They’ve been caught by surprise in not having their own proposals to deal with this problem.”

Listen: David Schultz on the Paulson and Dodd bailout plans and the presidential candidates’ response to the Wall Street crisis (14:22)

Lehman Brothers: A Wall Street icon goes bust.

After Monday’s dramatic tumble in the financial markets–led by dire announcements about Lehman Brothers (bound for bankruptcy court), Merrill Lynch (absorbed by Bank of America) and insurance giant AIG (desperately seeking bridge loans)–I got in touch with Doug Henwood for some help in sorting out these latest developments and what they augur for the US economy on Main Street.

In a 20-minute interview taped Tuesday afternoon, Henwood–the publisher of the invaluable Left Business Observer newsletter and perhaps our most plainspoken economics journalist–took the measure of “Gray Monday” and the arc of the US economy.

“So far, by historical standards, it’s not a very severe recession,” Henwood tells MnIndy. “The economy could, considering the blows it’s taken–the housing bust and the financial crises over the last year or two–it could be in a lot worse shape than it is. But I don’t think this is going to do it any good. My thinking is that we’re in the midst of a very long-term period of stagnation and economic trouble. I don’t think we’re going to see the kind of big collapse that a lot of people are expecting, certainly not like the 1930s, but even like the kind of deep recessions we saw in the 1970s or early 1980s. I think we’re going to see a very long period of a grinding and very unpleasant economy [where] the unemployment rate creeps higher and wages and income creep lower. It’s going to be very, very difficult to generate any prosperity out of this for a considerable period of time.” A complete transcript of the interview follows below the audio player.

Listen: Doug Henwood talks about Wall Street and Main Street after Monday’s financial bloodletting (19:28)

Minnesota Independent: After a day like yesterday, one of the things that’s most lacking is any sense of perspective. so i’d like to start by asking you a big-picture question: How is the US economic outlook different today from a week or a month ago?

Doug Henwood

Doug Henwood: Part of the reason we don’t have perspective in the heat of things is that we just don’t know, but my guess is that it’s marginally worse than it was. We’re in recession. I think that’s pretty incontrovertible, though it’s not officially declared yet.

So far, by historical standards, it’s not a very severe recession. Employment has contracted a little bit, but far less than in earlier recessions. The unemployment rate has crept higher, but also, again, less than in earlier recessions. The economy could, considering the blows it’s taken–the housing bust and the financial crises over the last year or two–it could be in a lot worse shape than it is. But I don’t think this is going to do it any good.

My thinking is that we’re in the midst of a very long-term period of stagnation and economic trouble. I don’t think we’re going to see the kind of big collapse that a lot of people are expecting, certainly not like the 1930s, but even like the kind of deep recessions we saw in the 1970s or early 1980s. I think we’re going to see a very long period of a grinding and very unpleasant economy [where] the unemployment rate creeps higher and wages and income creep lower. It’s going to be very, very difficult to generate any prosperity out of this for a considerable period of time.

MnIndy: Can you shed some light on the decision to let Lehman Brothers go bust but to pursue assistance for AIG?

Henwood: Who knows what these people are thinking? The other question is, why did Lehman Brothers go bust when they bailed out–well, they didn’t bail out, but they had the forced merger of Bear Stearns. The conspiracy theory version of events is that Goldman Sachs had it in for Lehman Brothers and was happy to see it go under–the Treasury secretary, [Henry] Paulson, and several other important people around all this were Goldman Sachs alums, and they were just happy to see it go down. I don’t know whether that’s true or not. People on Wall Street love conspiracy theories and gossip.

[There is] the possibility that they just wanted to teach Wall Street a lesson, that sometimes you can go bust. I think they got a little nervous after the Bear Stearns thing, the sense that Wall Street could get away with murder and get a get-out-of-jail-free pass. They didn’t want that to circulate too widely. So that may be why they let Lehman go down.

AIG is very, very, very big, the biggest insurance company in the country, and I think the consequences of it going under would be pretty dramatic. They may just be buying time for some sort of order rearrangement; who knows? But I think the fear is that to have Lehman go under, Merrill [Lynch] go into Bank of America in what could be something of a forced merger, and to lose AIG–all this in a couple of days would be just too much to handle. So they may just be buying some time [with AIG]. But I don’t think they really know what’s going on or what to do, either. They’re just improvising as they go along.

MnIndy: There’s been talk about what the Fed will do, later today and in the near term. What can the Fed do by way of containing this crisis that it hasn’t already done?

Henwood: It seems that just lowering interest rates is not enough. They’ve done a lot of that. Lowering interest rates works in more or less normal times. But credit markets are not normal markets in a lot of ways. And just lowering the price of it does not necessarily increase the demand for it. For example, if lenders get very, very scared and don’t want to lend money, they’re not going to lend. Or they’ll just buy government bonds with whatever cash they have, and avoid [doing] anything that looks even slightly risky.

So the problem is really, now, the availability of credit, not its price–not the interest rate. We’ve seen this in the mortgage market, where it’s very difficult for people to get mortgages unless they have really sterling credit histories. And I think we’re going to see this spreading beyond the mortgage market. The risk for the real economy in coming weeks and months is, what happens to commercial and industrial credit, the C&I lending that banks do–that is, lending to businesses just to finance day-to-day business operations, financing inventory, paying for supplies until the money comes in.

That kind of bread-and-butter business lending is what keeps the economy going. Without it, the economy would grind to a halt. I think there’s going to be less and less willingness on the part of banks to make those sorts of loans. We saw something like it in the early ’90s, when there was a credit crunch and a long period of economic stagnation, and I suspect we’re living through something like that again. It may go on longer and run deeper than in the early ’90s, though.

The Federal Reserve does a regular survey of lending officers at banks, asking whether they’re tightening or loosening standards, whether they’re making loans or not making loans. Those tend to have a long lead time, so the answers to those questions tend to predict what’s going to happen to the credit market six or twelve months out. Those surveys are showing that bankers are growing more and more unwilling to make loans to businesses, and certainly to consumers. That shutdown of lending is going to be a weight around the economy’s neck for what could be years to come.

MnIndy: There’s talk among the financial writers at the New York Times and Wall Street Journal today about a “contagion” of panic and, essentially, a run on major investment banks. Does yesterday represent a new threshold of anxiety for Wall Street, or no?

Henwood: Yeah, I think–Wall Street operates on a real herd mentality. A lot of what goes on in the world of finance is just one guy imitating the other. They operate like a crowd, and crowds do not operate rationally. During the housing bubble, for example, the crowd was very optimistic, and the crowd made loans to people who shouldn’t have gotten loans. People bought risky securities they shouldn’t have bought. Everyone thought it was okay.

Now we’re seeing the mirror image of that. It’s just going crazy in the other direction. There are rumors circulating about insolvencies all over the place. Everybody’s afraid of everyone else. Banks aren’t lending each other money. So even if the Federal Reserve cuts interest rates, if the banks don’t want to lend each other money, the interest rate is just a purely theoretical thing.

The only thing I think the Fed is going to do is keep pumping in money and making reassuring sounds, and hope that things just don’t get out of hand. There’s always a risk that things will get out of hand. In the past, all these bailouts have managed to contain the problem and keep it from spinning out of control. But this time it’s not working as well as in the past. We’re seeing one thing after another. We’ve had so many false endings to this financial crisis that began more than a year ago. It’s kind of like a bad horror movie.

MnIndy: Is there a shock factor among investors stemming from the refusal to bail out Lehman Brothers, or did Wall Street understand that this line would be drawn at some point?

Henwood: I think they probably suspected it, but they were probably also shocked when it actually happened. They had gotten so used to getting bailed out that I think there’s shock when it doesn’t happen.

It’s interesting who doesn’t get bailed out. Bear Stearns didn’t really get bailed out. They got liquidated and rolled into JP Morgan. Bear Stearns was not a very popular company among a lot of people on Wall Street. They refused to participate in the bailout of Long-Term Capital Management, that hedge fund that went bust back in 1998. There’s some sense that maybe Wall Street and the Federal Reserve wanted to get revenge on Bear Stearns. If we go back to the early ’90s, the same thing happened to Drexel Burnham Lambert, the junk-bond home of Michael Milken. A lot of people didn’t like them. They weren’t very popular on Wall Street or in corporate America, and so they were allowed to go under as well.

Lehman was not that unpopular, so I was a little surprised that it was not bailed out. It’s a venerable old name, although it’s undergone many changes over the years, but there is a bit of a shock they were allowed to go under so dramatically. On the other hand, the Fed and the Treasury tried very hard to find a buyer to take Lehman Brothers, but no one wanted it. There are still some valuable parts of the business they’ll be selling off in the coming months, but no one really wanted to get into it. There was too much concern over what toxic waste was hidden in its balance sheet.

MnIndy: You and I talked about the economy six or eight months ago, and I’ve always remembered something you said in that interview: that one of the critical points over time was whether this was a recessionary, cyclical downturn, or the harbinger of all sorts of structural economic problems coming home to roost. How does the economy look to you in that regard now?

Henwood: I think it’s revealing some serious structural problems. It’s not behaving like a normal business cycle. If we go back into the expansion period–officially, the expansion ran from late 2001 onward–the economy stayed in expansion until, I think, the end of last year.

The National Bureau of Economic Research, which is the official arbiter of these things, hasn’t declared a recession yet, but I think they probably will. Those six years or so were the weakest expansion we’ve had since the end of WWII. Employment was very weak, GDP growth was very weak, wages went nowhere. It was just not a good time for most people. The contrast to the late ’90s, for example, is pretty stark. Then, the employment growth was strong, the unemployment rate got under 4 percent. There were wages increases absolutely across the income distribution, at every level, high to low. Black, white, Hispanic, men, women–everyone saw very nice income gains in the last few years of the 1990s.

The opposite was true this time. It was really just the very, very top of the income distribution that did well in this expansion. I’m not talking about the upper middle class; it was really just the top 1 percent. The further you go up the ladder–to the top tenth of 1 percent, or top hundredth of 1 percent–the further you go up, the better they did.

It was a very unusual situation. Certainly we’ve seen the rich getting richer for the last 25 or 30 years. But in the last five or six, we’re just off the charts in that regard. That suggested to me that something was wrong already–that the expansion just was not a normal one. The only thing that kept things going at all was the housing bubble. People felt richer, they spent more money because of it, they borrowed money against the value of their housing to sustain their consumption levels even though the labor market was kind of stinky.

Once that housing stimulus was taken away, the underlying fundamental weakness of the economy became very visible. We can make a list of what’s wrong with it: Income polarization is part of it. People don’t have the incomes to sustain a mass-consumption economy, so they’ve been borrowing a lot. That’s been going on for a long time, but it was especially egregious after the end of the late ’90s expansion.

The very sharp weakening of our manufacturing sector over the last 10 years [is another factor]. We have a narrower and narrower economy that’s based on retail and financial services, bars and restaurants, and housing. That’s not really a secure foundation for a productive economy over the longer term. We need to do something about that. That’s the real fundamental problem. It’s possible that retooling the economy to deal with climate change, better forms of energy and transportation, could generate a boom. But our political system and the consciousness of our capitalist class are not there yet.

MnIndy: There’s a lot of heated political rhetoric now about the extent to which the Bush regime and Republican economic policies are responsible for the woes we’re experiencing now. What do you think about that? Is this a Bush legacy?

Henwood: I think that’s a half-truth. Certainly the Republicans have done some worse things. The Clinton economic policy was not so great either, though. Bob Rubin was in the forefront of financial deregulation. The Clinton administration was very aggressive in financial deregulation. One thing they did do differently, however, was that in Clinton’s first term, he raised taxes on very rich people–the top 1 percent or 2 percent of the population. That balanced the budget, allowed interest rates to fall, and did help generate the boom of the 1990s.

That was really one thing you could point to that the Clinton administration did that was good. One thing they did that was bad was to encourage home ownership in a very irresponsible way by encouraging people to make low- or no-down payment house purchases. It really laid the groundwork for the housing bubble that got us into trouble more recently.

The Republicans and Democrats both have been very, very fond of financial deregulation. While the Democrats did a couple of good things and the Republicans did NO good things, I think both parties are very, very guilty of doing some bad things.

MnIndy: As you try to sort out the signs and portents regarding this particular financial crisis, and the health of the larger economy, what sorts of indicators do you watch most closely?

Henwood: One is the arcane one I was talking about earlier, which is what’s happening with commercial and industrial lending–whether banks are continuing to lend money to businesses for day-to-day activity. That’s a very important one, and one where financial troubles can get transmitted to the real economy. Sometimes the financial sector is just off on its own, dancing to its own tune, but that’s one way in which the financial sector has a very strong influence on the real sector.

Another thing is just to look at what’s happening with the job market. Every Thursday morning, the Labor Department releases figures on first-time claimants for unemployment insurance, when people lose their jobs. That’s been elevated recently, and if it rises more from here, it would be a sign that the job market is deteriorating.

The monthly jobs report that comes out on the first Friday of every month is in many ways the best economic indicator we have. It’s very timely; it comes out just a few days after the end of the month. And it’s a report on what matters to most people–what’s happening with employment, wages, hours, the mix of jobs, who’s getting them, who’s not getting them, what’s happening with unemployment.

Another thing to watch is what’s happening with retail spending. The government reports on that monthly, and there are private services that report weekly. You want to see if people are holding back. Certainly a lot of people are just broke and can’t spend money. But the people who aren’t broke, are they hoarding the money or spending it? What are they spending it on?

The pattern in retail sales lately has been people spending money mostly on essentials, and not spending money on impulse purchases or luxury goods. If that trend continues and gets worse, it would be a sign not only of distress, but also of anxiety that could become self-fulfilling if people stop spending and hoard their money. That would throw us into deeper recession than we’re in already.

But it’s also the case that Americans have been living way beyond our means. Over the last several decades, really, but it got very bad in the last 10 years. It used to be that people saved about 8 percent of their after-tax income. That’s gone down to 0. People who have money aren’t saving it; people who don’t have it are borrowing heavily. And that’s got to change. People have to save money and not borrow so much.

To do that, people are going to have to consume less. That’s going to mean a very wrenching change for the economy, but for the culture and the society at large. Overspending is practically part of the American way of life, and to cut back on that could lead to some very dramatic changes.

The Sarah Palin GOP bounce: mostly--but not entirely--evangelical.

After a couple of weeks on unscheduled hiatus during MnIndy’s coverage of the Republican convention and its aftermath, David Schultz and the Schultz Report are back with us today. In this audiocast, Schultz talks about Sarah Palin, evangelicals and swing voters, and he discusses a surprising turn in the Minnesota US Senate race: Independence Party endorsee Dean Barkley, who most observers expected to hurt Al Franken, seems to be peeling away Sen. Norm Coleman’s more tepid supporters and helping Franken.

On the Republican convention and the McCain/Palin poll surge:

David Schultz

“What was really fascinating about the convention that no one’s really talked about is the dramatic extent to which it really did pander to the religious right. On the first day of the convention, the Gustav day that featured no night-time performances, no night television, there was just a pro forma business [session]. I thought that was where the most significant moment of the convention occurred. They did the opening prayers–as Democrats did too–but what the Republicans did was to have a minister say, we want to thank God and we also want to thank Jesus Christ, our one and true savior–or something to that effect.

“They made very explicit reference to Jesus in a way that was very Protestant and evangelical. I thought that was important. You’re looking at a Republican convention that had the least number of African-Americans in recent history, the least number of Hispanics, the least number of non-Caucasians. It was a convention dominated by evangelicals, and that opening prayer set the tone for the entire Republican convention: This is a convention that’s not reaching out to others, only to the inner core.

“What I want to argue, and I realize this is an unusual interpretation of the Republican convention, is that this was a convention with Christ imagery throughout the entire convention. Watching it that week, I thought that speech after speech being a POW was literally [saying] that his time in the Hanoi Hilton was his time on the cross. I could see an image being built that John McCain basically died and was resurrected to do battle with the anti-Christ Obama. I think the describing of the world in terms of good and evil, and of John McCain as a Christ-like figure–all of this [arose from] the tone that was set by that first prayer on opening day.”

“I think it’s primarily an evangelical bounce [for McCain/Palin]. Up until recently, it looked like it was confined to enlivening the base and getting Republicans excited again. There was an article last week in the Wall Street Journal that suggested the Palin effect was limited in her impact on swing states like Ohio. But over the last couple of days, the Palin phenomenon has continued, and we’re seeing for the first time that McCain is not only ahead in the popular vote, but he’s now inching ahead in terms of electoral college matchups. The effect seems to be going beyond the evangelical base and capturing the broader group of swing voters at this point.”

On Coleman, Franken and Barkley:

I think it’s less Franken making progress than it is Coleman stalling. Looking at poll numbers over the past several weeks, you had Coleman around 50 percent and Franken hovering around 42, 43 percent. The latest SurveyUSA poll still has Franken around 40 percent, but Coleman is down to 41. What’s going on here? You have Dean Barkley in the race, and Barkley is now polling around 14 percent.

“I would argue that the dynamics of the race have changed significantly. A little bit [is] because Franken is a better candidate [now]. Maybe he’s doing a better job of messaging, getting out his views, talking about policy, doing attacks. But to a large extent, the tightening of the polls has been [a matter of] Dean Barkley increasing his percentage out of the hide of Senator Coleman. From about six weeks ago, when Dean Barkley entered the race, to today, the race has tightened.

“This is something none of us expected–that in fact, the third-party candidate Barkley, who many of us presumed would hurt Franken, is actually helping him in a strange way. [Barkley's support] is literally coming out of Coleman’s hide. Why is that? The individuals who did not like Coleman but also did not like Franken now have someplace to go. The anti-incumbent, anti-Coleman vote is going toward Barkley instead of toward Franken. So Franken’s challenge at this point is to hope that Barkley support keeps eroding Coleman support.

“It suggests a possible perfect storm for Franken. If Barkley continues to eat at Coleman, and we have the 80 percent turnout in the state that a lot of people are predicting, with a lot of people coming out for Obama, one can now envision a scenario where Franken can actually win this race. I think it’s still a long shot, but compared to six weeks ago, he now has a chance.”

Listen: David Schultz on the Republicans’ evangelical bounce and Al Franken’s unexpected Dean Barkley dividend (16:59)