Source: Gage Skidmore, Flickr

U.S. Rep. Ron Paul launched the Minnesota portion of his presidential campaign with a spirited rally at the St. Cloud Civic Center Saturday.

Paul’s speech in St. Cloud touched on issues like domestic economic policy, the drug war and foreign interventions.

“The country and the world is in a mess today, and I’m quite convinced that we know exactly how we get here and exactly what to do,” Paul told the crowd, “and one thing’s for sure is we don’t need more government.”

Paul blamed the Federal Reserve for helping to bring about the speculative bubbles that sunk the nation’s economy.

“It’s the Federal Reserve that by interfering in the monetary system, monkeying around with interest rates, they create the bubbles,” Paul said. “For a while they can create one bubble and patch it up again, but eventually the big bubble bursts.”

He also condemned government bailouts of big banks and companies.

“They said if we don’t bail out the system there would be a depression,” Paul said. “Guess where the depression would have been? It would have been on those who were receiving our money. Instead the depression was dealt to the people, the middle class, they lost their jobs and they lost their houses and we the taxpayer absorbed the debt.”

Paul also voiced support for abolishing the Department of Education and the federal income tax, condemned the drug war as a tragedy and worried about creation of a worldwide monetary currency.

He told supporters that the country is increasingly in agreement with their libertarian economic views.

“We’re witnessing the end of an economic era,” Paul said. “This is a tremendous opportunity for those of us who believe in liberty to get this message out.”

Paul’s foreign policy stances have drawn jeers from some Republican crowds at debates, but he continues to advocate for neutrality and condemn the United States’ assassination of American citizen Anwar al-Awlaki, saying that ”what we must worry about is the rule of law because the rule of law protects us.”

Organizers put the turnout for the Republican candidate at about 2,500. Paul has trailed in most polls, but has captured a number of high-profile straw poll victories.

“You can not stop an idea whose time has come and the idea of liberty’s time has returned,” Paul said of his supporters. “We don’t have to understand each little issue, all we have to do is legalize freedom.”

Treasury Secretary Timothy Geithner. Photo: WDCpix

WASHINGTON — The latest political clamor over AIG, poised to combust next Wednesday at a House hearing on backdoor payments to banks that made risky deals with the company, centers on the Federal Reserve’s effort to conceal details of those payments. But senior officials, including Treasury Secretary Timothy Geithner, have so far evaded a key question: Why were AIG’s trading partners fully paid with taxpayer money instead of being told to take a loss?

“They chose to pay some people off entirely,” Bill Black, an economics and law professor at the University of Missouri and a leading critic of the government’s bailout managers, said in an interview. “They have never given a coherent explanation of why those particular folks. Under their own logic, there was no reason to pay off these parties at 100 cents on the dollar.”

Geithner, who led the New York Fed when it orchestrated the $62.1 billion payout to 16 banks that held AIG’s credit default swaps, has been asked to explain that controversial decision numerous times over the past year. And his answers have varied, depending on the questioner, causing Black and other critics to wonder whether the nation’s financial regulators can be counted on to spot the next economic crisis.

In November, bailout inspector general Neil Barofsky quoted Geithner as stating that AIG’s bank counterparties — including Goldman Sachs, Merrill Lynch and 10 foreign firms — were not at direct risk if the troubled company defaulted on its debts. “The direct effects of that failure would not have been particularly significant,” Geithner reaffirmed last month during testimony on Capitol Hill.

In May, however, Geithner suggested that AIG could not have negotiated lower payments to its trading partners without endangering the health of the whole financial system.

“We have no option now to selectively diminish the value of those claims without taking risks that you would have a default,” he told Sen. Chris Dodd (D-Conn.). Rep. Jo Ann Emerson (R-Mo.) was told that “you can’t selectively allow the institutions to default on particular types of creditors without risk that the whole thing comes unwound.”

So which explanation is true: Were AIG’s creditors hedged against the risk of a default — as Goldman has argued — or not? And if the banks had already mitigated the risk of losing their deals with AIG, why didn’t that allow Geithner’s Fed to negotiate a cut in repayments?

“There’s no way to prove it and no way to know,” former New York governor Eliot Spitzer, who took on Wall Street as the state’s attorney general, told The Washington Independent. “It’s part and parcel of the willingness of the Fed and Treasury to obscure from public view transactions involving tens of billions of dollars.”

Spitzer, who co-wrote a New York Times op-ed with Black calling for the public release of all AIG emails, said the Fed’s inability to intelligibly explain its actions cast doubt on the central bank’s fitness to lead the monitoring of systemic risk — as envisioned in the House-passed financial reform bill.

“Maybe [that power] should go to the Treasury, maybe it should go to the New York State attorney general,” Spitzer quipped. “But certainly, the Fed hasn’t done very well.”

Under the House’s financial reform legislation, the Fed chief would take a senior role on an “oversight council” of regulators, including the Treasury Secretary, that would be asked to neatly dissolve failing companies. The bill also allows the Fed to declare a financial “emergency” that would allow it to extend up to $4 trillion in discounted loans to banks.

Jane D’Arista, who spent 20 years as a congressional economist and now leads the Political Economy Research Institute’s financial reform project, said the AIG saga shows Fed officials “didn’t have a real handle” on the collapsed insurance firm’s web of complex deals.

“I don’t feel the team in place in this administration … understands institutions that well, and that was shown in Geithner’s response to the crisis,” D’Arista said. “He thinks he did a good job.”

Geithner told CNBC last week that he believes that paying off AIG’s counterparties in full was “absolutely” the right thing to do, adding: “Personally, I feel like I have a good sense of what the principal failures were” that caused the nation’s lingering financial crisis.

Barry Ritholtz, chief of the financial research firm Fusion IQ and creator of the The Big Picture blog, connected the Fed’s failures to spot burgeoning bubbles and abuse of lending rules to its lack of staff with Wall Street experience.

“The Fed is filled with economists and academics, none of whom have been on a trading desk or managed assets for a living,” Ritholtz said. “They have nothing to do with what’s actually going on on Planet Earth.”

Federal Reserve Chairman Ben Bernanke and Geithner were neither traders nor financial regulators before they joined the central bank. Bernanke’s background lies in academia, while Geithner focused on international monetary policy for 15 years before ascending to the New York Fed.

“These guys were fighting a forest fire, and they did the equivalent of clear-cutting a region,” Rob Johnson, a Roosevelt Institute senior fellow and former chief economist at the Senate Banking Committee, said in an interview.

“The frontier they chose was to use AIG as a conduit … the result of using that logic is, they fortified stockholders and bondholders and management, and did so at the expense of taxpayers.”

Among the most fortified bondholders was Goldman, which played a role in an estimated $33 billion of AIG’s riskiest deals. The company has argued that AIG was a “sophisticated investor” which should not be given free rein to renege on its contracts with big banks, even in the case of an effective takeover by the government.

But Janet Tavakoli, founder of Tavakoli Structured Finance and an expert on the credit derivatives that swamped AIG, countered that the game changed when public money was used for a “backdoor bailout” of firms that took hazardous gambles.

“We, the taxpayers, are not sophisticated … I’m saying, now we should revisit it,” Tavakoli said, by clawing back some of the payments the Fed made to big banks. “Without trying to get inside peoples’ heads and trying to read particular motivations, I’d say it’s about the money. Goldman Sachs is saying they’re entitled to it all and get to keep it all.”

Two Republican members of the bailout’s congressional oversight panel made a similar suggestion last week as part of a broader report on government rescue efforts.

To tamp down furor over its role in the counterparty payments, the Federal Reserve on Tuesday endorsed a Government Accountability Office audit of the AIG rescue. A spokesman for the central bank’s New York branch referred The Washington Independent to a lengthy statement released that day, disputing that it sought to withhold public information about the choice to bail out the 16 banks in question.

For its part, the Treasury Department has said that Geithner recused himself from discussions about repaying AIG’s counterparties on November 24, 2008, when his nomination to lead the agency became public, and “began to insulate himself weeks earlier.”

Yet Geithner took at least nine meetings related to the AIG rescue in the month before his nomination, according to his official daily calendar, which was released by the New York Times last spring.

One of those meetings occurred on November 21, 2008, and another on October 30, the day before AIG’s senior vice president of financial services emailed a colleague that a New York Fed official “asked me to stand down on all discussions with counterparties on tearing up/unwinding” the trades that have sparked the current controversy.

Photo: iStockphoto

WASHINGTON — Credit card holders hit with arbitrary interest rate hikes in recent months might be stuck with the extra burden, despite the high-profile congressional effort this year to protect consumers from such increases.

With most of Congress’ sweeping credit card reforms not taking effect until next year, some card companies have reportedly taken to raising rates — while the law still allows it — on even reliable borrowers. Rather than attacking those discretionary hikes head on, however, Congress sidestepped them, punting any protections for those card holders to the fancy of officials at the Federal Reserve, who are currently drafting rules for implementing the reforms. That punt could create a loophole for card companies to exploit — a possibility that’s raised concerns about the ultimate effectiveness of the law to protect the most responsible card holders from new rate increases, and left consumer groups anxiously awaiting the Fed’s interpretation of the statute.

It wasn’t supposed to happen this way. Enacted in May, the new law is designed to protect consumers from the most abusive practices of the credit card industry — practices like hidden fees, short payment windows and interest rate hikes applied to existing balances. Beginning next August, it will also require card companies to review rate hikes periodically to determine whether changes in market conditions, customers’ credit risks, “or other factors” should result in reducing the rates previously increased. The provision is designed to remedy the near-universal trend of companies raising rates when customers are deemed to be risky bets, but almost never reducing them again if conditions change and the risks are eliminated.

Yet the provision’s “other factors” clause is so vague — purposefully so, some experts say — that consumer advocates have been left wondering how successfully it will protect card holders from arbitrary rate hikes.

“The statute as written is so ambiguous that you really don’t know what it means or how it’s to be applied,” said Pamela Banks, policy counsel at Consumers Union. The “other factors” language, Banks added, is “a catch-all” which regulators could interpret to be “any number of things.”

A lenient interpretation of the provision, if it allowed arbitrary hikes to remain, would be an expensive one for many card holders — not least of all because any rate hikes installed before February may apply not only to new purchases, but to existing balances as well.

Lauren Saunders, managing attorney at the National Consumer Law Center, said that ambiguity has left advocates “concerned whether the [regulations] under this law will give it any teeth.” Consumers whose rates were increased for specific risk or market reasons — meaning, factors pegged to external indexes outside the banks’ control — might benefit from the bank reviews when those conditions no longer exist, she said. But in cases when the motivation for the increase is more nebulous — even arbitrary — the law offers no guidance.

“The problem is that a lot of these rate increases are not that mechanical,” Saunders said. “If the reason for the increase is amorphous or discretionary, then this review isn’t going to do a lot of good.”

A congressional staffer familiar with the bill conceded that the language leaves plenty of room for interpretation. “There are factors issuers must consider,” the staffer said, “but not specific circumstances.”

The questions surrounding the rate-hike review provision have only been confused by the timeline for setting the credit card reforms into place. Sponsored by Sen. Christopher Dodd (D-Conn.) and Rep. Carolyn Maloney (D-N.Y.), the original legislation was written to take effect this year. Yet most sections were delayed until February after intense lobbying from the powerful finance industry. The banks have taken advantage of the delay, with some of the nation’s largest credit card companies raising rates and fees — often to the surprise of responsible borrowers — to beat the implementation date.

Anticipating that trend, Democrats added 11th-hour language requiring that the banks’ rate-hike reviews apply to all increases imposed since the start of 2009. The retroactivity was “a concession to the fact that they didn’t put this thing into effect right away,” said Linda Sherry, director of national priorities at Consumer Action. “It was already known that there was going to be this interim period where [rates] would be played with.”

For their part, credit card issuers have denied the charge that the recent slew of rate and fee hikes reflects anything but sound business strategy amid the economic downturn. Irving Daniels, vice president for banking and securities at the Financial Services Roundtable, said the industry has simply been forced to protect itself in the face of rising unemployment and “general economic risk.” The rate hikes have “absolutely” been a function of these external factors, he said, not any effort to milk profits ahead of the reform law.

Not convinced by the industry’s argument, Dodd in July sent a letter to Washington’s leading finance regulators, including Fed Chairman Ben Bernanke, requesting their “diligent attention” to the section of the reform bill requiring the rate-hike reviews to be retroactive.

“[T]he look-back provision will serve as a deterrent only if it will be implemented and enforced effectively,” Dodd warned.

Later that month, the Fed issued an interim credit card rule, which recognized the rate-hike review provision, but left any details to the imagination. For rate increases beginning at the start of this year, the rule states, the card issuer “must review the account at least once every six months and consider changes [in credit risk, market conditions and other factors] in subsequently determining whether to reduce that rate.” That’s different than saying, however, that certain of those factors would require the companies to reduce that rate.

In the eyes of some on Capitol Hill, the enforcement of the provision is a kind-of test for the Fed, which doesn’t have a strong record, in the eyes of some Democrats and consumer advocates, of enforcing some of the bank regulations that Congress has enacted over the years.

Indeed, many Democrats and consumer advocates are pushing for the creation of an independent authority — the Consumer Financial Protection Agency — to oversee the finance industry, including credit card issuers. Dodd, who chairs the Senate Banking Committee, and House Financial Services Chairman Barney Frank (D-Mass.) have voiced hopes to pass that legislation as part of a larger finance reform package this year. Dodd spokeswoman Justine Sessions said Friday that the lawmakers retain that goal, although with thorny health care and climate change proposals remaining on the year’s legislative calendar, the odds that Democrats have the time to squeeze in another controversial proposal into the mix are slim.

Meanwhile, stakeholders on all sides of the debate remain in-wait for the Fed’s guidelines. Although several provisions of the reform bill launched last month, most won’t take effect until February, with the Fed set to issue proposed rules on those sections in the coming weeks. Other elements of the bill, including the new rate-hike review requirement, don’t take hold until next August. The Fed is issuing a separate set of rules, at a later date, to address those provisions. Few think that Congress has left the agency with an easy job.

“The Fed will have an interesting dilemma,” said Banks, of Consumers Union. “We’ll have to see how they handle it.”

Mike Lillis is Congress reporter for the Washington Independent.

One answer: Give us time. Riots weren’t making headlines right after the Great Depression started in 1929 either.

And locally, people have been picking up picket signs from time to time. Last September saw a demonstration against the federal bailout of the financial industry take place at the Minneapolis Federal Reserve Bank (Minnesota Independent video). Protesters gathered there again in November, this time with guest star Ron Paul, seeking to “End the Fed.”

The biggest local street protests on the economy (and many other issues) took place outside the Republican National Convention in St. Paul last September. (Studies asking the question, “Why were they not rioting during the RNC?” have tended to focus on the Twin Cities’ very effective police-state tactics.)

UPDATE: It apparently was here for today’s End the Fed rally at the Federal Reserve Bank. The sky advert was last seen in these parts at the tail end of the Republican National Convention. The timing and location made a certain amount of sense. But on a Saturday two-and-a-half weeks after the election, with a U.S. Senate recount in progress? What does Ron Paul have to do with that? Why here? Why now? Is this any better a use of fuel than Detroit’s Big Three auto execs each jetting into D.C. on private planes? Or does it simply signal that with the recount the Twin Cities have again achieved a critical mass of TV news crews? 

Bloomberg News reports that the Federal Reserve Bank is “refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.” Reporters Mark Pittman, Bob Ivry and Alison Fitzgerald add that Bloomberg has tried to obtain the information through a Freedom of Information Act request and a federal lawsuit filed last week.

But mum continues to be the word, not only from the Fed but from the Obama transition team:

Federal Reserve spokeswoman Michelle Smith declined to comment on the loans or the Bloomberg lawsuit. Treasury spokeswoman Michele Davis didn’t respond to a phone call and an e-mail seeking comment.

President-elect Barack Obama’s economic adviser, Jason Furman, also didn’t respond to an e-mail and a phone call seeking comment from Obama. In a Sept. 22 campaign speech, Obama promised to “make our government open and transparent so that anyone can ensure that our business is the people’s business.”

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.