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Palaima: Stomping all over Americans (EXPANDED VERSION)

Austin American-Statesman Friday, July 25, 2008

This year marks the 100th anniversary of the publication of Jack London's dystopian novel "The Iron Heel." In it, a super-wealthy oligarchy has used savage capitalism to destroy the middle class, bankrupt small independent businesses, and turn farmers and laborers into serfs. This no longer sounds like fiction.

For six years, former Sen. Phil Gramm of Texas has been an executive with the U.S. operations of the Swiss bank UBS. Sen. Carl Levin, chairman of the Senate Permanent Subcommittee on Investigations, says UBS has used a variety of clever "secrecy tricks," including smuggling diamonds through U.S. customs in toothpaste tubes, to enable 19,000 wealthy Americans to hide $18 billion dollars in assets from the IRS. In Levin's opinion, UBS and these fellow citizens have been waging "economic warfare against the United States and honest, hardworking American taxpayers."

The Marie Antoinette quality of Gramm's comment about whining Americans has been much discussed. More significant, however, are oligarchs, like the 19,000 tax-cheaters, who do not whine, because they have profited from the political and economic philosophy that has prevailed since the election of President Reagan.

You might recall Vice President Dick Cheney declaring during the 2004 vice-presidential debate in Cleveland that the answer to the 31 percent unemployment rate in "the biggest poor city in the country" was to "have a first-class public school system," and to do for high schools what the No Child Left Behind Act had already accomplished for elementary schools.

In 2004, the Cleveland public school district had a projected debt of $1.4 billion dollars. Two out of every three dollars it spent in its annual budget went toward debt service. For 40 years, many of the children in Cleveland's public schools have been left way behind. A February report by the Brookings Institution says that children of poverty have a 62 percent chance of joining the middle class if they get a four-year college degree. But the same report declares that dysfunctional public schools, families and neighborhoods are the main impediments to them even getting to college.

In December 2006, I heard a Federal Reserve Bank official explain that the role of the United States in the world economy was to buy things and we should keep on buying things, despite the weakness of the dollar and our record levels of household and government debt. I was dumbfounded until I understood that there is a powerful segment of our society that profits from such policies.

The very word "economy" means "household management." Its etymology implies that what goes on at the level of the individual household is analogous to what goes on within national economies. A basic fact of history is that debt comes due. When it does, as in the major economic crises that plagued Greek city-states during the seventh and early sixth centuries BCE, mechanisms may be found to make it perpetual. In the time of the Athenian leader Solon, many small farmers had become debt-slaves. Many Americans are effectively debt-slaves right now.

But there are people or institutions taking advantage of that indebtedness. A June 2 Newsweek story described how an entrepreneurial broker made a small fortune selling 71 houses in a depressed but stable Slavic neighborhood of Cleveland by manipulating the appraisals of these properties as much as 600 percent upward and then selling them via sub-prime mortgages. The neighborhood is now in ruins.

We think of institutions as culprits. The failure of big banks draws national attention. But for big lenders to fail, the Cleveland story has to be repeated thousands of times. In every case, mortgage lenders, real estate agents, appraisers, lawyers and sellers -- in the Cleveland case, the broker split his 8 percent commission with these other parties -- profit from the situation and bring about misery for individuals and whole communities.

There has been a 40% increase in homeless children in the Cleveland public schools, directly attributable to sub-prime mortgage foreclosures. Even once wealthy suburbs like Shaker Heights have been devastated by hundreds and hundreds of foreclosed and abandoned homes. In the last two years, the city has spent $12 million from its very tight resources just to knock down the worst abandoned homes. Since each such act costs ca. $10K, you can calculate the extent of the problem.

Worse still is that Cleveland officials tried to get the Federal Reserve Bank to take action to regulate sub-prime mortgage practices. The Fed held a conference in Cleveland in 2001 and then did nothing. Finally, Cleveland's leaders moved to pass their own regulations. Lobbyists for mortgage companies worked upon state legislators who then passed, by a wide majority, a state law forbidding communities to impose their own restrictions on such predatory practices.

My illiterate paternal grandfather came to Cleveland at the end of the 19th century. He worked in Cleveland's steel mills until he was 70 years old. He and my cleaning-lady grandmother raised four children in a house they bought in a Cleveland neighborhood like the ones now destroyed. How could an uneducated couple who could not even read or write do this? The Lithuanian lawyers and Lithuanian Catholic Savings and Loan were scrupulous in their lending practices. In each of Cleveland's melting-pot neighborhoods, ethnic business persons would not betray their own people as the predators who peddle and profit from sub-prime mortgages these days have done.

Conservative philosophers might argue that those aged Clevelanders on limited income who were seduced into taking out sub-prime equity loans in order to repair their century-old houses and those desperate families who thought they were being given a chance at the American dream of owning a home are to blame for their own foolishness. Here I abide by the words I once heard conservative educator and political figure John Silber speak: "Half of the American people are under average intelligence, talent and abilities." Government regulations, many instituted in our last great robber-baron period, were there to protect the little men and women and their families from their own human foolishness and from law-of-the-jungle capitalists.

We have had 28 years now of deregulation and anti-government politics. We have had savings and loan, junk bond, oil, gas and electricity deregulation (Enron), Iraq contractor and sub-prime real estate scandals. Our government is off our backs. This leaves the poor, powerless, unlucky and uneducated exposed to economic predators, what London called "the law of club and fang."

We have drifted far from LBJ's vision of a Great Society. We need a new New Deal.

Palaima is Dickson Centennial professor of Classics at the University of Texas at Austin. He recommends Bill Moyers' PBS Journal, at, which examines the effects of subprime deregulation.

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