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Why the Little Guy Matters
By David Glenn Cox
We have watched as the economic crisis has evolved like winter turned to spring and spring to summer. Bad loans were made by professional bankers who garnered fees from these loans. But when they turned sour they blamed the consumers, the little guys, for taking the loans.
What began in 2007 as a rising tide has become a tsunami of home foreclosures reaching ten million families. The collapse of the home mortgage market brought about the collapse of the building materials market. It brought down a string of little banks, which then threatened to take down the big banks. Sheila Bair as chairman of the Federal Deposit Insurance Corporation has been busier than a one-armed paperhanger (pun intended). Bair successfully arranged the buyout of failing banks by bigger banks, otherwise the FDIC would have been kaput.
The Washington Mutual failure alone would have cost the FDIC $8 billion had it not been sold to JP Morgan. The Fed and the Treasury in their infinite wisdom have decided that the large banks are too big to fail. This is where the emphasis has been placed, on rescuing the banks, while in the meantime Rome burns. California is facing a $20 billion budget deficit, New York State $8.3 billion and the hit parade goes on and on. Because of these financial travails the big banks have now decided to protect themselves by raising the interest rates that the states must pay for loans.
California’s tax revenues fell year on year by 40%. Pennsylvania’s state tax revenues have fallen the most since 1963. These statistics are repeated from sea to shining sea and it's still all the little guy’s fault. When the little guy is struggling to pay his bills he can’t buy anything, and when the little guys can’t buy anything tax revenues fall by 40%.
Last month Wal-Mart reported reduced earnings due to slow grocery sales. Kroger’s stock price has been lagging as well on reduced sales. Kroger reported that the good news was that more consumers were buying the Kroger brands, which is more profitable for Kroger, but the dollar amount spent is declining. If ever there was a canary in the coal mine, it should be grocery store sales. What is good news for Kroger is bad news for national brands and that means fewer deliveries and fewer drivers but it also means less fuel tax revenue. Lower grocery store sales means less sales tax revenue.
Fewer deliveries mean no need to purchase new trucks, no need for new tires. No need for new forklifts in the warehouse or to add new employees, and most of all, no raises. The little guy becomes pretty important in the equation. In the break room fewer employees means fewer coins in the snack machines. The twice a week fill up becomes once a week or maybe every other week. Less need for paper for the copy machine or the computer printer, even less toilet paper in the restrooms.
Because business is so slow the uniform company goes under, laying off employees. So does the forklift dealer, and the office supply company lets the sales rep that serviced the companies account go. It goes on and on, repeated tens of thousands of times each day.
We have a cancer that is eating our economy; as the economy grows weaker it spreads. Las Vegas was once called America’s playground. The gaming industry was considered recession proof but Las Vegas is one of the areas hardest hit by the depression. When the little guy can’t buy groceries he sure can’t go to Vegas. When the little guy doesn’t go to Vegas those big glittering hotels begin to lay off workers, and those workers can’t meet their mortgage payments. Nevada has one of the leading rates of home foreclosures. Are cities too big to fail?
The Las Vegas Monorail Company wants to reorganize its $1.2 billion government-backed debt and awaits the decision of a Federal Judge. The bond insurer claims that Las Vegas Monorail is, in effect, an instrument of the state of Nevada and shouldn’t be allowed to use Chapter 11-bankruptcy status. The bond insurer, Ambac, sold a policy that it doesn’t wish to pay out on. They would prefer that the millions of little guys in Nevada take the loss. The little guys who never planned or wanted a monorail and never collected premiums from the insurance policy, but damn, those little guys come in handy when the bottom drops out.
In Harrisburg, Pennsylvania the city council voted against selling city assets to meet their debt service requirements. Imagine a city in the United States holding a going out of business garage sale. The city had guaranteed bond payments to the tune of $68 million and now ponders selling off an island in the middle of the Susquehanna River. It would be easy to point fingers and just chalk that one up to bad government, but it is going on in almost every state in the union and until we fix the little guy it will continue.
Municipal bond defaults nationwide amounted to $6.3 billion in 2009 and $8 billion in 2008. This led billionaire investor Warren Buffet to remark, “If a few communities stiff their creditors and get away with it, the chance that others will follow in their footsteps will grow. What mayor or city council is going to choose pain to local citizens in the form of major tax increases over pain to a far away bond insurer?” Get away with it? Buffet's company sold insurance against bond defaults and now describes struggling municipalities as if they were hold-up bagmen. If Warren is as smart as they say, he would advise the administration to help the little guy.
We must generate economic activity somehow, someway, or we will remain becalmed and our economy will continue to weaken. The administration's call for a spending freeze when 30% of GDP is generated by government sales is insanity. The President's commission on the budget deficit wants to consider raising the age for Social Security to sixty-seven. Hell, why not seventy-seven or eighty-seven, or even a hundred and seven.? During the last Great Depression part of the idea of Social Security was to take tens of thousands of older workers out of the workforce. This created jobs for the unemployed.
Rather than raising the age for Social Security it should be lowered to sixty-three. Eliminate the withholding cap at $106,000 dollars and let the millionaires pay their fair share. Most of the workers in this country will never have their withholding capped so why do we give it to the wealthiest workers and then cry about what we can’t afford?
“Closely associated with this first objective is the problem of keeping the home-owner and the farm-owner where he is, without being dispossessed through the foreclosure of his mortgage.
"His relationship to the great banks of Chicago and New York is pretty remote. The two billion-dollar fund which President Hoover and the Congress have put at the disposal of the big banks, the railroads and the corporations of the nation is not for him.
"His is a relationship to his little local bank or local loan company. It is a sad fact that even though the local lender in many cases does not want to evict the farmer or homeowner by foreclosure proceedings, he is forced to do so in order to keep his bank or company solvent. Here should be an objective of government itself, to provide at least as much assistance to the little fellow as it is now giving to the large banks and corporations. That is another example of building from the bottom up." Franklin Delano Roosevelt
All economic success begins with the rescue of the little guys, and economic failure begins by ignoring the little guys.
“No nation can long continue half bankrupt. Main Street, Broadway, the mills, the mines will close if half of the buyers are broke."
“But they seem to be beyond the concern of a National Administration which can think in terms only of the top of the social and economic structure. They have sought temporary relief from the top down rather than permanent relief from the bottom up. They have totally failed to plan ahead in a comprehensive way. They have waited until something has cracked and then at the last moment have sought to prevent total collapse.
"It is high time to get back to fundamentals. It is high time to admit with courage that we are in the midst of an emergency at least equal to that of war. Let us mobilize to meet it.” Franklin Delano Roosevelt
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