Nostalgia is not a good basis for reform

Richard Rorty said that in America, people on "the left" think that there is a better, more just, more free, future we should aspire to while people on the Right like things as they were in some made-up past Golden Age. That's no longer true. The people who most insist on being called "the left" look to the past and the supposed Golden Age of the New Deal. They have a backward looking ideology in which Harry Truman's combative rhetoric, FDR's supposedly uncompromising stand, and aggressive government regulation of corporations are venerated in a way that has little to do with the actual historical record. Where they can, they call for restoration or protection of New Deal legislation: bring back the Glass-Steagall act, don't touch Social Security, and so on. Past the limits of the New Deal, they have latched onto talismanic legislative proposals like the "public option". Anyone doubting the necessity of these proposals is a "neoliberal" or, even worse, a "centrist". But it would be strange if the solutions of the 1930s were precisely suited to the economy and society of the 21st century, even if they had been perfect solutions. In particular, it's worth thinking about the regulations on banking.
Here's a story about the work of Ron Bloom, President Obama's manufacturing adviser and what he heard from executives at manufacturing firms in Northeast Ohio.

In some cases, they called for a more expansive government role in manufacturing, along the lines of China, Germany or Japan.

“We don’t have to reinvent the wheel,” said Andre Morrison, an executive at Green Mill Global, which makes lighting products. “But why can’t we model our policies on those of other countries, where government and private industry are in bed together?”

Mr. Morrison’s biggest complaint was credit. He said he knew five or six established companies that wanted to expand within the United States but could not get loans from commercial banks.

And why is there no money available?

Several seemed to nod in agreement when William N. McCreary, a vice president of the NSG Group, said that private equity firms and other financiers frequently asked for an American manufacturer’s “China strategy,” meaning that having an operation in China made a company more worthy of financial support.

The NSG Group, which makes flat glass of the sort used in auto windshields, operates in many countries, including China, and is based in Japan. Even so, Mr. McCreary, who is based in Toledo, Ohio, sounded perplexed by this lack of faith in American producers.

“The private equity world is heavily on the side that you have to be in China,” he said. “It thinks the U.S. is not a place you make things.

This is a problem not addressed by the Depression Era banking regulations, but maybe more important. Some group of money managers, managers of bank and non-bank financial centers have come to a group decision that investment in US manufacturing is a bad idea and there are no significant competing financial organizations willing to invest the other way. Of course, why would they engage in long term investment to boost manufacturing when there are amazing profits to be made betting on gold and securities?

Billionaire hedge fund manager John Paulson, whose bet against the overheated housing market made him one of the world's wealthiest people, became a lot richer last year.

By earning an estimated $5 billion in 2010 thanks mainly to bets the economy would recover, Paulson likely set a record for the $1.9 trillion hedge fund industry's biggest-ever year's earnings. He beat his own record, which he set in 2007 with a $4 billion haul made off the subprime bet. [Reuters]

Paulson seems to have made a fortune this time mostly because he bet gold prices would go up. Why would you struggle around with small time bets on Toledo glass makers that take several years or more to pay off when you can sweep the table with bets like these? Hedge-funds and other private equity (PE) are part of a huge financial "shadow banking" sector that was far smaller in the 1930s. And often this sector makes investments with funds belonging to giant public pension plans - something else that didn't exist in the 1930s. For example, CaLPERS, which manages the retirement funds of California's cops, firemen, and other public employees lost tens of billions of dollars in the collapse because of bets through private equity firms and other "money managers" on all sorts of ridiculous development projects including some dubious real-estate speculation. Now they're kind of reassessing:
“Mr. Dear said Calpers wasn’t planning any significant new commitments to real-estate private-equity funds. … In a tough criticism of the real-estate funds, Mr. Dear said they ‘tend to be more in the asset-gathering, fee-generating businesses than they are in the capital appreciation, income-generating business.’ [WSJ]
One might wonder why CaLPERS was not seeking out profitable Ohio glass companies instead of helping PE firms do highly leveraged real-estate speculation that they now realize was aimed at generating fees for PE companies? Because the people who manage PE funds and mutual funds and all the other complex parts of the financial system that does not want to invest in American manufacturing are, above all, the "in the asset-gathering, fee-generating businesses". For that matter, what about the managers of the pension of Ohio state workers? Well, OPERS which manages those funds has also been giving money to PE firms to invest, including a firm that is closing a factory in Ohio.
In total, OPERS has invested €110m in the firm, including €60m in Permira IV, the fund that acquired Hugo Boss, according to Workers United. Permira bought Hugo Boss parent company Valentino in 2007, in a deal valued at €5.3bn. The firm reportedly met with Valentino's management in June 2009 to discuss renegotiating the company's €2.5bn debt pile. The closure of the plant was announced on 29 December after negotiations about its future stalled. The company had been seeking to reduce average wages from $12 to $9 per hour.
So OPERS took money saved for the pensions of Ohio public workers and invested somewhere around $150 million of it in a Private Equity firm that took part in another highly leveraged deal for Valentino which owns Hugo Boss and then seems to be closing down an Ohio factory because workers were not happy to make a princely $9/hour. It turns out that the new Republican governor of Ohio was working to "help" public pension funds in Ohio find such opportunities via his previous employer - Lehman Brothers. By the way Lehman Brothers was an old-style investment bank, not subject to the stronger regulation depression era banking laws were supposed to impose on depositor banks. And if you want to see an example of how private equity can destroy US manufacturing business, you should read up on how Simmons was loaded up with debt and converted from a profitable stable business into a dead business much to the benefit of the PE firms that took it over. It's not just public pension money that has been funneled into speculative investment and away from slower, but probably safer investments in factories and wind farms and utilities. Something over a trillion dollars has gone into 401K pensions and a lot of that is generating fees for managers of mutual funds who are churning the money around in various stock speculations that may or may not pay off. Maybe a government that can guarantee mortgage bonds could also guarantee industrial development bonds and let pension holders direct their money away from the people in the "asset-gathering, fee-generating businesses" and into less risky longer term funding of manufacturing business, transportation and energy or into bonds that fund municipalities and the states or into anything other than speculation that tears out the core of the economy. But we're never even going to get to that discussion if we continue a debate between the New Deal and Reaganomics.

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