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  • Not Even Gerrymandering Will Save Some Candidates from Ethnic Shifts

    California’s 32nd congressional district, stretching from East Los Angeles to the eastern San Gabriel Valley, would seem like friendly territory for a Hispanic candidate. Labor Secretary-designate Hilda Solis’s district is more than 60 percent Latino, and there is no shortage of Hispanic local and state lawmakers eager to replace her in Congress.

    But rapidly shifting demographics suggest an Asian-American candidate – State Board of Equalization Chairwoman Judy Chu – has a shot at winning the urban-suburban district. Asians make up nearly 20 percent of the district, whom statistics suggest are better-organized politically, wealthier and have generally attained a higher level of citizenship (voting power) than Latino residents.

    The 32nd is one of several congressional districts that could soon trigger new leadership in ways that would have seemed unimaginable just a few years ago. The city where Chu long served as mayor, Monterey Park, is one of the only majority Asian-American municipalities in the nation.

    The increasingly mobile nature of American society means that no district – no matter how carefully gerrymandered – can be considered permanently safe. So while Solis’s district could slip away, Latinos can look west down the I-10 freeway to a swath of potential pick-up opportunities among seats held by African-American lawmakers.

    Consider the South Los Angeles-based 35th Congressional District, long represented by firebrand liberal Maxine Waters. The area won national attention – and infamy – as the epicenter of L.A.’s two postwar riots: in Watts in 1965 and at the corner of Florence and Normandie in 1992.

    But the district is no longer majority black. Inglewood – once all white, later mostly black – is now about 46 percent Hispanic, though city statistics suggest African Americans still vote in higher numbers. Hawthorne now has more Hispanics than blacks. And South Los Angeles, an almost entirely black neighborhood at the time of the Watts riots, now is home to more Hispanics. A small shift in district boundaries in the post-2010 Census redistricting process could provide a Hispanic lawmaker a decent shot at beating Waters in a Democratic primary.

    Rep. Diane Watson faces a similar political predicament in the neighboring 33rd District. Watson was a pioneering African-American lawmaker in her long state Senate career before serving as ambassador to Micronesia in the Clinton administration. She won a 2001 special election to Congress in the demographically diverse district, which begins about one mile inland from Venice Beach, runs through Culver City and ends up in South Los Angeles. The district also includes Koreatown, the Miracle Mile district, and Hollywood – all areas with both an influx of immigrants from various countries and a growing cadre of young professionals.

    Though once solidly African-American, the district is now 35 percent Hispanic, 30 percent black and 12 percent Asian. Lower citizenship rates among Latinos have deflated their political clout. But small shifts in new redistricting could have a considerable impact on Watson, altering the district’s racial and ethnic balance of power and possibly generating serious primary competition from a Latino challenger.

    This drama was already played out in the Long Beach area 37th Congressional District during a 2007 special election. The seat takes in Compton and Carson, which went from predominately black through the 1980s to heavily Latino. When Rep. Juanita Millender-McDonald passed away in early 2007 the open seat special election quickly came down to another African-American Assemblywoman – Laura Richardson – and Hispanic state senator Jenny Oropeza. Richardson edged out Oropeza in the special election primary, a temporary setback for Hispanic political ambitions. But the district could change considerably in redistricting within two years, providing another Hispanic pickup opportunity.

    The story is similar in other demographically shifting districts around the nation. In 2008 once-Republican Virginia, Democrats took over three U.S. House seats. The suburban district of long-time Republican Rep. Tom Davis fell to Democrat Gerry Connolly in an area filled with professional transplants from across the Potomac in Washington, D.C. Though technically part of the South, Northern Virginia votes more like affluent parts of New Jersey.

    Michigan, Pennsylvania and other large states with relatively static populations are projected to lose seats in the post-2010 redistricting process. Meanwhile rapidly growing Sunbelt states like Arizona, Florida and Texas will make big gains. All these states are seeing rapid demographic shifts, particularly from Latinos.

    Members of Congress have grown expert in tailoring district lines to their own political advantage. But given the rapidly shifting demography of the nation, the redistricting process of 2011 could result in even the craftiest lawmakers and political consultants losing control of their electorate.

    David Mark is a senior editor at Politico.com and author of Going Dirty: The Art of Negative Campaigning.

  • David Mark

  • Does Growing Inequality Mean the End of Upward Mobility?

    Barack Obama’s ascension to the presidency won’t end racism, but it does mean race is no longer the dominant issue in American politics. Instead, over the coming decades, class will likely constitute the major dividing line in our society—and the greatest threat to America’s historic aspirations. This is a fundamental shift from the last century. Writing in the early 1900s, W.E.B. DuBois observed, “The problem of the 20th century is the problem of the color line.” Developments in the ensuing years bore out this assertion. Indeed, before the 1960s, the decade of Barack Obama’s birth, even the most talented people of color faced often insurmountable barriers to reaching their full potential. Today in a multiracial America, the path to success has opened up to an extent unimaginable in DuBois’s time.

    Obama’s ascent reflects in particular the rise of the black bourgeoisie from tokens to a force at the heart of the meritocracy. Since the late 1960s, the proportion of African-American households living in poverty has shrunk from 70 percent to 46 percent, while the black middle class has grown from 27 percent to 37 percent. Perhaps more remarkable, the percentage who are considered prosperous—earning more than $107,000 a year in 2007 dollars—expanded from 3 percent to 17 percent.

    Yet as racial equity has improved, class disparities between rich and poor, between the ultra-affluent and the middle class, have widened. This gap transcends race. African-Americans and Latinos may tend, on average, to be poorer than whites or Asians, but stagnant or even diminishing incomes affect all ethnic groups. (Most housecleaners are white, for instance—and the same goes for other low-wage professions.) Divisions may not be as visible as during the Gilded Age.

    As Irving Kristol once noted, “Who doesn’t wear blue jeans these days?” You can walk into a film studio or software firm and have trouble distinguishing upper management from midlevel employees.

    But from the 1940s to the 1970s, the American middle class enjoyed steadily increasing incomes that stayed on a par with those in the upper classes. Since then, wages for most workers have lagged behind. As a result, the relatively small number of Americans with incomes seven times or more above the poverty level have achieved almost all the recent gains in wealth. Most disturbingly, the rate of upward mobility has stagnated overall, which means it is no easier for the poor to move up today than it was in the 1970s.

    This disparity is strikingly evident in income data compiled by Citigroup, which shows that the top 1 percent of U.S. households now account for as much of the nation’s total wealth—7 percent—as they did in 1913, when monopolistic business practices were the order of the day. Their net worth is now greater than that of the bottom 90 percent of the nation’s households combined. The top 20 percent of taxpayers realized nearly three quarters of all income gains from 1979 to 2000.

    Even getting a college degree no longer guarantees upward mobility. The implicit American contract has always been that with education and hard work, anyone can get ahead. But since 2000, young people with college educations—except those who go to elite colleges and graduate schools—have seen their wages decline. The deepening recession will make this worse. According to a 2008 survey by the National Association of Colleges and Employers, half of all companies plan to cut the number of new graduates they hire this year, compared with last. But the problem goes well beyond the current crisis. For one thing, the growing number of graduates has flooded the job market at a time when many financially pressed boomers are postponing retirement. And college-educated workers today face unprecedented competition from skilled labor in other countries, particularly in the developing world.

    The greatest challenge for Obama will be to change this trajectory for Americans under 30, who supported him by two to one. The promise that “anyone” can reach the highest levels of society is the basis of both our historic optimism and the stability of our political system. Yet even before the recession, growing inequality was undermining Americans’ optimism about the future. In a 2006 Zogby poll, for example, nearly two thirds of adults did not think life would be better for their children. However inspirational the story of his ascent, Barack Obama will be judged largely by whether he can rebuild a ladder of upward mobility for the rest of America, too.

    This article also appears at Newsweek.

    Joel Kotkin is executive editor of NewGeography.com and is a presidential fellow in urban futures at Chapman University. He is author of The City: A Global History and is finishing a book on the American future.

  • President Obama, Bring Us Together

    The election of Barack Obama signaled the beginning of a “civic” realignment, produced by the political emergence of America’s most recent civic generation, Millennials (born 1982-2003). Civic generations, like the Millennials, react against the efforts of divided idealist generations, like the Baby Boomers (born 1946-1964) to advance their own moral causes. Civic generations instead are unified and focused on reenergizing social, political, and governmental institutions and using those institutions to confront and solve pressing national issues left unattended and unresolved during the previous idealist era. The goal of a transition during such realignments has to be to lessen the ideological splits that have divided America during the preceding idealist era and take steps to unify the country so that the new Administration can more effectively deal with the major issues it faces.

    Reducing ideological divisions and unifying Americans to achieve important common goals has been a focus of Barack Obama since even before he announced his presidency. It is one of the key reasons his campaign had strong appeal to the emerging civic Millennial Generation, which he carried by a margin of more than 2:1. When CBS’s Steve Croft asked the then-candidate in a pre-election interview what qualified him, a junior senator with limited governmental experience, to be president of the United States, Obama led off his reply by citing his desire and ability to bridge differences and bring people together.

    Through Your Actions
    One way a civic era president-elect can demonstrate the importance he places on the need for national unity is to name members of the opposition party to his cabinet. The actions of Abraham Lincoln and Franklin D. Roosevelt, the only two other Presidents to preside over transitions to civic eras, demonstrate how this game should be played.

    For all the media commentary on Lincoln’s first cabinet, deemed a “Team of Rivals” by Doris Kearns Goodwin, it should be noted that it contained no one from the discredited Democratic Party, even though it did have representatives that spanned the breadth of opinion within the relatively new GOP. However, Lincoln did add a Democrat, Secretary of War, Edwin M. Stanton, to his cabinet less than a year after taking office. Stanton, a strongly pro-Union Northern Democrat, had opposed Lincoln’s election and had served as Attorney General in the final months of the Buchanan administration. However, Lincoln’s selection of pro-Union Democrat, Andrew Johnson, as his vice-presidential running mate in his 1864 re-election campaign demonstrates that it’s sometimes possible to take even a good idea too far. FDR appointed two Republicans to his initial cabinet–industrialist William H. Woodin, who as Treasury Secretary helped FDR implement his economic and fiscal program at the outset of the New Deal, and Harold L. Ickes, who served as Interior Secretary throughout the entirety of the Roosevelt administration. Both Woodin and Ickes were progressives who had supported FDR in the 1932 election. While neither was a member of the Republican Old Guard, together they demonstrated Roosevelt’s willingness to reach beyond his own party to enlist what today would be called “moderate Republicans” in a unified effort to overcome major national problems.

    Reflecting America’s changing demographics and social mores, Barack Obama has chosen the most diverse cabinet and set of top advisors of any president in U.S. history. Two members of Obama’s larger number of appointees — Robert Gates and Ray Lahood — are not Democrats, the same number for which FDR found room. This represents a greater number of members of the a different or opposing party than were present in the Cabinets of any of Obama’s idealist era predecessors.

    President-elect Obama’s attempt to include a wide range of political opinion and backgrounds in his Cabinet and White House team has generated criticism from the most ideological members of his party, just as FDR and Lincoln faced such criticism from the extreme partisans of their day. Obama’s appointment of many “centrist” cabinet-level officers who previously served in Congress, the Clinton Administration, or as governors suggests to his critics that he is abandoning his pledge to bring about significant change in economic, foreign, and social policy. But as political scientist Ross Baker points out, “In uncertain times, Americans find it much more comforting that the people who are going to be advising the president are steeped in experience. A Cabinet of outsiders would have been very disquieting.” And civic realignments like the present one have come at the most uncertain and stressful times in America’s history.

    Through Your Words
    Lincoln and FDR are also renowned for their ability to use their words to rally Americans to a common cause. Both did so at the very outset of their terms. Both of these great civic presidents’ first inaugural addresses addressed the fears of a nation in crisis with rhetoric that has continued to ring through the ages.

    Lincoln, in another last-ditch effort to forestall secession, told the South that neither he nor the Republican Party would make any attempt to undo slavery in states where it already existed. But he also reminded the South that, while only its actions could ultimately provoke civil war, his “solemn oath to preserve, protect, and defend” the Constitution would require him to prosecute that war if it came.

    Lincoln concluded his address with an appeal to the secessionists to rejoin the Union:

    We are not enemies, but friends…Though passion may have strained, it must not break, our bonds of affection. The mystic chords of memory, stretching from every battlefield and patriot grave to every living heart and hearthstone all over this broad land, will yet swell the chorus of the Union, when again touched, as surely they will be, by the better angels of our nature.

    Roosevelt used his inaugural speech to rally the country to the task ahead by telling it, “the only thing we have to fear is fear itself.” He reminded his listeners that at previous dark moments in our national history vigorous leadership joined with a supportive public to win ultimate victory in the nation’s trials. Perhaps most important, FDR gave clear recognition that the United States and its people had moved from what we have called an “idealist” era of unrestrained individualism to a “civic” era of unity and common purpose:

    If I read the temper of our people correctly, we now realize as we have never realized before our interdependence on each other; that we can not merely take but we must give as well; that if we are to go forward, we must move as a trained and loyal army willing to sacrifice for the good of a common discipline, because without such discipline no progress is made, no leadership becomes effective.

    Even before President-elect Obama had a chance to utter similarly comforting and inspiring rhetoric, his inaugural plans came under fire for inviting Pastor Rick Warren, a fundamentalist minister and activist in the passage of California’s Proposition 8 outlawing gay marriage, to give the invocation at his inauguration. But the selection of Warren should not have been surprising to careful observers. In his acceptance speech at the Democratic National Convention, Obama signaled his desire to find common ground on divisive social issues such as abortion, gay marriage, and gun control.

    By bookending his inaugural with a benediction from Joseph Lowrey, a minister who favors legalizing gay marriage among other liberal causes, Obama has signaled his determination to put an end to the debates over social issues from an idealist era that is ending and enlist all those willing to join his cause to rebuild America’s civic institutions.

    For in the end, it is the American people that Barack Obama must rally to his side. It is they who will ultimately decide the effectiveness of his transition as a springboard to a civic era Administration. So far their judgment is overwhelmingly positive. A late December 2008 CNN national survey describes “a love affair between Barack Obama and the American people.” That survey indicated that more than eight in 10 Americans (82%) approved of the way Obama was handling his transition, a figure that was up by three percentage points since the beginning of the month. Obama’s approval is well above that of either Bill Clinton (67%) or George W. Bush (65%) at that point in their transitions.

    More specifically, the poll suggests that the public approves of Obama’s Cabinet nominees, with 56 percent saying his appointments have been outstanding or above average. That number is 18 percentage points higher than that given to Bush’s appointments and 26 points above that of Clinton’s nominees. To quote CNN polling director Keating Holland: “Barack Obama is having a better honeymoon with the American public than any incoming president in the past three decades. He’s putting up better numbers, usually by double digits, than Bill Clinton, Ronald Reagan, or either George Bush on every item traditionally measured in transition polls.”

    Of course, the final judgment of the Obama presidency by the American people and history will be based on his performance in office starting on January 20. Still, these polling results clearly suggest that Barack Obama has internalized and put into operation the historical transition lessons provided by Abraham Lincoln and Franklin D. Roosevelt, the presidents who led America’s two previous civic realignments. If his inaugural address comes close to matching their first inaugural speeches, President-elect Obama will begin one of the most important administrations in the nation’s history with an enormous reservoir of political and public support that will serve him well in the crucial early days of his Administration.

    Morley Winograd and Michael D. Hais are fellows of NDN and the New Policy Institute and co-authors of Millennial Makeover: MySpace, YouTube, and the Future of American Politics (Rutgers University Press: 2008).

  • Solving the Financial Crisis: Looking Beyond Simple Solutions

    When presented with complex ideas about complicated events, the human tendency is to think in terms of Jungian archetypes: good guys and bad guys, heroes and villains. The more complicated the events, the more the human mind seeks to limit the number of variables it considers in unison in order to make sense of what it sees. The result is a tendency to describe events in the simplest black and white terms, ignoring the spectrum of colors in between.

    This principle can be seen in the current explanation of the financial crisis. University of West Virginia Professor of Sociology Lawrence Nichols has developed what he calls the “landmark narrative” shaping how the public reacts to dramatic swings in financial cycles.

    As Professor Nichols explains, the narrative described by the landmarks can be a contrived and even inaccurate version of history. By its nature, the shorthand narrative is often unable to describe the detailed reality of an occurrence. Much like an interstate highway, the landmark narrative takes the valley pass, avoiding the mountaintops from which the full view of history can be seen and understood. If we move away from the landmark narrative – beyond the highway for a view from the hilltop – we’ll see more of the landscape: enough to make sense of the complicated events that make up our financial environment.

    There is real danger in limiting our view of events to what can be described by the landmark narrative. It’s like describing New Jersey from the I-95 Turnpike: funny enough for late night television but not particularly useful for problem solving. Basing our view of events on the landmark narrative can, and very well might, lead to “solutions” that could prove as dangerous – or worse – than doing nothing.

    Specifically, reactions to the current financial crisis are making their way into popular consciousness, potentially becoming imbedded in unpredictable and usually indelible ways. In a democracy, our elected officials are bound to respond to these shifts in popular consciousness. The constant repetition of contrived and inaccurate versions of events eventually leads us to suffer what Nobel Laureate Merton Miller called “the unintended consequences [of] regulatory interventions.” Austrian Economist Ludwig von Mises, in fact, warned decades earlier that market data could be “falsified by the interference of the government,” with misleading results for businesses and consumers.

    As Americans, we have repeatedly failed to learn this lesson. Throughout our history, Americans have had an irrational fear of finance. Deemed to be too complicated, the field of finance lends itself easily to description by landmark narrative. Quite possibly to our detriment, the rise of the financial sector has been tied to economic expansion throughout our modern business history. The more robust the flow of finance in capital markets, the more robust is economic activity. Our economy, our livelihood and our well-being are inextricably related to finance at home and around the world.

    So what are the assumptions about finance we see today? It turns out many of the assumptions are often erroneous and usually dangerous. The problems on Wall Street, for example, did not stem from too few laws; rather, it resulted from not enforcing the laws we already have. When I talk to regulators and industry participants about problems with fails-to-deliver in bond and equity markets, they often respond that there is no rule against it. Indeed, there is no specific law that says that the seller of stock cannot fail to deliver the shares on the settlement date (usually 3 days after the trade); there is no specific punishment in place. Yet it seems clear that if someone takes your money and doesn’t give you what they promised, this is stealing and there are laws against it. Look at it this way: there is no specific law that says “it is a crime to hit a person on the head with a hammer.” Yet I assure you that if I hit you on the head with a hammer the police will arrest me for a crime. It will have some other name (like “assault with a deadly weapon”) instead of “the crime of hitting a person on the head with a hammer.” But I will be just as arrested. And it is just as much a crime.

    So the real problem here is not a lack of laws, but a lack of enforcement of what already exists on the books. Our reluctance to act on this reality has serious consequences. First, we don’t focus on punishing the perpetrators. Our government says they don’t have time for “finger pointing” because they are too busy rushing rapidly to fix the problem – a problem they have yet to define. So we pour money into institutions, allow huge bonuses to be paid with public money, lavish retreats on insurance company executives – and then insist what we need is massive regulatory reform.

    This has reached the level of absurdity. The House Financial Services Committee held hearings on January 5 to assess the alleged $50 billion investment fraud engineered by Mr. Bernard L. Madoff. The assumption is that somehow we don’t have the laws on the books to prevent Ponzi schemes; in fact those laws have been there for decades. A rash of new laws to prevent such occurrences is not necessary; we simply need to enforce what already exists.

    Yet rewrite we will, and with what may well be reckless abandon. Opening the session, Congressman Paul E. Kanjorski (D-PA), the Chairman of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, called for Congress to “rebuild” the regulatory system and commence with “the most substantial rewrite of the laws governing the U.S. financial markets since the Great Depression.”

    But this is the wrong approach. The real question isn’t new laws – although that may make good headlines for vote-seeking congressmen. The more basic question should be: where has the lawman been?

    Hearings like this are an integral part of the “landmark narrative.” Unless we’ve learned our lesson, we will be in for a rash of new rules, regulations and legislation paving the path for a future round of financial turmoil while allowing the perpetrators who created the crisis to avoid prosecution. Remember Sarbanes-Oxley, the measure supposed to prevent ill-doing by Wall Street. Passed in 2002, it didn’t seem to do anything except keep accountants and lawyers busy. In fact, it had the unintended consequence of discouraging small businesses from going public because of the extra cost for the reporting it required. Need more examples? Here’s a speech by an SEC economist that explains how regulations designed “to reduce executive compensation could actually increase expected compensation.” I’ve written in the past about “regulatory chokeholds” that make the failures of financial institutions almost inevitable.

    In 2009, we are presented with a new opportunity to display our capacity to evolve beyond the same old pattern of reaction and spurious law-writing. When dealing with violations of the law by respectable and powerful groups (like bankers), we need to consider using the laws already there; it’s simply time to find someone to enforce them.

    Susanne Trimbath, Ph.D. is CEO and Chief Economist of STP Advisory Services. Her training in finance and economics began with editing briefing documents for the Economic Research Department of the Federal Reserve Bank of San Francisco. She worked in operations at depository trust and clearing corporations in San Francisco and New York, including Depository Trust Company, a subsidiary of DTCC; formerly, she was a Senior Research Economist studying capital markets at the Milken Institute. Her PhD in economics is from New York University. In addition to teaching economics and finance at New York University and University of Southern California (Marshall School of Business), Trimbath is co-author of Beyond Junk Bonds: Expanding High Yield Markets.

  • A Little Genius for the City’s So-Called ‘Art World’

    There’s a little girl – maybe 10 or 12 years old – whose family owns a store just a couple of miles from Downtown Los Angeles. She spends a lot of time at the place after her nearby school lets out for the day, sort of helping out but mostly just hanging around where her older relatives can see her.

    I call her “Little Genius” because she’s always reading a book or busy at a computer or making paper dolls or working on some other challenge.

    Little Genius is Asian/American, the daughter of immigrants, and I think the flavor of academic prowess that comes with the nickname makes her happy in part because it makes her elders happy.

    It’s not just a nickname, though. I don’t know if Little Genius will grow up to be a great scientist or legal scholar or fill some other lofty role in our society. I do know, however, that she has the soul of an artist. Her paper dolls are much more intricate than the typical cut-outs. She recently put some craft clay and left-over cardboard from around the store together to make a scaled-down village occupied by little pigs. “The Pig Empire” went on display at the store for a few days, and plenty of customers enjoyed the work. Count me among them – it interested me, drew me close. I wondered about her motive and the inspiration for her little village.

    I thought about Little Genius when 13th District Los Angeles City Councilmember Eric Garcetti recently spoke of using $2.8 million in city funds to forge greater links between the Museum of Contemporary Art (MOCA) in the gleaming Bunker Hill district of Downtown and the many ethnic and immigrant and blue-collar folks who live in nearby areas.

    Garcetti pulled off a different sort of art – for a politician, anyway. He plainly spoke some truths that seldom get much of a genuine airing in our city. His brush strokes were bold, but applied with enough finesse to avoid offending anyone but the unduly sensitive. He said he’d like to see MOCA draw more visitors “who have never interacted with art in the visceral, provocative way that contemporary art can serve.” He called MOCA an institution with the potential to “set in motion a civic dialogue that’s been lacking in Los Angeles,” adding that that he hopes to see a variety of efforts focused on linking the museum to local schools, senior citizen’s centers, and everyday working folks by offering programs that appeal to them, and which they can readily attend.

    Perhaps this seems a mild triumph of rhetoric, but art in our city is in such a state of withdrawal that Garcetti’s comments amounted to some useful provocation of his own. Hundreds of thousands of persons live within a short distance of MOCA. Many of them labor hard – for some it’s a downright struggle – to maintain themselves in the city. Not many of them, or their children, are getting to MOCA.

    Garcetti’s comments also gave a reminder that museums and galleries might serve as reflections or repositories of art, but they should not be the exclusive province of what many refer to as the “art world.” I will go a step further – making clear that these are my thoughts and not Garcetti’s – and say that the moment artists, their patrons, and institutions such as MOCA come to believe that there is a distinct “art world” they lose touch with art itself.

    Art is a reflection of culture. Our culture is all of us, all mixed up. Great art engages all of us and helps us understand this culture of ours. How can anyone claim to be an artist while carving off a separate “art world” of limited membership?

    They can’t.

    That’s the best reason for all of us to take seriously Garcetti’s recent comments. It’s time to call on MOCA to make new and stronger efforts to reach Little Genius and the teeming mass of others who might not be members of the so-called “art world” but nevertheless serve as the heart and soul of our culture – also known as the real world.

    Jerry Sullivan is the Editor & Publisher of the Los Angeles Garment & Citizen, a weekly community newspaper that covers Downtown Los Angeles and surrounding districts (www.garmentandcitizen.com)

  • The Leveling of Citigroup

    The idea that Citigroup could support the family by gambling didn’t begin with Robert Rubin. It’s part of a long tradition. What was different in the most recent go-round is that, this time, Citi didn’t invent the game. Of course, once it got to the casino it characteristically placed larger bets than anyone else.

    Word that Citigroup is teetering on the brink of break up brings a certain wistfulness to this former Citibank speechwriter. Not because intensive care is something new for the old bank — it isn’t — but because it ended up on life support by following the crowd instead of leading it. For well over a century, Citigroup and its precursors — First National, the City Bank of New York, First National City, Citibank, and Citicorp — were innovators. They didn’t just overdo the fad of the moment, as they have done with mortgage-backed securities of one sort or another: they created it. They led the Charge of the Light Brigade.

    New York was America’s imperial city, and Citibank was a vehicle for imperial vision by people who lacked imperial lineage.

    When trade followed the flag to Latin America and the Philippines, Citi was there to count the cash. The vision of the bank as a financial supermarket didn’t begin when Sandy Weill stepped into the picture; it had its antecedents in the 1920s when Charles Mitchell, chairman of the National City Bank, merged commercial and consumer banking with his “bank for all”. His vision that was still ruffling feathers six decades later, when senior vice-president Eben Pyne bitterly told me, “Charles Mitchell ruined my grandfather’s bank [Farmers Loan and Trust], and they’re doing the same thing now with these credit cards.” After acquiring Grandpa Percy’s FL&T for its retail customer base, National City stuffed customers accounts with speculative paper from Latin America. Think Bernard Madoff with widows and orphans.

    Walter Wriston was CEO when I arrived at Citi in 1980. Walt used to say that when he entered banking soon after World War II, it seemed like the embodiment of everything dull. Over his next years as Citicorp Chairman, he would certainly turn up the excitement. He pioneered the negotiable certificate of deposit, shepherded the career of consumer banking king John Reed, and above all attacked the regulatory and legal regime that had been erected during the Depression, all under the watchful eye of a portrait of Austrian economist Frederich Hayek on his office wall. The strategy that emerged late in his tenure was known as the “Five I’s”: institutions, individuals, investments, insurance, and information. They wanted to do it all. And to do it, Citi needed to create a level playing field. Other institutions not regulated as banks could perform bank-like functions, while banks couldn’t reciprocate. Merrill Lynch’s money market accounts, which offered interest along with checking privileges, were a case in point.

    The deregulation campaign provided plenty of work for the speechwriting team. Ronald Reagan’s first term, when Adam Smith neckties were all the rage, was a propitious time to turn up the heat. The anti-regulatory fever that we were doing our utmost to spread was more reasonable then than many people now credit. At the time, we liked to remind everyone that the prohibition against interstate banking dated from an era when people traveled by horse. Under unitary banking laws then current in Texas, for example, each standalone ATM required incorporation as a bank. The commercial market allowed corporations with excess cash to lend to other corporations by way of Wall Street, bypassing the banks. It seemed as though any financial company that didn’t have a bank charter was free to poach on bank territory, while we had our hands tied.

    Citibank was constantly challenging these constraints, legally, operationally, and, happily for me, rhetorically. Some of the ideas were just plain dumb. One was a travelers-checks-by-mail scheme that would allow consumer deposits to be collected across state lines. What was missing was any sense that consumers could actually be induced to do business this way; one thing I did learn at Citibank was that consumer behavior often failed to keep up with the brilliance of these innovators.

    There was a pervasive feeling that Wall Street’s profits were unjustifiably high, and that we should be allowed to compete. We needed the regulatory freedom to enter each new line of business that just wasn’t there for banks. If Merrill Lynch could offer interest-bearing checking accounts and Sears could issue credit cards and sell insurance, why shouldn’t we sell mutual funds and insurance policies in our branches? We had machines to do mindless tasks like taking deposits and dispensing cash; why shouldn’t we use our people to do things that only people can do?

    But as we achieved some of our legal and regulatory goals, the true prize only receded. The head of our private banking division once confided in me, for no good reason, “Do you know how hard it is to beat the S&P 500 day after day?” Citibank was discovering, yet again, that it’s hard to make a whole lot of money in banking all the time unless you’re smart and nimble enough to adjust to changing economic circumstances.

    Citibank was nimble of mind but slow of foot. Profitability depended on finding an occasional niche and driving a truck through it, whether it was lending to Latin America, commercial real estate, or credit cards. At some point, John Reed told us that Citibank was a credit card company with six or seven [unprofitable] lines of business. At other times the investment didn’t pay off at all. Remember Quotron, the dominant player in desktop information for brokers around the world? Even the bank’s own due diligence showed that it wasn’t worth the $1.5 billion price tag. But we wanted to buy market share in that fifth “I”, the financial information business. This transaction made Daimler’s acquisition of Chrysler look like the Louisiana Purchase. At the time, there was a former trader named Bloomberg just entering the picture. Within a couple of years, it was his name, not Quotron’s, that sat on every trading desk in the world.

    In the early 1990s, as its stock fell below $10, necessitating a Saudi bailout, Citibank abandoned one of its most cherished traditions, the continuous payment of dividends for more than 100 years. A tradition sustained for many years, as it turns out, by borrowed money, not earnings.

    Fast forward to this week: a lead headline in the New York Times business section reads, “Citigroup Plans to Split Itself Up, Taking Apart the Financial Supermarket”. The playing field is now level. Bear Sterns, Lehman Brothers, Merrill Lynch, and Citi have all been leveled by their gambles in the same lousy securities.

    Citibank was always a bi-polar kind of place. It alternated eras of rash and brash with periods of sober and staid, sometimes with new senior management and sometimes with the same team that created the mess to begin with. For now, the mania is over. Current CEO Vikram Pandit, described in the press as a technocrat, has put Smith Barney up for sale. It’s back to basics. Both Grandpa Percy Pyne, and now Grandson Eben, can take time out from turning over in their graves for a little schadenfreude. If we’re lucky, Citigroup will be just a bank… until the next time.

    Henry Ehrlich is a footnote to the financial history of our time. He was a senior speechwriter for Citibank for 11 years, where he served the great, the near great, and the not so great. Among other things, he wrote every speech for the senior bank negotiator during the early years of the 1980s LDC debt crisis. He is author of Writing Effective Speeches and The Wiley Book of Business Quotations.

  • In a Financial Crisis What Happens to the Dog Bakeries?

    What will happen to the dog bakeries? I ask this question, because this line of business (and perhaps many others) escaped my attention for so long. I saw my first one years ago in suburban St. Louis. As one interested in economics, poverty and history, it struck me that dog bakeries represented a perfect symbol for the many “discretionary” business lines that have been established in recent decades in what has been called the consumer economy.

    This discretionary economy consists of businesses for which do not exist in societies with little discretionary income. It includes in its ranks a host of businesses that did not even exist before the last couple of decades, from dog bakeries, to Starbucks, tony cafes, specialized clothing stores and personal fitness centers. While these businesses might have been attractive to the households of the 1940s, 1950s, 1960s, or 1970s, people just didn’t have enough discretionary income to support them.

    Stores specializing in accessories for the bathroom simply did not exist in the immediate post World War II years. There was little, if anything, akin to a Gap store, a Banana Republic or an Abercrombie and Fitch. Few people had either access to or membership in gyms or personal fitness centers. Gyms in those days were often barebones affairs for roughnecks as opposed to the fashionista hangouts of today.

    Even in the 1960s and 1970s, many of the businesses we take for granted today simply did not exist. There were no Starbucks coffee shops. If you wanted espresso, you looked near a college campus or found an Italian neighborhood. Big box stores specializing in pets had not proliferated. Instead there were small stores crowded with everything from hamsters and turtles to birds and bulldogs. I suspect there were no dog bakeries.

    It would be most difficult to reliably estimate the size of the discretionary economy. Much of the discretionary economy lies embedded in the larger service sector. By 2007, the share of private employment in the nation in services had reached 2.5 times the rate of 1947. Within that vast sector are companies which provide goods and services our forebears lived without like gyms, boutique coffee and dog bakeries.

    The years since World War II have seen an unprecedented democratization of prosperity in the United States. Poverty rates have fallen and people live a far better life style than before. This has led critics to complain about the consumer society. For some, this “consumerism” was declared a false god and some even looked forward to a day of reckoning when the nation’s sins of over-consumption would earn it a deserved eternal damnation.

    Generally, these critics lacked a decent understanding of economics. For one thing even the most frivolous types of consumption employ people. When households cancel the gym memberships or have no need of the dog bakery, people lose their jobs. Supporting a nation of 300 million people requires all of the consumption it can afford to provide employment, a decent standard of living, and yes, to reduce poverty.

    So what happens now? If the ‘bubble’ expanded the discretionary economy, what will a prolonged recession do? It could be a mistake to presume that the economic downturn will soon be reversed and that previous consumption rates will be restored. One of the factors different about this downturn is the extent to which it has reduced the wealth of households. The IRAs and investment portfolios that many had relied upon to provide a comfortable retirement have declined steeply in value. This is a particular problem for the millions of baby boomers, who have spearheaded the development of the discretionary economy.

    Now they seem less likely to consume with the abandon they showed before the prospect of running out of money became a realistic one. The coffee at home will be more attractive than the $5.00 latte at Starbucks. Rather than stopping at the canine bakery, people may now choose to buy more prosaic dog biscuits from a supercenter aisle. The recent decision by Starbucks to close 600 stores recently may be a harbinger of things to come.

    But there is more. Boomers and others who have seen their savings devastated could reduce their spending on other items not directly part of the discretionary economy. The wardrobe – you need clothes, but not necessarily new suits every season – may not be renewed quite as frequently. The car may be kept a couple of extra years. This could place the entire auto bailout in jeopardy.

    It would be a mistake to assume that there will be a quick and easy exit from the current economic difficulties. An affluent economy is necessarily a consuming society. Such an economy requires both necessities as well as the frills. It needs gyms, Starbucks, dog bakeries and the rest of the discretionary economy, just as it needs automobile manufacturing, information services and grocery stores. The destruction of the discretionary economy may not be as serious as the loss of homes in Detroit or jobs on Wall Street, but it can not take place without destroying the jobs and lives of people.

    Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris. He was born in Los Angeles and was appointed to three terms on the Los Angeles County Transportation Commission by Mayor Tom Bradley. He is the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life.”

  • Henry Ehrlich

  • A Bailout For Yuppies

    The recent call by the porn industry – a big employer where I live, in the San Fernando Valley – for a $5 billion bailout elicited outrage in other places. Around here, it sparked something more akin to nervous laughter. Yet lending a helping hand to Pornopolis is far from the most absurd approach being discussed to stimulate the economy.

    Some influentials close to the administration may even find the porn industry a bit too tangible for their tastes. After all, the pornsters make a product that sells internationally, appeals to the masses and employs a lot of people whose skills are, well, more practical than ideational.

    As such, they may not even qualify for what is best described as a yuppie bailout, poised to extend the welfare state to the highly educated professional set. After all, George Bush’s bailout of Wall Street has already set a precedent, using public money to secure the bonuses and nest eggs of some of the nation’s most elite professionals. Call it the Paulson principle: In bad times, steer help to those least in need.

    A yuppie stimulus differs from the more traditional approach, which aims to get the front-line, blue-collar types back to work. Instead, it would channel public funds away from those grouchy construction workers – some 30% of whom may soon be out of work – to better heeled, and, in their minds, more deserving “creative” professionals. After all, what stake do the netroots have in making things better for Joe the Plumber?

    In contrast, the yuppie bailout focuses on a sure-fire Democratic constituency, the well-educated urban professional. One advocate of such an approach, pundit Richard Florida, has urged President-elect Barack Obama to eschew crude investments in traditional production and a renewed housing market in favor of goodies directed to what he calls “the creative industry.”

    Florida sees any focus on restoring manufacturing and housing as a misguided rescue of the “old industrial economy,” in which Americans actually made things and other Americans consumed them. Instead, he suggests, “the first step must be to reduce demand for the core products and lifestyle of the old order.”

    So let’s stop worrying about what happens to Detroit, or the crisis in the housing market. In Florida’s view, cars, of course, are demonized as woefully bad for environmental reasons and not particularly friendly to the preferred dense urbanity so attractive to advocates of “hip cool” cities.

    Florida even recommends shifting away from the single-family home, which is also, all too often, in the ‘burbs. Instead, we should develop what he calls “flexible rental housing,” so people can move every time they get new jobs. I think that is what they used to do in Chairman Mao’s China, too, albeit without the granite countertops and a Starbucks around the corner.

    In a yuppie bailout, what spending takes priority? More jobs for academics and educators. Florida suggests we invest in “individually tailored learning.” We assume this means neither home-schooling nor basic skills training but something more like painting and acting classes for tots and advanced “creative” navel-gazing for tweens and adolescents. And, of course, lots and lots of new jobs for well-paid, unionized teachers.

    These ideas should not be dismissed out of hand as the impractical meanderings of a lone scholar. In fact, Florida’s views are taken very seriously among influential Obama supporters at companies like Google as well as by politicos such as Michigan Gov. Jennifer Granholm, who is widely identified as a key Obama counselor on economic issues.

    Nor is Florida alone in his views. Bigger feet among the purveyors of conventional wisdom, like The New York Times‘ Thomas Friedman, also think the stimulus should steer more resources into the public pedagogy. Friedman even recently suggested teachers be exempted from paying federal taxes.

    And it’s not just teachers who would benefit from a yuppie bailout. The economic stimulus, Friedman says, should also focus more on high-tech companies like Google, Apple, Intel and Microsoft, all of which enjoy extraordinary valuations. This reaffirms the Paulson principle with a politically correct spin.

    Politically, a yuppie bailout would certainly appeal to powerful Democratic constituencies, not just the teachers’ unions. Select high-tech companies and venture capitalists can count on new subsidies and tax breaks. Greens and “smart growth” advocates will celebrate if money is diverted from hard infrastructure – such as improved roads, bridges, ports and transmission lines – which they insist would create enough carbon to heat the planet like a toaster.

    This “yuppie first” approach certainly would appeal to many mayors, some of whom are already adherents to the Floridian ideology. They may be further encouraged by a new report by the Philadelphia Federal Reserve called “City Beautiful,” which suggests cities should not promote growth through traditional infrastructure but instead invest in frilly amenities. As a Boston Globe article on the report summarized cheerfully: “Make it fun.”

    Here’s another hint of what might be coming in a yuppie bailout. Providence, R.I., located in the state with the nation’s second-highest unemployment rate, wants to sink money into a polar bear exhibit at its zoo – perhaps so we can see them before they become extinct or go on Al Gore’s payroll – as well as make improvements to a soccer field. Miami envisions spending on a giant water slide, new BMX and dirt bike trails at a local park and, of great national import, a new Miami Rowing Club building.

    Even the once-booming but now-hurting ultimate “fun city,” Las Vegas, wants in on the act. Mayor Oscar Goodman is asking the feds to kick in big time for its new Museum of Organized Crime and Law Enforcement. That’s right, taxpayers can participate in building a monument to Bugsy Segal. And with Nevada’s own Harry Reid running the Senate, the project seems well-positioned to get the “respect” it deserves.

    If Goodman, who used to defend mobsters as a criminal defense lawyer, has his way, it could spark a feeding frenzy for every under-funded tourist trap from Cleveland to Cucamonga. Pork used to mean roads, bridges and ports that, at least in theory, made the economy more productive while providing well-paid work for blue-collar workers. Soon these dollars may instead go toward yacht clubs, art galleries, museums and “creativity” training for toddlers.

    A yuppie bailout is likely to hold more money for Boston, San Francisco and other havens of the perennially hip – all of them Democratic bastions. There’s also likely to be less funding for the grotty suburban towns, industrial backwaters and Appalachian hamlets, all of which don’t usually appeal to the artistic set.

    To an old-fashioned Democrat, this all seems to miss the point. Shouldn’t we be stimulating the places already suffering the most from high unemployment, foreclosures and spreading impoverishment? Where do Toledo, Cleveland or Modesto fit in to the yuppie bailout? As Pittsburgh-based blogger Jim Russell says: “Most of the population will continue to live in ‘Forgottenville.’ Should we just forget about them?”

    In spite of all this, the mounting pressure for a yuppie bailout sadly reveals how the supposed party of the people is being transformed into just a second party of privilege. We should desperately try to create new productive capacity and better-paying jobs, especially for the denizens of Forgottenville. It certainly makes more sense than pouring taxpayer funds into new clubhouses, water slides or even better-financed pornographic movies – however much the latter may help property values in my neighborhood.

    This article originally appeared at Forbes.

    Joel Kotkin is executive editor of NewGeography.com and is a presidential fellow in urban futures at Chapman University. He is author of The City: A Global History and is finishing a book on the American future.