Google to Close Loophole to Payday Lenders


Type “need cash now” into a Google search and the first few results are ads from high-interest lenders or companies that refer customers to them.

Payday_loan_shop_window                                                                                 By Gregory F. Maxwell

That will change come July, when Google has said it will stop selling ads to payday lenders and other companies in the business of short-term or high-interest consumer loans, closing off one of the industry’s most effective avenues for finding customers.

Online lenders are already worried over Google’s decision to no longer sell ads for short-term or high-interest loans — those that must be repaid within 60 days or that carry interest rates of 36% or higher. That will affect payday lenders, which offer small, short-term loans, as well as installment and auto-title lenders, which typically provider larger, longer-term ones.

Google sources said the policy, which goes into effect July 13, also will apply to lead-generation websites that sell consumer data to those lenders.

But many lead generators don’t buy ads, instead relying on their sites to turn up in search results, which is why the T3 case is so important.

The crux of the CFPB’s lawsuit is its allegations that T3 does a poor job of policing lead-generation sites to make sure they are not making false or misleading claims.

“T3Leads steered consumers toward bad deals,” CFPB Director Richard Cordray said in a statement. “If you engage in this type of conduct, you risk the consequences for harming people.”

On the typical lead-generation site, borrowers fill out an application, providing names, addresses and even Social Security and bank account numbers. Once borrowers click submit, it triggers a series of nearly instant transactions.

First, the information is usually sold by the lead-generation site to an aggregator like T3. Next, the aggregator auctions the information to lenders. Finally, the borrower is automatically redirected to the website of whichever lender won the auction.

The CFPB alleges that the process can result in consumers being tricked into taking out loans from lenders that charge the highest interest because often they are the highest bidders for the lead.

Many lead-generation sites viewed by The Times tout benefits of payday loans that are fairly innocuous, such as that most lenders do not do a credit check and that borrowers can get money deposited into their bank account in a day or less.

But others make promises that seem too good to be true and provide fake, outdated or unusable contact information.

For instance,, which pops up in a search for “need cash now,” claims that high-interest loans can be “much cheaper than traditional bank loans.”

The site lists a nonexistent street address, an email address that doesn’t work and a phone number that goes unanswered. The website is registered to an address in Novocherkassk, a city in southwestern Russia. The registrant did not respond to a request for comment.


Inside Enforcers Shake Up Bank Culture

These paragraphs extracted from a Wall Street Journal article in today’s paper by Kirsten Grind and Emily Grazer, probably intended to show how cumbersome is the new regulatory system, actually reveal how essential it is.

The 2010 Dodd-Frank law, passed in the wake of the financial crisis and designed to prevent another, is one of the most complex pieces of legislation ever. At more than 22,200 pages of rules, it is equivalent to roughly 15 copies of “War and Peace” and covers matters from how much capital banks must set aside to how they can advertise. . .

The regulatory tightening has helped change the profile of a big bank in the postcrisis era. It now looks more like a utility, subject to complex rules about how it can do business and answering to government watchers whose careers depend on enforcing those rules with vigor.

BN-OC937_0520wa_J_20160520161728“The regulatory environment is completely different than [sic] it was five years ago,” said Greg Imm, chief compliance officer at M&T Bank Corp. in Buffalo, N.Y., “and you can accept it and move on, or fight it and lose.”

While the 2008 meltdown still inspires spirited debates about where to draw the regulatory line, there is general agreement that lack of oversight by regulators and banks contributed to the debacle and consequent government bailout. By some measures, the banking system is safer than it was.

At the same time, there are trade-offs. Banks pulled back from financing areas ranging from student lending to certain types of mortgages. They no longer make bets with their own money, known as proprietary trading, and have collectively ceased working with hundreds of thousands of individual or company accounts.

The heightened regulatory environment led 46% of banks to pare back their offerings for loan accounts, deposit accounts or other services, according to an American Bankers Association survey of compliance officers last year. . .

Wells Fargo & Co. Chief Executive John Stumpf in an interview with an industry group last year said “one of the real benefits of our regulatory system is a strong, well-capitalized transparent financial services industry.” Still, he said: “We need balance, and our nation’s leaders have to understand some of the unintended consequences of regulation, which ultimately hurt consumers.”

Bank traders now know compliance officers and regulators are combing through chat rooms looking for signs of collusion and watching to make sure market bets don’t include excess risk. Teams inside banks are devoted to ensuring that mortgage officers are making proper disclosures to borrowers and that advertising offering “free checking” isn’t proven false by the fine print. Compliance employees often walk bank executives through rules and explain potential customer impact.


The Panama Papers

This article in the May 29 New York Times by Scott Shane contains a splendid list of the megaleaks, both high-minded and low-minded, which have occurred in recent times, with special reference to the leak of the Panama Papers, the largest so far, and its inevitable repercussions in many of the countries affected.

WASHINGTON — In recent days, Sri Lanka, Zimbabwe and South Africa joined the growing list of countries hunting down tax evaders among citizens who own offshore accounts. The French bank BNP Paribas said it would shut its Cayman Islands branch. In Pakistan, a cricketer turned politician who had attacked the prime minister over his family’s offshore accounts admitted that he, too, had used a shell company. And the Group of 7 nations, meeting in Japan, agreed to crack down on illicit finance.

It was the latest fallout from the Panama Papers, the largest leak of secret documents to journalists in history. In the eight weeks since the publication of the first articles by some 370 reporters in 76 countries, an effort organized by the International Consortium of Investigative Journalists, the impact of the revelations on the shadowy world of offshore finance has been striking — even as prospects for long-term reform remain uncertain.

Investigations are underway in dozens of countries, including the United States. Proposed laws requiring disclosure of the true owners of offshore companies to tax collectors or to the public have new momentum. Cartoonists have had a field day, reflecting the widespread anger and disgust pressuring governments to act.


“The reaction around the world has been pretty spectacular,” said Gabriel Zucman, an economist at the University of California, Berkeley, who has estimated that 8 percent of the world’s personal wealth is hidden in tax havens. “The demand for financial transparency and tax reform is really growing. It’s the first time there’s been public outrage at the global level on these issues.”

The disclosure by an anonymous leaker of 11.5 million documents from a Panamanian law firm at the center of the offshore industry to a German newspaper was a landmark in another way as well. It was the latest and biggest in a series of recent megaleaks, establishing the large-scale, unauthorized disclosure of government and corporate secrets as a contagious phenomenon that is unlikely to go away.

la-et-cam-roundup-panama-papers-hit-art-world--001The release of the Panama Papers has led to protests in Britain, above, where demonstrators held a pig with an image of Prime Minister David Cameron, who is connected to the scandal. The hacks have touched the art world, too.

Since 2010, when a low-ranking intelligence analyst in Iraq copied thousands of classified files onto CDs labeled as Lady Gaga songs and gave them to the antisecrecy organization WikiLeaks, it has become clear that technology has revolutionized leaking. Pfc. Chelsea Manning, then known as Bradley, disclosed hundreds of thousands of diplomatic cables and military field reports. In 2013, Edward J. Snowden, citing Private Manning as an inspiration, gave a similar number of highly classified National Security Agency documents to a few journalists.

About a year ago, a self-described whistle-blower using the name John Doe contacted Bastian Obermayer, a reporter for the newspaper Süddeutsche Zeitung in Munich, and eventually passed to him a far greater volume of material from the Panamanian law firm Mossack Fonseca: The trove totaled 2.6 terabytes, more than 1,000 times the size of the Manning files. In a subsequent manifesto issued by way of the German newspaper, John Doe cited the precedent of Mr. Snowden, who he said deserved “a hero’s welcome.”

Trevor Timm, the executive director of the Freedom of the Press Foundation, which supports what it calls transparency journalism, said the impact of each leak had inspired the next leaker.

“Especially with the Panama Papers, I think it’s now a trend,” Mr. Timm said. “When people inside organizations see the impact that whistle-blowing on this scale can have, they follow that example.”

None of this would have been conceivable in the photocopier era, when the Panama Papers would have required a fleet of tractor-trailers to deliver. “These are disclosures not of documents but of databases — entire libraries,” said Steven Aftergood, who tracks government secrecy for the Federation of American Scientists. John Doe’s manifesto was tellingly titled “The Revolution Will Be Digitized.”

Of course, what many advocates cheer, the organizations exposed by the leaks denounce. In a series of statements, Mossack Fonseca has criticized journalists’ use of “information stolen from our files,” asserted that news reports “misrepresented the nature of our work” and threatened legal action. It is not clear whether John Doe is a disgruntled insider or a hacker who broke into the law firm’s files, as the firm has suggested.

The same tools that are being used by activists and journalists for what they consider to be high-minded purposes can be used by others. Hackers stole nude photographs from celebrities’ Apple accounts in 2014 and posted them on the web. A computer break-in later that year, attributed to North Korea, obtained hundreds of Sony Corporation emails, many of which were made public. The hacker group known as Anonymous has released voluminous email files of two security firms, Stratfor and HBGary Federal.


For Mr. Obermayer and a colleague at Süddeutsche Zeitung, Frederik Obermaier, the fact that anonymous companies created by Mossack Fonseca were being used to evade taxes and launder illicit money justified publication. They shared the Panama Papers with the international journalists’ group to bring strength and local expertise to the data.

When the articles were published, their newspaper’s web servers crashed from the initial volume of readers. Mr. Obermayer said it was “a really strange feeling — that something that started with you has led to mass demonstrations in several countries.”


Within days, Iceland’s prime minister, whose offshore company was revealed by the papers, had stepped down. So had a Spanish government minister, an Armenian justice official and a member of the ethics committee of FIFA, the world soccer association. President Vladimir V. Putin of Russia, whose friends had moved $2 billion through offshore companies, denounced the disclosures as an American plot to smear his country.


A Mexican cartel suspect was arrested in Uruguay at an address disclosed in the documents. Sierra Leone began to investigate mining contracts. The Swiss police raided the European soccer headquarters. The art market was rocked by revelations of subterfuge in the sale of valuable paintings. The list went on.

In the United States, the revelations of hidden wealth have resonated amid growing public concern about economic inequality; the word yacht appears in the documents 19,380 times. President Obama has deplored how the rich and some companies are “gaming the system,” as he said the documents showed, and has proposed multiple reforms.

In fact, some experts believe the “Panama” label is misleading, obscuring the central role of several states, including Delaware, Wyoming and Nevada, in registering companies with hidden ownership. Mossack Fonseca probably represents just 5 or 10 percent of the industry creating anonymous companies, Mr. Zucman of Berkeley said, so the disclosures have left the vast majority hidden.

And no matter where shell companies may be registered, he said, much of the wealth they own is invested in the United States, in real estate, stocks and bonds. “The U.S. could find out who the true owners are,” Mr. Zucman said.

But the United States may illustrate the difficulty of moving from splashy revelations to serious change. States with a stake in the lucrative corporate registration business are likely to resist serious changes, and Congress appears unlikely to act anytime soon on comprehensive reform bills.

“The offshore system is incredibly resilient, with a ton of smart lawyers and accountants to find new ways to hide money,” said Marina Walker Guevara, the deputy director of the international journalists’ consortium.

David Marchant, the editor of OffshoreAlert, a news site that covers offshore finance, called the Panama Papers “an extraordinary event” that dwarfs past exposés of the industry. A session on the leak at the annual OffshoreAlert conference in Miami this month grew heated, he said, as champions of transparency debated industry players who said privacy had been trampled.

Mr. Marchant said he believed the reform push from the leak would fade. “The people using the offshore system to evade their financial responsibilities tend to be very wealthy and influential people,” he said. He predicted that any changes in laws and regulations after the disclosures would be “mostly window dressing.”

On the other hand, Mr. Marchant said, the example of John Doe will probably be followed by other leakers. “This is the age we live in,” he said. “This record will be broken before long.”

May you, the readers of this blog, The Quaker Activist, resist the temptation to let this revelation slide. Only by remaining constantly aware of the injustices and unfairness we have allowed to occur in our economic system, will it ever be put to right.

The Big Short

TheAct I: Eisman and Team                                                                                                 



In his most recent best seller, The Big Short, Michael Lewis tells the story of the Great Recession through the eyes of four sets of players who foresaw the impending disaster and actually profited from it by betting against it and selling it short. One of these was a team led by Eisman, played in the movie of the same name by Steve Carrell. Using excerpts from the book below, we have synopsized this part of the story and highlighted the absurdities that led to the financial collapse. We will continue this exposition in subsequent postings, Acts II and Act III.



By early 2005 Eisman’s little group shared a sense that a great many people working on Wall Street couldn’t possibly understand what they were doing. The subprime mortgage machine was up and running again as if it had never broken down in the first place. If the first act of subprime lending had been freaky, this second act was terrifying. Thirty billion dollars a big year for subprime lending in the mid-1990s. In 2000 there had been $130 billion in subprime mortgage lending, and 55 billion dollars’ worth of these loans had been repackaged as mortgage bonds: In 2005 there would be $625 billion in subprime mortgage loans, $507 billion of which found its way into mortgage bonds. Half a trillion dollars in subprime mortgage-backed bonds in a single year. Subprime lending was booming even as interest rates were rising—which made no sense at all. Even more shocking was that the terms of the loans were changing in ways that increased the likelihood that they would go bad. Back in 1996, 65 percent of subprime loans had been fixed- rate, meaning that the typical subprime borrowers might be getting screwed, but at least they knew for sure how much they owed each month until they paid off the loan; By 2,005, 75 percent of subprime loans were some form of floating-rate, usually fixed for the first two years. . .

The market might have learned a simple lesson: Don’t make loans to people who can’t repay them. Instead it learned a complicated one: You can keep making these loans, just don’t keep them on your books. Make the loans, then sell them off to a fixed income department of big Wall Street investment banks, which will in turn package them into bonds and sell them to investors. . .

Eisman was predisposed to suspect the worst of whatever Goldman Sachs might be doing with the debts of lower-middle-class Americans. “You have to understand,” he says. “I did subprime first. I lived with the worst first. These guys lied to infinity. What I learned from that experience was that Wall Street didn’t give a shit.

The more they examined the individual bonds, the more they came to see patterns in the loans that could be exploited for profit. The new taste for lending huge sums of money to poor immigrants, for instance. One day Eisman’s housekeeper, a South American woman, came to him and told him she was planning to buy a townhouse in Queens. “The price was absurd, and they were giving her a no-money-down option adjustable-rate mortgage,” says Eisman, who talked her into taking out a conventional fixed-rate mortgage. Next the baby nurse he’d hired back in2003 to take care of his new twin daughters phoned him. “She was this lovely woman from Jamaica,” he says. “She says she and her sister own six townhouses in Queens. I said “Corinne, how did this happen?” It happened because they bought the first one, and its value rose, the lenders came and suggested they refinance and take out $250,000—which they used to buy another. Then the price of that one rose, too, and they repeated the experiment. “By the time they were done they owned five of them, the market was falling and they couldn’t make any of the payments.”

The sudden ability of the baby nurse to obtain loans was no accident: like pretty much everything else that was happening between subprime mortgage borrowers and lenders, it followed from the defects of the models used to evaluate subprime mortgage bonds by the two major rating agencies, Moody’s and Standard & Poor’s. . .

Their handling of FICO scores was one example. . . purported to measure the credit worthiness of individual borrowers. The highest possible score was 850, the lowest was 300; the U.S. median was 723. . .

Where to find the borrowers with high scores? Here the Wall Street bond trading desks exploited another blind spot in the rating agencies’ models. Apparently the agencies didn’t grasp the difference between a “thin-file” FICO score and a “thick-file” FICO score. A thin–file FICO score implied, as it sounds, a short credit history. The file was thin because the borrower hadn’t done much borrowing. Immigrants who never failed to repay a debt, because they had never been given a loan, often had surprisingly high thin-file scores. Thus a Jamaican baby nurse or a Mexican strawberry picker with an income of $14,000 looking to borrow three-quarters of a million dollars, when filtered through the models at Moody’s and S&P, became suddenly more useful, from a credit-rigging point of view. They might actually improve the perceived quality of the pool of loans and increase the percentage that could be called triple-A. The Mexican harvested the strawberries, Wall Street harvested his FICO score. . .

unnamed-8              Scenes from the movie The Big Short starring Steve Carrell and Jeremy Strong

On the surface, those big Wall Street firms appeared robust; below the surface, Eisman was beginning to think, their problem might not be confined to a potential loss of revenue. If they really didn’t believe the subprime mortgage market was a problem for them, the subprime mortgage market might be the end of them. He and his team now set about searching for hidden subprime risk: Who was hiding what? “We called it The Great Treasure Hunt,” he said. . . Once he got himself invited to a meeting with the CEO of the Bank of America, Ken Lewis. “I was sitting there listening to him. I had an epiphany. I said to myself ‘Oh, my God, he’s dumb!” A light bulb went off. The guy running one of the biggest banks in the world is dumb!” They shorted the Bank of America, along with UBS, Citigroup, Lehman Brothers, and a few others. . .

“We just shorted Merrill Lynch,” said Eisman. There is going to be a calamity, and whenever there is a calamity, Merrill is there.” When it came time to bankrupt Orange County with bad advice, Merrill was there. When the internet went bust, Merrill was there. Way back in the 1980s, when the first bond trader was let off his leash and lost millions of dollars, Merrill was there to take the hit. . .






Education and Its Effect on Wages

We are placing these two extracts, the first from Nobel prize-winner Joseph E. Stiglitz’s book, The Great Divide: Unequal Societies and What We Can Do about Them, the second from Thomas Picketty’s Harvard Press best seller Capital in the Twenty First Century, side by side to show clearly how the foremost economists of our day hold education as the single most powerful force for reducing income inequality.

Equal Opportunity, Our National Myth

young America“The Young Orator,” a 19th century American painting

The gap between aspiration and reality could hardly be wider. Today, the United states has less equality of opportunity than almost any other advanced industrial country. Study after study has exposed the myth that America is a land of opportunity. This is especially tragic: While Americans may differ on the desirability of equality of outcomes, there is near-universal consensus that inequality is indefensible. The Pew Research Center has found that some 90 percent of Americans believe that the government should do everything it can to ensure equality of opportunity.

Perhaps a hundred years ago, America might have rightly claimed to be the land of opportunity [see painting above], or at least a land where there was more opportunity than elsewhere. But not for at least a quarter of a century. Horatio Alger-style rags-to-riches stories were not a deliberate hoax. But given how they’ve lulled us into a sense of complacency, they might as well have been.

It’s not that social mobility is impossible, but that awkwardly mobile America is becoming a statistical oddity. According to research from the Brookings Institution, only 58 percent of Americans born into the bottom fifth of income earners move out of that category, and just 6 percent born into the bottom fifth move into the top. Economic mobility is lower in the United States than in most of Europe and lower than all of Scandinavia.

Another way of looking at equal opportunity is to ask to what extent the life chances of a child are dependent on the education and income of his parents. Is it just as likely that a child of poor or poorly educated parents gets a good education and rises to the middle class as someone born to middle-class parents with college degrees? Even in a more egalitarian, the answer would be no. But the life prospects of an American are more dependent on the income and education of his parents than in almost any other advance country for which there is data.

How can we explain this? Some of this has to do with persistent discrimination. Latinos and African-Americans still get paid less than whites, and women still get paid less than men, even though they recently surpassed men in the number of advanced degrees they obtain. Though gender disparities in the workplace are less than they once were, there is still a glass ceiling: women are sorely underrepresented in top corporate positions and constitute a minuscule fraction of CEOs.

Discrimination, however, is only a small part of the picture. Probably the most important reason for the lack of opportunity is education, both its quantity and quality. After World War II, Europe made a major effort to democratize its education systems. We did, too, with the GI Bill, which extended higher education to Americans across the economic spectrum.

But then we changed, in several ways. While racial segregation decreased, segregation increased. After 1980, the poor grew poorer, the middle stagnated, and the top did better and better. Disparities widened between those living in poor localities and those living in rich suburbs—or rich enough to send their kids to private schools. A result was a widening gap between rich and poor kids born in 2001 was 30 to 40 percent larger than it was for those born 25 years earlier, the Stanford sociologist Sean F. Reardon found. . .

Unless current trends in education are reversed, the situation is likely to get even worse. I some cases it seems as if policy was actually designed to reduce opportunity: government support in many state schools has been steadily gutted over the last few decades—and especially in the last few years. Meanwhile students are crushed by giant student loan debts that are almost impossible to discharge, even in bankruptcy. This is happening at the same time that college education is more important than ever for getting a good job.

Young people from families of modest means face a Catch-22: without a college education, they are condemned to a life of poor prospects; with a college education, they are condemned to a lifetime of living at the brink. And increasingly even a college degree isn’t enough: one needs a graduate degree or a series of (often unpaid) internships. Those at the top have the connections and social capital to get those opportunities. Those in the middle or at the bottom don’t. The point is that no one makes it on his or her own. And those at the top get more help from their families than do those lower down the ladder. Government should help to level the playing field. . .                                     — Joseph E. Stiglitz


Wage Inequality: A Race between Education and Technology          

Winslow_Homer_-_The_Country_School“The Country School” by Winslow Homer

Now consider the US case. Two economists, Claudia Godin and Lawrence Katz, systematically compared the following two evolutions in the period 1890-2005: on the one hand the wage gap between workers who graduated from college and those who only had a high school diploma, and on the other the rate of growth of the number of college degrees. For Goldin and Katz, the conclusion is stark: the two curves move in opposite directions. In particular, the wage gap, which decreased regularly until the 1970s, suddenly begins to widen in the 1980s, at precisely the moment when for the first time the number of college graduates stop growing, or at any rate grows much more slowly than before. Goldin and Katz have no doubt that increased wage inequality in the United States is due to a failure to invest sufficiently in higher education. More precisely, too many people failed to receive the necessary training, in part because families could not afford the high cost of tuition. In order to reverse this trend, they conclude, the United States should invest in education so that as many people as possible can attend college.

The lessons of French and US experience thus point in the same direction. In the long run, the best way to reduce inequalities with respect to labor as well as to increase the productivity of the labor force and the overall growth of the economy is surely to invest in education. If the purchasing power of wages increased fivefold in a century, it was because the increased skills of the workforce, coupled with technological progress, increased output per head fivefold. Over the long run, education and technology are the decisive determinants of wage levels.

By the same token, if the United States (or France) invested more heavily in high quality professional training and advanced educational opportunities and allowed broader segments of the population to have access to them, this would surely be the most effective way of increasing wages at the low to medium end of the scale and decreasing the upper decile’s share of both wages and total income. All signs are that the Scandinavian countries, where wage inequality is more moderate than elsewhere, owe this result in large part to the fact that their educational system is relatively egalitarian and inclusive. The question of how to pay for education, and in particular how to pay for higher education, is everywhere one of the key issues of the twenty-first century. Unfortunately, the data available for addressing issues of educational cost and access in the United States and France are extremely limited. Both countries attach a great deal of importance to the central role of schools and vocational training in fostering social mobility, yet theoretical discussion of educational issues and meritocracy is often out of touch with reality, and in particular with the fact that the most prestigious schools tend to favor students from privileged social backgrounds. . .                                                                               — Thomas Piketty




The Other America



This self-portrait by Egon Schiele serves us as an indicator that this article is about poverty.




We are printing this extract from  The Other America, Michael Harrington’s classic exposition of poverty in the United States, published in 1962 during the Kennedy administration, in recognition of Donna Cooper of our editorial board, who pointed out that, say what the economists may say about the reduced inequality of the post-war years, some Americans were still poor and starving during those years.

The Invisible Land

There is a familiar America. It is celebrated in speeches and advertised on television and in the magazines. It has the highest mass standard of living the world has ever known.

In the 1950s this America worried abut itself, yet even its anxieties were products of abundance. The title of a brilliant book was widely misinterpreted, and the familiar America began to call itself “the affluent society.” There was introspection about Madison Avenue and tail fins; there was discussion of the emotional suffering taking place in the suburbs. In all this there was an implicit assumption that the basic grinding economic problems had been solved in the United States. In this theory the nation’s problems were no longer a matter of basic human needs, of food, shelter and clothing. Now they were seen as qualitative, questions of learning to live decently amid luxury.


Norman Rockwell’s depiction of Affluent America in the Fifties 

While this discussion was carried on, there existed another America. In it dwelt somewhere between 40,000,000 and 50,000,000 citizens of this land. They were poor. They still are.

To be sure, the other America is not impoverished in the same sense as those poor nations where millions cling to hunger as a defense against starvation. This country has escaped such extremes. That does not change the fact that tens of millions of Americans are, at this very moment maimed in body and spirit, existing at levels beneath those necessary for human decency. If these people are not starving, they are hungry, and sometimes fat with hunger, for that is what cheap foods do. They are without adequate housing and education and medical care.

The government has documented what this means to the bodies of the poor, and the figure will be cited throughout this book. But even more basic, this poverty twists and deforms the spirit. The American poor are pessimistic and defeated, and they are victimized by mental suffering to a degree unknown in suburbia.

This book is a description of the world in which these people live; it is about the other America. Here are the unskilled workers, the migrant farmworkers, the aged, the minorities, and all the others who live in the economic underworld of American life. In all this there will be statistics, and that offers the opportunity for dis agreement among honest and sincere men. I would ask the reader to respond critically to every assertion, but not to allow statistical quibbling to obscure the huge, enormous and intolerable fact of poverty in America. For, when is all said and done, that fact is unmistakable, whatever is its exact dimensions, and the truly human reaction can only be outrage.

Field family FM

Poverty in Appalachia in the Fifties

The millions who are poor in the United States tend to become increasingly invisible. Here is a great mass of people, yet it takes an effort of the intellect and will even to see them.

I discovered this personally in a curious way. After I wrote my first article on poverty in America, I had all the statistics down on paper. I had proved to my satisfaction that there were around 50,000,000 poor in this country. Yet I realized I did not believe my own figures. The poor existed in the government reports; they were percentages and numbers in long, close columns, but they were not part of my experience. I could prove that the other America existed, but I had never been there.

My response was not accidental. It was typical of what is happening to an entire society, and it reflects profound social changes in this nation. The other America, the America of poverty, is hidden today in a way that it never was before. Its millions are socially invisible to the rest of us. No that wonder so many misinterpreted Galbraith’s title and assumed that “the affluent society” meant that everyone had a decent standard of life. The misinterpretation was true as far as the actual day-to-day lives of two-thirds of the nation was concerned. Thus one must begin a description of the other America by understanding why we do not see it.

There are perennial reasons that make the other America an invisible land.

Poverty is often off the beaten track. It always has been. The ordinary tourist never left the main highway, and today he rides interstate turnpikes. He does not go into the valleys of Pennsylvania where the town looks like the movie sets of Wales in the thirties. He does not see the company houses in rows, the rutted roads (the poor always have bad roads whether they live in the city, in towns or on farms), and everything is black and dirty. And even if he were to pass through such a place by accident, the tourist would not meet the unemployed men in the bar or the women coming home from a runaway sweatshop.

Then, too, beauty and myths are perennial masks of poverty. The traveler comes to the Appalachians in the lovely season. He sees the hills, the streams, the foliage—but not the poor. Or perhaps he looks at a rundown mountain house and remembering Rousseau rather than seeing with his eyes, decides that “those people” are truly fortunate to be living the way they are and that they are exempt from the strains and tension of the middle class. The only problem is that “those people,” the quaint inhabitants of those hills, are uneducated, underprivileged, lack medical care, and are in the process of being forced from the land into a life in the cities where they arte misfits.

These are normal and obvious causes of the invisibility of the poor. They operated generation ago; they will be functioning a generation hence. It is more important to understand that the very development of American society is creating a new kind of blindness about poverty. The poor are increasingly slipping out of the nation.

Illustration for Oliver TwistMichael Harrington somewhere says what America needs is its own Charles Dickens to dramatize the very real poverty that exists here just as it did in Victorian England.

If the middle class never did like ugliness and poverty, it was at least aware of them. “Across the tracks” was not a very long way to go. There were forays into the slums at Christmastime; there were charitable organizations that brought contact with the poor. Occasionally, almost everyone passed through the Negro ghetto or the bl0cks of tenements, if only to get downtown to work or entertainment. Now the city has been transformed. The poor still inhabit the miserable housing in the central area, but they are increasingly isolated from contact with, or sight of, anybody else. Middle-class women coming in from Suburbia on a rare trip may catch the merest glimpse of the other America on the way to an evening at the theatre, but their children are segregated in suburban schools. The business or professional man may drive along the fringes of slums in a car or bus, but it is not an important experience to him. The failures, the unskilled, the disabled, the aged, and the minorities are right there, across the tracks, were they have always been. But hardly anyone else is.

In short, the very development of the American city has removed poverty from the living, emotional experience of millions upon millions of middle-class Americans. Living out in the suburbs it is easy to assume that ours is an affluent society.









Inequality in the United States

The following extract from Thomas Piketty’s Capital in the Twenty-First Century serves as an excellent reminder of how far America has moved from a balanced economy following World War II to the highly distorted one of today.


The Transformation of Inequality in the United States

Indeed, let me turn now to the US case, which stands out precisely because it was there that a subclass of “supermanagers” first emerged over the past several decades. . .

I will proceed systematically. First, European inequality was significantly greater than US income inequality at the turn of the twentieth century . . . this does not mean that American society in 1900-1910 embodied the mythical ideal of an egalitarian society of pioneers. In fact, American society was already highly inegalitarian, much more than Europe today, for example. One has only to reread Henry James or note that the dreadful Hockney who sailed in luxury on Titanic in 1912 existed in real life and not just in the imagination of James Cameron to convince oneself that a society of rentiers [1]existed not only in Paris and London but also in turn-of-the-century Boston, New York, and Philadelphia. . .

Income inequality increased quite sharply in the United States during the 1920s, however, peaking on the eve of the 1929 crash with more than 50 percent of national income going to the top decile—a level slightly higher than in Europe at the same time, as a result of the substantial shocks to which European capital had  already been subjected since 1914. . . note the already crucial importance of capital gains in top US incomes during the heady stock market ascent of the 1920s (see Figure 8.5).


During the Great Depression, which hit the United States particularly hard, and again during World War II, when the nation was fully mobilized behind the war effort (and the effort to end the economic crisis), income inequality was substantially compressed, a compression comparable in some respects to what we observe in Europe in the same period. . . the shocks to US capital were far from negligible; although there was no destruction due to war, the Great Depression was a major shock and was followed by substantial tax shocks imposed by the federal government in the 1930s and 1940s. . .

The Explosion of US Inequality after 1980

Inequality reached its lowest ebb in the United States between 1950 and 1980: the top decile of the income hierarchy claimed 30 to 35 percent of US national income . . . This is what Paul Krugman nostalgically refers to as “the America we love”—the America of his childhood. In the 1960s, the period of the TV series Mad Men . . ., the United States was in fact a more egalitarian society than France . . . at least for those US citizens whose skin was white. . .

Since 1980, however, income inequality has exploded in the United States. The upper decile’s share increased from 30-35 percent of national income in the 1970s to 40-45 percent in the 2000s—an increase of 15 points of national income (see Figure 8.5). The shape of the curve is rather impressively steep, and it is natural to wonder how long such a rapid increase can continue : if change continues at the same pace, for example, the upper decile will be raking in 60 percent of national income by 2030.

Note, moreover, that stock market euphoria and capital gains can account for only part of the structural increase in the top decile’s[2] share over the past thirty or forty years. To be sure, capital gains in the United States reached unprecedented heights during the Internet bubble in 2000 and again in 2007; in both cases, capital gains alone accounted for about five additional points of national income for the upper decile, which is an enormous amount. The previous record, set in 1928 on the eve of the stock market crash, was roughly 3 points of national income. . .

Looking at evolutions without capital gains also allows us to identify the structural character of the increase of inequality in the United States more clearly. In fact, from the late 1970s to 2010, the increase in the upper decile’s share (exclusive of capital gains) appears to have been relatively steady and constant: it passed 35 percent in the 1980s, then 40 percent in the 1990s, and finally 45 percent in the 2000s (see Figure 8.5).  Much more striking is the fact that the level attained in 2010 (with more than 46 percent of national income, exclusive of capital gains, going to the top decile) is already significantly higher than the level attained in 2007, on the eve of the financial crisis. Early data for 2011-20012 suggest that the increase is still continuing.

This is a crucial point: the facts show quite clearly that the financial crisis as such cannot be counted on to put an end to the structural increase of inequality in the United States. To be sure, in the immediate aftermath of a stock market crash, inequality always grows more slowly, just as it always grows more rapidly in a boom. The years 2008-2009, following the collapse of Lehman Brothers, like the yeaers 2001-2002, after th bursting of the first Internet bubble, were not great times for taking profits on the stock market. Indeed, capital gains plummeted in those years. But these short-term movements did not alter the long-run trend, which is governed by other forces . . .

Among the numbers of these upper income groups are US academic economists, many of whom believe that the economy of the United States is working fairly well and, in particular, that it rewards talent and merit accurately and precisely. This is a very comprehensible reaction. But the truth is that the social groups above them did even better: of the 15 additional points of national income going to the top decile, around 11 points, or nearly three-quarters of the total, went to “the 1 percent” (those making more than $325,000 a year in 2010), of which roughly half went to “the 0.1 percent (those making more than $1.5 million a year).

[1] Society of rentiers: a society in which inherited wealth is very important and where the concentration of wealth attains extreme levels . . . This is the pattern we see in Ancien Régime France and in Europe during the Belle Époque . . .

[2] Decile: 10 percent




Quakers and Capitalism in the Nineteenth Century

Have Quakers always championed workers in their struggle with their capitalist bosses? Surprisingly, the answer is “no, they have not” as you will discover in this excerpt from The Philadelphia Quakers in the Industrial Age 1865 -1920 by Philip S. Benjamin:


This image depicts the destruction of Pullman cars in response to industrialist, George Pullman, laying off workers and slashing wages during an economic downturn.

Literary flights involving descriptions of arcadian beauty appealed to many Quakers who found the problem of urban life too depressing or too difficult of solution. But others demanded more realism on the subject. Haverford professor Rufus Jones tried to persuade Friends that a rural environment was no “Garden of Eden. But though he warned that rural religious life was “lower” than most people supposed, Jones had to admit that Quakerism was better adapted to rural communities than large urban centers. While the 1904 editors of The Friends’ Intelligencer viewed rural life and farming as ideals, they argued, like Jones, that Quakers had been satisfied to condemn the city instead of trying to save it. Because most people lived in the cities out of necessity, the editors believed it better to improve housing and sanitary conditions instead of trying to move people out to vacant land. Their demand for more serious study of urban economic and social conditions reflected the influence of the Progressive forces at work in the social settlements. [Editor’s note: Couldn’t the same be said today about the contemporary Quaker’s alacrity to criticize the business world but reluctance to engage in it. If you abandon a key post in society, then do you have the right to criticize the conduct of those who occupy it?]

We have already seen how the commercial temper of the modern city challenged the tenets of the Quaker business ethic. But the danger s Friends saw in industrial Philadelphia were not confined to the banks and brokerage houses of Center City. The great mass of the laboring classes which populated the rapidly growing area north of Spring Garden Street as well as the mean row house districts of South Philadelphia posed further worries for those who hankered after a smaller, more socially homogeneous city. The old deference of working men to their employers in a simpler era gave way to harsh confrontations between organized laborers and management. The critical spirit which Friends had developed toward postwar commercial leaders did not predispose them to take the side of the workingmen in clashes over wages and working conditions. They were truly devoted to the Gospel of Work, believing it to be the fountain of all human intelligence without which men would easily be demoralized. When the labor union leaders began to talk about an eight-hour day, Friends began to worry over the appearance of this demand of “an underlying assumption that labor is an undesirable thing.” Friends may have opposed economic expansion which was too rapid, but their commitment the concept of production itself was strong enough enough to prompt them to view any strike as an immoral interference with man’s basic economic function. They deplored work stoppages because they deprived laborers in related industries from gaining a livelihood. They fretted too over capital denied the opportunity to earn a profit in strike periods.

Friends’ love of pacific relations strengthened their antilabor predisposition. As workers rioted against railroad wage cuts by destroying property and battling with police, what sympathy there was for their cause in Quaker circles evaporated. Some in Philadelphia began to think of workers as an anarchic bomb bent on pillage and destructions; they even favored brute force and weaponry as the only way to check the violence. And their anger led some to urge the death penalty for convicted rioters. Yet Philadelphia in these years experienced only the mildest sorts of labor strife as “law and order” forces in the city government employed large numbers of police to confront strikers. More in line with pacific Quaker ideals was the suggestion that arbitration be used to settle labor disputes. Rufus Jones urged this solution during the railroad strike of 1894, although he viewed the workers’ tactics as “ill advised and radically wrong.” A decade and a half later, when a transit strike against the Philadelphia Transportation Company crippled the city, Jones served on a special panel of religious leaders which recommended settlement by arbitration. With such procedures older Orthodox Friends had no sympathy. The aging Joshua Baily believed that the P.T.C. could employ anyone it wished and discharge workers whenever it thought necessary. He declared that the employees of Joshua L. Baily & Company were not permitted to dictate how he ran his business; if they tried, he would quickly replace them.

While considerable agreement with such conservative views could be found in most Protestant churches in the late nineteenth century, a small minority of churchmen grew more sympathetic to labor in the wake of the force used against strikers. It prompted even some to question the capitalist system. Within Philadelphia Quakerism hardly anyone doubted the efficacy of that system until the twentieth century.         

The Establishment

The old WASP elite is long gone—but not the populist hostility it provoked


Dean Acheson, Secretary of State and Lewis Douglas, U.S. Ambassador to Britain in 1950

 Why do we introduce an  article on the political establishment into a blog about economic inequality? Because the original East Coast establishment of the ‘50s and ‘60s was so closely associated with that post-World War II period when inequality was at its lowest.

The establishment: It is a name to conjure with and curse in American politics. Donald Trump has denounced the GOP establishment at every turn in his march to the Republican nomination, though he has lately made a few peace offerings. And on the Democratic side, the left is still energized by Bernie Sanders ’s candidly antiestablishment campaign even as Hillary Clinton looks ahead to the general election.

But what is this establishment anyway? Why is it so often discussed but never defined? Does it even exist?

In 19th-century Britain, “establishment” meant the state church, but historians such as Thomas Macaulay and Thomas Carlyle reinterpreted it to refer more generally to the society’s dominant leaders and institutions. In the U.S., the term became a synonym for the immense authority once exercised by the White Anglo-Saxon Protestant upper class, in an era when the influence of big Eastern corporations, investment banks and law firms pervaded politics and national development.

The establishment was the closest thing the U.S. had to an aristocracy, and unsurprisingly, it provoked powerful populist resentments. In the 19th century, populists raged against everything they associated with the East: banks, railroads, cities, immigrants, cosmopolitanism and privilege. In the 1950s, the populist, red-baiting Sen. Joseph McCarthy condemned the establishment—represented by Harvard, the Episcopal Church, the Army’s top brass and posh diplomats like Dean Acheson —as a traitorous elite.

When the journalist Richard Rovere popularized the idea of the establishment in the early 1960s, he had in mind not so much the entire WASP upper class as a small number of talented men who circulated among high positions in government, Wall Street, the Ivy League, the national media and philanthropic foundations. They adhered to a gentlemanly code of loyalty, pragmatism and noblesse oblige and saw public service as both an honor and an obligation. Like the Founding Fathers, they believed that the national interest was more important than partisanship. Henry Stimson, the quintessential establishment “Wise Man,” served as secretary of war under both Republican President William Howard Taft and Democratic President Franklin D. Roosevelt.

To the conspiracy-minded, this bipartisan establishment was the country’s invisible government. Phyllis Schlafly, in her best-selling1964 tract “A Choice Not an Echo,” asserted that America’s so called democracy was controlled by “secret kingmakers,”a shadowy group made up mostly of New York internationalist bankers. This establishment supposedly selected the presidential nominees of both parties, dictated the outcome of elections through “brainwashing and propaganda blitzes,” and“work[ed] toward ‘convergence’ between the Republican and Democratic parties.”

Only the paranoiacs of the John Birch Society took Ms. Schlafly’s claims seriously, but establishment grandees did exercise considerable influence on politics, particularly on the Republican side. In 1952, pressure from the establishment played a critical role when the Republican national convention picked Dwight Eisenhower as its presidential nominee over conservative favorite Robert Taft.

By the 1960s, however, the establishment’s authority waned as the East lost the preponderance of economic and cultural power that had undergirded its political influence. Between the end of World War II and the mid-1960s, the population of the South and West almost doubled while that of the North and East shrank. At the same time, the Northeast lost its dominant role in manufacturing, banking and other key sectors.

The establishment’s diminished hold over the GOP was evident in its failure to prevent Arizona Sen. Barry Goldwater from becoming the party’s nominee in 1964. Eastern establishment Republicans typically were moderates in the mold of Eisenhower, and they recoiled from Goldwater’s radical antigovernment views and courtship of Southern segregationists. But there was little they could do to prevent his grass-roots movement from gaining a majority of delegates at the Republican national convention.

As for the left, it had a critique of its own. The journalist David Halberstam blamed the debacle of the Vietnam War on “the best and brightest,” while New Left activists saw the establishment as the repressive driver of U.S. imperialism, racism and inequality.

Even as the establishment slowly vanished from political life, however, it retained its hold on the popular imagination. The term still conjures up malign associations for both the right and the left, which is why it has been invoked so much lately.

Mr. Trump knows that Reince Priebus, the chairman of the Republican National Committee, is no one’s idea of an aristocrat. The RNC, for that matter, no longer exercises significant influence over the GOP, since its centralized authority has been eclipsed by the conservative media and a diffuse array of PACs, super PACs, outside organizations and billionaire donors.

Still, by branding the party leadership as “the establishment,” Mr. Trump has put the RNC on the defensive and tapped into deep-seated populist animosities. Mr. Sanders has done the same on the Democratic side.

If this election season has proven anything, it is that traditional sources of authority don’t carry much weight anymore. Americans don’t trust any of their major institutions, with the possible exception of the armed forces. Mr. Trump’s supporters don’t care that the pundits think that he is unpresidential, just as Mr. Sanders’s supporters don’t care that the “experts” consider his proposals unrealistic.

Polls suggest that Americans, more than ever before, feel oppressed by forces beyond their control. Much of the appeal of outsider candidates like Mr. Trump and Mr. Sanders stems from the widespread belief that neither political party is interested in ordinary people and that the American dream is no longer in reach for those who work hard and play by the rules. “Establishment” has become shorthand for a corrupt power structure and a rigged system.

The late sociologist E. Digby Baltzell didn’t think the establishment’s disappearance would lead to a freer and happier democracy. On the contrary, he predicted that it would be replaced by “naked power veiled in manipulation and deceit,” the unchecked influence of money and propaganda, an antipathy to all institutions and widespread belief in conspiracy theories.

The problem with present-day politics isn’t the invisible domination of an oppressive establishment—those days are long gone—but rather the absence of any authority that Americans still trust and respect.

Geoffrey Kabaservice, who wrote this article for the Wall Street Journal, is the author of, among other books, “The Guardians: Kingman Brewster, His Circle, and the Rise of the Liberal Establishment.”

Some Mansions in the Hamptons May Remain Boarded up This Summer!

Have hedge fund managers, once the kings of the roost among the 1 percenters, finally seen their day?

Screen Shot 2016-01-08 at 10.14.12 AMBobbie Axelrod’s house in South Hampton in the TV series “Billions”

By Rob Copeland and Timothy W. Martin for the New York Times

Some of the most famous minds in investing convened in Las Vegas this week for an annual celebration of the hedge-fund industry. But, feeling the weight of years of underperformance and an uptick in client defections, the mood was anything but festive.

Longtime hedge-fund manager Leon Cooperman openly questioned whether it made sense to continue on after redemptions from his firm, Omega Advisors.

Major hedge-fund clients, including China’s sovereign-wealth fund, aired doubts, positing that 90% of hedge-fund managers probably weren’t skilled enough to navigate the markets.

And it had been hard enough to get some of the attendees to even show up. The slump in the industry—highlighted by the largest exodus of investors since the financial crisis—damped interest in the SkyBridge Alternatives Conference, commonly known as SALT, according to Anthony Scaramucci, the event’s organizer and founder of SkyBridge Capital, which puts $13 billion into hedge funds.

“There is a decided pessimism in the hedge-fund community,” he said, while predicting the industry would survive. “A lot of guys opted out of coming, frankly, because of performance issues.”

A SkyBridge spokeswoman later said 2,100 people registered for the conference, up from 1,800 the year before.

The mood was a far cry from previous years. The annual desert confab, a three-day event held at the Bellagio hotel, is a staple of the hedge-fund circuit, famous for attracting heavyweight investors, celebrities and politicians. This year’s roster of speakers included everyone from Caitlyn Jenner, the transgender-rights advocate, to former New York City Mayor Michael Bloomberg. The days are dominated by panels of investment ideas, while after-hours events include swanky suite parties and a performance by the rock group the Killers.

But this year hedge funds arrived with unprecedented questions about their worth from their investors, and even some of the managers themselves. That is largely because since the start of the bull-market run in early 2009, a more traditional mix of stocks and bonds bested a broad hedge-fund index in 22 of 28 quarters, according to a Wall Street Journal analysis of data from research firms HFR Inc. and Morningstar Inc.

Collectively, clients yanked $15 billion during the first quarter, marking the largest quarterly outflow in six years, according to research firm HFR. The outflows represented the first consecutive quarters of outflows since 2009.

Big investors unwinding hedge-fund bets are piling money into other nontraditional assets such as private equity, real estate, toll roads and bridges. Others are migrating to cheaper alternatives that mimic the strategies of hedge funds but at significantly lower cost.

“I’m sort of disappointed with the performance, to say the least, of the industry,” Roslyn Zhang, managing director overseeing hedge funds for China Investment Corp., said Wednesday at SALT. China Investment is the country’s sovereign-wealth fund and the world’s second-largest investor in hedge funds, with nearly $30 billion committed to the asset class, according to Preqin, which tracks investment data.

Ms. Zhang later told The Wall Street Journal in an interview that she was excising managers from her approved list and evaluating whether to slash the fund’s investment in hedge funds overall.

The 73-year-old Mr. Cooperman summed up the industry’s mood with comments he made Wednesday. “The hedge-fund model is under challenge. It’s under assault,” he said, adding that he was contemplating whether it was worth it to remain running hedge funds at all. Mr. Cooperman’s Omega Advisors told investors in March that U.S. regulators intend to recommend civil charges against the firm for alleged violations of securities law. Mr. Cooperman has denied any wrongdoing and said he would defend himself and the firm.

Hedge funds typically charge higher fees than other money managers, usually 2% of assets under management and 20% of profits. But one prominent manager, James Chanos, said Thursday “fees are too high. I’m surprised they’ve stayed this high for this long.”

Since the crisis, hedge-fund managers have rejected direct comparisons with the broader market returns, saying they aim to reduce volatility and invest elsewhere than simply stocks and bonds. “But guess what happened when a flat market showed up?” Mr. Chanos added. “Everybody got killed. That’s the real problem.”

China’s sovereign-wealth fund isn’t the only big investor having second thoughts. In recent weeks, insurers MetLife Inc. and American International Group Inc. said they were pulling billions out of hedge-fund bets, citing poor performance. Large retirement plans from New York to Illinois to Oklahoma are also stepping back.

Insurer CNA Financial, a subsidiary of Loews Corp., has exited from about $500 million in hedge-fund investments since 2014. “The returns haven’t been there,” said Loews Chief Executive James Tisch, on a recent earnings call.

Two decades ago when the industry was smaller, “hedge funds could earn very, very attractive returns,” Mr. Tisch said. “Now that there are hundreds of them, the rate of return that those hedge funds can earn has come down rather dramatically.”

The investor rebukes are starting to inflict pain on some brand names. Assets fell about $1 billion in March for Och-Ziff Capital Management Group LLC, according to a company filing. The largest publicly traded U.S. hedge-fund manager had $42 billion as of April 1.

“There is no doubt that we are in the first innings of a washout in hedge funds,” said Dan Loeb of Third Point LLC in a quarterly letter dated April 26. Money was recently pulled out of Third Point, said people familiar with the matter, which the firm hopes to replace with new funds.

Another manager, Paul Brewer of Rubicon Fund Management LLP, told SALT attendees Wednesday, “The hedge-fund industry needs to rethink the model.” Managing tens of billions to bet on macroeconomic trends at a single firm “and trying to have decent returns is not possible.”

At SALT, the relative strain on the industry was evident beyond the official events.

One major investment bank told clients they would have to hail cabs to a nightclub venue because the bank would no longer cover limousine service of years past, a person familiar with the matter said.

Tips at the shoe-shining station a few feet from the main ballroom were down more than 50%, to $5 or under in most instances, from as much as $20 one year earlier, a shoe shine employee said.