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A luxury house along “Billionaire’s Row” in San Francisco.

The failed economic policies of the Obama administration have been evident in measures of every important fundamental for six years now. Dismal job growth. High unemployment. Weak consumer demand, and so on. The biggest failure of the Obama administration was arguably the refusal to write down mortgage debt and force the top one percent of wealth holders to share some of the losses sustained during the housing market crash. While monetary policies pursued by the Fed, and a bailout of the secondary housing market with taxpayer dollars, temporarily provided a shot in the arm for housing prices, these gains were artificial. They weren’t based on genuine demand for housing by the majority of Americans. The result is that the top one percent of the U.S. housing market, the luxury segment, is booming, while the rest of Americans are having trouble affording homes. Now the housing market appears to be stalling out, except for luxury purchases by the elite whose wealth was protected by virtually every economic policy advanced through the financial crisis.

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A single family home in Oakland.

Let’s review the problem. In the 2000s the U.S. housing market was flooded with cheap credit. Lenders extended giant loans, many of them sub-prime, and the prices of houses shot upward in a bubble. But stagnating wages for American workers meant that the prices of real estate diverged from the reality of the ability of the average household to safely repay these loans. When the financial system imploded, the price of housing collapsed, and it was the borrowers who sustained the brunt of losses in the form of equity. The debt remained to be repaid, however, because Obama and his economic advisers chose to protect the wealth of the top one percent.

As economists Atif Mian and Amir Sufi have pointed out in their book House of Debt, the federal government could have taken over as the servicer of mortgage-backed securities and renegotiated millions of loans, dropping interests rates and principal balances. Or the government could have allowed bankruptcy judges to reduce mortgage debt burdens. The few principal reduction programs there were, like the Home Affordable Modification Program, could have been pushed much further. As is, programs like HAMP served only a small fraction of distressed borrowers with underwater loans. HAMP and other loan modification programs did not meet their original numerical goals.

By not making creditors share the pain of the collapse of real estate prices, the Obama administration enforced a giant wealth transfer from the majority of Americans to a small minority, literally the one percent who own the majority of stocks and bonds, particularly stocks in banks and mortgage servicing companies, and bonds backed by residential mortgage debt.

But the wealthy also cache their fortunes in non-housing related stocks and bonds, and the Obama administration’s quantitative easing program has been good for supporting the value of these securities. So the wealthy never took the same kind of hit the average American did with housing price dips and job losses. Then the wealthy benefited from federal programs that jacked up asset prices.

Should we be surprised then to learn that the top one percent of the residential housing market is booming while sales of literally every home priced below a luxury-grade are dropping? This is one consequence of the Obama administration’s housing and economic policies.

A new batch of numbers from the real estate research firm Redfin illustrates the consequences of the Obama administration’s economic policies by comparing the very top of the American real estate market to everything else. “Sales of the priciest 1 percent of homes are up 21.1 percent so far this year, following a gain of 35.7 percent in 2013,” writes Troy Martin of Refin. “Meanwhile, in the other 99 percent of the market, home sales have fallen 7.6 percent in 2014.”

“For the top 1 percent, the housing market is still booming. But for the rest of the market, the recovery is running out of gas,” concludes Martin. “As home prices have risen, wage and job growth have failed to keep up.”

Redfin’s research shows that in virtually every major metropolitan region the luxury segment of the housing market, the top one percent of homes in price terms, are selling fast and at higher prices. Not surprisingly, there’s considerable regional variation, but it’s a nation-wide phenomenon.

The real estate market in the San Francisco Bay Area is perhaps the most unequal and driven by sales to the super-rich. Luxury home purchases are way up in Oakland, San Jose and San Francisco, with Oakland and San Jose experiencing a virtual doubling of the luxury market over the past year. The top one percent of the market for Oakland, San Jose and San Francisco combined is priced at an average of $3.7 million, but San Francisco has pulled ahead of the rest of the nation with an average home price of $5.35 million for the top one percent of its market. Some of this is likely due to the booming tech sector which is creating thousands of millionaires in the region.

Screen Shot 2014-05-30 at 10.43.54 PMFor the majority of Americans the problem boils down to household debt. There’s still too much debt for the average household to sustain purchasing power that would drive an economic recovery, including a recovery in the housing market. From 2003 to the peak of the housing bubble in the third quarter of 2008, total household debt shot upward by about $5.4 trillion, according to data compiled by the Federal Reserve Bank of New York. From the peak of the housing bubble to the present, total household debt only decreased by $1.5 trillion. That means that about $3.9 trillion in debt piled onto U.S. households during the housing bubble is still weighing down family budgets. Most of this debt, about $2.89 trillion, was mortgage debt.

Over the same time period wages remained flat for most Americans. The median household incomes in the year 2000 was approximately $42,000. In 2012 it was about $51,000. Accounting for inflation, the real value of household income actually declined over this period by $5,000.

The income and wealth gains at the top of America’s economic pyramid over this same time frame should be familiar by now, as they have been extensively explained in recent research. What’s important to point out, however, is that the the average household, the median Americans whose incomes dropped by $5,000, took on significant mortgage debt during the 2000s, altogether in the trillions of dollars, and the lenders of this capital, ultimately, are the top one percent households.

So that’s why we see the luxury housing market booming while virtually 99 percent, the rest of America is stagnating.

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Atmosphere

Part of San Francisco’s Union Square hyper-lux retail offerings, the De Beers store which features armed guards at the entrances. Ferrari recently opened a store a block away on Stockton Street. Haute Couture names obscure fill the district’s buildings offering items of conspicuous consumption.

Through the Financial Crisis and the Great Recession, inequality has intensified through income, housing, and public debt in the Bay Area. Black and Latino communities have lost wealth and power, while white and Asian communities have mostly to recovered. At the top, the wealthiest 5 to 10 percent, have made enormous gains.

Imagine a place where the hills are lined with the mansions of millionaire families, some of them billionaires. Their residences sit atop forested ridge lines with views of a peaceful ocean, or upon oak-studded peninsulas that jut into an azure bay. In this place they want for nothing. De Beers opened a retail store in one of their favorite shopping districts a few years ago, next to haute couture names like Bulgari, Cartier, and Gucci. An investment bank opened a “coffee shop” just a couple blocks from the headquarters of no less than seven Fortune 500 corporations, to catch their employees after work for talks over lattes about what to do with all that money crowding their bank accounts. Posh towers filled with luxury apartments sprout from the city center where multiple cranes seem to perpetually dot the skyline. iPhones pop from the palms of pedestrians like third hands, and newfangled apps like third eyes give them instantaneous information about the latest opulent consumer activities. Everything glows with money and power, a lot of it.

Below the hillsides glittering with wealth are even more expansive terrains of crumbling homes and apartment buildings —many foreclosed upon and awaiting some kind of financial death— packed with families that barely scrape together twenty thousand dollars a year to live on. Their views: smokestacks, port cranes, freeway overpasses, and scrap yards, or, sometimes on a clear day, if they ever think to pause from survival mode, they can see the hills, the mansions, the gleaming skyscrapers beyond reach, the towering campaniles of universities where they can never afford to send their children.

This place is characterized by the crowding of impoverished human beings, most of them of African and Latin American descent, into hollowed out industrial zones where factory buildings and abandoned warehouses echo the bustle of past decades. This economy of yesterday was exported to the new shop floors of China. Among the only things left are the toxic plumes of chemicals spreading slowly under fence lines. In this place entire generations face severe poverty and a decimated public sector – especially the schools. Tens of thousands of adults exist, persist, somehow without meaningful work or income. Tens of thousands of house-less persons —likely no longer even part of the statistical surveys used to calculate joblessness and income— wander the streets and sleep in the cracks of weathered concrete each night. Every few months the police slay a youngster under questionable circumstances. Crime is rampant. Violent crime is hard to avoid, part of the overall suffering.

The splendid heights and stratospheric wealth would not be so contemptible was it not hanging directly over such desperate poverty. Of course the two things are not unrelated.

Welcome to the San Francisco Bay Area, in the Golden State of California.

The West Coast financial center of the United States.

The epicenter of the tech industry.

The global vortex of venture capital.

One of the most brutally unequal places in America, indeed the world.

If measured by the same metrics that are used to gauge income inequality within nation states, the Bay Area’s internal divide between its rich and its poor would place San Francisco between China and the Dominican Republic, making it roughly the 30th most unequal state in the world. China is now the estimated home to 317 billionaires. California counts perhaps 90 billionaires. Half of these, mostly white men, live in San Francisco and Silicon Valley. The Census counted 4.2 million persons slipping below their definition of poverty last year in California.

In the distribution of income and wealth, California more resembles the neocolonial territories of rapacious resource extraction and maquiladora capitalism than it does Western Europe. Oakland is more El Salvador than it is EU. The Bay Area metropolis is more Bangladesh than Belgium.

California is just one of seven states that has the distinction of ranking higher than the national average on three basic metrics of income inequality, as measured by the Bureau of the Census. Its gini coefficient of income inequality was most recently measured at 0.47.

The ratio of income between the top 10 percent and the bottom ten percent, as well as the ratio of income between the top five percent and the bottom twenty percent show staggering divides in economic power that few other places in America, indeed the world, surpass.

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Source: Weinberg, Daniel H., “U.S. Neighborhood Income Inequality in the 2005-2009 Period,” American Community Survey Reports, U.S. Census Bureau, October, 2011.

The only states that compare to California’s harsh inequalities are deep southern states structured by centuries of racist fortune building by pseudo-aristocratic ruling classes, and the East Coast capitals of the financial sector.

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Source: Weinberg, Daniel H., “U.S. Neighborhood Income Inequality in the 2005-2009 Period,” American Community Survey Reports, U.S. Census Bureau, October, 2011.

The economies of Louisiana, Mississippi, and Alabama remain bound by racial inequalities founded in slavery and plantation agriculture; the wealthy elite of all three states remain a handful of white families who control the largest holdings of fertile land, and own the extractive mineral and timber industries, and the regional banks.

Texas, with its sprawling cities, global banks, energy corporations, universities, and tech companies, is more like California in that its extreme economic inequalities are as new as they are old. Stolen land and racial segregation combine with unworldly new fortunes built on the Internet and logistical revolutions in manufacturing and markets to manifest a gaping divide in power and wealth between the few and the many. The Texas border, like California’s, opens up vast pools of Mexican and immigrant labor for super-exploitation by agribusiness and industry.

The same goes for New York, Connecticut, and Washington D.C. the other most unequal places in the United States. New York and Connecticut, like California, have become societies divided by an upper stratum of financial-sector workers and corporate employees whose salaries and investments simply dwarf the bottom half of the population’s earnings, and unlike the South, this extreme level of inequality is rather new in its source of valorization. Washington D.C. is split between the federal haves, mostly fattened contractors who run the military, or who represent the interests of the billionaires in California and New York, and the have-nots, mostly Black and immigrant service sector workers who wait on these technocrats of empire.

It’s a strange club, the super-inequitable states of the U.S. This exclusive list pairs the bluest coastal enclaves of liberal power with the reddest Southern conservative states. In terms of wages and wealth these places have a lot in common.

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San Francisco’s real estate roller coaster. The Financial Crisis cut 20% off home values in San Francisco, but the U.S. Federal Reserve’s bond buying program, coupled with broader tax and fiscal policies, has created a rally in securities markets, handing the wealthiest Americans enormous gains in net worth. These economic policies benefiting the rich are evident in San Francisco’s real estate prices. Secondarily is the Tech 2.0 boom in San Francisco and Silicon Valley, pulling in thousands of new residents to work in Internet, biotech, and other industries where six figure salaries are the norm.

In San Francisco homes now routinely sell for millions. Not mansions. Not even particularly large houses. Just simple homes built decades ago. In most other markets they would fetch the national median home price of about $170,000. San Francisco, which locals like to call “the City,” sees dozens of real estate deals every month in which a cool million or two pass hands, and afterward the new owner, usually someone with freshly minted tech or finance money, has the modest structure demolished and scraped away. The new thing is to build upward, and lavishly, from scratch. Heated stone bathroom floors and wine cellars are popular. Securing a pad in Noe Valley or Bernal Heights for a few million is seen as a reasonable way to spend money.

In San Francisco the western end of Broadway is known as “billionaire’s row.” Quite a few of the side streets and parallel avenues like Jackson, Pacific, and Washington are lined with estates that trade hands on occasion for a few tens of millions. No tear downs here. The villas and manors along these avenues were built by sugar barons and banking tycoons of centuries past. Silicon Valley’s most senior executives, and the City’s hedge fund managers, buyout barons, bankers, and a few celebrities make up most of the neighborhood’s owners. Their children attend exclusive private schools in Pacific Heights where they are preened for Stanford and Princeton.

It is becoming hard to identify any part of San Francisco as an “elite” enclave. Tech 2.0, as the Google and Facebook-led regional boom is being called now, has vested thousands of twenty somethings as well as senior executives with billions in IPO cash and billions more in salaries to hunt for real estate, and they have chosen San Francisco, nearly all of it, as their preferred stomping grounds. Maybe it will only be another decade until Broadway starts getting called trillionaire’s row.

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Sea View Avenue, Piedmont, California. 71 percent white, only 5 percent of Piedmont’s population is Black or Latino. Median household income is $200,000, and wealth holdings are much more. Piedmont supports its own public schools, police force, parks, and libraries.

Across the Bay is a slightly more modest version of billionaire’s row, probably better called a millionaire’s row running across the ridge line from Oakland north to Kensington. In the middle of Oakland, in fact completely surrounded by the scrappy industrial city by the Bay, is the city of Piedmont. When it was founded in the 1920s its first residents gave it the nickname “city of millionaires.” They restricted housing to single family residential homes on large lots from the start to prevent Black and immigrant families from moving up the hillside. Sea View Avenue is where the big money that wants to show off buys real estate, but the entire city boast a median home price of $1.4 million. The Berkeley hills are similarly rich and populated by an unusually high number of lawyers.

Lawyers, especially tort defense, corporate, and tax lawyers who serve the wealthy and defend corporate America from labor unions, environmentalist, and consumer advocates, also love Marin County. Across the Golden Gate from San Francisco, Marin is not much more than a bedroom community for corporate lawyers and CEOs who want a little more room and sun than San Francisco provides. If Piedmont was a city shelter to exclude the working class, then Marin is similar, but on the level of a county. Despite growing pockets of Latino poverty in older towns like Novato and San Rafael, Marin remains one of the wealthiest counties in the U.S. on a per capita basis. Marin’s Black population is segregated into the tiny Marin City, one of the only places public housing was allowed to be built. Marin City’s residents work in the retail sector and some of the industry along San Rafael’s waterfront. They earn near the bottom of the region’s wage scale and subsist on a fraction of the income their wealthy neighbors take in each month.

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Hagenberger Road, East Oakland. Oakland is over 50 percent Black and Latino. Sections of the city such as the area pictured above are 90 percent non-white. In the typical pattern of environmental racism, residential homes are in close proximity to major roadways, highways, rail lines, industrial facilities, scrap yards, and utilities.

Unemployment stalks the working poor of the Bay Area, threatening to force them into insolvency and bankruptcy, foreclosure and displacement. During the first Dot Com boom of the late 1990s unemployment was at five percent for white Bay Area residents. For those living along the billionaire’s and millionaire’s rows, unemployment is a meaningless concept. The capital invested by the rich, by their clever advisers who run the hedge funds and private equity shops, earns interests and returns on equity far larger than any years honest wage labor can eek out. The tax code provides for this with carried interest and the lowest personal income tax rates for top earners in many decades. Hordes of tax lawyers, many who live in Marin, the Oakland hills, and San Francisco, will eagerly structure a family’s investments and bills to minimize taxes, so long as they possess a minimum of $5 million in liquid assets – preferably more.

Black men in the Bay Area have consistently suffered an unemployment rate double that of white men. Through the entire George W. Bush presidency, a period characterized by an economic policy to benefit the wealthiest with low taxes and interest rates, Black men endured double digit unemployment rates, reaching about 13 percent when Obama took office. The Financial Crisis sent Black unemployment rates skyrocketing in San Francisco, Oakland, Richmond, and Vallejo, upwards of 22 percent in 2010.

UnemploymentCAbyRace1999-2012Economic policies under Obama —both those he championed, and those he compromised on— have been very good for the wealthy, and that’s reflected best by the real estate and consumption bubbles frothing over places like San Francisco. The Federal Reserve Bank’s unprecedented purchases of bonds and its low lending rates have produced rallies in stock and debt markets which have greatly re-inflated the fortunes of the rich.

Pew_Uneven_RecoveryThe Pew Research Center recently summed up this polarizing redistribution of wealth from the bottom to the top by noting simply that since 2009 the wealthiest 7 percent of Americans experienced an increase of 28% in their net worth, while the bottom 93 percent actually lost 4 percent of their savings.

The San Francisco Bay Area’s current tech boom is further dividing the wealthy few from the impoverished masses. Companies like Google, Apple, and Oracle are among the least diverse workplaces places where men outnumber women, and white and Asian employees dominate the ranks of lowly programmers and senior executives. The need to hire thousands of engineers is drawing waves of college graduates to Silicon Valley and San Francisco, and they’re washing over the current residents like a tide of suffocating oil. Some of the tech buses —private transit systems operated by Silicon Valley’s largest firms to shuttle employees from San Francisco to their suburban campuses in Santa Clara County— now run lines into Oakland and Hayward, a sign that their employees are increasingly colonizing formerly undesirable zones of real estate.

The drift apart between the pale wealthy few and the impoverished multitudes of darker-skinned peoples is evident on the level of whole cities. San Francisco enjoys robust public finances, high credit ratings, low per capita debt to income ratios, and many well funded public services. However, two decades of intense gentrification mean that this healthy public sector increasingly caters only to those “citizens” who can afford to live in San Francisco.

Pushed out of the region’s urban core, in the 1990s and 2000s Black, Latino, and some Asian immigrants found themselves in the affordable locales of Vallejo, Stockton, Richmond and Oakland. Further out towns like Antioch, Brentwood, and Pittsburg became increasingly non-white and working class. In the Financial Crisis these cities hemorrhaged residents and revenues due to some of the highest foreclosure rates in the nation. Vallejo and Stockton went bankrupt after slashing the most basic services. Vallejo is 75 percent non-white. Stockton is 80 percent non-white.

The wealthiest Bay Area communities, the “towns” of Hillsborough, Woodside, Atherton, Los Altos Hills, and the city of Piedmont are three quarters white with median incomes in the six figures. Public finances barely flinched during the Great Recession. A few of these local governments in fact have no outstanding public debt.

Atherton and Los Altos Hills have zero bonded public debt.

Oakland has almost a billion just in bonded debt.

In the tony Marin hamlet of Fairfax the public debt burden resting on each resident is about 1.7 percent of their annual income.

In Richmond the ratio of public debt to personal income for each resident is 16 percent.

Richmond, a quarter Black and a third Latino, is a tangle of oil and chemical refineries run primarily by Chevron. Not a year ago a massive fire at one of the company’s plants spewed toxic vapors and smoke into the sky, poisoning thousands of residents.

Chevron is headquartered in San Ramon, another exclusive, mostly white suburban environment with low municipal debt and a household median income of $121,000 a year.

future-generations-debtCalifornia Watch published a very important story last month about the massive debt loads that capital appreciation bonds have heaped upon at least 400 school districts in California. Called CABs for short, many cash-strapped districts have resorted to these types of bonds in order to finance necessary buildings and infrastructure upgrades. Unfortunately without CABs, and because of California’s gutted property tax and slack economy, it would otherwise have been impossible to fund school construction over the last half decade in many regions.

Unlike normal bonds used by local governments to finance capital projects, CABs allow for repayment of interest and principal spread over longer time frames, often with no need to begin paying back principal immediately. This means easy money here and now, but it also means that the borrower will pay back much more over the term of the bonds than a regular loan, sometimes as high as 23 times the original borrowed sum.

There’s one error in how California Watch framed their story, however. Following State Treasurer Bill Lockyer, the reporters and editors imply that CABs shift the debt burden onto future generations – the kids. It’s right there in the story title, “Controversial school bonds create ‘debt for the next generation’,” and then it gets restated in the intro:

[School district administrators] have borrowed $9 billion that will cost taxpayers $36 billion to repay over the next 40 years, according to data compiled by California Treasurer Bill Lockyer. He called it “debt for the next generation.”

“The average tenure of a school superintendent is about three and a half years, so they aren’t going to be around in most instances to worry about paying that off,” Lockyer said in an interview. “Nor will the voters, probably, that enacted it in the first place.”

The idea that California’s children will be stuck paying the the debts of their irresponsible parents might be a catchy news frame, but it’s not economically accurate. It also de-politicizes the issue at hand and gives the story an uncontroversial gloss because it’s the “next generation” in the abstract that is losing out.

What’s actually happening is not a shifting of the burden to future Californians yet unborn, but rather an immediate transfer of income between classes and races, with the working and middle class residents of these various school districts being forced to pay out a greater share of their incomes to a small elite of rentiers who will come to hold these capital appreciation bonds when their investment managers purchase them in the bond market.

The idea that public debt is a burden to future generations rests on the idea that the current generation is acting as a spendthrift, carelessly buying what they want now in a fit of irresponsible pleasure seeking, and allowing the payments to come due in later years. This is wrong, however. We’ve known this generational theory of indebtedness to be wrong for over a century. One of the earlier logical refutations of the future-generations debt burden myth was provided by political economist Arthur Pigou. In his classic A Study In Public Finance Pigou wrote:

“It is sometimes thought that whether and how far an enterprise or enterprises ought to be financed out of loans depends on whether and how far future generations will benefit from it. This conception rests on the idea that the cost of anything paid for out of loans falls on future generations while the cost met out of taxes are borne by the present generations. Though twenty-five years ago this idea could claim some respectable support, it is now everywhere acknowledged to be fallacious.”

Twenty-five years prior to the time Pigou laid out this refutation was 1898.

Rather than constituting inter-generational transfers of wealth, Pigou explains how these are transfers of wealth in the present.

“[…]interest and sinking fund on internal loans are merely transfers from one set of people in the country to another set, so that the two sets together —future generations as a whole— are not burdened at all [….] it is the present generation that pays.”

Like a lot of liberal economists of his era, Pigou unfortunately also managed to obscure the inherently political nature of the problem by referring to “set[s] of people.” By “set” he really means that income and wealth is being transferred via debt between different classes. Large public debts tend to work as redistributive mechanisms that allow the truly wealthy to claim much larger shares of the total national income through the regressive taxes paid the working and middle classes.

This is exactly what’s happened with respect to California’s capital appreciation bonds. After decades of tax cuts, primarily via property taxes, and cuts to federal income and capital gains taxes passed on to local governments as cuts to federal aid to states, the wealthiest Americans now possess more of the income and wealth pie than they have since roughly the late 1920s. Lacking these untaxed dollars that have piled up in the bank accounts of the top 1 to 5 percent of America’s wealthiest residents, local governments have resorted to ever-increasingly desperate forms of debt financing to pay for everything from schools to healthcare. The wealthy have loaned their politically-gotten surplus of dollars to governments that no longer have the power to tax. The result is a current transfer of even more income and wealth to the rich in the form of higher interest rates paid back over longer periods.

Paul Krugman has commented on the fallacy of the future-generations debt burden trope also, and his take is worth reading for further clarity.

What the California Watch reporters did do well is name the names of some of the financial advisors and debt underwriters who have gotten rich off the fees they charge for recommending CABs to school districts. It will probably come as no surprise that the likes of Piper Jaffray and Goldman Sachs, among others, have made millions by facilitating the CAB boom. Financial advisors like Caldwell Flores Winters, Dale Scott & Co., and KNN Public Finance have reaped millions also.

Need I point out that the finance sharks who staff these companies are of course the same high net worth individuals who own the bond funds that gobble up CABs and other debt securities?

When Bill Clinton was elected in 1993 US Treasury bond yields were trading around 5 percent. Within a year prices dipped and yields shot upward of 8 percent. The bond market —meaning a relatively elite coterie of highly paid investment managers working for the largest global banks, insurance companies, and mutual funds— was sending a signal to the new administration: cut spending, reduce the federal deficit, and do whatever else necessary to reverse possible inflationary forces. Inflation is the mortal enemy of the rentier whose profits depend on interest rates outpacing the growth of prices.

Clinton complied. As a first-term president hoping for a sequel, Clinton knew that US government bond prices and yields respond to changes in monetary policy. If the bond market’s major players wanted to cause trouble by selling their holdings, as they were already doing, it would become costly to finance federal government. If the bond market’s masters could be appeased, they would hold their securities, purchase more, and yields would drop. Clinton’s team set a contractionary monetary policy in motion. Luckily the economy grew in spite of these measures during Clinton’s first term, leading to his re-election. That appeasing the bond market’s masters also required imposing austerity measures above and beyond what the Democrats had planned for upset some liberals in the administration.

It was in this fix that Clinton adviser James Carville famously quipped, “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”

That sentiment about sums up the relationship between capital, perhaps most purely personified in the financial rentiers who buy and sell government bonds, and the state, personified by the countless local and state governments always seeking to borrow capital, and always intimidated by those who have it. Capitalism may have emerged as a mercantilist system sometimes at odds with the monarchs and priests who ran early state bureaucracies. Capitalism may have undergone an industrial revolution and seen various phases of hegemony in which the merchant and manufacturer have called the shots, but capitalism’s real center of power all along has been the financier. Lest we forget, the financier emerged not as the venturesome investor supporting the expansion of companies and funding the ideas of private entrepreneurs. Rather, the financier emerged first to fund the state and its wars. Ever since there has existed a relationship between private capital and the government defined by the rentier’s thirst for yields that outpace inflation, and exchange rate changes, and the state’s thirst for access to debt financing.

Of course a half-millennium of history, of economic accumulation, nation building, imperialism, and urbanization has radically transformed the relationship between capital and the state. The nexus of the state’s powers, to borrow, spend and tax, and capital’s powers, to fund and accumulate, has grown incredibly complex. There are countless institutional variations of this meshing of government and business across nations and sub-national governments. (And this of course is to say nothing of the still multi-trillion dollar “informal economies” of mutual aid and criminal venture that escape and subvert the regulated channels of capital and the fiscal state.)

In the US, however, we see the most fine-tuned, rationalized, and massive combination of private capital and state finances. For all the variations between states and among the multitudes of counties and cities in the federal system, the public’s finances are remarkably standardized, and capital’s role, and the power it wields over the people at all levels of government is rather the same whether you’re in Seattle or Puerto Rico.

And what is capital’s role today in the public finance of the United States? What is the power of the bank, the private bond holder, the fund manager, or the broker over the various governmental units of the commonwealth? The state and capital are certainly co-dependents; capital depends on the state’s powers of monopoly violence, law, and regulation; and the state depends on capital for its fiscal life. Capitalism is defined by the private ownership of capital, however. Thus the state itself exists in a world in which fiscal power can only be borrowed and taxed, and not manifested by powers intrinsic to the state itself.

Enough theory though, what of the actual world we inhabit?

What this means for all of us living in actual communities, bounded by the fiscal authority of cities, counties, and states, inside units of government that do not even have the power to print money or set central bank rates, what this means is that a small number of financial institutions that control enormous concentrated pools of capital have a strange kind of power over our collective lives. These modern day lords of finance determine the terms on which our communities’ may access credit and capital. The few banks, insurers, and brokers that dominate public finance markets hold enormous sway over our decisions about whether and how to invest in schools, clean up the environment, pay for public safety, provision healthcare and housing. Or to do the opposite of these very things, to disinvest in public schools, subsidize polluting corporations, build prisons for the poor and luxury apartments for the rich – after all, our politics are hardly always beneficent attempts to provision public goods.

The rentiers do not often directly influence the what, where, and why of public spending, but they do control the how and when. Their over-arching goal isn’t to pick specific winners and losers in local politics – although there are dominant political philosophies popular among the lords of municipal finance, various conservative hues informed by fears of inflation, and hostile to other practical options that tend to foster egalitarian relations (think full employment policies like deficit spending, for example). Really though they don’t care much if cities spend the people’s credit on affordable housing and hospitals or five star hotels and casinos. They only care that they maximize the wealth that can be extracted from the public through claims they make on future state revenues. They draw the blood of cities, mindful that taking too much will kill the patient, but always pushing the limits to secure a maximum rate of return.

Gold in the vault, treasure.

Last week I mingled with the contemporary lords of municipal finance at one of their annual industry conventions, the Bond Buyer’s California Public Finance Conference. This particular gathering holds an important place on the calendars of the financiers. California is the biggest single market for public debt in the United States. With its numerous agencies and regional authorities, its 58 counties and 482 cities, California contains 38 million residents, and encapsulates a $2 trillion economy, a big chunk of which includes state and local spending on everything from the salaries of 352,000 public employees who teach millions of children in hundreds of school districts across the state, to paying the salaries of 31,000 more government workers employed to lock up roughly 400 out of every 100,000 of the state’s residents, mostly Black and Latino men from Los Angeles and the Bay Area cities. Prisons, schools, roads, airports, sewers, bridges, utilities, water, railways, housing, hospitals….

The fiscal affairs of California’s state agencies and local governments are complex due to the state’s tax system, sabotaged as it was by conservative libertarians in the late 1970s who mostly were just interested in securing the interests of parochial real estate rentiers, mere millionaires, apartment owners and small-time commercial real estate tycoons. In doing so they crippled cities and counties, creating an opening for global financial companies to increase their overall claims on the state’s tax receipts. The mismatch between California’s flow of tax revenues, and its actual budgetary requirements, both in terms of timing and magnitudes, makes the Golden State desperate for, well, gold, and lots of it. It’s these gargantuan borrowing needs of California governments that makes the state more important, and lucrative to the financiers than probably any other state. No other market offers so much capacity and has such a desperate need for borrowing throughout the year.

The modern public finance industry has devised innumerable novel products for California’s governments in perpetual search for more elastic money. No longer does the market rest on auction rate general obligation bonds – the boring traditional securities traded once upon a time by prudent Anglo-Saxon men with degrees from Yale and Stanford, managing their balanced portfolios, clipping their coupons in the same Manhattan and San Francisco offices where bonds were bought and sold over a century ago.

Government entities now routinely borrow using revenue anticipation notes tied to expected tax or fee income collected later in the annual cycle. Expectations are more speculative. The volatility of the economy weighs heavily on everything. Bonds and notes have proliferated into numerous varieties tied to specific taxes or fees and now often have variable interest rates.

California municipalities like Oakland and Sonoma County invented the pension obligation bond to pay down scandalously expensive pensions for retired cops and bureaucrats, and devised parcel taxes and other tax overrides to pair with said debts.

Cities like San Francisco devised lease revenue bonds to channel incomes generated by public assets like parking garages, parking meters, buses and street cars, to investors.

Cities and counties across the state have utilized lease-leaseback and sale-leaseback deals, tax increment financing, business improvement districts, private activity bonds, and numerous other novel finance arrangements to raise capital over the past several decades. All raised money, but at what cost? As the types of debt instruments have grown in number and complexity, and their financial impact on communities becomes more difficult to discern, what has become clear is how these products enable private parties to harvest value from the social product of the city.

In the 1990s and early 2000s even more complicated and opaque financial innovations multiplied in both the asset and liability columns of the public’s books. Cities, counties, and other agencies agreed to complicated interest rate swap agreements to trade variable rate debt payments for synthetic fixed obligations on billions in nominal debt. Other derivatives like guaranteed investment contracts (GICs) or even CDOs were purchased by local governments because the banks told them they were safe, temporary places to park public dollars. Some public officials even gambled on derivatives.

Along with these innovations in public finance (which often costs governments dearly, even if the financiers made their bucks back) are new experiments in infrastructure procurement. So-called public private partnerships have been authorized for highway and road projects across the state, and there’s even a courthouse in Long Beach that will be built and managed by private companies who will in essence lease it back to the state. Proponents of these forms of privatization claims such complicated P3 agreements will stretch public dollars across a greater number projects, getting more miles of asphalt out of every borrowed dollar. Whether they will or not remains to be seen. The track record is mixed on California’s first two P3 highways. Even so the state’s big public pension funds are rumored to be interested in placing money with infrastructure investment funds controlled by private equity groups and investment banks.

What they do immediately accomplish is clear. P3 deals provide yet another way for private investors to make claims on the wealth that the people as a social totality generate. Alongside these privatized highways, the Golden State’s ports are now being handed over to private consortiums of financiers who back terminal operating corporations. It’s yet another twist on the privatization of infrastructure that stops short of actually selling the assets off to investors, but still provides them with all the benefits a private owner would have.

The Bond Buyer’s California Public Finance Conference included all the chatter you would expect about these and other opportunities for the lords of finance to magnify their claims on the social capacity to produce wealth. A workshop was scheduled to discuss San Francisco’s privatized road Presidio Parkway, effectively sold to a German construction company and a French bank. It’s a model privatization project that is soon to be replicated in the Los Angeles region with other highways. Spanish, German, French, Australian, and US corporations and investment banks are said to be circling Sacramento, Los Angeles, San Francisco, and other regions in search of billion dollar infrastructure concessions. Toll roads that will be owned by private investors were discussed in another workshop under the guidance of a managing director from JP Mogan Securities. Another workshop delved into profitable investment strategies for those looking to purchase “distressed” debt from struggling cities, of which there are plenty in California. “Asset sales and other ways of restoring fiscal balance,” was one of the conference’s concluding sessions. Schwarzenegger tried to sell off state buildings during the last months of his presidency in 2010. The net proceeds would have been about $1.2 billion for two dozen edifices. California’s budget gap was almost $10 billion in 2011.

But before the main event and all these insightful workshops promoting strategies to intensify extraction of profits from the state was a pre-conference luncheon and discussion for the investors seeking an inside track. In the Merchant’s Exchange building, described as the city’s “commercial club,” a place “where city leaders and businessmen [meet] to socialize and address the issues of the day,” Bond Buyer conference attendees crowded in for lunch with California’s Treasurer Bill Lockyer. Lockyer told the audience, mostly middle-aged men in grey and blue suits with short haircuts, that he plans to sell $7.5 billion in state bonds through the next fiscal year, a big jump over the previous twelve months.

Some of the sponsors of the Bond Buyers’ annual California conference.

The elephant in the room?, California’s reputation as the most indebted state, and the recent bankruptcy of Stockton. The financiers, packed into the Merchant Exchange’s lavish Julia Morgan Ballroom, 15 floors above the “Wall Street of the West,” the intersection of Montgomery and California Streets, speculated with one another between speeches about the ability of local governments to repay debt. Would defaults ensue? Their co-dependence on the state was apparent, their anxiety palpable.

These fears were quickly addressed by speakers from credit rating agencies and current and former city officials. Their general conclusion was to assure the investors: “I genuinely believe these cities are outliers,” said Bill Statler, a conservative public finance director retired from San Luis Obispo who is well-liked by the rentiers. The fear among bondholders with Stockton, Vallejo, and few other California cities that have gone into bankruptcy, has everything to do with privilege, and maintaining their capital against the general deflation that has struck most plebeians. They should not be subject to the loss of capital that workers, children, the poor and elderly of indebted cities are.

James Spiotto, a lawyer who represents a few lords of municipal finance, complained of unfairness to capital: “the bondholders and insurers’ concern is, look, if we provide money to help these people are we just second-class citizens?” Such histrionics is typical when profitable yields are threatened by the collapse of a community due to growing poverty and geographic disinvestment whose social realities are brutal and violent on the ground. Stockton and Vallejo have become harsh places to live for those who cannot escape behind the walls of gated communities and private schools. Those left behind in California’s hollowed out post-industrial, post-Prop 13, post-dotcom, post-housing bubble towns have been abandoned by corporate capital and the state’s wealthy households, but are still expected to pay back debts that harken back to prior eras and bygone social contracts.

An ad in the Bond Buyers’ conference guide, shoe shines brought to you by BNY Mellon, the largest custodial bank in the world, entrusted with the funds of thousands of governments and agencies.

“During the Great Depression we saw 5000 bankruptcies. We’re not seeing anything like those sorts of numbers,” Statler reassured the bondholders. “Does Stockton tell us anything? There’s over 400 cities in California that just emerged from the worst economic crisis in over seventy years, and just a few have declared bankruptcy.” Bankruptcy could require that the lords of municipal finance take a hair cut, a loss on their returns, rather than requiring public employees to be axed, schools to close down, and healthcare services to be withdrawn. Most of the professionals who work for local governments in their finance offices are fiscal conservatives who, thanks in no small part to meet-and-greets like the Bond Buyer conference, identify more with the rentiers who lend the money, than the working families in the cities who employ them. It’s routine for public finance officials to make upwards of $100,000.

Oakland is one of California’s most bled patients. The “five-and-dime” port city across the Bay from imperial San Francisco has issued billions in bonds and notes over several decades, not always under favorable terms. Scott Johnson, Oakland’s finance director, was called on to address the rentiers, as a representative of on their most lucrative, but also troubled sites of wealth extraction. Johnson’s message was reformist in tone, explaining austerity reforms his team of budget crafters has advanced.

“We have trained our city council,” said Johnson of the lengths his staff have gone to keep local elected officials from seeking to restore badly needed services. “We keep them better informed about the realities. There have been many times in closed session negotiations with the labor unions, if there’s a surplus of funds, members of the City Council will say, ‘can’t we give some of that back?'” Johnson sees his job as inspiring fiscal discipline in his bosses, the City Council, in order to appease the bond markets and secure cheaper loans. It’s a situation of forced austerity not unlike that described by James Carville.

“When I came in as finance director the reserve was low, and we had to work with the Council and employees to re-establish reserve levels,” said Johnson, who actually makes a relatively modest salary compared to others in his position, about $83,000 in total compensation last year. By comparison Mark Bichsel, the finance director of Piedmont, the affluent “city of millionaires” in the hills above Oakland, indeed completely surrounded by Oakland like some archaic city-state that has raised the drawbridge around the moat to protect its exorbitant home values from the working class urban swamp below, earned $243,000 last year.

Reserves are maintained to ensure the rentiers that their bonds will reap full repayment, of course. A city is by no means required by any natural laws of economics to maintain high reserves, or to comply with many other austere measures favored by today’s public finance professionals. The existence of such standards is more a measure of the power of capital over local government, than a measure of any sort of rational or humane economic system.

With the end of the pre-conference panels the financiers left the Merchants Exchange, walking down California Street to the Hyatt Hotel, where the main events were schedule for the next two days. Greeting them out front, a picket of workers, foreclosed homeowners, SEIU 1021’s militant rank and file, Occupy San Francisco activists, Oakland’s the Coalition to Stop Goldman Sachs, activists with ACCE, among other rabble. The Hyatt’s own cleaning staff are currently engaged in a battle with the hotel’s management, and some labor leaders urged public officials to boycott the Bond Buyer conference because of its location.

Across the broad and busy expanse of Market Street a woman yelling into a megaphone at the packs of tourists and suited professionals bee-lining from one tower to another: “are you disgusted by the homeless protesters camped out in front of the Federal Reserve?”

The US Federal Reserve Bank of San Francisco (est. 1913), not as old as the Bond Buyer Magazine (est. in 1891), and arguably too much the servant of the bond markets, was since September of 2011 the gathering point of Occupy protesters. Occupy San Francisco established a camp in front and stacked literature about economic inequality, political corruption, and policy brutality on tables for pedestrians to pick up. The police busted the camp and tables down several times. Like everywhere else Occupy on the ground has been a street battle between the activists and cops. “Don’t label it. Don’t call it Occupy!,” screamed the voice under the corporate towers of the city’s financial district, before the glass facade of the Federal Reserve.

“Call it waking up!”

Inside the Hyatt the conference officially began with a panel moderated by Ian Parker, a vice president at Goldman Sachs: “[the] global economic and interest rate environment, and how munis are priced as a result.” Parker runs the public sector and infrastructure banking group in Goldman’s west coast office, located just five blocks up from the Hyatt in the old Bank of America building.

Protesters outside the Bond Buyer conference.

As he set into his introductory remarks came shouts from the crowd, protesters who had infiltrated the conference. “Stop the swap! We demand that your company stop the swap with Oakland,” they yelled, lifting signs above the balding heads of piqued bankers and lawyers. Parker knew immediately who they were and what they wanted.

In 1997 Goldman Sachs signed an interest rate swap agreement with Oakland, promising cheaper rates on $187 million in bonds the city planned to sell the next year. The city’s leaders, influenced by their financial advisers and Goldman Sachs, tweaked the swap deal twice over the next seven years to create more funny money. When the economic crash came in 2008 Oakland was one of hundreds of local governments left holding a toxic swap derivative that sucked millions from the city every year.

The title of the panel about to be moderated by Parker couldn’t have been more appropriate given that the global interest rate environment, determined very much by the political decisions of central bankers and a handful of cartel-like corporate banks working through institutions such as the British Bankers Association’s LIBOR, have the power to raise or lower interest rates, a power that profoundly affects debt-strapped local governments.

Parker pleaded with the protesters, “we are negotiating,” and promised to meet with them later outside for a discussion. “The Goldman Sachs VP came up to us while we were chanting to say that yes, GS was in process of negotiating with Oakland, and that he’d come out later and talk to us about it,” said a member of the Coalition to Stop Goldman Sachs, the grassroots group that has been rallying for financial justice for their city for almost a year now. Quickly security guards threw out the troublemakers. Parker never emerged from the hotel. In response to the same demand made at the company’s annual shareholder’s meeting earlier this year, Goldman Sachs CEO Lloyd Blankfein told another Oakland resident to buzz off: “That’s not how the financial system could work, and were we to do that, we would, frankly, be impairing the interest of our shareholders and the operations of our company. I don’t think it’s a fair thing to ask.”

2012 was a different kind of year for the Bond Buyer conference. The protest created buzz inside. One can only imagine the guilt and worry of various banking executives, wondering if the protest was specifically directed at them, probably hoping it was just abstract frustration. Or perhaps they found it funny, a source of amusement, content to tell one another that the hordes below know not of what they speak. But increasingly they do.

Detailed knowledge of the economy and public finance, how it actually works, who it harms, and who benefits, can be a dangerous thing. Revelations about the moral system of modern day usury that dominates public finance can be shocking and mobilizing moments. The complaints of bond investors who fear cities might treat them as “second class citizens” by reducing the profits they can harvest on public debt seem perverse when the real second class citizens, children, the poor, and the elderly, must endure school closures, crumbling streets, disappearing social services and the general disintegration of the safety net.

Oakland’s Scott Johnson said it best during his remarks to colleagues at the pre-conference luncheon. When asked what he and his staff in the city of Oakland are doing differently now in light of continuing crises and uncertainty, Johnson observed, “We work in a very political environment,” adding, “the public is paying attention to municipal finance now.”