Some months ago, when the financial crisis was in full bloom and the scandal surrounding the payment of bonuses at the very recently bailed-out AIG had everyone from Ralph Nader to Rush Limbaugh screaming bloody murder, the New York Times ran a story about company executives who were being harassed by angry taxpayers in the driveways and front lawns of their stately Connecticut homes. It was a memorable story in a lot of ways (it has been a long time in this country since people had seemed quite so on the verge of taking up pitchforks and storming the manor), but mostly for one line in particular, spoken in breathless desperation by an anonymous, uh, “victim.” It was a line that so totally epitomized the naked venality of our very own Gilded Age leisure class that it almost had to have come out of Tom Wolfe’s The Bonfire of the Vanities. No real-life human being, no matter how harried and upset by the public censure that was pouring down like some Biblical plague on his head and the heads of his fellow AIG execs as they cashed their bonus checks, could actually complain to a reporter, “It is as bad if not worse than McCarthyism.”

If not worse.

Unfathomable. Ridiculous. Execrable. And yet, as you read that line, you know what he means: “It wasn’t me. Not my fault. Why are they picking on me?” And by some measure, of course, he was right. He wasn’t the only unlucky schmuck who got stuck with a million-dollar bonus after the company he worked for nearly torched the entire financial sector and much of the broader economy along with it. AIG wasn’t alone in paying extravagant bonuses and compensation packages to its executives—this was as much hard-wired into the corporate culture as the Brooks Brothers ties and the addresses in Fairfield and Greenwich. He didn’t make the rules, he just got rich by them.

So there may be a perverse kind of redemption for that poor, unnamed (and decidedly uncouth) AIG executive in a report issued Thursday by New York Attorney General Andrew Cuomo, which documents, in painstaking detail, just how common the practice was at all of the major banks last year. After receiving $35 billion in TARP funds, Bank of America paid more than $8 billion in bonuses in 2008. At Goldman Sachs, bonuses paid came out to more than double the company’s net income, and 953 executives received payments in excess of $1 million. Citigroup and Merrill Lynch together paid their employees more than $10 billion in bonuses, even while posting losses of more than $27 billion—each!

Confronted with these and countless other examples of excess, the Cuomo Report concludes that, on Wall Street, “a disconnect between compensation and bank performance [has] resulted in a ‘heads I win, tails you lose’ bonus system,” which, for today’s Masters of the Universe, is “all ‘upside.’”

Not surprisingly, there is talk again now, as there was in the spring after l’affaire AIG, about capping executive pay, and on Friday the House passed a bill that would impose restrictions on compensation at firms with over $1 billion in assets. And this talk is generating the predictable dismissals from the business press, which as usual amount to appeals to the sanctity of the contract (these folks were promised bonuses for their honest day’s work!); or arguments about the irrelevance of executive over-compensation to the performance of these banks over the last year and a half. Floyd Norris at the Times, for example, claims “there is little evidence that big pay…caused the financial train wreck that sent the world into recession,” and that even with their incentive-filled contracts, financial executives “had plenty of incentive to keep their banks from failing,” if only to keep the money train rolling.

In a smart new book called Managed By The Markets: How Finance Re-Shaped America, Gerald Davis, a professor of management at the University of Michigan, makes a very different argument. According to Davis, there took place a “massive shift in compensation practices” during the 1980s and 1990s, as CEO pay grew rapidly and increasingly came in the form of stock options. The effect, he explains, was to tie “their pecuniary interests ever more tightly to share price,” which in turn drove executives to make business decisions primarily with the aim of pumping up the value of their company’s stock.

The consequences of this could be lethal: before the housing bubble burst, Citigroup stock was selling at $54 a share; after the bubble burst, it fell to a low of 97 cents. The explanation for both prices was the same—Citigroup had bet long on mortgage-backed securities, which generated huge profits during the bubble years but then turned out to be only so much worthless paper when the underlying loans began to fail en masse.

For corporate executives, the imperative of maximizing share value—for the sake of their own option-laden compensation packages, as well as for the sake of the shareholders at whose discretion they serve—makes it very hard to bet against the conventional wisdom, even if that wisdom turns out to be wrong. Citigroup could not have produced the stock market gains it did without betting long on the housing market; and if Citigroup executives had chosen to keep the bank out of the market while their competitors got rich, they most likely would have been removed for a more willing replacement.

In this sense, what the Cuomo Report calls a “disconnect” is not really a disconnect at all—it’s more like a basic flaw in financial capitalism itself, one that extends beyond the particular issue of executive compensation to the very essence of an economy which has, in Davis’s words, “tied the well-being of American society to financial markets to an unprecedented degree.” Compensation structures did play a role in creating our current “financial train wreck,” not because they encouraged particularly greedy executives to take unwise risks so as to increase their end-of-year bonuses, but because to a great extent they left them no other choice.

Think of it like baseball in the Steroid Era. Sure, David Ortiz, Manny Ramirez, and all the rest of them didn’t have to use performance enhancing drugs to boost their offense productivity. But as success in baseball increasingly came to be measured by how many home runs you could hit—and everyone from the league to the players’ union to the credulous, boosterish media turned a blind eye to what was going on—it’s fair to say that if they hadn’t been using the drugs, they probably wouldn’t be David Ortiz and Manny Ramirez. Big guns had become the name of the game, and until somebody was prepared to change the rules there would always be willing dopers ready to replace the squeamish.

On Wall Street, it isn’t so much about guns as butter. Extravagant compensation for executives was—still is—the law of the land, in part because we imbue such mythic significance to their ability to “hit the long ball” and drive the stock market into the stratosphere. Like Ortiz and Ramirez, Dick Fuld at Lehman Brothers and Jimmy Cayne at Bear Stearns earned their paychecks for doing what they were supposed to do: who was telling them to put down the needle and take off a few pounds in 2006, when the housing bubble was at its peak?

Certainly not their shareholders and board members, who were nodding all the way to the bank as the stock ticker climbed—which should give pause to those now pushing to give shareholders greater say in determining compensation packages. Nor was anyone at the Federal Reserve raising much of a fuss, as soaring stock and home prices kept consumption high and fueled the economy. And the media was far more likely to publish fawning stories about their financial wizardry and lavish lifestyles than they were to ask questions about how well the banks were hedging their investments in AAA-rated subprime mortgage securities.

But what goes up must eventually come down, and the giddier the ascent the more painful the crash. Baseball is disgraced, the housing bubble burst. If there are lessons here, it’s not simply that bankers and souped-up home run hitters are overpaid, but that they are paid to do the wrong thing altogether. Pitching and defense may win championships, but they don’t bring in the same endorsement deals.

Come to think of it, that infuriating remark from the tone-deaf AIG executive was spot on.

“Hey man, it ain’t me. It’s the system.”

But don’t uncork the champagne just yet. The latest foreclosure numbers are still bleak and likely to worsen, as an epidemic that has thus far been confined largely to the riskiest subprime and adjustable-rate borrowers shows signs of  spreading to more conventional homeowners with fixed-rate loans. After the housing crash of 2007, prices fell so far and so fast, in so many communities around the country, that more than one-in-five homeowners found themselves “underwater” on their mortgages by the first quarter of 2009. The percentage of prime borrowers with fixed-rate loans who were behind on their payments or facing foreclosure during the first three months of this year was more than double that during the same period in 2008.

Prices still have a long, long way to go before these borrowers will again see the light of day. Tuesday’s report indicates that home values have gotten back to where they were in mid-2003—which sounds good until you consider that it was only after 2003 that the housing bubble really took off. Prices are still down more than 30 percent from their peak in 2006, and it’s hard to see how, even by the most optimistic forecasts, we’ll get back to that level anytime soon. And with even Fed Chairman Ben Bernanke now acknowledging the likelihood that the job market will remain slack for some time to come, things will almost undoubtedly worsen before they get substantially better for millions of at-risk homeowners.

More troubling still have been the disappointing results of the Obama administration’s mortgage relief plan, ushered in in February with promises of helping more than three million troubled borrowers keep their homes by offering incentives to mortgage companies to renegotiate eligible loans. To date, though, only some 200,000 homeowners have been enrolled in the Treasury Department’s loan modification program, and that lackluster performance finally prompted the administration to summon representatives from twenty-five mortgage firms to Washington on Tuesday. According to reports, Treasury Department officials chastised the assembled mortgage executives for not moving more quickly to modify loans, and extracted a pledge from them to pick up the pace substantially between now and November 1.

Will a slap on the wrist from the White House be enough to make a difference? I’m not so sure. As Kai Wright pointed out in The Nation a few months ago, the Obama administration’s plan for addressing the foreclosure crisis shares at least one key attribute with earlier—failed—plans put forward by Congressional Democrats and the Bush administration over the last year and a half: “industry participation in the president’s plan is largely voluntary, if heavily subsidized.” If mortgage services decide they are better off foreclosing on at-risk loans—as they often do—rather than renegotiating, there is nothing in the Obama plan to stop them.

In a July 9 letter that precipitated Tuesday’s meeting, Treasury Secretary Tim Geithner and Housing Secretary Shaun Donovan told mortgage industry executives, “We believe there is a general need for servicers to devote substantially more resources to this program for it to fully succeed and achieve the objectives we all share.” Geithner and Donovan are certainly right, but they have little leverage to work with in their attempts to get the mortgage companies on the same page. The Obama administration’s homeowner relief plan, in Wright’s words, “avoids fundamental questions: can the crisis be stopped as long as the mega-servicers call the shots, and can we simply buy them off?”

After five months of unimpressive results, it seems like the answer is no. And if that’s true, then unless the administration changes direction—and fast—we probably have many more months of trouble in the housing market ahead of us.

The benefits for low-wage workers are obvious: since 1980, the real (after inflation) value of the minimum wage has declined precipitously, from a high of around $8.00 to a low of around $5.50. In nominal terms, the minimum wage did not budge between 1997 and 2007, even as annual inflation averaged 3 to 4 percent during most of those years. Adjusted for inflation, the minimum wage today is 17 percent lower than it was 1968.

During that same time, the shrinking value of the minimum wage has contributed to a steady increase in income inequality across the board. By 2005, according to the Economic Policy Institute, minimum wage earners made 32 percent of the average hourly wage, down from a peak of 56 percent in 1950 and 40 percent as recently as 1998. Women and minorities make up a disproportionate share of the minimum wage workforce, which at least partly explains the continuing lag between their earnings and those of white men.

Even if times were good, there would be a case for increasing the minimum wage—and indeed, nineteen states plus the District of Columbia have already passed state laws that pay $7.25 or more, and most will be unaffected by the federal increase. Still, the EPI estimates that today’s raise will translate into $1.6 billion in additional annual income for minimum wage workers; which, given the perilous state of today’s economy, represents some much-needed security for workers who are too often used to doing without.

And they are not the only ones who will benefit. For the same reason that boosting social welfare payments in the form of unemployment benefits or food stamps have large positive effects on personal spending, the minimum wage hike will feed directly back into the overall economy at much faster rate than, say, tax cuts for the middle class. Low-income workers are far more likely to spend small windfalls (if a long overdue wage hike can be thought of as a “windfall”) during times of recession than middle- or high-income workers, who tend to sock it away as protection against future uncertainty. The EPI figures that raising the minimum wage to $7.25 will increase consumer spending by more than $5.5 billion over the next twelve months.

Critics of the minimum wage often complain that it increases unemployment by forcing businesses to hire fewer people or eliminate low-productivity jobs during recessions. But there’s very little evidence that this actually happens. Surveying a half-dozen recent studies which “have failed to find a significant impact on unemployment from raising the minimum wage,” Kai Filion of the EPI points out that “if raising the minimum wage leads to millions of families spending billions of more dollars, then this spending creates jobs for other workers and helps offset the theoretically negative impact on employment.”

Not only is the minimum wage’s direct impact on employment largely fictional, but as labor economists William Spriggs and John Schmitt suggested more than a decade ago, the devaluation of the minimum wage over the last quarter century is at least partly responsible for a parallel deterioration in wages throughout the labor market. “The dramatic decline in the real value of the minimum age did not lead firms to expand total job opportunities” like minimum wage criticisms would imply, Spriggs and Schmitt write, “as much as it induced them to alter the composition of employment by substituting low-wage, low-productivity jobs for what used to be higher-productivity, better-paying ones.” So long as the minimum wage remains so appallingly low, in other words, we all pay.

Today’s increase is the final step in a three-year minimum wage hike passed by Congress in 2007. During the 2008 election, Barack Obama promised to keep the upward trend going by increasing the minimum pay for the lowest paid workers to $9.50 by 2011. Let’s hope he can follow through—for their sake and for the rest of us.

David Weidner at the Wall Street Journal writes that the decision to deny further assistance to CIT is a “referendum on what bailouts are for, whom they serve and what their purpose is,” because after throwing trillions at the big banks, the administration is now “balking at expanding aid to smaller players.” And the consequences of that decision, he argues, could be more serious than the administration realizes. “Without CIT and companies like it, small businesses in the U.S.—producing half of the nation’s gross domestic product—would be suddenly caught in a financing crunch at a time when the nation needs small businesses to hire workers, fuel production and lead the economy out of recession.”

Weidner is only half right. It goes without saying that the federal government has been pretty much indiscriminate in bailing out big banks not named Lehman Brothers. But does that mean it should be bailing out all the smaller banks, too? Probably not. There are better ways to spend public money, which I’ll return to below.

What about Weidner’s argument that small businesses will pay the price for CIT’s failure, and that the national economy will suffer because of it? Here I think he overstates the role of small businesses in the larger economy, especially during times of recession. As economist Dean Baker noted recently, small businesses actually account for disproportionate shares of job creation AND job loss, and “on net, create new jobs at roughly the same rate as larger businesses.”

That’s not an argument against small businesses, of course. But despite all his hand wringing about the “catastrophic” effect of a bankruptcy for workers at small businesses, Weidner doesn’t say anything about the government providing direct financing to those companies so that they can avoid layoffs or closures. He just wants to save another bank. The columnist doth protest too much.

Should the government be spending more money to keep relatively small, at-risk financial firms afloat, in the hope that a finger in the dike now will have us back to Dow 15,000 next year? Or would that money be better utilized through more direct stimulus spending for job creation on crucial infrastructure, public transportation, and green energy projects? Increased funding for unemployment insurance, food stamps, welfare transfer payments, all of which tend to have large overall multiplier effects by stimulating consumption and economic growth? Or through taking more direct control of strategic, goods-producing firms in the industrial sector? Or…well, you get it.

One problem with the kind of triage, bailout capitalism — “Wall Street socialism,” if you will — that has emerged in the wake of the financial crisis is that once the government walks through that door, it’s always going to be hard, politically, to find its way out again. But that doesn’t mean that every bad loan and risky security at every financial institution should be whited-out with taxpayer dollars—and all in the name of a “shared” recovery that is working out a lot better for the banks than it is for the rest of us.

So is it a good sign that the Obama administration is saying no in this case? Don’t get ahead of yourself. After all, the money pump keeps flowing for the big, politically powerful banks even as the Treasury Department considers shutting it off for mid-market lenders like CIT.

In other words, the administration’s calculus in this case probably boils down to pure politics. The once again fabulously profitable Goldman Sachs and JP Morgan were among Obama’s biggest individual contributors during the 2008 election. The main opposition to the CIT decision, meanwhile, will likely come from various trade associations and small business groups, most of which tend Republican anyway (the National Federation of Independent Businesses gave 85 percent of its 2008 federal campaign contributions to the GOP) and don’t like Obama because of his support for health care reform and pro-labor legislation like the Employee Free Choice Act.

And with the regular folk getting more than a litle sick of bailouts, yet another last-minute government credit line for CIT would just piss too many people off, plain and simple.

Whether or not Goldman is the true éminence grise of modern capitalism—or more precisely, the “great vampire squid wrapped around the face of humanity,” as Taibbi would have it—there is no doubt that the financial giant is doing remarkably well these days. For that matter, so are JP Morgan Chase and Wells Fargo. Not as well, of course, but still nothing to sneeze at given that six or nine months ago it seemed the end was in sight for the lot of them.

And why not? After all, this has been the main thrust of the Bush/Obama recovery plan all along: save the major banks from imminent collapse, re-inflate sagging capital markets, make a nod towards increased regulation, and party like it’s 2006. It can’t be long now before Tim Geithner dons a flak suit, ascends to the balcony overlooking the New York Stock Exchange, and declares that mission accomplished.

Meanwhile, back in the real world, beyond the canyons of glass and marble in Lower Manhattan, the bubble is still bust. Nowhere is that more true than in Michigan, which was suffering through a recession a full three years before the rest of the country and where a statewide unemployment rate of more than 14 percent now leads the nation. Barack Obama, on his way to throw a low, offspeed first pitch at the Major League Baseball All-Star game in St. Louis, stopped yesterday in the struggling auto city of Warren, where he gave a speech on the economy and announced a new proposal to substantially increase funding for community colleges around the country.

“The hard truth is that some of the jobs that have been lost in the auto industry and elsewhere won’t be coming back,” Obama told the crowd at Macomb Community College. “They are casualties of a changing economy. And that only underscores the importance of generating new businesses and industries to replace the ones we’ve lost, and of preparing our workers to fill the jobs they create.” To that end, his $12 billion American Graduation Initiative is to fund postsecondary education and skill training for millions of American workers, which will “help us thrive and compete in a global economy.”

But as a sobering editorial in the Detroit Free Press noted on the eve of Obama’s visit, “Michigan has emphasized job retraining for months, if not years now—and yet people keep losing their jobs, even in supposedly hot fields such as health care.” An informal survey conducted by the New York Times, of thirty-six graduates from a retraining program at the very same Macomb Community College where Obama spoke, found that “at least 60 percent appeared either not to be working or to be in jobs unrelated to their training.”(6)

Nor is Michigan alone on this count. A Department of Labor study issued late last year found the benefits of the major federal retraining program to be “small or nonexistent” for dislocated workers, who can expect “at best, very modest” gains in earnings from participating in the program, “even three to four years after entry.”

“The real problem in Michigan,” the Free Press rightly concluded, is not inadequate funding for job training programs, but, simply, the jobs themselves, which are disappearing fast as the auto industry contracts in the wake of the structured bankruptcies at General Motors and Chrysler. And that’s one reason why the Obama administration’s handling of the crisis in the industry (which I wrote about recently for The Nation) was so disappointing. Instead of seizing the moment to put forward an ambitious new industrial policy agenda for reinvigorating (and greening) the American manufacturing economy, the administration decided on a plan that made sense only in corporate boardrooms far removed from the shuttered factories and worthless retraining programs of Warren, Michigan. 

More money now for education and skill training is hardly a bad thing, but without a plan to create the well-paid jobs of the future to go with it—well, as the Free Press put it, Obama “can’t afford to sugar-coat anything in front of a Michigan audience.”

Still, it was unfortunate to learn that the administration’s auto task force, assembled to plan and carry out the restructurings at GM and Chrysler, looks like it will be dismantled by the fall. Rather than pulling out of the auto industry as soon as possible, the Obama administration would be wise to reconsider its role in steering the domestic manufacturing economy towards recovery. Some smart, well-organized, and progressive thinking autoworkers have a much better plan for how to approach the crisis in the industry, by tying it to the broader environmental crisis and coming up with a “bold proposal that can put people back to work and address global climate change.”

That’s the kind of recovery everyone can appreciate.

A copy of a letter the autoworkers sent to President Obama yesterday can be read here.

Then the latest round of jobs numbers hits, and the true nature of our current recovery reveals itself. In June, the economy shed nearly 500,000 jobs, as the unemployment rate reached 9.5 percent, its highest in a quarter century. When factoring in the number of people who are underemployed—those who have given up looking for work or who are working part-time because they are unable to find full-time employment—the total soars to 16.5 percent.

The figures on wage growth, which I noted in a previous post would be a crucial indicator of recovery in the labor market, are equally bleak. Heidi Shierholz of the Economic Policy Institute finds that “wage growth, which held up for the first year of the recession, has collapsed over the last six months.” Weekly earnings actually fell over the last few months, even as corporate profits began (slowly) to increase.

Worse still, even as the pace of job loss has slowed from late last year and the beginning of 2009, Shierholz points out that “the entire growth in jobs over the last nine years has now been wiped out-the economy currently has fewer jobs than it had in May 2000.” As much as anything else, this speaks to the tepid job growth of the last recovery, when rising home values and stock prices fueled consumer spending even as the economy was slow to add new jobs after the 2001-2002 recession, and wages remained stagnant except for at the very top of the income ladder (which, come to think of it, had a lot to do with producing the bubble-madness that got us into this mess in the first place).

It also reveals just how the severe the current crisis has become, and should give the lie to the false hopes now being bandied about by Obama’s economic team. After all, as New York Times columnist David Leonhardt reminded us recently, their early economic forecasts had unemployment peaking at around 8 percent this year, a once-startling number now growing ever smaller in the rear-view mirror. As was clear to many smart people at the time, the stimulus plan they came up with, to forestall this “worst-case” scenario, was something like trying to dress a gunshot wound with band-aid—and sure enough, it has not yet stopped the bleeding.

The Obama team should have been reading Paul Krugman—or at least listening to Loudon Wainwright III.

The third, and definitely the strangest, was an optimistic news story about the job market by the Times’ labor correspondent, Steven Greenhouse. I say strangest because what was far more compelling than the labor market trends Greenhouse seized on — 4.3 million new hires in February, millions of other new job openings — was an obvious subtext he never saw fit to mention.

As documented by a graph that accompanied the article, February saw more jobs gained than lost in industries like government and education and health services; while in the retail trade, new jobs created trailed new losses only by a slim margin. In manufacturing, however, new hires trailed new job losses by nearly 200,000. “Who is hiring?,” Greenhouse asked. “Hospitals, colleges, discount stores, restaurants and municipal public works departments.” Oh yeah, and Wal-Mart is “hiring aplenty,” too, with plans to add 50,000 jobs by the end of the year.

This is significant for obvious reasons that don’t require much by way of sophisticated analysis. According to the Bureau of Labor Statistics, average weekly earnings for manufacturing workers are $741; $712 for construction workers; $685 for workers in education and health services; $564 for workers in the retail trade; and $470 for leisure and hospitality workers. Wal-Mart, meanwhile, is something else altogether, as anyone familiar with its notorious record of mistreating workers will know.  In other words, workers are still losing jobs that pay well, but now they’re gaining jobs that pay like crap.

Greenhouse surely knows all this—he wrote about it in a book called “The Big Squeeze: Tough Times For The American Worker.” And so far, that’s exactly what the early signs of recovery amount to — another “big squeeze”, as businesses return to profitability by dramatically cutting the cost of production; which has meant, as it tends to mean, dramatic cuts in the cost of labor. This is what economies in crisis do — think of it as controlled deflation. With the Great Recession and now the Maybe-Recovery, we’re witnessing a massive transfer of American workers out of high paying industries and jobs into more flexible, informal, poorly-compensated work in service industries like health care, retail, and office administration. Forget stress tests and TARP funds for a moment — if workers like the one Greenhouse spoke with for the article, who replaced a $15 an hour construction job with $7.50 an hour job as a “fry guy” at the local burger chain, are at all typical of the “robust” new job market, then you don’t have to have an MBA to see how this works: wages go down across the board, corporate profits begin to rebound, business investment picks up, and next thing you know — tada! — recovery.

So why didn’t Greenhouse bother to point any of this out? Beats me — call it the Been Down So Long It Looks Like Up To Him syndrome. Still, if you wanted an even more explicit example of predatory capitalism at work, you could do no better than to turn back to the front page of the same day’s paper and read the story about J. Christopher Flowers and the First National Bank of Cainesville.  ”It’s a Wonderful Life,” anyone?