Lesson's from The European Parliament Elections

I meant to post a link to this earlier this week, but didn't get around to it. From Salon, here is Michael Lind's take on the victory of rightist parties across Europe in the European Parliament elections last week: "A warning for Democrats? The right just won all across Europe, thanks to nationalism, populism and recession. It could happen here too.".

Below is an excerpt from Lind's essay, followed by a few thoughts by me.

[I]t has become something of an orthodoxy among bien pensant progressives on both sides of the Atlantic that territorial nation-states are immoral because they privilege the identity of one cultural nation over others (the nation part) and because they favor the well-being of their citizens over foreigners who may be poorer (the territorial state part). Most progressives favor ending agricultural subsidies in Europe and the U.S., claiming that this would help poor peasant farmers in the global South export their way to prosperity (of course this would really benefit multinational agribusiness, not romanticized peasant farmers, but never mind). In debates about immigration, as in debates about trade, elite progressives whose own positions and incomes are secure frequently demonstrate their altruism by suggesting that it is acceptable if immigration somewhat lowers the wages of their less-fortunate fellow nationals, as long as poor foreign immigrants and receivers of remittances are thereby made better off. How generous of them!

The new pro-capitalist, anti-nationalist center-left finds allies in investment banks and college campuses but has little to offer ordinary people who view the nation-state as their agent and protector in a dangerous world. Nobody should be surprised when, in a period of economic crisis, significant parts of the population should turn to unabashed nationalists of the right, as opposed to progressives who fret that helping out their fellow citizens might be a form of discrimination against more deserving foreigners. It's true that toxic forms of racism and illiberal nationalism drive the anti-immigrant politics of the far-right parties that have benefited from protest voting in Europe. But the economic case for limiting the inflow of new workers into an economy at a time of mass unemployment is likely to seem commonsensical to many non-racist voters who do not share the new center-left's unease with national patriotism.

Lind makes some astute observations here, and Republicans can draw some lessons from this if they are willing to part company with Democrats on some of their shared orthodoxies (e.g., embrace of large scale unskilled immigration). The way to do this would be to acknowledge the challenges posed by globalization to the American middle class and offer some constructive solutions. In a recent post ("How Not to Create Broad-Based Prosperity"), we mentioned one Democrat (Matt Miller of the Center for American Progress) who acknowledged these challenges but didn't offer constructive solutions to them (e.g., Miller's proposed replacement for manufacturing jobs lost to outsourcing was to replace them with service jobs such as hospice aids; Miller proposed this without acknowledging the extent to which these jobs are currently filled by immigrant workers). I've made these points before, but two specific areas where Republicans can draw a contrast with Democrats are on immigration policy and energy policy.

On immigration policy, Republicans would be smart to buck the Chamber of Commerce's demands for cheap unskilled immigrant labor and advocate a transition to an immigration system similar to those of Australia or Canada, one that selects for immigrants with high levels of human capital. While unemployment is high, immigration should perhaps be further limited to foreign entrepreneurs who have the capital and intent to start businesses here and create jobs for American workers. To counter the inevitable accusations that anyone advocating an economically rational immigration policy is advocating it because of racism, Republicans ought to do two things. First, they ought to scrupulously distance themselves from anyone who advocates restricting immigration based on race. Racist immigration restrictionists may win elections in Europe, but they will be the kiss of death to any plans to institute a Canadian- or Australian-style immigration policy in America. Second, Republicans ought to point out that it is often minorities who are most harmed by the effects of our current immigration system. Let Democrats explain why we should import more unskilled immigrant laborers when, for example, 39.4% of African American teens are unemployed (Hat tip to Dr. Mark Perry for the chart below).



On energy policy, Republicans would be smart to continue advocating efforts to develop more domestic sources of oil, gas, and coal, while advocating an increase in nuclear power as well. Increasing domestic supplies of energy would create more high-paying jobs in the energy sector, and ensuring a large supply of relatively inexpensive energy would facilitate the creation of jobs in energy-intensive industries such as manufacturing (we noted the effect of lower energy prices on employment in a post last fall, "A Tale of Two States: Utah versus Rhode Island").

A third area where (some) Republicans may be able to draw a favorable contrast with Democrats, if they are willing to do so, is by running against Wall Street, or more accurately, running against the incestuous relationship between some major Wall Street firms and Washington. I suspect New Jersey's GOP gubernatorial nominee Chris Christie will try a version of this while running against our incumbent governor, former Goldman Sachs CEO Jon Corzine. Republicans would be smart to look for economic advisers from among the smart bankers and investors who haven't required government rescues. I don't know what John Hussman's politics are, but to the extent his policy prescriptions (e.g., making big banks eat some losses) have been ignored by the current administration, I bet Dr. Hussman would welcome a chance to advise a Republican candidate willing to listen to him. Another potential economic adviser might be Andy Beal, the self-made billionaire Texas banker who successfully navigated the credit bust.

"No Easy Workout"

That headline appeared above a photo of gym-goers working out on treadmills and stair masters at the soon-to-be foreclosed on Fayetteville Athletic Club, in a front page article about distressed debt in the business section of yesterday's New York Times. Apparently the business section's online editors don't have the same sense of humor, since the online version of the article eschews the clever pun of that headline and photo. Instead, the online version leads with this headline, "After the Bank Failure Comes the Debt Collector", and the photo above, of Fayetteville Athletic Club owners Robert and Katherine Shoulders.

The article notes that the Shoulderses borrowed $10 million from a local bank to renovate and expand their health club, and when that bank failed, they stopped paying their interest payments. Then Rick Williamson, "a Chicago banker turned junk-loan buyer", swooped in and bought the Shoulderses' loan at an FDIC auction for 34 cents on the dollar, and sued to foreclose on their property. One question raised, but not answered, by the article is why the Shoulderses didn't bid on their own loan at the FDIC auction (or have a friend do so). According to the article, the Shoulderses were willing to pay the FDIC $6 million upfront to forgive their loan -- so why not bid $4 or $5 million at the auction for their own loan (which Williamson bought for $3.4 million)? Williamson might have backed out then, and the Shoulderses wouldn't today be in danger of losing their business.

Also mentioned in the article was Andy Beal, the self-made billionaire and buyer of distressed debt who was the subject of a previous post here ("A Different Kind of Banker"):

The single biggest buyer at these [FDIC] auctions has been Andrew Beal, a banking billionaire from Texas who made his fortune buying distressed debt during the savings and loan crisis.

By the end of February, Mr. Beal had paid more than $200 million to buy $438 million worth of loans, according to agency records. Some of the loans came from the failed Arkansas bank.

Mr. Beal is hardly averse to risk. He is famous for trying (and failing) to build his own space satellite launch company, and for luring some of the world’s best poker players to a series of games, with him as a participant, and betting pots worth $2 million. Mr. Beal, in a telephone interview, said he went to great lengths not to push people out of their businesses, but at times he had no choice.

“Borrowers force us into litigation,” he said. “They don’t want to perform on their loan, they won’t talk to our workout people. What are we supposed to do, send them a vase of roses?”

A Different Kind of Banker

From Forbes, "The Banker Who Said No" (Hat Tip: Carpe Diem):

While the nation's lenders ran amok during the boom, Andy Beal hoarded his money. Now he's cleaning up--with scant help from Uncle Sam.

[...]

Andy Beal, a 56-year-old, poker-playing college dropout, is a one-man toxic-asset eater--without a shred of government assistance. Beal plays his cards patiently. For three long years, from 2004 to 2007, he virtually stopped making or buying loans. While the credit markets were roaring and lenders were raking in billions, Beal shrank his bank's assets because he thought the loans were going to blow up. He cut his staff in half and killed time playing backgammon or racing cars. He took long lunches with friends, carping to them about "stupid loans." His odd behavior puzzled regulators, credit agencies and even his own board. They wondered why he was seemingly shutting the bank down, resisting the huge profits the nation's big banks were making. One director asked him: "Are we a dinosaur?"

[...]

Now, while many of those banks struggle to dig out from under a mountain of bad debt, Beal is acquiring assets. He is buying bonds backed by commercial planes, IOUs to power plants in the South, a mortgage on an office building in Ohio, debt backed by a Houston refinery and home loans from Alaska to Florida. In the last 15 months Beal has put $5 billion to work, tripling Beal Bank's assets to $7 billion, while such banks as Citigroup and Morgan Stanley shrink and gobble up billions in taxpayer bailouts.

Beal has barely got a dime from the feds. A self-described "libertarian kind of guy," Beal believes the government helped create the credit crisis. Now he finds it "crazy" that bankers who acted irresponsibly are getting money and he's not. But he wants to exploit their recklessness to amass his own fortune. "This is the opportunity of my lifetime," says Beal. "We are going to be a $30 billion bank without any help from the government." (A slight overstatement: He is quick to say he relies on federal deposit insurance.) Not much next to the trillion-dollar balance sheets of the nation's troubled banks, but the lesson here might be revealed in the fact that this billionaire is not playing with other people's money--he owns 100% of the bank and is acting accordingly.

You should read the whole thing, but here's one more brief quote from it:

In the last 15 years Beal says he has bought only one stock. If he ever thinks of investing in hedge funds or private equity, he says, "Just shoot me."

If you read the rest of article, you'll understand why Beal limits himself to buying distressed debt: he has access to more information than he would investing in a publicly-traded stock, he's built his own methodology, and he's good at it. He seems to be better at it than most of the hedge fund managers who invest in this asset class. The article notes that Beal got his start buying distressed debt during the last credit crisis.

The photo above, of the headquarters of Beal Bank, comes from the company's website.