Somewhat to my surprise, the Obama administration took a hard line with the U.A.W. and effectively warned it not to push its luck. So far, the U.A.W. has resisted making any significant concessions, but if the administration keeps this up it might just have no alternative but to do so.

Obama, a soi-disant left-winger and friend of labor unions, is willing to step on the U.A.W., while kow-towing to the powerful bankers, letting them keep their outrageous taxpayer-funded compensation packages after a few cosmetic paybacks. This shows the truth behind the Atlantic article about the financial oligarchs. Not that the U.A.W., doesn’t need stepping on, quite the contrary, but the bankers have done far more to ruin their industry and the economy than the U.A.W. ever has.

Of course, the last bastion of the labor unions is the public purse. In my opinion, there would be little wrong with labor unions in the private sector if their Sherman Act anti-trust exemption were to be repealed, and something like the European co-determination model adopted. But the strike power has no place in the public sector, where the government monopoly gives the unions control over essential services. And of course they have abused this disproportionate advantage, holding our daily lives to ransom. However, even there, there are signs of hope for us embattled taxpayers.

This month, the town of Vallejo demonstrated not only that it was possible for a city to tear up its union contracts in bankruptcy, but that it was even easier for a city to do so than for a company. The precedent may matter.

Municipalities do not file for Chapter 11 bankruptcy protection; they use Chapter 9, which has different terms and a much smaller body of legal precedent. Municipal bankruptcies are so rare that until the Vallejo ruling, it was not clear whether a city could get out of its union contracts in Chapter 9.

Unions representing Vallejo’s public employees tried to argue that state labor laws protected the contracts. But the federal judge handling the bankruptcy, Michael S. McManus, wrote that federal bankruptcy law trumped the state labor law. He also observed that Congress could have set tougher standards for municipalities voiding their labor contracts — it did so for companies. But such bills died in committee.

For a long time, I’ve been mystified by the ability of the financial services industry to command such enormous compensation. I know people in the industry who make a great deal of money. Of course, their own opinion of their abilities leads them to see their compensation as merely the just rewards for their talents and abilities, but in point of fact these are very ordinary people. By the standards of most engineering organizations, for example, they would be considered dumb. Many of them do have loud voices and very quiet consciences, however, which seems to be an important requirement. I read this whiney letter from an AIG bonus recipient:

On March 16 I received a payment from A.I.G. amounting to $742,006.40, after taxes.

Who had obviously extracted an enormous amount of money from the company over the years, and is totally oblivious to the fact that, had the taxpayers not supported the company, he would be out on the street. But the real issue is that this guy was being paid so much money to simply unwind contracts. He claims to have had nothing to do with originating the deals in the first place, so he has no special knowledge of the situation. He’s just acting as a clerk, basically. Yet he unblinkingly believes that his services are worth, on a pre-tax basis, more than a million dollars a year to the company. He does admit that:

Some might argue that members of my profession have been overpaid, and I wouldn’t disagree.

Well yes. Then just this week, I read this:

March 27 (Bloomberg) — Bank of America Corp. plans to increase some investment bankers’ salaries by as much as 70 percent following the takeover earlier this year of Merrill Lynch & Co., people familiar with the proposal said.

So I keep asking myself, how did these people get this level of economic power? This seems like The Great Gatsby redux. How did this happen? Then I came across this, in The Atlantic, written by a former chief economist of the IMF. An economist who actually understands that economics is a branch of politics. He puts the problems of the U.S. in the context of those of the emerging market countries which more commonly get themselves into this kind of trouble.

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders.

Well, he has that right. And documents some of the effects in the US of the alliance between the financial services industry and the political class:

Not surprisingly, Wall Street ran with these opportunities. From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

As he goes on to observe, the grip of this oligarchy must be broken for sustained recovery. I agree, and I think things must get much worse before that will happen. I see a period of stagflation as the fiscal and monetary stimulus works its way through the stock and bond markets, which it is presently boosting, and into the economy, followed by another collapse. Then, perhaps, we will see some change that we can believe in.

In the fuss over Bernie Madoff, somehow the largest Ponzi scheme in the world is being overlooked. Perhaps because like any Ponzi, no-one really wants the whistle to be blown.

Edit: Paul Kasriel’s commentary this week asked the question: “What is the difference between Madoff and Social Security?” He answered his own question: “Coercion.”

One of the main reasons that the US is in such trouble in so many ways is the corruption in Washington. Want a law or an earmark of taxpayer money? Just hire a lobbyist to grease the right palms and you will get it. This is because, unlike most democratic assemblies, there is little or no party discipline in Washington. Every senator or representative is free to bargain for his or her vote – and does so, shamelessly. In democracies, parties generally enforce party line voting. That means you can’t bribe an individual member, as you can here. There’s no point, because if the member doesn’t vote the party line, he or she will be ejected from the party and lose the party’s support at election time. Which usually means they don’t get re-elected. A party member’s vote is not negotiable, and so cannot be sold. A member cannot say “I won’t vote for this bill unless you put in a special tax break for the XYZ company and allocate $3.5 million for research to be done by company ABC.” You can certainly try to influence the party leadership, but that’s an entirely more difficult task.

Strict adherence to a party line is referred to in the US as “partisanship,” and it is considered a pejorative. It is interesting to see a piece in the mainstream press that identifies this as a symptom of weakness in the political process.

By contrast, bipartisanship can cloak corruption, obscure chasms between politicians and the people they are supposed to be serving, or simply show that the leadership of both parties has become a closed club. In principle and in practice, a serious partisanship – one that brings fresh reason to bear on orthodoxy – is fundamental to a healthy democracy.

Quite. Which is not to say that a democratic house can’t mess up just as badly. The U.K. is still a democracy – with party line voting and partisanship provided by “Her Majesty’s Loyal Opposition.” And the U.K. is in, if anything, deeper doo-doo than the U.S., having had the same credit excesses and, as a result, becoming the sick man of Europe. But it is not the result of bi-partisanship. Get a load of this:

The U.K. government – the Bank of England, actually – recently started down the path of “quantitative easing,” in other words buying up government bonds, referred to in the U.K. as “gilts.” Mr Bernanke just started doing this in the U.S. as well. Unfortunately, this has given the U.K. Treasury some heartburn when it came time to sell Treasury debt to the private sector.

The Treasury yesterday tried to sell 1.75 billion pounds ($2.6 billion) of 40-year gilts and got 1.63 billion pounds of bids, a sign that investors are reluctant to finance his record borrowing.

Oops. But then I’m short Treasuries.

Aleksandr Solzhenitsyn’s famous book publicized the Soviet system of labor camps. The word “archipelago” compares the system, spread across the Soviet Union, with a vast “chain of islands”, known only to those who were fated to visit them. It is sad to see the USA becoming what at one time it most feared, a totalitarian state like the Soviet Union. The US version of the gulag can be found in the suburbs of many cities, more subtle than the Soviet system because the fences are invisible, but no less effective. In this version, people were lured into the gulag by the siren song of ever-rising house prices and easy financing. Now, they cannot leave, because the value of the house has declined far below what they owe on the loans they took out to buy it, and they have no savings to allow them to make up the shortfall. They must keep working and make the payments, or else they will be evicted with their credit-worthiness ruined. They are as effectively enslaved as any zek.

Meantime, Gosplan is taking over, starting with the financial system, the nervous system of the economy. Not satisfied with buying shares in the key banks and brokers, the administration is seeking unlimited and unfettered authority to arbitrarily seize companies and assets, and abrogate private contracts in the name of economic stabilization. And you thought that Homeland Security and the TSA were bad news.

The administration’s proposal contains two pieces. First, it would empower a government agency to take on the new role of systemic risk regulator with broad oversight of any and all financial firms whose failure could disrupt the broader economy. The Federal Reserve is widely considered to be the leading candidate for this assignment. But some critics warn that this could conflict with the Fed’s other responsibilities, particularly its control over monetary policy.

The government also would assume the authority to seize such firms if they totter toward failure.

Besides seizing a company outright, the document states, the Treasury Secretary could use a range of tools to prevent its collapse, such as guaranteeing losses, buying assets or taking a partial ownership stake. Such authority also would allow the government to break contracts, such as the agreements to pay $165 million in bonuses to employees of AIG’s most troubled unit.

Paul Volcker warns:

“We’re in a government-dependent financial system; I never thought I would live to see the day… We’ve got to fight to get away from that.”

The massive injections of sovereign credit into the economy will result in ballooning prices. Volcker again, from the same speech:

“One historic way of getting yourself out of this situation — or trying to — is to inflate. Either you do it deliberately or you allow it to happen,” he said. “And if we permit that to happen then I think all these dollars will come tumbling down on us.” He said the U.S.’s greatest strength is its history and reputation, and suggested that shouldn’t be put at risk.

He also critiqued the Fed. “I get a little nervous when I see the Federal Reserve announcements that they want have the amount of inflation that’s conducive to recovery,” Volcker said. “I don’t know what ‘the amount of inflation that’s conducive to recovery’ would be appropriate. I’d much rather they say that they want to maintain stability in the currency, which is conducive to confidence and recovery.”

As always happens, the rich will get richer. The proletarians, the zeks, will be facing rising prices for food, energy and imported goods in general, while their wage income stagnates. The poor will be poorer, and more numerous. The capitalist wealthy, the members of the political nomenklatura, who hold financial assets rather than rely on wages, will see those assets appreciate as the new money flows into them. Oh, and Mr Volcker? He has been sent to Siberia work on tax reform. Mr Obama brooks no dissent, it would seem.