»  The Straggler, No. 72

November 3, 2008

   De Haut en Bas

Throughout recorded time, and probably since the end of the Neolithic Age, there have been three kinds of people in the world, the High, the Middle, and the Low … The aim of the High is to remain where they are. The aim of the Middle is to change places with the High. The aim of the Low … is to abolish all distinctions and create a society in which all men shall be equal.

Thus Emmanuel Goldstein in The Book, the one that Winston Smith reads while canoodling with his girlfriend in the novel Nineteen Eighty-Four. Goldstein got the essentials right, but he failed to foresee the great success of meritocratic welfare capitalism. His schema needs a few adjustments.

These thoughts ambled through my mind while I was watching the Palin-Biden debate the other evening. Both Vice Presidential candidates were terrifically keen to assure us folks in the Middle how wonderful we are and how firmly on our side they stand. Biden: "We're going to focus on the middle class … The middle class needs relief, tax relief … The middle class is struggling." Palin: "John McCain and I … We're going to fight for the middle-class, average, everyday American family like mine."

Well, one thing's plain about the next four years: It's going to be great to be middle class! Obama, McCain, Biden, Palin — these guys love the heck out of us! The federal political establishment regards the middle class as fondly as Marx did the proletariat.

Looking at the statistical tables put out by the IRS, it's not hard to see why. By far the biggest haul for the federal government comes from the middle class. The range of "adjusted gross income" from $50,000 to a million accounts for 65 percent of all income tax revenues, and total receipts on either side of that, from the poor and the rich alike, drop off like continental shelves. Over twenty percent of revenue comes from the sub-range $100,000 to $200,000, and another huge slab — eighteen percent — from the $50,000 to $100,000 range. The middle class is fertile soil for tax farmers.

Politicians are also vote farmers, and here too the middle class is the place to go. These dutiful, rule-following, public-spirited habits that get us into, and keep us in, the middle class also prompt us to our citizenly obligations: taxes, voting, and (when demanded) military service. No wonder that one of the standard conceits of democratic politics is fetishization of the middle class.

Not everyone thinks we're wonderful, mind. Chicago's Trinity United Church of Christ has long warned its parishioners — including its most famous parishioner, Barack Obama — against the bourgeois temptation. Item number eight in Trinity United's list of concepts on which congregants should ceaselessly reflect is: "Disavowal of the pursuit of 'Middleclassness.'"

Even some conservatives have their doubts about the virtues of the middle class. Linda Chavez, in a recent column, scolded that: "The average American now owes more than $16,635 in consumer debt, excluding mortgages … We've simply become accustomed to buying what we want, when we want it, regardless of whether or not we can really afford it." Assuming that Ms. Chavez's "average American" is middle class — and what else would he be? — the cause of the current financial crisis may be middle-class fecklessness. You won't hear that from the politicians, though.

Whether Goldstein's Middle still has the aim "to change places with the High," I do not know. I wouldn't mind doing so personally, but it would be presumptuous of me to speak for my entire class. The Low, at any rate, seems to have lost its revolutionary enthusiasm in the warm soak bath of the modern welfare state. The Wall Street Journal the other day reported on the efforts by Róger Calero, the Socialist Worker's Party candidate for president, to refute the notion that Treasury Secretary Paulson's near-trillion-dollar bailout plan is socialist. Au contraire, asserts Mr. Calero: "It poses the urgent need for a revolution in this country … that will throw the billionaire ruling families out of power and replace them with a workers and farmers government." (Farmers?) Calero, who is is from Nicaragua, labors under the disadvantage of not being a U.S. citizen, and therefore not eligible to serve even if elected. Not much going on with the Low, then.

Meanwhile, what is the root cause of this financial mess? At some point in the last dozen years or so our financial system was seized with the compulsion to issue big fat mortgages to people who would have no chance of meeting their repayments when the economy slowed from a gallop to a canter, as economies cyclically have done since, as Emmanuel Goldstein would have said, "the end of the Neolithic Age." The only way to float these mortgages was to package them up as securities and sell them to foreigners with too many dollars in their safes — foreigners who will likely take a coldly unforgiving approach to those bonds curling up and shrinking down to the size and value of postage stamps when mortgage repayments stop flowing in at the far end.

But why was the financial system so seized? Many theories have been put forward. I don't know which one is correct (though, like the rest of you, I have my favorites) but I do have a suggestive coincidence. Here it is.

In one of my fitful attempts to earn an honest middle-class living in order that I might bask in the sunshine glow of politicians' favor, I was employed by a Wall Street bond brokerage as a computer programmer, in a team supporting a system used for trading those very same mortgage-backed securities that have gotten us into this mess. One component of our system carried out the actual allocation of mortgage debt to "pools" of securities for onward trading. The input to this process was a type of not-quite-security, a form of paper the firm had not actually got its hands on yet, but which it had bought on a forward-delivery basis. These not-quite-securities were known in the trade as "deliverable when issueds," abbreviated of course to "DWI."

There you have it. The whole structure of mortgage-backed securities trading rests on something called a DWI. Just a coincidence, of course.