Post Mortem for the Stock Market

May 1, 2007

By Mike Whitney

"There’s class warfare, all right, but it’s my class that’s winning." Investment tycoon, Warren Buffett


The real estate market is crashing faster than anyone had anticipated. Housing prices have fallen in 17 of 20 of the nation’s largest cities and the trend lines indicate that the worst is yet to come. March sales of new homes plummeted by a record 23.5% (year over year) removing all hope for a quick rebound. Problems in the subprime and Alt-A loans are mushrooming in previously “hot markets” resulting in an unprecedented number of foreclosures. The defaults have slowed demand for new homes and increased the glut of houses already on the market. This is putting additional downward pressure on prices and profits. More and more builders are struggling just to keep their heads above water. This isn’t your typical 1980s-type “correction”; it’s a full-blown real estate cyclone smashing everything in its path.

Tremors from the real estate earthquake won’t be limited to housing—they will rumble through all areas of the economy including the stock market, financial sector and currency trading. There is simply no way to minimize the effects of a bursting $4.5 trillion equity bubble.

The next shoe to drop will be the stock market which is still flying-high from increases in the money supply. The Federal Reserve has printed up enough fiat-cash to keep overpriced equities jumping for joy for a few months longer. But it won’t last. Wall Street’s credit bubble is even bigger than the housing bubble---a monstrous, lumbering dirigible that’s headed for the cliff. The Dow is like a drunk atop a 13,000 ft cliff; inebriated on the Fed’s cheap “low-interest” liquor. One wrong step and he’ll plunge headlong into the ether.

The stock market cheerleaders are ooooing and ahhing the Dow’s climb to 13,000, but it’s all a sham. Wall Street is just enjoying the last wisps of Greenspan’s helium swirling into the largest credit bubble in history. But there’s trouble ahead. In fact, the storm clouds have already formed over the housing market. The subprime albatross has lashed itself to everything in the economy ---dragging down consumer confidence, GDP and (eventually) the stock market, too. No one will be spared.

So why the stock market keep hitting new highs?

Is it because foreign investors believe that American equities will continue to do well even though the housing market is slumping and GDP has shriveled to the size of a California raison? Or is it because stockholders haven’t noticed that the greenback getting clobbered every day in the currency markets? Or, maybe, investors are just expressing their confidence in the way the U.S. is managing the global economic system?

Is that it---they admire the wisdom of borrowing $2.5 billion per day from foreign lenders just to keep the ship of state from taking on water?

No, that’s not it. The reason the stock market is flying-high is because the Federal Reserve has been ginning up the money supply to avoid a Chernobyl-type meltdown. All that new funny-money has to go somewhere, so a lot of it winds up in the stock market. Evergreen Bank’s Chuck Butler explains the process in Thursday’s Daily Pfennig:

“The Fed may have quit publishing the M3 data, but they continue to publish all the data that goes into the calculation and our friends over at Shadow Government Statistics have a chart which demonstrates
why the Fed decided to keep M3 under wraps. A look at the chart shows the Fed is pumping up broad money supply at an astounding rate of 11.8% per year! All of this rapid money supply growth is reflected in an increase in equity prices. The stock market needs to rise just to keep pace with all of this newly-created money. As long as the Fed doesn't rock the boat with another rate hike or by turning off the spigot of money flowing into the markets, the equity markets will continue to run.”

Ah-ha! So the Fed gooses the money supply, stocks shoot up, and everyone’s happy---right?

Wrong. Growth in the money supply should (closely) parallel growth in the overall economy. So if GDP is shrinking (which it is) and the money supply is increasing then—Viola!—inflation. (“11.8%” to be precise)

Of course inflation doesn’t affect the investor class or their fellow-scoundrels at the Fed---the more money floating around the markets the better for them. It’s just the opposite for the pensioner on a fixed income or the salaried wage-slave who gets a 15-cent pay raise every millennia. They end up getting ripped off with every newly-minted greenback.

But then that’s the plan---to shift zillions from one class to another through massive equity bubbles. All it takes is artificially-low interest rates and a can of WD-40 to keep the printing presses rolling. It’s so simple we won’t dignify it by calling it a “conspiracy”. It’s just a swindle, pure and simple. But it never fails.

Every time the Fed prints up another batch of crisp $100 bills; they’re confiscating the hard-earned savings of working class people and retirees. And, since the dollar has dropped roughly 40% since Bush took office in 2000; the government has absconded with 40% our life savings.

That’s the truth about inflation; it is taxation without representation, but you won’t find that in the government’s statistics. In fact, the Consumer Price Index (CPI) deliberately factors out food and energy so the working guy can’t see how the Fed is robbing him blind. The only way he can gauge his losses is by going to the grocery store or gas station. That’s when he can see for himself that the money he works so hard to earn is steadily losing its purchasing power.

The big question now is how long will it take before foreign creditors wise up and see the maxed-out American consumer is running out of steam. As soon consumer spending slows in the US; foreign investment will dry up and stocks will tumble. China and Japan have already slowed or stopped their purchases of US Treasuries and China has stated that they plan to diversify their $1 trillion in US dollars in the future. This has lowered demand for the dollar and decreased its value in relation to other currencies. (The dollar hit a new low just last week at $1.36 vs. the euro)

A slowdown in consumer spending is the death-knell for the dollar. That’s when there’ll be a stampede for the exits like we’ve never seen before—with each of the world’s central banks tossing their worthless greenbacks into the jet-stream like New Years’ confetti. According to Monday’s Washington Post that moment may have already arrived. As the Post’s Martin Crutsinger says, “Consumer spending rose at the slowest rate in five months in March while construction activity managed only a tiny gain, weighed down by further weakness in housing”.

The connection between housing and consumer spending is critical. Not only has housing been the main engine for growth in the US in the last 5 years; it has also accounted for 2 out of every 5 new jobs and hundreds of billions in additional spending through home-equity extractions. A downturn in consumer spending means that foreign investors will have to look for more promising markets abroad; triggering a steep reduction in the amount of cheap credit coming into the country via the $800 billion trade deficit. This will slow growth in the US while further weakening the dollar.

Can you say stagflation?

The present currency and economic crises were brought on by Bush’s unfunded tax cuts, unsustainable trade deficits, and the Fed’s hyperinflationary monetary policy. These policies were executed simultaneously for maximum effect. They were entirely premeditated. Many people now believe that the Bush administration and the Federal Reserve are intentionally creating an “Argentina-type meltdown” so they can privatize state owned assets and usher in the North American Union--the future “one state” alliance of Canada, Mexico and US--along with the new regional currency, the Amero.

We’ll see.

Nevertheless, monetary policy is not the only reason the stock market is headed for a fall. There’s also the jumble of scams and swindles which have been legalized under the rubric of “deregulation”. New rules allow Wall Street to take personal liabilities and corporate debt and repackage them as precious gemstones for public auction. It’s the biggest racket ever.

Consider the average hedge fund for example. The fund may have originated with $10 billion of its own cash and swelled to $50 billion through (easily acquired) credit. The fund manager then creates an investment portfolio that features CDOs and Mortgage Backed Securities (MBS) to the tune of $160 billion. The majority of these “assets” are nothing more than shaky subprime loans from struggling homeowners who have no chance of meeting their payments. In other words, another man’s debt is magically transformed into a Wall Street staple. (Imagine if you, dear reader, could sell your $35,000 credit card debt to your drunken brother-in-law as if it was a bar of gold or a vintage Ferrari. That, believe it or not, is the scam on which bond traders thrive)

So, the fund is leveraged, the assets are leveraged and (guess what) the investors are leveraged too---either buying on margin or borrowing oodles of cheap, low interest credit from Japan to maximize their profit potential.

Get the picture; debt x debt x debt = maximum profit and skyrocketing stock prices. That’s why the face value of the market’s equities far exceeds the world’s aggregate GDP. It’s all one, big debt-Zeppelin and it’s on a quickly-descending flight-path to planet earth.

KABOOM!

Deregulation works like a charm for the gangsters who run the system. After all, why would they want rules? They’re not thinking about capital investment, productivity or infrastructure. They’re not building an economy that serves the basic needs of society. They’re looking for the next big mega-merger where two monolithic, maxed-out corporations join in conjugal bliss and create a mountain of new credit. That’s where the real money is.

Wall Street generates boatloads of cyber-cash with every merger. This pushes stock prices up, up and away. Deregulation has turned Wall Street into the biggest credit-generating Cash-Cow of all time—spawning zillions through seemingly limitless debt-expansion. These virtual dollars were never authorized by the Federal Reserve or the US Treasury—they emerge from the black whole of over-leveraged uber-transactions and the magical world of derivatives trading. They are a vital part of Wall Street’s house of mirrors where every dollar is increased by a factor of 50 to 1 as soon as it enters the system. Assets are inflated, debt is converted to wealth, and fiscal reality is vaporized into the toxic gas of human greed.

Doug Noland at Prudent Bear.com explains it like this: “We've entered a euphoric phase of financial arbitrage capitalism with extreme Ponzi overtones, a pyramid scheme of revolving credit rackets and percentage spread plays completely abstracted from any reality of fruitful activity. The reason we don't even call "money" by its former name anymore is precisely because we realize at some semi-conscious level that "liquidity" is not really money. Liquidity is a flow of hallucinated surplus wealth. As long as it flows in one direction, into financial markets, valve-keepers along the pipeline, like Goldman Sachs, Citibank, or the hedge funds, can siphon off billions of buckets of liquidity. The trouble will come when the flow stops -- or reverses! That will be the point where we will rediscover that liquidity really is different from money, and if we are really unlucky we'll discover that our money (the US dollar) is actually different from real wealth”.

Noland is right. The market is “a pyramid scheme of revolving credit rackets and percentage spread plays” and no one really knows what to expect the flow of liquidity slows down or “reverses”.

Will the stock market crash?

This is the question that looms over the sudden blow-down in subprime mortgages. As liquidity dries up in the real estate market (through tightening lending standards) the aftershocks are expected to ripple through the entire economy raising havoc with a stock market that is addicted to ever-increasing amounts of cheap credit. Wall Street needs its credit fix and it has invented myriad abstruse debt-instruments to get it. But what happens when investment simply withers away?

According to WorldNetDaily.com Jerome Corsi that question was partially answered in a letter from the Carlyle Group’s managing director William Conway Jr. Conway confirms that the rise in the stock market is related to “the availability of enormous amounts of cheap debt”. He adds that:

“This cheap debt has been available for almost all maturities, most industries, infrastructure, real estate and at all levels of the capital structure.” (But) “this liquidity environment cannot go on forever. The longer it lasts, the worse it will be when it ends…….Of course when ends, the buying opportunity will be once in a lifetime."

Ah, yes; another wonderful “buying opportunity”!?!

You can almost feel the breeze from the wings of the great birds flapping overhead as they focus their gaze on the carrion below. Once the stock market collapses and the mighty greenback flattens out on the desert floor; they’ll be plenty of smiley faces preparing for the feast.

It’s true; the stock market IS floating on a cloud of cheap credit created by a humongous trade deficit, artificially low interest rates, and a 10% yearly expansion of the money supply. And, like Mr. Conway says, “It cannot go on forever”.

We’d might as well select the funereal dirge and the pall-bearers now while we still can. No since waiting ‘til the last minute.

What Did You Do During the Ruling Class War, Daddy?

I am back from the Progressive States Network’s first annual gala in conjunction with the National Conference of State Legislatures meeting in Washington, D.C. - a city where ruling class warfare rages on, despite (or perhaps because of) the new partisan makeup of the nation’s capital. While our event trumpeted the courageous group of progressive state and federal lawmakers who are fighting on our side, a look at news from the Beltway this week nonetheless broadcasts the steep odds this courageous group faces in its efforts to make government even acknowledge the existence of the vast majority of Americans.

Take, for instance, today’s Washington Post story on the Alternative Minimum Tax, which though projected to hit more middle-class families, still today exclusively hits the richest 3 percent of Americans. After a few paragraphs highlighting an admirable and potentially progressive reform of the tax, we get this nugget:

“Democratic Rep. Allyson Y. Schwartz, who represents a suburban Philadelphia district, said she was among those who argued successfully that any AMT change should provide relief to some of the 4 million families who already pay the tax. That way, she said, “real people will be able to stand up and say, ‘I don’t have to pay it next year because Democrats understood that it was unfair.’”

There’s really nothing quite like a Democratic congresswoman inserting herself into a national news story by demanding new tax cuts for the richest sliver of the population that already pays the AMT - the same sliver that was handed about half a trillion dollars from the Bush tax cuts already. But then, why should we be surprised when the Post simultaneously reports today that “in the four months since the midterm elections, the number of new lobbyist registrations has nearly doubled to 2,232 from 1,222 in the comparable period a year earlier” and that “hundreds of new Democratic lobbyists have been hired” to shill for the super wealthy.

But it gets better.

In an Associated Press story about recently passed legislation giving shareholders a right to offer non-binding advisory resolutions on CEO pay, we get this doozy:

“‘It greatly worries me that this bill could set a precedent of giving activist institutional investors, who may have their own political and social agendas unrelated to the financial wealth of the companies, more influence,’ said Rep. Mike Castle (R-DE)….’This is Congress beginning to intrude on corporations,” said Rep. Spencer Bachus (R-AL).’”

So now not only is the White House threatening to veto the legislation, but the Republican Party is publicly saying that shareholders - that is, company owners - should have absolutely no say (not even a non-binding one) on what the companies they own pay the CEOs they employ. If anyone thought the “ownership society” was anything more than an Orwellian, Frank Luntz-inspired sham, these quotes put that delusion to rest.

But while Iraq burns and middle American economic casualties simultaneously mount, the “let them eat cake” attitude of the ruling class in D.C. is shoved down our throats. For, the truly pressing political question as the Post breathlessly asks today is “What would the White House correspondents’ dinner be without the after-party?” Reporters at one party receive bags “containing camera memory cards and $50 gift certificates to Lord & Taylor” while “hot model types in bathrobes give out single-serve bottles of champagne from a bathtub.” In another scene “Antonin Scalia is in deep conversation with Ana Marie Cox, nee Wonkette, who is on the sofa.” And yet another party is being held at the Colombian ambassador’s residence - the ambassador who represents the foreign government that is helping assassinate union organizers while our own government cheers its approval by offering up a free trade agreement.

Yes, the Ruling Class War is on, folks - replete with Democrats who look middle-class economic disaster in the eye and demand more tax cuts for billionaires, Republicans who give company owners the middle finger, and Beltway reporters who toast it all to flutes of champagne provided by runway models. While our country is driven into the ground, it’s party time in Washington. And when the rest of us outside the Beltway look back, our kids will have just one question: What did we do to stop it?

COMMENTS: Go to Sirota's Working Assets site to comment on this entry

posted 4/23/2007 by David Sirota @ 9:41 am | Permalink

Silence All Around on the War, Save for One Movement

March 22, 2007

Leonard Fein
On March 12, the Union for Reform Judaism became the first national Jewish organization to take more than a tongue-clucking position on the Iraq war. It did what the U.S. Senate has been unable to do: It voted overwhelmingly to oppose President Bush's "surge" of new troops, and it called on the president to set and announce a specific timetable for the phased withdrawal of troops.

Alas, the URJ decision is very much nonbinding.

What's surprising -- bordering on astonishing -- is that the URJ, joined since by the Reconstructionist Rabbinical Association, which passed a similar resolution last week, was the only major national Jewish group to have spoken out so decisively on this misbegotten and misconducted war. I say "astonishing" because the American Jewish public, which is represented by a broad array of organizations, has very clear views on the war.

At the end of February, the Gallup organization conducted a poll of more than 12,000 Americans. Overall, it found that 52 percent of Americans think the war a mistake, and 46 percent do not. But the same poll found that 77 percent of Jews called the war a mistake, while 21 percent support it.

It was a strange week for Jews to express themselves quite so decisively.

It was, after all, the same week in which Vice President Dick Cheney, speaking at the annual convention of American Israel Public Affairs Committee, said: "My friends, it is simply not consistent for anyone to demand aggressive action against the menace posed by the Iranian regime, while at the same time acquiescing in a retreat from Iraq that would leave our worst enemies dramatically emboldened, and Israel's best friend -- the United States -- dangerously weakened."

This was reportedly received with considerably less than the enthusiasm Cheney is accustomed to when he addresses AIPAC. Perhaps what the AIPAC people now know is that it is exactly because of the wicked policies of the president and vice president that America has already been dangerously weakened.

Not to be outdone, Israeli Prime Minister Ehud Olmert also weighed in on the subject last week to AIPAC via a video link from Jerusalem to echo Cheney.

No serious person can take pleasure from the very sour pickle in which the United States now finds itself. Never mind that the Bush administration have mixed the brine themselves; their comeuppance is hardly adequate compensation -- not for the dead, not for the wounded, not for the chaos, and not for the cost to America's treasury and dignity.

All that's left these days are bad choices.

Among them, President Bush has, predictably, seen fit to pick the very worst -- a creeping open-ended escalation that resolves nothing.

Among these bad choices, the major American Jewish organizations -- save only the Union for Reform Judaism -- take a pass.

Questions of war and peace are properly the provenance of religious institutions. In the case at hand, because Israel's security is so directly at stake, America's Iraq policy would seem to be of immediate interest to all the single-issue pro-Israel groups in the Jewish firmament, as also to all those -- American Jewish Committee, American Jewish Congress, JCPA and others -- that so often opine on matters of less immediate Jewish relevance. What can account for their timidity?

Some organizational leaders likely support the war; roughly 10 percent of Jews are of the Republican pro-war persuasion, and we may surmise that these, typically wealthier, are disproportionately represented in the ranks of Jewish leadership.

But more prevalently, I believe, many "leaders" are curled up in a little ball in the corner, seeking to hide from the headache of taking a stand. These same leaders frequently fret out loud about Jewish continuity, about their own failure to attract young Jews to their ranks.

Might it, this time around, occur to them that it is they who have opted for the irrelevance to which growing numbers of Jews consign them?

Tomorrow, they will again flood their fundraising appeals with talk of the imminent threat from Iran. But what of the war that is being waged today? Their silence on Iraq is a feckless evasion of responsibility.

Leonard Fein is a Boston-based columnist.

Is economic populism on the rise in the Democratic Party?

Populism

Fanfare for the common man

Nov 23rd 2006 WASHINGTON, DC
From The Economist

AS THE embers of this month's mid-term elections are raked over, a new conventional wisdom is emerging in Washington, DC. The outcome was not just about Iraq, corruption and voters' frustration with George Bush. It also marked the return of a phenomenon that has long hovered offstage in American politics: economic populism.

Frustrated by stagnant wages and rising health costs and fearful that their jobs will be sent to China, anxious voters, particularly in the industrial heartland, sent a new brand of Democrat to Congress: one who may believe in God and guns but who is wary of big business and even more dubious about free trade. The rise of these “Lou Dobbs Democrats” (a reference to a globophobic blowhard on CNN) could spell significant changes in American economic policy.

The new populists are certainly noisy. In an article entitled “Class Struggle” in the Wall Street Journal, Jim Webb, the incoming Democratic senator from Virginia, recently railed against “incestuous corporate boards” and the “hubris” of America's elites. Congress has wobbled on trade even before the newcomers actually arrive in January. A supposedly uncontroversial bill to approve permanent normal trading relations with Vietnam failed to gain enough votes for passage before Mr Bush's trip to Hanoi last week. And even the Democratic Party's centrist presidential hopefuls are joining the fray. Barack Obama, for instance, formally jumped on the Wal-Mart-bashing bandwagon last week (see article).

So is America headed for a bout of protectionist class warfare? History might suggest not. After all, recent politicians have often flirted with populist themes of the sort William Jennings Bryan (pictured above) once promoted, from Ross Perot's rants against the “giant sucking sound” of jobs lost to Mexico in 1992 to John Kerry's attacks on “Benedict Arnold” firms in 2004, without much actually happening.

Yet this year seems different. Not only are the new Democratic lawmakers distinctly more protectionist than the politicians they replaced, but their trade-scepticism was important to voters. An analysis of voters in 50 competitive districts by Stanley Greenberg, a pollster, showed that Republicans' support of trade was one of the main factors that put off swing voters. Almost 70% of voters want the government to “protect jobs and ensure that trade is fair” rather than promote free trade.

Go beyond the protectionism, however, and Americans are less convinced by populist politics. In Mr Greenberg's polls voters preferred limited government and low taxes over a government that creates conditions “so that many can prosper, not just a few”. Douglas Schoen, another Democratic pollster, finds scant support for economic redistribution. Even amongst poorer Americans, large majorities prefer policies that boost economic growth to those that redistribute wealth.

This combination of scepticism about trade without any great enthusiasm for class warfare is awkward for the party's internal politics. Left-wing Democrats have long bashed both trade and business, while the Clintonite centrists have embraced both. The contours of Democratic populism will depend on how both factions now react.

The spotlight is on Congress, where the party's left is likely to shout loudest, but achieve less. Oil and drug companies will be hauled in front of congressional committees. But laws will probably focus less on bashing businesses Democrats don't like than boosting ones they do. The talk may be about a windfall tax on oil companies, but the action will be on boosting subsidies for alternative fuels. The focus on tax policy, too, will be more on helping the middle class than punishing the wealthy. Though many Democrats want to roll back Mr Bush's tax cuts for the rich, the party's energy, at least initially, will be on fixing the alternative minimum tax.

On trade, the congressional leadership is less rabid than many of the new arrivals. Charles Rangel, the top trade man in the House, supported the Vietnam deal. He also wants to extend a package of expiring trade laws, including a textile provision that helps Haiti and other preferences for the poorest countries. He may get those done. But the new protectionists, and their union paymasters, will stymie much else. Free-trade agreements with Colombia and Peru (see article) will go nowhere unless Mr Bush agrees to renegotiate their labour and environmental components.

In the short term America's populist mood may bring little more than a stalemate on trade. Look ahead, however, and the risks multiply. For one thing, the economy is slowing. The White House this week reduced its growth forecast for 2007 to 2.9%, and that may prove optimistic. The jostling for the Democratic presidential nomination could well coincide with sluggish growth, increasing the appeal both of business-bashing and protectionism.

There are plenty of ideas to counter this, mostly clustered around assuaging American workers' financial insecurity. Jacob Hacker, a political scientist at Yale University, argues that Americans' incomes have grown more volatile (see chart) while the country's social contract has frayed, particularly as firms retreat from providing pension and health benefits.

Virtually every centrist Democratic policy-wonk now brandishes ideas about how to rebuild America's social contract as a prerequisite for shoring up support for globalisation. One goal is more protection against sudden income loss, whether by revamping the system of unemployment benefits or introducing broader wage insurance—in effect a government subsidy for those who are forced into lower-paying jobs. A second pillar focuses on making health insurance more portable as well expanding the number of people covered. Democratic wonks differ in the ambition of their ideas, but they all think their party needs to offer an alternative to Mr Bush's consumer-driven model of health care in 2008. Another set of proposals focuses on ways to encourage people to provide for their old age. Around half of Americans in their late 50s have virtually no retirement savings.

Many of these centrist ideas have promise even if some, such as wage insurance, sound better in theory than in practice. But this agenda, however ill formed, is clearly preferable to protectionism and Wal-Mart bashing. The big uncertainty for the Democratic Party is whether the centrist platform can be built in time, and whether the presidential candidates have the sense to stand on it.

Graphic:
http://www.economist.com/world/na/displaystory.cfm?story_id=8326299

Class Struggle

ELECTION 2006

American workers have a chance to be heard.

BY JIM WEBB

Wednesday, November 15, 2006 12:01 a.m.

The most important--and unfortunately the least debated--issue in politics today is our society's steady drift toward a class-based system, the likes of which we have not seen since the 19th century. America's top tier has grown infinitely richer and more removed over the past 25 years. It is not unfair to say that they are literally living in a different country. Few among them send their children to public schools; fewer still send their loved ones to fight our wars. They own most of our stocks, making the stock market an unreliable indicator of the economic health of working people. The top 1% now takes in an astounding 16% of national income, up from 8% in 1980. The tax codes protect them, just as they protect corporate America, through a vast system of loopholes.

Incestuous corporate boards regularly approve compensation packages for chief executives and others that are out of logic's range. As this newspaper has reported, the average CEO of a sizeable corporation makes more than $10 million a year, while the minimum wage for workers amounts to about $10,000 a year, and has not been raised in nearly a decade. When I graduated from college in the 1960s, the average CEO made 20 times what the average worker made. Today, that CEO makes 400 times as much.

In the age of globalization and outsourcing, and with a vast underground labor pool from illegal immigration, the average American worker is seeing a different life and a troubling future. Trickle-down economics didn't happen. Despite the vaunted all-time highs of the stock market, wages and salaries are at all-time lows as a percentage of the national wealth. At the same time, medical costs have risen 73% in the last six years alone. Half of that increase comes from wage-earners' pockets rather than from insurance, and 47 million Americans have no medical insurance at all.

Manufacturing jobs are disappearing. Many earned pension programs have collapsed in the wake of corporate "reorganization." And workers' ability to negotiate their futures has been eviscerated by the twin threats of modern corporate America: If they complain too loudly, their jobs might either be outsourced overseas or given to illegal immigrants.

This ever-widening divide is too often ignored or downplayed by its beneficiaries. A sense of entitlement has set in among elites, bordering on hubris. When I raised this issue with corporate leaders during the recent political campaign, I was met repeatedly with denials, and, from some, an overt lack of concern for those who are falling behind. A troubling arrogance is in the air among the nation's most fortunate. Some shrug off large-scale economic and social dislocations as the inevitable byproducts of the "rough road of capitalism." Others claim that it's the fault of the worker or the public education system, that the average American is simply not up to the international challenge, that our education system fails us, or that our workers have become spoiled by old notions of corporate paternalism.

Still others have gone so far as to argue that these divisions are the natural results of a competitive society. Furthermore, an unspoken insinuation seems to be inundating our national debate: Certain immigrant groups have the "right genetics" and thus are natural entrants to the "overclass," while others, as well as those who come from stock that has been here for 200 years and have not made it to the top, simply don't possess the necessary attributes.

Most Americans reject such notions. But the true challenge is for everyone to understand that the current economic divisions in society are harmful to our future. It should be the first order of business for the new Congress to begin addressing these divisions, and to work to bring true fairness back to economic life. Workers already understand this, as they see stagnant wages and disappearing jobs.

America's elites need to understand this reality in terms of their own self-interest. A recent survey in the Economist warned that globalization was affecting the U.S. differently than other "First World" nations, and that white-collar jobs were in as much danger as the blue-collar positions which have thus far been ravaged by outsourcing and illegal immigration. That survey then warned that "unless a solution is found to sluggish real wages and rising inequality, there is a serious risk of a protectionist backlash" in America that would take us away from what they view to be the "biggest economic stimulus in world history."

More troubling is this: If it remains unchecked, this bifurcation of opportunities and advantages along class lines has the potential to bring a period of political unrest. Up to now, most American workers have simply been worried about their job prospects. Once they understand that there are (and were) clear alternatives to the policies that have dislocated careers and altered futures, they will demand more accountability from the leaders who have failed to protect their interests. The "Wal-Marting" of cheap consumer products brought in from places like China, and the easy money from low-interest home mortgage refinancing, have softened the blows in recent years. But the balance point is tipping in both cases, away from the consumer and away from our national interest.

The politics of the Karl Rove era were designed to distract and divide the very people who would ordinarily be rebelling against the deterioration of their way of life. Working Americans have been repeatedly seduced at the polls by emotional issues such as the predictable mantra of "God, guns, gays, abortion and the flag" while their way of life shifted ineluctably beneath their feet. But this election cycle showed an electorate that intends to hold government leaders accountable for allowing every American a fair opportunity to succeed.

With this new Congress, and heading into an important presidential election in 2008, American workers have a chance to be heard in ways that have eluded them for more than a decade. Nothing is more important for the health of our society than to grant them the validity of their concerns. And our government leaders have no greater duty than to confront the growing unfairness in this age of globalization.

Mr. Webb is the Democratic senator-elect from Virginia.

Copyright © 2006 Dow Jones & Company, Inc. All Rights Reserved.

http://www.opinionjournal.com/editorial/feature.html?id=110009246