Wednesday, September 24, 2008

Where To Next?

Suzie Orman gets soundly ridiculed sometimes, as do most “inspirational speakers”. But I’m fairly sure she’s not taking any pleasure in what she must see as a reckoning of biblical proportions (Lehman Brothers is gone for Christ’s sake). She’s been telling Americans to avoid mutable credit agreements of any kind and to stop buying things they don’t need. She’s been telling people to save their money as often and in as great amounts as they are able. If anyone in America has earned the right to say “I told you so” she certainly has.

Today, Wednesday September 24, 2008 many economists and analysts are still saying that this crisis in the finance and real estate markets is not large enough to sink the American economy. Today, I’m still saying they’re missing the point. This crisis is a symptom of a larger economic catastrophe already happening. The American economy is imperiled by the weakened collective earning power of its individual citizens which has in turn injured those sectors of the financial markets that exploited them most severely.

The investment banks that have imploded over the last couple of months put a gun to their own heads by shifting to a “derivative” paradigm back around 2001. Investment banks had historically been institutions that made their money on deals and on facilitation of transactions. Around eight years ago by my estimates, they got swept up by a relatively new fad/scam that emerged after the Internet bubble burst. They decided to try and make money off of their own portfolios and the portfolios of other competing investment banks by structuring what are generally called “financial derivatives”. When people started walking away from the debts and letting mortgages go unpaid and those homes were foreclosed on, the investment banks with the biggest dependencies (exposures) to the real estate sector failed. Bear Stearns was among the first of the big ones to fail because they had “purchased” too many loans and mortgages that were “originated” by other institutions and subsequently went unpaid. This was possible because Bear Stearns and other Investment banks didn't know the details, history and solvency of the clients involved in the loans they bought. There was no "chain of origination", -to use a term I just learned yesterday and to coin a phrase I just made up.

The analysts said:
Bear Stearns was too big to fail. It’s gone.
Fannie Mae and Freddie Mac were too big to fail. The government practically owns them.
Lehman Brothers was too big to fail. It is the greatest bankruptcy in history.
AIG was too big to fail. It’s being bailed out by the taxpayers and will probably be sold off in pieces.

The economists, regulators and government officials are telling Americans that this isn’t the same as the Great Depression. But saying a situation is “different” is a far cry from saying it’s “better”. Now, while unemployment is not nearly as high as during the Great Depression; that isn’t a watermark for normalcy or health on its own. What is happening right now is that individual wealth and earning power are dangerously out of scale with individual debt for most Americans.

One of my college professors Niki Logis, once said to me that “Science can not be allowed to develop without oversight because it doesn’t march on for the sake of human progress and the people’s well being, it marches on for the sake of itself.” Those words are painfully applicable to all the cynical rhetoric and cheerleading for unrestricted and deregulated business and markets over the last 25 years. Business only ever has “business” on its mind.

I don’t think Ronald Reagan wanted to see the economy fail. He and the other political stars of the right wing elite power base that have steered, inspired and supported deregulation didn’t do it to make anybody poor, or ruin anybody, they just didn’t take into account that it probably would. If it worried them, they showed no sign. There are no angels in this however. Fannie May and Freddie Mac sowed the seeds of this year’s collapse during the Carter administration and the subsequent ridiculous overdevelopment in the West in the 1980s. Democrats and Republicans alike failed to pass any meaningful regulation to control these “monsters in waiting” for decades. That’s not to say no one is to blame, just that very few in government can escape culpability for the negligence in question.

In my last two posts, it has not been my aim to make you think that the world is ending, just the world as you know it.

There have been other massive bubbles and financial implosions in my own lifetime: the Savings and Loan scandal of the 80s; the hedge fund crisis and crash of the Pacific rim markets in the 90s; the internet bubble of ’00; even down to companies like Enron and WorldCom. All of them were the result of unregulated practices and the appeal of “fast” money.
The difference is none of these brought down Wall Street.
None of these were bailed out.

If you’re like me, you might be wondering why it is that other commercial sectors don’t seem to be suffering or triggering such horrendous collapses and bankruptcies. The corporations that produce, manufacture and distribute goods and services for product categories like food and restaurants, apparel, toiletries and cosmetics, electronics and paid entertainment to name just a few don’t seem to be in trouble, some are even thriving.

That’s because Americans can still “pay” for those with credit cards…
Therein may lay the next financial disaster.



plf said...

Individual accountability shouldn't be overlooked either. While the Country's biggest firms are embroiled in a fight to avoid ruin - brought on through their own greed and bullishness - each citizen earns, spends and saves money as to their own desires. When an individual believes they are entitled to a lifestyle that requires continual expenditure beyond what they earn, then there is no outcome but debt. This is the most basic math - simple subtraction. We've all learnt it, yet we are swayed by promises of 'happiness' or 'get rich schemes' or the 'birthright of a nation' - all possible through spending, acquisition and attainment. For the individual the solution is simple - stop spending.

SJ said...

Well said/written. I couldn't agree more. Again, people like Suzie Orman, hardly considered an economist or expert of note, has been saying it all along. It's really why I think this financial disaster in the markets is actually just the surface of a larger widespread credit/debt crisis across the country. When "the people" can't make good on their loans and credit card payments, is the Financial Community then going to turn around and bail them/us out like we the people are about to do for them?
Probably not.
Thanks for reading our blog.