Duped!

By Those We Trust

Conrad Lawrence

But, we should have long since stopped trusting those we elect

This past Monday, September, 29th, I momentarily felt a sense of hope. Finally, someone was going to stop this madness; break from the trickle-down paradigm and help, economically, stimulate those who really need it, but we were duped! Twice!

It didn’t happen and it is clear that Congress never had any real intention of doing anything other than give money to those responsible and who can’t be trusted to self regulate themselves with large sums of money. To add insult on top of injury we are being duped a second time by the large financial institutes leveraging the crisis to implement mergers that would never be approved by the Treasury Department for reasons of diminishing competition.

Independent Presidential Candidate Bob Barr puts it succinctly, “We are doing precisely more of what got us into this problem by giving nearly a trillion dollars to those who got us into this problem to purchase bad debt.”

Hasn’t the last 8 years, the loss of the middle class, constant decline in jobs and untenable national debt proven the folly of giving a break, stimulus and a bailout to those at the top of the economic heap, those who are most influential

If you are not familiar with the term duped, please see the definition for the word in the side bar and the unflattering implications it has on both those we trust and ourselves.

Instead of moving us away from more of the same failing strategy, Congress only put off the bill long enough to add their own earmarks. “Earmarks” is the new politically correct term for what was once referred to as pork: a $2 million tax benefit for makers of wooden arrows for children; a $100 million tax break to benefit auto racetrack owners; $192 million in rebates on excise taxes for the Puerto Rican and Virgin Islands rum industry

Oink,

This Wall St. piggy went to market,
This creditor piggy went to mortgage backed securities
This banker piggy went to congress
This taxpayer piggy had none

Sorry if the rhyme and the onomatopoeia doesn’t ring true, but then nothing about this situation rings true; especially the Administration and it’s cronies call-out to our fears claiming we are doomed to economic melt-down. In their April 2007 issue, Vanity Fair labeled the Bush Administration as more destructive to the economy than the Hoover administration, yet Congress bought it when Bush initiated the bailout with the same apparent naivete as buying into his cry of WMDs. Like that, Bush made an urgent appealed to our fears, met by a House and Senate apparently blind to the needs of the people of this country.

Except for the dire global consequences, the BBC found the situation laughable. One of their producers even put together a medley of quotes from Bush, McCain, Paulson, and Bernanke and put it to the theme song for the children’s show, Only In America. Unlike most U.S. news outlets, the BBC is able to find a plethora of U.S. based analysts who don’t understand why the bailout isn’t a demand-side bail out. This doesn’t seem hard to do considering that on September 24th, over 200 economists signed a letter to the Speaker of the House and the Senate President pro tempore speaking against the bailout. These are not blog slouches, but economists based in highly respected institutions on the economy, such as Carnegie Mellon, Columbia University, Stanford University, MIT, UCLA.

That letter can be seen at this University of Chicago link: http://faculty.chicagogsb.edu/john.cochrane/research/Papers/mortgage_protest.htm

I can’t help but point out the irony that this letter was drafted and kept at the University of Chicago, the home of Milt Friedman, considered the Father of Supply Side Economics.

Everyone the BBC interviewed both domestically and abroad found it unfathomable that our government would take nearly a trillion dollars from the victims of the financial crisis mess and give it to those very people who created the problem. One valid question raised a number of times is what is going to keep large financial institutions from using this money for other financial enterprises and insure that they will actually put it back into the housing economy?

Seasoned and highly respected News Analyst Daniel Shorr has much more jaded view of the situation. He indicates that Congress never had the intention of stopping the bill, but put on a media dog and pony show to give the impression that they are actually concerned for the tax payer.

The Fallacy

Once they get the bail out, who will financial institutions lend money to? The one sentence explanation of the mission, purpose, raison d’etre for the $700 billion bailout indicates that this is so that financial institutions can once again start lending, the basis of our economy being the credit and cash flow of consumers.

Who, after this fiasco, is left to make viable application for loans? After the sub-prime crisis, all that is left is those who defaulted and those who already have property. How many of those will not be too frightened to accrue debt for several years. Think about it. With job losses (over 159,00 in September), declining wages, and those who have defaulted in mortgages, who will be left over that will not be considered a credit risk? What percentage of people who can afford to take a loan and not be considered a risk, do not currently own property? Of those who don’t have property will be willing to enter this very chaotic environment of debt? What will be the driving impetus for the loans needed to move the economy forward and the reason (think WMDs) for this bailout? Will it be the need for other big ticket items? Big screen TVs? Household appliances? Cars; in a declining economy with increasing fuel prices? How is this bailout going to be injected into the economy if there is no place to inject it?

I fear I suspect that people will be acquiring loans to pay for necessities as the economy further tanks.

The Second Dupe

The second, quiet and more pervasive dupe is the way monolithic financial institutions are using the financial crisis to institute wholesale mergers previously not allowed by the Treasury and Justice Departments.

During the eleven years I worked in what was then the third largest corporate bank in the U.S, much discussion and worry centered around mergers impeding needed competition and rampant abuse of depositors (that would be you and me) by financial institutions. Back then, many mergers were not allowed. Even in the banking industry, many felt there were too many mergers. Ironically, or maybe not so ironically, in 1998 Republican Representative Jim Leach worried that mergers might overrun regulators ability to manage large financial institutions. Even the supply-siders worried that large financial institutions without the checks and balances of competition couldn’t be trusted.

So, what’s going to be the outcome of these crisis driven mergers: Chase taking over Bears & Stearns and Wamu, while Citi and Well Fargo battle over Wachovia. Here’s the question I have. If Chase can afford to buy up debt from both Bears & Stearns and Washington Mutual and sit on it until the crisis turns around when deposits and loan payments will cover the debt, why can’t WaMu and Bears & Stearns wait it out also.

I mention this second dupe because it plays into the root paradigm that drives this crisis and prevents a real solution

The Myopeia of Greed....

…prevents legislators from seeing the obvious.
Even the staunchest of supply-siders ostensibly agree that the basis of our economy is the movement of money among what used to be our middle class. They agree that the eventual point of the bailout is to lend money to people to use, why not inject the money right at the level where you eventually want it?

Why are we injecting money at the top level to let it trickle down after years of proof that nothing ever trickles down? Why not cover the debt at the level of the people who are struggling to pay the debt. (See Alternative Bailout in the Sidebar to the right)

The Root Paradigm

Delaying the Inevetible
To say that at the root of the fallacy of the bailout is the supply-side paradigm is over simplified. It is the root, but it is pervasive. This bailout takes the stance that the status quo, our credit and investment based economy, charitably referred to as service oriented. The bailout ignores that what is really needed is a different economic paradigm which will require less short term and more long term views. Other than the movement of money, the U.S, has little of anything else backing up our economy. We have no products or materials, save housing, on which to base our economy,

The problem is and will continue to be that we have no way of digging out of our debt and our debt paradigm, we will face this in the future. Debt cannot continue to expand. According to the President we are facing the possibility of the economy shutting down because the ability to keep debt moving will quit. We have nothing bet debt to fall back on to keep our economy going.

The paradigm that debt is good has gone too far. Even if we sold off all of our GDP we couldn’t pay off even 40% of our national debt. One of the facts about debt that most financial people involved in the debt industry won’t tell you is that debt and investment is only really dependable and safe if everyone involved knows what a risk everyone else poses. That in fact is not true. If accurate risk assessment had been done, the sale of mortgage backed securities would have never happened.

In order to get out of what is becoming a vicious and spiraling cycle in a direction of recession we need to realign our economy to be backed by product, manufacturing. To do that we need to get jobs and profit revenue back into this country. Tax incentives have proven ineffectual over the last eight years, simply because big business does not hold up it’s end of the bargain and offshores…everything. How come we never hear about tax penalties to business who have sent jobs and profit outside the U.S. economy.

No one, neither of our Candidates of Change addresses this. The current paradigm of propping up debt seems to be accepted without question, ignoring the risk that seems obscure but has walloped our economy in the face.

We do hear of tax cuts and whether it should be given to business as incentive or consumers as incentive. At this point I need to ask, wouldn’t a bailout at the debtor level be the same as a tax incentive, only more effective? Still, the point is that beyond tax cuts, no one speaks of any other options.

How about opening the discussion of things like tariffs to make it more expensive to manufacture outside of the U.S. than inside. The argument tariffs only goes one step and the three or four it needs to go, which is that tariffs increase prices and people won’t purchase. Fine, let that happen. People won’t purchase an in a competitive capitalistic market, someone is going to say, I’m going to manufacture in the U.S, in order to keep prices down and tap into that market. Manufacturing in the U.S. means jobs, means more cash flow, more loans.

How does this relate to the bailout? It’s like this. The bailout is solely oriented around the credit industry as the singular influence on our economy. Because of that, and being mired in the supply side, no other alternatives are considered. In fact the whole loss of jobs, lower wages and increasing Consumer Price Index (inflation) are all related in that they drove the need for more credit, a change in our economy that really took off starting in the 1970s. At that time the investment markets got dimes in their eyes, thinking money could be made from the movement of money. This is fine if the movement of money continues to grow. However, the supply-siders shot themselves in the foot by wanting to keep too much of the cash for themselves and stalled its movement. They begin relying on credit, again which is fine as long as you can keep loaning out more, but even in the most rudimentary understanding of economics, it’s easy to understand that without cash flow, credit cannot keep expanding. No cash to move, no way to invest in credit.

The need for a different paradigm is imminent

Yes, this does mean biting the bullet for everyone, but even in the bailout plan, there is still talk of people have to bite the credit bullet and massive job losses that could be in the millions. At least with a debtor side bailout and a plan to move away from a credit based to a good or product based economy, there is the possibility of work.

The bailout only says we need this money now, to start loaning again. There is no talk of long term impact or recovery. I would rather face a solution that looks beyond now and at least indicates jobs with checks people can live off of, even if it means a more austere life. A solution that only looks at right now and insists on continuing a process that has proven to be very risky scares me. I know from my own experience the long term damage of living off of credit, buying necessities on credit card. To those about to join me, I say welcome to my world.