How can we help people apply this?

I was speaking with a colleague about the current economic conditions. We were discussing Greece and their predicament, and why that could (and frankly should) happen in the United States. By all measurements, especially Debt/GDP we are in worse shape than Greece. Why haven't we started to fix this I asked?

He expressed a good point: the common people don't really know how this is going to effect them. College professors, politicians, etc. can talk about GDP, National Debt, Keynesian theory - but until someone says "if this happens, no one has a job" people will continue to argue for Government spending.

So in that spirit, here is my attempt at making this simple.

The United States Dollar is the reserve currency of the world. This means that EVERY country will pretty much accept your US dollar. Our CURRENT debt estimate for the next ten years ($107 Trillion) is so high that we are UNABLE to service our debt. We have been effectively servicing our debt by rolling it to a new borrower, much like shifting the balance of my Visa to my MasterCard. In the end, they BOTH want to be paid, but we just CAN'T pay right now. We can not increase taxes enough to cover this debt. We can't even really inflate our way out of this debt. The only way to take care of this is CUT spending. Period. The Supreme Court has the authority to FORCE Congress to uphold their oaths. They can follow the Constitution and eliminate all other government spending that is not dictated in that document. This means Social Security, Medicare/Medicaid, etc. (this alone could possibly fix it) and even Defense (which is dictated) could be cut in half, because we DON'T have to police the world.

Now, how does that effect you? If the government defaults or inflates the dollar supply ALL of your money becomes useless. You will NOT be able to purchase food, housing, etc. with it. It will be as useful as toilet paper.

What do we do to fix it? We have to elect Representatives that will make the tough choices. That will ACTUALLY cut spending. And then we need to NOT PUNISH them for doing what needs to be done. What do you all say?

PS - If you are interested this article explains this concept fairly well.

Aren't there rules for this?

So on the train I noticed something that has been in my periphery for some time. I attribute the oversight to always having to watch out for that sociopath...

Anyway, the train goes right past these subsidized/Income restricted housing(also sometimes called a ghetto) and I noticed that 3/4 of the apartments have a satellite dish. Now I am not certain of the cost of those dishes, but if I have to guess I would put the cost at about $100 plus the Monthly payment that has to be close to what cable is (which in SoCal is about $70-$100). So... these people are in such dire circumstances that they are not able to afford housing on their own. Because of this the government steps in and helps to the tune of 50% (and sometimes more), but they have enough free cash flow to pay for extra TV channels?

That doesn't sit well with me. Here is why:

• the government only has that money to subsidize because they took it from someone else.
• if you are in need of charity, than you should have exhausted your own resources first.
• Cable/Satellite is a luxury, not a need. So are cell phones, computers, Internet, etc.

I am not saying that these people aren't in need. I am simply perplexed that the government doesn't have any rules in place to restrict frivolous spending. California might be able to close that budget deficit by a fair margin if it applies a few common sense rules... but who am I kidding? The government (Federal and State) does not have common sense. If they did, they would understand that you can't spend what you don't have. There is NO SUCH THING AS A FREE LUNCH. Everything has its cost. Shoot we don't even want to think about how much interest we are paying for our current deficit. It is ridiculous... I am going to go cry in the corner for a little while. Someone come get me when they decide to reimburse the tax payers for everyone's cable/satellite.

What are you talking about GB?

Some one please help me. Why is this even an issue? The US census is part of the Constitution. It has been around since freaking 1790. Bachmann is a retard and I am questioning the intelligence of the people who voted her into office. She doesn't want *further* government intrusion? This is not further at all, the Patriot act was intrusive, but this is just par for the last 2 centuries or so.

To answer some of the questions that were posed:

Yes, the government needs to know how many people are in an area in order to determine not only Federal funding allocations, but also how many seats will be in the House of Representatives (they also use this data to determine the size and area of these districts).

No, they didn't include the question about legal residency because those that are not legal wont actually fill it out and return it. So I suppose this isn't the perfect time to find out how many illegal aliens are in the country.

No Glenn, don't be completely asinine, they can't use this information to take away your gun permit. The information in the census is information that you have already provided in order to legally own a firearm. This means that they already know who you are and where you live if you have a permit to own. Now... if you don't have the gun legally, that is different. But I still don't see how they could know that you have the illegal weapon from the questions in the survey, so they STILL can't use the census as a "loophole" to take away the gun.

Instead of trying to stir up trouble over something that has been done for centuries and has done little to no harm, try actually reporting the freaking news. I know that GB is an "opinion" show, can you have some logic in there somewhere? I mean, how did Glenn make the "logic leap" from "there are 3 people that live in this home" to "the government will take my gun"?

Each day I lose more faith in not only our politicians (there wasn't much to begin with) but our media are only a bunch of attention whores. They don't actually care about reporting anything worthwhile, only about what will get other brain dead people to watch. 5 minutes of thought would let you know that the census is FINE. Please for the love of all that is right in this world, fill out the census. If you choose not to, that is fine as well, so long as you have a logical reason for choosing not to. "I am lazy" works better than, "they will take my gun" or "they will know where I live."

Doesn't that go without saying?

President Obama told Diane Sawyer, that he will continue to pursue an "aggressive agenda" because he would "rather be a good one-term President, than a mediocre two-term President."

Yeah, that should go without saying. I sincerely doubt anyone that has the ambition to become the President of the United States, sits down in the Oval office and goes, "now how do I do a 'so-so' job?" I mean really, NO ONE with any drive at all seeks to do a poor job. I am a rather pessimistic person, and even I will give a person the benefit of the doubt. If they do a poor job, it wasn't because they WANTED to. When it comes to President of the U.S. I think that the term "good" isn't determined by the President anyway. Mostly the Media I would think. And lets not kid ourselves, the media loves President Obama. They have their noses so far... anyway...

I guess, what I am saying is, I am glad that you want to be a good President, Mr. Obama. Because I would hate to see what you could/would do if you wanted to be a crappy one... (though in reality, only the future will decide which you were).

poor choice of words.

"There is only one guarantee — that if we don't pass something the notion of trying to put Humpty Dumpty together again is a real long shot," said Rep. Patrick Kennedy, D-R.I., son of Edward Kennedy. "It's a lot easier to pass something and fix it later."

Did Mr. Kennedy realize that using Humpty Dumpty - the big egg that fell off the wall and couldn't be FIXED - as an example, was a poor choice if the next sentence out of your mouth is "[i]t's a lot easier to pass something and fix it later."? Cause the moral of Humpty is that once something is broken or wrong, it CAN'T be fixed. That is the reason you should have a GOOD, COMPLETE, and SOUND piece of legislation to begin with.

I would argue that statement by Mr. Kennedy sums up almost all that is wrong with our political leaders right now.

Our grandparents had it right all along.

"Anything worth doing, is worth doing right." And "if you go right at first, it is easier to go right all along."

ruminating on Batman

So, I was thinking about Batman this morning. Not sure why... well I know WHY (I am a total nerd), but I am not sure why I was thinking of him in this regard.

I have had politics on my mind of late (probably cause they effed with my bonus) and was thinking about the Fed and what it does, what its purpose is, and how it has affected the current economic reality. Somehow in this thought process I started to think that the REASON (among others) that I like Batman so much more than Superman is that Batman has to deal with his problems with whatever he has available to him. While Superman can always do something impossible. There is a certain amount of pride that can be garnered from doing something from good hard work. Batman has to work for his accomplishments. Superman is just super, cause he was born that way, cause he is special, just because. That just... irritates me.

Our Congress (and entire government) doesn't actually see where the money comes from, they are happy that the money is just always there. It is always available to do any project that they want... They treat the federal balance sheet like a college kid on spring break with his parents credit card. There is nothing that they can't buy! They are Supermen/women! But eventually, reality will come creeping back in and ruin their party.

I just hope enough of them are sober enough to listen to constituents, because it might be one horrid hangover. The recent polls are telling. We don't like what Obama is doing, what the Senate is doing, what Congress is doing. This is not along party lines... we (the people) don't like the government right now. It now appears - according to the WSJ - that the greater majority of people do NOT trust the government to do the right thing most of the time. As in, we think they are crooks.

A bit of a ramble...

When is breaking the law, not breaking the law?

When you are the Federal Government.

Yesterday the national debt, as reported by the Treasury, reached $12.13 trillion. Rest assured, it’s even higher by now. The official debt ceiling — a rule of law which the government must obey, lest it render all other laws illegitimate — currently does not allow the national debt to exceed $12.10 trillion. Viva la revolucion! The government is breaking the law!

back to misused/overly used words.

"Crisis" is a word that should be used in its proper time and place. Hurricane Katrina=Crisis, complete financial meltdown of Lehman bros.=Crisis, the current "state" of health-care in the US= troubling, but NOT a crisis.

This is not to say that we couldn't improve the system. I am simply trying to help people see that it isn't a crisis at this point. We don't have catastrophic casualties, and while costs are mounting, when they are seen with inflation they aren't "spiraling out of control." Frankly, if you want to improve the health system and lower your costs, just be healthier. Stop eating fast food, and get some exercise for crying out! Those two things alone could probably save you countless dollars...

If you want some more tips, just ask anyone other than a politician.

hijacked words

i will be very brief. I am more than slightly irritated by the overuse of certain words when politicians discuss profit. whether discussing Investment banks or Health Insurers, Ms. Pelosi is always calling the profits "obscene" or "immoral" (or both). Just because those words draw attention does not make them accurate. there is NOTHING inherently immoral or obscene about making a profit if you run a company. on top of that, when dealing with Health Care, people really ought to think before they speak. First, despite the problems with our health care system, America is STILL the pinnacle of medical care and treatment. there is no other place on the entire planet that you can receive BETTER care than here. Second, it is NOT the governments job to provide health care. period. if you want health care, go out and get it just like everyone else does you freaking slackers! there are no free lunches, even when people claim there are! suck it up and realize that someone is paying for it. and contrary to your lazy ass opinion, it is NOT a fair share to have someone else pay for it, just cause they can. what is your fair share? what have you contributed? If i bake a pie and use all my own time and ingredients that i purchased, what is your fair share of that pie? ZERO. you don't get any of my pie unless i SAY you do. if you want some of my pie, you can help make it. if you don't help, then SHOVE OFF, you lazy, sack of useless crap, thief.

ok. done.

Words without actions are worth what?

President Obama is awesome as a public speaker. There is no denying that he possesses eloquence in excess. However, for awhile now I have felt that our Commander in Chief is missing something very important. Follow-through. All his pretty speeches are just that, pretty. His rhetoric is spectacular! But I want more than good ideas from a leader, I want action. I want an outcome.

Here is a short list of Obama's checklist.

Pretty speech about the economy? check. Any positive improvement (other than the media that spout crap anyway)? nada. Didn't get the change you were looking for? change the goal. (no one really strives for something when they don't succeed anyway, right? Why would we want a leader to be responsible for what they claim?) Talk to all the leaders of other countries, but don't have any actionable propositions. Done. Condemn Mahmoud (Iran) and let him think about his response until September. Good thought, except we are going to talk to him next week...

At this point President Obama, I don't have to agree with everything you say, but in order to be a good president... you will have to DO something more than give public speeches.

Drunks pay taxes, why can't Stoners?

California's budget is $15 billion under water. In my opinion this is mostly because the state is run by economic airheads. I can say that because, all of the fiscally intelligent people are too busy making money to run for office. That is our loss. There is also the issue that more than 60% of the population receives some sort of aid from the state government. California is starting to see why socialism doesn't work. (as I have said before, eventually you will run out of other people's money).

but there is hope for the crappy budget. It comes in the guise of "moral corruption," also known as legalizing marijuana. I have to say that it is humorous, to say the least, that a State that throws a fit over same sex marriage (a TRULY moral topic), is struggling at all with this issue. The pot growers have VOLUNTEERED to be taxed, and have suggested "at least $1 billion" in tax revenue. (the money that is saved by not having to enforce lame laws will be close to $10 billion on the low end). I know that there will be people that think this is a horrible idea, but if it is legalized, you solve a budget deficit, make lots of people happy, and correct a logic problem all in one. I mean, we let people drink and smoke tobacco. Both of those are taxed at a higher rate, because they are viewed as bad for your health. How is Mary Jane any different?

If you don't like it, don't smoke it. You can still enjoy all your state benefits, while you abstain.

Redistribution of wealth? good luck with that...

i suppose the few people that read my blog may have gathered that i have had the economy on my mind lately. not surprising, i would guess most people in the world have that on their minds more often these days. but i have to address another issue that is irking me.

lots of people are looking forward to the current administration's attempt to 'right the wrong' that is the unfair distribution of wealth. I could point out that the majority (not all... we have Paris Hilton to consider... ick!) of those that are ultra wealthy, paid their dues and in my opinion deserve their HARD EARNED wealth. the lesson we should learn is that if we work as hard as they do we can be wealthy too.

but that is an aside. my real topic is this. IF you want to redistribute the wealth of this nation, putting greater regulation on the industry is counter productive. sounds strange? here let me explain my reasoning.

our current economy is marked by lots of "Delevering" and "Deglobalization," these are natural consequences to an over bloated market that was fed by the very government that is now attempting to "fix" it. these are good things because they are correcting the market naturally. the economy is also marked by lots of re-regulation and new regulation. this is not a natural consequence. this will create an "inefficient market" (which is actually the whole point of the regulation). instead of rewarding the smartest and hardest working person, you can force (through regulations) a "fair" price, etc. fairly simple to understand.

here is where i start to smile to myself (more of a smirk, really). the reason that many investment banks made a KILLING in Eastern European countries, India, China, Brazil, etc. is BECAUSE they are inefficient markets. i mean for crap sake, i work for a "alternative" investment bank that specializes in this! we are practically licking our chops waiting for this to happen here in the US. inefficiency is what creates the opportunities to make money. so even though you are trying to redistribute the wealth, who do you think is going to be capitalizing on these markets? I can assure you that it will be the wealthy and they are going to remain wealthy.

so my advice: stop with the jealous whining and stop waiting for government handouts. they aren't helping any of us.

why raising Corporate taxes is a problem

here is the thing. if the economy is failing (which it is) how is the government going to save it?

the answer: it can't

the government gets its funding from two main sources: taxes and it prints its own.

if it just prints the money to cover the shortfall that we are seeing then we will have inflation, maybe even hyper-inflation. that is VERY bad. don't believe me? look at what Mugabe has done in Zimbabwe. we are already being threatened by high inflation rates. so Obama (or any government) can't do that to fix it...

that leaves taxes to collect all the necessary funds for the 'relief' programs (Social security, Welfare, Unemployment, TARP, Bailouts, etc). now here's the thing, individual citizens are suffering in the economy and are making less money, so you can't increase their taxes without causing more harm. so who can the government tax? Corporations, of course! i mean, they are greedy and make too much money anyway (sarcasm is present). i will admit that some corporations are greedy and corrupt, but the vast majority of them are not. most of them are trying to keep producing in a stagnant economy. so when you increase taxes on them, that cuts into the earnings and revenue and the company needs to compensate in some way. the company has two ways to do this (1) increase the sale price of their product, or (2) cut costs. in order to increase the sales price to compensate for the proposed tax increase, most companies would need to up the price between 10%-30%. They wouldn't be able to sell very much in a sinking economy by doing that, now would they? so that leaves them with cutting costs. guess what is the easiest and most efficient way to cut costs? get rid of employees. that is right, lay-offs.

so increasing the corporate tax will lead to more unemployment. which leads to further recession, etc. i believe the term we are looking for is 'a vicious spiral.'

so here is a suggestion for employers that i heard and I think it is good enough to propagate. if you are having trouble deciding which employees to let go. just go to the parking lot, and find the cars with 'Obama' stickers. after all, they did want change...

Ron Paul and my taxes.

so, i have been reading a book by Ron Paul. i am really liking it. i think the reason i like it so much is that one, he makes sense. two, he isn't a douche bag that ignores things that he disagrees with (he addresses them instead, what a novelty for a politician!). Lastly, he explains the Constitution and uses it as the basis of all of his arguments, which is EXACTLY what all politicians should do.

one of the arguments that has been rolling around in my head for a day or two is that for income tax. Income tax is NOT Constitutional. I never thought about it, but he is right, it is just a form of slavery. we don't really have a choice in paying them or not. we must pay them or we go to prison. how is that any different from me going to my neighbor with a gun and demanding some of his/her income? or, is a slave really free if you allow him to vote, if he is still not able to keep that which he labored for? it is the same principle, and that is why it has really been irritating me. income taxes, conscription, and many other abuses of the Constitution that are perpetrated by our very own government... is it any wonder that i have been so jaded with politics? neither party really adheres to the very document that is supposed to serve as the divining rod for our great country.

much more thought will need to go into our next election process, cause i can't vote on party lines at all...

Obama says we aren't quiters.

I think he is wrong though. cause we have become a nation of whiners and french people. we are becoming more and more the European socialists that we used to mock and revile. we used to mock them because they still relied on a sense of 'monarchy' or 'class' that was supposed to help those that were less fortunate. those that couldn't do it themselves. those that had would provide for those that didn't. well after hundreds of years, we can see how well that has worked. America on the other hand, said 'eff that! give us your tired, your hungry, your poor. we will do it ourselves. we will be bankers, we will be steel barons, we will be presidents, we will be generals, we will be business leaders, scientists and scholars. we don't need an aristocratic class to tell us what to do or to help us.'

THAT is what made America great. that is why the rest of the world didn't and doesn't like us. because we pointed out that we don't need them. we are self sufficient. we are tough SOB's and can do whatever we want. we are capable. we are stalwart. when a European factory worker saw his boss drive off in the nice car he would say 'i want to bomb that car.' when the American worker see's it, he says: ' i am going to have a car like that some day.' at least that is what we used to be like... now we have huge bail outs, massive government debt and spending. (do you that read my blog realize that we spend $1.42 for every $1 of tax revenue brought in? we are increasing our deficit by 42% a year!) when did our beloved Democracy become a Socialist regime? but, you know... the problem with Socialism, is that eventually you run out of other peoples money.

saving money the bass ackward way

California has a HUGE budget deficit. one of the biggest of all time.

here is part of their solution.

have all the State employee's stay home every other Friday. does this help ease traffic congestion? absolutely. i can attest to this. the train was practically deserted and my office mate said he got into the office in only 20 minutes today instead of the usual 45 minutes. (i am sure this is due in part to the holiday weekend as well).

but by not paying the employee's one day less each pay period save money? NO, it doesn't ACTUALLY save any money. all the projects are still being worked, they are just taking longer now. NOTE TO CALIFORNIA: this means that these projects are COSTING MORE.

now i don't have all the solutions (though i often express the opinion that i do), but the best one i can see is spend LESS then you BRING IN. that seems to work for most people. the people that followed that advice are still doing rather well, despite the recession and crappy economy.

here is another one if that one is out of the State's reach. privatize some of it. the DMV would be a great example of something that would work WAY better if it was private. look what happened to public transportation once it went private! buses were on time, they went more places, and the employee's were payed better and had better compensation packages. if the DMV went private, the long line would disappear, i wouldn't be annoyed at the RETARDED people that work there (they would be fired for incompetence), and it would bring in revenue to both the State and the private company.

there let's try that one...

I am with Isreal. period.

I know this is a highly disputed subject. I know that war is bad. that horrible things happen during war time. I truly feel for those innocents that are paying the price for other peoples stupidity.

here is how i see it. every couple decades, Israel has to re-establish that they are not prey. they have had their rights, religion, and lives threatened far longer than... well just about anyone i can think of. Israel (and specifically Jerusalem) were theirs before the other people that are currently claiming that land. more importantly, they have been there for over 50 years now. they aren't leaving. it is almost set in stone. they will be there and fight until they are all dead, or everyone else leaves them alone.

in the "6 Day War", the Israeli's established that they are not a push over. in fact they are a cornered badger in its den. and Israel's neighbors keep poking sticks (read 'rockets') into the den. now those neighbors have some how got the whole world all upset that the badger came out and is not content to bite their hand... no they want the whole damn arm. I say they should get it. The U.N. should shut its freaking pie hole. if it had done what it was meant to, they would have stopped the rockets. IF ISRAEL KNOWS HOW THEY ARE GETTING ROCKETS and HOW TO STOP THEM. then the U.N. knew too.

so Israel. I say wreak havoc. destroy them. they have publicly declared that they intend to 'utterly destroy' you. i say you mimic their intentions. destroy them until they capitulate. and only stop when they have stopped. you have superior weapons and training. the only thing that keeps them from being wiped out is your morals. remind them of that.

I am an advocate of 'Total War' because it is the fastest way to end a war and to prevent future wars. in nature animals know when it is best to leave something alone. you don't bother a mother bear, you don't bother a feeding wolverine, and you leave a cornered badger the hell alone! Japan doesn't pick fights with the US anymore... any guess as to why?

the captain of a sinking ship.

so i have felt that this country is a sinking ship... from the war in Iraq/Afghanistan/N. Korea/Darfur/Iran(pending)/Pakistan to the economic breakdown, we are just in for a S*** storm.

keeping that in the back of my mind, i have decided that it really doesn't matter who the next president is. they just have to be willing to wade through all the crap and get their hands really dirty. there really isn't any other way to get things fixed. mechanics get dirty to fix a car, construction workers get dirty to build stuff... and the next president will have to get his reputation dirty.

good luck Obama (or in the less likely event, McCain).

I understand your point. I just disagree.

Brad left a comment on my last post. It was very articulate and well thought out. I just disagree.

the following is an article that i feel points out all of the sides to this economic situation. If you are in the first group that is mentioned (like Brad) then there really isn't any point to trying to fix anything and we are in this for the long haul. However, if you are in the second group (me) then we need to do something to organize our resources to mitigate the consequences as best we can. then there is the third group (i tend to lump most other people in this group) that feels that this 'bailout' is to save the rich from their own mistakes.

I apologize in advance for the length of the article, but please read it.

By George Friedman

Classical economists like Adam Smith and David Ricardo referred to their discipline as “political economy.” Smith’s great work, “The Wealth of Nations,” was written by the man who held the chair in moral philosophy at the University of Glasgow. This did not seem odd at the time and is not odd now. Economics is not a freestanding discipline, regardless of how it is regarded today. It is a discipline that can only be understood when linked to politics, since the wealth of a nation rests on both these foundations, and it can best be understood by someone who approaches it from a moral standpoint, since economics makes significant assumptions about both human nature and proper behavior.
The modern penchant to regard economics as a discrete science parallels the belief that economics is a distinct sphere of existence — at its best when it is divorced from political and even moral considerations. Our view has always been that the economy can only be understood and forecast in the context of politics, and that the desire to separate the two derives from a moral teaching that Smith would not embrace. Smith understood that the word “economy” without the adjective “political” did not describe reality. We need to bear Smith in mind when we try to understand the current crisis.

Societies have two sorts of financial crises. The first sort is so large it overwhelms a society’s ability to overcome it, and the society sinks deeper into dysfunction and poverty. In the second sort, the society has the resources to manage the situation — albeit at a collective price. Societies that can manage the crisis have two broad strategies. The first strategy is to allow the market to solve the problem over time. The second strategy is to have the state organize the resources of society to speed up the resolution. The market solution is more efficient over time, producing better outcomes and disciplining financial decision-making in the long run. But the market solution can create massive collateral damage, such as high unemployment, on the way to the superior resolution. The state-organized resolution creates inequities by not sufficiently punishing poor economic decisions, and creates long-term inefficiencies that are costly. But it has the virtue of being quicker and mitigating collateral damage.

Three Views of the Financial Crisis

There is a first group that argues the current financial crisis already has outstripped available social resources, so that there is no market or state solution. This group asserts that the imbalances created in the financial markets are so vast that the market solution must consist of an extended period of depression. Any attempt by the state to appropriate social resources to solve the financial imbalance not only will be ineffective, it will prolong the crisis even further, although perhaps buying some minor alleviation up front. The thinking goes that the financial crisis has been building for years and the economy can no longer be protected from it, and that therefore an extended period of discipline and austerity — beginning with severe economic dislocations — is inevitable. This is not a majority view, but it is widespread; it opposes government action on the grounds that the government will make a terrible situation worse.

A second group argues that the financial crisis has not outstripped the ability of society —organized by the state — to manage, but that it has outstripped the market’s ability to manage it. The financial markets have been the problem, according to this view, and have created a massive liquidity crisis. The economy — as distinct from the financial markets — is relatively sound, but if the liquidity crisis is left unsolved, it will begin to affect the economy as a whole. Since the financial markets are unable to solve the problem in a time frame that will not dramatically affect the economy, the state must mobilize resources to impose a solution on the financial markets, introducing liquidity as the preface to any further solutions. This group believes, like the first group, that the financial crisis could have profound economic ramifications. But the second group also believes it is possible to contain the consequences. This is the view of the Bush administration, the congressional leadership, the Federal Reserve Board and most economic leaders.

There is a third group that argues that the state mobilization of resources to save the financial system is in fact an attempt to save financial institutions, including many of those whose imprudence and avarice caused the current crisis. This group divides in two. The first subgroup agrees the current financial crisis could have profound economic consequences, but believes a solution exists that would bring liquidity to the financial markets without rescuing the culpable. The second subgroup argues that the threat to the economic system is overblown, and that the financial crisis will correct itself without major state intervention but with some limited implementation of new regulations.
The first group thus views the situation as beyond salvation, and certainly rejects any political solution as incapable of addressing the issues from the standpoint of magnitude or competence. This group is out of the political game by its own rules, since for it the situation is beyond the ability of politics to make a difference — except perhaps to make the situation worse.

The second group represents the establishment consensus, which is that the markets cannot solve the problem but the federal government can — provided it acts quickly and decisively enough.

The third group spoke Sept. 29, when a coalition of Democrats and Republicans defeated the establishment proposal. For a myriad of reasons, some contradictory, this group opposed the bailout. The reasons ranged from moral outrage at protecting the interests of the perpetrators of this crisis to distrust of a plan implemented by this presidential administration, from distrust of the amount of power ceded the Treasury Department of any administration to a feeling the problem could be managed. It was a diverse group that focused on one premise — namely, that delay would not lead to economic catastrophe.

From Economic to Political Problem

The problem ceased to be an economic problem months ago. More precisely, the economic problem has transformed into a political problem. Ever since the collapse of Bear Stearns, the primary actor in the drama has been the federal government and the Federal Reserve, with its powers increasing as the nature of potential market outcomes became more and more unsettling. At a certain point, the size of the problem outstripped the legislated resources of the Treasury and the Fed, so they went to Congress for more power and money. This time, they were blocked.

It is useful to reflect on the nature of the crisis. It is a tale that can be as complicated as you wish to make it, but it is in essence simple and elegant. As interest rates declined in recent years, investors — particularly conservative ones — sought to increase their return without giving up safety and liquidity. They wanted something for nothing, and the market obliged. They were given instruments ultimately based on mortgages on private homes. They therefore had a very real asset base — a house — and therefore had collateral. The value of homes historically had risen, and therefore the value of the assets appeared secured. Financial instruments of increasing complexity eventually were devised, which were bought by conservative investors. In due course, these instruments were bought by less conservative investors, who used them as collateral for borrowing money. They used this money to buy other instruments in a pyramiding scheme that rested on one premise: the existence of houses whose value remained stable or grew.
Unfortunately, housing prices declined. A period of uncertainty about the value of the paper based on home mortgages followed. People claimed to be confused as to what the real value of the paper was. In fact, they were not so much confused as deceptive. They didn’t want to reveal that the value of the paper had declined dramatically. At a certain point, the facts could no longer be hidden, and vast amounts of value evaporated — taking with them not only the vast pyramids of those who first created the instruments and then borrowed heavily against them, but also the more conservative investors trying to put their money in a secure space while squeezing out a few extra points of interest. The decline in housing prices triggered massive losses of money in the financial markets, as well as reluctance to lend based on uncertainty of values. The result was a liquidity crisis, which simply meant that a lot of people had gone broke and that those who still had money weren’t lending it — certainly not to financial institutions.

The S&L Precedent

Such financial meltdowns based on shifts in real estate prices are not new. In the 1970s, regulations on savings and loans (S&Ls) had changed. Previously, S&Ls had been limited to lending in the consumer market, primarily in mortgages for homes. But the regulations shifted, and they became allowed to invest more broadly. The assets of these small banks, of which there were thousands, were attractive in that they were a pool of cash available for investment. The S&Ls subsequently went into commercial real estate, sometimes with their old management, sometimes with new management who had bought them, as their depositors no longer held them.

The infusion of money from the S&Ls drove up the price of commercial real estate, which the institutions regarded as stable and conservative investments, not unlike private homes. They did not take into account that their presence in the market was driving up the price of commercial real estate irrationally, however, or that commercial real estate prices fluctuate dramatically. As commercial real estate values started to fall, the assets of the S&Ls contracted until most failed. An entire sector of the financial system simply imploded, crushing shareholders and threatening a massive liquidity crisis. By the late 1980s, the entire sector had melted down, and in 1989 the federal government intervened.
The federal government intervened in that crisis as it had in several crises large and small since 1929. Using the resources at its disposal, the federal government took over failed S&Ls and their real estate investments, creating the Resolution Trust Corp. (RTC). The amount of assets acquired was about $394 billion dollars in 1989 — or 6.7 percent of gross domestic product (GDP) — making it larger than the $700 billion dollars — or 5 percent of GDP — being discussed now. Rather than flooding the markets with foreclosed commercial property, creating havoc in the market and further destroying assets, the RTC held the commercial properties off the market, maintaining their price artificially. They then sold off the foreclosed properties in a multiyear sequence that recovered much of what had been spent acquiring the properties. More important, it prevented the decline in commercial real estate from accelerating and creating liquidity crises throughout the entire economy.

Many of those involved in S&Ls were ruined. Others managed to use the RTC system to recover real estate and to profit. Still others came in from the outside and used the RTC system to build fortunes. The RTC is not something to use as moral lesson for your children. But the RTC managed to prevent the transformation of a financial crisis into an economic meltdown. It disrupted market operations by introducing large amounts of federal money to bring liquidity to the system, then used the ability of the federal government — not shared by individuals — to hold on to properties. The disruption of the market’s normal operations was designed to avoid a market outcome. By holding on to the assets, the federal government was able to create an artificial market in real estate, one in which supply was constrained by the government to manage the value of commercial real estate. It did not work perfectly — far from it. But it managed to avoid the most feared outcome, which was a depression.

There have been many other federal interventions in the markets, such as the bailout of Chrysler in the 1970s or the intervention into failed Third World bonds in the 1980s. Political interventions in the American (or global) marketplace are hardly novel. They are used to control the consequences of bad decisions in the marketplace. Though they introduce inefficiencies and frequently reward foolish decisions, they achieve a single end: limiting the economic consequences of these decisions on the economy as a whole. Good idea or not, these interventions are institutionalized in American economic life and culture. The ability of Americans to be shocked at the thought of bailouts is interesting, since they are not all that rare, as judged historically.

The RTC showed the ability of federal resources — using taxpayer dollars — to control financial processes. In the end, the S&L story was simply one of bad decisions resulting in a shortage of dollars. On top of a vast economy, the U.S. government can mobilize large amounts of dollars as needed. It therefore can redefine the market for money. It did so in 1989 during the S&L crisis, and there was a general acceptance it would do so again Sept. 29.

The RTC Model and the Road Ahead

As discussed above, the first group argues the current crisis is so large that it is beyond the federal government’s ability to redefine. More precisely, it would argue that the attempt at intervention would unleash other consequences — such as weakening dollars and inflation — meaning the cure would be worse than the disease. That may be the case this time, but it is difficult to see why the consequences of this bailout would be profoundly different from the RTC bailout — namely, a normal recession that would probably happen anyway.

The debate between the political leadership and those opposing its plan is more interesting. The fundamental difference between the RTC and the current bailout was institutional. Congress created a semi-independent agency operating under guidelines to administer the S&L bailout. The proposal that was defeated Sept. 29 would have given the secretary of the Treasury extraordinary personal powers to dispense the money. Some also argued that the return on the federal investment was unclear, whereas in the RTC case it was fairly clear. In the end, all of this turned on the question of urgency. The establishment group argued that time was running out and the financial crisis was about to morph into an economic crisis. Those voting against the proposal argued there was enough time to have a more defined solution.

There was obviously a more direct political dimension to all this. Elections are just more than a month a way, and the seat of every U.S. representative is in contest. The public is deeply distrustful of the establishment, and particularly of the idea that the people who caused the crisis might benefit from the bailout. The congressional opponents of the plan needed to demonstrate sensitivity to public opinion. Having done so, if they force a redefinition of the bailout plan, an additional 13 votes can likely be found to pass the measure.

But the key issue is this: Are the resources of the United States sufficient to redefine financial markets in such a way as to manage the outcome of this crisis, or has the crisis become so large that even the resources of a $14 trillion economy mobilized by the state can’t do the job? If the latter is true, then all other discussions are irrelevant. Events will take their course, and nothing can be done. But if that is not true, that means that politics defines the crisis, as it has other crisis. In that case, the federal government can marshal the resources needed to redefine the markets and the key decision-makers are not on Wall Street, but in Washington. Thus, when the chips are down, the state trumps the markets.

All of this may not be desirable, efficient or wise, but as an empirical fact, it is the way American society works and has worked for a long time. We are seeing a case study in it — including the possibility the state will refuse to act, creating an interesting and profound situation. This would allow the market alone to define the outcome of the crisis. This has not been allowed in extreme crises in 75 years, and we suspect this tradition of intervention will not be broken now. The federal government will act in due course, and an institutional resolution taking power from the Treasury and placing it in the equivalent of the RTC will emerge. The question is how much time remains before massive damage is done to the economy.
This report may be forwarded or republished on your website with attribution

To www.stratfor.com

© Copyright 2008 Stratfor. All rights reserved.

Obama did what?

McCain says that the bill wasn't passed because Obama and the Democrats put politics ahead of the economy. pot calling kettle black? yeah....

It was both Republicans and Democrats that didn't support the bill. it was a big group of 'i want this passed, but you vote for it. I have an election coming up.' why can't we have presidential candidates that are intelligent enough to know that they don't know everything and that there is a reason we have 'advisers.' you don't have to think Bush is smart about the economy, but you sure as S*** better realise that Ben Bernacke and Hank Paulson are a couple really smart SOB's when it comes to money and Economic theory.

so McCain (and Obama for that matter) stop throwing mud at each other and start looking for people smarter than you to fix this crap. here is a list of really good ideas.

Mitt Romney
Howard Marks
Bruce Karsh
James Dimon

or you could just listen to Hank and Ben.