Financial Mess

I'm just so frustrated with the financial mess our country is in.  I look to the future and wonder whether retirement will ever be an option for someone like me.  And I wonder about my business, how it will be affected and how I'll continue to provide for my family with such an unstable economy - one in which many people are losing confidence.  It's scary to think about. I've been doing my best to follow what's going on.  And I just can't believe that something like this can happen.  To my mind, several truths are emerging:

  1. George W. Bush's legacy, when we all look back on his presidency, will be the looting of America's wealth and redistributing it to the wealthy.  (To paraphrase Chris Rock, not the merely rich, but the wealthy.)
  2. Even the basic pillars of the rescue plans are flawed.  I'll get into this in a minute.
  3. Both Congress and the Bush administration were asleep at the switch.
  4. The impact on our lives, I believe, will be a lot more significant than your typical American believes it will be.  This isn't something where you can shrug your shoulders and say "What can you do?"

I'll circle back around with respect to the Bush legacy.  We'll get there.  Let's talk about the other three points first.

This economic situation wasn't sprung on us overnight.  Former Fed Chair Alan Greenspan warned us that Freddie Mac and Fannie Mae needed to be reeled in over four years ago.  Say what you want about Greenspan - he might be an evil bastard, but he's a smart evil bastard.  Ben Bernanke is an intellectual midget compared to this guy, and he ought to be taking his cues from Greenspan instead of ignoring them.  We had our warnings.  And we did nothing.

It shouldn't take a genius to understand that if government gets involved in private enterprise, bad things can happen.  Our government's stellar credit allowed the government-sponsored Freddie and Fannie to borrow at unbelievably low rates.  The spread between what they were able to borrow at and what they were able to do with the money was astronomical.  It could have never happened in the private sector.  The notion that this situation wouldn't be exploited, by Freddie and Fannie and the institutions they did business with, is absurd.

That these institutions are so large that their failure could mean the entire economy grinds to a halt is another situation we never should have been in.  It also doesn't take a genius to see that if the failure of a company like AIG would destroy the economy, then AIG has remarkable leverage.  They can take ludicrous risks, like insuring a ridiculous amount of bad debt - hey, the government won't allow us to go under because they'd be in as much trouble as we would be...

That's why all American taxpayers should feel as if they've been taken hostage.  Either bail out companies like AIG for their stupidity, or watch the economy flush itself down the toilet and be in the same boat.

Now, let's talk about the magnitude of the problem here.  $700 billion is the number President Bush would like to see stick in our heads.  Truth be told, the economic impact is much greater than that.

Bailing out Freddie and Fannie added the potential of the $5 trillion those two collectively underwrote in mortgages to our national debt obligations.  As of June or so, that national debt was already at $9.5 trillion.  Folks, the government can't borrow like this without it affecting the lives of Americans significantly.  There's been talk of T-bills losing their AAA rating because of a lack of confidence that our government can meet its debt obligations.  That means that when the government needs to borrow in order to cover the deficit, it will be more expensive to do so.

What does that mean?  It means inflation, so it's going to cost more to afford our standard of living.  In the event that your credit is good enough to secure a loan for a home or a car, you'll pay a higher interest rate than you might have in the past.  Everything is going to get more expensive.

Especially fuel.  When it comes to the oil market, values are expressed in American dollars because of our currency's long-standing reputation for being stable.  (There are other reasons I'd rather not get into right now.)  When dollars aren't worth as much anymore, the price of fuel jumps.  Earlier this week, we saw a one-day jump in the price of oil that was unprecedented - $25 in a single day.  Oil went from around $90 a barrel to $115.  (This sent me scrambling to the auto parts store for a locking gas cap and to the pump for a fillup before prices went up.  Granted, I didn't see a huge increase in gas prices right away, but considering the lame excuses fuel companies have used to justify huge price increases, a jump in crude of $25 in a single day seemed like a legit excuse for boosting prices up into the $5/gallon range.  So I acted on it.)

Back to the economic impact for a second...  Before we even get to bailing out AIG and other financial institutions, we've already added a huge amount to our already-huge national debt tab.  Now we're going to add $700 billion to that amount in direct layouts of money we don't have to prop up financial institutions that ought to go out of business.  And here are the preconditions, as specified by President Bush in his address last night, in his words:

  1. "It would remove the risk posed by the troubled assets, including mortgage-backed securities, now clogging the financial system. This would free banks to resume the flow of credit to American families and businesses."
  2. "Any rescue plan should also be designed to ensure that taxpayers are protected. It should welcome the participation of financial institutions, large and small. It should make certain that failed executives do not receive a windfall from your tax dollars."
  3. "It should establish a bipartisan board to oversee the plan's implementation, and it should be enacted as soon as possible."

With regard to point #1, there is no such thing as the removal of risk in situations like this.  Mortgage-backed securities contain some element of bad debt, which will need to be paid when the bill comes due.  You can mitigate the risk somewhat by giving financial institutions time to figure out what they think these securities are really worth, but you can't remove the risk.

Point #2 is ridiculous.  Taxpayers can't be protected.  Already, they're going to bear the burden of this bad debt.  They're going to continue to be screwed as mortgage-backed securities are valued and purchased over time at pennies on the dollar.  The financial institutions have been running off with the money for the past several years during the housing boom.  They'll continue to do so when they eventually invest in securities that are likely to be highly undervalued.  The notion of protecting the taxpayer is ludicrous.

As for executive compensation, that's just something that will make us feel better without having any real impact.  After all, when you're talking about tens of trillions of dollars, what's $40 million in deferred compensation in comparison to that?  It's less than a drop in the bucket.

Point #3 is silly, as well.  The Bush Administration and Congress both share the responsibility (to varying degrees) for this mess we're in.  Bipartisan oversight of the plan just means it will take longer to implement while the economy continues to hemmorhage.

This brings me back to Bush's legacy.  Already, he's known for starting wars over oil.  He's known for turning a budget surplus under the Clinton administration into the largest deficit of all time, and this current crisis just adds to it.  As our cost of living increases, and the profits of the wholesale shift in value across the economy continues to benefit the ultra-rich, we're increasing the size of the widening chasm between the haves and the have-nots.

What does this mean for you?  Continued debt slavery, the notion that no matter how hard you work, you won't be able to get out from under the debt you've accumulated just trying to make a living.  Saving for retirement is just another joke - By the time you get around to using the money you're putting aside, it won't be worth as much as it should be because of inflation and the devaluing of the dollar.

Looks bleak, doesn't it?