So here's a fun game. Below is a big picture of what I understand to be the basic setup of our current situation. I'm not an economist, so if you are and know better, fill in the gaps or correct the mistakes. However, I think this is pretty decent. I've added in a bunch of lightening bolts that represent the "moral hazards" of our current system. Guess what, no silver bullets. But at the same time, they should not be the same size, some of them are much more important than others. Care to guess which ones match up with which bullets on the list?
Lightning Bolts:
*The formation of highly complicated mortgage-based debt products called tranches.
*The lack of diversity, integrity and leadership between the GOP and Democrats.
*The Treasury Secretary and Chairman of the Federal Reserve are appointed by the president and are smarter than him.
*The risk-free rate of return is determined by a centralized banking authority, not a free market.
*The Federal Reserve has a history of enabling the Financial Industry with bail outs.
*Congress does not have any authority or auditing power over the Fed.
*Our money supply is not based on gold or hard assets and is not audited by the people.
*Global insurance companies offered insurance contracts on bad debt they didn't take the time to understand.
*Congress has regulated and insured Fannie May and Freddie Mac in an effort to push home ownership policy, espcially for minorities and low-income families, regardless of the economics of it.
These did not all happen in a specific order. Clearly, the Fed has been around so long, most people think you're crazy if you seriously call into question the effectiveness of its existence. The Gold Standard is for quacks (right?), although it had been good enough for our country for the vast majority of our existence until 1971. We must have gotten a lot smarter in 1971 by magic.
Furthermore, causes and effects are getting reversed. Massive mortgage foreclosures by "homeowners" were not the cause of this mess but the effect of it. If you watched the previously posted video series by Peter Schiff, he illustrates how for some time it was easier for consumers to buy a house than to rent an apartment. A cautious landlord usually demands first and last month's rent, a damage deposit, proof of employment, references, etc, whereas greedy mortage initiators just demanded signatures. Afterall, the landlord has to "live with" his tennants, but the mortgage initiators were selling these debts for fees.
I don't claim to have all the causes down cold. I don't know. You can see how complicated a simple version is getting. Yet this is the economy our centralized bank is claiming they can more effectively manage than a more spread out free market could.This bailout comes along and I'm still shocked how many people just go along with it. Maybe it makes sense, after all, the only alternative we're given is that there is no way we could contain this disaster, either in the U.S. or globally (it is now our stated duty to manage the global economy, aparrently).
And with all this mess... with all these questions and uncertainties and huge bills sitting there... no one is standing up to question the Federal Reserve's very existence. Unelected and unregulated. And don't be fooled into thinking we need more regulation. Regulation is one of the main reasons we're here and one of the main reasons the problem got big instead of corrected itself in a distributed way.
For those who like computing, imagine if the internet were run on one central computer, and that computer were run by a small handful of guys who went to yale and harvard whom we could never replace. Would we trust any aspect of that setup?
Finally, an interview that you should watch.
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3 comments:
Great take. Both parts. We haven't had a multi-part post this good since Law & Order parts 3 and 4! Seriously though, both posts were excellent, maybe your best yet.
The $700 billion is supposed to be a worst case scenario. What it really means is that still - STILL, EVEN AS COMPANY AFTER COMPANY ADMIT THEY'RE ON THE BRINK OF COLLAPSE - no one really knows how bad it is. These companies still can't say how much they're in the red, because they can't read their own books, because all of this crap has been borrowed and packaged and sold and packaged and borrowed again. The suits got together for ONE day, felt they had to keep the dam from breaking, and decided/hoped $700 billion ought to do it. By the time it's all over, it's been estimated all financial aid will total a trillion dollars. A trillion dollars.
Taxes will be raised, and money will be printed. One more than the other depending on who's elected, but when you have to come up a trillion dollars, you'll have to employ both methods to some extent. Get your money out of the market and into gold.
This is a somewhat old (4 months) but humorous explanation of the sub-prime mess, if you need a little laugh.
I went to our church picnic/carnival yesterday. It was a weekend-long picnic, complete with bouncy-bounces, carnival games, a band, a petting zoo, even a makeshift bar with benches for the dads to watch the Ryder Cup. It was packed. This is consistent with what I see all over the place - it doesn't really seem like the consumer has changed his/her habits yet. I don't get it. Politicians are criticized for suggesting that Americans might have to adjust their lifestyles. I've ranted long enough, but I could go on...
I'm going to cash out and move to Costa Rica. Kids are young, they can still learn Spanish.
Roller, I remember that cartoon. Funny.
I think I"ll write a third part tonight on the coercive language everyone is using for this.
I wonder what Noah felt like building his arc, knowing something bad was on the horizon, but not knowing where/when the horizon was?
If we don't do the bailout (I know we will), then people on wall street stand to lose their shorts. And they should. But that is an isolated part of the economy, for example, it wouldn't affect your neighborhood church's ability to have a picnic or your job. It might affect some people's wealth.
But the bailout affects everyone, even if they don't have any money in the market. Your paychecks, your wealth and your savings all get smaller at the same time.
The bailout spreads these toxic assets costs to all of us, whereas no bailout limits the damage mostly to wall street and financial firms.
The fact that foreign countries are being helped by the bailout sucks. That's why Paulson did AIG without any approval, which has to be strictly speaking completely illegal, but AIG is an international firm, and congress might have blocked it from happening, etc.
Also, i have nothing against "yale and harvard", specifically, just against the institutionalization of our political leadership.
I also am not in that camp that makes fun of Bush for not being the sharpest tack in the box. But I think he is too easily impressed and led around by these other guys who seem truly smart. Whether or not that's a function of intelligence or some other lack of judgment, I dunno.
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