Friday, October 3, 2008
The $800 Billion Dollar Load of Bullshit
For the record, I'm not an economist. I've taken a macroeconomics class and an introduction to finance class, and of course had Economics in High School, so I know a little, but I'm no Warren Buffet. But I feel that something has to be posted about this, and as (currently) the sole contributor to this blog, I guess its up to me.
Note: Feel free to correct me in the comments section if I am incorrect on my analysis.
First things first: This whole mess could have been avoided. The Fed screwed up royally letting the credit market go hogwild and the housing bubble inflate to preposterous levels. The banks screwed up by passing bad loans -- going far beyond the reasonable prodding of congress to enact "fair housing" policies. Neocons will wail and say that the democrats are to blame because of this fair housing legislation.
A typical target of blame is Rep. Barney Frank. Barney Frank is a good man. The intentions of these legislative measures were to lower some standards of mortgage lending that seemed to unfairly single out minorities from home-ownership. Of course, we all know where good intentions lead... But the relaxations on credit that the fair-housing movement gave did not create the crisis we face. It may have been the first step, but it didn't end there.
Then Bush came into office, at the start of a recession because the tech-bubble was collapsing. Desperate to keep the economy going strong, the Fed lowered interest rates. Then Phill Gramm pushed forward further deregulation of mortgage lending. Then we started the war in Iraq, and piled up massive deficit spending to wage it. Again, interest rates were lowered to keep the economy growing. So then there was a lot of easy credit to be had, and we were very willing to gobble it up. HSBC wanted to give credit cards to everybody, Capitol One's actual mission statement is "to get every single American to have a Capitol One credit card." Chase was no better.
So everybody had tons of credit, and with the relaxed mortgage market, everybody could do weird things like borrow against their equity or reinvest it into weird new securities and such. Meanwhile the Fed kept pumping new money into the system to continue paying for the war.
Well, as you can imagine, such a state of affairs is unsustainable. When things started to go south, however, everybody ignored it. Not EVERYBODY, but the people in power who could regulate us into a soft landing did nothing. Bernacke fiddled with the interests rates, lowering them a little bit, raising them a little bit - to stave off the inevitable collapse of the housing market.
So the banks tried to figure out how to deal with these bad loans they never should have extended in the first place. They repackaged them, and sold them off to other banks. I don't quite understand how you can get people to buy debts that will most likely never get paid off, but somehow they did it. Of course, it didn't work. Putting a bow on a pile of shit doesn't make it a christmas present.
Then, the same thing happened in the credit market. People don't tend to read the fine print. Its just a fact. You might think you're smarter than some dumbass like me who got an HSBC card my first year in college, and you might be. But the predatory lending was real, and a lot of people who are not moronic hicks got snagged by it. Interest rates suddenly skyrocketed to like 18-24%! Millions of Americans could barely pay the minimum balance due on their credit card bills, let alone try to pay down the interest.
Then the neocons decided it would be a good idea to make it harder for people to bankrupt and default on their debts. It was a double-whammy. Of course, that didn't change the fact that millions were hopelessly in debt they couldn't pay, and that debt had to be absorbed by the banks. So then credit tightened. It became harder for banks to be able to borrow money from other banks and from the Fed. And faced with all these ridiculous "mortgage backed securities," they couldn't hold up any more.
Countrywide was the first to go. Then Bear Sterns. It started a chain reaction. So far this year 12 banks have outright failed. Washington Mutual had to get bought out. For god's sake AIG needed a bailout! Morgon-Stanley got bought out! These are some of the biggest companies in the WORLD, let alone the USA!
So yes, we're in a terrible mess, and we need to do something about it. So here comes Secretary Paulson (diehard neocon) to the rescue! The government will buy up all these bad loans! But that wasn't it, he wanted the Treasury department to be free of oversight from any and all regulatory organizations, including the justice department and congress. He thought he was gonna get it too, with all his blustering and scare tactics.
But it didn't work. The democrats came up with a set of guidelines, and the republicans agreed with them -- and oversight was one of them. The House crafted a bill centered around these principles, and it failed to pass -- the cats weren't so easily herded...
So the Senate took the SAME BILL (which is improper at best and outright unconstitutional at worst), and loaded it up with $100 billion extra in pork to make the republicans happy. They passed it cheerfully --- Senators McCain and Obama both voted yes.
And now the House, even though most representatives reported a constituancy call-in of about 100-1 against this bill, passed it through. Surely Bush will sign it into law eagerly. And this bill is 451 pages long! Its one of the biggest bills ever passed by the legislative branch! Nobody knows all the little surprises that could be in it.
Meanwhile the Fed went ahead on its own and pumped about $650 bllion new money into the financial systems, while still hammering away at the nessecity of the $700-billion, now $800-billion bailout bill. That's a total of $1.45 TRILLION dollars in magical new fiat money.
Look, I'm not a Ron Paulite. I don't own a "Gold IS Money!" t-shirt. I don't think the government is trying to destroy the yankee dollar to replace it with the mythical Amero...
But do you honestly believe that over a trillion dollars in new currency injected into the economy in one week is not going to have a serious negative impact on the value of the dollar? A lot of armchair economists on the web say the bailout is a dire necessity, and that the inflation that will come with it is better than the alternative -- which is, they say, a total credit freeze and melt down of the banking system.
I've never been convinced of this -- most real economists seem to be suggesting that the government should be engaging in a careful purchase of these bad securities, along with major new regulation on the financial industries.
But, oh well, its over and done with now. We're buying everything up now and sorting it out later, with no major sanctions on the banks and financial institutions that engaged in this predatory lending and lack of risk-assessment. And while we're at it, we're giving tax breaks to rum companies, toy manufacturers; basically a legislative orgy of special interest kickbacks.
So for you TL;DR folks: Our government fucked up the free market through interventions, and now it is attempting to fix the free market with interventions.
Oh, and our kids will foot the bill. Even though most of America didn't want this damn thing anyway. Hmm, I remember a saying I learned as a child when I was in social studies... how did it go? Oh yes,
NO TAXATION WITHOUT REPRESENTATION!!!