I guess by now our leaders have done a decent job explaining to us why the bailout package is a "necessary evil". It's not just a blank check to Wall Street at the expense of Main Street. For better or worse, we're like symbiotic organisms; our fates are tied and Wall Street credit is the lifeblood that sustains Main Street activity. Though many times (including now), it seems that Wall Street calls the shots and we are just along for the ride. They tell us it's all about credit availability. Small businesses and local governments need loans to buy raw materials or even pay their workers, not to mention the private citizens that seek car/college/home loans. But is credit the answer for everything, and does it have to play such a crucial role in modern economies? Must we do "whatever it takes" to insure a free flow of credit forever, or face worldwide panic and recession like we see now?
Despite the uproar from some GOP leaders and talk radio of all stripes, America is not "dead set" against this bill, and I bet the House will approve version 2 today (oh, I just now see on BBC that they did), especially with time running out in this Congressional session. All 535 of their asses are up for re-election on November 4 (but only a few incumbents are ever really challenged), and voters/investors are running out of patience for political posturing as the Dow sinks to 10,000. I guess the new bill is 90% similar to the previous version, except for the FDIC insurance limit is increased from $100k to $250k (that's really great news, since most of us have like $240k in our savings accounts and were getting nervous), and about $100B in new tax breaks were included to persuade the holdout Republicans, with no mention how debt-laden Washington will recover that revenue of course. Clearly Main Street, Wall Street, and Washington have problems with borrowing responsibly.
Some of the included tax breaks are pure pork and quite laughable: http://www.taxpayer.net/resources.php?category=&type=Project&proj_id=1429&action=Headlines%20By%20TCS.
Many gripes about the bailout are justified and it won't be a panacea, but unfortunately there's not much room left for further debate. If asked, "Would you risk half a trillion in tax dollars to help Wall Street recover from its mistakes?", most people would instinctively answer "no" without the benefit of additional context. So one can understand why our initial reaction to Bush's plan was skeptical at best. But recent Pew Research poll suggests America is now split roughly 50-50 over the plan, though few Americans are well versed in macroeconomics and fiscal policy to really understand the repercussions either way. If geniuses like Bernanke and Greenspan are grasping at straws, that doesn't bode well for the rest of us. People might not want to throw their tax billions at Wall Street, but they also don't want to see their investments evaporate and commerce dry up around them (and in many cases it already has). When push comes to shove, we'll go to bed with the devil to save ourselves.
That's what really frustrates me about this crisis - it demonstrates how easily Wall Street can manipulate us like a puppeteer. Big firms and private citizens alike made big bucks during the loose credit housing boom, but some got in too deep and hung around too long until they got burned. And all along, the Fed tried to prolong the binge instead of trying to cool off an obviously oversupplied and overvalued housing market. Many huge banks have seen their holdings lose over 50% of their value since 2007, causing financial panic or ruin to millions. So at every mention of a government rescue (despite many economists' concerns), the Dow surged, and when the House balked on the first bailout proposal, the tempermental Dow responded with a record point drop. Was that due to millions of Average Joes going on E*Trade in unison to cut their losses and sell their 50 shares of blue chips, or rather the high-rollers and big fund managers dumping their vast numbers of shares in favor of safer commodities like gold? It may not be deliberately punitive, but it's still blackmail.
Banks might be drowning in debt, scared to invest and lend to each other and us, but they are still sitting on billions of good, liquid assets. They could try to reverse the slide if they wanted, and some have, like the European Central Bank injecting billions into the credit market and Warren Buffet looking for some bargains. But instead they tighten up even further, because why should they risk their money when Washington might do it for them? It's like the "welfare mom with 6 kids" that Newt Gingrich types loved to villify. Why should she make an effort to get a job when Uncle Sam will cut her a check every month? Wall Street said, "OK Washington, if you don't give us the money, we're going to execute hostages until you do." Economic terrorism, right? Ordinary citizens saw the unlucky 777 point drop, and feared even more for their 401(k)'s and other investments. Maybe some who were previously opposed to the bailout changed their minds and started to lobby the bickering Congress to act. Anything to protect our money, right? Maybe I'm just full of crap and don't understand how the market works, but it sure seems like a scam to a simpleton like me.
The selective rescues or facilitated purchasing of some troubled GSEs and financial institutions by our government was huge economic news already. Maybe some people were already musing about a government repository for toxic securities as a potential next step, but the Bush-Paulson plan must have still taken America by surprise, as well as their demand for immediate implementation (hence the huge Dow swings in the last 2 weeks). I guess Congress and citizens had a right to be skeptical of a back-of-the-envelope plan crafted by Treasury, that gives Treasury god-like powers, and promoted by an administration with an unprecedented track record of augmenting executive powers (sometimes in defiance of the Constitution and common sense).
I am tired of hearing Harry Reid-type blowhards stressing the need to work together and pass this bill now, yet blame colleagues like John McCain for "interference", and proclaim that all 100 senators could have written a better bill. Then why didn't they? Don't give us a turd decorated with fancy wrapping paper and a $700B price tag, then expect us to congratulate you. I hate the fact that we have left the disease unchecked for so long that our best course of action left is to cut off our arm before the infection spreads. We've cornered ourselves. Many people in Washington and Wall Street seem very eager to get us to do a bad thing quickly, because the alternative is worse. I suppose that constitutes leadership these days. At least Lyndon Johnson had the dignity to not seek re-election after failing to deliver victory in Vietnam. If the Fed, Treasury, SEC, and Congress had an ounce of self-respect left, half of them should have resigned by now in shame. After Bush's speech to sell the plan to America, PBS had a couple chaps from the House Financial Services Committee on for analysis. At times they were actually smiling and joking about the situation to each other! Millions of Americans are in trouble and getting ulcers from worry, and they, who are in the eye of this storm and maybe contributed to the crisis, are hamming it up. Talk about out of touch; this is why revolutions happen.
A lot of people blame this credit crisis/housing bust on unbridaled personal and corporate greed and irresponsibility coupled with poor government oversight. While that may be partially true, greed and poor oversight have been and will always be a part of human civilization. There's no way around it unless we all become monks and peasants. But maybe the trick is to reduce the opportunities for reckless, greedy bastards to be reckless and greedy, and reduce the policing duties of the government to give them less chances to drop the ball. Yes, less regulation is fine as long as the credit markets and other financial systems are organized in ways where excess and fraud are not just illegal, but impossible. Maybe I'm just dreaming, but what are we paying all those PhD's for? Can commerce be free, but also with failsafe mechanisms? Can we create more ideal markets where human nature is less able to make a negative impact, without sacrificing productivity and efficiency too much? We all operate out of self-interest, and our behavior is affected by external carrots and sticks. Obviously the sticks weren't big enough to prevent even smart people from taking stupid risks in pursuit of very juicy carrots. But incentives and punishments only go so far, especially to powerful entities that think they can dodge accountability/consequences, and often they're right.
Maybe a good first step is reducing our dependence on credit. I know borrowing is necessary for some up-front costs of large investments like businesses and homes. But why can we not spend what we don't have? And do we have to exploit every last dime by loaning it out or investing in others? Can we reinvent economics with less emphasis on credit, because clearly the status quo has some pitfalls. I'm not saying we should bury our cash in the backyard, but there has to be some restraint and moderation. Otherwise, we'll keep getting market panics and crises like this one, except maybe worse and worse as financial institutions become "too big and interconnected to fail". It has gotten so complicated that we don't even know where the money in our savings account really goes, nor the true value of our investments. We are so dependent on large, predatory credit entities - it's too dangerous and unfair. They are the "landlords" and we are the "tennants". They dictate terms to us and only exist to take a piece of our labor and creativity. Microfinance has helped millions out of poverty in the Third World, even if it has its share of criticisms, such as very high interest rates to justify the investment risk. Maybe instead of relying on corporate America to keep our local economies going (where their interests may be quite different than ours), we can form more credit unions and municipal cooperatives. Share and spread the accountability and prosperity, with the goal being collective stability and security, not individual profit. People pay into and withdraw from a general fund based on their economic situations and financial preferences. Members vote on who gets loans and the conditions of those loans in a transparent, democratic fashion. But maybe that's just crazy socialist talk?
In closing, I find myself thinking about my few months as a student in Europe in 2000 (when the dollar was kicking the Euro's butt, so it was great timing). Obviously Paris is a modern metropolis with its share of problems too, but people from many walks of life were not obsessed with money, advancement, and acquisition, as we are. Of course there was plenty of greed and evil, though life was so different. It was a fast-paced, turbulent city, but somehow life seemed saner and more people-centric also. Maybe nostalgia is a rose-colored lens, but the differences were too large to be imagined. Every little neighborhood had several bakeries, convenience stores, and boutiques. Sometimes they would have no customers all day, yet they were still in business, paying the bills and providing for their familes. In America, it seems that all but the best small businesses are hanging on by a thread, while the rest of us whores have to attach ourselves to corporations for career development and financial survival. It is hard to get fired, and even harder to work more than 50 hours a week, yet unemployment was at 10% (though no one was starving to death). Companies weren't merging or going under left and right. Workers left their work at the office and could actually relax at home, often having two-hour long dinners together with the whole family. Maybe they didn't have a big home with a white picket fence, big screen, and station wagon, but they seemed quite happy and comfortable.
No one worried about saving up for tuition, child care, or retirement, because the state assumes most of those burdens. In America, we get nickel and dimed into poverty with "maintenance fees" on our retirement investments and college loan scams. Same goes for medical insurance, obviously, as France's system perennially ranks in the top 5, while ours is about #30-40 near Estonia. Middle-class people went on month-long vacations and could afford it. My uncle was on unemployment insurance for years and no one accused him of being a deadbeat. Taxes run about 50%, but many consider it a patriotic duty in order to maintain their society and quality of life. Maybe that welfare state lifestyle is going the way of the dinosaurs, with an aging populace and rising costs of basic goods and services. There is plenty of evidence for that, with conservatives like Sarkozy coming to power. However, other socialist nations have rejected their Bush-allied conservative leaders in favor of leftists, like Australia, Spain, and Japan. Maybe there is a chance. There has to be an alternative to this insane, and I mean literally insane, American way of life and commerce. Oh yeah, and mainland Europe isn't saddled with war expenses and the accompanying political blowback either.
Some interesting links:
http://www.iht.com/articles/2008/10/01/opinion/edbuchanan.php (using computational models to better understand/predict economic activity)
http://news.bbc.co.uk/2/hi/business/7646863.stm (have banks share more information and maintain accountability for their lending)
http://www.newsweek.com/id/161199 (the menace of the booming 'credit default swap' market and how it could be regulated)
http://baltimorechronicle.com/2008/092908Lendman.shtml (a big economics rant that I haven't even finished reading yet)
This section in italics is pretty lame, so please skip it over unless you want to ridicule my ignorance:
[The market and the past decisions of financiers have left us little alternative. We need to restore confidence and flowing credit in the markets, or the whole machine grinds to a halt. Credit is the "lubricant" of our economy, but does it have to be so? Liberal capitalism is roughly defined as private ownership and exchange of products/services/investments/etc., with prices determined by a free market. Credit is not inherently essential to market economies, but of course in our current industrialized, globalized economy, it is. We already know the dangers of relying on or abusing available credit. Our government is in record debt to foreigners, which contributes to our weak dollar and makes some struggling companies ripe for the taking by offshore competitors. Hyper-consumers with little self control keep taking out new credit cards to cover spending beyond their means, as well as their previous accumulating debt. Yet some of those people were offered huge mortgages without having to provide evidence that they were able to afford them. And sadly, many vendors almost rely on and tailor their business models in expectation of customers over-spending. We know all this already.
But why does our economy need to revolve around credit? I know borrowing and lending are as old as the pyramids, but it's probably no coincidence that usury is a sin in most religions. Micro-finance aside (a relatively recent invention), very few of us possess the vast capital and/or means of production necessary to provide substantial credit to would-be borrowers. So instead, investments and assets are pooled into vast multinational corporate financial entities that become umbrella lending hubs. Millions of people entrust their savings to them, hoping it will grow, and millions others depend on loans from them for various large purchases. Heck, even non-finance related companies make a good portion of their revenues through lending (GE and insurance companies like State Farm to name a few). GE makes jet engines and toasters - why venture into financial services? I think it's because the money is easier. They have all this surplus cash lying around - why not lend it out for a higher return, even if it gets them in hot water at times? It's hard to provide a tangible, desirable product or service to the marketplace, such as a new software application, home appliance, medical therapy, or even a cup of coffee. You have huge development and production costs, may need to file for patents (which could take years), conduct extensive safety and reliability testing, study consumer tastes, and comply with government regulations. And if things go wrong, you had better have deep pockets and some good lawyers/lobbyists. With lending, all you need are a few PCs and MBAs. I know I'm being simplistic, but you can't deny that the infrastructure needs of a company like Citi are much less than ExxonMobil or Toyota.
I know economics is all about maximizing efficiency, so in a sense it rewards "easy money". I guess that is why we may never totally expunge financial "gimmicks" from our society, and it seems that regulators are always playing catch-up as new scams emerge just as the old ones are finally contained. I guess this is the price we pay for freedom and democratic capitalism. ExxonMobil has to search for new oil fields, build wells, pay royalties, and find ways to get the product to buyers in a safe, legal, and cost-effective manner. Investment banks just move numbers on a board, albeit through very ballsy, high-stakes, and heavily-researched transactions. Easy money? There must be a reason why the median salary at places like Goldman Sachs is higher than even highly respected, productive companies like Google or Amazon. A neurosurgeon or Silicon Valley engineer might make good money, but it pales in comparison to the next innovative investment vehicle or shady tax shelter conceived by Wall Street. Maybe that's why the financial sector is the most powerful in our economy, even though it doesn't really do anything tangible. Everyone wants more money, and to grow the money they have. Surely there is a large demand for their services, which is why they exist, but I don't know how we can justify the power they wield. No other industry can bring global commerce to a halt and billions of people to their knees with a simple error.]
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