Faith Based Economics, by John Ostrander
I don’t know much about economics. It’s all voodoo to me. Unfortunately, the same appears to be true of the corporate bosses of Bear Stearns, the “hallowed” investment bank that was sold over the weekend for pennies on the dollar to JPMorgan Chase. That was made possible by a thirty billion (“B” billion, not “M” million) dollar hand-out from the United States Federal Reserve Bank to cover Bear Stearns assets that would be “difficult” to sell off, meaning the U.S taxpayer will be stuck holding that bag.
“How could this happen?!” Actually, how could it not? Bear Stearns, along with a lot of other investment banks, were using “mortgage based securities.” Essentially, as I understand it, they lent the money to the guys lending the money to the people who were buying homes. Mortgages. They issued and traded bonds that used these mortgages to secure the money for the people who bought the securities. So long as those mortgages were prudent, it was not necessarily a bad idea.
However, the guys making the mortgages invented a new category – sub-prime mortgages. Many of those mortgages were given to people who didn’t have the funds really to make the payments and weren’t going to have them. That’s okay. Just re-finance! And the “worth” of the houses being bought kept going up and up. Anyone with half a brain knew that the housing market was WAAAAAY over-priced. It was crazy.
The reason the houses and land were worth that much was because everyone agreed they were. They believed it as deeply as any Born Again Christian grabs hold of the Bible. The loaves and the fishes with which Jesus fed the multitude didn’t multiply as much or as fast as some of the housing prices. It had to be true. Shout down the un-believers and naysayers. Except, of course, it all wasn’t true.
The whole thing was a bubble, a pyramid scheme. It had to bust and it did. A little thing called reality stepped in. Doubt came with it. The housing market of cards collapsed. People kept saying that it had to collapse or, at the very least, cool off a lot. As it did, what did Bear Stearns do in response?
From what I read, they put more money into the mortgage securities racket. Sounds to me like some people who get behind when they gamble. They’ll do the same thing – keep in the game and lose even more money in a desperate attempt to get even. As I understand it, that trick rarely works.
What the Fed has done in the Bear Stearns case is unprecedented. The Fed is supposed to involve itself in saving banks, savings and loans, that sort of thing. Every investment portfolio warns that you can lose every dollar that you put in because such funds are not guaranteed by the Federal Reserve. Except now the Fed is doing a bail-out of an investment bank. Making good on losses they weren’t insuring.
It may not be the last one bail out, either. As I write this, there are reports skittering around Wall Street thatother investment banks may be in trouble and, of course, what one gets, they’re all going to want.
I suppose I’m not really bitching about it. From what I read, not doing this would have had far more harsh repercussions on the economy as a whole. If Bear Stearns just declared bankruptcy, it would have caused a panic on Wall Street because their investments are tied into so many other banks and stock brokerages. The only thing I know about Wall Street is that it goes into mood swings. Maybe it needs Valium or Paxil or something. Wall Streets’ ups and downs sometimes seem to have no connection to the real world. It’s as if everything is fine so long as they believe everything is fine. Like I said, faith based economics.
What does bug me is some of the bullshit surrounding all this. I remember hearing or reading when the housing crisis first developed that, according to some, the housing crisis wouldn’t affect the rest of the economy because, after all, it was just one sector and not even the most important sector. Well, that was wrong.
I also keep hearing an undercurrent that the real fault are all those who got the sub-prime mortgages and now can’t afford them and are getting foreclosed. They shouldn’t have asked for money if they didn’t know how they were going to repay it.
Really? How about those who made the loans? They didn’t know or they didn’t care if those people to whom they were pushing the mortgages could make the payments; if the lender had to foreclose, they could just sell it to the next sucker for even more money. In the meantime, they make all those lovely fees et al.
I heard a hard-nosed conservative on radio saying they shouldn’t be bailing out those who are trapped in ballooning mortgages that they can’t pay because it was morally wrong. Bailing out investment bankers, however – that’s a different set of morals, I bet.
In the past few days, as the Bear Stearns story broke, I heard another commentator express concern for the people who worked at the company and for its stockholders. It was so sad for them. Really? I’m betting they all made lots of money when times were fat. Did the stockholders question how the company was being run? Probably not – so long as the rate of return on their dividends was good.
As I watched the opening segments of HBO’s John Adams miniseries on Sunday, I was struck by the segment on the working of the Declaration of Independence how particular was the wording for a key section:”We hold these truths to be self-evident, that all men were created equal. . .” Not any more. The stockholders of a failed investment bank are more important than those people holding mortgages that they find they can no longer pay. The failed investment bank is more worthy of a bail out than ordinary citizens trying to hang on to their homes. “All men were created equal. . .” Was it ever really a principle or just an aspiration? Something that we say, that we claim to believe, but don’t really want put into action.
Can we all agree on a few things? The “A free market is the solution to everything” mantra is nonsense. This Administration has spent the last seven years reducing regulation. They’ve been religious about it. A Free Market patently will not regulate itself. There are no long-term goals; only short term ones and they are tied to greed. The money people aren’t thinking beyond the current quarterly report.
Can we all agree that the creed of Gordon Gecko – that “Greed is good” – is bullshit? Greed is greed. It knows no loyalty, is tied to no one nationality, and cares about nothing but itself. Crystal meth is not as addictive, and maybe not as destructive, as greed. It doesn’t care about what’s fair. It’s share is whatever it can grab and more.
Nor is it simply the business leaders who are crippling us. The Bush Administration has shooting us in the back of our economic heads while at the same time shooting themselves in the foot. Economist Bernard Wasow summarized pretty well here: “The tax cuts of 2001 and 2003, combined with the enormous costs of the war – costs that have no end in sight – have forced the U.S. Treasury Department to borrow hundreds of billions of dollars every year to cover the budget deficit. This borrowing has made us highly dependent on foreign lenders, highly vulnerable to a fall in confidence in the U.S. economy.”
As the value of the dollar shrinks, the cost of the money we need to borrow as a government just to stay even gets higher. With the volatility in our stock market, foreign investors are pulling their investments outof this country. The ability to get the money we need to stay afloat may be in question.
The Administration’s solution? Give everyone $600 “mad money” to go splurge with. President Bush can hardly bring himself to say the word “recession”. How much leadership will we get out of him at a time when most financial commentators are saying this is the worst economic crisis since the Depression?
Am I advocating massive governmental regulation? No – I understand there has to be a certain freedom to grow. However, I also think that a certain amount of oversight is necessary and should be one of the government’s functions. “The government that governs best is the one that governs least,” is an interesting philosophy but should not be treated as dogma – as an article of faith. A little healthy skepticism in the free market is warranted and healthy. I do not trust the Lords of Wall Street to do what is best or even always what is in their own long term best interests – not when there are short-term gains to be made.
Am I scared? Hell yes! I live real close to the edge financially. The ice is always thin underneath me and I continually hear it cracking. I don’t have any money in the market; like lots of my fellow Americans, I haven’t had the spare money to invest. It all goes into surviving from one month to the next. I don’t really care what people do with their own portfolios but when people play dice with the economy and start losing, I’m going to gripe. I don’t need someone else’s gambling addiction (which is what the Market boils down to) to screw up my life. I can do that on my own, thank you very much.
“This isn’t a time for finger pointing.” Sure it is. Let’s find out who is responsible and then hold them responsible. Let’s make sure that those Financial geniuses, the CEOs and Lords of Wall Street responsible for this mess don’t get to bail out of it with golden parachutes intact. A guy with no money robs a bank, they’ll do time. Let’s make sure that the guy who runs the bank who robs the country also does time. All men are created equal, right?
Otherwise, let’s just trade in the eagle as symbol of our country and replace it with Scrooge McDuck, rolling around in the coins in his vault.
John Ostrander writes GrimJack: The Manx Cat, new installments of which appear every week here on ComicMix, and much of Munden’s Bar, new installments of which will reappear anon here on ComicMix. Both for free. His new Suicide Squad mini-series is out there from DC Comics, and his StarWars: Legacy is out there from Dark Horse, both at finer comics shops across the galaxy.
Instead of recession we have "downward trends" because no one wants to admit we're close to a recession. The word "recession" was coined in the 70's when no one wanted to admit we were dancing on the edge of another depression. And the word "depression" was coined when no one wanted to use the word "collapse". 30 years from now we'll be afraid of a "fiscal dent".The thing that screws up the market are the people looking to Get Rich Quick. Speculators and Day-traders who buy and sell like mad, grabbing things in a attempt to start a run, like that. The comparisons to the collectibles industry are staggering. It was a vastly over-valued stock market that caused the Depression in the first place. The Stock Market was a hot trend back then; people were writing pop songs about it. And somebody looked around one day and said "Hey, this stock can't possibly be this valuable, and people panicked. It's that herd mentality that causes such violent changes in the market. I remember back when marvel went public-Bill Mantlo left the company, a press release was written, and Marvel stock took a hit. Why? Because people who invested in Marvel without knowing anything about it read that one of their editors (which they equated to a high-level executive) left, which is often a sign of a company in trouble. The people that "win" in the stock market put their money in a major company with a long tradition, and leave it there. Slow and steady, don't you know. It was either Benjamin Franklin or pro wrestler John Bradshaw Leyfield who said "The greatest invention of the human race is compound interest".And BTW, the sub-prime loan was created after pressure from public officials who accused the banks of being…oh, let's call it "preferential" for not extending mortgages to certain parts of the population. The banks tried to explain that it was because the people did not and would not have the money to pay back the loan, not because they were members of a certain part of the population. Yes, they may have jumped into it with both feet once they got started, but it wouldn't have got started in the first place had they not been shamed into it. Legislation is a good idea for the free market, but as a last resort, not as an ingrained part of the process. Everybody knows that things don't get BETTER once the government gets involved, so the threat of it is usually enough to get the wheels grinding. The Comics code, the labels on records, and the video game labels are all examples of industries responding to the threat of government involvement in their industries.
Sorry Vinnie, I don't think there's any evidence to support your assertion that the evil government somehow forced responsible bankers into the subprime mortgage market. The government did, indeed, play a role by ALLOWING the subprime market to fluorish by DEREGULATING the banking industry. Good old-fashioned bipartisan (you can thank Ronald Reagan AND Bill Clinton) GREED caused the subprime disaster.
I'd also include George W. Bush among those making deregulation in general go i9n the government. Not so much because he believes in less government, I think, but because HIS brand of people are the the heads of business.
Dubya believes in less government…when it's government that benefits anyone outside his social circle or isn't related to military spending (which also tends to benefit folks in his social circle). He believes that social security is bad ostensibly because it's backed up by nothing but paper (everyone take a dollar out of your wallet and tell me what it made out of). In reality, he's opposed to social security because folks in his social circles don't need it, so why should they have to pay for it?
Amazing how risk-averse people are when they lose money, ain't it?
I've always hated "certain parts of the population" and am energized to realize they are responsible for this, too. Continue to face front.
"Did the stockholders question how the company was being run? Probably not – so long as the rate of return on their dividends was good." 33% of Bear Stearns stock was owned by the employees! This was how the company funded their employee retirement. So, yes, a great deal of the stockholders knew how the company was being run, they ran the company. So, Bear Stearns was bought out by J.P. Morgan (another investment bank), that means huge job redundancies and potentially thousands of Bear Stearns employees will be out of jobs after losing much of their retirement savings too. I'm not sure how much the average employee was responsible for the policies that led to the collapse of the Bear Stearns House of Cards. Now, it's my understanding that the fed didn't PAY 30 Billion out in the Bear Stearns deal. The fed has just guaranteed 30 Billion in Bear Stearns holdings. Basically the Fed is acting like the F.D.I.C. for an Investment Bank (which is unprecedented). The 30 Billion is to back up J.P. Morgan in case there is a "run on the bank" at Bear Stearns. It's up in the air as to how much money this deal will actually cost the government.But you are right, the government did choose to back up the holdings of investors with Bear Stearns rather than the company itself. In this way, the one truly left holding the bag is the average worker at Bear Stearns, who didn't set company policy, the one without a golden parachute, but will still be out of a job and out of their retirement savings too.
Vinnie – you raise some good points. I didn't know/don't recall that the government convinced banks to adopt sub-primes. Where could I reference it?Russ – well its good to know that the Fed hasn't yet outright bought a bank for JP Morgan. Just guaranteed it so far. I agree that the employees are the losers. But then there's always losers from an acquistion.John, you raise some valid points. Here's some counterpoints. One, the Fed isn't bailing out Bear Stearns. Just in case we are arguing semantics, I don't consider an acquisition to be a bail out. If the Fed would have done what they did last "Sunday earlier in the week then Bear Stearns would still be around". That I consider to be a bail out. Incidentally, the quotation is a paraphrase of a statement that Jim Cramer made on his Mad Money TV show. I don't recall what exactly the Fed did.Two, your comment on Wall Street's faith-based economics is actually a core component of economics itself. If we believe the country is in a recession then it is in one. Which is probably a reason that is influencing Bush's denial of the current economic status of the country.Three, I agree that the lenders should not receive preferential treatment compared to the ones facing foreclosure. However, the hard-nose conservative would probably argue that the lending company affects significantly more lives than any given individual.Four, I doubt that the common stock shareholders of Bear Stearns is happy. I know I wouldn't be happy if my stock was reduced to two dollars a share. (I'm assuming share price as I don't recall specifics.)Five, What scares me more is that the Fed (or at least Bernanke) seems to be playing favorites. If the Fed continues playing favorites while encouraging consolidations of banks, a few banks will rule them (and us) as well. An incredibly scary thought.
I thought Freddic Mac and Fannie Mae were for people who had low incomes and couldn't get a loan from a bank. if true, why would banks create sub-prime mortgages at the govt. request?
Corporate welfare is good; personal welfare is bad. That's the mantra being proposed by this bailout.As usual in these cases, it is the little guy who gets hosed when these things happen. The people making $50,000 a year or less can only be beaten down by the loss of a pension. Those making $250,000 and more don't need the retirement that they lost; they have enough othr investments to survive a recession.The decades long experiment with trickle-down economics has proven to be a failure. The gutting of Federal agencies designed to protect the common good has left the US vulnerable to thieving moguls. Witness the lead paint, tainted beef, e.coli from spinach, the collapsed bridge in Minnesota, the 2 collapsed cranes in the last weeks—all are indicative of the down sizing of the Federal agencies that protect us all. The toy factory in China was NEVER inspected. The farms where out foods are grown are only inspected once every 3 or 4 years. Inspector jobs were eliminated because the companies doing the work were considered to be above making mistakes or getting greedy. Or even worse, because they were friends of the Republican Party.
In all honesty, I don't feel that we should be bailing anybody out. I've got to pay my own mortgage and don't believe I should be paying someone elses. It all comes to greed both corporate and individual. People bought bigger houses in an attempt to keep up with (or exceed) the Joneses. And it is also with the builders, building the McMansions and townhouses becuse they can get more money for those than if the build smaller houses. I am tired of having to spend my money (via taxes) for other people's poor judgement. Or greed. And that is either corporate or individual.
Alan, you're confusing trickle down economics with the draw down of funds for inspectors, which can be considered part of deregulation. And I blame Congress for this. Congress controls the purse strings, and they should have told Bush to take a hike when he proposed decreasing the funding for oversight. When the Democrats took over for the Republicasn, they have done nothing to correct the situation. Personally, I would much rather have a lot fewer gov't programs and more oversight on businesses, but I also want a house with a big gameroom so I could get a pool table. (Of course given the original topic of conversation, maybe I should have just bought it and let you all pay for it. :) )
Sean, I think it all goes back to killing the size of government, which was a part of trickle down. Bring down the size of government and all that left over money will trickle down to line everybody's pockets. Empty promises.