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.