Feeling A Bit Deleveraged?
Sunday, September 21, 2008
There's been much talk lately about the financial markets unwinding. On one particular forum I participate with, it has been asserted by some that the ones responsible for the gathering storm are the architects of the mortgage and financial products scheme, while others claim that the blame should be placed on the shoulders of the ignorant buyers of their products. That's like saying that the drug problem is caused by drug dealers, not drug addicts (or vise versa). Pure BS, of course! They both share in the blame. You can't have one without the other. But, risky mortgages themselves aren't the real problem. It's much more complex than that. It seems the problem stemmed from creating commodities from debt instruments and selling them. It came from placing bets on whether borrowers would default on their loans and then not being able to cover those bets when they did. It came from putting book value in something of no value, then borrowing against it to lend to others. It was a house of cards just begging to be kicked over.
People buying homes they couldn't afford was just the beginning. The whole system was built on the belief that tomorrow would be better than today and everyone would be able to pay their bills. Well, that didn't happen. Businesses will fall; big American icons will be consumed or disappear because they made bad business decisions driven by what? Greed, I'm sure. And who's to blame? Themselves, mostly. They short-circuited the home buying system that had worked so well in the past. It use to be that you had to have so much down, that you had a whole row of hoops to jump through before they'd even look at you. But, now? All you have to have is a pulse and a paycheck (and the paycheck was optional).
But why? Why would these companies hang themselves like this? Easy money. The Fed was practically giving away money to lenders. All they could want to lend. But what good is all the money in the world if those wanting to borrow it don't qualify for their home mortgages because the bar is set too high? Not to worry, they thought, we'll move the bar. Lower and lower until they finally tripped over it. So, who's to blame for this major financial F-up? Sure, "the party that wrecked America" carries some of it, as do the Democrats, but the real culprit in this story is the Fed. Yep, the entity that everyone is now running to--begging it to save us from the falling sky--is the very same entity that created this mess. And we're too blind to see it. We sit around here blaming the borrowers and lenders when we should be burning Bernanke and Greenspan on stakes out in front of the Federal Reserve building.
And, as for writers like Sally Kohn claiming that the government could have averted the current financial crisis by "creating affordable housing and good jobs, strengthening public education and providing health care and child care for all families, to help hardworking Americans thrive in the middle class instead of being pushed into poverty", I ask you, how do you plan to pay for all these social programs you've just listed? Where does the money come from? The government has no money. It only has two mechanisms for raising capital: to tax or to print. So, unless the already-working class is prepared to hand over a whole lot more of their measly paychecks to the government so that you can institute your social programs, they're going to have to fire up the printing presses. Which do you want, taxes now at probably 75% or taxes on your children at probably 80%? Either way, the government has got to come up with the money to pay for it.
Oh, and speaking of the middle class being pushed into poverty, I'll remind you that the rich don't make you poorer. How one ever came to that conclusion, I'll never know. What makes you poorer? Inflation. The stealing of your purchasing power makes you poorer. The poverty line today was upper class earning levels just a few decades ago. What changed? The value of your money. And what changed the value of the money we use. The Fed. That's right, them again. Inflation constantly nibbling away at the value of your earnings potential--like a cancer on society--is the leading cause of the middle class sinking into poverty. And now it's happening at an accelerated pace. Wages have not kept up with inflation and we're all a little poorer because of it. It's because the Fed has dumped billions and billions--if not trillions--of dollars on the market in the last ten-odd years trying to forestall the coming collapse of the marketplace.
Our current system is not sustainable. The piper must be paid. As The Mogambo Guru says, We're Doomed!