Setting the Record Straight

September 30, 2008

Have We Reached China Yet?

Down Our Economic Hole
    While all the sturm and drang about the failed Wall Street bailout shuttlecocks back and forth, there are many other factors going on that spell bad economic times ahead for the United States. Here are just a few points to keep in mind, beyond our already-mentioned flood of suits to come.
     –Parts of the United States in less than two weeks after Hurricane Ike hit oil rigs in the gulf and more importantly, caused refineries to be shut down in Texas, were experiencing something not seen since the early 1970s—lines of cars waiting for scarce gas. As we all know, supply short of demand equals higher prices.
     –The price of energy drives the entire American economy. The economy was already being hurt by inflation two and three months before Ike, at a time when people on the lower end of the income ladder were experiencing the germs of a recession. Their employers already were cutting back.
    –Stagflation, the result of inflation coupled with a recession, always hit the lowest on the ladder first because they have less disposable income than those on rungs above them. But they are never part of the government measurements to see how the economy is doing, so the government and those who rely on its measurements are the last to know as they greed along their merry way.
     –Then the bailout calamity. That news drove a lot of people into the hole, their weight alone making the hole deeper.
     –Wall Street’s house of cards was built on over-leveraged bad paper, which, because of the not-quite-yet trillion-dollar debt the Bush administration amassed with mistakes far beyond Iraq, is owned by several foreign countries, particularly China and Japan.
     –Seeing their investments in trouble with the bailout gloom-and-doom, those governments, along with several others, pumped billions of their own money into the American economy to help shore it up. That, too, will come due some day.
     –The same sharp rise in energy prices has had an effect on the whole world similar to the effect felt in the United States. Inflation was rising in tandem with a rising cost of food.
     –Other countries, particularly those in undeveloped South Asia, have long depended on sales in the United States to develop their economies. A middle class has developed in China as a result, but already seeing inflation as they enjoyed that growth, they were hit by America cutback on buying and paying for production.
     –Other countries in Southeast Asia felt the same tremors, many of them facing gargantuan inflation rates.
     –Although Japan is not an outsourcing center, many of its industries have saturated the Japanese market and need to look at markets elsewhere. They already had been acquiring other companies abroad to expand and diversify their markets.
     –The Japanese still has an economy that is richer than that of the United States right now, and before the yen went into the tank 15 years ago, the Japanese owned a lot of property in the United States. Keep an eye on who buys your country club or some other major piece of property in the near future as the fire sales escalate.
     –Even the Democrats will feel it if they win the White House and a greater congressional majority. Gone for at least the first term are all of those programs they wanted to restore like a phoenix from the ashes of the Bush administration. They will promise, but the will not be able to deliver, regardless of any quick solution in Iraq.
     No, we haven’t reached China yet, but the hole is nowhere as deep as it is about to get. Remember who got us there, who was one of them, who sided with them and who used to brag about being an “unregulator.” And we now have had a chance to see some of his judgment abilities.
     Where is your shovel, John McCain?



September 24, 2008

Meltdown II to Follow

Meltdowns and McCain
     As the federal government considers bailing out the financial meltdown on Wall Street, some care should be given to the fact there in all likelihood be another Wall Street meltdown after this one cools, a residual meltdown if you will. And voters should know of John McCain’s role in enabling the meltdown and how it reflects on how much he cares about such matters.
     About a week before the federal government bought AIG, the massive insurance company at the head of the current financial markets meltdown, the company settled a huge lawsuit brought by shareholders over the actions of a former chairman. (Ironically, most of the $100 million settlement was covered by—you guessed it, liability insurance.) Just days before, many of the investment banks in the meltdown were sued by investors.
     More central to the point in Meltdown II, shareholders sued pharmaceutical company Merck for failing to disclose the trouble they were about to get in because of one of its drugs that was the target of massive class-action lawsuits. Shareholders have brought class-action suits against Oracle for misleading them, others are suing Yahoo and on and on. This is not an uncommon type of lawsuit.
     Shareholders collectively lost billions in the meltdown of the Wall Street investment banks and related institutions and just about all of them should be expected to file multi-billion suits against the same firms for not disclosing to them over-leveraged positions and other actions that preceded the meltdown.
     As for McCain’s role? All of this financial mess was made possible by repeal of the Glass-Steagall Act, which had been passed as a result of the stock market crash of 1929 that touched off the Great Depression. It prevented regular banks from engaging in most of the mergers that created today’s giants and engaging in the type of business as investment banks and other institutions offered.
     The repeal came exactly a decade after the savings-and-loan meltdown that followed a similar Republican-led law to allow those institutions to engage in full-service banking activities. What was it George Santayana said? (Irony No. 2–The S&L scandal that followed the meltdown came to be known as the Keating Five, to which McCain was tied and later wrote was “the worst mistake of my life.”) 
     Paying no attention to that meltdown, the McCain campaign’s first financial adviser, Phil Gramm, led the effort in Congress to pass a law that now bears his name—Gramm-Leach-Bliley Act (all GOP—and repealed Glass-Steagall.
     The bill passed the Senate by a veto-proof 90-8. One of the senators who did not feel it important enough to cast a vote on a groundbreaking piece of legislation—a rarity for a senator—was Sen. John McCain, R-Ariz. Since he had announced he would have voted for the bill, he apparently paired his vote with a fellow Republican who opposed it.
     And, although McCain is now saying the campaign is about issues, just a few days ago his campaign adviser had said the campaign was about personalities, not issues. What does McCain care about?


September 22, 2008

Send in a Gunslinger

Oracle of Omaha as Sheriff of Subprime


Note: Democrats pressed to include in the $700 billion mortgage bailout plan provisions for helping homeowners threatened with losing their homes because of subprime loans. The Treasury secretary resisted, saying it would delay the plan centered on bailing out those holding derivatives based on the subprime loans. A trickle-down economics solution.


    The real government people doing the work of trying to resolve the financial meltdown have thrown up their hands, realizing there is no regulatory or legal system in place to resolve it. Instead they are thinking outside the box, just not far enough.

    One proposal that has been raised coincides with one we had been tinkering with for this page—buying up the subprime mortgages on houses most in danger of foreclosure. Although we are believers in compassionate government, we have a take that is different from that of Treasury Secretary Henry Paulson.
     He says it would take “hundreds of billions” of dollars for the government to do buy the bad mortgages, and would leave an impression it was bailing out the greedy money-lenders who enticed naïve borrowers into taking out such mortgages.
     Although the United States already is deeply in debt—nearly half a trillion dollars—adding to the debt with a mortgage bailout could be defrayed in part by a quicker-than-planned exit from Iraq.

     Or call in Warren Buffett, and maybe his new-found partner in charitable largess, Bill Gates. This is the idea we had been working on.

     Even these two guys do not have cash to throw around that is anything like the federal government can come up with, but they could make a huge dent in at least this part of the crisis.
     Create a foundation with people—how about some of those “community organizers” Republicans now appear to disdain—scattered all over the country with no-strings authority to buy up bad mortgages, beginning in depressed neighborhoods at homes in greatest danger of foreclosure. Offer the mortgage holders a bit above their foreclosure costs and have the foundation hold the paper.
     The foundation broker then would offer the person with the mortgage a monthly payment equal to that charged before the amount crossed beyond the line of affordability.
     In most cases, those mortgages would be paid off within the lifetime of the mortgage. Saving houses in a neighborhood from foreclosure also saves the neighborhood, as towns and cities all over America are discovering. Eventually, the value of the house in danger is likely to equal at least the amount being mortgaged.
     The foundation, as with the government, is not in the mortgage business to make money, but if it does make money, all the better. That gives the paper-holder more funds to put back into the program, raising the bar to a higher income level.
     Any such action by a foundation or the government has the added effect of creating competition with the money-lending community. Tighter regulations would still be necessary, but competition from an entity outside of the private sector could go a long way to make businesses a bit smarter, less reckless and less greedy.
     We will never hope for compassion above the level of the neighborhood grocer, if those exist any more.


          From Oracle to Sheriff

I think we need a gunslinger.
Somebody tough to tame this town.
I think we need a gunslinger.
There’ll be justice all around.

                –John Fogerty’s “Gunslinger,” from “Revival” 


September 19, 2008

Economy GOP’s Gift

Brass-Ring Chance for Democrats
     Finally, the economic meltdown is leading us away from subjects for sycophants and onto a real issue that should clarify the difference between Republicans and Democrats and define the race for president.
      As goofy as it sounds, relying on the marketplace to do the right thing without regulation is like relying on communism. Neither can work because both ignore human nature. Everything a child has to be taught should be factors to keep in mind when deciding whether and how much to regulate human activity.
     Most Republicans, particularly the ones who claim a fealty to “family values,” would be appalled if their children behaved crassly, displayed excess greed and selfishness and cried every time they had to conform with the rules of good behavior.
     Yet the same Republicans seem to believe it is all right for businesses, investors and the other money changers of our capitalist system to behave in a similar manner. U.S. political cycles are pretty clear on this subject—when Republicans are in power, regulations either come off or are ignored. When Democrats are in power, regulations go back on.
     Similarly common, the switch back and forth has predictable outcomes that are met practically every time. The cycle is so pervasive, even without change in regulation or the enforcement of it, the greed can rise or fall just with the knowledge a certain party is in power.
     Six months after Republicans gained control of both houses of Congress for the first time in 40 years, Enron made its first electricity trade, kicking off what would become an enormous scandal. The scandal was still building and had not erupted when Republicans gained control of the entire government in 2001. Enron executives were great friends and contributors and the White House rewarded them.
     Decisions that would lead eventually to today’s economic meltdown already were being put in place with the knowledge the big players had friends controlling the federal government.
     The Republican Congress eliminated entire regulatory regimes Democratic-controlled Congresses had put in place over several decades and amended many others in an attempt to at least declaw ones left in place so they were largely ineffective. The administration did its part by simply taking advantage of the basis of the American governing system—the legislature enacts laws, the administration administers them—and simply ignoring many regulations.
     The investors, business executives and others responsible for the economic meltdown were more than willing to step into the regulatory vacuum, the “aregulation” as it were, and begin earning their unregulated millions; make that billions.
     The Clinton administration might have wanted to restore some regulatory oversight, but without the cooperation of Congress it was largely impossible. The best the administration could do was step up enforcement of the regulations it oversaw.
     Democrats returned to power in Congress in 2006 and the House quickly responded with an attempt to fill in the holes left by their predecessors, but with a 50-50 Senate, there was no way to get much done during the past two years.
     Unfortunately, although this is the way things work, and worked, it is inside-the-beltway stuff that makes the eyes of the average ill-informed American voter glaze over. The meltdown should be used by Democrats to hit the public between the eyes with a 2 x 4 to get their attention on the problems they really have and away from the worries they imagine they have or are too ridiculous to be concerned about.


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