A MATTER OF CONFIDENCE

MORALITY AND THE LAW CLXIV
By Stephen Ellis

THE ECONOMIC ROLLER COASTER RIDE


Nobody asked me, but…

To a limited extent, you can count me among the people who do not fully understand the economic roller coaster ride we are on. One day the Dow Jones Average is down 500 points, the next day its up 500 points…one day Treasury Secretary Henry Paulson says he’s going o buy delinquent mortgages from the banks…the next day he says he already spent half of the $700 billion bailout…one day Paulson is flushing the banks with money, the next day major banks like Citi Bank are ready to be taken-over by government regulators…what’s really going on?

If there is one word that can best explain this whole thing, it’s “confidence”. The world has lost “confidence” in the American economy. To a very limited extent, this lack of “confidence” is justified because of the greedy and corrupt top management of many of our long-trusted firms. Frankly, I would love to see some the automobile industry’s top execs, some of Wall Street’s top execs, some of the banking industry’s top execs…rot in jail for what they’ve done to the American economy. More important, I’d really like to see George W. Bush and Dick Cheney rot in jail with them.

The keys to this economic debacle are Bush and Cheney. Bush appointed his Texas cronies to the most important positions in the world…and they proved they were totally incapable of handling the jobs. Rumsfeld was a disaster as Secretary of Defense and got us into the Iraq War. Colin Powell was good Secretary of State, but Bush fired him because Powell wouldn’t do everything Bush told him to do. So, Bush appointed his “yes-girl”, Condoleeza Rice as Secretary of State. He appointed an unknowledgeable Ben Bernake to head the Federal Reserve. He appointed a totally incompetent, Henry Paulson, to be the Secretary of the Treasury. Bush appointed unqualified and inept people to head FEMA, the transportation system, the commerce system, national security, etc. And then, as a topping for the cake, Bush and Cheney took away anything that would regulate the economy and gave the greedy and corrupt free reign over absolutely everything.

Is it any wonder that our people have lost “confidence” in America?

It is a lack of “confidence” that is driving the economic roller-coaster. Most companies are showing much lower profits…but they’re still showing profits. Ridiculous as it may sound, the sub-base of our economy is still strong…but people don’t know where it’s headed. Because most companies don’t know what to expect from the economy, they’re playing-it-safe and cutting back the number of employees…thus creating greater unemployment. Greater unemployment means that people have less money to spend, so the economy is falling into a downward spiral.

Under Bush, banks could lend someone else’s money and make a profit. Banks would lend money for mortgages (improving the real estate market), then they would “pool” the mortgages, and sell the "pools" off to investment groups (maintaining a small servicing charge). The banks would get their money back from selling the "pools" of mortgages and were free to do this over and over again. To the banks and to the real estate market, this was great. But then, without regulations, banks started to get greedy and make loans to people who should not have gotten loans. “No money down”, etc.

It took longer than it should have, but investors who bought these pools of mortgages started to face the reality that a lot of them were not making payments. Most of the "no money down" home buyers had nothing to lose by handing their houses back to the bank or allowing them to be foreclosed upon. Many had borrowed second and third mortgages on overpriced homes. The Wall Street firms demanded the banks take the mortgages back. The banks refused and the market to buy pools of mortgages from banks dried-up overnight. This meant that banks were now stuck with a ton of mortgage pools they could not sell off...and would have to lend their own money, and not someone else’s money, for mortgages. So banks tightened up their credit requirements to a ridiculous pointand even legitimate borrowers couldn't afford the down-payment requirements lenders were now demanding. Houses stopped selling and the real estate market started sliding down.

Congress pushed through a $700 billion bailout bill to buy-up the foreclosed on mortgages. The whole idea behind the bailout was to take the bad debt away from the banks and encourage them to start lending on real estate and manufactured goods again. A good idea…but the inept Henry Paulson changed the plan: Now he wants to give cash to the banks and let them use it however they want. Without regulations, of course!

Which reminds me: Paulson had said that fully half of the $700 billion has already been spent. I’d like to know how, why and where it was spent…but Paulson isn’t telling.

And the automobile industry is crying the blues and saying that if the government doesn’t lend them 5 or 10 billion, the US automobile industry will collapse. Maybe, with the incompetence of their top executives, it deserves to collapse! While every car manufacturer in the world was gearing up to build smaller, more economically operating, cars, GM was building and promoting …the Hummer. If any money is loaned to our Big 3 auto makers, it should come with the caveat that all present execs are fired…without golden parachutes…and replaced with younger, innovative thinking.

Besides, what is the “American” automobile industry? The Big 3 are no longer the mainstay of the American automobile industry. Toyota of America builds and sells their cars here and the profits go to the American Toyota Corporation that hires lots of people to build the cars...here! Honda and Nissan do the same. Fifty percent of all Mercedes and BMW cars are built in America by American companies. If the Big 3 fail, their slack will be taken-up by the other car manufacturers. Jobs? Sure, there will be a lot of jobs lost…initially…but in very short order, the other car manufacturers will need to hire every available skilled worker. When money becomes more available, the American romance with the automobile will be reborn.

Will the Obama administration be able to straighten-out our economy? In all probability, yes. Just based on the quality of cabinet members selected so far, I’m guessing that an Obama administration will restore “confidence” in our economy. Just look at how the stock market has reacted to the naming of members of Obama’s Cabinet. Each new announcement has brought about a surge in stock prices. It’s not going to happen overnight, but just watch what a restoration of “confidence” in our economy will bring.

As I said…nobody asked me.