US Economic Crisis – “Privatizing Gains, Socializing Losses”

The quote in the title of this post comes from Gretchen Morgenson, who writes the MarketWatch column for the Sunday New York Times, on the 9/19/08 episode of PBS’ Bill Moyers Journal. Watch it.

I am so thoroughly disturbed by the current state of affairs in the US economy that I must put all political correctness aside for a moment and ask you, dear reader, for a reality check.

It appears that our government is about to take on a tremendous amount of debt by nationalizing private entities, buying trillions in bad debt, and by some accounts, taking on some 70% of the mortgages in the United States.

This is unprecedented. Cataclysmic. Terrifying.

I spent some time last night actually watching TV, something I do less and less of these days, catching up on a backlog of Tivo from the past week. I watched a bunch of news reports, pundits, and analysis of how and why this economic crisis has come to a head, what the government is doing about it, what those who have been reporting on the financial sector for 30 years think about it, and the whole time I’m thinking to myself, wow: I have absolutely no faith that anyone in the US government or otherwise actually knows what they are doing with regards to this imploding/exploding economic mess.

If you somehow aren’t following this, you should be. Every American citizen certainly should be, because we the American people are about to be saddled with TRILLIONS of dollars of more debt – and I cannot imagine how this won’t impact the rest of the world in some way – so you should be paying attention even if you aren’t in the US. Did I mention _trillions_ of dollars in new debt? I can’t really fathom a trillion dollars, personally, it’s still hard for me to wrap my mind around billions of dollars. Here’s a quick primer, if you’re trying to catch up:

Government Pledges Swift Financial Crisis Rescue

Wall Street Turmoil Marks Wholesale Banking Shift

So, from what I can tell, the last 30 years of banking deregulation (i.e. relaxing the laws, standards, and oversight of what financial institutions and Wall St. investors are allowed to do), has led to ever larger financial institutions creating ever more complex financial “products” that have become so damned shady and complicated that even Wall Street itself doesn’t understand what they’ve gotten us all into.

You’d have to have been hiding under a rock to not know that a bunch of companies made a bunch of risky loans for people to buy houses they couldn’t really afford, and as the price of everything (especially energy) began to soar, a bunch of these people couldn’t afford to make the payments on their homes anymore. The companies that loaned them the money weren’t too worried, cause they’d “packaged” up big bunches of these loans and “sold” them to other companies and banks, who then themselves sold pieces of this debt to a bunch of other companies and banks, and so on and so on. And as more and more people stopped being able to pay their mortgages, more and more of these companies and banks were stuck holding the bag on all this debt that no one was paying on. This is the “Subprime Mortgage Crisis” that we’ve been hearing about all year.

Except it seems that the people in the US government and the geniuses on Wall St. either didn’t know or didn’t want to admit that these “packages” of defaulted loans had become so widely sold, traded, and mixed in with other stuff, that even big, stable, long term financial institutions and companies were in big trouble as more and more people became unable to pay for their houses. Suddenly the troubles of “Main Street” were wreaking havok on “Wall Street” and everyone began to panic. It got so bad, that big name companies that everyone thought were safe and stable started filing for bankruptcy and begging other big banks to buy them, it got so bad, that people and companies began to take their money out of money market accounts and other funds and that caused even MORE people to panic.

And so, in the span of a week, the Bush Administration’s people have stepped in and said, don’t freak out, we, the US government, will take over some of these failing companies, and we, the US government will insure your money market funds, and we, the US government will take on the debt of all these houses that no one is paying for anymore. And Wall Street rallied at this news on Friday and had a big party that Uncle Sam was going to swoop in and save the day.


From what I can tell, this is the craziest, scary economic situation of our lifetimes. The financial health of the United States of America hasn’t been this jeopardized since the Great Depression.

Now one of the analysts on PBS said that you don’t stop to fix the leaks in your roof when the hurricane is still going strong, you just do what you have to do to survive the hurricane, and you fix the structural damage when it’s over. I think that’s true. I think if the government had not stepped in, goodness knows how far reaching this crisis might have become, it’s truly terrifying to think about, particularly considering how much US debt is owned by foreign investors.

But. BUT.

It seems to me that this means that the US government is going to make damned sure that the free market capitalists don’t loose THEIR homes and savings and retirement, and the ordinary people who have already lost their homes and savings and retirement are just out of luck. For all of my living memory, the REPUBLICAN PARTY has stood for business, for smaller government, for telling regulators to butt out of what business does, let the all-knowing all-wise market sort out the winners and losers. And when they were winning, all those profits, all that money, was THEIR money and the government shouldn’t tax it, shouldn’t take any of it, the American people as a whole shouldn’t share any of it, because it was the gutsy risk-taking of the capitalists that led to the profit in the first place, and the market rewards winners and punishes losers. Not two weeks ago I saw a political ad for John McCain talking about making the tax cuts to the wealthy that the Bush Administration enacted early on permanent.

Except now, when the all-knowing, all-wise market started doing exactly that, started punishing the risk takers who were taking TOO MUCH RISK, now the REPUBLICAN PARTY is saying wait, hold on, the American people, the US government (you know, the ones who didn’t get to share in the wealth cause it was all YOUR money), well, we’ll take on a bunch of your debt. We’ll take on a bunch of the risky crap that you’ve gotten yourselves into. Hell, we’re even going to take over some of your companies. And the free market capitalists are saying HALLELUJAH, yes please, please take all this mess we’ve gotten ourselves into. PLEASE TAKE IT. The financial press is using words like toxic, poisonous, and radioactive to describe this debt. The wonky economic analysts in their rumpled suits and crooked ties and silver hair, the people who have been studying this stuff for their whole professional lives admit that even they don’t understand exactly how “toxic” this toxic stuff is.

And me and you, Joe, we’re about to get handed that bag of toxic stuff.

My undergraduate degree is in Political Science. I (sadly) didn’t focus on economics as much as I wish I had, and I can’t claim to understand everything that’s going on right now if even the pros don’t have a clue, but I just have to put this out there, publicly, for my own conscience.

The REPUBLICAN PARTY, representing free-market capitalists, has largely had their way in terms of economic policy, they have successfully gutted many of the laws put in place after the Great Depression, and they have successfully protected the profits – the sickeningly vast profits – of a very, very tiny percentage of very, very wealthy Americans.

I’ll sit tight with everyone else while the hurricane is upon us, but when it’s over, we have a LOT more than just repairing the roof to do. I personally know people in my family, people in my social circle, who are facing homelessness and dire economic circumstances. I personally know people who got a few thousand dollars into credit card debt (and I’m talking $4-5000 range) who then had something bad happen, an illness, a job loss, who were unable to get out from under it and are struggling to just plain feed their kids. And I didn’t see Uncle Sam coming to bail THEM out.

I am angry. Afraid. Worried. And I genuinely believe that the REPUBLICAN PARTY has quite literally wrapped themselves in the American Flag and used every dirty trick in the book to keep the average, church-going American distracted by issues like guns, abortion, and gay marriage so they can rob our country blind. And they seem to be getting away with it.

When does it stop? When does the party of “Country First” actually start putting the country – the whole country, not wealthy investors – first?

I do not understand how any sane person could vote for John McCain in this election. I really don’t. I don’t know how any sane person could be watching this and not see the horrible irony of wealthy “government keep your hands off” investors begging the government to take on their private debt, so much money than I can’t even fathom it in any real sense. 35% more than the entire US defense budget. 4/5ths of the output of our entire national economy in debt.

It’s staggering. Just plain staggering.

And the last time I looked, this is what CNN’s homepage looked like. The only indication of this on the front page? A tiny link on the right.

And on that depressing note, I’m off to finish laundry and go to my grandpa’s house. He grew up in just-post depression America, and I hope he has some damned good advice for me.

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  1. Hi Fleep. I’m Sean FitzGerald aka Sean McDunnough. You may remember me from previous appearances in SLED and http://sleducation.wikispaces.com/ (hehe… I hope you get the reference). I’ve started following your blog after being impressed by your article in Educause which gives one of the best overviews of the use of Second Life in higher education I’ve seen.

    Anyway, on to the serious issue at hand:

    As a layman trying to wrap his head around the complicated world of finance this seems like a fairly good (layman) overview of the current crisis.

    I wanted to add three words to the mix though:

    1) ‘Gambling’ – many of the analysts I’ve seen have described what those in Wall St have been doing as high risk gambling. They’ve been turning Wall St into Las Vegas, and in the process risking the economy and engaging in behaviours that could hurt us all. I think we should call it for what it is, and not let them get away with perpetuating the myth they are engaged in anything more noble.

    2) ‘Greed’ – not a word I like using normally, as I think greedy people are at heart people who are fearful of lack, and the word is too often used as a judgment. But the word does spring to mind here as a reminder that a lot of what is in play here are some serious human foibles and moral failings that should have us asking what the moral lessons are here. The solution (if there is one) to this crisis shouldn’t just be a dispassionate technical analysis of the marketplace.

    3) ‘Consequences’ – or the lack thereof. As I understand it, the government’s actions send the message to the high risk takers that they will be protected from the (painful) consequences of their behaviours, thereby encouraging them to continue taking extremely extravagant risks knowing that if things go bad the government will be there to bail them out. This can only make things worse.

    I hear your distress. I’ve spent this year reading a lot about the serious economic and environmental crises the world is facing, trying to understand exactly what’s happening and how dysfunctional and unsustainable our society and civilisation has become, and it really takes a while to come to terms with what’s really happening. I fear this current crisis may only be a taste of things to come though.

    I suggest you subscribe to Dave Pollards ‘How to Save the World’ blog if you aren’t already. He has been for me the main source for understanding the big picture in terms of the root causes of the coming global crises – both economical and environmental. Even though his own analysis and conclusions are a bit negative and pessimistic for me at times he has pointed me to a lot of resources, authors and analysts that have helped me understand the big picture, namely the dysfunctional and unsustainable nature of our current system, and what we can do about it.

    p.s. I’m an Aussie, but what happens to the US economy will effect us all.

  2. I haven’t written much on this as it has gone down because I think it’s beyond most people to understand it. I believe I understand it as well as any non-professional economist can. Do you remember when I started ranting ten years ago or so about how the deregulation of insurance and financial markets were setting us up for a reckoning. It could have happened when the dot com bust came, but the fed used low interest rates and the financial sector used loose financial products to generate another speculative bubble to heat up the economy. A year or so ago, I started debating whether or not the reckoning would come now or if there were another bubble that could be generated to forestall it. That bubble would likely be “green technology” related.

    I think we’re getting our answer.

    This is going to take some incredibly skillful management of the economy and of these nationalized and bail out firms and assets to keep us from living through an incredible shit storm. This financial crisis in many ways is worse than what happened in the early part of the great depression. We have some other things going for us that have kept mass panic from breaking out, which helps. The average american is also a lot wealthier with a lot more financial flexibility than they had in the late 20s and early 30s as well. In spite of the gutting of the New Deal era programs that has been done in the last 30 years, we have a philosophy of government that is different now, too. In the 1920s, the governent would have let AIG and all of the investment banks fail.

    As bad as it may be for us to bail out these companies, it would be worse for us to have just let them fail. That would have been 1930 and 1931 all over again.

  3. Sean: Hi! I’m a huge fan of http://sleducation.wikispaces.com/ so no introduction necessary. 🙂 I actually saw your nice tweet about my article and tried to send you a DM of thanks several times but Twitter was just not being cooperative!

    But thanks for your post here too, I just recently subscribed to How to Save the World, and I’ve been finding it a very helpful resource as well. Lots of good links and ideas about things that are outside my area of expertise.

    I fear you may be right about the lack of natural consequences encouraging the risk-takers on Wall St. to continue with practices that clearly put us all at risk. As Policywank says in the comment following yours, I think the consequences might have been so dire that it would have harmed even more people than deserved to be, and so in some sense I’m glad that the government is stepping in before the whole house of cards collapses, but at what point do we say “enough is enough”?

    I honestly don’t know what the right response is now that the deregulation and lack of oversight has happened, and the results are as bad if not worse than we feared, but you bring up the _moral_ implications of all this and I think that’s something that the American public is ill-equipped to talk about. In our current culture, I think the “pursuit of happiness” has been literally transformed into the “pursuit of money” as an American value. For all its religiosity, American culture seems to celebrate and reward greed. I _hope_ this will reignite a conversation about what values we hold as Americans, and what the moral implications of our professed values are, but I worry that even this crisis isn’t enough to spark a serious conversation among those who don’t follow financial markets.

    I think part of the problem is another thing you mentioned in your comment – the language used to discuss these matters. You suggest calling it “greed” outright, and think we should too. It’s just so hard to even read about this topic, though, because all of the financial market jargon obscures the reality. If you and I were to borrow $30 for every $1 we had in our bank account, we’d be called financially irresponsible and in debt up to our eyeballs and probably bankrupt – but when Goldman Sachs does it, they’re “highly leveraged”. I tried to write this piece in every day language in part because I think all of that jargon is deliberately meant to obscure the plain meaning of what Wall St. investors are really doing in terms that the average citizen can understand.

    It’s a mess, all the way around.

    Thanks again for the comment and the kind words, I’ve been a fan of your work from afar, and I’m glad to connect with you after all this time!

  4. Policywank: Would you believe the second I heard the news about this latest mess, I had a VERY clear memory of sitting in my apt reading your posts about this topic back on the BBS? And I thought to myself, man, Dave was spot-on.

    This is one of those cases when I really hate to say you were right, not because I begrudge you the foresight, but because it shows just how preventable this crisis really was. Back then we were just college kids (or recent post-grad for you probably) with a lot less life experience than we have now, if you could see it, certainly others could too, and somehow they/we still failed to prevent this from happening.

  5. Fleep, I hate to say I was right, too. I’d be happy to be wrong and look like a paranoid freak on economics. All that said, the Paulson plan is a bad plan. As sure as I am that something needs to be done, this isn’t it. I was okay with what happened with Bear Stearns, Merril, and even AIG. If we’re going to bail out the rest of these companies, the American people need to get something for it. It needs to include ownership in the firms and the appropriate share of future profits. There needs to be a ton of oversight to make sure this doesn’t end up just being a sweetheart deal for the people who caused this mess. I’m cautiously optimistic that we may get some of that (as I posted last night).

  6. I’m going to go check out How to Save the World, too.

    Personally, I think the way out of this is to support Dodd & other’s demand for ownership shares (warrants) to go along with the bailout. The Swedes did pretty good with that, in terms of long term economic payback.

    And then we just have to really hammer the theme of progressive taxation, getting the economy off its war footing and into a development footing (like Van Jones’ green jobs idea) and regulating like hell.

    The problem is, if this crisis actually *is* averted, the Shock Doctrine folks are going to use that as an argument that it wasn’t really a big deal after all. I don’t know how we combat *that*.

  7. p.s. people have been trying this for a while, but how about invoking the Eisenhower era?

    Check out this article:
    http://www.toomuchonline.org/articlenew2006/Feb13a.html

  8. I know you are a political partisan, Fleep. But honestly, a pox on both their houses. Both parties are in this up to their eyeballs.

    Here’s the NYT in March, 2007 saying our legislators were thinking real hard (but never actually doing anything) about tightening up on subprime mortgage regulation: http://www.nytimes.com/2007/03/29/business/29scene.html?ex=1332820800&en=e09a15f9b118d649&ei=5088&partner=rssnyt&emc=rss

    The horse was out of the barn long before 2007. And the legislative roots of the deregulation go back decades.

    Once housing inflation (boosted by subprime mortgages) peaked in 2005, the handwriting was on the wall. The only question was how big was the crash going to be.

    It’s a truism that poorly informed investors are alternately ruled by greed and fear. The same is true for politics. The last few days have been panic time.

    And the media loves to fan the flames. That draws more viewers and readers and they get more ad revenue.

    Fortunately, we have more than one branch of government and things may drag out long enough in the legislature for everyone to calm down a bit.

    Having the government (i.e. the taxpayers) bail out every single bad investment on the horizon doesn’t seem to be much of a plan to me.

    The credit markets need some stability but investing is a risk/reward proposition. Remove the possibility of losing on a bad investment and we will continue to see irresponsible investment practices.

  9. Though it might be tough to find a bright side during the economic crisis at hand, this blog post gives some good tips for using this as an opportunity for positive change. Dr. Toni Galardi coined this as a “LifeQuake™” and talks about looking on the bright side – i.e, no money to dine out means more meals spent at home with the family and downsizing to a smaller house means living in closer quarters and getting to know your loved ones better. Check it out for inspiration: http://lifequake.blogspot.com/.

  10. What a great summary/rant of the current crisis, Fleep.

    I’m showing my ignorance of financial markets and stocks with this question, but can anyone point out to me a legitimate use for “selling short?”

    It looks to me that it is simply a means to profit from a stock’s expected decline. A great way to gamble without the expense of flying to Las Vegas. Even worse, it provides motive for investors to actually work against a companies success.

    Likewise, some of the remarkably complicated financial instruments put together during the mortgage crisis actually allow investors to make a profit when the mortgages become worthless, thereby providing an incentive for some very powerful financial players to actually bring this crisis about.

    Is it simplistic to enact a 100% tax on the profits from any of these toxic instruments and then prohibit them in the future?

  11. We are still in the midst of this debaucle. In the last few months the economy shift has propelled all of us to reframe our values. What counts most, when expendable dollars are not available.
    MerrieWay suggests more unity in community is the ultimate outcome.happening spending more time with friends and family, having fun together enjoying life’s simpler things.
    With the middle class shrinking before our eyes…restructuring lifestyles and values is mandatory for our physical,mental and spiritial being.