The Mythical Camel and the Real Straw Which Broke His Back

Pundits and talking heads are filling the airwaves with their analyses of the proposed stimulus package.  Lots of criticisms being offered, and no wonder – the stimulus package is huge thus offering a big target for critics.  There is plenty to criticize.   Besides, the daily talking heads have a massive amount of airtime to fill and so they babble on hoping to stimulate the troubled minds of their faithful just as the politicians hope the stimulus package will spark the troubled economy.

The critics seem to be short on specific predictions and details for what alternative should be followed.   When all you have to do is criticize, the job is not too hard, especially whan the target to be criticized is so massive.  For life if it teaches us anything enforces the lesson that something is sure to go wrong.  So it doesn’t take a whole lot of smarts to predict that something will go wrong.  Besides, when the inevitable happens, no matter what the wrong is, the critics can always say, “I told you so.” 

What would be far more helpful to us would be for the critics to state exactly what they think will happen and when it will occur if the proposed stimulus package is enacted.  Such comments as “too big”, “not enough”, “too fast”, “not soon enough” are really not helpful at all.   What would be more helpful is people taking their economic theories (opinions, ideologies, whatever), and spelling out in specific detail what they think will go wrong, when and why.   With such specifics, we could actually learn something about how these different pundits’ ideas actually work.    We might learn which economic theories and ideologies successfully predict the future.   Thus if someone says, if you do that you will create inflation but deflation happens, that person would not be able to say, “see I told you your plan wouldn’t work” because even though the taken action didn’t produce the desired result, neither did it produce the critically predicted result. 

It isn’t helpful enough to say a plan won’t work, or that it is a bad idea.  Let the political pundits give us the specific predictions of what they think will happen if the proposed stimulus in inacted.  Then we can measure the words of these talking heads against reality, and they won’t be considered wise for predicting “things will go badly” which is no prediction at all; specifically spell out what the negative effects are going to be, otherwise your criticism are more empty on specifics than the plan itself.

Maybe slightly more helpful is pointing to an example of what a stimulus did or didn’t do.   This you can find in Martin Fackler’s 5 Feburary 2009 NY TIMES article Japan’s Big Works Stimulus is a Lesson.   There at least we can see how big time spending impacted Japan’s economy or failed to do so. 

Steven Pearlstein in a 6 February WASHINGTON POST article, “Wanted: Personal Economic Trainers.  Apply at Capitol“, makes the suggesting that we use the stimulus money to hire personal economic trainers for each congressman and senator in order that they learn how an economy really works so that they can make sensible comments and decent decisions based in economic realities and not in their personal opinions or ideologies.   If economic stimulus means increased spending, then he argues government spending is shown to be much more effective than tax cuts for stimulating economic growth.

Part of the problem for me in dealing with the economic crisis is that I do not understand economics.  That is why I read articles like Stephen Gandel’s “Why Your Bank is Broke” (TIME magazine, 9 February 2009).   It has very colorful charts showing how many tens of billions of dollars less the biggest banks are worth after having received the billions of dollars in TARP funds from the government.    The basic reason banks are broke is something like this:  You want to borrow $10 from me.  I only have $1 to my name.  I lend you $10 anyway. ….  Wait a minute you say, how could you lend $10 if you only have $1 to begin with?   That apparently is the lure of capitalism – capital produces more capital, at least on paper.   Banks came to rely not on their deposits and holdings but on supposed profits and money from their investors.   In other words I take $9.50  from friends who trust that I am going to make them money with the $9.50 they gave me.  I lend $10 to you.  My friends get paid back only if I make money on what they entrusted to me.  But if you cannot pay back the $10, those who invested in me lose their money and I now have $.50  left and am stuck holding a $10 IOU that is worthless.   It’s possible that everyone – borrower, lender and investor all end up being losers.   That is as far as I can tell what happened to our economy.  Banks were lending not what they owned but other people’s money (investor’s money), which works as long as those people don’t ever ask for their investments back or as long as the borrowers keep making payments on the loan.  It is a giant pyramid or Ponzi scheme which was being played by more players than just Madoff.   Some want to put all the blame for this on questionable loans that were made to first time unqualified borrowers (see my The Party in which Democrats and Republicans Reveled).   But there is a much bigger picture to the banking scheme of which these questionable home loans were just a part.  They may have been the straw that broke the camel’s back, but that camel was loaded down with an unsustainable system which for a period of time was so incredibly profitable for some as to be addictive to the many.  Breathing this intoxicating air of seemingly unlimited profits, the entire banking system gleefully threw the expanding home loan business onto the top of the pile which the poor camel was carrying.  And great was the fall thereof, or what was realized was the camel didn’t really exist so there was nothing to carry the load.

States Starving for Cash Look to be Fed

As the economic recession continues to loom large, state governments in the U.S. are also lining up hoping the federal government is going to bail them out of their own economic crises.  Logically, it seems to me anyway, there are two opposing desires in the U.S. that cannot be reconciled:  the desire to have no taxes on the one hand, and on the other, the desire to have a government which can solve all problems (mostly by tossing money at them).   American state governments got into the cut taxes mode, apparently thinking cutting taxes is always the way to stimulate growth.  However, at a time when taxes are pretty low, the growth has not only stopped but the economy has contracted and now the governments have large financial outlays with no way to pay for them.  Cutting taxes even further can neither stimulate the growth nor pay for all the commitments.

I saw in the paper the other day that state governments have gotten in line asking the federal government for a bailout, and the total of requests from the states is about 1 trillion dollars.   Whatever happened to fiscal conservatism?   No state government,  even conservative ones, is willing to wait for prosperity to trickle down – they want the federal floodgates opened and opened immediately.    Belt tightening is apparently never politically acceptable in America.  And we are either an extremely short-sighted people and have forgotten that what we do today will have to be paid for tomorrow, or we are a forever hopeful people trusting that massive federal spending is the answer to a shrinking economy (and every other national or international problem).    We do print “In God We Trust” on the dollar, but is it God or the dollar we really trust to bail us out of our financial difficulties?   It is as if we hope the federal government’s printing “In God We Trust” billions of times will simultaneously influence God like the prayers of a righteous person.   If we print “In God we Trust” often enough, maybe even God will believe we do and so bless America.    That surely would be a lot easier than actually having to change our indebting spending habits and money loving ways.   Jesus may have taugt you cannot love God and mammon, but Americans seem willing to try to prove Him wrong.

Money is a good servant, but a bad master.   So, no matter how the economic crisis turns out, who will we be serving in the end?  Who are we trying to serve right now?

In any case, the crises of the state governments forcing them to ask the federal government for a bail out caused me to think of this headline –   STATES STARVING FOR CASH LOOK TO BE FED.

Our nation recently implemented all kinds of welfare reform to kick a host of “freeloaders” off of the public dole.  Now it is the banks, lenders, the auto industry, and the states themselves who have lined up for the hand outs.  American ethics are such that we are more comfortable with this kind of welfare, even if it is millionaires and the upper class who benefit most from it.   Giving to the poor is giving with no hope of getting someting in return – meaning no benefit to the economy (Is the economy really the god in whom we trust?).

Maybe we will learn some valuable lessons from the current economic crisis.   Maybe we will take a serious look at health insurance and think about a plan that can benefit everyone (the uninsured and medical providers).  Maybe we will look at our dependency on oil and consider a use  tax that will raise money to find other/better sources of energy.  Maybe we will rethink our spending habits, reliance on debt, selfishness, greed, sense of entitlement, wastefulness, lack of concern for the common good, and self-centeredness.  

This all of course assumes we are willing to look into the abyss of the recession as somehow reflecting the true depth of our souls to see if we can find a way to become better people as a result of the crisis we are in.   The recession says something about us as a nation – our values and priorities and character and heart.   What lessons will we learn about ourselves and our relationships to one another and to the world?

A Real Economic Stimulus?

“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.”  (Alan Greenspan, former Chairman of the Federal Reserve)

Greenspan expressed dismay that the lending institutions did not look after their shareholder’s interests.   But he may have been wrong – but mostly in terms of the time frame.  He assumed the lending firms would be interested in their shareholder’s bottom line before there was any economic meltdown and government bailout.   But his timeline was simply too short.  For according to the Associated Press, Uses for $700 billion bailout ever shifting:  “But reports surfaced that bankers might instead use the money to buy other banks, pay dividends, give employees a raise and executives a bonus, or just sit on it. Insurance companies now want a piece; maybe automakers, too, even though Congress has approved $25 billion in low-interest loans for them.”

It’s all quite legal according to the bailout plan sold to the congress by the Bush administration.

When the price of the entire bailout-economic stimulus is calculated, it may come close to $1 trillion.  Perhaps, if a truly comprehensive plan had been considered, instead of intervening in the market in such a way as to save lending institutions and wall street brokers who made very risky and very bad decisions, congress should have considered divvying up all the monies they would have invested in failed and failing companies and given each tax payer a $5,000 tax rebate.  Now that would have caused a real stimulus in the economy.

The Party in which Democrats and Republicans Reveled

My efforts to understand the economic meltdown have led me through a maze of articles with lots of people willing to point the fickle finger of blame at different people and agencies.   And I have come to understand the economic crisis in terms of two analogies, mixed metaphors to be sure: a home alone teen party and an implosion to demolish a building.

 One factor that many point to is during the Clinton administration of the 1990s, policies were enacted to push the banking/lending industry into sharing the good times and the wealth with people who normally didn’t qualify to get the big loans to buy homes, cars or other big ticket items.  This according to the NY TIMES seems to have been the particular brain child of President Clinton’s  HUD Chief Henry Cisneros, who admits that many blame him for the crisis, but who like many of the big names in the financial collapse deny that their role was the key role.  From what I can tell, if one wants to find a “beginning” of the problem, Cisneros’ policies are as good as any place to start.  But like with the demolition of any huge structure using implosion, it takes more than one charge to bring a building down – and those charges must be strategically placed for the collapse to be successful.   This certainly is the case of the U.S. and global economic collapse.  Alan Greenspan is another key player who comes to mind: he too denies he is to blame for the collapse, though his policies certainly were a key to shaping what happened – he strategically planted some of the charges, though he acknowledges only one “mistake” in an assumption he made.

If the encouraging or forcing (as some charge) of banks to make riskier loans is to be blamed on Cisneros, Clinton and the Democrats, it also seems true that President Bush not only did not stop this program but expanded it.  In fact Bush made the “ownership society” a key part of his 2004 election campaign and Republicans voted for Him and his policies.  What the Democrats began, the Republicans expanded and even made a cornerstone of their own policies (at least in as much as Republicans these days claim Bush’s policies as their own – the McCain campaign is certainly trying to distance him and the party from Bush).

My analogy of what happened would be something like this:  ever hear about a teen being at home, knowing the parents are gone away, and invites a couple of friends over for a party?   And each friend invites a friend, and pretty soon the house is filled with party goers, and the original teen no longer knows who all has joined the party, or how many have joined, and certainly has no control over what is happening.  And the party gets out of control as the revelers get increasingly drunk and do more outrageous things because it gets harder and harder to entertain the growing mass who want the party to really rock.  The partiers consume everything, and before long their consumption becomes destructive and party becomes a riot.

And some would say it was the fault of the parents for not being home in the first place to exercise supervision of their teen.  For had there been more oversight from the beginning, the riot police would not have been needed to bring the situation under control.  And as often happens in those situations the parents have to go down to the jail to bail their kids out.

Well, that’s my analogy.  There were plenty of people who were more than willing to join this party.  In fact it was the one party to which both Democrats and Republicans were willing to belong.  Talk about bipartisan co-operation and reaching across the isle!  And whatever force was used to get people to join the party, quite a few quickly became revelers as it all seemed to be part of the ever growing and expanding U.S. economy.  And why not? If people could keep getting richer – main street got more home owners and wall street got more wealth to speculate on and gamble with.  And whatever the fault of these riskier mortgages was, they soon got swallowed up in Wall Street leveraging and derivatives, bundling huge amounts of loans into products that apparently no one could control or understand. 

And the charges were all being placed into their strategic locations, and the implosion occurred as one might expect, and suddenly all the big name participants denied they had been laying the charges and everyone began looking for ma and pa (more affectionately known as Uncle Sam) to bail them out.

All of the economics and finance people could write a better explanation than I, but I have to write by analogy because the reality of American economics is too great and too marvelous for me.  And the revelers are all now feeling hung over, and like alcoholics are shocked and dismayed by the damage they have left in the wake of their party.  (I would also like to say shamed, but alcoholics feel shamed, brokers and CEOs seem only to register dismay and shock not by what they have done, but at what has happened).

So what’s the bottom line?   I think in the same way that many joined this profligate party, many are going to be needed to fix it.  The aftermath of the party-become-riot is serious devastation.  Strangely two men – McCain and Obama – want to become responsible for the clean up (well to be honest it is not exactly why they sought out the presidency, but it is what they are going to step into).  It seems doubtful to me that either Democratic or Republican ideologues will fix the problem.  This seems to me to be a situation where truly co-operation of all parts and parties of the U.S. are going to be needed.  Partisan politics will be nothing more than a divorce occurring at the teen’s home at the very moment when parental intervention is needed.    It is not the candidate who can polarize who is going to be the best man for the job, but rather the one who can form a strong parental coalition to deal with the mess.  The economic problem is a real ongoing crisis – the next president is not going to have to wait for his first crisis to occur, we are already in the middle of it.  And this crisis is not one to be resolved by the military or by the president reducing his role to Commander in Chief.   This time the president’s role is going to be to insure domestic tranquility, not to declare war, but to find the way back to peace and prosperity for the entire nation by restoring order to the family, getting all the family members to cooperate, and getting all the members to shoulder their share of the chores that need to be done for the good of the nation.

The Insecurities and Exchange Commission

When it comes to the Stock Market, analysts have often pointed to particular events as being the “cause” of the Market’s rising and falling.  Even without any evidence as to these influences, analysts continue to explain the Market’s daily “fortunes” by mentioning one event or another which they think explains the day on Wall Street.  And though some have pointed out that the analysts actually don’t agree as to what events have what effect on the Market, there is a strong sense that the Market is often driven not by hard economic news but by intangible and unpredictable psychological factors. 

This week’s plunge on Wall Street is being described as apparently the result of such psychological factors, for example in the New York Times by Vikas Bajaj in his 7 Octoberber 2008 Forget Logic, Fear Appears to Have Edge.   The precipitous fall in the market according to him has become almost a herd behavior.

In his article, Bajaj has an interesting description of what motivates people when it comes to investments.  Here is what he writes:

Fear is an immensely powerful force, perhaps more so than greed, said Andrew W. Lo, a professor at the Massachusetts Institute of Technology who has studied investor behavior.

Scientists who have studied the brain function have found that the amygdala, the part of the brain that controls fear, responds faster than the parts of the brain that handle cognitive functions, he said.

“Fear is a much stronger motivational force,” Mr. Lo added. “The loss of $1,000 has a much bigger impact than the gain of a $1,000.”

He cites a series of groundbreaking experiments in the 1970s by psychologists Daniel Kahneman and Amos Tversky. In one test, they asked students to choose between a sure bet of $3,000, or an 80 percent chance of winning $4,000 (meaning there was a 20 percent chance of winning nothing). Most students said they would take the $3,000.

The same question, framed differently, asked them if they would rather lose $3,000 or accept an 80 percent chance of losing $4,000 (with a 20 percent chance of losing nothing). In this case, they said they would take the riskier bet.

In other words, they were willing to take a bigger risk to avoid losing money than they were when they stood to make more money.

As the study shows when it comes to making big profits people tend to be cautious, but when the risk of losing money is at work, people throw caution to the wind and are willing to take riskier chances and risk bigger losses to try to beat the system.

The activities of investors in the Stock Market seem to closely parallel what actually happened in the banking industry.  Stock Market investors are greatly influenced by rumor and beliefs about things rather than basing their investing decisions on actual fact or hard evidence.  In turns out to be a belief based system – it is not the facts but what people believe about the facts that matters.  This is exactly what caused the banking/lending/home value crisis – much of what was going on in the lending industry ended up being based not upon real cash value but upon what people believed about land values and the economy.  This is as true for individuals as for institutions, except that the instritutions are operating on a grander scale – the hundreds of billions rather than the thousands.  The financial system ends up being based on rumor and beliefs, not upon any audited bottom lines.  It is more like a faith system than a financial system, but populated with people who are as likely to be skeptics as believers.   Maybe it is ironic that the U.S. dollar has printed on it – “In God We Trust” for the amoral financial system is ultimately not based on anything more than the ephemeral get-rich-quick (aka, greed) phantasmagoria of investors and brokers.  Some may think they are dealing in the real world of insured “securities,” when in actuality they are dabbling in the insecurities and superstitions of the human psyche.