Nothing To Worry About
I don’t know whether to be angry but cynically resigned over the recent Bear-Stearns deal, or whether to be very, very frightened.
Bear-Stearns got itself into trouble by leveraging beyond all reason: a 38-to-1 ratio of debt to assets, if memory serves. Leveraging is essentially a means of increasing profit by increasing risk: money is borrowed for reinvestment; in extreme cases, the investment itself is used as collateral for further borrowing, in an exponential cycle. While the market is on the upswing, this is a great way to rake in the dough, but when the market turns, all that exponential function operates in the other direction. Bear-Stearns was too dependent on all those bad housing loans an easy credit we’ve heard so much about recently, and when lenders got spooked and called in some of that debt, Bear-Stearns found all that leverage pushing back. On the verge of collapse, Bear-Stearns sold out to JPMorgan-Chase for $2 a share, in a del brokered by the US government, but not before the government pumped a whole lot of money in to Bear-Stearns and promised to take on its risk and bad debt. In short, JPMorgan-Chase bought out one of its few remaining competitors for pennies on the dollar, and the US taxpayer paid them to do it.
I’m angry because we have here another case where the dangers of the free market apply only to the little guy; the fat cats are immune to their mistakes, including the mistakes they make with other people’s money—all while profiting from other people’s money. Secretary Paulson took three repetitions before he could no longer pretend he didn’t understand the question in his CNBC interview yesterday: is there any comparable rescue coming for the homeowners? After a few hems and haws, he eventually admitted to speaking with Project Hope for 45 minutes about the matter, not that anything concrete came out of it, but Paulson sure feels for those folks who are losing their homes. After all, the government can hardly protect them from their own mistakes; it wouldn’t be proper. Irresponsible bankers and speculators, however, are another matter: they can’t be allowed to fail, so they’re allowed to gamble over and over, with other people’s money, rake in huge profits if they win, and receive huge bailouts if they lose, on top of enormous salaries.
But more than this, I’m frightened for our economy. Bear-Stearns isn’t the only company out there to leverage itself into peril of utter collapse. And the government no longer has the assets to bail out the banks even if it wants to, regardless of the morality of the situation. Remember the deficit? We’ve been pissing away our national assets to tax cuts for the rich, and in a pointless war. The country is in hock up to its eyeballs, because the very wealthy figured it would be nice to take the national treasury for themselves, and our president agreed, with the firm support of a friendly Congress. Printing money won’t help; we’re already headed into a recession along with a sinking dollar—the stagflation our president and his staff insist doesn’t exist. Accelerating inflation by pumping more money into the system only lowers the dollar further and encourages our foreign creditors to call in the debt before they lose big, speeding the collapse. Meanwhile, it’s the American consumer who loses buying power in order to insulate bad managers from their misbehavior.
Massive debt, leveraged into even more massive debt on hopes of a market bubble, rampant deregulation that made it possible, declining trade despite a falling dollar. We have been here before. With good leadership, and some bitter medicine, we’ve successfully pulled of the nosedive.
But we have also failed to avoid the looming crisis once before, when our leadership was too committed to an economic ideology that the business of America is business, that what is good for captains of industry is necessarily good for the country, that everyone is fit for sacrifice on the altar of the free market except for the very wealthy who would take everyone down with them as they fell. The president built his political career as Secretary of Commerce, arrogating powers from other branches of government to serve his belief that the proper role of government is to serve big business. As the economic crisis he’d helped to create unfolded, a president unwilling to help the average citizen found himself less and less popular, and therefore ever more reliant on a shrinking circle of supporters—the robber barons and banking magnates—to the point where he could not kick out the only support he had. The president, unwilling to subordinate the free market to the interests of the citizenry, resorted to lies, insisting that there was nothing to worry about, that the crisis was essentially over: “We in America today are nearer to the final triumph over poverty than ever before in the history of any land.”
He was wrong. The Stock Market Crash of 1929 occurred within months, and the nation—and the world—spiraled into the Great Depression.
We could get out of this mess with programs honestly designed to do so. I’m frightened when I consider the chances our current leader, either unwilling or unable to recognize the crisis exists at all, will adopt them. To date, his response has been to call not for a reversal of his destructive policies, but an acceleration, as though we might outrun stagflation, a recession, or even a depression by speeding into it. I can see that leading only one place. The only question is how much damage can be done before someone else’s hand is on the tiller, and out of the till.