The iPINIONS Journal

Frankly, if nothing else, this latest bailout should finally destroy the myth that the US is running a capitalist, free-market economy.  After all, this (and the other government bailouts cited above, which effectively privatized shareholder gains and nationalized losses), coupled with longstanding corporate subsidies, are indistinguishable from the way China runs its socialist, controlled-market economy.

[Chickens come home to roost on Wall Street..., The iPINIONS Journal, September 16, 2008]

Last weekend, finance ministers from the world’s richest countries betrayed the most basic tenet of capitalism by agreeing on a multilateral plan to effectively nationalize the banking industry in their respective countries.

In each case, governments from the US, Europe and Japan allocated the equivalent of hundreds of billions dollars to buy stock in private banks as a means of insuring them against failure.

What this portends for capitalism, however, is not lost on Venezuelan President Hugo Chavez - who President Bush and other western leaders have continually condemned for nationalizing the banking and other major industries in his country:

This crash of capitalism and of neoliberalism will be worse than that of 1929.  The world will never be the same after this crisis. A new world has to emerge, and it’s a multipolar world.  We are decoupling from the wagon of death.

Nevertheless, Wall Street (and other markets around the globe) greedily endorsed this betrayal of capitalist principles by rallying from historic losses last week to historic gains yesterday - with the Dow in particular closing up 936 points, which nearly doubled its previous historic one-day rally of 499 in 2000.  

Never mind that it’s probably only a matter of days before this theoretically efficient market suffers new historic losses. Because this seems inevitable given what Business Week describes as a “$516 trillion derivatives time-bomb” waiting to explode…. 

(And if you don’t know what derivatives are, you have that ignorance in common with most of the money managers who have amassed this incomprehensible debt by investing in them in some netherworld corner of the global marketplace.) 

Capitalism, in its quest for higher profits and new markets, will inevitably sow the seeds of its own destruction.

[Karl Marx]

But I suspect that yesterday’s historic gains will have the same effect as the plant in a street game of Three-Card Monty who pretends to win a bundle only to lure suckers in who invariably lose their shirts. 

Investors beware….

That said, as a Keynesian (big-government) liberal, I never believed the free-market fairytale that an  ”invisible hand” would cause profits generated by the investments of greedy corporations and rich folks to trickle down to poor folks.

Instead, I’ve always believed that government intervention was necessary not only to stimulate economic growth and regulate the private sector but also to ensure the equitable redistribution of the wealth of nations.

Therefore, bailing out Wall Street is only the first step.  Because, to prove that they have really seen the light, governments in these rich, erstwhile-capitalist nations must now follow through by bailing out Main Street as well (eg. by forgiving the mortgage and credit-card debt of all citizens who make less than $100,000).

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Chickens come home to roost on Wall Street…

Yesterday afternoon, after 48 hours of political theater, the Bush administration and congressional leaders finally agreed on the $700 billion rescue plan, which they touted as a “Wall Street bailout to save Main Street.” 

This, despite ideological carping by a few nutjob Republicans who, after leading the charge to double the national debt to over $10 trillion in recent years, are now posturing as born-again fiscal conservatives determined to spare the American people more wasteful government spending.

The legislation includes the four guiding principles Barack Obama championed, namely: 1) a ban on generous payouts for irresponsible CEOs on Wall Street; 2) replacing Treasury Secretary Hank Paulson’s absolute authority over the bailout’s execution with a bipartisan independent board; 3)  an investor stake for taxpayers; and 4) assistance for people who are in danger of foreclosure.

According to the Wall Street Journal, the legislation, “at its core”, provides the means for the Treasury Department to:

[buy] impaired mortgage-related assets from financial firms — giving them cash to replace the toxic debts that have put them in danger or dissuaded them from lending. The plan is to help the firms restore their capital bases as well as the trust that enables them to borrow and lend at reasonable terms. Without this, officials worry that the credit markets, the lifeblood of the economy, would grind to a halt.

Meanwhile, there has been virtually no reporting on the $25 billion in loan guarantees for the financially strapped auto industry, which the government approved on Saturday.

Moreover, nobody knows whether these bailouts will prevent the economic meltdown everybody has been warning about.  But they do answer the following question I posed in a recent commentary on this unfolding crisis:

What will happen when another corporation “too big to fail” (like GM or GE) looks to the government for taxpayer dollars to pay for their corporate losses?

[Chickens come home to roost on Wall Street..., The iPINIONS Journal, September 16, 2008]

And they confirm the cynical conclusion I drew in this commentary about the very visible hand of government reaching out to rescue so many erstwhile private companies; namely that:

If nothing else, this latest bailout should finally destroy the myth that the US is running a capitalist, free-market economy.  After all, this (and the other government bailouts cited above, which effectively privatized shareholder gains and nationalized losses), coupled with longstanding corporate subsidies, are indistinguishable from the way China runs its socialist, controlled-market economy.

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Chickens come home to roost on Wall Street…
McCain and Obama debate…amidst economic crisis

In 1929, the government did nothing and the fall led to the Great Depression; whereas today, it has moved over one trillion dollars (i.e., $1,000,000,000,000.00) in place to cushion the fall, hoping to stave off an even greater depression.

But don’t worry, many of the erstwhile masters of the universe are so disoriented by the sudden loss of their ill-gotten wealth that, when they jump, they’ll miss that big cushion and land right on the pavement….

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Chickens come home to roost on Wall Street…

A number of people have asked in recent months why I have written so little about the sub-prime mortgage mess and its impact on the US economy.  I often replied that I didn’t have a clue what to make of the mess or what it portends.

(Evidently, I am not nearly as clueless as John McCain who started off yesterday declaring that the “fundamentals of the US economy are strong.” But only hours later he was making the patently fatuous assertion that “The American worker and their innovation and their entrepreneurship, the small business, those are the fundamentals of America (sic) and I think they’re strong.” And just to reinforce his cluelessness he ended the day with a new TV ad declaring that “Our economy is in crisis.”)

Little did I know, however, that the masters of the universe on Wall Street were even more clueless.

Because only this explains the universally shocking meltdown over the weekend that wound up with the collapse of Lehman Brothers, the buyout of Merrill Lynch and the fate of American International Group (AIG), the world’s largest insurer, hanging in the balance. Not to mention the 500-point tumble in the Dow on Monday, which was the biggest one-day decline since 9/11 in 2001.

In fact, this fallout stems from the gamble investment bankers (in New York, London, Hong Kong and elsewhere) took by betting the farm on sub-prime mortgages and other debt-laden transactions that would make any fly-by-night pyramid or Ponzi scheme seem financially sound.

This crisis is clearly deeper than anybody had imagined only a short time ago.

[Peter Stein, associate editor at The Wall Street Journal]

(Note: If you don’t know what sub-prime mortgages are by now, stop reading and go crawl back under your rock!)

And coming on the heels of the government’s recent bailout of Bear Sterns and receivership of mortgage giants Fannie Mae and Freddie Mac, this historic meltdown gives the impression that the entire US financial industry is now quivering in quick sand. Worse, nobody seems to know how or when the economy will rebound.

Indeed, many are calling this the biggest crisis to hit the financial markets since the Great Depression in 1929. And the worst may be yet to come - since the looming bankruptcy of AIG could make even the Great Depression seem like little more than a small-town budget crisis by comparison.

Are you enjoying watching this? You think this is funny?

[This is what one investment banker reportedly shouted at a crowd that had gathered yesterday to gawk at the procession of laid-off workers exiting the Lehman Brothers office building.]

Meanwhile, the schadenfreude is palpable amongst those who think these developments herald the belated comeuppance of rich investment bankers who have been living on easy street for far too long - primarily by “wracking up big returns and sticking it to the taxpayer when things go sour.”  And even though some glee over their pink slips is understandable, it is also shortsighted.

After all, it’s seems only a matter of time before this meltdown comes to main street, making daily transactions at commercial banks (e.g. getting a car loan or a mortgage)  much more expensive.

That said, this is hardly the forum, and I am hardly qualified, to distill the myriad permutations of this financial crisis or to dispense advice on how to deal with it.  Although, you might find this nutshell explanation of the crisis from The Wall Street Journal somewhat helpful:

Lehman, like Bear, Fannie and Freddie, had too much leverage. Think of a homeowner with a 96% mortgage and credit card bills. If the value of the house declines only 5%, the homeowner is wiped out. The total leverage of companies like Lehman is difficult to calculate, but it is not unlike that of a highly over-leveraged homeowner. Small declines in the value of its assets jeopardize its solvency.

Finally, I feel obliged to reiterate the generally accepted fact that deposits at commercial banks (like Bank of America, Citibank and JP Morgan) are insured by the federal government (FDIC) up $100,000.

And since over 90% of Americans do not have account balances anywhere near that amount, you probably don’t have to worry about losing your savings the way many rich folks have now lost their investments on Wall Street.

All the same, it can’t hurt to ring your banker or broker for a little reassurance - especially if you are invested in a 401k or some other pension plan.

UPDATE

Government abandons free-market principles to save US economy…?

Today at 9:45 pm:  Proving my point that nobody has a clue about how to deal with this unfolding crisis, the federal government threw AIG an $85 billion lifeline today, less than 48 hours after vowing not to bailout another financial institution. 

Now the question becomes: what will happen when another corporation “too big to fail” (like GM or GE) looks to the government for taxpayer dollars to pay for their corporate losses?  Never mind that the only honest answer anyone can give is: who knows?!

Frankly, if nothing else, this latest bailout should finally destroy the myth that the US is running a capitalist, free-market economy.  After all, this (and the other government bailouts cited above, which effectively privatized shareholder gains and nationalized losses), coupled with longstanding corporate subsidies, are indistinguishable from the way China runs its socialist, controlled-market economy.