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Tuesday December 16, 2008 10:04 am

Werd: Bailout - Part Two

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I am not a master of finance, to say the very least.  [You can find my full opinion on debt and credit here.] 

While 80% of the freshman when I was a senior at the University of Richmond in 2000 would go on to earn a major or minor degree from our Business School, I never took a single class at the School, and only ever held disdain for those that did.

It should be no coincidence, then, that almost ten years later, I am still buried underneath school loans and have seen my best entrepreneurial ideas die quick deaths due to my ignorance in all areas involving money.  My relationship to the American economy, to this point, has been adversarial: we both cared little for one another and worked towards the other’s hopeful demise.  But it is not with joy that I witness the economy’s current unhealthy state, as its disappointment only furthers a lesser state of my personal economy.  If the current American economy were to die, a part of my life would surely die with it.


*****


I was on 40th Street and Third Avenue on September 11.  I remember looking up to the sky an hour after the first plane hit, seeing it cloudless and bright, and thinking – “Bush is going to #### this up.”

Why did my thoughts move immediately to his inability to handle such a situation?  Very simply: because I follow the news.  Just as I knew in 2006 that Obama would be our next president, so did I know that Bush in 2001 was the last person we wanted in charge of an American crisis.  It wasn’t for the shallow belief that he was “evil,” it was for the concrete knowledge that Bush had failed in every endeavor he had ever been involved in.  Arbusto, Harken, then the Texas Rangers: all short-term windfalls for Bush and his cronies and long-term failures.  Just from reading about Bush in the runup to the 2000 election, I understood that Bush’s chief positive attribute was his ability to earn political capital that he could change into monetary capital.  He was, very much so, the president that my peers in Business School most resembled: their eyes fixed squarely upon profits without regard for any noble virtue; all of them, sons of Gecko.  The rationale for Bush’s election was his familiarity with the corporate world and he surely considered himself the CEO of America.

We can argue forever about the root causes of any economic collapse — indeed, even now, we can watch as historians debate the causes of The Great Depression of the 1930s.  But, in a sense, is not the economic state of a nation entirely dependent upon confidence of its citizens?  If money is an abstract representation of that which we, as humans, value, is not the American economy the abstract representation of what we, as Americans, value? 

All of this, whether we can admit it or not, is the end-result of a Bush presidency.  No matter how we attempt to explain the attribution of blame for our current state, the country is as the country does, and as Bush leaves office no one can say that we as a nation are better off then when he took office in 2000.

If you want to look at that on an existential level, then the economic state of 2008 represents the world’s waiter placing the bill for the past eight years on our table.  The dinner is over and we have to pay.  Except this time, we can’t use our credit card.  Cash only, please.

 

*****


The credit and housing crises were sniffed out by 2007 [e.g., see articles here and here].  The market did not realize these realities until September 2008, but nonetheless, the problems existed. 

A government that was led by leaders who were looking for warning signs could not have ignored the same articles that I saw passing in front of my eyes (I had been looking for the warning signs since 2000).  But the government we actually had, led by leaders who were bolstered by the promising history of good performance, saw no reason to change the current system.  The history they knew told them that nothing was wrong.

In order to sacrifice, Bush told us to shop.  It was not an idyllic or irrational request: but rather a crafted means of sustaining an economy during a crisis.  To support the billions/trillions of dollars that we would, over the next seven years, spend in war and defense, our leaders asked to direct our money into commerce, in hopes that our commerce spending would spur an economy that was certainly shocked in 2001.  The reality at the time, however, was that the average American was already nearing the end of their credit rope.  Wages were not rising in accordance with inflation, making American’s poorer each year.  Wage inequality was exacerbated, rewarding the rich with more riches and denying the middle class with an opportunity to save money.  Bush’s order for spending was certainly heeded, but after seven years the effect of that spending spree is no longer in doubt: we see it reflected in our personal and national credit ratings that can’t afford the house that our economy is now trying to sell.

The economy of 2008 is the conclusion to Bush’s strategy of 2001.  The nation is in as much debt as its citizens.  Once again, I am unsurprised that Bush leaves yet another company in worse financial shape than he inherited it.  It is a historical fact as reassuring as it once was to believe that houses would always grow more valuable.  The bubble of Bush’s incompetence is one that has yet to be popped.


*****


As we prepare to make real sacrifices, our shovels on our shoulders at the ready, there are two emotions that offer to arm us: fear and trust.

Bush’s legacy of fear, as always, is delivered as a blurry threat.  During the past eight years, we might have been afraid of immigrants, terrorists, Muslims, liberals, the ACLU, our own government, homosexuals, offshore jobs and the global economy, Europe and the Euro, France and french fries, but all of those fears failed to threaten our livelihoods.  But recently we have been able to understand, first-hand, the real threat that a bad economy poses.[1] 

This is the fear that goes unspoken in the popular media, especially as pundits from all sets of ideologies suggest solutions to our economic crisis.  All of them essentially argue, “If we don’t do X, we are going to be in big trouble!”  While X varies based on political philosophy, no one will define what, exactly, big trouble means.

Big trouble starts with the lack of credit.  Lack of credit is essentially a lack of trust.  Right now, bank A doesn’t trust bank B because bank A doesn’t know what sort of terrible housing investments bank B is holding.  If bank B is holding onto worthless housing investments (like Wachovia and Washington Mutual were), then bank A isn’t going to give bank B a line of credit, being too great a risk.  But, because of the extraordinary complications of these housing investments, bank A can’t even tell if bank B is holding bad investments.  Therefore, a stalemate is reached: bank A can’t know, so bank A isn’t going to take a chance.  Bank A figures it is better to hold onto the risk of the investments they know (the ones bank A already has) instead of the investments they can’t know (the ones bank B has).[2] 

The lack of extended credit means that the family restaurant down the street can’t get an advance from the bank to buy as much chicken as they did last year from their distributor.  The distributor, selling less chicken, lays off a few employees.  Those employees, now unemployed, can’t go to the restaurant to buy the chicken dinner.  The restaurant orders even less chicken to meet the demands of the diminishing crowds, cutting into their profits.  The restaurant then lays off a few employees, who, in turn, don’t buy the other things that the distributor sells.  The economy keeps spiraling until the market bottoms out: reaching its actual, real world, value as expressed in the minimum amount of people hired to perform the minimum tasks that provide the most people with food.  That’s what big trouble is: the point of real value that exists without confounding speculation.

When we land at that bottom, a revolution can take place.  This is what every economist, no matter how “socialist” they are considered by fiscal conservatives, worries about.  This is the unnamed Trouble.

When a state reaches the point of revolution, anything is possible.  There is a chance that America could become a gun society where everyone protects their food and property by force (see: Jericho).[3]  There is a chance that America could become a society that cooperates to find a greater purpose in its existence than mere profit (see: Battlestar Gallactica).  But however we would emerge, that state is naturally feared because it is unknown. 

The bailouts, then, represent the last-ditch efforts of our government to keep themselves relevant by retaining an American economy.  Should the American economy fail, our politicians will be the last to be laid off.  If you don’t believe our leaders want to save us — ask yourself if you would save your own job, if you had the power to do so.  Our politicians, from Obama to [insert GOP leader here], have the power to keep the American economy running, we need not fear that they will not try.  We need not even fear that they fail: for their failure only means a new chance at getting this American “thing” right. 

Indeed, just as in our last great economic crisis, we need only fear fear itself.  When we cease trusting that our fellow Americans are up to the task, when we fear the world that we are faced with, the entire proposition of America will go kaput.  If we want America to persist, we must rely on that nebulous emotion that Obama sailed in on: Hope.  It is for this reason that he was elected: he answered all of our modern American worries with the only response that the America of the past has ever known in crisis: Yes, we can.

The bailouts of Fall 2008 saw America’s hired help doing most of the heavy lifting.  Yes, the taxpayers paid for the work to be done, but few Americans have yet to feel the full brunt of the heavy weight. 

The bailouts of 2009 will require real strength and real efforts.  The sacrifice that Obama will ask for will not involve “shopping” but will necessitate prudence and hard work — those valuable investments of labor that are never risky.  If banks can trust Americans to make good on their initial investments, then credit will return to the economy.  If Americans can trust banks to make those investments and not invest in other countries, then we have truly have nothing to fear.

We will disagree on how best to get the water out of our boat, but we can all agree that we are getting flooded.  It’s time to bail.






BAILOUT SERIES
Bailout - Part One
Bailout - Part Two
Bailout - Part Three
Bailout - Part Four
Bailout - Part Five





[1] All those other fears are luxuries, really — examples of the freedom of speech that makes America equally great and frustrating.
[2]  This lack of credit/trust also extends to the banker-individual relationship.  Most middle class citizens have one very large asset: their house.  Before the housing crisis, these houses were very valuable.  Therefore, banks were comfortable lending money because the risk was mitigated by the value of the house.  But now, with housing values plummeting, banks are less likely to extend a line of credit to the homeowner.
[3] That would be my greatest fear, because I would survive for less than a week in a world dominated by force of brawn and bullet. 

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