Eclectic Analyses From Orthogonal Viewpoints

Goodbye, Capitalism. Hello, Socialism, American Style…

Gone are discussions of environment, value issues, military adventurism and more. It’s all, and only, about the economy now. And we’re well on our way to bankrupting the nation and the world.

Let’s be sure not to toss out the golden goose with the bath water on this one. The system that got us out of World War II and on to about the mid 1980’s worked just fine. Banks were conservative and responsible. Then came an equity crash in 1987 that we rebounded from in about three years. During this time, junk bonds were used to finance corporate takeovers and leveraged buyouts. Also during this time, real estate depreciation requirements were changed from 30 years to 15 years, fueling a mini-boom in that market.

Junk bonds crashed in 1989, and some folks even went to jail over that debacle. (Unfortunately, Michael Milken came out of prison richer than he went in, even after paying $600 million in fines.)

Fannie Mae was formed in 1938, but was changed from a governmental agency to a private corporation in 1968. (This was done to balance the federal budget.)

real estate mini-bubble that burst in 1996. Then we had the 1997-1998 Asian Currency Crisis. We climbed out of those, but during that time (and maybe a bit before) the stage was set for our current meltdown.

In 1995, under the Clinton administration and a solidly Republican Congress, the first seeds of the current mortgage-driven ruination of liquidity were sown. You see, Fannie Mae and Freddie Mac (formed in 1970, but also turned loose in 1995) were allowed to buy subprime mortgages from underwriters. This seemed like a workable idea at the time, and a risk-sharing mechanism already existed: The CDO, or Collateralized Debt Obligation, invented in 1987 by Drexel Burnham Lambert.

Ufortunately, many of the underlying risks in these CDOs (and further bundled derivatives) were opaque to buyers globally.

By 2003, Fannie Mae had a debt equal to 46% of the U.S. National Debt, approaching $8 trillion at that time. (As an aside: Bush, Reagan and Bush Jr. are the only administrations since WW II to drive the National Debt up.) Executives of Fannie-Freddie were being paid handsome bonuses for meeting the needs. Fannie-Freddie were buying everything in sight; often without looking first.

Here’s another eye-opener: In 2001, total mortgage debt in the U.S. was $4.8 trillion. By 2008 it has ballooned to $10.6 trillion, with over half the increase from subprime mortgages. The subprime fiasco began to unravel in 2006, but Fannie-Freddie were directed by Congress to step in and buy the bad-debt paper, hiding the problem for two years. McCain’s Bill in 2005, once Congress was Democrat-controlled, was stonewalled in spite of Greenspan’s testifying in support and warning of an impending disaster.

You see, the policies for Fannie Mae and Freddie Mac made it easy for other underwriters to loosen their rules. And regulators did nothing. And Congress, once the bright boys warned of the problem, didn’t want to hear about it. On partisan terms.

Oh, there’s plenty of blame for both parties here as well. This could have been fixed a decade ago, but the go-go-go on return, plus hiding risks behind multiple derivatives (often opaque), seemed like a good deal at the time. That is, Everybody, including Congress, were getting privately rich, and no real end was in sight, quite.

Sometimes the pigs win, but hogs always get slaughtered.

You think there weren’t enough indicators we were in Big Trouble? Look at this chart:

A loss from 259 to 133, or 49%, continuing a downward trend from the previous year. Or how about oil?

From $50 to $150 in 13 months, on top of the mortgage pressures. People quit paying their mortgages so they can drive to work, to feed their families. This drives the bad-paper situation crazy, and suddenly all that risky-paper stuff is worthless. The drop the last three months is too little, too late; the cycle time on mortgage recovery is way too long and the damage is done.

And banks globally, betting on getting cash from these futures contracts, are stuck without a key revenue. They’re all under water. And anybody with any cash, those entities who did their diligence (more or less; none are escaping unscathed), won’t/can’t loan to those who are broke.

Final Answer: It’s the Leverage, Stupid. And no amount of crisis lending from national banks will fix that. Any of that money will simply disappear down a rathole as banks dump the bad paper.

Saving entities that are “too big to be allowed to fail” like AIG only makes things worse; they’re now done with the first $85 billion and are getting another $70 billion; which they’ve already run through the first $38 billion of. While executives go on spa retreats to pat themselves on the back (and others pat them all over) for rescuing their company.

Let the suckers die. They don’t get it. And meanwhile, get out your red clothes, your hammer and your sickle, socialism’s pretty much here…

Seeya ‘Round the Ol’ Gulag, Comrades…

No related posts.

Related posts brought to you by Yet Another Related Posts Plugin.

Trackback URI | Comments RSS