Sunday, August 16, 2009

Yeah, It's Going to Take a While...

Much ink & many electrons have been used to describe the similarities between today and the Great Depression. That scary line you hear often about curing the GD is "the only thing that ended it was WW2". I partially agree with that statement. Many of Hoover & FDR's public works projects were intended to help spur the economy, but were also a way of putting many unemployed young men in remote areas instead of organizing in cities or marching on the government (sad example here). Think the TVA and Hoover Dam were funded purely for electricity? These projects jumpstarted nothing because we had to repair balance sheets and had tons of excess industrial capacity. A turning point in the GD was when the debt levels in America returned to a more normal ratio to GDP. When 'we' got back in line, a true end could be declared (end as in things got back to previous levels and grew, not chump change growth of the cliff dive crashes).

That graph looks pretty scary. It does end in March of 2008, so an updated graph would be interesting to see if we've made progress in paying down debt.Notice how the graph jumps up then slides back down over the course fo the 30s and when the graph reaches equilibirum with historic norms, it coincides with the end of the GD? In much of the talk about making important moves to correct the economy, few politicians or TV experts want to stick their neck out and say "look, we ran up this debt, we got to pay it down". There's also another motivation to that and another way the GD ended. Debt forgiveness. Back in those days, debts were paid off or an element was forgiven, wiped away clean. An example of this is calling your credit card co about your 10K balance, and they allow you to pay only 1500 back and wipe the rest away. This is at the heart of the mortgage problem, and is a way to keep people in their homes. Some heartache and ghost towns could be avoided with debt forgiveness. This is why Obama and Congress' plan to get people to refinance was not a move to help people stay in their homes as much as it was to get people to refinance at a cheaper rate with the same principal, keeping them as debt slaves.
There are some big reasons for this not to happen.
1. Our politicians are owned by the banking industry. - Well, every interest has its claws into our leaders, but the banks are big boys. They want to collect their proper due. Perfect example is how Citigroup is still around in its current form when we, taxpayers, own 1/3 of it & I'll spit nickels if they are solvent.
2. The debt forgiveness would ruin banks balance sheets. - Banks would take haircuts on these mortgages' values, which would show them as insolvent or nearly insolvent. They would rather be able to mark them up high rather than face facts.
3. The ultimate holders of some mortgage and agency paper. - Not just institutional investors and fat cat bankers, foreign central banks, sovereign wealth funds and other bad guys with big pocketbooks (see here). These jerks are the same jerks who fund our federal govt and current account deficits. They recycle their dollars into these holdings. They do not like taking haircuts. Think the average Chinese citizen would like to know hundreds of billions of $$ was wasted on holdign agency paper rather than being put to use in their nation?
wayyyyyyyy down the list in significance, but next...
4. The backlash by prudent folks everywhere & citizens of states that are not bubble lands. - Tea Part protests are a form of this. The "I played by the rules why do they get bailouts" crowd. Actions would ultimately 'bail out' the aggressive households that levered up. This happened everywhere, so in certain areas you'd just anger prudent others. The backlash could depend on how it is positioned by the media (MSM and alternative). Crafted as a beneficial way of socializing losses to spur the recovery in the entire housing market, it could still be a horse pill for the public but acceptable. Portrayed as a means to bailout fly by night flippers, the irresponsible, the greedy, the poor, etc. at the expense of the "good" you could have a huge backlash at entire states (California-Florida-Nevada come to mind). The state bailout of Cali is going to be big and ugly, but that's another topic. The bailout game is always dangerous for the ruling party. You infuriate a block of voters no matter what you do, but the fear is in swing states, districts, sub-groups. Just ask Arlen Spector if he's going to vote for cap n trade or the health care reform debt debacle plan.
This process will take years to sort out. America, and the rest of the world, got into this jam over the course of many years, and it will take many to get through it. Unfortunately, if we do not face up to facts quickly, we will ultimately just kick the can down the road for a later resolution and confront it once more with with a bruised foot. My fear is that we waste money on stimulus plans like the Bush 08 (pure transfer of debt) & Obama 09 (waste on medicaid and transfer payments to the already poor) plans and the bank, GM-Chrysler + AIG bailouts, crimping our ability to borrow money when we truly need it from foreign lenders.
(I say borrow because a govt should never raise taxes in a down economic time. This is also why I am against adding public option health care reform now. After all, Medicare only has 30+ Trillion in unfunded liabilities and is going to start running deficits soon, what's the problem with adding trillions more?)

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