Analytical & Intelligence Comments] RE: The Political Nature of the Economic Crisis
This is a response to Mr. Friedman's article at Stratfor.com
Very good, Mr. Friedman,
I like your article. It is certainly a discussion starter.
There are several issues as to what it is Mr. Paulson is trying to do verses what the RTC. Senator Schumer wants an FRC. Then it became an RFC. R means reconstruction. F is for financial. C equates corporation. The problem with Senator Schumer's idea is the same as the old RTC. Who is going to be making fortunes from this situation that both parties created over 20 years?
First one needs to address Mr. Paulson's objectives. His idea is to create a floor be that a sub floor for financial instruments to be able to sell them in a reasonable market place. A concept lending itself to the FASB 157 statement that "mark to market" has to be in regards to an "exchange price is the price in an orderly transaction between market participants" and "trades in an active market". Meaning the instruments cannot be sold for "firesale" prices.
My initial viewpoint that this "plan" is a sub floor in these instruments stands correct. Nobody can say for sure that these instruments if held for any amount of time will make a profit. The risk is surely on the default side. It appears that the risk aversion comes from trying to sell them in an orderly fashion hoping to slowly deleverage these instruments. It is hard to analysis "hold to whatever time frame to turn a profit" if one doesn't know the risk. Some of these instruments may recover turning a profit that then is used against the ones that don't and take a loss.
Which brings up the question of why Senator Schumer wants so much to make a corporation to deal with this paper? The problem with this FRC or RFC is it will take too long to create. From what I understand they are buying bad assets not good assets.
Paulson wants to put a floor in to make an orderly market. This could mean that some people are pushing down the prices of these assets to buy at firesale prices. They may be the ones who have been selling these instruments and now know they aren't worth holding. Some of these instruments will probably default. I think there is a provision in the bill to use newly authorized financial institutions into federal entities to take control of these properties. They will be held to no golden parachutes and the other regulations.
At this time, news that Warren Buffet is going to buy in interest in GE is being released. Same deal as he had with Goldman Sachs. I will reserve comment at this time.
Back to the subject at hand, how did the RTC make money? Well, Mr.Greenspan became Federal Reserve Chairman in 1987. His plan to lower interest rates in order to spur an economic recovery had a few branches involved. One part was to create a market in which to sell the RTC properties into a good economy or as they say a growth economy.
The first is that one had to create a consumer to buy and a cheaper way to produce products. Basically by having a currency that would be cheaper to exchange with and tax incentives to make the imports profitable to companies involved with the production. American workers were not as cheap and had labor laws. The experiment of lifting developing economies began. Greed was in and ethics was out.
Free trade agreements ruled the world. Becoming part of the WTO was the carrot. The new "Service Industry" was born. Logic being that a person could lose their higher wages to lower wages and not have a decrease in purchasing power due to low imports. They created a backstop in the bleeding of the losses in personal incomes merely as a facade.
In addition, in order to account for higher property values in the purchasing power the imports had to be real low. Thus, leading to an economy where a person used more of their income for their mortgage and rent. Thus, low wage earners were forced to have many people living in a single housing unit in order to pay the rent or mortgage. This situation created more divorces and relationship problems. Of course that led to many social jobs for the court system in order to recommend as to who was at fault by a sociologist.
Another aspect in the inflation numbers is called the basket of goods. My favorite example to use is bleach. My whole "doing laundry" life dealt with good old regular bleach. I knew how much to use for what kind of load. It was cheap and used for cleaning. Then, along came the sale of ultra bleach. A slimy condensed product that when adjusted as to usage didn't save any money.
Not clearly in the amounts they say it made up for. This new bleach was a more expensive product. Yet, since generic bleach and one name brand company still produced the product the new product is not introduced into the basket of goods. Even though in the grocery stores many times regular bleach would be sold out forcing one to buy the new bleach.
Nevertheless, the longer the regular bleach is sold in a limited quantity the new bleach at a higher price is not included in the basket. Thus, I find myself for the past 5 years looking for my regular bleach as the first indication to when inflation will be accounted for.
Now, when it comes to the subject of home furnishings the new economy brought even more hardship on the average worker. Once Wal-Mart became a big enough company its pricing structure was used to offset the increase in quality home furnishings. The price of their best furniture products verses the lowest of a middle quality furniture maker is where they get their median number for inflation in furniture. As there is no right for a person to be able to purchase nice things when cheap products is all they deserve as a lower class of citizens.
Now, we are in the mid 90's and credit cards are easily acquired. People had equity in their homes and savings accounts. These people were the target of the sales of new cheap imports on credit cards. As low interest rates were pushing up their property values and the new 401k retirement plans were first being started and looked good. President Bush touched on this in his speech on September 28, 2008. He stated foreign investors were taking their money out of the market. In 1998, this became the encouragement of expanding 401ks due to foreign investment in the US market place.
Then for the past 8 years the republicans who claimed they were going to clean up the problem did nothing. President Bush kept Greenspan. Even though in 2000 Greenspan was forced to take his money out of the stock market and put it in the bond market due to his conflict of interest as being the Chairman of the Federal Reserve. He did that just in time for the fall of the stock market. Not to mention that the bond market has performed well over the years for as I have not heard he could not be invested in Bonds.
The republicans had deregulated and given tax incentives to their special interests for moving more jobs overseas to build more imports and create a service sector and outsourcing. The republicans say that the democrats deregulated Fannie Mae and Freddie Mac. Yet, in 2005-6 President Bush went out in front of the cameras to state that the United States had the highest Homeownership ever.
Then, Bernanke became Chairman. At lot was said about increasing interest rates in order to encourage more savings. Well, that didn't last long.
American people are now faulted for not having regular bank savings. Yet, encouraged to have asset savings since interest rates for a bank account is so low. Therein lays the rattrap. As the no inflation economy (which was correct from a business standpoint of being unable to get a set a price for one's product) squeezed equity in homes and emptied bank accounts people wanted to borrow on their 401ks.
Bernanke attempted to raise rates, which started deleveraging of the economy. Every time he did a quick flip back to cutting interest rates. The weak dollar helped exports. In fact, there had been sightings of new life in the steel industry. Unfortunately that came with a price of loss of purchasing power. This eventually leads to an increase in wages and rising interest rates.
The more employees that non-farm payrolls show the more reserves have to be to make the payroll leading the economy into a downward spiral. As interest rates go up everything else goes down.
Take all of the past 20 years and add to it accounting fraud. The likes that make the Savings and Loan look nice. Here we are. Incompetence and ignorance being pleaded by the very people who claimed they should make multimillion of dollars because they were smarter than normal everyday people were.
Even though that multimillion was the savings account of the companies they claimed to have grown. Well, they grew the stock price using steroids. Any other growth is surely speculative. A giant is a giant. Normal size can become a giant on steroids. After the steroids, normal becomes injured.
At last the patient is in cardiac arrest and taken to the hospital. Where the 'doctors' will not cure the patient but treat the patient and send them home. Follow care is truly needed. Yet, until there is a valid discussion as to how this economy arrived where it did there is more on the horizon.
In regards to the premise that the RTC worked, I guess there is some disagreement. Clearly a lot needs to change.
"A people without reliable news is, sooner or later, a people without the basis of freedom." Harold J. Laski: A Grammar of Politics