Economic Realities of the Past 20 years (II)

Subject: [Analytical & Intelligence Comments] RE: The Political Nature of the Economic Class

Date: Thursday, October 2, 2008, 5:49 PM

Upon having a chance to digest my thoughts yesterday I realized a few mistakes including a couple things left out of the piece I wrote.
President Bush actually came out in 2006-7 hyping the high percentage of home ownership in the country. Correct me if I am wrong. In 2003-5 President Bush pushed the idea of more home ownership. The Bush administration this year stated that the institutions were healthy. Maybe Mr. Paulson didn’t read the FASB 157 statement on defining the accounting of Mark to Marketing as of November 15, 2007 and going forward.

Going back to the Clinton era, the issue of the “balanced budget” needs addressed. The way they were able to put the credit card expansion on the books and cut rates was due to that perception. When in fact there was no balanced budget. An agreement to increase spending by 8% on the federal budget constituted a balanced budget. Anything over 8% spending then qualified as a deficit. Trying to get the Clintons or a hard core Clinton supporter to understand that is very difficult. In addition, that was a product of a republican congress held by Newt Gingrich and a democrat President named William Jefferson Clinton. Most people do not really know where to assess credit and/or blame for the economy making economics a big part of the political game.

When the republicans blame the democrats for deregulating Fannie and Freddie is quite ludicrous. The democrats didn’t take over both houses of Congress until 2007. In 2003, the investment banks now causing the spread of the trouble asked for permission to leverage 40 to 1 dollars. They did that under the premise they were not FDIC insured and didn’t take actual checking and savings accounts. I would say that the 2003 expansion of leverage needed the 2005 deregulation of Freddie and Fannie. Otherwise, neither could pump up the asset and cash flow of their respective financial statements.

This also gives rise to all the new construction in the past 6 years enough construction for 25 years. With low interest rates pushing up property values new construction boomed. Developers need that kind of environment for it to be worth building even though at the end of the cycle people are paying too high of a price for the construction.

Thus, as prices go down the asset value of inventory starts slipping on the financial statements of these builders. Most CEOs have taken their stock options and bonuses over the years. In the next year will probably leave with high cash payments. Along with them cashing in stock options as these companies claim loads of cash which leaves less attractive financial statements. Less cash flow and lower asset values will be the problem as long term debt becomes due after their departure.

One more thing about the new construction, most did not contribute to the communities in which they built. Such as they did not contributing to the roads, schools, and utilities. Leaving the communities to issue bonds and raise property taxes. Of course being a low interest environment many communities did issue bonds. Which is why strengthening the economy for wage earners is very important.

In regards to 401k plans, my problem was in it not properly being explained to people. Using that money to buy products from businesses would have gone a long way to lessen the effect of the Fed Beige book credit widening in the economy. Yet, politics of privatizing Social Security was and is the driver for the 401k. Not to mention the actual wanting of privatizing Social Security in order to get rid of it by the Republicans since the conception of Social Security.

401k’s are just units of ownership of common stock. Common stock in a failure never recoups money. Unless, one gets enough shares for a vote and convertible bonds as did Mr. Buffet with GE and GoldmanSachs. Common stock is just a way of borrowing money and having really no responsibility to the lender. Unless one is running a good company and wants the company to survive long time.

In addition, the institutions in charge of the holding of the assets of 401k’s are considered the shareholder. They receive the shareholder information and voting rights. Those rights are not regulated to the unit holders. The managers of these funds get their pay if they play the game that was going on. And for the most part these mangers do not calculate outstanding stock options that will be taken out in the future. Just because that information is not released does not mean that can’t take a guess. Such as using how high the P/E is and if the company isn’t part of a hostile takeover.

The attempt to give the wage earner a share of the profits within the meaning of 401k’s created problems. People losing money in pension is why the idea was born. Like too many cooks in the kitchen. 401k’s creates too many owners. Thus, putting pressure on the management to cut other perks and pay increases in order to create the illusion of more profits to pump up a 401k.

Some people who in the middle 90’s who had pensions when their companies were sold to corporations had their pensions turned into 401ks. Over the next few years it looked really nice on paper. Yet, some knew the increases were just too large to fast. Some people believed the hype and wanted to borrow on it.

In this new “wealth economy” the selling of mortgages skyrocketed. With a high principle and low interest rate gave more collateral then truly was there. Bank A sells the mortgage to Bank B pretty much after writing it. Bank B pays for the principle and percentage of the amount of future interest. Bank B sells to Bank C and so on. Obviously the amount of interest to gain in profits during the sale gets lower the more times it is sold or the bank is taking a loss. I know of good mortgages being sold 4 or 5 times.

After a mortgage can no longer be sold for the interest it will earn. The banks started issuing what has become known as “complex financial securities”. I would call them instruments.

A better way of explaining them is the bank issued a type of bond on their holding of these mortgages to investors. Which as the public now finds out was not regulated or properly accounted for. Actually, the whole problem is not just bad loans. It is that all assets are losing value and the over sale of good mortgages. The holders of these “complex financial securities” have used these instruments to pump up their financial statements in order to take the real money out of the company. This money should be used to cover the company during the downturns. As the old saying goes, the crap just hit the fan.

As the wind blew, the Paulson plan was proposed to the Congress. The Executive Branch can not write legislation. The idea Mr. Paulson would submit something other than a proposal that he could then deal from is just not realistic. It does though give enthusiasm to arguments that the Treasury Secretary wants too much power. An assertion coming from people who want to go back to an antiquated banking, mining, and coining metal system of money wealth control that they rule over. In addition, they feel that the Federal Reserve and Treasury shouldn’t exist to begin with.

"A people without reliable news is, sooner or later, a people without the basis of freedom." Harold J. Laski: A Grammar of Politics