On Thursday morning, September 18, 2008 a tragedy almost befell the 450 billionaires and 3,000,000 millionaires that live in the United States. The billionaires were on their way to becoming millionaires and the millionaires were about to leave the club. Luckily, Hank Paulson, U.S. Treasury Secretary, felt their pain. His $700 million portfolio was probably taking a bit of a haircut too. There are 305 million people living in the United States. The net worth of all the households in the U.S as of June 30, 2008 was $56 trillion. The 450 billionaires have a net worth of approximately $1 trillion and the 3,000,000 millionaires have a net worth of approximately $11 trillion. So, 1% of the population currently owns 21% of the net worth in this country.
Many of these billionaires and millionaires have accumulated their wealth by managing other people’s money. The customers never have the yachts. The money managers have the yachts. The .1% ruling elite decide the fate of your grandchildren in Washington D.C. out of public view. The ruling elite have the most to lose. Whose best interest do you think they are looking out for?
As I watched the various business networks over the last few months, I sensed desperation and fear among the commentators, pundits, and “experts”. It is a fear based upon self interest. Their lives depend upon the masses keeping their money invested in the market. They have overwhelmingly been in favor of the bailout bill. I wonder why. Jim “Mad Money” Cramer, who has a net worth of $100 million, was in favor of the bailout bill. Larry “Free market capitalism is the best path to prosperity” Kudlow, a multi-millionaire, was 100% in favor of a socialist bailout of the criminal investment banks. They supported this “blank check” to a government that is already $10.6 trillion in debt, because they want to maintain their lavish lifestyle, multiple estates, and prominent positions in society.
An honest balance sheet (as opposed to the balance sheets of US Banks) will always tell the true story. The balance sheet of U.S. households shown below explains the situation we are in today. The value of real estate rose 50% between 2002 and 2007, much faster than historical growth rates of 3% per year. The problem is that mortgage debt rose by 75% over this same time frame, resulting in owner’s equity as a % of real estate reaching an all-time low of 45.2% in June, 2008.
The assumption by homeowners that prices could only go up, supported by lies from the National Association of Realtors and Wall Street gurus, led homeowners to take $3 trillion of equity out of their homes and live a more lavish lifestyle than was warranted by their income. Consumer debt has risen 30%, while durable goods assets (which naturally depreciate) have only risen 24%. Financial Assets outpaced all classes, rising 55%, as the stock market came out of a bear market in 2003. The vast majority of this financial asset wealth increase benefitted the billionaire club and millionaire club. The rest trickled down.
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Many are now learning a hard lesson. Real estate asset values declined by $500 billion during the first 6 months of 2008, while mortgage debt continued to rise. Financial assets declined by 4%. The lesson being learned is that real estate assets and financial assets can and will decline. As the recession gets deeper and the bear market growls, asset values will decline by 10% to 20% more. The debt will remain and probably increase. With the bailout, horribly run financial institutions were given a pass on their bad debt. Who is going to relieve our debt? No one. The executives of these banks will continue to reap multi-million dollar pay packages, while we make their debt payments in the form of interest payments to the Chinese and higher taxes.
I can’t help but compare our country’s situation to the maiden voyage of the Titanic. Everyone has seen the movie, so can relate to the story. The captain (Alan Greenspan) has been handed the greatest ship (United States) ever made. It is unsinkable. The initial voyage across the Atlantic Ocean has drawn the rich elite ruling class (financers & bankers) onboard. But, the lower decks are filled with lowly peasants (Working Class) who are sneered at by those in the upper decks. A maiden voyage should always be taken slowly. A prudent captain would not take undue risks. Our captain (Alan Greenspan) wants to make his mark on history. He declares full steam ahead (reducing interest rates to 1%). Midway through the voyage, the captain is handed a telegram warning of icebergs (potential financial catastrophe) ahead. If he slows down the ship, he will not set the speed record. He ignores the warning and steams on to his rendezvous (eternal disgrace) with history.
In the middle of the night, the lookouts (Ron Paul, among others) scream iceberg!!! But, it is too late. The great ship (United States) has struck an enormous iceberg (banking crisis). At first, it seemed like everything is OK. There are no visible problems. But, below the waterline the great ship (United States) is taking on water (massive mortgage write downs). The engine room (Federal Reserve printing presses) works frantically to stem the damage. The captain believes that the compartmentalization of the ship will save it. The expert on the design of the ship (Nouriel Roubini) explains that the ship will surely sink. The captain orders the band (Hank Paulson) on deck to distract the masses from their imminent fate. The owners of the ship (U.S. government) never thought it could sink, so they didn’t provide nearly enough lifeboats.
To avoid mass panic, the crew (government bureaucrats) has locked the lowly peasants (Working Class) below deck. They will surely go down with the ship. But, here is where our story starts to deviate. The band (Hank Paulson) decides that the women and children (Middle Class) should not be saved first. The ruling elite (financers and bankers) are piling into the boats to escape their fate. The captain (Alan Greenspan) does not go down with the ship. In a cowardly act, he leaped onto the 1st lifeboat to be launched. So, this is where we stand today. The great ship (United States) is sinking. Should we let the band (Hank Paulson) dictate those who get onto the lifeboats first? If we do, we will all face the fate of Jack as he slowly freezes to death in the icy Atlantic.
The Big Lie
“If you tell a big enough lie and tell it frequently enough, it will be believed.”
- Joseph Goebbels
We must pass this bailout bill before it is too late. This bailout bill is really for Main Street, not Wall Street. Trust the government, we’ve got the solution. Blah, Blah, Blah. The American people are tired of being lied to. Enough is enough. We’ve believed our government and financial “leaders”. They lied to us. We don’t believe them anymore. They cannot be trusted. The bailout bill of $700 billion was originally documented on 3 pages by Hank Paulson. Below is Section 8 from Paulson’s proposal.