The bailout is failing because it is a trickle down bailout to solve the problems created by a trickle down economy. In case you haven’t noticed the stock market has fallen into the low 8,000’s and gyrates by 200-500 points a day, somewhat akin to a startled herd running from one fence to another, hoping against hope they will find something different when they end up at the same spots trampling what pasture they have left. Meanwhile the politicians argue about “moral hazard”, creeping socialism and Nancy Pelosi and those communists. It would be a bet against human nature that the raw opportunism, ideological posing and hoarding instinct will be thrown out to save the future of America and maybe the world.
The need to act with dispatch to prevent the economic freefall that is coming if we don’t, has never been greater. The deregulators, who were drunk on greed ignored the risks, Bush and the political bosses pumped money into the false economy to keep it going, the wealthiest with almost free borrowing and windfall tax breaks, unleashed a speculation monster of unprecedented proportions. Unfortunately those are the folks who are still running the show and creating more disaster.
It will get worse, much worse, why? The bailout solution is based on the same trickle down theory the economy was built on, give it to the rich who know how to use it and it will help the people at the bottom. The theory was if you spread the debt widely, it would have little impact if some of it failed. They used this theory to ignore normal debt to asset ratio, instead comparing it to a drop in the ocean, forgetting enough drops fill an ocean.
Only when some of the underlying debt masquerading as assets began to fail did anyone ask the question, how much of this debt have we put out there? Income to debt ratios suddenly became meaningless. No one knows how much debt is out their, what it is worth or who is holding it. The reality is that until stock values deflate to a reasonable asset to debt ratio and consumers have income to buy, the market will continue to fall.
Simply, it is likely that thousands of businesses will fail including some giant automakers. General Motors assets for example, are estimated to be worth $2.6 billion while its debt is $300 billion. This is a sobering thought, yet the Detroit executives are arguing to keep their bonuses if they get government help as this is being written.
As the amount of debt and the true value of the assets is revealed, the stock price falls, requiring the sell off of real assets to stay in business, workers are laid off to cut costs, reducing their buying power. The feedback loops now in play; deflation, unemployment, more deflation will drive the market artificially low as it wipes out any remaining consumer and lender confidence. The solution with the least pain is to boost both consumer income and let the air out of the asset bubble simultaneously, not try and save those who created the problem.
Wealth redistribution created the problem.
The Bush tax breaks gave more capital to the rich and almost free borrowing to play the market with. At first it was invested in qualified mortgages, credit cards, auto and student loans. These were packaged and sold as bonds which were used as collateral to borrow more, to invest in other speculation. Private equity companies and hedge funds offered inflated prices for companies. They sold junk bonds to finance the deal, loading that debt on the purchased companies’ books and then taking huge fees and bonuses off the top for the debt they had created. Excess cash and deregulation also fueled the buyout and merger markets, creating companies “too big to let fail”. In essence they expected to be bailed out if they got in trouble.
These bonds were then rated AAA by companies paid by the sellers and insured with credit default swaps, which again were traded and used as collateral. How big is the problem? Current estimates are the amount of Credit Default sold equals between $55-62 trillion.
Building an economy on debt worked fine as long as you had enough qualified debtors that would pay back the notes. The problem was they ran out of qualified buyers, so pushed to give credit to those who weren’t qualified. This coincided with removal of usury laws restricting consumer interest rates, the restrictive bankruptcy laws passed in 2005 forcing more repayment and doubling fees and a steady bombardment of advertising selling credit to those least able to afford it. Those with no credit were offered payday loans at 600-750% annual percentage rates. Using extraordinary penalty interest rates and fees on the certain to be late payments, was used to give cover higher interest rates to the bond buyers and to justify the high ratings given on this debt.Trickle down, flood up.
During the same period those same big money forces forced wages down by an all out assault on organized labor beginning with Ronald Reagan, weakening of worker protection laws, outsourcing, throwing of retirement programs to wall street and discontinuation of healthcare benefits. Americans found out that jobs created in the new economy were low paying part time service jobs, with few if any benefits. Construction was the fastest growing sector compensating for lost manufacturing jobs, of course that’s based on house building. All of this was successful in insuring a disproportionate share of the profits of the “new economy” went to the rich, not the working people and small businesses.
Making it worse were changes made in how unemployment was calculated hiding, actual unemployment numbers by taking those who had given up off the roles, reducing what full time was defined as and exclusion of some classes of workers. Those who were displaced to lower paying part time jobs were employed, whether that employment paid the bills or not was inconsequential to the conservatives in power. Income adjusted for inflation has fallen 30% since the 1970s, extra household members working and borrowing was the only way to keep up.
Federal housing subsidies have declined by over 60 percent since the 1980s, due to lower funding and the increased inflation of housing, pushing more people to refinance and enter risky financial obligations like subprime loans. In many cases, people had no choice but to take this cheap credit when emergencies that in the past that would have come out of savings arose.
While banks and companies line up at the federal trough to be rescued, millions will be abandoned. We hear bankers and politicians about insuring the “irresponsible consumer” is not let off the hook.
The free market boys also campaigned and got the destruction of the safety net that would have assured a bottom to consumer spending. According to a November 16th, New York Times article the tightening of rules has led to only 37% of the unemployed being eligible for benefits, which average $293/week for up to 39 weeks as compared to 65 weeks in the 1970’s. Of those without unemployment only 40 percent of poor families who actually qualify for public assistance receive it. Much of public assistance has been replaced by the Earned Income Tax Credit. The only problem, if you lose your low paying job, you lose your tax credit. The safety net is gone.No consumer, no profit.
It seems not many people thought about what would happen when the squeezed consumer ran out of money and credit as long as the economy was churning along on speculative investments because of the low interest rates and the inflated money supply. The New York Times reports that bankruptcy filings are up 35% over October of last year and that’s not counting the sizeable number of people that think they can’t file under the new law or just don’t have the money to.