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The Party's Over

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"In just a few days, shares of Internet travel company Expedia lost 12 percent of their value." That, according to an article in the Washington Post a couple days ago. What am I saying? A blip at an Internet company signals the end of the financial world?

Maybe not. Other things worry me. The article, Easy Money, Lifeblood Of Economy, Is Drying Up, continues;
“The era of cheap money appears to be ending. Easy credit has been the economy's lifeblood in recent years. It gave people who previously couldn't afford homes a crack at the American dream. It fueled multibillion-dollar takeovers of some of corporate America's biggest names. It buoyed the stock market and propped up the prices of many other assets.”
I don’t mean to sound like a conspiracy theorist, but easy credit did what easy credit always does; cuckolded the unsophisticated in favor of the rich. You don’t see any ruined capitalists jumping out of windows, at least not yet. What you did see over the past few years was a lot of baiting, and now it's time for the switch.
“But now, the investors who a few months ago were willing to lend money to Wall Street at low interest rates, on loose terms, are balking as they worry about having to pay the price for lax lending standards.

The trouble started in one of the shakiest sectors of finance, home mortgages for people with bad credit, but it is spreading.”

The trouble actually started with the anything goes lending practices of banks and savings and loans, which are supposed to get oversight from the Federal Reserve. But there was just too much money to be made and the Fed couldn’t bring itself to do the right thing; not while hedge funds (which no one understood) were inventing a derivative-a-day (which promised no one would get hurt, but no one understood them either). Thank Alan Greenspan, who left while the leaving was easy.
"When people get scared, they tighten up all over," said A. Gary Shilling, president of the investment firm that bears his name. He said he expects housing prices to fall significantly further. "This kills consumer spending," he said of the credit crunch. "We think we'll be in a recession as a result by the end of the year. And that will spread globally because U.S. consumers still are the buyers of first and last resort for the excess goods and services produced around the world."
Well that’s certainly true. Tightening up all over for the rich is a matter of investment, but for the poor it’s more sphincter related. Big players sell short, but the gullible lose their homes. Guys whose names begin with a single letter are always in the know. It’s what the rich do before they’ve been rich enough long enough to have Roman numerals after their names. A. Gary not only expects housing prices to fall significantly further, he expects to profit from it. No offense, Mr. Shilling. May I call you A?

Actually, the market is doing what free markets always do, maximize. This time it was a variation on the Florida real estate scams of the thirties.
  1. You find a bunch of buyers who can’t possibly afford to buy.
  2. You invent a new investment ‘vehicle’ and call it a sub-prime mortgage. The reason it’s called a vehicle is because it’s designed to drive off with your money. Sub-prime is banker-speak for a loan no right thinking manager would make.
  3. Find a way for everyone in on the scam to make money. Salesmen, loan officers, loan packagers, derivative inventors, hedge funds and (at least a portion of) investors in hedge funds.
  4. Let the good times roll.
There is of course only one source of cash in this scam and that is the loan itself. So it gets the economic equivalent of a Thai massage and is sliced and diced and parceled out so that no one on the front end of the deal gets hurt. They are currently all out of it and counting their percentages. The underlying (expressive word for it) mortgage is not meant to be paid off, it’s meant to be foreclosed. Winner, winner, winner, winner, winner . . . loser. When the music stops, there aren’t always enough chairs.
“Some market watchers say the credit market is simply in a midsummer pause, and investors will return to scoop up the billions of dollars in loans and bonds yet to be sold.

"What's really going to trigger the rally is when people start to refocus on the strong fundamentals in the underlying economy as well as the companies that issue the high-yield bonds," said J. Eric Misenheimer, a fund manager at J. & W. Seligman. "Default rates are still very low. Corporate earnings are robust and their balance sheets are some of the strongest they have seen since the mid-'90s."

Trouble is, those ‘high yield bonds’ are mortgage-backed securities and the mortgages that secure them are generally not worth a fart in a whirlwind. The mid-90s you may recall, were followed by the late 90s, when the bubble burst and the poor bastards who got caught up in that were sheared like sheep. But J. Eric is yet another guy with a letter for a first name, so who knows? Don’t listen to me, my first name is Jim, but Wikipedia describes the bust thusly;
“A combination of rapidly increasing stock prices, individual speculation in stocks, and widely available venture capital created an exuberant environment in which many of these businesses dismissed standard business models, focusing on increasing market share at the expense of the bottom line. The bursting of the dot-com bubble marked the beginning of a relatively mild yet rather lengthy early 2000s recession in the developed world.”
This time it may not be so mild. The overriding difference is that, before the Bush administration got their hands on the American dollar, it was still worth something internationally. Most Americans still think it is. Their buck still buys the same groceries in what we have been encouraged to call the homeland.

Out there in that space on the planet called 'the rest of the world,’ the buck didn’t stop on George Bush’s desk on its way to the basement of currencies. It didn't even pause. Hold your breath, I have bad news.

The buck has dropped by half.

Essentially, that means anyone who loaned us a buck in 2000 is going to get 50 cents back when repaid, plus interest. Nice, huh? It has to do with (among other things) George, Donald, Paul and Dick giving $1.5 trillion or so to their friends and another trillion or more to fight a war—each of which they put on America’s credit card. There are more reasons than his girlfriend that Paul Wolfowitz was bounced from the World Bank.

So, the investors of the world, who stepped in and loaned us money to get over our hiccup, may not be as anxious a second time. We continue to spend money we haven’t bothered to raise by taxes and we do it by the hundreds of billions, like a profligate uncle.

Uncle Sam, a solid guy in the old days has recently become recklessly wasteful, unrestrained by convention or morality. That’s what profligate means. Washington has him hooked on coke. Would you lend this guy money so he can continue to party through the night?

Thought not.

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Jim Freeman's op-ed pieces and commentaries have appeared in The New York Times, Chicago Tribune, International Herald-Tribune, CNN, The New York Review, The Jon Stewart Daily Show and a number of magazines. His thirteen published books are (more...)
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