Musings

It is getting progressively darker each morning when I leave the house for my morning exercise or yoga; however, it is even darker yet when I look at the Dow Jones Averages or read of the impending failures of some of our largest institutions. The de-leveraging of America is going to be a painful process and government meddling is probably only going to raise the price and to extend the duration.

There are many “villains” that have contributed to this precipitous demise; politicians, investment bankers and management have all played a role, but if one had to pin the tail on one donkey, it would be that “to borrow short to lend long” is a continuing prescription for trouble. Ours is a consumer driven economy; 70 % of the gross domestic product is attributable to consumer spending. The consumer, for many years, has been seduced by those who provided easy credit. In fact, many viewed the equity in their homes as a virtual ATM machine.

The politicians championed the lovely though that all should own a house. This mantra became almost an entitlement and who was going to oppose that notion ? It would be un-American to be anti – homeownership. The Wall Street got involved with a basketful of alphabet acronyms, all highly rated by monocline insurers who were paid a princely sum to issue triple A credit ratings. The SIVs, the CDOs and others were packaged attractively for sale, ( possibly to disguise the fraud that existed in most of the instruments ), and were sold to people all over the world who were seeking “just a little higher yield” to please themselves or their masters. And managements abandoned conservative borrowing practices in favor of always seeking the lowest cost source; after all, that was the paradigm being taught at all the business schools. Even states and cities joined the rush to lowest cost borrowing. Collectively they forgot the “time money reciprocal” . . . life was all too wonderful . . . we had survived the “tech bubble” and although 9/11 was a gruesome tragedy, this chapter of the war was being played out on others’ turf.

So the balloon was filled until it started to leak at some seams . . . not to worry, a little rubber cement in the form of federal support, ( our money, of course ), would seal the leaks. But it hasn’t and the tab is now approaching $ 1.5 trillion and that will add 10 % or more to what was already called by many a back breaking burden when coupled with the unfunded liability of Social Security and Medicare.

Whether it is just after midnight or 4:30 AM is yet unknown, but 2009 does not look to be a recovering year. Unemployment may go to 9 % and the “unintended consequences” of government intervention or policy mistakes could deepen the recession.

However, there will be a recovery . . . it would come faster were politicians not so concerned with easing everyone's pain with someone else's money. It is clear now that there is a housing glut in only five states: California, Nevada, Arizona, Michigan and Florida. And to understand how harmful media can be, their trumpeting of the housing disaster would have everyone believe that the whole country is suffering. It also does not help to hear our politicians say that we are headed over a cliff unless we authorize the spending of an additional $ 400 billion, ( a number so big that few can comprehend ).

But in answer to the query: "Will this expenditure work", the stock answer is that: "No one knows", a comment that is hardly a confidence builder in the general public.

The Stimulus Fiasco

When will government ever realize that the only sure . . . and proven . . . way to cure a sick economy is to lower taxes and to provide incentives for investment ? The random splashing of extraordinary amounts of money around under the guise of stimulus is simply another way of redistributing wealth through welfare and earmarks. And to generate these funds by burdening our children and grandchildren with a crushing debt load is virtually criminal. The orgy of the past was fueled by leverage. The pain of deleveraging America should be borne by those who participated in this Nantucket sleigh ride, not by the innocent and the unborn.