Politicos have been telling us for half a year that they are going to help solve the economic circumstances unfolding. First they announced a plan to help homeowners late last year. How's that working out for you? Anyone feel better owning an asset that's worth 30% less than it was three years ago? And still dropping? I sure do. That reminds me of Hayek's Road To Serfdom.
Everyone in that situation is on the road to serfdom and the bank is their lord. Banks, using anti-competitive, monopolistic and predatory practices supported by politicians, break basic risk management practices. As a result they make billions then receive welfare bailouts while consumers are told personal welfare promotes sloth. So, then what does corporate welfare promote? Consumers live in servitude to corporations receiving welfare. I need a vacation. A permanent one. Any bankers hiring? What better vacation than to be a banker? Have a monopoly on receiving money from the Federal Reserve and lend it out at cost plus. Then sit back and watch the cash roll in. When people don't pay their loans, garnish their house, family, children and future grandchildren. Blame your garnishments on their lack of personal responsibility. Then when all else fails, absolve yourself of responsibility and receive government welfare. How can one lose? Free markets? Competition? Why subject one's self to such pressures?
We are about to see the law of unintended consequences come to pass in more ways than anyone can imagine across the global asset bubble. One we already see is that homeowners with good credit are walking from deflating properties regardless of their ability to pay. In the end, attorneys are likely to present lawsuits and legal challenges on behalf of homeowners. If these gain traction, we could see a wholesale exodus from overvalued properties. And, who would be left holding the bag? Banks. That is just one example. America is not Japan and the outcome of an asset bust will likely be somewhat different as Japan's culture is very different. In the U.S. many will show no loyalty to a system that has perpetuated a costly scheme at their expense. There will be many impacts and unintended consequences that will, in part, be dependent on actions intended to deal with perceived issues. I say perceived because the reality is that no one is really acknowledging the underlying problems that have created this situation. That means the intended actions could create much larger problems. Right now we are traveling with an inaccurate map. And, that means we are likely headed to a place where no one wants to go.
There are only so many IOU's government can write. If those are used and a real crisis emerges, then what? In other words, throwing money without discretion at housing, markets, consumers, wars, defense, banks, homeland security, pet projects and other forms of government irresponsibility is limiting our ability to deal with a real crisis should one occur. As we wrote some time ago, excessive government spending reduces economic vitality and private investment. In the long run I really don't worry about that. The market will enforce change when it is necessary regardless of whether it is wanted. In other words, there comes a time when change is imminent. Change we should all embrace because it will lead to solving today's greatest economic problems and transforming government. Transforming it into what it was originally intended to be. That is, elected stewards with a responsibility for its citizens first and foremost.
I have written for three years that financial market deregulation would haunt us. Before anyone cares to blame a particular political party or politician, this deregulation happened over a period of decades and has its roots in both political parties. Defending any participant is nonsense. Rather than throwing money at a stimulus package, maybe politicians could find time to reflect on their involvement in this situation. Might I add their involvement is substantial. Amongst many significant issues, politicians have fallen prey to corporate lobbyists and special interest groups seeking to undo or deflect necessary transparency and oversight in the financial industry. When playing any game, in this case economics, there must be rules. Those rules involve transparency and regulation. Don't kid yourself when people tell you we don't need transparent and regulated markets. That free markets somehow means no regulation. If you really want to talk about free markets, we should bust up monopolies that have developed in our economy. That's not going to happen unless Teddy Roosevelt gets re-elected so we must have regulation. In normal circumstances I would be willing to argue transparency before regulation but we passed that opportunity eons ago.
Each second or third generation is equally foolish in their belief they are smarter than those before them. That our accumulated knowledge somehow makes us impervious to repeating mistakes. I have heard this so often from friends and acquaintances that it must be one of the most commonly held untruths of society today. Humanity is indeed brilliant but the irony is that we are equally foolish. There is no way to separate the two. It is the human condition. Given that fact, how many times do politicians need to be reminded that our money and deposits are never to be jeopardized? Maybe a constitutional amendment would keep lobbyists and politicians away from our money. But, what is even more horrifying is that Wall Street used money made on our deposits to lobby politicians on behalf of jeopardizing our deposits. And politicians used these lobbying efforts to get re-elected and perpetuate the process of greed and power in lieu of integrity and righteousness. The human condition we have always suffered from. I hope that someone will read this and write their Congressperson or some politico will read this and have an epiphany that will result in permanent laws never to be tampered with again. And, that we clean up this lack of transparency not only in markets but government. Permanently. By law. Laws are to be trusted. Not politicians. Not anyone regardless of virtuosity. We are a society of laws that must be applied equally. That is all that protects us from ourselves.
Let's lighten up the post with a little joke on this topic. Why do bankers, hedge funds, mortgage companies, private equity, insurance companies, ratings agencies and other financial institutions engage in foolishness? Because they can. Funny isn't it? Funny enough to embolden you into action to ensure this never happens again? Maybe not yet. But, hang around. It's going to get a whole lot more interesting. Crisis creates change. One unintended change is a lack of confidence in the status quo. Isn't it ironic we were just told months ago that Goldilocks was upon us? That myth was perpetrated by those wanting the status quo to continue for whatever reasons. They've lost the game. And, in the long run, that is a very positive development for everyone.
Now we have the recently announced stimulus package. I appreciate that politicians are sincerely trying to help but I view this as election year pandering more than anything. These consumption-focused packages have no history of success. Because politicians know this from historical records of similar efforts, how can we not concluded this is only an effort to garner votes? What they should have been focusing on whilst they were deregulating our financial markets was business investment and technology-based or new economy small & medium business (SMB) growth and creation. Not pizza franchises for Wilma and Fred Flintstone. (Although pizza franchises are a good thing.) Large companies have been a net reducer of jobs and, therefore GDP, for decades. Their government welfare needs to be reigned in. Frankly, as does their disproportionate and negative impact on free markets. Small and medium businesses are the dynamite that fuel job creation and economic vitality. On that note, I am completely bored with the dogmatic types yammering about a need to protect capital formation. Who cares? I mean really. These dogmatic types open their mouths and garbage comes out without even thinking about what they are saying. Part of the problem is that excessive capital formation is chasing every asset imaginable in the form of hedge funds, real estate, investors, private equity and on and on. We have too much capital and too little economic demand. But, then we talked about this ages ago.
Let's look at the primary stimulus package component, cash for individuals, and the implications for the economy. This is really quite simple and really proves my point of political pandering. Let's assume the stimulus payment to each individual is $600. That's close enough for government work. Pun intended. Let's also suppose that American consumers run their households generally as companies do. That is, in an environment of uncertainty, they are looking to cut down on their expenses or reduce their debt if possible. That's entirely plausible as an assumption. Especially given we've already seen data confirming the consumers are spending substantially less. And, let's assume financial institutions are hoarding money as is clearly a fact. In case that needs some type of explanation, banks are doing so for fear of rising bankruptcies, to shore up their capital ratios, increase their loss reserves, pay down their bad investments, pay their bloated salaries, throw good money after bad by doing things like buying Countrywide, etc, etc, etc. There are a multitude of issues.
So, how does this $600 stimulus help the economy? Given the above dynamics, let's walk this stimulus through the economy. (It's a very short walk.) The majority of consumers will likely use most or all of this money to pay down their debts or expenses. Or possibly deposit the check for an emergency. Mind you, just like banks and businesses are doing as I type this. And, to whom does the consumer pay their debts? The banks. And, what are the banks going to do with that stimulus money once they get it? Continue to hoard it of course. So, what effect does this stimulus package have on the economy? Well, I can see one effect. The government has just spent more money it doesn't have and our future repayment obligations as taxpayers have increased. Oh, and our favorite politicians can tell us come election time that they reached out to us. But, it hasn't helped the economy one iota. The problem with this stimulus approach is that money turnover in the economy has ground to a halt. There is no economic multiplier in stimulus. Ironically, what this stimulus package turns out to be is more corporate welfare for banks. Through a circuitous route banks end up with the majority of this stimulus. No wonder Wall Street cheered the stimulus package. More handouts for them. More gruel for us.
Is it really so hard to understand why the leading Presidential candidates are change agents of some sort? Or that integrity and transparency seem to have bubbled to to top of the process as opposed to cronyism or partisan hacks gaining favor? And, that the election spin machines and money machines of the status quo are failing to deliver on their spin genius? That two of the three candidates left had little money and weak organized support just a matter of half a year ago? (Update: I've been corrected. Three of the four candidates....) I find it hilarious that candidates now believe in the concept of morphing their personalities based on polls and marketing spinsters. Here's a more clear view of reality. These high priced hacks hired to manipulate people actually believe their voodoo works. The reality is few are really listening as long as economic conditions are reasonably good. People don't care what politicians do when they have some jingle in their pocket. But, when that isn't the case people actually care about who gets elected. And, if an American can smell one thing from a mile away, it's bullshit. So, when substance matters, the spinsters and manipulators are the first to be written off by the electorate. This is an election of change. What kind of change? That's for the voters to decide. And, if they aren't happy with the change, in four years we'll get another change agent. But, ready or not, change is here.