KRISIS!!!

There's an old saying, I think I learned it in the Navy, that goes like this: "When in danger or in doubt, run in circles scream and shout." This very much resembles the behavior of politicians in Washington these days.

There are some metrics in this that are pretty scary. Take a look at the following chart:

The "adjusted monetary base" is "the total amount of a currency that is either circulated in the hands of the public or in the commercial bank deposits held in the central bank's reserves. This measure of the money supply typically only includes the most liquid currencies." Now according to this chart, from before the Great Depression, to about 1972, the AMB stayed in a range of $1-30 Billion Dollars. In 1971, Nixon took the U.S. Dollar off the gold standard...you know, "In God We Trust," and from that point till September 2008, it grew from about $30 billion up to about $850 billion in September, 2008. Some quick math here...hang on, my shoes are still on...about $22 billion per year on average. Now...from September, 2008 till today, it has grown from just under $900 Billion to about $1750 Billion...hmm, that's $850 BILLION in less than six months. Well, surely something that dramatic must have had a profound impact on financial futures in our country right? Let's see...the Dow Jones Industrial Average stood at 11,020. Today it closed at 8,001. Well that's good isn't it?? Lower is better?

Umm, no. So while our money supply has increased almost 95%, the Dow has lost 27%. Bear in mind that the Dow is a forward thinking index...while it reacts to day-to-day news, in the aggregate it reflects the sentiment of investors for where they think this thing is going. By this rationale, if we assume that some version of the $900+ BILLION "Stimulus" bill does make it to Obama's desk and he signs it...after all, he has to do something!!!! It's a crisis!!! We can expect our 401K's to fall in a similar proportion...$900 Billion represents another 51% increase in the money supply, therefore, applying our ratio the Dow should go down another 15% to 6,800. Now I know there is not a DIRECT correlation, but these things are related and should not be ignored.

This is not a "bash Barry" piece. The panic began under Bush when he cried "fire" in a crowded theater. Without going into too much detail, because I've covered a lot of this in previous posts, this is a ten step anatomy of the abyss we find ourselves in:

1. Lousy policy that encouraged those that could not afford homes to buy them.
2. Lousy policy that encouraged banks to lend that money.
3. Lousy policy that created "public/private" entities (Fannie and Freddie) to insure said bad loans.
4. Lousy policy that allowed the practice to go on unabated despite warnings from every sector.
5. Human greed that figured out how to securitize these bad loans and sell them off as "mortgage backed securities."
6. Human greed that figured out how to re-securitize these bad securities into "collaterized debt obligations."
7. An excessive influx of capital into the United States and into real estate in particular.
a. China and India emerging with purchasing power wanting to put the money in a safe place.
b. The crash on Wall Street of 2000 - the "tech wreck" - led everyone to believe real estate
was safe.
8. Lousy governance and cronyism that constantly swept the warning signs under the rug.
a. Barney Frank
b. Christopher Dodd
9. Lousy leadership that led to a panic.
a. George W. Bush
b. Hank Paulson
10. Cynical leadership that sees opportunity in fanning the flames of a crisis for political gain.
a. Barry O.
b. Rahm "Knuckles" Emmanuel

Now in Barry's defense, he feels he has to do...ummm, something. The Hill Democrats see a special moment in time where they can ride off of Barry's popularity and the sense of panic in the country and ladel in some heavy doses of social engineering. Their clear aim is to add to their patchwork quilt of constituencies in the hopes of creating a permanent class that is beholding to them for their well-being. Please notice that in the above menu of ten items, six of them - 60% for those of you fascinated with numbers - are attributable to Democrats. The very same people who account for 60% of the problem are now the ones with their hands on the tiller steering the boat. (In case you need help, put a check by numbers 1,2,3,4,8 and 10.)

The money has to come from somewhere to pay this tab. Or, alternatively, you could just print it. Weimar Germany tried that and it didn't work out too well. Their panic led to a tyrant...you know one that everyone loved to chant slogans to. It's that or taxation and didn't we fight one war already for "taxation without representation?" These folks up on Capital Hill are spending money on their pet projects without even pausing to catch their breath and consider that it it not their money.

Sadly, the other impact of this Katrina of Money hitting the system is two-fold. First, once it makes its way out of the bank vaults and onto the street, it could cause hyper-inflation and to stem that, the Fed would have no choice but to raise interest rates dramatically, killing off any chance of a recovery in the cradle. Secondly, the dollar will lose its stature as the global market setter. The type of irresponsible policy with no thought to unintended consequences that is being exhibited today in D.C. should make you nauseous.

There is hope though. The House Republicans and 11 Democrats votes in opposition to this bill. And the more people that know about the guts of the bill, the more they are going to realize that this is nothing more than a grab bag for favorite Democrat projects. This from the Wall Street Journal:

So then what’s the multiplier for the $50 million for the National Endowment of Arts? How about the $400 million for global warming research, the $335 million for STD prevention, the $650 million for digital conversion coupons, the $81 billion for Medicaid, the $20 billion for food stamps, the $30 billion for Cobra insurance extensions, the $4.1 billion for neighborhood activist groups like ACORN, the $83 billion for the earned income credit to give tax refunds to people who don’t pay income tax, and the $6 billion to subsidize university building projects just to name a few.

Does that really say $4.1 BILLION for "neighborhood activist groups like ACORN???" Yup. And how does that stimulate anything productive? Well, it doesn't. If the word can get out that this is nothing more than a pork barrel of nonsense, there is a chance it can be stopped.

The teachings of Hippocrates should apply to public policy as it does to medicine - first do no harm. (It's not in the Oath, but it is in his writings.) Obama has inherited a terrible problem. One caused in large part by his fellow party members, though compounded by a rush to solution by the outgoing Bushies. And he faces the true test of leadership. He has pledged that he is going to do "something." The best possible "something" he can do right now is "nothing," but that is not in the cards. Further, he has surrounded himself with neo-Keynesians who ignore the lessons of history in the belief that they are the "best and the brightest" sprung from Mt. Olympus for our salvation. It's a toxic mix. Ironically, Barry O's best chance at salvation right now may well lie in the Republican party. If they can stop this bill...filibuster it to death if need be...or raise enough public awareness that the pollsters in the West Wing get the message, they may buy Barry another term. If.

Rumble on!

Bridges

In mid-July in the United States we crossed a psychological river. Here's why:

It became common to see $4.00 per gallon gasoline at the pumps. This is the river we crossed:

It is the Rubicon in Northern Italy. This is close to where Caesar crossed uttering "the die is cast." Republican Rome was about to die. The first hint that we had emotionally crossed was the "Drill Here, Drill Now" movement. This is a good thing. Energy self sufficiency is something we will need as a strategic necessity if we are to survive as some form of nation state. Sadly, some of that verve has ebbed as gas prices have done this:

But the trauma of filling up an SUV for $100+ has not gone away. I submit it was the opening round of the fear that has gripped this economy. This was a defining cultural moment. A society built on consumerism and easy credit can not long stand. When Harry swiped his Discover card to buy the gas for the Jimmy at the Exxon station and got home to see Sally that night, a gnawing feeling was in his gut. They pulled out their credit card statements, their mortgage note and second mortgage (that they got the great rate on for the new deck and grill area!). They gathered up the car loans, insurance costs and pending school costs for Jimmy and Kelly, their iPodded kids. What they suddenly realized was that the mental math they had been using to convince themselves they were OK was wrong. They were living well beyond their means in their 3,800 square foot house in Burbia, USA. They saw this in the Washington Post:

The average household debt is now $117,951. This breaks down to an average credit card debt of $8,565, vehicle and tuition loan debt of $14,414, home equity loan debt of $10,062 and mortgage debt of $84,911.

Americans have been living in a financial wonderworld for at least the last twenty years. We have a generation that has grown up on the notion that if you get in trouble, you apply for another credit card. When I graduated from college in 1980, there were no credit cards available for young Naval Officers with a real job. My first credit card was an American Express that I applied for after I made Lieutenant Junior Grade. It came with the stern warning that balances were to be paid off "in full each month to establish your credit worthiness." My how far we have come! Up until a couple of months ago, I could keep shredders going 24/7 at the office and at home trying to destroy the credit card offers and I would barely keep up. Here's my contribution to the World Series Parade:

Now those offers are coming in slower than Obama's response to the Blago scandal.

To a great degree, large parts of our economy have been built on shaky ground. A consumer economy without a diverse jobs base (manufacturing, services, agriculture, etc.) can not long stand. I still believe that, other than the last 60 days, the lowest point of the Bush presidency is when he told us, in the wake of the economy buckling post 9/11, to go out and spend! We were/are at war and war requires sacrifice. But an economy built on consumer spending complicated by the securitization of all that debt has a round chambered and pointed at the middle of the forehead. When the notes of people who can't afford thier houses are packaged and sold to investors who expect an annuity-like return, there's gonna be catastrophic failure. There has been. And the worst is yet to come.

There are more shoes to drop. The multiplier effect of money being spent in the economy is taught in Econ 100 classes as standard fare. When I studied economics in the late '70's we were told that for every $1 spent, there was a $12 impact on the economy because of the "multiplier effect." That was long before the Gucci clad geniuses started increasing the multiplier through complex financial...err, "gadgets?" I spoke to a classmate of mine that was with Wachovia Securities just before the crash in mid-September. Candidly, and he's a reader of these posts, he sounded panicked. They were working through some of the tranches of bad paper. "There are more than 6,400 'strips' in some of these things, we have no idea what we are looking at," he said. A "strip" could be something like Harry's mortgage, Sally's car note, my Visa bill, a piece of permanent financing on an apartment complex in Meridian, Mississippi and God knows how many bad mortgages courtesy of Fannie and Freddie.

Well, the multiplier effect works in reverse too, but with very real and damaging consequences...here comes that shoe! At an Urban Land Institute meeting I recently attended, the outlook was as dreary as four days of Nashville gloom we are currently enduring. The best guesses point to a scenario that says after dismal Holiday sales, a number of retailers are going to go "four paws up." As stores go dark, strip-centers and malls can no longer service their debt due to the drop in rents. The financial institutions get hit again. And it gets worse...the growing job losses will soon have an impact on "good" mortgages too. This is especially true in a world where $2.8 trillion has been lost from the peak cumulative value of American housing...that's $2,800,000,000,000! Well, if your loan is $250,000 and your house is now worth $150,000...what do you do? Send the bank the keys and go start a new life. In other words, the "bottom" is probably 8-10 months away still.

And what will the marvelous "bail out" have accomplished? Honestly, not much. We will have nationalized a large part of our banking system...we have practically nationalized housing already; we the taxpayer will own Detroit...yippee! America, here's what's in your investment account now:


There's a better than 70% chance that we will be well on the way to nationalizing our healthcare system. All for our good. Melville was so right:

Power unanointed may come -
Dominion (unsought by the free)
And the Iron Dome,
Stronger for stress and strain,
Fling her huge shadow athwart the main;
But the Founders' dream shall flee.

But all shall not be lost. For as grim a picture as I have painted, I would still rather be here than say Rwanda, or Mexico, or China, Russia, India, France, Germany, England...OK, anyplace else. I am like Gatsby:

Gatsby believed in the green light, the orgastic future that year by year recedes before us. It eluded us then, but that's no matter—tomorrow we will run faster, stretch out our arms farther. . . . And then one fine morning—
So we beat on, boats against the current, borne back ceaselessly into the past.

I see a revolution ahead. We are going to continue this experiment with socialism, the love affair with the Obamessiah will go on un-checked for a few months. But, as in times of struggle in our past, reality will come anew. We will try a revolutionary concept called "capitalism." Capitalism will be properly monitored, but not regulated to encourage political ends. We will be smarter about how we take care of our own job base and approach the world seeking equality along with fairness in our openness to trade. I expect that our entire tax system will be replaced. We will become more realistic. We may realize that we don't need the 3,800 square foot house for a family of four. The old 2,400 square foot ranch model from the 1950's might work just fine. We will keep our cars longer. A lot of us will pass on early retirement. But we will also vote those that got us into this mess out of office...Americans don't mind taking a little pain. They mind it a lot when they are taking all the pain while the criminals in Washington rack up nice pension plans and health benefits. Along the way we will rediscover the spirit that made us great. It is rugged self-reliant individualism. It's not diversity...it's not levelling the playing field to the lowest common denominator. This is not a sissy nation that needs to turn to Mama Government anytime there's a problem. We're doing it right now, but it will not work. It will fail and when it does, we will remember that we are a restless people and in the words of T.S. Eliot:

We shall not cease from exploration
And the end of all our exploring
Will be to arrive where we started
And know the place for the first time.

The bridges we will build to this new economy will be stronger because of the fire we will have passed through to get the will to do it.

To the green light...
Rumble on!