“A billion here, a billion there, pretty soon you’re talking about real money,” for many years wrongly attributed to the late Senator Everett Dirksen, seems applicable here. So far the cost of Fannie Mae, Freddie Mac, Lehman Bros. AIG and what Wall Street is asking for equals a trillion dollars. While its not peanuts in anyone’s book the real cost is probably more like 2-3 trillion dollars. That is in addition to the 100s of billions of dollars pumped into the economy by the fed to prevent a credit freeze up before last week.
August 9, 2007 $24 billion, August 10, 2007 $38 billion, November 12, 2007 $42 billion, November 27, 2007 $8 billion, March 12, 2008 $200 billion, August 13, 2008 $70 billion, September 18, 2008 $180 billion, September 24, 2008 $30 billion, pumped into the economy by the fed, all money printed producing more debt for America.
That is in addition to the $700 billion proposal. And that doesn’t count the money that was pumped into the economy through massive tax cuts for the rich and the deficit war spending that took us from a $5 trillion surplus to a $9 trillion dollar national debt.
This all happened for a simple reason, trickle down economics doesn’t work. That extra money was used for speculation while squeezing equity out of the American worker for even more gambling cash. Bush was willing to do anything to avoid a recession on his watch, even if it meant creating a depression for the next guy. He just ran out of time.
For the American economy to work consumer spending, which makes up 70% of the economic activity, had to continue even though consumer income when adjusted for inflation was falling. Wages and benefits fell almost 30% since 1970 when adjusted for inflation while corporate profits rose to record levels. The only way Americans have kept up is to work longer hours, put more people in the household work and live off credit.
How do you grow an economy when consumers don’t have any more money? Easy credit, made available by the extra cash infused into the system and low interest rates pushed the American worker to borrow to keep up through home equity loans, credit card purchases and auto loans. Pushing people out of guaranteed retirement benefit plans and into 401(k)s added more gambling dollars to the players table.
While traditional and investment banks were getting loans to finance this consumer debt from the fed at record low interest rates, consumers were paying record high interest rates. The money rolled in from this “spread”. The biggest product produced by our new financial transaction centered economy was debt based collateral instruments that were then used to borrow more.
All of these consumer liabilities were booked as assets. They were bundled into mortgage based securities/bonds and bought at an inflated worth by people who borrowed more money to do it. Those in turn were sometimes rebundled into new financial instruments which investors leveraged already leveraged financial products to buy.
This has brought about the situation where, a large part, if not most of the economy was based not on investment of one savings, you know like they tell us commoners we should do, but on how much could be borrowed, which only depended primarily on how much the deal makers could make off the deal. The more money you had the lower the interest rate.
One of the primary maxims in business is to always use someone else’s money when possible, buyers of these financial instruments borrowed 80-90% of their purchase money. In the hedge funds, qualified investors, in other words rich people, borrowed 90% of their investment money to get in, which was then leveraged again at sometimes twenty to one to play the market with and take over companies.
Banks became direct investors in those deals and leveraged buyouts, instead of just lending the money. Paying the money back was never intended, the debt was loaded on the purchased company or instrument making it someone else’s problem. One of the things that deregulation insured was you passed the responsibility on to the next guy and took your profits, except for the guy at the bottom, the homeowner.
So for every $250,000 home mortgage, the financial wizards multiplied the debt many times that at each step. See why even a small uptick in foreclosures can create economic catastrophe in this ponzi scheme.
This excess magic capital that was generated by this scheme was not used to make America more competitive by huge investments into research and innovations but to help financial corporations, hedge funds and leveraged buyout companies, go on a huge buying binge, in order to try and dominate the new global economy. In return for this direct giveaway of American tax dollars and income, those favored rich shipped jobs overseas, established headquarters off shore to avoid taxes and gave themselves huge bonuses.
Then somebody asked the questions, what are these debt instruments, standing behind more debt really worth? The answer is no one really knows, but nowhere near their posted value.
The Impact of a Debt Based EconomyInstead of setting free the supposed market majic of pure capitalism, the creation of this regulation-free, almost-free-money environment turned into a free for all where the most larcenous characteristics of Wall Street were glorified. According to the Scott Burns (www.scottburns.com) in an article printed September 28, 2008 Bear Stearns, Bank of America, UBS, Merrill Lynch, Morgan Stanley, Wachovia, GMAC Bank, IndyMac Bank, Countrywide, JP Morgan, Citigroup, CIBC, HSBC, Freddie Mac, Fannie Mae, Lehman Brothers and “independent rating companies” Standard & Poor, Moody’s and Fitch all worsened the problem through their deceptive and illegal actions.
What were those actions? They ranged from abusive and illegal loan practices, deceiving investors about the amount of risk they were taking, deceptive advertising, securities fraud, fraudulent ratings, structuring products to hide real risk, hiding their true positions and developing tax evasion schemes.
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