It’s The Economy, Stupor
It is downright nasty weather out there: Major banks are dying, Government Sponsored Enterprises (GSEs) are getting bailed out, Bear Stearns, Lehman Brothers, Merrill Lynch are all failing, and now an $85 Billion loan to bailout AIG. How many decades of debt repayment are we willing to pass onto our children and grandchildren until we say “Enough is Enough!”, until we start paying attention as citizens and investors when companies start crying for deregulation, huh?
Time to shed some light on the side effects of free market deregulation… First, know that I am not in favor of heavy regulation, but sensible regulation. I do not believe you can allow any one company or industry to operate completely without regulation, any more than you can hand $50 to a bum on the street and expect him to return even a portion of it to you. Weak regulation can gut an economy just as too much regulation can stifle it. As Lord Acton’s dictum states: Power tends to corrupt, and absolute power corrupts absolutely. This is the basis for this blog entry and a firm credo in my life. There has to be a careful middle ground sought out before deregulation goes into effect. And that was not done this time around. But I’m getting ahead of myself…
The mess we’re in is partially (i.e., not wholly) due to the era of deregulation at the hands of several Congressional members on two key issues:
Oil Futures – see Commodity Futures Modernization Act (CFMA; aka, “Enron Loophole”).
Banking – see the Gramm-Leach-Bliley Act (GLBA)
Not to blame all of our troubles on one man, but there is a central spoiling character here on both accounts. In case you’ve not heard, the man’s name is Senator Phil Gramm (R-TX), recently relieved as financial advisor to the McCain campaign after he publicly called Americans “whiny” (yeah, that dude) although he remains as a general advisor to John McCain and his presidential campaign. Gramm led the Senate Banking Committee which sponsored the GLBA, and he was a major proponent of the CFMA. Read these Read these links to the GLBA & CFMA, then ask yourself:
Do these people represent my interests, or even those of the average American? I think not, or at the very least, not very well.
The GLBA repealed the Glass-Steagall Act, the latter of which was put into place in 1933 during the (first) Great Depression to control speculation, requiring banks & investment houses to keep more funds available for cushion and to keep this sort of bank & financial failure from occurring again. At a minimum, the Glass-Steagall Act was designed to minimize the effects of global panic during the normal boom-n-bust cycles, when greed and panic consume even the professionals, as witnessed in October 1929, nearly 79 years ago. One of the key provisions of the 1933 act was to prohibit banks from owning other financial companies, spreading out the risk that all of them would fail around the same time. Wisdom would seemingly dictate that more minds (and eyes!) watching the money would prevent everyone from being greedy and doing stupid things, like leveraging yourself up the wazoo, or not doing your financial due diligence, or going with “liar loans” and crazy 110% loan-to-value numbers, or “trusting” the real estate value to continue climbing. Back in 1999 & 2000, I guess Gramm and his lobbyists thought they could handle all that -- NOT!
Purportedly, the GLBA was to spur competition among banks and financial companies by allowing investors to consolidate their savings & investments at one place (certainly convenient, but not necessarily the wisest move to protect your money, I’d say). Also, I don’t know about you, but since 2000 when the GLBA went into effect, I’ve only seen banking fees go up for Joe Citizen, while the banks mangled & fought each other to consolidate the heck out of the U.S. financial landscape. Banks are no longer for the little guy, IMO; their fees will tell you that much. I’ve given up on them and kept my savings & checking accounts in credit unions. Unfortunately, the current crisis does affect me because some of my money is in these investment houses.
Just to keep the record straight, these key pieces of legislation (the CFMA & GLBA) were authored mostly by lobby-owned Republicans like Gramm (though the Democrats had a minor role as well), and unfortunately signed into law by Bill Clinton in the last 2 months of his Presidency. (I’m not making this up; read the links above). Perhaps the lame duck president was looking forward to his afternoon golf outings and less about finishing out his term. But time and time again, after this sort of deregulation plays out and bites you in the butt, you gotta ask yourself one question: When you put the fox in place to guard the hen house, did anyone think this was NOT going to end badly?
Certainly the solutions are going to be complicated to fix today's financial problems (if we can), and you can bet it's going to be a LOT more difficult than either Presidential candidate is letting on right now... but it seems one presidential candidate has something of a plan, while the other still seems to be clueless, speaking in (even more) generalities and platitudes. “The fundamentals of our economy are strong,” says the older gentleman. Really?
Job growth? Nope. Highest unemployment rate in 5.5 years.
Inflation in check? Nope. Bernanke is still flying that helicopter tossing out money (though, thank goodness, they didn’t lower rates today!).
Expanding GDP? Not in a long while, bub.
Strong housing sales? Yeah, on Pluto maybe, not in the U.S.A.
Increasing consumer confidence? Yeah, right. What paint have you been huffing?
Growing stock market? Nada. Been in the grips of the bear for nearly a year; we’ve probably got another 15-24 months left to go. (I’ll have an update to these numbers in a blog later this week or early next; stay tuned.)
Just how do you measure the fundamentals of our economy, John? And how do you spell “Second Great Depression”? If we don't all start pulling together in the same direction, we're gonna be there sooner than you think. Hopefully not.
Below, try to see past the partisan nature of the talking heads' comments and listen to the substance of each candidate's speech. Are they really that far apart from each other? Apparently so...Yikes. We need better corporate governance from both parties going forward, in good times and in bad...