The Big Con

Big R Republican or little L libertarian, I’m not sure what to call myself anymore. Maybe “dupe” is the best term. One thing I have no doubt about though is I’m a capitalist through and through. Capitalism has lifted more people out of poverty than any other economic system out there hands down. Sure it’s not perfect but it’s closer to perfection than any other method of arranging our affairs. That’s one thing that makes these times so frustrating for me. Everywhere I turn capitalism is being attacked and those that should be championing it are hanging their heads and acting like whipped dogs. The harsh truth is that those supposed champions never really believed it. They just used it as path to power so when they are challenged they just collapse and cringe in the corner and take whatever scraps they are offered.

Take the current economic situation we are in. What’s the root cause? Capitalism? Hell no! While there are of course a bunch of reasons we are in the situation that we are in but the root of it is that a bunch of goody to shoes in Washington thought it would be a good idea if more people owned their own homes. The primary goody too shoes, Barney Frank and Chris Dodd. Who can argue with that? Sounds like a laudable goal. Now all of what follows is a gross simplification but it’s what happened in a nutshell. A bill was passed that made banks along with the quasi governmental organizations Freddie Mac and Freddie Mae ease up on the mortgage requirements to allow more people to purchase their own home. Hell I’m even a recipient of part of that largess. The reduced down payment that I had to put down on my own mortgage was paid for by some grant from the state, all I had to do was take a class about budgeting, that I bet was funded by the Federal government. I’ve made all of my payments but a lot of people didn’t. When I bought my house, this was in the early ‘00s, the bank approved me for double of what I spent. I did the math. I knew there was no way in hell that I could afford the payments if I spent what they would have gladly given me. A lot of people didn’t. At the time my credit was pretty good, I just didn’t have enough cash to make a big down payment. So my mortgage got bundled with a bunch of other mortgages. Some better some not so good, with new home buyers with little equity it’s a crap shot. These bundles helped spread the risk or that was the idea. You didn’t even have to buy a whole bundle you could buy bits of one bundle and bits of another bundle, again it helped to spread the risk. This went on for years, with the banks getting more and more aggressive with the loans, meaning riskier and riskier, because they could bundle them up and somebody would buy them, not me or you but other banks and financial institutions. Now don’t forget where this all started. Congress pressured the banks into making these loans and changed the rules to make it possible and profitable for them to do it. Who were the two most responsible in Congress for pushing these changes? Barney Frank and Chris Dodd, the chairs of the appropriate committees.

Fast forward to last year, people are defaulting on their mortgages, lots of people. Bundling, the mechanism meant to spread the risk has in fact spread the rot. Now all of those bundles are contaminated, remember the saying about apples in a barrel. Now this would not be the end of the world. Some mortgages would be foreclosed on, some people who were having problems would catch up. Those banks and financial institutions that owned the bundles would eventually take a hit, but the damage would be spread out and while it would be painful but like I said it wouldn’t be the end of the world. Except for something called Sarbanes-Oxley.

Let’s jump back several years, how far back I would have to look up and I don’t feel like it right now. There was a big accounting scandal, again I don’t remember the specifics. I assume it had something to do with companies fraudulently carrying worthless assets on the books, under the old rules the companies wouldn’t technically take a loss on those assets until they were sold. Some how this caused some type of kerfuffel which for this discussion is not pertinent. Anyway Sarbanes-Oxley was the solution. It required companies to mark assets to market, which meant that any assets that a company held had to periodically have their value adjusted to their market value. Now combine this with all of those banks and financial institutions that have invested in those bundles, which because they are contaminated by those bad mortgages, are now worthless. The bundling did such a good job of spreading the risk around that it’s impossible to untie the good mortgages from the bad. Now all of the banks and financial institutions have to mark down their assets, which means even if their cash flow is okay their books now look like hell. Our economy relies on money moving from institution to institution. Banks and other financial institutions loan money back and forth all the time, but now whose going to loan money to a organization that has a balance sheet that looks like shit?

Now given a little bit of time this might have all sorted itself out, banks would have failed, the ensuing credit crunch would have caused other business to go under, jobs would be lost, but that’s the nature of capitalism. Creative destruction is a important part of the capitalistic system. Out of the ashes of the fallen firms would have come newer stronger institutions, the unemployed would find new jobs often jobs that would take better advantage of their skills than the old jobs, some of the unemployed would start their own new businesses, most of those would fail but the surviving few would more than make up for those that didn’t. There would be individual tragedy and lives would be upturned but when everything sorted itself the economy would be stronger than it was before. That is if the market is left to itself. There is an institution though that can no longer leave anything to itself. Government.

The great meddler saw an opportunity to play the hero, it climbed it’s little step ladder and swung it’s swollen fat thigh over the back of it’s poor little white pony and waddled out to tilt windmills. Yes the government thought it could short circuit this process. There was no need for these troubled firms to have to go under and all those people lose their jobs. The government would pump hundreds of billions of dollars into the system to prop things up. There was considerable resistance to this but those two champions of the little guy , Barney Frank and Chris Dodd, added there voices to the fray and managed to arrange all of the chicken littles so that the bill passed. There is plenty of culpability to go around here and Bush deserves a large portion of it, but Frank and Dodd are particularly conspicuous due to their actions in precipitating the whole boondoggle. No one saw the irony that the fools responsible for causing the mess were the same that ended up being trusted in fixing it. No instead they blamed capitalism. Anyway the bill promised over seven hundred billion dollars in aid. Three hundred billion to be spent immediately, or very soon at least, and the rest to be spent at a later date.

Now several months have past the first three hundred billion is gone. No one really knows what it got spent on and there is really no way to tell if it made any difference or not. A day doesn’t go by with out hearing about a different company going under or about five or ten thousand or more people losing their jobs. Doom was averted certainly but according to the government it was only postponed. Now they are asking for even more. They chant stimulus, stimulus, stimulus, but most of the spending will not even kick in for eighteen months, probably just as the economy is coming around on its own. Looks like Generation X, Y, and Z will get a life lesson on run away inflation and of course by then Barney Frank and Chris Dodd will have figured out someway to blame that on capitalism as well.

As I’m wrapping this up I just heard that the Great Rip-Off just passed. At least the whipped dogs had enough backbone to unanimously vote against it.