“The real problem is not that we are different, nor that we disagree and have conflict. It's that most of us automatically view conflict as something negative rather than as a tool God can use to help us better understand ourselves and one another.

--Robert Ricciardelli”

Tuesday, September 30, 2008

09/30 Morning Report

Deregulation and greed go across party lines. Before we blame it all on Bush, it’s important to remember that some of the deregulation occurred during the Reagan years, with Democratic controlled Congresses. But, deregulation is not the only issue involved here. think of the debt that's caused all of this...real estate and other kinds of debt, like credit cards. I think most of us realize how spread out the debt risk of those mortgages is. But, that isn't the only debt bought and sold and repackaged in the economic system today.

Let’s start with a brief overview of the money multiplier effect. Banks are required to keep a certain percentage of every deposit at the Federal Reserve. So, assuming that to be 10%, if someone deposits $100, the bank puts $10 at the federal reserve, and loans the rest. Assume that $90 is deposited somewhere. The fed gets $9, and the rest is loaned out. And so on, and so on. In the end, you have something like $100 at the fed, and thousands of dollars of debt held by a large group of people. In other words, according to this viewpoint, our economy is based on debt creation. Most companies buy and sell debt in order to increase returns or immediate cash flow. Many times Company A will sell their receivables for a discount in order to have cash now, instead of say 3 months from now. This keeps factories going, workers employed, etc. However, without that debt, we would not have the standard of living or economic growth we have today--worldwide.

Now, let's carry the example a bit further. Let's just look at mortgages. If I buy a house (which we just did), the mortgage company is probably going to sell that loan to someone for a discounted rate in order to have cash to make another loan. The other firm probably borrowed or leveraged that deal by using some type of debt. Freddie Mac and Fannie Mae, for example, bought a lot of that debt. They, and many other lenders, then repackaged it as various types of bonds and notes, selling that to use the money to buy up more mortgages and so on. Companies bought those, and used the interest to pay their own debts. When people could no longer pay those fancy mortgages developed to get more people to buy houses and put more money into the economy, things started to unwind. As you can see, following the line of reasoning behind this particular viewpoint, the dark cloud we are under suddenly looks a lot worse.

Now, back to the point about deregulation being the cause. I agree that deregulation was involved, as was human greed. But, was it the main culprit? There has always been a measure of sub-prime debt. But, banks and lenders always tried to minimize that debt amount. The amount of sub-prime lending actually took off during the Clinton years. And, that happened under the banner of stopping racially based lending (so-called "red lining")--which needed to be stopped. But, to finance the increased borrowing, or more accurately compensate for the increased risk, banks needed to find a way to get money back...and that's what lead to the increase of derivative debt instruments behind so many problems today. Now, before anyone rants about blaming Clinton, here are some sources on these claims:

The Law & Economics of Subprime Lending
Boston Globe article: Subprime Lending Misconceptions
Investors Business Daily aarticle: The Real Culprits In This Meltdown
Investor’s.com Editorial: Whose Bailout Is It?

Whether the solution is a government bailout, with payback requirements as there were for Chrysler, or not something must be done. Many people have pointed out it isn't just the Republicans and the Bush administration who did this. This is the cumulative effect of many years and administrations--from both parties. The finger pointing and politicking has to stop before America bleeds to death economically.