After listening to the news of the collapse of Lehman Bros., the assimilation of Merrill Lynch and the dire forecasts re: AIG, I listened to several "experts" whose hindsight is unbelievably postscient. They can all explain how clear it was that this would happen, but none offer explanations as to why they didn't sound the alarm before or while it happened.
I have heard, many times, in the past several days that the structural failures which led to the ruin of the U.S. and world economies in the the Great Depression were the impetus behind much legislation that erected firewalls between speculative investment and traditional banking institutions; and, that because of those firewalls it was much less likely that the sort of things that brought about the run on banks and subsequent. It appears, however, that the U.S. congress has, in the past several decades, undermined or simply removed those firewalls so that they are no longer effective or no longer exist.
It occurs to me (not) for the first time that the difference between investing on Wall Street and shooting craps in Vegas is that at least in Vegas they comp the drinks for the marks.
The new "conventional wisdom" is that the "housing bubble" and it's reliance on sub-prime mortgages are to blame for the demise of numerous financial institutions. The people who are saying this are, in many cases, the same folks who had been telling us, until fairly recently, that it was the housing market that would draw us out of the recession. It seems that the financial experts and the economists were not blowing hard enough on the dice before they threw them.
Much of the blame for the sub-prime mess, of course, can be laid at the feet of people who bought homes during a period of "irrational exuberance". I have heard that many people just wanted to have a home of their own. Count me in that number. I have a lovely little hovel which I bought for $25K because it was pretty much gutted and it sits on a small, crowded lot, in a city, in the upper end of NY; a city whose economy has been in the shitter since about 1975. Purchasing the house took about 1/2 of what was in my small 401K. Then I took a lump sum check for my retirement in order to finance the renovations. So, now I have about 30K in an IRA and this house (which needs about 1000 hours work and $15K in materials to make it livable) what I don't have, at the moment, is any debt--of course I don't have an income either.
Now, then; I'm going to be 59 in a few weeks and I'm probably never going to have anything like a good paying job again (I blame a lack of talent and ambition--I am so unfair to my life!). There are lots of people my age who have nice homes, decent amounts of savings, nice cars, kids in college and all of the other accoutrements of the middle class. They also have boatloads of debt. A large portion of their indebtedness stems from reliance on traditional financial instruments, mortgages in the main, to finance homes. However much of the indebtedness is the result of high interest borrowings on credit cards, to finance those things which they were told they needed to be seen as successful. They were convinced, by the lenders that debt was good, regardless that the cost of servicing the debt was usurious. Debt is good, especially if you're not the debtor--AND if, when your position as the debt collector becomes unprofitable, you can ask the government to spare you from the repercussions of the "free market" that you created!
Here's the thing that really bothers me about all of this: that dream of constant acquisition, each successive generation having more of everything than its predecessor, is rooted in Ponzinomics. There is a finite amount (and it's quite large, I won't deny that) of wealth that is available at any single point in time. When there is not enough to go around, debt is created--wealth anti-matter, so to speak--some of which is fine. But, when debt becomes the driving force of the economy, it becomes an 800 pound gorilla. Debt dictates how we spend and save. Too much debt means that, first--we can no longer save, and second--that we can't buy more stuff. If it's only for a week or two, no biggie. Otoh, if it's for a few quarters the party in power calls it a period of stagnation (the party out of power calls it what it is--a recession).
Ya know what? This is all just my opinion, cuz I never finished college, never mind the Wharton School or Chicago U. But I don't think the homeless (and those who are going to be joining them in the next few years) need degrees in economics to know that they're screwed.
Tommorow, class, we will look at how the necessity to be part of Mr. Bush's "ownership society" left us all holding one thing--the bag.