The economy is in great turmoil, the likes of which we have not witnessed in the past 50 years. People are losing their homes; major houses of investment are collapsing. What we hear depends on what channel to whom we are tuned. From my angle, I am glad that I have read such classic writers as George Orwell, Joseph Heller and, Kurt Vonnegut these writers have prepared me for the last decade. I should also give thanks to such artists as Salvador Dali, and Jackson Pollack for without their vision I would not have begun to “see”. I never thought that when I read the absurdities of “Catch 22” they would imitate real life. I recall Milo Minderbender’s arrangements allowing the enemy to drop bombs on a US airbase, or Major Major’s declaration that he was only “in” when he was not in his office. (Remember Vice President Dick Cheney assertion that he is neither a member of the executive nor legislative branch of our Government.) Nevertheless, I digress:
My parents lived through the very difficult 1930’s; my mother told me a loaf of bread had cost five cents. She told about an excursion that she made with her younger sisters when she was about six years old that she undertook to go to the five and dime store. She was able to buy several gifts for her sisters and her mother all with fewer than 50 cents. I was amazed that you could buy so much with less than what was sitting on the desk. Then my mother told me that people did not have much money. It was hard to afford the food that then overflowed in our refrigerator. Back then, my grandmother was worried, where could her young children have run off? Later when my mother presented her the candy they bought for my grandmother, she was not too happy with my mom. My mother learned a lesson that day about responsibility and money, that today’s investors could greatly benefit.
My mother was fond of telling me that sure things are never what they seem. She warned me with such well-worn phrases as “don’t put all your eggs in one basket” and, “don’t count your chickens before they hatch”. Such farm references were more common then, given that the president Herbert Hoover promised prosperity around the corner and a chicken in every pot. My mother knew different, not so with today’s “sophisticated” investors. They took the proverbial profits before the chickens had hatched and now we are left with eggshells, plus the leaders of the current administration have egg on their collective faces.
Conservatives argue that Freddie Mac,Fannie May and coercion from ACORN led to the loss of more than a trillion dollars. Right wing news organizations from Fox News to the National Review have placed the blame on decisions to open up housing to those who are less fortunate. Such notables as Thomas Sowell, Rich Lowery, and of course Rush Limbaugh and Sean Hannity have wailed: if only lawmakers and banks were not pressured into making such risky loans. Then the tragedy that befell the economy would have never occurred.
A recent article by Michael Lewis illustrates the problem with assigning blame. Mr. Lewis authored a book about his experiences with the investment business during 1980’s titled “Liar’s Poker”. He wrote the book as a warning to new graduates of our nation’s colleges. He was making hundreds of thousand dollars each year yet he knew that he and others like him did not know what they were doing. “Sooner rather then later there would come a Great Reckoning when Wall Street would wake up and hundreds if not thousands of young people like me, who had no business making huge bets with other people’s money would be expelled from finance.” Lewis who left Wall Street in 1985 remarked that, that day never came, and young people have written to him looking to tips to get into the business and succeed, “they were using my book as a how-to manual”. Nevertheless, Lewis continued to document the coming events.
(Wall Street has been built like a house of cards!)
Lewis noted that in 2000, there were $130 billion in subprime mortgage loans and 55 billion of these loans were repackaged into mortgage bonds, by 2005, the subprime mortgage loans had gown to $625 billion with 507 billion converted to mortgage bonds. The greed of the industry produced this crisis. Lehman Brothers et al. did not fall from investing in loans designed to help those less fortunate buy a homestead. Rather they fell because they thought they had found a way to make chicken salad out of chicken feathers. As a result record profits and bonuses were realized and more risky loans were encouraged. Lewis explained that though clever accounting, investment houses bought mortgages rated as BBB the lowest rating, and repackaged them as AAA bonds the highest rating. “By the spring of 2005 FrontPoint (a hedge fund) was fairly convinced that something was very screwed up not merely in a handful of companies but in the financial underpinnings of the entire U.S. mortgage market.
Once what was small part of the overall market known as the sub-prime mortgages became the house of cards that brought down Merrill Lynch, Lehman Brothers, AIG, and now is threatening Citi-Group. Lewis further elaborated that credit default swaps allowed investors to make side bets whose arrangements “bore the same relation to actual finance as fantasy football bears to the “NFL”. Today one hears that the Clinton Administration passed the Community Reinvestment Act and this led to the crisis we now face. To this, I reply in the words of Paul Harvey, we are not being told the rest of the story. What conservatives do not want people to know is what lurks beneath the surface. This is like believing that an iceberg is only as large as that which one can see from a ship.
http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom I strongly urge you to read the entire article.