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Vet’s Guide to the Economic Meltdown…Watching the Snake Swallow Its Tail part II

Vet”s Guide to the Economic Meltdown, Part 2…Notice the snake doesn’t gag

The first truth is that the liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than their democratic state itself. That, in its essence, is fascism—ownership of government by an individual, by a group, or by any other controlling private power.  – Franklin D. Roosevelt,  Message to Congress, 1938.

On Saturday, I got a haircut and then decided to get the car washed.  I went over to a place owned by a Korean family, and while I was ordering the Double-Diamon-Zeus forever Wash or whatever they called it, the son offered to give me a price on tinting the windows. Well, the offer was good, and I agreed to come back after closing so he could do it without interruption.

Anyway,  I brought a book and was just sitting there reading Frank McLynn”s  Marcus Aurelius: A Life when the guy said something to the effect that I reminded him of his business economics department  chair at San Diego State.  We started chatting as he worked, and he told me that he had been an investment banker, and then was laid-off during the early stages of the meltdown.  We talked about how this had all occurred, and I discovered that he was pretty knowledgeable about some things. However, I watched his eyes glaze over as we discussed the bonds market. THIS KID WAS WAY SMARTER THAN THE AVERAGE BEAR, HAD MAJORED IN ECONOMICS, AND HAD BEEN AN INVESTMENT BANKER, AND HE DIDN”T UNDERSTAND WHAT THEY”D DONE!!!

Ok, having taken a few deep breaths, here”s what is going on. There is a concept in accounting called retained earnings. If you look at a balance sheet, the assets are supposed to equal the liabilities. For every debit, there is an off-setting credit. The last thing listed is called Owner”s Retained Earnings, or Equity, or something. This can be a lot of things – actual money, other investments, or intangibles – the value of the brand, good will, or whatever. Most of it is normally the intangibles. There is no big pot of money or gold or jewels or secrets of the Illuminati in a damn vault somewhere.  It”s an intellectual tool to make the numbers add up and balance. That”s all. If I value the equity at 1 dollar or 1 KAZILLION dollars, it doesn”t matter. The auditors and regulators may not agree with the number, and we may discuss this for a while; it”s possible that they may get me to change the number to something that we can agree is reasonable. Then, they can give me the auditor”s letter saying that my accounting meets the standards of the Generally Agreed Accounting Principles, and that the balance sheet is reasonable. Reasonable. Not accurate, not correct, not honest, but reasonable. A pretty good SWAG  (in case you”ve forgotten, Silly Wild Ass Guess), as we used to put it back in the day.

When I taught finance in China, this was the hardest thing for my students to grasp. Not unlike the stupid bank commercials with the slimy guy and the children with the wagon and the ponies and the Easter Eggs, these students got that there was something inherently wrong with this; they weren”t willing to accept it as a tool of the “grown-ups,” they wanted to understand it. We really ought to try and recapture some of that innocence.

While I think that Ron Paul and his followers are largely intellectual Luddites and somewhat deranged on some things, Dr. Paul rails against a lot of this sort of thinking and he deserves something of a hearing.  At the most recent Conservative Convention – the one where he lost to Mitt Romney by 1 vote in the Straw Poll – said that Obama is not a socialist but a corporatist.  “He”s a Corporatist. And unfortunately, we have corporatists inside the Republican Party and that means you take care of corporations and corporations take over and run the country.” Personally, I was shocked, shocked, shocked that, not unlike the gambling in Casablanca, there are Corporatists in the Republican Party. Arrest the usual suspects!

In fact, Corporatism and Corporatists are part and parcel of Capitalism as practiced in the United States. There has been a tension since Hamilton and Jefferson over whom the government was supposed to serve, the people or the corporations.  The Wikipedia Article on Corporatism is pretty thorough, although all over the place as can happen with that resource. (http://en.wikipedia.org/wiki/Corporatism#U.S._corporatism) As Congressman Paul means it, Corporatism is the practice of the government taking care of corporations first, then the state and then the people.  While some might hold that that is the nature of laissez-faire capitalism, there is a difference. Laissez -faire is a Darwinian approach – the government ignores the business world, and lets the chips fall where they may.  Realistically, by refusing to referee, those organizations with the greatest power win. But it”s fair…like a game between the champions of a local Kiwanis T-Ball league and the Yankees.

Corporatism is more the practice of doing what Dr. Paul accuses Obama of doing, and unfortunately what he has on balance done – not in health care, but in finance and economics.  Perhaps the president was looking for results based on the negotiation principle of reciprocity.  If so, he was wrong.  The banks and financial institutions were bailed out, and they didn”t even say thanks, send flowers or call. They took the money, locked it away and haven”t done a goddamn thing to help the people they screwed.

Quite the contrary.  In fact, the hypocrisy of the big banks is amazing. Huffington Post cites JP Morgan Chase for opposing any relief for underwater mortgages, citing the borrower”s responsibility to pay.  The contract is sacred – we agree to loan you the money, and you agreed to pay us. HUFFPO obtained an advance copy of the “CEO for Home Lending” testimony to be delivered today.  It”s worth quoting:

“Like all loans, mortgage contracts are based on a promise to repay money borrowed,” Lowman’s prepared remarks read. “Importantly, there is no provision in the mortgage contract, express or implied, that the lender will restore equity or reduce the repayment amount if the value of the collateral — be it a home, a car or a stock market investment — depreciates.

“If we re-write the mortgage contract retroactively to restore equity to any mortgage borrower because the value of his or her home declined, what responsible lender will take the equity risk of financing mortgages in the future? What responsible regulator would want lenders to take such risk?”

Well, that”s a hell of a good question, given the paradigm in this guy”s head. Obama and his advisers were probably operating from another point of view – that of the common good – when they didn”t ditch the Bush era TARP plan and let the banks go down the tubes. I don”t agree, but for argument”s sake, I”ll stipulate that there is nothing wrong with having different world views, that they”re all equally valid. I just think that taking the taxpayers money and not providing some kind of reciprocal benefit to the people slammed by this economy while taking huge bonuses and posting insane profits is immoral and should be illegal.

On health care, President Obama eventually got mad, bitch slapped the opposition and made his own party sit down and act reasonably. On this one, he needs to do the same thing and there are a number of possibilities. My home dropped 40%. Give me a tax credit equal to 30% of the original purchase price over 4 years, back-dated to the taxes due for 2008. This could be done based on zip codes; pretty simple; slightly more complex but not impossible would be to transfer that money directly to the mortgage holder. Or, and this would help a tremendous number of people, require banks to allow people who are now upside down on homes that were at time of purchase the primary residence, to refinance at the lowest interest rate without requiring mortgage insurance.

Or, and this is probably what I”d prefer, remembering that I”m not an economist, I just occasionally impersonate one, do something else that mitigates the disaster for the people. Not the banks, the people. Odd thought – I kind of agree with Ron Paul.

View the original article at Veterans Today

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