The present economic crisis affecting the Nation will soon become a global economic depression. While few economists are willing to say so, the simple fact is that investor confidence, and indeed interbank confidence is shaken to its foundations.
There is little Congress, Treasury or the FED can do to absolve the economy of the one critical issue, that property values are devalued. While we believe the recently announced economic recovery plan with nearly $700 Billion in additional taxpayer bailouts is good for Wall Street’s confidence, it does nothing to resolve that underlying problem.
Buying up bad debt doesn’t mean that the loans made by banks will result in positive change in property valuations. With continued unemployment, business closures and bad lending, not to mention the effect vacant homes, stores and offices have on a community, real property values will remain in negative territory and potentially, continue to spiral downward. This loss of value makes it impossible to ease credit, even if banks have unlimited access to FED funds.
The evidence of this is all around us, but it seems people are so overwhelmed by the volume of negative information that they’re turning themselves off to more news.
To demonstrate my point, we cite these simple facts:
- The two bourses in Russia, Micex and RTS had to halt trading for the second day last week. RTS in May hit its all-time highs and that day, it had lost 50% of its value.
- Two of the leading and successful investment banks, Morgan Stanley and Goldman Sachs lost considerable equity in the markets despite reporting record profits. This shows that the investing public does not believe reported numbers. All they’re seeing is that these two firms could or would not help bail out AIG – that has damaged investor confidence.
- The Federal Government is bailing out companies with a new plan and soon investors in US Government securities will be fleeing those bonds because they don’t believe these bailouts will provide revenue to the US Treasury. Lack of confidence is a disease that spreads.
- The Deficit grows daily, continuing to erode confidence in both government securities and in the management of our nation irrespective of which party may be in control.
- Talk about regulation and Congressional action is usually more problematic than realistic, leading the public to believe Washington has failed them. Congress, in truth, cannot regulate this crisis because it is a holistic crisis, stemming from the confidence of everyone, globally, in the fundamentals of their personal fortunes. Rich or poor, people depend on the equity in their homes and if that has turned negative, their futures are bleak and they’ll remain in a personal economic depression for years.
By that last section, we mean that it is impossible to point blame to one thing or person. The crisis is the result of a huge volume of technical issues. While Congress might patch a hole in the ship here, another will be created somewhere else.
The ‘blame game’ seems the desire of many, but playing it is alot like engaging in Russian Roulette. Sooner or later, you shoot yourself in the process. Not a wise move.
Blame for our crisis can be spread across the board. Everyone, from investors seeking high yields to bankers willing to use data and statistical modeling to make lending decisions, are but a few. Congress, surprisingly, is the least of the culprits, as it cannot regulate the greed and corruption of bankers or investors, nor can it compel the actions of regulators to go beyond the scope of their jobs.
What we lack in this nation is exactly what made our government work for more than 200 years – a system of checks and balances, but this time in the area of finance. This can be legislated, but even with such a system, everyone has to be on-board. Unfortunately, in our society, the one yelling the most against the common good often wins the day.
Recently, in trying to obtain the support of a Democratic US Senator for such a bill, the senior staffer dealing with the matter suggested that business loans should be fast and extremely inexpensive to obtain. Oddly, that was the same reaction we had after discussing the same legislation with a Republican US Senator’s office in April. Both concerned more about what special interest groups would say than in doing the safer, sounder thing and getting that bill passed. So not getting it done this year, which do you blame when both parties sound exactly alike. And whom do you vote for when the choices are two candidate unfamiliar with economics in a time of economic crisis?
We fear the collapse of our economic system is imminent and the consequence of that will be the fall of the Republic. That’s probably what Secretary Paulson warned Congressional leaders about last week. When nations have excessive debt and their financial systems fall apart, the government invariably falls. Throughout the history of mankind, this has happened thousands of times and the US is not exempt, despite our Constitution. Wars usually follow, and in the past 100 years, they’ve been global wars. Today, they’d be nuclear. Would Russia, China or other nations hesitate to push the button to protect their economies and their governments from collapse?
Reminded of Louis XV’s words “Apres moi, le deluge” (After me, the end), we keep thinking that no matter which candidate we elect this year, the winner may be our last president. Whomsoever wins the White House, we’ll need to spend in astronomical figures to get ourselves out of this mess, exacerbating the problem.
Should we suddenly or slowly leave Iraq, Defense spending will reduce, costing more jobs so essential these days. Can this nation afford to cut any more jobs?
Spending for bailouts is imprudent, even if necessary. A careful and immediate plan should be drawn up to establish a large number of national infrastructure development projects. Prizes should be offered for the best energy solutions. Anything to build economic recovery. We need to put people back to work and create private sector jobs in the small and mid-sized business communities.
The loss of jobs, and lack of new business startups and high business failure rates are reducing the volume of payments into the Social Security system, forcing that, in the next year or so to go into critical mass. Where will the money come from to bail that system out? It is particularly critical these days as our economic mess has wiped out most of our retirement savings.
The individual with more than $250,000 saved in an IRA or Roth IRA may lose the bulk of their nest egg if their bank fails. Is the nation prepared to bail out the individual to the tune of half a million each? Even spread out over time, such a bail out will bankrupt the nation from the outset.
The new Economic Recovery program we are convinced, will fail, but not during this President’s term. It is a setup to disaster for the next man to sit in the Oval Office.
Without the systems put in place to police the banks outside the scope of government regulators, nothing will change in lending. The Housing Reform Act did go a good distance, but not quite far enough as it failed to address policing the lenders on a loan-by-loan basis. Washington expects banks to police themselves. This has proven, again and again not to work, but they keep expecting it to happen. Any day now… Okay. Sure.
Realistically, regulators, consolidated or otherwise, are not in a position to review the loan applications for regulatory compliance. Banks do these themselves. However, if a rogue bank officer simply pressures an underwriter, the entire system falls apart and banks will make continually worse loans. Because a regulator didn’t catch the first, then the second, third and ninety-seven thousandth will go through. First at one bank, then another and yet another and within years, the whole mess repeats.
Congress and regulators are not demi-gods capable of seeing behind walls. However, they can legislate into existence an independent third-party capable of reviewing the loan applications for compliance and keeping records for the regulators. Doing this would solve any risk of future game-playing.
Congress also needs to establish an office or committee for financial reform. Not a body to pass, but one to review laws and make sure they are in compliance. The Government Accountability Office (GAO) usually does a great job notifying Congress of impending problems, but few in that body really pay attention to GAO reports. It lacks credibility solely because it does so much in so many areas.
We urge Congress to immediately pass the Loan Evaluation and Management Analysis Act.