Monday, October 6, 2008

What's up with our economy? or should I say down?

What is economics

According to Webster, E`co*nom"ics\, n. 1. The science of household affairs, or of domestic management.

I was a little surprised by the definition, considering all of the news lately, so let’s put this into perspective. The Economy that’s in the news today isn’t so far removed from this simple definition, however they are talking about the National Economy, Political Economy and World Economies all being tied together. So, how are the household affairs or domestic management of our nation doing?

I’d like to take you back to the early days of our National household, the days following the American Revolution. As a result of the revolution, the federal government had acquired a huge debt: $54 million including interest. The states owed another $25 million. Paper money issued under the Continental Congresses and Articles of Confederation was worthless. Foreign credit was unavailable. By demonstrating Americans' willingness to repay their debts, he made the United States attractive to foreign investors. European investment capital poured into the new nation in large amounts.

I don’t want you to miss the KEY sentence here, because I believe this is KEY to what happened in our bailout last week. Our National Economy is mostly based on Capitalism with oversight to prevent blatant greed and fraud. I believe in Capitalism, a free market – with oversight. Capitalism’s strength understands that money motivates and the purpose of oversight understands that money also corrupts. With men of integrity at the helm then Capitalism – a free market system – with oversight works very well. Our National Economic system failed last week, not because the concept doesn’t work, or because we needed more regulation… it failed for one reason only. Our legislators on the hill failed to provide prudent oversight, because they had been corrupted by the very industries they were charged to regulate. Pay attention to the end, because I’m going to name names…

The U.S. Department of Housing and Urban Development (HUD) carries the oversight responsibilities for the housing mission of the government sponsored enterprises or GSEs. Effective January 1, 2005, HUD established new and increasing affordable housing goal levels for the GSEs for the years 2005 through 2008. These goals require that a certain percentage of the mortgages purchased by Fannie Mae and Freddie Mac support financing for housing low – and moderate – income families. The Office of Federal Housing Enterprise Oversight or OFHEO published the following mission: OFHEO's mission is to promote housing and a strong national housing finance system by ensuring the safety and soundness of Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation).

The goals themselves were not even at fault. It was the failure of oversight and fundamental economic integrity that caused the crisis.
OFHEO's oversight responsibilities include:
• Conducting broad based examinations of Fannie Mae and Freddie Mac
• Developing a risk-based capital standard, using a "stress test" that simulates stressful interest rate and credit risk scenarios
• Making quarterly findings of capital adequacy based on minimum capital standards and a risk-based standard
• Prohibiting excessive executive compensation
• Issuing regulations concerning capital and enforcement standards
• Taking necessary enforcement actions
I’ve been racking my brain to understand how my president, as fiscally conservative as George W Bush is, personally, could agree to this kind of a bailout, until I understood the foundation of our INTERNATIONAL Economy. “. By demonstrating Americans' willingness to repay their debts. The world had invested in America’s reputation for honor and integrity and their willingness to repay their debts…that is the reputation and the crisis that had to be defended. It was a matter of National Security and International Integrity.

So, how are we doing?
I happen to be among the generation that has never had to struggle too much financially. I’ve had my ups and downs, but most of it was of my own making. I’ve had my health and a fairly stable economy around me that I could find a way to stay in the middle. I’ve never had to be the kind of steward that could make or break a household. Consequently, I don’t have the kind of honor and respect for money that my parents had. I’ve been lackadaisical at my best and downright irresponsible at my worst.

It’s not like I don’t know how to stretch a dollar, I can make it pretty elastic, but I’ve never had to for any length of time. I learned it from my mother, but was glad I didn’t have to practice it very often. The 80’s were a bit tough under President Carter and even with Reagan’s election, our household went through job changes and gas prices, utilities and inflation had us pretty strained. It was relative to the affluent lifestyle we had become accustomed to, not to our basic needs not being met. I can honestly say, other than those few years of being an immigrant child in the 50’s, and maybe again as a newlywed, not understanding economics, I’ve never really known poverty, and I’ve never thought to ask the government for assistance.

The beginning of the article defined economics as “the science of household affairs, or of domestic management”, so in all honesty, I’d have to say I am personally failing. Perhaps my neighbors could be polled, house by house, family by family to see how economically prudent they are. I’m going to guess that they each carry a fair share of debt. Many are upside down in their biggest investment, their house and carry auto, home and consumer loans. What each of us has to ask themselves is, “Am I practicing economic prudence and responsibility or am I living outside of my means?”

We know what the government is doing, living trillions of dollars in debt. It’s that debt that made our president consider this bailout. Fighting fire with fire? I think that only works for fires. I don’t see how adding debt can fix your economy unless some of those bill collectors are threatening what? Their friendship, their support, their alliances? Have you ever borrowed from Peter to pay Paul?

I heard a newscaster say that our economy is built on credit, and when credit freezes up, then our economy comes to a screeching halt. Friends, I believe our economy is coming to a screeching halt. We can’t use the governments’ plan of more debt to combat this. Our states and some municipalities will certainly try. We are already seeing the lines forming at the US Treasury for their bailouts. California is at the top of the list requesting 7 billion to meet payroll for October. Seems we were more attentive to our Uncle Sam then we were to our parents.

I know what I personally have to do, assuming I can keep my job and my company can stay in business. I can’t utilize credit without a AAA credit ranking or a FICO score over 750, and if that’s you, then don’t expect the same great interest rates of the past. It doesn’t matter what the wholesale or prime rates are….. that will not trickle down to you and me. Then it was greed, now it’s survival that will set the new rates. What I can do is take a look at my budget. What can be trimmed? What are the needs in my life that need to be protected and what can I live without?

• Tighter credit terms
• Higher interest rates
• Unstable employment
• Higher utilities (gas, water, elec)
• Higher transportation costs
• Higher Food prices
• Less buying power

The only difference between a recession and a depression is that your bank deposits are guaranteed by the Federal Deposit and Insurance Corporation, or FDIC. If you want take all of your money out of the bank, then you have a right to do that…but when a lot of people do it at the same time, it’s called a “run on the bank”, and considering the bank exists on margins, that bank will run out of money before they pay back all of the depositors. Remember “It’s a Wonderful Life” when George and his neighbors worked out the run by convincing clients that it wouldn’t really help them if they took all of his honeymoon money. Today, if that happens, the FDIC steps in, seizes the banks assets and continues business on behalf of the depositors, or sells the assets and operation to a willing buyer. Remember how Mr. Potter kept the money he knew belonged to George Bailey’s uncle (stole), and waited for the bank to fail?

The FDIC can not and will not run out of money. Why am I so sure? Because, like all federal trust funds, the FDIC's insurance "trust fund" does not exist. The fund is simply an accounting entry with the US Treasury. There is no separate fund. The reserves shown in the fund simply represent the amount of money contributed by the banking industry into the fund. The cash raised by FDIC insurance premiums goes into the Treasury's general fund. When the agency needs cash, then the Treasury makes the money available. When the positive balance shown in the FDIC insurance fund is depleted, the FDIC simply runs a negative balance with the Treasury, kind of an automatic overdraft protection.

So, we may not see the Great Depression of the past, assuming we let the FDIC continue to authorize money out of air, but what we can be sure of, is the value of the dollar is being diluted with the printing of more and more dollars, so each dollar you have will buy you less and less. Whenever I say that, I think of a verse in a song I heard as a kid, “ …a piece of bread could buy a bag of gold, I wish we’d all been ready.”

I wish I had been more ready, not for what that song implies, but to face economic REALITY. We all need to be more prudent. Let’s not change the meaning of the word economic, which Webster also defines as:
E`co*nom"ic a. 3. Managing with frugality; guarding against waste or unnecessary expense; careful and frugal in management and in expenditure; -- said of character or habits.

If our economy is based on credit, as the newscaster reported, then we have a chance to change that, one person, one family, one household at a time. We can rely on our family, friends and neighbors, and make sure that credibility and integrity and our willingness to repay our debts is what determines our credit line, not an arbitrary rating or FICO score. We can carpool and co-op; barter and trade for goods and services until we have our savings accounts back on track. We can ignore the traditional credit markets and have the merriest of Christmases this year; And, we can promise ourselves and our children and our children’s children, that never, never, never again…will we be put in this situation. Not by crooks and swindlers in congress or the banking industry, they played on our own weaknesses after all. We let them swindle us. Easy credit was not a temptation for the generation that had lived through the first great depression. It was not a temptation for those who had their P’s and Q’s in order and in perspective. We can call for REFORM, not more regulation; we can call for the heads of the corrupt politicians who had their hand in the till; we can call for more free market and less public entitlements; we can DEMAND more from the men and women we send to congress.

1 comment:

Anthony said...

Seems to me this "crisis" is rather bogus. Not to say there aren't people in trouble, like Fannie Mae and Freddie Mac, etc., but because they can call this systemic, they can frighten people and have rescue measures proposed. They have this clout and the wherewithal.

I honestly don't think more regulation would have helped, unless we're talking about regulating the unfettered printing of money.

What I mean is, there really is no limit to how much our government monetizes as long as foreigners are willing to invest and our government is willing to tax.

There are just piles and piles of money waiting to be lent out which I talk about in a blog entry I wrote not too long ago, "Bush's Housing Socialism."