The Incredible Bottomless Pit or Are We Searching for the Bottom Now?

As the big financial institutions gorge themselves on cheap Federal Reserve loans, smaller local banks are cash-dry as a bone. Even after a $25 billion auto industry bailout, GM is mulling whether to shut down plants and implement massive lay-offs, because people don’t buy big ticket items in unstable times, and its gets worse where there are no car loans to be had anyway. It’s the big example of what’s happening everywhere. Is this a “slow motion crash” as the Wall Street Journal states or have we hit the point where it is obvious that we are “throwing the baby out with the bathwater”? Are we at or near the “bottom”?

As the Treasury Department (the Administration in general) still fights direct consumer assistance, is still unwilling to freeze foreclosures so that mortgage rates can be reset in a sensible time frame, won’t guarantee grassroots receivable financing… what else can they do that does not involve this direct individual, consumer-targeted relief? If we have to play by their “work through the institutions only” rules, can the government still make a difference? While the efforts outlined below most certainly are not the best and most immediate solutions, the answer is “yes, there are steps they can take” that will help.

The Treasury is considering trading equity stakes in smaller banks in exchange for cash infusions; that policy should carry the string of immediate available small business cash to support payrolls. The government can also guarantee inter-bank loans, from the big cash-rich banks to the grassroots local banks that are best suited to distribute capital to local borrowers. Finally, federal officials can start setting mortgage rate caps where teaser rates and ARMs (adjustable rate mortgages) have dramatically increased monthly mortgage costs. Under the terms of the bailout plan, and where banks and financial institutions accept government loans or insurance (virtually every lending institution in this country), the government has rule-making power to implement these strategies very quickly. Not the best solutions, but at least the kind of movement the market needs to see quickly.

And here’s where I am sticking my neck way, way out… If the government takes these steps now (as the beginning of a litany of many more steps), I honestly believe that the market is looking for a bottom. If it happens, a GM reorganization won’t help stop the fall, but we can survive that as well. It shouldn’t take that much to convince Americans that the stock market – a leading psychological indicator of positive growth – is not going to crash much farther. The market will begin to vacillate instead of dropping day after day… and with the right government support… stabilize. But the market “sheep” need some market leaders to change their attitudes.

I’m Peter Dekom, and I approve this message.

Priorities

As California searches the credit markets for $7 billion in interim loans and increases its budget deficits way beyond any state deficits in history, Virginia and Maryland join a host of additional states in “being forced” to trim educational budgets, and as most states and the federal government have recognized that they will lose many billions of dollars in lost property taxes from reduced housing values, foreclosures and lower revenues from all forms of income and capital gain taxes – something’s gotta give.

Watching the Presidential debates, it’s hard to understand exactly what our priority spending ability will actually be in the next fiscal year – maybe it’s because we really don’t know. We have massive interest obligations to nations around the world with a $10 trillion (and growing) national debt. We could default, but then we could never have another deficit again (no one would take our debt), and we would see some dumping of dollars in the international market that would create inflation at a level we have never seen before (think $20 Burger King burgers). Maybe the silver lining of the government’s taking stakes in the institutions they bail out will produce unexpected longer term values.

But we have “now” to deal with. And there is a little German word that we have borrowed that should be addressed as well: schadenfreude. It is the perverse delight in the misery of others – pretty much for the sake of watching suffering. It is often accompanied by a “savior” complex – to be the hero after you let the misery of others continue and step in with a magical solution well after you could have helped solve the problem. Why do I mention this here? Because politicians from both sides of the aisle often delight at the failures of their opposition, letting things get worse, not cooperating to help with solutions until they can appear as heroes before their constituency and replace the evil incumbents who failed so badly. For many, this is simply, “politics as usual.”

There’s a catch – if things get so bad that no one can fix them, if the misery factor extends to the vast majority of constituents of both parties, “politics as usual” can be fatal. I believe that we can repair this economy, restart our financial institutions and ignite our workforce, but it cannot be done with “politics as usual.” We need to understand what patches we need to get to a growth period, and what investments are absolutely necessary if we are indeed going to have growth sooner rather than later.

The patches are keeping people in jobs, keeping people in homes and supporting the institutions the enable both of the above. It looks like a bailout, but unless we waste the money on executive pay and perks, rewarding the idiots who got us here, it is actually a necessary investment – a repair to foundation of the house we are rebuilding.

But given the budget restraints of paying interest on national debt and the moral imperative of stopping genocide anywhere it occurs, we also have differentiate between (i) state and federal programs of limited value to Americans (money down the drain) versus (ii) governmental investments that make our economy more efficient (highways that work, dams that hold, levees that don't break costing us billions in emergency relief, bridges that do not fall – how we more goods and services from place to place, plus a more efficient use of energy – from buildings to cars), create a work force that can create more valuable products and services (clearly every form of education in the system), eliminate waste from the system (from pork barrel politics to reducing the $1,500-$2,000 of health care in every car we sell, stopping the drain on emergency medical services and focus on prevention, making sure Americans are healthy enough to fix the problem) and seeding invention and research that will create new jobs in the future – from new energy exploration and alternative energy creation, better batteries, better medical and biotech research, etc.

And that means we have to look at everything else with a big question mark. We're not going to win a civil war in a country where we are not even a party, and if we have to deploy military resources, let it be where it helps keep Americans safer or where we stop mass murder. While we should not kill our future by failing to invest in it, we likewise cannot kill our future by spending on failed policies (throwing good money after bad), failed bureaucracies and programs that having nothing to do with our future or our survival. Can America change its divisive ways and rally to rebuild our greatness? We must.

I’m Peter Dekom, and I approve this message.

Comes Now the Night - Doing It Right (Part 2)

As we watch markets falling at levels reminiscent of the Great Depression, and states attorneys general implementing direct actions against corrupt banks and implementing moratoriums against foreclosures that have not appeared from the feds, it does appear that we need some federal action immediately, before the markets freeze up so badly that lay-offs become permanent job losses. Fire!

1. Impose 120 day federal moratorium on foreclosures of residential real estate.
2. Until a bigger plan can be implemented, provide instant federal guarantees to banks operating under their reasonable and standard business practices in providing “receivable” financing to small business owners (those with fewer than 1000 employees) consistent with past practices (this means lending against sales that have been made but not yet collected). This will stop unnecessary bankruptcies and layoffs, perhaps permanent job loss, that will vastly exceed the cost of the guarantee. Begin looking at growing the credit markets to bigger companies as the economy justifies.
3. Ask the Department of Labor (with input from other federal agencies like Energy, Interior and Transportation) to submit a plan to create a massive job corps to rebuild our nation’s bridges, dams, highways, levees and comparable infrastructure under the supervision of the existing building trade unions, but at entry-level wage rates. Prepare to submit that plan to Congress and the President within 60 days. Since this represents a productivity investment, the fact that it may strain the federal budget must be ignored. It will pay for itself many times over and will put a huge cadre of unemployed workers in paying jobs.
4. Ask the Department of Education to prepare a budget and an action plan to: a. retrain laid off workers into fields where growth clearly exists (traditional and alternative energy, health care, etc.), and b. to add one additional hour per day to junior and senior high schools in math and quantative science (can be applied math, such as is standard in manufacturing or construction) to upgrade our national schools to provide competitive job skills (another productivity increase).
5. Invoice and collect the $79 billion of oil revenues sitting in the Iraqi government, and give them their wish of an accelerated withdrawal starting now (muster out 2/3 of the returning troops and send the other 1/3 to Afghanistan), to stop the drain on our budget – whether you are for or against the war, we just do not have the money to pay for it (this is not a productivity investment). The civil war will continue as we depart – it would no matter when we left.
6. Phase out water-wasting and unproductive ethanol farm subsidies over three years and all other farm subsidies (which mostly benefit large corporate farmers, whose commodity values are soaring in this market) over five years. Terminate the oil depletion allowance.
7. Train local and federal investigators and prosecutors in the prosecution of the white collar crimes that gave rise to this debacle. Go after the folks who lied on their loan applications, the lending officers who told them to do it, the financial wizards who having done the numbers still insisted on creating the “derivatives” that pushed us over the edge, and the senior managers at banks and other financial institutions who either encouraged this misconduct or chose to look the other way as it fell beneath their feet. Make them pay – in cash, assets and, perhaps in serving time.

I am sure that what I have written will offend one special interest or another, but what is at stake is the America I know and love. Time is not on our side. We need action. Now!

I’m Peter Dekom, and I approve this message.

Foreign Government Reassurances - “We’ll be Alright; It’s an American Problem”

The international finger of blame is pointed at America as the under-regulated “free market” economy with loopholes drafted and designed by the special interests that benefited from the massive over-borrowing, fully sanctioned by the government. “It can’t happen here,” cry the nations of the world with their figures outstretched. Because the U.S. has been viewed as arrogant – trying to win a civil war in Iraq where it is not even supporting either faction (how do you win a war when you’re not a party?), telling the world that “you’re either for us or against us,” and in international opinion, an unbridled cowboy doing whatever it wants as a self-appointed global policemen (incurring massive military bills paid for with deep and unprecedented borrowings in the international market) – this is sadly being taking in as the payback for American hubris, something we just plain deserved.

But the international impact is just settling in. The European Union, which suffers from a lack of general EU oversight on financial institutions (still, for the most part, a local national matter), is beginning to see the ripples from our meltdown tsunami their way across the ocean. Many European banks drank at the toxic glass of over-leveraged American securities, and are shuddering near collapse as a result. Germany just issued an edict guaranteeing the safety of their bank deposits, and has moved to take over more than one financial institution. England is forcing sales of financial institutions and moving shaky banks to stronger players. Luxembourg , Belgium , Ireland , Sweden are all implementing ad hoc or overall “bailout” policies of their own.

Across the world, regulators are taking one more look at their “it can’t happen here” mentality and finding banking and financial institution anomalies within their own sacred cows. Further, as U.S. consumer demand drops like stone in a flurry of survival instincts, as small businesses shut their doors or postpone deliveries, the manufacturing economies of the world are gasping at the magnitude of the impact this reality is having or clearly will have on their financial viability. Financial capital Dubai is watching real estate values plummet and deal flow subside as oil prices have fallen mightily from their pinnacle a few months ago. The Singapore stock market plunged on Monday trading (along with its Asian brethren), a trend that carried over to Wall Street this morning.

While the U.S. market remains the shakiest, because the majority of toxic securities were born and consumed locally and the underlying consumer-homeowner market is hitting extreme negative growth, the harsh reality is that this is a global problem that is going to require global solutions. “Smug” is rapidly being replaced with “Oh my, it is happening here!”

All eyes are now on how America implements her bailout, and many overseas analysts know that if the Department of the Treasury focuses first on the big financial players, postponing the micro solutions until later – leaving bleeding small cash-strapped businesses (employers!) to writhe on the floor of the economic emergency room – many in economic death throes (since most working Americans are in small businesses), to allow the acceleration of real estate value-killing foreclosures to continue unabated without a moratorium, the tipping point taking us to a super-recession or even a depression is still out there.

If the soaring U.S. unemployment rates (which mask under-employment and those who have given up; they’re probably vastly higher) aren’t clear enough, then our leaders need a massive voter campaign to sound the alarm. The Treasury can deal with both issues at the same time – what it cannot do without dire consequences is take care of the big boys first and believe that the solution on Main Street will trickle down later. That option is no longer on the table, if it ever were.

I’m Peter Dekom, and I approve this message.

Instant Gratification? Not this Time

The bailout is necessary, and I’ve said that before. But the bailout does not mean that the good times will be “here again,” at least not in the immediate future. The difference is between a possible 1929-style depression (no bailout) and an uncomfortably long (15-24 months I suspect) recession (with a bailout). To have growth, we need value. That means retraining and education, fixing broken infrastructure, and encouraging job growth.

We've got lots that needs to be done, in both the public and private sectors, but a slow economy and tough money with sluggish leading indicators (even with a bailout) make achieving those goals that much more difficult. And with the rest of the world pointing their fingers at greedy Wall Street and the government that refused to regulate them until it was too late, the international capital markets are not likely going to help much.

We have energy and health care issues that can create massive new jobs, roads, highways, bridges, dams and levees that need to be repaired and expanded. Whatever the long term result, most of the bailout will be recaptured if the government makes the right moves, but we now have to focus on getting this nation into a place where it can grow, build jobs and sustain hope. Climate change, with the irony of drought and battering hurricanes, only makes that job more difficult. But we can, and we must.

The next President will be faced with the issue of priorities, as questions from the debate so clearly indicate. Choices must be made, spending cuts must be implemented, but we need tax dollars and capital investment to move from bailout to success. This is a multi-step process, and it will take both cash and patience. It will also take courage.

I'm Peter Dekom, and I approve this message.