And It’s Subprime by Nose!

These times seem just like a horse race, but we are getting off track. The OTB folks – Wall Street – are missing the calls (they think the market is really up!). The horses are getting tired, and somebody forgot to tell us how many laps we have left. But at least we’ve still got our sense of humor in tact! Seems that a real live horse named High Yield sired a real live horse named Subprime, now a two-year-old filly, and this little girl really won the ninth race Thursday at the Aqueduct race track in New York. The people at the track cheered.

Meanwhile, at the American racetrack, S.E.C. who sired Lax Borrowing Rules at the “Big Financial Institution” track in Washington, D.C. stepped aside to let Treasury, who sired Foreclosure and Layoff, run the “Bailout Stakes Classic” and lose. Federal Reserve was still in the paddock and missed the race because of a sprained ankle.

Funny how in the real world, Subprime was the winner of a horse race, but when you think about when these real ponies were actually named (a couple of years ago) and the kind of folks who can afford to buy and race horses, the humor just might be a little too dark.

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

Pushing String

How will Americans cope with a world where borrowing, even after the credit crunch de-crunches, has a whole new set of rules? Household debt sits at around $13.8 trillion! The people have actually borrowed more than their government, and as I have said in a recent blog, U.S. households have borrowed 139% of their disposable income.

Big investment banks, allowed under that infamous April 28, 2004 SEC ruling I have written so much about to borrow well above the 12 to 1 debt to equity ratios imposed on the smaller financial institutions (Lehman Bros. and Bear Stearns died at somewhere between 32-22 to 1), now have to de-leverage (reduce their debt). This is especially true for companies like Morgan Stanley and Goldman Sachs that have voluntarily elected to become commercial banks, where the debt-to-equity ratios remain at that 12 to 1 level. Guess where they are getting some of the money they need to pay off that debt (and create enough balance sheet solidity to handle any crises that may fall in the coming months)? Yeah, that hoarding thing again.

Besides the fact that the “home equity” is just a house, and in spite of the fact that losing a job (or the prospect of losing a job or getting less overtime, etc.) puts a damper on spending, exactly how are Americans going to cope with a world that has moved one giant step towards “pay-as-you-go” versus “go-now-and-pay-later”? Credit card limits and restrictions, discussed in earlier blogs, make borrowing for consumer goods much more difficult. Car purchases have all but ceased. Restaurants are experiencing severe drops in customers, and travel is something that seems to be relegated to necessity, business or a “virtual” trip on a computer or on television.

Empty stores and restaurants don't make Christmas look bright. We spent $460.2 billion last year in the 2007 holiday season, but don't expect anything but down this year. If you are looking for bargains – except for Japanese electronics (sorry, even with the Japanese stock market down, the yen is even stronger than the dollar) – boy is this going to be a great shopping season! And escapist movies – forget the serious stuff – are doing gangbusters at the box office.

Bit by bit, we will rebuild this economy. For all those who missed the Great Depression (almost all of us), the Great Recession (2008-????) will be the life lesson that generations of Americans will carry with them into the future. This is not a short-term fix which changes because we have a new President and a reconfigured Congress.

The key for the next administration is to recognize that government spending falls into three general categories: 1. Stuff we can't stop or limit, like paying our national debt or keeping us safe from criminals and our enemies, 2. stuff that really brings us no or very limited value (like the Iraq War, ethanol subsidies and pure pork), and 3. investments in our future growth (such as infrastructure development and repair, energy research, education and health care). The second category is where a President and the Congress have to cut the most, and the third category, despite rising deficits (don't worry about that!), is actually how we invest and fund our recovery and our future. Simple plan on a vicious political battleground. We will be back… but it will take years… Sometimes, it just feels like we're pushing string.

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

Assumptions can Kill You (and your economy)

Those most familiar with the industry – the folks who made millions, even billions from a business sector – are the best suited to become the federal regulators who can oversee that sector. After all, they are clearly the most knowledgeable. The “best protector of hen houses would be the fox” theory of government. Let mining and logging interests become the environmental “deciders,” petroleum industry barons draft and implement oil-related tax and regulatory statutes, and investment bankers and financiers rule the SEC, Treasury and Commerce Departments, etc.

We cannot apply the Constitution of the United States of America , which every elected federal official is sworn to uphold, when times get tough. That’s the “when times get tough” exemption in Article… er… I can't find it, but I know it’s here…. We should let power concentrate in one branch of government, surely an efficient choice, without legislative and judicial checks and balances, and we know that the executive branch has everything under control and will always make the right decision.

Our houses are really our saving accounts, which will be there on a rainy day and we can use a home loan or a HELOC (home equity line of credit) to cover an emergency, a lay-off or putting our kids through college. We really don't need a separate savings account, since home prices are solid, right?

We are the most competitive nation in the world; we rock, so we really do not have to fix our infrastructure or educate our children, because we are Americans and we are so far ahead of the rest of the world!

We do not need government interference in business, since corporate America is responsible and will not pollute our air or water and they will only sell pure food and drugs without all those terrible regulations. We need to be more like the wild laissez faire markets of Asia , real “capitalism”!

We don't need government to run Social Security – that's too “socialist”; we'd be much better off if individual Americans could instead invest that same money in the stock market instead of having the government administer the program! The private markets will make that social security payment much bigger. Hey, we don't want government in health care either for the same reason.

I’m Peter Dekom, and I am shaking my head.

Boy is It Hot in Here!

The markets were up Thursday for the reasons mentioned in yesterday's blog, but so are the autumn temperatures in the Arctic – a record 9 degrees Fahrenheit (5 Celsius) above normal. Melting ice reveals dark ocean waters beneath; darkness absorbs heat better than light (which reflects it away), which accelerates the warming process. And I can't even blame that on Henry Paulson, but I am checking! I wouldn't count on a sustained up-market by any sane estimates any time soon (they're already down!) – stocks should waffle up and down based on each day’s news, and should tumble hard if Henry makes any more recommendations to work through institutions… but I think I would count on Arctic temperatures holding to the “rising temperature” phenomenon for the foreseeable future.

Those aren't Republican or Democratic degrees; they're the old fashioned Celsius and Fahrenheit kind. They're the kind of degrees that should set our best and brightest scientists to thinking about managing the inevitable consequences, preparing the infrastructure for the inevitable strain, and maybe, just maybe, bring Americans together to work together to find energy alternatives, improve efficiency and solve problems from a bi-partisan platform. Or not.

I could just blame this on the Democrats who repealed the Glass-Steagall Act in 1999 and allowed banks to merge into and own financial trading companies (and vice versa) – a spur to big fat bank/financial institutions that helped fuel the economic mess or the Republican Securities and Exchange Commission that, on April 28, 2004, created a horrible exemption to a rule on how much equity five financial companies (those worth over $5 billion at the time: Goldman Sachs, Morgan Stanley, Bear Stearns, Lehman Brothers, and Merrill Lynch – look who’s gone from that list!) needed to have against their debt load – allowing them to borrow their way into buying massive piles of derivatives based high-yield (and very flawed) subprime mortgages and other secondary values (Bear and Lehman went from 12 to 1 – the old limit, and the limit on everybody else – all the way up to 32/33 to 1 before they died)… but I won't.

Instead, I'd like to suggest that we gather together and simply get to work solving problems that plague us all. Us… you and me… people… making individually responsible decisions. Using less energy. Not borrowing above our means. Not buying it all now. Saving and investing in each other, our children and our future. We can ask the government to help, but they seem not to notice you or me. Not enough of us are plumbers, it seems. I'll keep railing about what the government should do or stop doing, but I know, in the end, it’s just up to you and me to begin to make this a better place, one individual step at a time.

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