Our reactions to the market prevent us from planning appropriately.
This is a critical point for humanity. To further the analogy I started in my previous blog post: the human race is on an economic ship headed straight for an iceberg. I'm convinced there is nothing we can do to avert it. Our past mistakes have made it impossible to avoid. It started in the Clinton administration and continued through W's administration. We need to understand how and why it happened to make sure we don't make the same mistakes again, but more importantly we need to understand what could happen so we can plan the best methods to repair the damage and restore the markets to functionality.
Like most people, I'm frustrated to think that the red flags for this failure appeared as many as seven years ago. Any economist who studied the Japanese bank failures of the eighties could have easily related our systemic failures to theirs. But most everyone ignored it. Some senators sent letters and tried to create laws to correct the misuses of loans, but they all failed because "Frandie Meac" dumped money into the congress to prevent the inquiries and laws from passing. They spent millions on congressional campaigns to earn billions of "shaky" dollars that rested on various floors of a house of cards.
Its easy to get caught up in blame. Its clear many were greedy bastages. Look at AIG's recent fun in so. Cal: 500K of their new loan money to celebrate being bailed out by the tax payers? WTF?
Its clear the people who got horrible ARMs to extract cash from their house's over-inflated value should get what's coming to them. They should lose their homes for making a foolish mistake, but they aren't, the tax payers are bailing out their greed as well.
Its easy to blame these people for their moronic mistakes, especially when you didn't risk taking a loan out on your house that's worth $500K more than your loan because you don't believe in debt, you believe in cash.
However, we can't allow ourselves to blame. Its pointless. Perhaps we should assign folks in the FBI the job of finding people who broke the law, but my guess is: they won't be able to prove anything. In the end it would probably be a waste of tax payer money.
We must set aside our blame and indignation, not because we are wrong to blame, but because the blame itself won't accomplish anything.
The fact remains: the economy is hurting and the question is: what can we do now to get it going again as quickly as possible. That is exactly the question that Bernanke, Paulson, and their team of experts are trying to answer.
After years of resting on their laurels and lying about the state of the economy (they had to be lying, the only other alternative is they didn't see it coming and that means they really shouldn't be in the positions they are in), now they have 700 billion dollars to attempt to help the economy.
From where I'm sitting, it looks like perhaps they didn't see this coming and perhaps we gave our 700 billion to the wrong guys. Why do I say that? Because the changes they have announced to date haven't helped anything and appear to be nothing more than knee jerk reactions to the economic issues that are arising. They see that the Paper Market has dried up and they volunteer to back any and all paper as long as companies will loan to each other again. They see that there are trillions of dollars in bad debt and they offer to buy it up to restore liquidity to the system. Will that work? No. The coming failure isn't due to bad debt or failure to loan, its due to people's lack of trust in a system that failed them.
I got this idea for a three panel comic yesterday. In the first panel we see Paulson standing in the dark on a smooth concave surface with a shocked look on his face. In the second panel Paulson has a knife out and is blindly stabbing in the dark. In the third panel we see that Paulson is standing in the palm of a sixty foot ape labeled "economic collapse."
Paulson does not have enough resources to avert the disaster and he cannot even see the extent of the size of the disaster. He can't know. This has never happened before so no matter what he does to try and fix it, its a stab in the dark.
I do not believe that anything he does with our precious 700 billion is going to make any difference, UNLESS it is well planned out and attacks the problem systematically.
To do that, he must identify all the probable areas of the system that are broken and in the process of breaking. This may not be possible.
He must then figure out the most efficient way to inject the money he's been given by us to get the economic wheels spinning again.
But I don't believe the problem is money. I believe its confidence. The system has failed and as expected, people have no confidence in a failed system. I don't believe he can restore anyone's confidence by injecting ANY amount of money. The system itself is flawed and cannot be repaired by money alone. It needs new legislation, new guide lines, and needs to be re-engineered from the ground up.
Here's an analogy: a failing structure can not be re-engineered and rebuilt until the existing fallen structure is cleared away. We cannot rebuild our financial systems and try to leave bits and pieces of it in place. It is unsound as it is, so it must all be cleared away and rebuilt from the ground up.
It is possible that some of the system's foundations are strong. If so, they will need to be reinforced, but everything above them must be cleared away.
Currently Paulson is wrapping a house of cards with scotch tape, trying to sure up the existing structure with 700 billion dollars. The problem is: the scotch tape goes away after a certain amount of time (eaten by people's lack of faith in the broken system). To keep the cards up, he'll need to put on more tape. He'll ask for another 700 billion and another 700 billion until the US government itself is at risk. Mark my words: the system MUST FALL. We must let it and we must begin to learn from our mistakes and build a new system which is regulated enough to be healthy but not so much as to be stagnate.
Once everything is cleared away and the dust settles, we will be sure to have hit rock bottom. Companies like the one I work for who have limited debt and a boat load of cash will survive. Those who run on credit will not. Lesson to be learned: CREDIT BAD, CASH GOOD. HAVE WE LEARNED THAT YET? We've only had this happen twice: I'd hate to see it happen again. LETS LEARN THIS LESSON, OKAY?
Rock bottom is going to ABSOLUTELY suck. But how else can we be sure that the house of cards is down? Once people feel that we've hit rock bottom then people will need leadership to help them begin to build again.
THIS IS WHERE OUR 700 BILLION SHOULD BE USED!
Instead of trying to fix that which is borked (that's engineering slang), we should clear away the flawed system and start anew. This is where leadership can shine. If economists get together and find the flaws in the old system and engineer a new financial system that is flexible and at least less flawed, then people will be able to get behind the new system, structure themselves and their companies to match it and we can start building again. Confidence will be restored not because we have faith in what Paulson did with the 700 billion we gave him, but because the system itself is good and deserves our faith. Over time we can build upon that system and as the markets grow, faith will be replaced with belief and eventually knowledge of our past will be our basis of understanding.
Once the new system is in place we can link it with certain goals that both the left and right wing are behind: namely becoming more respectful of our planet and eliminating our need for foreign energy.
One of the critical things that needs fixed is government's relationship to the system. It was part of the system that failed and therefore it to needs to be changed. I believe the foundation of our government is strong, but we've built some serious crap on it over the years and much of that needs to be redone. Here's some ways how I suggest we change government:
- All donations made to politicians must be anonymous. When a politician learns about a donation, the donation must be returned. (this eliminates PACs and lobbyists without actually needing to legislate them).
- Politicians caught in the knowledge that they received money (that's assumed to be the same as 'accepted a bribe') are jailed for a long time and fined and never allowed to participate in politics again.
- Companies who try to bribe are seized by the authorities and the executive boards are fired and replaced. Knowledge of the bribery is not needed, they all go. New boards will be instated by stock holders and will be thoroughly investigated before being allowed to run the company to insure there are no ties to the old management. This is quite stiff because we really need to stop big money from running our government.
- The government would sponsor non profit corporations with the task of educating the people about their congressmen. I think issues put before congress should be voted on by citizens and then congressmen who don't do as their constituents desire must have a really good reason or face being voted out (or even recalled). The system is supposed to work this way, but doesn't because people don't get involved. The government needs to inspire people to get involved otherwise the power / money hungry will always take the control, will always fill the vacuum.
- Individuals who feel the government should do something can use existing channels (congressmen) to get laws introduced. Companies may not participate in any way with the process of making laws. People make laws.
- There should be civilian oversight of the process of making laws and people should be able to find out who is involved in the laws before they vote on them. That way if its obvious that a big oil company is trying to get a tax break by having ten thousand of its employees working with their congressmen, then the people can vote it down and then hold their representatives responsible if the law gets passed when the majority of people didn't want it to.
With respect to the financial crisis, this is what I suggest we do:
- Wait for the system to collapse while monitoring its life signs and condition and learning as much possible from its demise.
- Spend money to clear away the rubble, salvaging what can be salvaged.
- Spend money to prevent people from starving to death. I think this is a real possibility. The money we spent in Iraq is going to seem rather gratuitous if we have people starving at home in the next few years.
- Organize all the really smart people and ask them to list the issues we had in the old system.
- Once the issues are known, break them up and give them back to new teams of smart people to figure out how to solve them.
- Get a representative from each group in a single room to hammer out the solutions to make them match up and figure out the most efficient structure for the new system.
- Send the representatives back with the global goals and solutions and ask each team to hammer out a piece of the total system.
- Bring all the leaders back again to integrate the new system specifications.
- Pass the laws necessary to implement the new system.
This will likely need to be done in stages: repealing old laws (like Freddie and Fannie) will happen first (nationalize them for the moment, they already are really anyway).
Then basic laws that outline the gross structure will come first enabling companies to begin to feel a sense of normalcy.
Finally, the fine details which outline how we intend to keep our markets free and healthy.
Clearly there is a need for all participants to be motivated by a desire for healthy markets. People found to be in it for the greed need to be prosecuted, have all their money taken from them, and jailed. Greed must be punished. However, it will be nearly impossible to prove so we must do our due diligence to catch them and stop them, even if we can't prosecute them.
Aside: To find out if you are greedy, just ask yourself this: "how much is enough?" Write down the answer and then in a year without looking at your old answer, ask yourself the question again. Then compare the two answers. If your answer has changed and gotten bigger, you best look over your first answer and figure out why you've set yourself a moving goal.
Once the new system is created the government can spend that 700 billion intelligently. Here's where I suggest put some of it:
- Environmental research.
- Energy research.
- Medical research.
- Space Technology.
- Energy Grid / Infrastructure.
What do you think? Is it a pipe dream?
Causes Brian McKee Supports
I support the cause of peace via peaceful means.