Friday, November 21, 2008

So much for free markets ... by gimleteye

Like many of you, I woke up at an ungodly hour this morning—worrying about the economy, the financial markets, and the future.

To think: less than five years ago, then governor Jeb Bush gushed to the assembled Tallahassee audience of his final inauguration, “There will be no greater tribute to our maturity as a society than if we can make these buildings around us empty of workers; as silent monuments to the time when government played a larger role than it deserved or could adequately fill.”

Today, the only robust sector of the economy is government employment.

The stock markets have already given back all the growth of the bull run that began in 2002 and much of the gains from the late 1990’s.

The number of industries begging to be bailed out reads like a catalogue of campaign donors to Jeb’s inaugural ball; the production home builders, the auto manufacturers, and finance companies.

On the same day that the CEO’s of Detroit’s Big Three flew private jets home, having been refused a blank check for $25 billion to resurrect the failing businesses, the New York Times quotes David Cole, chairman of the Center for Automotive Research in Ann Arbor, Michigan, describing the newly elected chair of the House Energy and Commerce Committee Henry Waxman as an “irrational environmental zealot.”

Who is more irrational: an elected official who believes the way to the future of a moribund, bankrupt automotive industry is providing clean green cars that consumers want, or, executives who spent decades fending off regulations in favor of the free market and beg for federal bailouts after they failed?

In fact, what has disappeared in the carnage of the nation's economic crisis--a "once in a hundred year event", according to Treasury Secretary Hank Paulson yesterday-- is the zealotry of the Reagan Revolution; described simply as the fuel of the Bush era.

I’m afraid that “Bonfire of the Vanities” was only a warm-up for today’s events. The de-leveraging of titanic debt structures has just started. One way or another, the financial system is vomiting its toxins. That's an involuntary reaction of the free market.

5 comments:

Geniusofdespair said...

Damn, this is depressing. Maybe because I believe it.

Anonymous said...

Gimleteye writes:

Yes it is depressing... but rather than bury the stories in feel-good nonsense, we would all have been far better off with a critical eye to the inflation of serial asset bubbles: first the dotcom boom, and then, housing. Other than our blog, I have not read anything resembling an analysis of how this happened politically-- there are still a lot of missing links, and presumably, the stories will come out in the end; for instance, who lobbied for what breach of regulatory hurdles at HUD, relative to Fannie Mae and Freddie Mac and other constrictions of bank lending practices and rules. My sense is that there is a fair share of Miami traffic between DC and MIA when Mel Martinez was head of HUD that was tied to it.

But as to feeling better about what is going on today, my only advice is to face up to the fact, expressed best by Robert Shiller; asset prices will return to mean averages. A lot of the stock market is way oversold because of selling pressure by hedge funds to meet redemption orders by investors-- all clumped together around allowable "windows" to withdraw money. Many of those hedge funds are going to go bust. We won't see the real damage until 2009 when the full reporting is due and it is going to be a shock; but the sooner it is over, the better for the stock market and for average investors.

What is the lesson to be learned from the hedge funds' disastrous impacts on equity and commodity markets? At the top of the list is the need for adequate transparency. Hedge funds famously disclose practically nothing to investors of their investments and are not required to, by law, like mutual funds. All is well in rising markets; but in collapsing markets like we have now, the leverage and uncertainty has turned markets that might be expected to stabilize, upside down.

The only question is whether the nation's financial institutions, including the largest private ones, can survive the volatility. Since we've never been in this territory before, your guess is as good as mine or anyone else's; another reason that markets are violently down for the year.

The worst part of this is that the disappearance of confidence in markets and our government's reporting of the economy is going to take a very long time to repair. This is no ordinary recession.

out of sight said...

Where does that leave us; the little guy? The guy with kids in college, an IRA that is down the tubes and a wife looking for work that will pay a living wage. Who bails us out?

The mysterious tax breaks can only do so much. Tax breaks will not pay the electric, the food and the doctors bills; not in this economy. We will end up being punished because to the final moment we will juggle our bills to keep the uninvited sub-prime mortgage that was given to us when our mortgage was sold, current. And staying current on that mortgage will keep us from getting to refinance our mortgage under the government program, even though a refinance at 2 points less would help us shoulder the load.

For the most part, this economic disaster has done one thing, and that is to bring a greater part of Miami's average population closer to being social equals united by their struggle to survive and to hang on to the things they earned in the previous years. This is the wrong way to unite a community or a nation, for that matter.

It is depressing. Do we sell our house and give the equity to the new buyer, so we can pay one more semester for college and for a car that doesn't have 175,000 miles on it? OR do we sit tight and watch 700 Billion dollars go to the millionaires who whine in DC and then sneak off with golden parachutes? What exactly are we supposed to do? No one is giving Joe the screwed family guy, a clue.

Anonymous said...

Does this mean that capitalism as we know it is failing and dying? As all these companies come in for government handouts and government welfare, are we morphing into something else? Did the economic historians predict this?

Anonymous said...

I don't know much. But, I do know that while I have some responsibility to avoid personal financial crisis, the corporate world and policians did a great job of pushing us into the mess we are in now.

It is like their greed overshadowed the fact that they were literally destroying the lives and retirements of thousands of their co-workers and neighbors.

It makes me ill to think that these people are getting away with it, while we bail them out with, I would guess, fake money. (fresh off the press?)

Meanwhile, these creeps have put an entire nation of seniors into the job market instead of retirement and put another generation out of jobs. Nice going.