The financial sector is a mess, but this is only a symptom of a larger set of problems. It’s been awhile since I posted anything, but the craziness of the past few days and months has motivated me to write. The walls are coming down around our ears and it’s nearly impossible for an average person of reasonable intelligence to make sense of it all. Even while financial companies are coming unglued, the golden parachutes are floating lazily overhead sending the heads of many financial institutions clear of the carnage created at their hands.
As reported this week by Bill Moyers, Rich Fuld the CEO of failed Leman Brothers earned $354 million in the last five years. The chairman of Merrill Lynch who has been on the job only nine months pocketed a $15 million signing bonus. His predecessor, Stan O’Neil, retired with a package of $161 million after an $8 billion loss in single quarter. Bear Sterns Chairman James Kane sold his stake in the company for $60 million after the company collapsed and was sold at bargain basement prices. And the heads of Fannie May and Freddie Mack are fighting to keep combined severance packages of $24 million.
But the problems we are facing are much larger than the greed of CEO’s on Wall Street, although many of them can probably be traced back to that same motivation that has driven so many short sighed individuals. Kevin Phillips reports in his book “Bad Money” that there are “Seven Sharks” in the economy that we must beware of. Oh and by-the-way, Phillips states that when the US is heading into a recession there are usually two or three big things we are worried about not seven. This gives you a sense of the scope of the problems we are facing.
The first shark is the financed economy. We have shifted from a nation that makes things to a nation that buys things. The financial markets represent 21% of our economy and the manufacturing sector has fallen to 12%. This gives the financial sector a huge amount of power over the economy resulting in the bailouts you’re seeing every day. And while this industry has created a huge amount of wealth for a small number of people, it has provided little value to the middle class even while siphoning off the money from pension funds and if the powers-that-be have their way, social security.
The second problem is our massive debt, both public and private. Government debt alone accounts for some $9.7 trillion. This breaks down to $31,723 for every man, woman and child who is a citizen of our country. Is your family ready to write a check to cover this?
Nearly $4 trillion of this debt has been added during the last two terms of George Bush. What have you gotten for your money? And it’s not all from the Iraq war, not even close. The war has added about $588B to the debt so far. I don’t know where all the other money has gone, but the lost revenues from the Bush tax cuts are likely a big piece of the puzzle. Why is this not being talked about during an election year?
And this is just the public debt. If we add up the debt from corporate America and consumer debt with credit cards and mortgages we have to tack on another $35 trillion. That totals nearly $45 trillion in total debt, or nearly 340% of national GDP. The only other time this number was so large, and it was smaller then, was in the 1920’s and 30’s. Dare I mention the word depression?
The third shark is the collapse of home prices, another thing that this period has in common with the Great Depression. And while my home in San Francisco has so far been isolated from this trend, most experts are predicting a 15-20% decline in home prices across the board. We met with our real estate broker yesterday to explore the possibility of refinancing to a lower interest rate and she explained to us how even people with credit scores of 800+ are often having difficulty getting loans. With all the troubles in the financial markets, banks aren’t willing to lend out any money even to strong buyers, this practice will take its toll on housing prices even in the best of markets.
As if these problems aren’t enough, let’look at the fourth problem and that’s global commodity inflation. Phillips points to oil and food specifically. With gas and milk in a fierce battle over which one can cost more per gallon, people across the globe are having difficulty providing the basics necessities to their families. Isn’t it convenient that we don’t include these necessities in how the government calculates inflation? How long can the government keep up the pretense that inflation is under control?
The fifth shark is, frankly, lousy economic statistics. Phillips warns that we shouldn’t believe either the inflation numbers, the GDP numbers or the unemployment numbers. While there’s a lot of complexity and technical terminology involved here, the long and the short is that over the last thirty to forty years, we’ve seen a kind of Pollyanna Creep. The administrations of both parties have been unwilling to give the truth to the American public. They want the figures to be friendlier, not to get them in trouble. And we’re at a point now where the figures lie enough that foreign investors are starting not to believe them and, probably, with considerable justice. We are at a point that we don’t even understand the trouble we are really in.
The next shark in the tank is peak oil and its effects on the economy. While we’ve seen the prices come down recently, this respite with be short lived. Goldman Sachs is predicting $150-$200 barrel oil this year as the winter heating demand kicks in. How are people on fixed incomes going to keep the heat on and still feed their families? Yet another reason for facing down our dependence on fossil fuels and developing clean renewable solutions that are developed by us and deployed here at home.
But demand is not the only driver, Oil since the Kissinger days has been bought and sold only in US dollars, and the OPEC countries have been investing their petrodollars in US Treasury debt. So historically, our currency has been buoyed by the trade in oil, but those days are ending. We spend $400 billion annually to import the oil we need, and while the conventional wisdom dictates that we got into Iraq to control the flow of oil the result has been a 500% price increase in the last five years. We’ve lost control, and the dollar is on the ropes, which is the seventh shark in the tank.
It’s been a long time since so many difficult problems been arrayed against the American economy. Match this with daily reports about the collapse of the financial markets and we have a very difficult problem on our hands. I’m worried.
My concern is that we get sidetracked by the symptoms and don’t deal with the problems at their root cause. Bailing out the financial markets is a good example. My guess is we will myopically focus on this single issue and lose sight of the larger systemic problems we are facing.
And I just don’t see the necessary leadership in either of our presidential candidates. Will either one have the insight to recognize these problems, speak the truth about them to the American people, and to take on all the many entrenched industries, power brokers, and established financial interests that will most definitely resist change with all the power and money they can muster. I doubt it. These interests are already well entrenched with both campaigns as is evidenced by a recent article by Jackie Calmes in the New York Times.
There has never been a period in anybody’s memory, except very old people who remember the late ’20s and ’30s, where you had so many problems converging. And that’s what makes it frightening. And every time the administration and candidates say that the fundamentals of the economy are sound, that it looks like it’s under control or its half-over, you start to get evidence that, no, it’s not under control, and maybe it’s not even close to being over.
I believe that the people have to get angry and demand that our leaders deal with the fundamental issues at hand. Only by rising up and demanding action can we face down these problems at our door. Only by dealing with these issues at their fundamental roots, can we form a truly sustainable economy and nation. Without a strong fundamental economic underpinning, dealing with global problems like climate change will prove very difficult if not impossible.