When President Kennedy
was assassinated, I was a sophomore at Penn State. During most of
the 50 years following, even when my mother and I watched the Oliver
Stone movie on television, I accepted the Warren Commission report
that Oswald acted alone; it seemed reasonable enough to blame one
crazy communist, and crazy to imagine conspiracies.
Now in 2013, after
decades of watching various government insanities, nothing seems too
crazy, and I’d no longer bet on the Warren Commission being right.
Rather than add to the many columns written for this anniversary of
the Kennedy assassination, I’ll give you a column about the ongoing
assassination of the American economy.
Full disclosure: I know
almost nothing about Wall Street, about the stock and bond markets.
So, as I was looking for used adventure novels for Chip’s and my
winter reading at the St. Andrew’s fall fair, I wasn’t interested
when a church worker overseeing the book tables handed me Michael
Lewis’ “The Big Short: Inside the Doomsday Machine,” insisting I
must read it. Still, for the sale dollar, I was reluctant to reject
his recommendation; once I started it, I was reluctant to stop
reading.
I missed this 2011 New
York Times best-seller because until I watched “Too Big to Fail” in
2012, I didn’t realize how essential it is to know what HBO promoted
as “the true story behind the 2008 economic crisis.” The movie
covers the 36 days of the almost-fiscal meltdown, caused by the
crash of the subprime real estate market and allegedly resolved with
the passage of the TARP bailout and, of course, the 2008 election of
the Great Man himself, healer of all wounds financial and otherwise.
According to “The Big
Short,” the “doomsday machine” was turned on in the 20th century;
some say in 1999, when, according to
Wikipedia, the repeal of the Glass–Steagall law “permitted Wall
Street investment banking firms to gamble with their depositors’
money that was held in affiliated commercial banks.” I have
absolutely no expertise here but wonder if doomsday didn’t become
inevitable when someone in the early days of human history felt he
needed to invent the word “greed.”
Aside from arguing in
vain with Barney Frank about potential problems with Fannie Mae, the
Bush administration didn’t address the subprime mortgage issue,
probably because it didn’t understand what was going on: No one
except the most inside of insiders knew that the mortgage bond
hedge-fund process was, as one insider told Lewis, “insane.” Short
explanation: While some in the mortgage industry were giving
mortgages at subprime rates (i.e, lower than normal, often with no
down payment), just to tempt people to buy homes they couldn’t
afford, others were packaging and selling these poor risks and some
were betting that they would default. And eventually they did.
Insurance companies couldn’t cover the losses.
Since companies you
don’t usually associate with mortgages got caught up in these unwise
investments, the stock market, as well as the bond market, became
infected. All together, they were “too big to fail,” and the
government (Congress and the Bush administration) stepped in with a
bailout (Troubled Assets Relief Fund, i.e. TARP).
The revelation in the
book that most intrigued me was the role played by the rating
agencies, especially Moody’s ― with
which I’d had my own run-ins, as they testified against state and
local tax cuts. It seemed to me that all Moody’s cared about was
making sure the state government had unlimited tax dollars to pay
back its lenders; long-term viability of the state economy wasn’t on
its radar screen. So, I wasn’t surprised to read in “The Big Short”
that one reason Wall Street firms bought these mortgages was that
their packages were getting the highest bond ratings from Moody’s.
Lewis quoted one Goldman Sachs trader, “Guys who can’t get a job on
Wall Street get a job at Moody’s” where ... “the asset-backed people
are basically brain-dead.”
So, the zombies
validated the greeders who got very rich selling, packaging and/or
betting against the viability of subprime mortgages. I know this all
sounds crazy; you have to read the book, which caused me to
alternately laugh out loud and grab my jaw as it fell toward the
floor. A great Christmas gift for people on your list who are
annoyingly clueless about Big Government and Big Business.
At least, since all
this has come out, regulators are keeping an eye on the subprime
mortgage industry, sort of, though I still hear ads on the radio
urging people to apply for a mortgage with no down payment, and for
some reason, Fannie Mae is still in existence, and Moody’s is still
rating bonds.
But here’s the new game
to watch. Glancing at the Nov. 12 Wall Street Journal abandoned on a
table, I saw bold headlines in the “Money & Investing” section:
“Hedge Funds Muscling into Munis.” Get this: The same kinds of
greeders who almost collapsed our private sector are now “barreling
into the municipal-debt market at a time when many investors fear
increasing defaults.”
Some of the nation’s
municipalities face bankruptcy because of their unsustainable public
employee benefits. So, now we toss Big Labor into the scary Big
Government-Big Business combination.
Wanna bet there’s
somebody looking for a way to bet that municipalities’ bonds fail?
Let’s watch to see how many Detroits and San Bernardinos will go
bankrupt before someone considers the aggregate failure “too big”
and expects a bailout from a federal government that is already $17
trillion in debt of its own, with another $93 trillion in unfunded
liabilities.
Maybe the government
can appoint a commission, chaired by our own Sen. Elizabeth Warren,
and call it the Warren Commission.
