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Friday, September 26, 2008

The US Economic Situation for the Complete Idiot

The US National economy is in the toilet.

I know, I know, you're shocked at this news and I'm sorry to be the one to have to tell you. But it's true and we need to face it.

But Jim, everything was going so well. How, how, did this happen? I hear you ask in that wounded whiny tone you have. Help us, Jim, help us to understand why the economy has turned on us in such an ugly and brutal fashion.

Well, I'll do my best to explain it, but be warned, the economy is a complicated beasty and only snotty elitists can fully understand it. Now, don't be scared, I'll speak slowly and wave my arms around a lot. If I'm going too fast, raise your hand and I'll try to use smaller words. No child will be left behind, folks.

______________________

First, the Cliff Notes version:

Fundamentally, the current economic meltdown is based on the following principle: Never ever under any circumstance allow anybody to ask either of the following questions:

a) "Do I really need this? Do I?"

-and/or-

b) "Can I actually afford this without mortgaging my soul to Satan for all of eternity?"

Instead, starting at as young of age as possible, aggressively encourage individuals, organizations, business, industry, and government to chant boldly:

a) "I am full of self esteem and I deserve this!"

-and/or-

b) "My God! The neighbors will be so jealous! I've got to have this!"

* in the above explanation, "This" is defined as basically any product or service. "This" could be a $50K SUV with spinning hubcaps, gold trim, fur lined ass-massaging seats, and an engine the size of Nebraska, pulling a trailer full of recreational watercraft. "This" could be a 4,000 sqft McMansion in California wine country with a pool, sauna, and genuine Disneyesque Princess bedrooms. "This" could be a bizillion percent per annum growth in corporate wealth. Or "this" could be a pointless military adventure in a foreign land. The scale may change, but the basic idea remains the same.

And there you have it. Thanks for paying attention.

Now run right out and buy yourself something nice to make you feel all self-actualized and full of manly esteem. That's how you help the economy.

__________________

What? You're still here. And still confused?

Well, hell, I told you it was complicated.

Sigh.

OK, I'll explain in detail.

We'll start with the following illustration to better help explain things:

___________________

For this illustration of how the US Economy works, we'll use a quote from the best damned Danny DeVito movie of all time, Ruthless People:

The scene takes place in a home electronics store. Twenty-something year-old Joe Average America, a product of the "My Child is a Super Star Full of Self Esteem" bumper sticker generation, is trying to decide if he should buy a stereo system that he can't, no way, no how, afford but really, really wants:

Salesman (Uncle Sam, played by Wall Street): Check it out, my man! Thirty feet of thigh-slapping, blood-pumping nuclear brain damage!
Kid (Joe America): Bitchin'! Hey, what's it fucking cost?
Salesman: That's the bitchin' part about it! It don't matter! If you can't afford it, fucking finance it! So what if it's as big as a fridge and costs as much! You'll never have to get another one! This is gonna be with you for the rest of your life! And when you die, they can bury you in it!
Kid: Awesome, Dude!

_____________________

The above illustration describes, precisely, the fundamental principles of the modern American economy, which can be summed up as follows:

Take cheap worthless crap and convince people that they should spend piles of money on it in order to make themselves feel more empowered. If they don't have any money, give them some and pretend that they'll pay it back eventually, with interest. Convince other people that this process actually contains some kind of intrinsic value, and then sell the process to them. For extra credit, convince people that saving money and buying only those things you actually need and can afford is for unAmerican Croissant eating pisswillies.

Whoa! I hear you say, that sounds risky.

Not at all. See, take a something like a car, which has a basic, low, value. Now, in America, a car tells the world what kind of person you are - it's kind of like a wearable billboard that advertises the length of your manhood or the size of your womanly charms. Basic low value car, basic low value person, i.e. Loser. But, if you add some plastic fairing, gold rims, XM Radio, and slap the word "Limited RMS Titanic Edition" on the side despite the fact that you're making a trillion cars exactly the same, advertise that it'll go from dead stop to light speed in less time than it takes George W. Bush to lie, and then for good measure you super-size that sucker - well, it basically quadruples in value. Big Shiny SUV = Zoom Zoom, Winner!

The technical economic term for this process is: Whore It Up and They'll Be Saying "Awesome, Dude! I Gotta Get Me Some of That!" Whore it up enough, and they'll be saying "Screw the upside-down loan payments, I gotta get me a new one of those every two years!"

For the rest of this text, I'll refer to this process as the "PT" or "polished turd" principle. And the PT Principle applies at all levels of the economy, both large and small.

Let's take Wall Street for example.

Start with the basics:

1) Banks like money, especially other people's money.

2) Just like national intelligence reports, money can be created whole cloth from nothing.

3) Now, take something worthless and apply the PT Principle.

4) Convince investors that this is a good idea.

Step four sounds difficult, but it's actually the easiest part of the process. See investors like safe investments, but they also want to give the appearance of being true maverick devil-take-all risk takers who live on the edge, movers and shakers, and generally men about town. Now, historically investment banking is a risky business, but savings and loan banking is pretty safe. Only there's a catch - you don't make a lot of money in the savings and loan business, compared to investment banking anyway. And what money you do make takes a long time. Patience doesn't exactly fit into the maverick investor image. So, a while back, some bright guy got the idea to bundle those Savings and Loan mortgages together, then turned the resulting bundle into a bond, and sold that to investors at a big fat commission - and in the process dumped the risk on the investor.

Brilliant.

The bank loans money to a home buyer on a 30-year fixed mortgage at the current interest rate. If the principle was $180K at 5.5% annual interest, the total payback over 30 years is about $368K, i.e. the bank makes a profit of nearly $190K. The problem is that it takes thirty years. So, you take a bunch of those pink slips, bundle them together and sell them to an investment bank who uses them to power up Wall Street. Not only does the bank get their money now, they get a commission too.

For a bank, that's just about as good as it gets short of owning their own mint and printing press.

And in America, if it's good - well, then more is better, super-size me, Baby.

Now, at this point, those mortgages actually have some real value - the value of the physical properties they represent, and the promised moola over time. Bundle enough of them together, sort of like finding loose change in the couch cushions and putting it into coin rolls, and you're talking major bucks here. Trillions actually.

And everybody on Wall Street said predictably enough, "Hey! I gotta get me some of that!" And like crazed teenaged Hannah Montana fans rioting outside TicketMasters, investors rapidly began to lose their minds.

The problem was that there just wasn't enough people buying houses. How did they fix that? By applying the PT principle, of course. First, the S&L's started giving out loans to people who really, really couldn't afford them, using a variety of elaborate and convoluted scams like interest-only, balloon-payment, sub-prime mortgages to hide the fact that the buyer really never had any hope whatsoever of paying back the loan. Ever.

What? That's crazy you say? No bank is going to loan money to somebody who they know can't pay it back! That's insane.

Well, yeah, except that the S&L's didn't plan on getting their money back from the borrowers, they planned on getting it from Wall Street plus interest, and at the same time dump the inevitable loan default on the investment bank in one of the biggest bait & switch scams in history. And, they reasoned, nobody is getting hurt here, when the loans default the investment banks will repossess the properties in question, which we'll then buy back at bargain prices, and then sell those same batch of properties to another whole batch of suckers.

Shake, repeat as necessary until the cycle becomes self generating and self reinforcing - sort of like a perpetual motion machine of turd polishing.

Now, wait just a damned minute, Jim, say you in that outraged tone you use when you think I'm talking out my excretory orifice. That can't work, what about the second law of thermodynamics, you know, that bit about entropy increasing? No way your theory of cyclic turd polishing works.

Good, you're paying attention. And you are, of course, correct; perpetual motion machines always use more energy than they produce, always. But if you give them a big enough spin when you set them in motion, well, they look like the real McCoy - for a while, long enough to round up the suckers anyway.

See, for a while it looked like the whole complex mess was actually working - or in Wall Street terms, a bubble began to form. But it was just another scam, this time a pyramid scheme, because every time those mortgages cycled around in the perpetual motion machine they increased in value, and what was once a $180K property rapidly became an $800K property, or more. And the S&L's cheerfully kept handing out those loans.

But it was all an illusion, same as any perpetual motion machine, same as any good con. As with any con, they whored it up in window dressing, they gave the marks, er, sorry the investors the illusion of safety. In the banking industry that's called insurance. The investment firms bought insurance on the loans, exactly as a con artist does when he pulls out what appears to be his own money. In this manner they got the rating agencies to give the investments a AAA rating - and then they could go back to the investor and say, "This is a great and safe investment. But, don't take our word for it, see what the rating agencies say!" However, in this case, the investment firms were buying insurance from each other, and the money didn't really exist in the first place.

Sooner or later, every pyramid scheme collapse under it's own weight. Sooner or later every perpetual motion machine runs down. Sooner or later, you get overtaken by events.

The S&L's, the investment firms, the mortgage industry, they all knew that a certain percentage of those loans would default, hell, they depended on it to keep the machine turning. But it's a fine line, too little and there's not enough input to keep the flywheel spinning (i.e. not enough turnover to keep the demand tight and the value high), too much input and and the money just vanishes and you're left holding the bag.

And that's just exactly what happened. Energy prices soared. Everything suddenly costs more. All those balloon payments suddenly came due. People just couldn't keep up with all of that debt, and an increasing number began to default on their loans. Since the insurance was provided by the industry itself, and it all got called in at once, well there just wasn't enough dough left for a rainy day. So the industry started borrowing money themselves, from each other, and from overseas. They borrowed billions and billions and billions, and kept plugging it into the stock market, like a gambling addict pillaging his kid's college fund in order to keep playing online poker and hoping to hit it big. But it just didn't happen.

And the bottom fell out.

And here we are, standing in the wreckage and looking for someone to blame, and just who is that?

Well, nominally, it's the S&L's and the investment firms' fault. What they were doing was as dishonest as any scam artist.

But ultimately, it's every dumbass who bought into the PT Principle in the first place. You can't get conned unless you let yourself get conned, and the best marks are the stupid greedy ones - that's how come the Spanish Prisoner Scam (I.e. the Nigerian Letter Scam) is still going strong two hundred years after it first surfaced. Everybody that just had to have a shiny new house they really couldn't afford in order to impress both themselves and their neighbors, is the root cause of this mess. Everybody who actually thought they were going to get something for nothing is the root cause of this mess.

Did we learn anything?

No.

Not one damned thing.

You know how I know this? Because I'm watching Congress try to fix it right now...

Joe America: Bitchin'! Hey, what's it fucking cost?
Congress: That's the bitchin' part about it! It don't matter! If you can't afford it, fucking finance it!

...by borrowing billions from foreign nations to give it to the very same con artists who bilked us out of our life savings in the first Goddamned place.

Congress: This is gonna be with you for the rest of your life! And when you die, they can bury you in it!
Joe America: Awesome, Dude!

___________________________
Update: My proposed solution to the US financial sector crisis can be found here.

26 comments:

  1. I wrote about this yesterday. Copycat. :)

    Although not nearly as eloquently.

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  2. And, of course, you could always sell the property for more that the original purchase price when you foreclosed on it because real estate prices were going up and up and were never, ever gonna come down.

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  3. Exactly. That's exactly what they kept telling themselves and everybody else. Despite all the examples of history, 1929, the S&L Bailout, the Dot Com bust, this time it'll be different.

    But it never, ever, is.

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  4. I think I may have to consider raising a mercenary army and starting my own country. Except unlike all those failed attempts in Africa in ages past, I will conquer an uninhabited area. No sense in starting off with an already corrupt system. I'll just go conquer a few thousand acres of...oh...maybe that area just north of the Eielson AFB training area and west of Delta Junction, or some other likeable area where no one will come mess with me and I can be king, or emporer, or something like that.

    We'll start off fresh and build from the ground up, importing good women for my sons and the mercs in my army. Those mercs by the way won't really have to be ruffians, since we're not conquering an inhabited place, they can be fairly nice folks...but still have to able to shoot...and maybe use a bayonet...just in case ya know.

    Anyway, I see that as the best way out. At least until I can think of something better.

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  5. Best explanation of the situation EVAR!

    ReplyDelete
  6. Let's not forget that Joe America, the flippers, the speculators and all the other players in the bottom of the pyramid that helped make this all happen. Refinance now! Use your Home equity to pay off that Credit Card at a lower interest rate. And still all the banks offering competitive sub-prime loan advertisements keep on playing on local and national televisions and radios. And people are still biting.
    I'm gonna drive off and park in the woods somewhere.

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  7. In all seriousness, it is a totally systemic problem. From the roots up. Banks and businesses didn't create the problem, they fed it. The problem is with the people themselves. A society that has a vast majority of people living in the kind of ease we in America enjoy will always decay from the inside.

    We covered it up for so long while it ate at our core and now we are hollow.

    Think Roman Empire circa 425 AD. We've been around about the same length of time, enjoy the same mostly unchallenged world power status, and an even larger middle class, with virtually no slave/serf class among our own citizens.

    That means everyone got comfy and lazy. Add to that the fact that the Russians and Chinese are investing time, effort and cash into pushing us over the edge like we did the Soviets and the inevitable is fast rising upon us.

    Of course the next question is, what are we going to do protect ourselves and families with it all hits the fan?

    My spot on the Yukon probably won't get too crowded, being that not too many folks can handle -50 for very long.

    ReplyDelete
  8. It's okay - the world is going to end in 2012 anyhow. :)

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  9. Beastly, We got lots of woods around here. So feel free to come on up to our neck of the woods. :)

    I'm trying to convince everyone that we need to take over the Greenbrier for our hideout.

    I've been mulling over Jim's post for awhile, and I realize that this problems strikes me as completely foreign. Not just because it's against my personal ideals, but because it's so foreign to the immediate world around me.

    I live in a state where the average house is worth $65k-lowest in the nation. The idea of spending hundreds of thousands of dollars simply boggles my mind.

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  10. Don't move to the west coast, Michelle. Just saying. You mind, it would be boggled.

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  11. I have been to Baltimore and the cities outlying DC.

    And those areas do boggle my mind.

    Big giant houses on plots of land that are only a hair larger than the houses. Who the hell wants to live like that? That's not to say I wouldn't mind a bigger house--but that's only so I could have somewhere to keep my books.

    Guess I'm just a simple WV girl at heart. ;)

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  12. Don't forget the "non-regulating regulators" in the government required Fannie Mae and Freddie Mac to give out a certain percentage of loans to high risk creditors because deadbeats vote, too. The ensuing required slippage in loan standards was used as a smokescreen to go beyond the required percentage and loan to con men disguised as real estate speculators.

    There is blame to go around to every single entity involved.

    ReplyDelete
  13. I actually take issue with the concept of reverse mortgages.

    I guess it's so that you *avoid* being buried in your house, but still, the concept seems creepy and predatory to me. Take your only major asset and hock your equity, so that you go indebted into that good night. Yuck.

    I don't believe in leaving an inheritance, my goal is to break even, but I just can't accept this particular - and recent - mortgage practice.

    ReplyDelete
  14. So, live fast, die young, and leave a good looking corpse?

    And John, you are of course correct. A lot of the regulations put in place post 1929 went away when everybody old enough to remember finally died. And we're paying for that now. Sure, there's regulation, and the fed is keeping an eye on things. wink wink

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  15. Have you seen this faux spam related to the bailout that's making the rounds? It's freaking hilarious.

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  16. Jeri,

    I actually think that if done correctly, reverse mortgages are a good idea.

    My grandmother's niece's only asset was her house, and it was all but falling down around her, and her only method of transportation was so unreliable as to be almost worthless.

    A reverse mortgage has allowed her repair her home--and remain in it. If she hadn't made those repairs, she would have had to move out, and the price she would have gotten for her house was much less than it has now after those repairs. It also allowed her to buy a new-to-her reliable car.

    These two things have allowed her to remain independent and in her home, something that was becoming impossible. (Her only son died last year, and her daughter is such a bad position, that she has no support except that which she provides for herself [and my grandmother for emotional support]).

    Should a reverse mortgage be used by all elders?

    Of course not.

    But for a woman who spent the last twenty (or thirty?!) years caring for her father, then her mother (who had Alzheimers), and then her husband (who was a wheelchair bound diabetic) and whose savings had been eaten by medical bills years before the reverse mortgage is a blessing that allows her to use her only asset to remain independent.

    If she needs to go into long term care--which I unfortunately think she'll have to do at some point, as caring for her family members aged her beyond her years--she can recover the remaining value of her home.

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  17. Jeri, that spam is hilarious.

    Michelle, you make a very good point. I think a reverse mortgage is a good solution in a specific situation, such as the one you described. Not so good for other people. As always, caveat emptor, which is of course what didn't happen with the current mess.

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  18. I served with a USNR attorney who helped to write the laws and best practices for reverse mortgages. She worked for a nonprofit offering legal services to seniors here in Colorado.

    She told me the intent of the idea was never to be predatory, but to allow seniors to be self-sufficient for longer periods of time (as Michelle's scenario describes).

    But no good deed goes unpunished, and the jackals saw a great opportunity to make some quick, unscrupulous money.

    People suck.

    ReplyDelete
  19. people suck

    Well, the technical term is: Bastard Flavored Bastards with Bastard Filling." :)

    "People Suck" should be the first rule of economics - because this is absolutely the underlying cause of the current meltdown.

    - Stupid, selfish, self involved people who could not afford high end loans, and got them anyway. Thinking they were getting something for nothing, and were too stupid and greedy to realize that "if it sounds to good to be true, it is." Period. And didn't read the fine print, or just expected to pull a new mortgage out of their ass when the bill came due, or just didn't plan on paying it at all.
    - Greedy and dishonest S&L's who weren't satisfied with bundling long term, fixed interest loans - and came up with the original Bait and Switch Balloon Payment, Interest Only Loan idea in order to create basically worthless bonds.
    - Greedy and over confident Investment firms who bought the bonds, inflated their value beyond any real worth, and perpetuated a pyramid scheme of their own. And then went and borrowed money to invest when those bonds began to fall apart.
    - and the government who let them get away with it, in order to claim economic growth beyond any actual reality. And now thinks that using the same exact technique that got us into this fucking mess in the first place, i.e. borrowing more money, will get us out of it.
    - and we are full circle back to the idiots who are letting the government get away with it. Again.

    Fuck bailouts, let the bastards fucking rot in their own shit. Except, of course, they'll get shit all over the rest of us too. Catch-22. They're damned lucky I'm not in charge, I'd line them all up against a wall and shoot their dumb asses.

    Yeah, people suck. And we need to plan for that. We need strict regulation, strict separation between S&L and Investment Banking, and strict oversight by steely eyed men in black suits and skinny ties. Period.

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  20. Oh, oh, oh -- Jim I _WANT_ that Limited RMS Titanic Edition vehicle. All that wood paneling and brass fixtures. All the splendor and elegance of the peak of Edwardian arrogance. And Kate Winslet and...

    *snap*

    Damn, in the movie she was in love with that Leo DiCaprio worm. And she smokes. The bubble is burst. I like my twelve year old Blazer. It gets me where I need to go and is still relatively low mileage, young and no rattles. So I'm happy and...

    *snap*

    Warning. User "Dr. Phil (Physics)" has been deleted for violating the Americans Right To Splurge Act of 1983. Please do not listen to the rants of someone living within their means in a reality distortion field.

    You have been warned.

    [strike]Dr. Phil[/strike]
    The American Economy

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  21. Jim,

    Thanks for what is one of the best explanations I have yet read!

    This is gonna go to many, many of my friends and family. With due credit, of course.

    SP

    ReplyDelete
  22. And it isn't only for the commercial aspects. The Village is looking at having to change over police radio systems (to work with the Sheriff's dispatch, which is also our 911). The sheriff thought so much of our predicament (end of budget year, which has been tight, and staring at an unplanned $30k+outlay in less than two months) that he negotiated a lease arrangement that would make our first payment after one year. Yep, one year later after accumulating at 6% interest on a principal (for us) that would be around $36k. I thanked him in a befitting way in our county wide meeting. I think I started off with "I wouldn't accept those terms if I was buying my own appliances, imaging how much less I would want that for spending my constituent's tax dollars." And the conversation went down from there.

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  23. Jim, thank you, as always I leave your classroom greatly enlightened.

    But since I happen to be one of those idiots who is cheering the proposed bailout as nearly the only thing that can stop the downward spiral of the current economic conditions, I'm afraid I need further enlightement. What is the better alternative? The one that is not aimed at "let's punish the greedy cons", but at "let's prevent the Great Depression while we still can"...

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  24. Ilya,

    I was going to answer you question here, and realized that the answer is actually a separate blog post.

    I'll do that here in a minute.

    Thanks for the question, it got me thinking about a few things.

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  25. Well, the house voted the bailout plan down, the blaming and mudslinging has begun, and according to top officials, the sky is falling.

    Me, I think there are problems that need to be fixed, but the bailout isn't the way to fix it, and I'm glad it failed.

    I await more punditry from you.

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  26. and you'll get it :)

    Yeah, I've got the news on here and just hit the mute button rather than listen to the back biting crap.

    ReplyDelete

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