Update: This post is a follow-up to yesterday's post: The US Economic Situation for the Complete Idiot.
In the post below, I advocated that the bailout bill contain a provision for punishing those responsible for the current financial meltdown. Commenters Ilya and Eric pointed out that this is not a good idea, and they are correct. Further expansion of my thoughts, and theirs can be found in the comments section.
My proposal for a long term, permanent fix can be found here.
In April of 1912 the largest passenger steamship then in the world, RMS Titanic, set sail from Southampton, England for New York.
You've seen the movies, you've heard the tale, and you all know what happened, right?
On the night of Sunday, April 14th, moving at full speed she struck an iceberg off Grand Banks, Newfoundland, gashed a 300 foot hole in her bow, and sank two and a half hours later with a massive loss of life.
Why did it happen?
Well, historians talk about rivets and brittle steel in cold water, calm seas and icebergs and excessive speed, a rudder too small for the vessel's size and a resulting lack of maneuverability at speed, watertight bulkheads that weren't actually water tight enough, the distribution of flooded compartments, buoyancy, the lack of lifeboats, and the state of the art in shipbuilding and iceberg predication and communications and etc. Wrong. All wrong. While it can be demonstrated that all of those things exacerbated the disaster once Titanic was set on her course with destiny, not one of those things was the underlying reason for the sinking.
So what was?
Having been a Sailor most of my life, and as an experienced bridge officer myself, I can say with complete confidence that Titanic sank for one reason and one reason only:
Hubris: overbearing pride and/or presumption; utter and abject arrogance.
Hubris, the belief that a ship sailing full speed ahead in dark and deadly waters without the ability to see the known dangers, without adequate safety equipment, will somehow make port safely simply because you so will it.
Hubris, the enthusiastic willingness to gamble with other people's lives and livelihoods, and the willingness to dismiss the warning signs of impending disaster or wrong doing with the belief that you will beat the odds where all others throughout history have not.
Hubris, the belief that it is perfectly acceptable to play God, to risk a disaster on a grand scale, far beyond your own personal concerns in order to advance your own wealth and pride and self worth, and the belief that those who are cast off in the disaster you created are lesser men who somehow deserve their fate in the frigid waters.
Hubris, the belief that great men dare greatly, and that should disaster fall, those great men should be rescued at the expense of others, set back on their feet, and allowed to try again.
And Hubris, my friends, is exactly what brings us to the current disaster unfolding in the United States financial sector today.
Just like with the Titanic, prideful greedy men set on us a course for disaster. Those captains of Wall Street, in their pride and arrogance, deliberately ignored the lessons of history, 1929, the S&L crash of the 70's, the Dot Com bust of the 90's, and all the rest of it. They ordered the boilers lit and the throttles pushed hard to the stops, in order to line their own pockets and to advance their own hubris, and they took all of us down here in steerage along for the ride.
And when we slammed head on at full speed into the iceberg, those arrogant bastards were the first ones to the lifeboats, - or the golden parachutes, choose your own analogy here - demanding safe passage from the crew, or in this case, the government, as they believe is their right.
And, just exactly like the pride of White Star Lines, there's not enough lifeboats to go around, and a lot of us are going to be left to sink or swim in the icy wine dark water.
OK, I've pushed the Titanic analogy to the breaking point - but the comparison is apt.
We seemed to have settled on the term "Meltdown" to describe the current financial crisis in the combined mortgage, S&L, and Investment financial services industry, and so that's the term I'll use here.
This meltdown was the result of hubris both large and small. As I described in the previous post, the meltdown is the result of a rather large number of prideful idiots:
- Those who failed to read the fine print on those interest only mortgages or utterly failed to see the implication of the conditions of the loan - or did, but thought, somehow, some way, that they would be able to refinance before the first balloon payment came due, despite the fact that instead of saving and working to build some kind of equity and collateral for that refinanced loan, they just kept spending and borrowing their way further into massive debt - in some cases you had couples with a combined income in the $100,000 range with debts totaling well over a million dollars, they couldn't pay the interest, let alone the principle. That, my friends, is the height of stupid greedy pride. These are the same clueless dolts who thought they would be able to sell those houses at a profit in time to stave off impending financial ruin, while driving past thousands of new construction sites and thousands more homes for sale, as everybody else jumped on the snake-oil mortgage bandwagon. On the Titanic, these are the people kicking around blocks of ice on mid-deck and having a jolly old snowball fight.
- Those greedy, dishonest bastards in the S&L business, who not satisfied with the pile of dough they were already sitting on, found a way to turn worthless loans into the largest bait and switch scam in history. These bastards, more than anybody else are responsible for the disaster, they dreamed it up and they deliberately hoodwinked as many suckers as they could find. In the Titanic analogy, these people are personified by J. Bruce Ismay, who placed profit and pride above safety.
- Those in the rating agencies, who gave those worthless bonds AAA ratings, who allowed themselves to be deceived, who bowed to pressure from the S&L's and from Wall Street Investment firms instead of actually doing their jobs. These people were the enablers, they didn't just let it happen, they actively encouraged it. On Titanic? Well, that would be Captain E. J. Smith himself, now wouldn't it? Savvy, experienced, who knew the danger and knew his responsibility to his ship and passengers and still ordered the last four boilers lit and the ship ahead at her maximum speed in utter disregard for good seamanship. And then went to bed.
- Those on Wall Street who jumped at the chance to build a house of cards on top of those worthless bonds, and then borrowed their way beyond any kind of rational sense when it all began to come apart - and still kept paying their departing executives astronomical bonuses for their brilliant leadership. These would be the White Star shareholders who cared little for the danger, as long as they got a dividend check each quarter.
- And finally those in government agencies and in Congress whose job it was to oversee and regulate the industry - and didn't. And here, the we don't need an analogy, because the government's role is this disaster is exactly the same as in the Titanic sinking. Exactly.
And so, now here we are. Today, Congress will vote on a bailout package, in fact has just voted it down as I type this - and "bailout" is exactly the right term here. If you're a fighter jock and you've been pulling some unauthorized stunts with your tax-payer owned, multi-million dollar aircraft and you screw the pooch and flame out, well, you pull the handle and punch the hell out of the cockpit. And that's exactly what's going on here, Wall Street Executives are pulling the ejection handle to the tune of $700,000,000,000 and leaving us with a giant smoking crater for our money.
Now, show of hands, how many of you think that we're going to get out of the current financial market meltdown for a mere $700,000,000,000?
If you do, you really haven't been paying attention. $700,000,000,000 has about as much chance of pulling us out of this tailspin, as Bush's tax refund did of stimulating the economy.
$700,000,000,000 is just the tip of the iceberg - and yes, I'm back to Titanic metaphors again. See, just like when that ship went down, some of the crew responsible for the disaster ended up in the lifeboats. They had to be there, because those boats needed experienced and trained crew to man them in order to save what passengers who were lucky and/or ruthless enough to find a seat onboard. Same here, we're going to have to save some of the institutions responsible for the meltdown, for the benefit of the rest of us - no matter how galling that may be. As satisfying as it would be to let Wall Street go down with the ship, all of us will suffer unless we save a few of those greedy bastards.
Don't get me wrong here, while I think that circumstances dictate that we must bail out Wall Street, and the Federal Government is the only entity large enough to do so, I don't think that they should in any way get off Scot-free. (and for the record, Scot-free is precisely the correct term, as it's etymology descends from the old English term Sceot, or tax. Those who didn't pay taxes were referred as getting off Scot-free or without payment or without punishment).
There are many, many problems, however, with performing a bailout of the financial industry.
- First and foremost, the process simply perpetuates the original reasons for the meltdown. Investment firms borrowed trillions to prop up their pyramid scheme. The federal government will have to borrow nearly a trillion, or more, themselves when all is said and done to fix the mess. We're in debt up to our children's eyeballs now, with the war and energy and inflation - tacking another trillion on top of that isn't going to improve the dollar's value against foreign currency at all. We will all pay for this, and so will our children, and maybe their children too.
- Second, a bailout rewards those responsible for the meltdown. Those who lost their homes (foolish though they may have been for getting themselves into ridiculous mortgage terms) lost everything, nobody bailed them out. Like the steerage passengers on Titanic, they've been left to the flood. Why should the S&L's and Investment Firm execs be any different? A bailout sends a very clear message that no matter how negligent they have been in their duties, no matter how blinded by greed and speed, there will always be room in the lifeboat for them, at the expense of those they climbed over to get there. The bailout simply reinforces the hubris they already believe themselves entitled to.
- Third, a bailout sets a precedent, or in this case perpetuates one. It says very clearly, just as it did the last time, that no matter what happens, those that control the financial heart of this country may act without regard for anything other than their own greed and avarice, despite the fact that their irresponsible actions affect all of us.
- And finally, the bailout bill, as currently drafted will nationalize a large part of the financial industry. If there is one thing we know about the free market, no matter how poorly greedy executives manage the market and industry, the government is far, far worse at it. And once the government is directly involved, it is absolutely impossible to get them out of it. I see a lot of calls this morning for nationalization of the banking industry - and this is just as shortsighted and idiotic as the decisions that led directly to the current mess. Seriously, folks, do you really want the same incompetent jackasses who brought you the War on [Drugs, Terrorism, Poverty, etc et al] running Wall Street? Really?
So, what do we do about it?
Well, I don't know. I'm certainly no expert on the economy. I can say few things with confidence when it comes to fixing the current situation - and I strongly suspect that nobody else can either, especially the 'experts' who aimed us square at the iceberg.
I will say a couple of things though:
- While there is a pressing to need to get a fix implemented, sooner rather than later, we need to proceed with common sense and an eye on the implications of whenever solutions are approved. It took a decade of mistakes to get us into this mess, and I seriously doubt that a bill slapped together by Congress at the eleventh hour is going to fix the problem or do anything but get us further into the hole. We need to take whatever time is necessary and find real solutions and long term corrections, rather than just throw money we don't have at Wall Street.
- I think that any presidential candidate who attempts to turn this mess to his own political gain in order to score points with the voters should be run out of town on a rusty rail - and I am looking directly at you, John McCain. So far, McCain's only concrete response to the crisis is to blame Barrack Obama, and for that if for nothing else he will not now, or ever, get my vote. Period. Now, I don't think Obama's response has been particularly exemplary either, but McCain has cast himself in the same foul cloth of the Bush Administration and frankly from where I sit I can no longer tell the two apart. If he truly thinks at this point that as a Senator his duty is to the country, then honor demands he perform that duty without regard for his own ambition. The mere fact that he can't shows exactly how far behind he's left his training as a Naval Officer, and exactly how similar his own hubris is to those who got us into this mess in the first place.
- And speaking of those who got us into this mess, I won't support any bail-out bill that does not directly punish, and severely, those arrogant greedy bastards. The executives of every S&L and investment firm involved in this process should be bankrupted, their personal assets seized and liquidated to help pay the trillion dollar debt they've levied on us without our consent or approval. I'm talking every penny, every stitch of clothing, every house, car, boat, bank account and bonus - and then dump them on the street in front of a homeless shelter. Fuck 'em, hard.
They're lowering the lifeboats half full of smug arrogant bastards in top hats and frock coats, and a chill wind is blowing. Many of my fellow passengers are going to end up in the water and there is neither room in the boats, or rescue on the horizon. The Captain of this disaster is still standing on the bridge, hopelessly twisting the wheel back and forth instead of out on deck taking charge, rallying the crew and passengers and saving what he can.
And meanwhile, in Congress, the band plays on - unfortunately, the tune they've chosen is Send in the Clowns.