Oh, how listening habits change! I have listened to sport talk radio for years faithfully while I commuted to work or installed. However, my concerns for the economy and the politics that affect it have been so great lately that National Public Radio and Bloomberg have increased their ratings by one, even as the Super Bowl loomed. I have found myself listening intently at GNP and unemployment figures along with the stock market closings instead of the third-down efficiencies of the Steelers’ offense. The following are some observations that some might find interesting
I find myself very angry at times. I did very little to aid the world in bringing on this recession and still I find myself deckside on this economic Titanic looking out over an icy foreboding ocean of uncertainty. I know I am not alone in this disaster, but it’s a bittersweet realization since I’m also aware that there are not enough lifeboats to go around. I am also clueless on how they are going to be allotted.
Economic maxim: It’s a recession when your neighbor loses his job. It’s a depression when you lose yours.
There is a popular notion that the United States doesn’t possess a Brahmin class. Don’t believe that fallacy for a minute. I will simply submit that Wall Street and the highest echelons of corporate America feel like they are the enlightened and the chosen few. There is a prevalent attitude in that small circle that they possess special gifts and talents that set them apart from the rest of the populace and that in itself allows them to live by a separate set of rules. What better proof of this fact is the recent news that $4 billion in bonuses were paid to a group of Merrill Lynch employees prior to its takeover by Bank America, which then applied for TARP bailout funds to finance said takeover? In the real world, employees usually benefit only when a company makes a profit, instead of contributing to its collapse.
Our nation’s unemployment figures are rising monthly. Double-digit numbers are already a reality in states like Michigan. They won’t be alone for very long as economists predict that even on a national scale we could hit more than 10 percent within a few months. One reason is that companies are acknowledging falling sales and, with the existing credit crunch, they are dumping employees so that they can hoard cash attempting to ride out the recession. One unpublicized figure that we in the auto glass industry are painfully aware of is the immeasurable under-employment figure. How many of us are working shorter hours and being sent home early due to a shortage of work? Then there are us who are working longer hours or an extra day to try to make up for the shortfall of lower sales.
The conventional wisdom about this recession from most economists is that is going to get worse before it gets worse. Expect another wave of banking crises later this year just due to another anniversary of adjustable mortgage loan interest resets and the wave of loan defaults that action will bring. That will tip even more economic dominoes. By selling securitization instruments such as mortgage derivatives, Wall Street, along with banks, have managed to find a way to affect financial markets and institutions worldwide. Securitization is simply the method of banks to bundle loans and sell them to investors as a revenue stream. That has the dual function of removing those loans as liabilities, making them assets while increasing the bank’s abilities to make more loans and thereby more profit without having to increase its capital. Got that?
The mortgage, auto financing, the student loan for Johnny’s college tuition and even your credit card bill all have been bundled together and sold off to investors the world over with the theory of providing investors with a constant income return that was considered safe and insured. The insured part is where AIG has become liable. The safe role has become a source of a fairly unpublicized scandal whereby bond rating companies like Moody’s and Standard & Poor for fat fees gave high value to these speculative securities without doing proper due diligence, which apparently misled the buyers of these derivatives by downplaying the risk contained within those bonds.
Think of the world economy as a shared closed water system. There is a large finite reservoir of capital from which all nations drink. Consider these sub-prime mortgage loans that have been packaged and sold as a sort of poison like mercury that has been discharged into the system and has been distributed throughout. Contamination is universal and the damage caused is almost impossible to ascertain. That is problem number one.
Problem number two has to do with the banks and other financial institutions that hold or have liability for these bonds. There exists both a huge economic and political issue in determining the current value of these assets due to the capital requirements that banks must have. The lower the value of the bad sub-prime derivatives, the higher the amount of capital the banks need to legally operate since those bonds were carried on the bank’s books as assets not liabilities. That is the greatest reason why the first $350 billion of the TARP funds disappeared into oblivion as much of those funds went into recapitalization (or so the story goes).
Those same banks and many others have a long way to go in weathering the current storm they helped create. However, it will be the American taxpayers who are going to be in some way bearing the burden for quite some time in bailing out the seemingly criminal misdeeds of our financial institutions.
The political powers-that-be want Americans to spend their way out of this economic calamity. The “stimulus” bills being drawn up at the time seem to reflect that philosophy. As many Americans are learning, the easy cheap credit of the past has vanished almost overnight. Check your credit card charges. The prime rate is less than 1 percent these days. That is what banks pay for funds these days. I’ve received notifications from both of my card companies that the interest rates will raise on balances to 13 percent. What is most distressing is the fact that many individuals along with small businesses are almost forced to use their credit cards for cash flow purposes thereby creating a situation that can be both expensive and possibly self-destructive. My best advice is for us to mimic the best corporate minds: pay down debt and save cash. I realize that we are playing a dangerous juggling act these days when many of us are unaware what lies ahead for work, making any sort of long-term plan problematical. Still you have to work hard to ensure that you have a lifeboat out there at the ready in case of need. Praying for bad weather like hail or ice storms is not considered in good taste or sound business forecasting.
I apologize—in normal times, I would have been far more conversant in points spreads and the strength of Pittsburgh’s defense than I would be on the health of the world’s banking system. Blame radio and CNBC. Be thankful I did not sleep in a Holiday Inn over the past few weeks. If I had, I then could have qualified to be named the chief executive officer of Merrill, a division of the Bank of America. (I will admit I would have been hard-pressed to figure out how to spend a million dollars to decorate an office.)
P.S. I had no team loyalties for Sunday’s Super Bowl, but I did feel sorry about Kurt Warner. This guy represents one heck of a class act and should be perceived as a Hall of Fame role model as a family man.
