The Sky Won’t Fall
By Mr. L
November 2008
The worst financial crisis in decades has taken heart in the world—the big financial institutions collapsed one after another on Wall Street. The U.S. government was lobbying fiercely on Capitol Hill to seek a second life for its unpopular $ 700 billion bailout bill, defeated 228-205 on Monday, September 29, 2008, which sent the Dow Jones Industrial Average down about 778 points, the biggest point drop since the Great Depression. What happened? Who’s next? Suddenly, everybody seems to be trying hard to get out of the financial markets, and existing banks have promptly tightened their lending.The world’s greatest leaders and their smartest advisers are working hard to curb the meltdown,or even trying to plan a magic turnaround with their talents. But nothing will be that easy, the sky won’t be falling either. However, as the current credit crisis is mainly a sign of the long time illness of the established financial system, it may need time to recover. Given the difficulty of shaking up the current systems, there may be no quick recipe for the crisis. The process of the recovery may be prolonged and somehow painful, especially for the folks in businesses and those on the margins of the labour forces.
In fact, this “tsunami of the century”, as called by former chief of the U.S. Federal Reserve Allen Greenspan, was just a natural blasting of long time bubbles of the financial system. Few people had ever thought seriously how the value of a century old creaking house could still double in a very short period. It sounded like daytime dreaming, but it was the reality. No one would be surprised if a home was sold at a price better than asked, and with the same money earned for the sale one could buy anything in the world. Actually, in the period of appreciation, it was a win-win game for every one who was involved in stock and/or real estate purchases. Every one was happy with the decent outcome of the “investment” except for the hourly workers and most salary employees whose hard earned money might have actually been halved due to the inflation. We have been raising the prices of everything we have for too long a time. It should not have a problem if the home prices had not moved up too quickly to keep pace with the inflation. Had we had more and more home hunters who joined confidently and continued to buy aggressively, we would not have had any problem at the moment. But that was only a matter of time, and a bigger bubble would blow up eventually with an even bigger mess. The business had gone too far following the so-called housing boom before being hauled for a bad turn when the GDP of the United States came out at a brisk 5.9% for the second quarter of 2007 at the first reading. The subprime mortgage practice was blamed as the trigger of the current credit crisis though it was operated in a principle which was not much different than banks used customers’ savings for loans and their own mortgage business. In fact, it was not about subprime mortgages; it was not about the percentage of down payment either (even a 30% down payment might have been well melted down to a hole).The point here was that we were spending future’s money for today’s business or doing future’s business for today’s life. And for some time, the Americans’ saving actually showed negative growth (even saving banks might have to use their reserves for the risky lending business). When we saw an advertisement, as we can still see a lot of its kind today, that we could take something with no money down, with no interest for three months, for six months, and even for one year or two, we should have realized that we had had little room for today’ business. Since we have over produced a lot of things for today, plus much cheaper supplies from emerging developing countries like China and India, an over due, inevitable deflation is just a matter of time.
The elite group of executives on Wall Street were the main forces to lead the markets unusually up and down to exaggerate the crisis and they were always big winners anyway. It was not too hard to recall the fact that the CEOs on the street were paid up to $53 million for 2006, $68 million for 2007 (Goldman Sachs, the former CEO of which Henry Paulson, the key designer of the rescue plan, was paid $38 million for 2005 before taking current office as U.S. Treasury Secretary) as bonuses alone. The CEO of Merrill Lynch, one of the biggest investment banks to fall recently, was paid $47.3 million as bonus for 2006 shortly before his leaving the office due to the surfacing of the big trouble in the company’s business. They would get paid by all means any way. According to the figures drawn from ABC news, in 2007, Wall Street’s five biggest banks –Bear Sterns (acquired by J.P. Morgan early this year), Lehman Brothers (filed bankruptcy), Merrill Lynch (acquired by the Bank of America), Goldman Sachs, and Morgan Stanley—paid a record $39 billion in bonuses to themselves. That was $10 billion more than the $ 29 billion loan the taxpayers made to save Bear Sterns. One month ago, the people’s representatives on Capitol Hill were still hesitating to propose the least limits of compensation for those fallen stars, including three CEOs of the five banks mentioned above. Just imagine how powerful those people are, especially in contrast to those who lost their homes or need special care. As knowledgeable as those CEOs and their teams are with the economy and money markets, it might not be that they did not see the risks ahead when all the markets were too overheated while still struggling to move up further. They just believed their power in hands and tried to take advantage of the regulations and the game rules of the numerous derivatives, pushing the prices every where even higher with their control of hefty capital to make more money. Even when the trouble of subprime mortgages surfaced and non-farm payroll dropped significantly for the first time last August since the last recession, after a long time slow growth, the major indexes of the stocks still climbed restlessly for about a 15% gain hereafter before peaking in October 2007, saying “encouraged” by the Fed’s first interest cut of 0.5%--an official sign of the beginning of an economic downturn. When the markets finally lost the steam, the talents on the street just did what they could to hammer the markets sharply down and down, taking advantage of “short selling” or other “investment” vehicles they drove to legally take other’s assets for their own. Moreover, they joined the international forces of the kind to dump crude oil to $ 12 a barrel and gold to $ 250 per troy ounce, and then in no time leveled them up to $ 147 and over $ 1,000 respectively. They would do the same with the euro, dollar, and loony, do everything they could world wide to make messes and money at the same time. How much do the world money markets have to do with the fundamentals for those ups and downs?
Consumers, though not as expert as those on the street, are always the first to feel the truth of the economy. Their confidence would eventually determine the direction of markets, though their nature as humans certainly did their part to deteriorate the situation. Not all who bought a house or houses were just for a shelter. Not all who frequented the stock or other money or real estate markets played or invested with their own savings. People have taken for granted the financial systems which provoke the culture of borrowing to spend or “borrowing a hen to collect eggs”. When the markets were on the upbeat tempo, most people tended to follow up the main stream to do their part of pushing the prices unreasonably high. For example, they might have used up all their borrowing sources to buy a home at a higher than asked price. For the aggressive youngsters, who would hesitate to buy a new car or a new home with no money down, with no or low interest? When the gossip of a possible recession went louder and louder over the media and streets, even a desiring,capable home hunter would probably be very cautious to assume a principle of wait-and-see. That is why the economy could come to a sudden halt. Real estate agents, appraisers, and local authorities also contributed a lot for lifting the home values for the purpose of commissions and taxation. The misleading of these people largely cost some troubled home owners their last chance to get out in time,on hoping that the values of their properties would keep going up.Leaving the interest rate at 1 percent was questionably blamed to have spurred the last housing booming. Now that the rate has come back again at 1 percent so far, does this mean another turn of the same run for the housing market? It is consumer confidence that always has a final say for the true direction of the markets.
Is the U.S. government’s rescue package an effective recipe to clear the mess? The answer is simply no for the economy as a whole. It certainly will help, but help a handful of troubled businesses or selected individuals. As for the majority of the taxpayers, this is just a costly reclaim of their last tax rebates. About $ 1 trillion in total, that is about $ 3,000per person for the Americans. It is only a shift of interests or burdens but has little to do with healthy development of economy, because, as did for tax rebates, the government actually used or will use blank checks for everything, for the government has actually had no disposable revenues but a mountain high deficit in the account for a long time. It makes sense because the same share of the debt in fact has different meaning for different individuals. If the last tax rebates of $ 600-1,200 per household have practically benefited the low income working class, this creation of the rescue package, $ 3,000 per person,will mainly reward the people in business, mal-operated or not, with little to do with those who lost or are losing their homes, with little to do with daily life of ordinary people. The best the government expected is that the banks could start lending as soon as possible, to support the same culture of borrowing to spend, which has led and will always lead to credit crisis. In fact, except for the regulations, governments’ role should be very limited in a free market. If they choose to support one group of people for some rosy data or indicators, they will certainly sacrifice some real things of others.That is the politics the administrations have been working for.
In conclusion, the current credit crisis was caused by the blasting of the bubbles themselves in a long time overheated financial system; the manipulations and mal-operations from Wall Street exaggerated the ups and downs in the money markets; and the big swing of consumer confidence finally deteriorated the situation.
Of course, the persistence of the crisis will mean a hard time for businesses, and will hit hard on those who are on the margins of the labour forces and very vulnerable to lose their jobs. But for the whole world, for the whole society, it may just mean some ugly data or indicators, because basically, the assets may remain the same with steady increase, and the fundamental constructions remain pretty strong in almost all the aspects. Few people have ever felt that the wiping out or adding up of trillions of dollars in value on Wall Street in days or months have much to do with their daily life at the time. Anyway, the sky will not fall. The crisis itself, which might mean disasters for certain businesses and individuals, is a positive process of correction, to correct what has been overdone or mal-done in the past. For the majority of productive working class, the life will be only better if they can work hard to keep their jobs or to find right places (jobs) to contribute,to meet the positive needs of the society, because every penny they earn will eventually be worth more, as we have already seen that with a same dollar, one can pump more gas into the tank of a happy car. And everything around us may probably be in a better order after all. Japan’s GDP growth has been fluctuating around zero for more than a decade, and so has its interest rate. Few will doubt that the Japanese are living only better and longer. Even for businesses, there are newly thriving ones and new typhoons too in play. So the crisis is also a course of natural selection, to select and award winning and stronger ones at any time. For sure, there will be fewer and fewer easy jackpots to hit. The best we can and we must do is to work hard, keep productive for the civilization of our society, everything will be just well fared. Everything will be just fine.
Good luck for every one!