I watch quite a bit of television and there really are very few people that can speak intelligently on the economy, and what on Earth caused the GDP to shrink so quickly and so explosively. I’m a capitalist, mostly. Many ask what I mean by mostly and I monologue as follows,”I like free markets but only when they operate.” Just as teenagers left unsupervised may drink the entire liquor cabinet, capitalism left unfettered by smart babysitters will burn the fertile field in which it lives.
It all started for me on March 20, 2008. I’m sure the writing was on the wall the previous week with Bear Sterns falling into Chase’s safety net, pushed off the cliff by the U.S. Government, but CIT tapping its entire credit facility on the 20th was a sign that the problem could not be contained, and that even a company with broad exposure, a bullet proof commercial paper history, and millions of small and mid sized debtors in its pool of business was not able to finance its operations. I knew that many more issues would follow, as CIT was an old time, easy going conservative commercial financing company.
The issue is simply that people rely on business being done in a certain “way.” In 1950 if you announced that car loans could no longer be made, auto manufacturing companies wouldn’t have batted an eyelash. People paid cash for cars, put down payments on homes and lived within their means. If you cancelled someone’s credit card in 1960, they had a small limit and usually paid off the balance. The world was unlevered and cash or check was the business choice of all.
Today the cash flows are different. It’s hard to explain to most how American Express, a company that made $4-5 billion a year over the past years would be in jeopardy six months ago or three months ago, but they were. Their business cash flows in a negative way, meaning that they extend 30-60 day money to customers on massive amounts of “charges” and issue “commercial paper,” which is 2-270 day IOUs to the capital markets (insurance companies, corporations and governmental entities) for rates that are better than CDs. They don’t have hundreds of billions of dollars in cash, nor are banks able in this market to syndicate the loans needed for them to access this money. They have a mature way of doing business that’s been standard to them for years.
The reason that the government has to “backstop” all these finance companies and banks is without them no one can do any business. Credit card companies are looking at people with good credit histories and reducing their limits. Business credit lines are being shut down. It’s like a bad dream, with the citizens providing $4-10 trillion dollars of capital once the dust has settled, and banks using it to give bonuses and laying off workers to preserve “shareholder” interests (who should in capitalism have been zeroed out by now).
It’s hard to deal with the people who don’t understand the truth. Everyone is pointing out some reasonable period of time and saying,”it will start to turn in the fourth quarter, everything will correct itself,” but there is no one telling the truth. Here’s some logical analysis from a simple guy, If the government put $9 trillion dollars in gross into the market and nothing happened, it’s much worse than you believe it is. Derivatives are supposedly a “zero sum game” meaning that if party A writes protection insurance and party B buys it, party A’s loss is party B’s gain, so everything should level out. If it doesn’t, it means, like in Bernie Madoff’s case, that the money all along was a lie and fraud doesn’t correct with infusion of money easily.
We need governmental intervention to stabilize the platform. We need manufacturing in this country and to correct the ridiculous economic choices made in the past 20 years that have trended us almost entirely towards service. We need to stop, as citizens, “croupier economics,” systems that are designed to move money from many to few, and stand up for rules that don’t allow large wages for people controlling public companies, especially companies that have lost billions of shareholder equity over the past 3 years. The companies and the money controls the market and the job holders, not the other way around. People need to call their pension funds and get involved in their own lives because 650 elected officials will only speak for the large donors who demand their voices be heard.
Be mindful, be careful and good luck!