By John Galt
July 18, 2007
As this article is being penned, Bear Stearns has roared and their stock is down a healthy five bucks in the aftermarket tonight. While most see that as just that high faulting Dow Jones CNBC stuff that doesn’t impact their little slice of America on Main Street, the shortsightedness of the masses and their abdication of their responsibilities to vote for ethical, patriotic and intelligent people will soon begin to impact their lives in ways they never imagined. After the 1929 Stock Market crash, there were numerous investigations as to the causes and cures which needed to be implemented. One of the cures was to put a firewall between the banking industry and Wall Street. This firewall was removed after September 11th along with other desperate moves to stimulate the U.S. economy. The regulators winked and nodded and allowed practices which in every decade since 1929 were frowned upon and often blocked. This lack of moral clarity in the name of keeping the economy afloat and the bank accounts bulging was all based on smoke and mirrors. As a result, Greenspan will go down in history as the instigator of the largest financial disaster since the Great Depression because of the actions taken after the WTC attacks.
Why am I being so critical of another one of these Ivy League buffoons? Because if the markets had been allowed to do what needed to be done after the attacks, that is to correct naturally and wring out the excesses, after about one to two years, the economy would have been fully recovered and cleansed of the weak companies and stupid investors who made horrible bets left over from the dot bomb era. Instead, we perpetuated an era of corporate irresponsibility, credit expansion to the point of absurdity, and changed the American model from long term saving and investing for safety to one of encouraging the casino mentality. I shall address each point by themselves, but the media, financial elites and government all agreed to pump up the U.S. economy by doing the most unethical and illogical promotions imaginable. The idea of using your home as an ATM twenty years ago would have been not only discouraged by the moral mindset of the World War Two generation, but outright forbidden by the regulators in the past. Now, the consequences of fifteen years of financial idiocy are coming home to roost. And three full generations of Americans will pay the price.
First the baby boomers who are retiring now in great numbers are about to discover the old axiom “if you don’t hold it, you don’t own it.” By this, I’m referring to the physical ownership of an asset versus the trusting of a bankster or broker to provide a document claiming your ownership of an asset or equity. The concept of using others to trade your equities for you, monitor your investments and make decisions that benefit your retirement or future was held as a serious matter for decades since the 1929 Crash, but in recent years, the term “churn and burn” were used to great excess. This meant that while you envisioned your account being used to your benefit, it was just luck that your particular investments were not all zinged in one shot. I’ve seen the stories about naked shorting and heard one poor lady try to sell some stock from her own account only to be notified by her broker that the shares were unavailable due to them being “loaned out” by the brokerage for a short sale. That should speak volumes to the average person, but alas, it does not. The individual investor had best realize that it is not your best interests at hand, but only the profitability of the banksters or investment house which is of the utmost importance. Unless you have a one hundred million dollar account, they could care less about you and your retirement. To add insult to injury, cable television shows, the main stream media, and of course numerous infomercials and seminars encouraged everyone to play the market like the big boys when they were in no position to accept the kind of risks being promoted for their portfolios. And if the market corrects on a historical par of fifty to seventy percent as it has in other economic depressions, then millions of people will be flooding back into a job market already filled by the illegals and middle class, and the repercussions of that are too horrible to consider. The only jobs that will be available to this senior citizen class will be those so far below their standard of living, it will cause a major economic and political ripple that will change every aspect of our society.
Unfortunately, the middle class decided that if the government can be in debt then it can not be all that bad for them either. The “government will bail us out” mentality is still the prevalent mentality of the average schmuck, and this theory works great if the year was still 1989. However, things have changed just a tad. Energy prices are off the chart. The U.S. Dollar is heading towards historical, not critical, HISTORICAL support levels. Inflation when measured in pre-1992 terms (CPI-U) is well in excess of six percent annually and is about to skyrocket with the crash of the dollar. Unfortunately, the average American homeowner does not and will not take the time to understand the implications. This lack of a financial education, which I was a party to in my personal activities in the past, will punish the middle class exactly as it did in the late 1830’s and early 1930’s. This time though, it will be different in the type of punishment history doles out. The middle class does not have a manufacturing job to return to which will act as a stimulus when the recovery should logically begin. Unless McDonald’s or 7-11 increases their pay scales dramatically, the salary shock will impact the ability of the middle class to ever pay back the debts they have incurred. The credit expansion will leave many homeless as the theory that the “banks don’t want them” is so pathetically incorrect and misguided, it’s beyond comprehension. When a bankster is faced with getting nothing or a little something, they will take a home back whose value has declined some seventy percent over nothing. The sad part is that under the new bankruptcy laws, the losses that the banksters take can no longer just be dismissed by a bankruptcy judge. It means a debtor can now become an indentured servant to the banking cartel by being required to send part of whatever earnings they have to the banks on a monthly basis for as long as ten years. In this brave new world, the banks can carry some degree of cash flow on their books, in addition to the value of the real estate. The middle class homeowner with two mortgages, a boat load of credit cad debt, and the typical three family cars, will soon find that credit is not free and the costs incurred of the monthly payments, insurance and taxes will put them into the “feed their family” or make a payment dilemma which many are facing now. The level of defaults will only increase, not decrease as history has shown.
Finally, the constant postponement of a much needed “day of reckoning” will be brutal for the U.S. citizen. Unfortunately for the managers of the casino have forgotten that markets are based on people, not computer models. If I elect not to go into debt to buy a four thousand inch plasma television or buy the latest and greatest sports utility vehicle with ten year financing, it has an impact on my household and the manufacturer, retailer and others supporting those industries. If everyone in my town elects to do the same, or is forced to due to economic conditions, then it starts to spread. This is what we are witnessing. The average person is no longer using their credit line to go shopping for toys; they are using credit cards to pay for medical needs, utilities, car payments, tax payments and in some drastic cases, housing payments. The middle class prayer is that they will win at the stock market casino or hit the lottery. In reality, if they own equities and sell them at the top, then pay their debts off, then they would be light years ahead of the game. Instead, the promise of “Fast Money” (no apologies to CNBC for that one), have enhanced the entitlement mentality, not diminished it. This lack of moral clarity, the desire for more, more, more, will result in a punishing boomerang effect where the greediest of the people who can afford to play this game the least will pay the greatest price. Instead of letting history fulfill its pattern of a recession when excesses bleed into the economy, we devalued our economy and the currency to a point where everything is for sale, including our morality and values. The result is that the excesses have reached such a point that only an economic depression and the resulting social and political changes will be the logical conclusion based on historical patterns. Some things we now take for granted will not recover from the impending crash in our near future.
Hopefully, those things which made this nation great in its past, can be rediscovered and taught to the future generations which will have to rebuild. Our generation, the generation preceding ours, and the baby boomers, are a group of lost souls, if they did not prepare for the disaster dead ahead.