death spiral

I don't think I need to say anything this week, the news headlines speak for themselves.

Attempted Revolution

As one of the contributor's to Jim Cramer's www.thestreet.com said, "We just had a revolution". Not quite. Although by the end of the day last Friday it seemed inevitable that Congress would authorize Henry Paulson's proposed bailout of the entire Financial System, today Congress is pushing back, as some commentator's like Paul Krugman weigh in and point out that this bailout may not work unless it pays inflated values for the toxic securities. In which case the taxpayers get stuck with the bill and the financial companies make money on the deal.

Of course the bailout of AIG, the insurance giant, is already accomplished. But it looks like this last step may not be a certainty, and hopefully it won't be. What a way to make policy - basically at gunpoint. What can't be accomplished in decades by the legislative process can be engineered in 10 days if you have a sufficiently large crisis.

Finally Taking Notice

Last week Fannie and Freddie were nationalized, this week Lehman Bros. goes bankrupt and Merrill Lynch is bought out for half its value. And now the news media at least is starting to notice that something is wrong. NPR anchors sounded genuinely worried Monday morning, and CNN gave breaking news coverage to the Lehman/Merrill story. News stories now openly mention the comparison to the bank panic of 1907 and the great depression.

One thing that strikes me is that back in the 1930's probably half the U.S. population were farmers, industry and manufacturing were located here, and we had large oil reserves. Now our food is raised and distributed by giant agribusinesses, we import most of our manufactured goods, and import a large amount of our oil. I think we're a lot less prepared for hard times now than we were in the 30's.

The Economy

First I'll just mention that as we anticipated in the last post, Fannie and Freddie have been nationalized. This rated a front page fairly bold headline in the Salem Statesman Journal and an interview with Secretary of Treasury Henry Paulson on NPR this morning. I have the suspicion that I could ask ten people on the street and I'd be lucky if one of them knew about it.

Now back to our topic: what is "the economy". We are told that Fannie and Freddy had to be nationalized to save the economy. For the some workers this means that we can now be assured that if we sit in front of a computer screen for eight hours every day we will be able to make our house payment and car payment and buy food and household items produced in distant countries, and so life will go on as usual. For others the 8 hours in front of the computer may be replaced by eight hours or more driving a UPS truck or maybe wiring an office complex. For almost no one will it mean growing food for local consuption or manufacturing something. Manufacturing has been outsourced to other countries with lower wages, and likewise much of food production.

So what does the US economy actually produce that is of any use? I can't think of much, they say that 70% of our economy is in the service sector and retail. So we buy and sell stuff to each other and maybe provide services (James Kunstler's ubiquitous tanning salons, fitness centers, perhaps auto repair, carpet laying, etc.) Some of these things do seem useful around here, but can't be exported to the other parts of the world that we get our food and goods from.

It seems to me that right now we're pretty much living off the generosity of the rest of the world, which makes the stuff that we actually need. I can't see that we're giving them anything they need in return.

Fannie, Freddie will be nationalized

Heard a story on NPR this morning saying it is pretty likely that the two home mortgage Government Sponsored Enterprises Fannie Mae and Freddy Mac will be nationalized, i.e. the taxpayer will assume all their debts. This is necessary to keep the housing market from totally freezing up (which would happen if there were no Fannie and Freddy since they are the only ones offering mortgages right now) and to keep big foreign stakeholders like China from losing their investment. We can't afford to have China lose the money they have invested in Fannie and Freddy because we depend on them so much for other debt; I believe we have about an 800 billion dollar trade imbalance with China.

Ben Bernanke and the Federal Reserve took fairly extreme action to try to prevent this around a month ago, but they still ended up in this position. The recurring theme in this housing/economy crisis seems to be that we can stall the inevitable for a little while, but it always ends up happening anyway. Why do we try to stall it? Because it is bad. Therefore when it actually does happen, as is happening to Fannie and Freddy now, I don't believe the reassurances that things are actually okay and it's perfectly fine to do this.

Saw an article saying that hotel business was down 20% from last year to this year, and that 100 small cities were expecting to lose airline service this year. Also saw several articles talking about the possibility of General Motors going bankrupt - maybe Jim Cramer was on to something.

There was a surprising article in the Washington Post (surprising because I wouldn't expect to see it in this paper) saying that free market capitalism may have had its run and was now on the retreat. The writer felt that the average american had reached the point where they had nothing more to gain from increased globalism and more to lose. He also pointed out that although we like to keep government out of things, we also expect a certain level of fairness and workability in our social system regarding things like health care, and that we have fallen well below this level.

Air Travel to End Soon - July 28, 2008

The local paper ran an article about the troubles of the airline industry. Last year they had 31 billion in expenses and 5 billion in profit, this year their expenses have almost doubled to 51 billion. Salem is losing it's airline service, after having it for about a year. Some of you may be surprised that this small town has airline service, and if you saw the tiny airport you'd be even more surprised. The airline is pulling out because of insufficient passengers. Another article was promising that we'd restore the service soon; I don't think it's ever coming back (and no great loss in my opinion). What's more, I think this year we will see that air travel is no longer an option for the average person. First because of the expense, and second because the airlines will no longer offer it for many routes.

What will happen to the economies based on the availability of air travel? Things like hotels, restaurants, convention centers, city budgets? As these businesses are forced to cut back due to diminished revenue, people will lose their jobs. As these people spend less, other businesses will be impacted, furthering the cycle.