The Mugging of America
Jim Quinn

On Wednesday afternoon Harry Reid, Democratic Senate Majority Leader, spoke the first truthful words from a politician during this entire crisis:

"No one knows what to do. We are in new territory here. This is a different game."

I respect him for this comment. We have been listening to Hank Paulson tell us that our banking system was sound for over a year. He was the CEO of Goldman Sachs. He knew the extreme risk taking that was going on. He was lying to the American public. Today, he is being hailed as a hero in saving our country. We should be very careful in declaring men such as Paulson a hero. Union Colonel Joshua Chamberlin, who led his men in a charge down Little Round Top at the Battle of Gettysburg and saved the Union army, is a hero. Hank Paulson, has committed our future generations to trillions in obligations for the sins of his buddies on Wall Street. I know many heroes, and Hank Paulson is no hero.

Author Nicolas Taleb poses the following questions.

Why don't we realize that we are not that capable of predicting? Why don't we notice the bias that causes us not to realize that we're not learning from our experiences? Why do we still keep going as if we understand them?

If our business leaders and government leaders had learned from the LTCM collapse and NASDAQ collapse, we would not be experiencing this current crisis. Instead, Wall Street, Alan Greenspan, George Bush's administration, and Congress attempted to put off the pain of recession by encouraging more risk taking by companies and citizens. We are now reaping what they have sown.

This has been a remarkable year. The United States has taken actions that will change our country forever. They have taken these actions without citizens voting or Congress passing any laws debated upon in public view. These actions have taken place behind closed doors and in conjunction with the bank CEOs who caused the problems. A multi-millionaire former investment banker, former professor of economics, and our 1^st Harvard MBA President have committed at least ONE TRILLION of our future tax dollars to bailing out greedy incompetent criminal millionaire investment bankers. They have done this to avert an Armageddon type financial meltdown. I'm reminded of the rhetoric about weapons of mass destruction before our attack of Iraq. We needed to attack to avert a future nuclear holocaust. Why should we believe them now? Hank Paulson and Ben Bernanke's commitment of your grandchildren's future so far is as follows:

Remember, when the government gives you an estimated cost, it is always prudent to multiply it by 10 to get closer to the truth.

Let us be perfectly clear. The U.S. government has no money. We entered this week with a National Debt of $9.65 trillion. The deficit for next year will surpass $600 billion. Every dime of these bailouts will be borrowed. They will be borrowed from China, Japan, and the Middle East. In an effort to keep our corrupt financial system afloat, we have sold another piece of our country. The prestige and status of the U.S. in the eyes of the world community have suffered a catastrophic non-reversible decline in the last nine months. "We The People" had absolutely no say in this decision.

My musings on what has transpired over the last nine months are as follows:

The people who made the miscalculations that got the country into this mess are the same people who did not see it coming, denied it was a big problem, and have now come up with the solution to the problem. This should not give Americans a tremendous feeling of confidence in their government.

The government has used all the missiles in Hank Paulson's bazooka. What if it doesn't work? What next? I shiver at the thought.

The Republican ideology of deregulation and free markets has been discredited and thrown into the scrap heap of history. The total lack of regulation in the financial industry let the inmates run the asylum and almost collapsed our financial system.

The Democratic ideology of believing that every American should own a home has proven to be one of the stupidest ideas in the history of our country. The housing implosion, which continues today, proves that many morons in this country should rent forever.

The current crisis proves that a "village idiot" could have done less damage to our country if they had been CEO of any of our financial institutions, rather than the Harvard MBAs now in charge. Their total lack of foresight, vision, strategy, or risk management argues for the elimination of the immoral pay packages of all CEOs. The greed and short-term profit motives of these CEOs and top executives leads to awful decision-making with tragic consequences.

Reliance on computer models developed by brilliant "scientists" that can predict all outcomes in a "Normal Distribution" world should be discredited at this point. Human emotions and Black Swans have proven more powerful than any computer model. How about using thoughtful conservative assumptions regarding any financial transaction. I know, that sounds crazy.

Financial institutions should not create instruments that are so complicated that they can't even understand them.

I hate to quote Richard Nixon, but when he was told that some corporate goliath was "too big to fail" he responded, "Tell it to get smaller." I am tired of hearing that every company that has a problem is too big to fail. The government cannot let any company become too big to fail. But, of course they just encouraged Bank of America to buy Merrill Lynch and become way too big to fail.

A total scrapping of the bond-rating system is in order. The companies receiving the ratings cannot be compensating the rating agencies. The false credit ratings misled so many into a false sense of security and contributed greatly to this financial debacle.

It should be clear to the American people that the $1.255 trillion will be borrowed from the Chinese, Russians, Japanese, and Middle East. The United States of America is broke. We have no money. The annual interest charge that the American people will pay will exceed $60 billion per year, $164 million per day, $6.8 million per hour.

As all Americans know, when you borrow from someone, they call the shots. The reckless mismanagement of our country's finances has put us in the position of asking other countries for favors. We are now begging for capital infusions from China. The Chinese and Middle Eastern countries know they are gaining more power, day by day. The U.S. Empire has begun its long slow decline.

The old dilemma for a country was whether they could fund guns or butter. When the U.S. tried to fund both in the late 1960's and early 1970's it resulted in massive inflation and a stagflation economy. With our current foreign wars, massive unfunded liabilities, promised tax cuts from both candidates, and now the greatest bank bailout in history, we are trying to fund guns, butter, and banks simultaneously. The massive issuance of Treasury bills should result in much higher interest rates.

Consumer confidence and trust in their government will fall, not rise because of the actions taken this week. Your leaders have lied and misled you. The massive redemptions from money markets were not panic. It was a rational response to being misled by bankers that money markets were safe and could not lose money.

Based on the actions taken to relieve banks of all their bad debt, American citizens may come to the conclusion that they don't need to honor their own obligations. The moral hazard message from our leaders is that bad decisions do not have bad consequences.

Does anyone really think that government will run Fannie, Freddie, and AIG better than they were run by their previous management? Will Hank Paulson hire the same Wall Street cronies to manage his new investment portfolio?

Comparing this new RTC to the original RTC used for the S&L crisis seems too simplistic. Bill Siedman, head of the original RTC, described his job as fairly easy and it took six years to complete. His job was to sell off land from bankrupt S&Ls. This new RTC will be taking toxic waste mortgage debt off the books of the banks. I doubt there will be a line waiting to buy this crap.

With congressional leaders like Christopher Dodd, Chuck Schumer, and Barney Frank in charge during the next term I'm not confident that we will avoid another negative Black Swan. They have all shown a complete lack of basic financial knowledge.

Will the government ban all selling if the market continues to fall? Banning short-selling could result in unforeseen results. China has not banned short selling. We certainly won't see any short covering rallies. It is ironic that naked short selling by Merrill, Lehman, Goldman, and Morgan Stanley was extremely profitable for these firms over the last few years.

The rhetoric about these programs lasting only until 2010 is a farce. These programs will end up becoming a permanent department. Government never contracts. It only expands.

Any legislation that is slapped together in the midst of a crisis with an extremely tight timeline will be flawed and not well thought out. There will be mistakes, omissions and holes. Let's hope it doesn't cause another Black Swan to develop.

Hopefully, our citizens will come to their senses and elect more patriots like Ron Paul, whose words in Congress on September 10, 2003 foretold the future crisis:

"Despite the long-term damage to the economy inflicted by the government's interference in the housing market, the government's policy of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing. Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary, but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts."

September 23, 2008

Jim Quinn [send him mail] is Senior Director of Strategic Planning at an Ivy League university. This article reflects the personal views of Jim Quinn. It does not necessarily represent the views of his employer, and is not sponsored or endorsed by them

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