Monday, January 19, 2009

Obama Implores: Be a Debtor Nation

I thought I heard that one wrong. I thought we should be a better nation. Well, maybe Mr. Obama means both things. But the headline reads:

"Obama Advisers Say They Will Aim TARP Funds at Widening Credit"

Quotes from the article make it crystal clear that the Obama team is following the scenario laid out in Econblog Review that it there are to be no fundamental changes that the financial system of the U.S. should remain based on debt.

"Top advisers to President-elect Barack Obama signaled they will emphasize getting credit to consumers and businesses rather than helping banks as the new administration deploys the second half of the $700 billion rescue fund."

"'The focus isn’t going to be on the needs of banks; it’s going to be on the needs of the economy for credit,” Lawrence Summers, the president-elect’s top economic adviser, said on CBS’s “Face the Nation” program yesterday."

“'The point is to get credit flowing again to businesses and families across the country -- that hasn’t happened with the expenditure of the first $350 billion,” Axelrod said."

The view here and at many other places is that too much credit was extended to too many people, businesses, and governmental entities for too long. The view is further that this should represent the end of a supercycle in credit expansion and more broadly in the "financialization" of the economy of the U.S. and its allies. This ended badly in the 1920's credit boom and has gone bad now. Last year's "solutions" failed because the financial institutions were broke.

What's happened is a mess and a disgrace, as we see with AIG (allegedly still worth almost $4 Billion in stock market value!) and Fannie Mae and Freddie Mac (each still "worth" significant sums in the stock market). Here is another mess from Britain:

"RBS May Post 28 Billion-Pound Loss as Crisis Deepens"

This is about a 42 billion dollar loss. How can a bank lose 42 billion dollars making loans? It can't! Bloomberg goes on to report that the company spent almost $90 B (ninety billion dollars) on takeovers since the start of this millenium.

These giant financial institutions have proven they are too greedy to succeed. The Royal Bank of Scotland is 282 years old. When I started in the financial field about 30 years ago, RBS boasted of its stinginess and of its prudence. Another almost as ancient bank, Barings (1762-1995) was allowed to fail when, allegedly, a rogue trader named Leeson lost vast amounts of money.

Why are Fannie Mae, Freddie Mac, American International Group, Royal Bank of Scotland and many other companies that are broke still in business and still with significant stock values? They should be allowed to fail. Failure means the Lehman Brothers bankruptcy solution, but an orderly bankruptcy this time.

The answer goes back to the lack of change between the new Administration and the old one here in the U.S. The Remocrats and the Depublicans are united as an Establishment that built up and is sustained by the same financial companies that have grown so fast and were so fat that like Icarus, they fell to earth with a thud. The over-stuffing of American "homeowners" (often renters in disguise) with first, second and third mortgages was only part of the problem. The problem goes beyond bad and excessive lending. It includes the systemic overpricing of public stocks for years in the 1990s and most of this millenium by all prior criteria.

Right now, though, the stock market is no longer the dog but rather at best the tail that the dog wags. The main problem is the folly of policy-makers in the U.S. and the U.K. to revive the credit-based economy rather than foster one of decreased debt. The U.S. and the U.K have become addicted to "credit" just as they have become addicted to empty calories. The results are in and they are bad. The average 13-year old in America is over 30 pounds heavier than 30 years ago. The same is more or less true in Britain. And the debt loads of the people are similarly gargantuan.

It makes no difference in the scheme of things if the Obama administration forces more credit directly onto consumers and postures that the Bush Administration was too friendly to the big banks. It's two sides of the same counterfeit coin.

The American people have already begun to do the right things. The savings rate has risen. It should continue to rise. If that means that "production" will be a little slow for a little longer, so be it.

Unfortunately, when easy credit is again pushed by the Merchants of Debt, much of the public will be unable to resist even if knows it is making a mistake, just as dieters as a class cannot resist being around sweet, good-looking food, or alcoholics are at risk just from seeing liquor ads. The lure of having and spending is simply that powerful.

Knowing that enablers of the rise of the finance-based economy remain in power in Washington will lead to huzzahs for Mr. Obama from Wall Street. Unfortunately, the tide is going out for this trend. Everyone knows, or knows of, people who are in financial trouble because of too much credit card use, over-aggressive borrowing against their home, etc. They see that the downside of living beyond one's means can be severe. With the 1990s Perot movement and the consistent popular support for a balanced Federal budget (well, sort of balanced- entitlements were excluded from the Gov's books), the public showed the same good sense it is showing now in rebuilding savings. The public is in fact willing to sacrifice and will support a President Obama who leads them to the path of sound financial practices and away from overindebtedness.

Barack Obama is not even President, yet it is time for him to change course.

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