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The New Magic Kingdom
By David Glenn Cox
Move over Disney, fantasyland is no longer your domain alone. Now there is a new contender for the title, "The Happiest Place on Earth." Why shouldn’t it be so? If you are about to be foreclosed on and put out of your house, your only chance for escape might be Disney. When you wish upon a star and all that rot, when you take out a loan and find yourself unable to pay it back, the President calls you irresponsible.
When Bear Stearns' CEO announced last week that it had no problems with liquidity and then went to the Federal Reserve and JP Morgan for a bailout on Friday, Bernanke threw his arm around the CEO's shoulder, like Ward Cleaver, and explained, "You know, Wally, you really should have come to us sooner about this. You just sign over all of your assets to Eddie Haskell here, at JP Morgan, and I’ll take care of the rest."
"But, gee, Dad, the New York headquarters building alone is worth more than $240 million."
"Wally, its called capitalism. I can only bail you out if you agree to let everyone else get screwed. You understand, son? Otherwise, we might have to ask all of those executives to give back those bonuses you paid them just six weeks ago. You wouldn’t want me to do that now, would you, son?"
"Well gee, no, Dad!"
The federal reserve has offered to swap bad paper for good, to save the banks, but, to the mortgage holders, they ask, "Aren’t you just ashamed of yourself?" Not a word about Bear Stearns' assets, which suddenly became worth only $2.00 a share, or about Lehman Brothers, which holds assets in common with Bear Stearns. Father Christmas has cut interest rates yet again, and we’ll deal with inflation when you’re shivering in the snow. Questions about Lehman Brothers' assets are mute and maybe they are just as worthless as Bear’s but, now, we’ve got lower interest rates!
The Fed is determined to save America's banking system by bailing out the perpetrators and castigating the victims. So far, 50% of all available reserves are credited against the balance sheets of books done by the same folks who rated Bear Stearns' book. But, now you, you should be ashamed of yourself, defaulting on your mortgage like that. Maybe if we make those Bush tax cuts permanent, all this will go away or perhaps we should all smoke whatever it is they are smoking on Wall Street.
Like children who ask for an advance on their allowance, Bernanke ponies up 200 billion dollars and an emergency quarter point rate cut over the weekend. Wall Street responds by asking for another full point rate cut less than a week later. They keep drilling holes in the bottom of the boat, yet the water won’t run out! The rate cut doesn’t change the debt level of the country or energy prices, in fact it hurts the value of the dollar overseas. It won’t help one homeowner make one mortgage payment; it will, however, help banks, burdened with bad paper, to dump it on uncle sucker. But, for you and me in the United States of Katrinaville, nothing, nada, zip!
The Fed places inflation as a secondary concern as energy prices hit all time highs and commodity prices for staples, such as wheat, soar to beyond double and triple traditional record levels. If you think that you’re unhappy now with $4.00 a gallon gasoline, wait until it's $7.00 a gallon of milk or $6.00 a loaf of bread. The wheat will be sold to the highest bidder, whether that’s China or Wonder Bread makes no nevermind to Wall Street. It makes no nevermind to Bernanke and it certainly makes no nevermind to Dopey on Pennsylvania Ave.
But, what the Federal Reserve has done by opening the discount window to all the banks is to take all the bad debts of the banks onto the books of the United States government. The rate-cutting is a chance for the banks to stem their losses by lowering their costs and then bleeding the consumers, the same consumers Bernanke just obligated to bail out the banks.
My Father was born in 1920 and used to tell me about the Great Depression. I asked him one time about all the Okies driving to California and asked, if times were so hard where did they get the cars? He thew his head back, laughing, and said, "You don’t think those cars were paid for, do you? Many a Smith left Oklahoma and arrived in California as a Jones. License plates fell off a lot back in those days and the sheriff’s department would rather you just keep moving than arrest you over a tag because, if they arrested you, they might have to feed you and then everyone’s tags would start falling off."
The Hoover administration tried the same type of plan, offering loans to industry to get the economy started. The problem wasn’t that industry couldn’t get credit, it was that industry couldn’t get customers. But, Herbert Hoover was a good Republican and believed, like Henry Ford, that it was wrong to offer direct help to the people, as that would just make them lazy. As Ford observed, "It is a good thing that the current downturn is so prolonged, otherwise we might not profit from the illness."
Each Hoover initiative was hailed by the Congress and Wall Street, and America’s Republican newspapers crowed in unison about the wisdom of the President's plans. Yet, the problem kept getting worse. The administration then, just as the administration now, lived in a fantasy land. They believe that it is by their wisdom alone that America prospers. Ignorant of the common sense that what makes the tree strong is the roots in the dirt, not the leaves closest to the sun.
Rep. Barney Frank is attempting to push through Congress a bill for the FHA to start buying up and refinancing the subprime mortgages. A good idea, but not a new one, it is straight off the pages of the New Deal. The cost of Frank’s new old idea? Less than Bernanke gave away over the weekend to bail out the banks. Wall Street analysts and brokers grumble and acknowledge that perhaps it might do some good. But a three-quarter of a point rate cut, woo hoo! Party tonight at Caligula’s.
The stock market buoyed up 400 points from lower interest rates, lower interest rates that lead to a lower dollar value. That leads to inflation, an inflation that makes it harder to pay off foreign debt. A foreign debt paid off in agricultural products, the demand for which has never been greater. An inflationary spiral that will start at the bottom and burn up but, in the meantime, lesse le bon ton rolle. Let the good times roll on Wall Street, we didn’t just have a major bank failure did we? Oh, that was just an isolated incident, wasn’t it? The other brokerage houses are all run differently.
Aren’t they?
Let’s buy some Lehman Brothers' stock, it’s higher now than it was on Friday! Or maybe some Ford or GM stock, it’s up on the rate cut news, and Visa is about to have a new IPO and there are fears that there won’t be enough to go around. It’s hard to imagine another time when reality was so routinely ignored, where fantasy rules as fact. Well then, let's all get onboard the monorail to fantasyland!
Dear Mr. Bernanke,
Find enclosed a list of my debts for which I am now currently delinquent. Please take note of the dollar amounts and send me the equivalent amounts in Treasury securities to the enclosed address. Your attention to this matter at your earliest convenience would be much appreciated.
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