And The Bailouts Continue

The Fed is guaranteeing a $30b loan to provide an incentive for JP Morgan to buy out the effectively bankrupt Bear-Sterns. Granted, Bear-Sterns is getting hit hard nevertheless, but still this doesn't seem to have an end, does it. The problem is that these firms make money - I don't mean as in making a profit, but they literally make money like they have a printing press. So if Bear's assets disappear there's a whole lot more money out there that will go poof as well. They have us over a barrel, Wall St. does, and there's nothing we can do about it.

There's just no built in checks and balances to control reckless financial behavior under our current regime. Management has no incentive to avoid risky investments since it's not really their own money they're playing with. To some extent there's a disincentive, as in the collapse of share prices. But how much did Bear's management make in the years leading up to the crash compared to how much they've lost over the past few months? Was is it all worth it? This is the most extreme case so far, but I bet even here it was worth it.

So the solution is more regulation, but this is a farce because the government can neither keep up with the speed of innovation in financial products nor predict where the next problem will be. Sarbanes-Oxley hasn't done us much good here, has it? Of course not, because Sarbanes-Oxley was inspired by the Enron debacle, and didn't really address the basic problem there anyway. Sarbanes-Oxley lives in the fantasy world where strict financial controls are supposed to keep crooks and liars from fleecing their own shareholders.

Obviously, with the dollar in free-fall, our monetary policy is utterly ruinous. The Fed is supposed to be the guardian of our money, but instead it is debasing it at every turn, churning out an extra hundreds of billions with every stroke of its bail-out baton. But what is the root cause of all this?

Clearly, our trade policy. We have been on a binge the likes of which has never been seen. Trade once meant that one country might send another shipments of grain in exchange for silk. Even though it might have been mediated in currency or gold, real goods would be exchanged. Well the U.S. has been getting tons of shipments from abroad for the last 20-some years, and has been exporting dollar bills in return. Dollars mean nothing more ultimately than a coupon to purchase one-dollar's worth of American assets. Back in ancient times, a backward place like Gaul would trade slaves for spices and pottery - we're not literally trading slaves, but we're selling our birthright for cheap air-conditioners.

The cheap dollar should be growing our exports, but can our economy really respond that flexibly? Factories are closing and being torn down left-and-right - can we just suddenly turn around and start manufacturing exportable goods in the midst of our fevered de-industrialization? And our economic woes will not be good news for the 40 million immigrants in this troubled economy. With the construction business flattened, our maniacal eating-out binge will surely come to an abrupt end soon, leaving many of our guests - invited or otherwise - with little to do. The biggest myth of all is the "global economy." There is no true "global" economy - there is the U.S. economy, which is stretched out globally. I actually recall last summer thinking that my portfolio was diversified because I had money in "global" funds - what a fool. The source for profits in India, China, Singapore, Indonesia, etc. is the same as it is for G.E. - U.S. consumers. We go down, they go down, period.

What we as a nation need to do is shore up our financial system and rebuild our industrial base. That means no more bailouts. The Fed needs to pull in the reins on the money supply, and let interest float where they may. We should implement an across the board 10% (or whatever %) tariff on all imported goods and a surtax on all foreign services. A consumption tax to cut down on spending should be implemented to offset a $20k exemption for investment income to encourage saving. We're going to get hit hard here someway, somehow - let's decide ourselves how it's going to go down. It's far preferable to bite the bullet ourselves, and force ourselves to reduce our standard of living in exchange for greater savings and investment - than to have the rest of the world start redeeming their 4 trillion little coupons.