Your Lying Eyes

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17 March 2008

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.


Anonymous Anonymous said...

A fine article, sir.

A friend of mine several years ago was laid off from his job as a skilled machinist at a tool maker when his plant relocated to Mexico. He received NAFTA trade adjustment benefits and used it to earn an 80 credit hour Electrical Engineering Technology degree. He then got a job with Lucent Technologies as a production technician at a plant that made telecom switching & routing equipment. He worked there for a couple of years before it too was closed and production moved to China. Lucent itself is now owned by the French. Last I heard, he was working as a grill cook at a Hooter's and the only joy he got from the job was being able to stare at big, perky tits all day. Such is our upwardly mobile economy these days.

No wonder the newest alternative investment fad for those who can afford it is to buy pasture land out west, in the event the owner gets laid off and has to resort to subsistent farming to survive. You've even got ex-Wall Street big shots now advising people to buy the three G's: Guns, Gold and God's green acres. So that is the future of the world-beating, cutting edge American economy: shoveling shit and farming dirt out on the plains. Don't ya just love progress?

March 18, 2008 1:06 AM  
Blogger Steve Sailer said...


March 18, 2008 6:03 AM  
Blogger ziel said...

Anonymous - you bring up a good point about the ever-shifting "jobs Americans shouldn't do". How many men and women were laid off of technician jobs then went to school to learn how to program, got jobs as programmers, then watched those jobs get outsourced?

March 18, 2008 7:49 AM  
Blogger ziel said...

Steve - thanks for the link. That Silly Symphony is terrific. That's one area where we do probably have a net export - entertainment, though that's easily pirated and I believe is routinely pirated outside Western Europe and Japan.

March 18, 2008 7:52 AM  
Anonymous Anonymous said...

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.

Will it leave the immigrants with little to do, or when the crunch comes will businesses favor the illegals over the Americans? I suspect that Americans may soon be wanting to do all those jobs "Americans won't do."

I've always known that the day of reckoning was coming: high immigration, high deficit spending, high trade deficits, tax policies tilted towards the wealthy, and real estate prices climbing at unrealistic and unaffordable rates - it's an explosive mix.

How many men and women were laid off of technician jobs then went to school to learn how to program, got jobs as programmers, then watched those jobs get outsourced?

The problem today isn't just outsourcing - it's insourcing: bringing in foreigners to do jobs that can't be shipped overseas, or that the employer would rather not ship overseas. Americans today are fighting against both. If the next Congress elects to grant amnesty to 15 million illegals it will be the economic equivalent of the mortgage crisis, and only deepen our economic woes.

March 18, 2008 8:10 AM  
Anonymous Anonymous said...

Im glad that I can pay off my house if I want to (but I'd be kinda broke for a while if I did and I dont like that). Let me start with that. Car is already paid for also, and relatively new.

Now let me say that Zeil has wrote a piece worthy of chiseling in stone on a cliffside somewhere so that it will be there 500 years from now.

International corporations offshoring factories to foreign nations because nationals there will work for less than a dollar an hour with no benefits move REAL assets (factories and their super-expensive equipment) overseas. The corporations count of the gigantic US miliatary to be able to enforce property deeds to this equipment. If we didn't have all those carrier groups and nukes they wouldn't allow this. Its a case for a smaller military in a sense. This nation has been run since 1988 for the investor class.............who basically thinks only for itself and its immediate decendants. The investor class isn't worried about the future so much as they are in their stake in the worlds largest companies and i-banks. They can easily move to gated-fortress communities in Brazil, Singapore, Beiging, Copenhagen, Amsterdam, London, Montreal, Toronto, Dubai, get the picture. They simply dont care about fly-over America at all. Worried about military enlistment? Hell, just legalize 20 million young Mexican men and give em' 50K to enlist and keep extending their tours of duty. They have an answer for everything.

What is good for Wall Street isn't necessarily good for Mainstreet at all anymore.

Witness the insanity of allowing Airbus to get the refueling contract instead of Boeing. Is our very national defense going to start being outsourced too? This is a huge outsourcing of technology that will enable "others" on the planet to buy from Airbus equipment that will be the equal of our own----which is patently stupid on our part.

Unfortunately there is no real way for Americans to really "fight back". Ive wondered if Americans could use foreign brokerages for their 401K's and used offshore internet banks chartered elsewhere to "fuck" Wall Street, if they'd get the message. But that will never happen anyway so its wasted idle thought. The very existence of 401Ks as our primary retirement funding instrument guarantees that we all have a stake in Wall Street, even as it outsources our jobs and lobbies for insourcing cheap labor and redirecting taxation away from it to you. You cant simply put money in CD's at your bank anymore to save for your retirement, and few employers are offering retirements these days anyway. Its the stock market to protect your savings from inflation or nothing.

Its amazing what they have gotten away with. Dividends paid to people worth hundreds of millions of dollars are taxed at 15%, while waitresses in their early thirties with a child and looking for a husband are taxed more. Moreoever, for our further economic gloom, even the "machines that make the machines", the tool and dye operations that manufacture the large machinery that factories need are also going we couldn't "retool" quickly even if we needed to.

Disraeli warned to not allow the colonies "to even manufacture as much as a hairpin" and he was right. We have literally built China (manufacturing) and India (technology) into our greatest global competitiors of the future out of almost nothing since 1980 or so. Our corporate elite "class" simply feels that since they own stock in these ventures that they will be well off regardless-----------and they are right. They will be fine-living behind walls in the better areas of this nation no matter what. If it really goes to hell, they simply emigrate somewhere else on the planet in gated fortresses there.

Pat Buchannan was right back in 1992, about everything.

Personal HI-B anecdote....:

A few friends of mine (Zeil has heard this before) left their jobs in manufacturing supervision after years of night school to get into "high tech". They got information technology degrees and went to work at DELL. After being promised big raises and benefits...........they found they were all three simply "troubleshooters" and one in particular was someone paid to help others on the phone "stuck" with computer problems, be it other IT personell or individuals with PC's. Its not AT ALL what they were promised. As Dell insourced Indians and Pakis, their salaries were staying the same and not moving. The situation was such that even daring to ask for a raise was stupid as they could see that they all three were being made redundant to employees paid even less than them. Temps were everywhere at the company (still are). Do you know what 2 of these 3 men are doing for a living now?

Wanna guess?

They mow grass for a living. They bought a bunch of large lawnmowers and weed-eaters, a truck with a trailer, and literally oversee and work THEMSELVES cutting yards all spring, summer, and fall. This IS NOT what they intended to do with their computer degrees. One of these guys had a psychology degree and one a associate business degree before IT they WASTED years of their lives getting education to do something as mundane as cutting yards. They are very depressed about the possiblility of a bazillion illegals being made legal for the simple reason as the know they will be undercut on price and will have to go back into (what else?) IT.

Maybe if we started hiring only foreigners as CEO's and CFO's the "elite" would "get it".

And here we are, facing a nutjob (Obama) and another nutjob (McCain), neither of which even begin to understand what the average PRODUCTIVE American is going through. One is worried about our scummy underclass, and one is worried about neo-con glory and doesn't even think about economics.

March 18, 2008 10:30 AM  
Anonymous Anonymous said...

Does anyone else remember that Goldman-Sachs bailout from the early nineties? They lent a ton of money to Mexico in which it couldn't pay back, but defaulted on.........................................and the US Taxpayer picked up Wall Street's tab.

Goddammit they should have to eat it like anyone else. If you dont pay your car note, the bank comes and takes your car back. The jerk-offs that made bad loans shouldn't get bailed out----they should get unemployed like anyone else who professionally failed does. There really is no risk when you know that a Greenspan or Bernake is going to bail you----and there simply has to be a risk in making a bad loan or you are basically giving money away if there is not.

March 18, 2008 10:53 AM  
Anonymous Anonymous said...

I can see the point of bailing out the big financial institutions that are critical to the economy. But if the US taxpayers are going to do that shouldn't we also get to own the company? The US can then turn around and sell the stock to the highest bidder. I've known Goldman Sachs partners, and those guys make millions every single year. Why shouldn't they pay up in the bad years?

March 18, 2008 1:14 PM  
Anonymous Anonymous said...

Anon at 1:06 am is right. Investing in lead and brass isn't such a bad idea. If you can get some productive land, do so. If you can do this with family and friends, even better. Build a commmunity, as tightly-knit as possible. You might need it.

March 18, 2008 4:27 PM  
Anonymous Anonymous said...

I agree with most of this post, but I do want to make a few points.

First, the firms don't make money as though they have a printing press, but rather make loans. That is similarly confounding, borderline unethical, and borderline damaging to the economy, but it's not quite the same. On the other hand, if the federal government bails them out, well, the federal government does print money.

Second, I disagree that "They have us over a barrel, Wall St. does, and there's nothing we can do about it"-- we can stop using credit, by buying train or bus fare and apartment rent with money we have, instead of buying cars and houses with money we borrow. Mind you, this does still require having a job, and if Wall Street goes belly-up, that may require a Civilian Conservation Corps.

I love your point about regulation like Sarbanes-Oxley being a useless and expensive farce! Well put.

Third, I don't think the global economy is really just a big myth, and that the truth of the matter is a globalized US economy, because there's plenty of consumption going on in countries like Europe, Japan, Australia, Canada, and increasingly also China, Brazil, India, South Africa, Russia, and Mexico.

Finally, I love the recommendations you make for fixing the problem. The only change I would suggest is that we should maintain very low tariffs with countries like Canada and Europe that do have environmental and labor standards, in hopes that they will reciprocate, and we can all be wealthier because of our comparative advantages in production.


March 18, 2008 11:13 PM  
Anonymous Anonymous said...

Uh, "countries like Canada and Western European nations," I mean.

March 18, 2008 11:15 PM  
Blogger ziel said...

electronwill, you make some fair points. You're right - banks create money by loaning money they don't have - or backing security purchases with money they don't have.
When I say they have us a barrel, I mean right now - we let them fail at great risk. We can certainly mend our ways and change or monetary policies to turn the tables.

My sense of the "global economy" is that its dynamism (or marginal growth) is almost entirely driven by US imports - the secular internal growth of these new economies is effectively zero.

I'd say there are 4 economies in this world - Europe, Japan, the U.S., and countries that export to the U.S. The rest of the world doesn't even count as an "economy".

My proposal for an across the board tariff was intended to avoid favoritism towards particular countries or particular industries, but if we want to be real blatant about it I'd be for your approach.

March 19, 2008 12:14 AM  
Anonymous Anonymous said...


Very interesting post; one minor correction: JP Morgan is buying Bear, not Morgan Stanley.

March 19, 2008 3:31 AM  
Blogger ziel said...

JP Morgan, yes, thanks. I was going to look up the actual entity's name but got distracted. It's guaranteed - if it's something I'm not absolutely certain about I'm going to get it wrong. And people think blogging is easy!!

March 19, 2008 7:41 AM  

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