Day Ninety: Avoiding Corporate Depression

I got up today with the intent of working around the house but since I didn't go to bed until late it has been a more leisurely day. While I do have a few domestic chores that won't wait, my leisure has allowed me to think and react to the financial news.

The announced "bailout" plan is probably as good as can be expected from politicians, regardless of party. At least it doesn't perpetuate the worst of the lack of care typical of the liaisez-faire Republican management of corporate America.

As to the need for the bailout, at a corporate level the problem is almost identical to the 1929 crash that triggered the great depression. Essentially, corporations are able to be 100% margined and have unlimited speculation. The crash in 1929 was due to speculation on 90% margin. (Subsequent controls have limited individual stock margins to 50%.) In essence, financial institutions have been able to sell 100% of their mortgage loans in repackaged securities, divorcing the real property securing the loan from the instrument. They then took the proceeds from this paper and made more loans.

This is nothing but a questionably legal pyramid scheme, which as long as there were new investors, speculators, who would continue to drive up the price of real estate. As the price rose above the threshold of people who could afford housing, even with no money down, the new blood stopped and the prices have plummeted. This doesn't even address the greed both at an individual level when someone would "buy" a house for the free rent because they had no intention of paying and at the corporate level which would assign higher rates to the people who could least afford them and further push up the level of their debt just to keep expanding the pyramid.

Reagan and Bush 43 do have at least one thing in common. They each have presided over the greatest increase in national debt of any presidential tenure. This has other consequences, including a declining value for the U.S. dollar, which has exacerbated the credit crisis. When the government has to borrow $10,000,000,000,000, it is $10,000,000,000,000 not available to the private sector. It also drives up the cost of money, which also has two impacts: fewer of our tax dollars are available to maintain government functions and business expenses go up reducing tax revenue. (Yes, I know that our global corporations with transfer pricing get away with reducing their U.S. taxes to nothing more often than not.) I haven't looked at it recently, but some time ago I was struck by the similarities in the annual deficit number and the annual interest payment number, even with the favorable loan rates that borrowing from Social Security excess funds allowed.

Social Security is the third factor in this "perfect storm" of a credit crisis. With baby boomers retiring, there will be no additional excess funds. Unless the government changes the rules on who qualifies for Social Security and reduces its impending outlay, the cost of the $10,000,000,000,000 and growing borrowing will sky rocket as it is replaced with more expensive loans.

Unfortunately, there is yet another factor. Our trade deficit has been negative for most of my life. This also devalues the U.S. dollar, which increases the cost of borrowing...

Now, I am not yet ready to go into survivalist mode but I do know that my Life after Layoff has been affected and not in a positive way. Credit for starting a business will be substantially more difficult to obtain bailout or not. Things that will sell to people with less spendable and more devalued money are fewer in number. Even jobs will be less available and for less money.

As I've been writing this, I've been watching a surprisingly large variety of birds cavort around my bird bath and the surrounding foliage. Since I don't want to disturb them, it makes for a good excuse to avoid yet another of my domestic chores, at least for the moment, mowing the yard.