Sunday, January 20, 2008


With housing prices falling, and consumers looking for money and credit, Citibank borrowed $500 million from the Federal Reserve in late August. In spite of Citibank being involved in the subprime mess, their rationale was that it was the consumers and borrowers who needed money. Citibank's public relations office reported they were “pleased” to borrow and “inject liquidity into the financial system during times of market stress.”

Like dutiful stenographers, our increasingly worthless press wrote what the corporate press officers gave them. And all was good in the market. I mean, after Enron, we all know we can trust market players to tell us the truth and do the right thing, right?

Conservatives and Marketopians smiled wistfully at one another, and delighted in their observation that markets work wonders if we just leave them alone ...

Let’s get real, kind of ... Think what would happen if you went to borrow money from the Financial Rock of your family. Then you learned your Financial Rock went to the local bank soon after you went to him.

Then you learn from co-workers, who also have Financial Rock buddies, that their Financial Rocks also went to the local bank to borrow money after they were asked for loans. When confronted all the Financial Rocks said they wanted to demonstrate going to the bank to borrow money is a good thing. By borrowing they're really saying: “Taking out a loan shows we have ‘community spirit’ and that we want our local bank to succeed.”

A warm fuzzy feeling comes over you. After all, this is what the paper reported. If the press reported what the Financial Rocks told them, it must be true.

Then you learn that your Financial Rock will not lend you any money. Hmmmm. Fuzzy feeling all gone.

You soon learn that your Financial Rock suddenly stopped investing in your community. Instead, your Financial Rock succumbed to the potential for large payoffs … in Vegas. "Don’t worry," your Rock tells you, “We have a system.” It must be true, you think, because your Financial Rock has friends in Vegas … he must have insider knowledge. Warm Fuzzy returns.

Financial Rocks win early bets. Better yet, they won with money provided by friendly Vegas “insiders” and even “friendlier” bar pals. You go to Vegas to see for yourself. They are so friendly. They even give you your drinks for free. Warm Fuzzy deepens.

But you soon learn that your Financial Rock – along with other Financial Rock – have been losing big at the track. You wonder, Can we fix the system to work for your Financial Rock again? Fortunately, you are told, it can be done.

However, there is a hitch. As was the case with mobster Doyle Lonnegan in the 1973 movie The Sting, your Financial Rock has to start providing their own money. You think to yourself, “this doesn't sound good.” You tell your Financial Rock. But Doyle Lonnegan, um, er, your Financial Rock, tells you to “Min’ yer owen bizness … ya fellah …”

What’s happening in the market today is similar to the logic we saw in the movie The Sting. The institutions with money and contacts (i.e. Lonnegan), who were already making good money, wanted even more. So they decided to put their money in profitable but questionable “subprime” loan markets. Put another way, they got sucked into dangerous but lucrative “insider” track tips of easy early money. In both cases - Lonnegan and our financial industry - the sucker ignores how the easy money is made possible. Both "hot" money making activities were driven by developments that could not be sustained; e.g. the sting operation and low interest loans (along with rising home values).

My friends, our financial institutions got suckered into a sting of easy money, greed, relaxed regulations, and even easier profits. The bartender (Alan Greenspan) and his bar pal (George Bush) helped make it all happen. And they could care less that subprime lending preyed on the American Dream of owning a home ... telling themselves we're doing them a favor by getting them into homes. This hackneyed and incredibly misguided justification tells us everything we need to know. These guys (the financial industry) got so greedy that they were willing to damage the integrity of the market for a temporary high, which they get from another shot of fat fees and easy profits.

Let me make this simple: Preying on the needs of others when you know your greed and incompetence will be bailed out by the Federal Government is NOT what Adam Smith was talking about when he talked about capitalist markets.

The funny thing is, we stung ourselves by believing in bartender Alan “I’ll Pour You Another” Greenspan and George “I’m your bar pal” Bush. But, together, they concocted a toxic brew. Today, Bush’s economic stimulus plan - yet another tax cut with rebates - is little more than Doyle Lonnegan going back to the scene of the crime for more action. Only this time, the bartender and game are gone. All that's left is the bar pal (George Bush), who’s desparate to leave once he sees you. But he's also ready to offer a smile and one last swig of whiskey (Bush's Economic Stimulus Plan) from his flask. He does not feel your pain, and doesn't want to see it.

And the flask? Bar Pal Bush is not drinking from it.

Oh, and it's full of rotgut.

- Mark

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