Spurred by deficit spending, Federal Reserve policies, state subsidies, successive bailouts, and deregulation the laggard American economy of the 1970s was able to stabilize and then take off in the 1980 and 1990s. But it did so on the backs of the American taxpayer and because of favorable legislation.
More specifically, the idea that the "free market" brought America back is a myth. The causes behind the market collapse - which many are just learning about for the first time - are evidence of this. Still, we have free market zombies telling us that, on the road ahead, we need to follow the same path that got us into this mess.
Famed bond trader Bill Gross (of PIMCO) is not one of these zombies.
One of the reasons that Gross is not one of these free market zombies is that he sees the same things about our past that I discussed in my book. He argues that the period of government-sponsored easy money (from low interest rates), managed inflation, and the excessive use of debt to take advantage of deregulation (the "accelerated use of financial leverage" for "increasingly complex financial innovation") may have brought growth. But he also recognizes that this period is now officially over. In its place we are going to see slower growth and the rise of new financial power centers, like Brazil, Russia, India, and China (the so-called BRIC countries).
So where does this leave us?
In market speak Bill Gross likes to discuss how "deleveraging, reregulation and de-globalization" must occur and that we must be prepared for what follows. But we are resisting change. Why? Because, as PIMCO Managing Director Mohamed El-Erian explains, many are inclined to "look back to what we are familiar with, rather than try to define the new paradigm."
In plain English what both Gross and El-Erian are saying is that as we scramble to adapt to and fix this mess there are many others who only want to save themselves, and are standing in the way of real change. Look no further than Wall Street's pay/bonus scale and their lobbying efforts in DC to understand how this works.
From what I can see, selfish and greedy people are winning the day. Or, to paraphrase the kid in Sixth Sense, I see stupid people, and they're walking away with our money.
Still, there is hope. David Einhorn, founder of Greenlight Capital, and one of the earliest users of credit default swaps (a from of insurance) is now calling for a ban on these instruments. He argues, convincingly, that “trying to make safer credit default swaps is like trying to make safer asbestos.”
Others, like the former chairman of the Council of Economic Advisers under President Reagan, Martin Feldstein, call for innovative ways to help stabilize housing prices. His approach includes allowing American homeowners to borrow up 20% of the value of their mortgage at low interest rates from the U.S. Treasury. This would cut out the private sector, which has effectively been gouging American taxpayers through higher credit card rates, while holding back small business and personal loans.
All of this is important because Bill Gross appears to support a plan that resembles what Professor Feldstein is proposing. According to Chicago mortgage broker Michael White, Mr. Gross has signed on to Plan Orange. In a few words Plan Orange would have the American government pay down the mortgage debt of all property owners in the United States, to 80% of the value of their home today. This would make mortgage debt more affordable and help make most deliquent mortgage (now running at a record 13%) current. It would also strengthen the banks who own mortgages and are now worrying about defaults. See the details here.
(In my world I would also call for a forced unwinding of the CDO market, which would help to take care of much of the mess that the CDS market is worried about. But that's another story for another day.)
To be sure, the bill for Plan Orange may be as high as $5 trillion. But consider this. We've already spent and/or guaranteed $20+ trillion in toxic wealth. Worse, we have little to show for it other than "stability" that includes record deficits, 10% unemployment, record bankruptcies, record bank failures, collapsed and falling home prices, decling consumer confidence, and banks that won't lend (if I missed one, I apologize). Put another way, we've raised the Titanic, but have it sailing through the same ice-berg filled waters.
We should also consider the following. We're already on the hook to the banks for about $23 trillion in the form of loans, credits, and numerous other financial guarantees. The banks - or the banksters - will get their money one way or the other. The bonuses will continue (because they're doing such a fine job). Would you rather take a shot at saving family homes and neighborhoods, which just might make additionial trillion dollar guarantees to Wall Street unecessary? Or would you rather sit around waiting for the banks to lend money, in the process suffering through a steady drip of news of how Wall Street has become "liquid" with $20+ trillion of our money?
I don't know about you, but a self-imposed financial waterboarding - that includes giving Wall Street what they want but leaves Main Street drowing in debt - is not what I'm looking forward to.
Let me repeat. The people on Wall Street already have their money and their guarantees. I think it's time we start thinking about Main Street. Especially since it just might curb the housing free fall, and make much of the incredibly toxic CDS-CDO payoff unnecessary.
- Mark
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