THE RESTLESS MISCREANT Bubbles, Bailouts and the Sticky Side of the Ledger: ‘The Great Boomer Bust’
When the United States had a firm grip on the world economy following World War II, all was well. The American Dream was in full swing and being fulfilled year after year as the baby boomers grew up. But all the while rot was setting in, subtly at first but now screaming for attention. We closed our eyes when manufacturing jobs started going overseas because the relatively basic skills necessary could be found elsewhere at half the price that years of excessive labor union demands here had driven them to. And as the cost of buying those goods went down, we not only saved the difference but made money as well since the stocks of our multinational corporations rose. So who cared about the ultimate consequences? Besides, we were proud to become an “advanced” service economy, selling each other “hamburgers and life insurance policies” as Victor Kiam put it. Of course we still had some skin in the game, most notably silicon valley and its progeny, so we closed our eyes once again and shot the moon; consequently, in the tech bubble crash of 2000 we lost big money, and it was just about then that we realized our last best hope to stay on top was being usurped by China and others. And on top of that, we added insult to injury in a classic case of societal masochism and denial by blindly letting Bush, Greenspan and the banks piper us off the cliff in the biggest housing bubble in history, losing us even more money in the process plus our houses to boot. Now we’re closing our eyes to the obvious reality that we’re going to lose lots more money before this is all over.
Having allowed the financial sector to take over for the productive industries we greedily threw away in the quest to maintain our late-empire lifestyles, we provided the backdrop for the future necessity of bailouts to cover for the inevitable excesses that resulted. For my money, it all really started with the Long Term Capital Management (LTCM) fiasco and bailout in 1998. If you’re unfamiliar, it seems that these early hedgefund boys had bet huge sums on a currency play that went bad, so bad in fact that the powers-that-be deemed it necessary to arrange a multi-firm bailout of the firm believing that a worldwide financial meltdown could occur if it was allowed to go broke (shades of J. P. Morgan in the Panic of 1907). That alone should have raised serious flags and calls for additional safeguards, but Wall Street just upped the ante and moved blithely on. And it set the stage for what was to come later, namely huge banks and investment houses engaging in out-of-control, highly leveraged risk-taking (just like a casino but without a mathematical certainty of profit), much of it with government-insured money virtually guaranteeing their status as “too big to fail.” And so we went from capitalism where corporations go broke to a weird form of corporate socialism where the bigger you are the more we have to save you because we’re afraid to turn over the rock and see what crawls out. Had LTCM been allowed to go down, it’s conceivable that we’d still be solvent today.
Now, even if you’re not an accountant you know that a balance sheet deals with assets and a liabilities and a profit and loss statement with income and expense. Well, over the years we’ve been cooking the books relentlessly, shifting national assets to the liabilities side and increasing expenses without providing income to cover them. What corporation could do that for long and survive? The answer is obviously none, but the federal government can do a bit better, seeing that it can print money; the long-term problem is to make sure that others will take that money at a non-ruinous rate of exchange. But we’re losing income-producing jobs at a frightening rate while still adding people to an already-bloated federal, state and city roster, thereby further adding to expense. And all those government jobs, safe and secure, used to pay a lot less than their private industry equivalents but now, in a classic caseof the tail wagging the dog, they pay more and their unions are more adamant than ever to keep the game going. I just read today that the Southampton Town police are getting raises that will, by my calculations, let a cop making $100,000 today jump to almost $110,000 by 2012 while the rest of us eat dog food. Doesn’t that just do it for you? This sort of thing has been relentlessly adding to expense in the face of declining income all over America and it’s now reaching critical proportions as the jobless rate skyrockets. Add the fully-vested pensions all these people have been promised versus the shortfall in the funds necessary to pay them and you can see where all this is leading.
Enter the “Bernanke Bubble”, super-low Fed bank borrowing rates allowing the banks that got us into this mess in the first place to live on the “carry trade”, i.e. to make phony profits by buying treasuries yielding more than they’re paying for the use of the money. All very convenient to keep the bastards going at our expense but hardly useful for the rest of the economy. If you get the feeling the whole thing is going to go “poof” any day now, you’re not alone. My advice going forward would be to stay very close to high buildings when you’re out walking.
In the end it’s really all very simple: we’ve painted ourselves into a corner and we don’t have wings. Though we depend on guys like Bernanke and Geithner to make it all go away, they haven’t got a clue – they’re academicians, not magicians. But they think that they can provide formulas to transport us back to “before-it-got-like-this” and, unfortunately, are in the position of being able to commit virtually unlimited amounts of our money to try to prove themselves right. In my mind’s eye, I can see something like 100,000,000 boomers all lined up in a row like in some apocalyptic sci-fi movie, waiting for their turn at the old-age trough, eager to taste the fruits of their labors in their waning years but only to be harshly reminded that they didn’t really produce much of anything at all, and are now reduced to being simply a slew of old mouths to feed from a shrinking asset pool that can’t be sustained in a collapsing economy.