Tuesday, September 23, 2008

Wall St. Turmoil for Dummies

The stock market rocks and rolls, international financial markets tremble, credit sources freeze up (loans are just not available for houses, credit cards, cars, etc.). The Bush administration proclaims, after attempting several gigantic bailouts (at U.S.-taxpayer expense), that the only solution is to write the Secretary of the Treasury a blank check (backed by U.S. taxpayers) for $700 billion to buy up the bad loans that are clogging the system.

Here's how the troubles started. Ronald Reagan did not think up "deregulation" or "trickle-down economics" but he adopted them as part of his uninformed, pig-headed ideology. And he was a charismatic man with a golden tongue; he cast a broad shadow from the Oval Office. His policies and his legacy deprived Wall Street of two essential functions usually provided by the government--law and order.

Over a couple of decades the financial big boys (and girls) increasingly tumbled to the realization that nobody was watching (aka "deregulation"). So they increasingly paid themselves huge bonuses tied, if to anything, to short-term balance-sheet manipulations rather than to good business practices, long-term profits, or shareholder interests. When a lot of poorly run savings and loans institutions crumbled, the government stepped in (at U.S.-taxpayer expense) to take a lot of the sting out of the situation for the big guys. (That's the "trickle-down" part--if the big guys make money, they will create businesses and jobs, and goodies will trickle down to all the little guys; this theory has been discredited as often as it has been used.) Ditto, Enron. Ditto, the dot-com crash.

So the stage was set for the next crisis. When the housing market bubble burst (no, Dorothy, housing prices couldn't keep going up 10-15% a year forever), the big guys were stuck with a lot of bad loans. Since they had been packaging and repackaging these "creatively" and selling them back and forth to one another in bundles (read "deregulation" again), a lot of big people from banks to insurance companies to hedge funds to retirement funds, etc. got burned.

Does the stock market volatility (the DOW down 500 points one day and up 400 the next) signal that the financial markets are in extremis and about to collapse? No, it signals that in the middle of the poker game the U.S. showed up at the door and the big guys started scrambling to guess who the biggest winners would be this time.