Wednesday, January 07, 2009

Hard Rain Falling

2008 Was a Dismal Year, Economic Woes Abound. Impact on State, City Will Be Negative in '09.

Let's face it. 2008 was not a good year, although the Presidential election raises hopes for 2009.

We will look at the old year in bits and pieces, starting today with our overriding national problem.

At this time America’s economy appears to be collapsing. Economic conditions are worse today than anyone under the age of 70 has seen. Our high production costs, unwise deregulation, failures of supervision, and excessive borrowing in both the private, public and personal sectors of the economy have wrought serious damage, which has not yet been controlled. Unemployment has risen sharply, following recurring waves of layoffs, many of which will be permanent. Tax revenues, predictably, have fallen, which will reduce the level of government services.

Over the years, our economic sages, like Alan Greenspan, who was chairman of the Federal Reserve for 18 years, supported a market economy and deregulation because they assumed that people in business would act in their own economic self-interest, and that the aggregate result would be beneficial to society. It sounded reasonable.

Their error was in not realizing that greed, competition, and groupthink would lead bankers and credit raters to make decisions that were fundamentally unsound. The bankers acted in part without fully understanding what they were undertaking to do. They did, however, ignore internal warnings in the pursuit of profit. On October 23, Greenspan said before Congress, "Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief." He further stated that "this crisis has turned out to be much broader than anything I could have imagined."

It is noteworthy that the current economic disaster was not caused by a terrorist attack like 9/11, nor was it the result of a natural disaster like Katrina or the 2004 tsunami. It was not the result of Chinese or other foreign interference with our markets; in fact, it is the United States that has adversely impacted world finance.

Unfortunately, the problems we face are essentially due to greed and ignorance of risks. It started with mortgage brokers and was aggravated by the US government through HUD, which promoted home ownership by people who could not afford homes (like the so-called NINJAs—people with no income, no jobs or assets). Fannie Mae and Freddie Mac, and their managers who received private sector salaries and huge bonuses and were not subject to controls, fed the flames. Competing banks made irresponsible loans, which they should have known would be difficult to repay. They accepted toxic paper as security, bundled into trenches which were no defense line.

The repeal of regulatory safeguards and the incompetence of the watchdogs, whose political masters basically did not believe in securities regulation, further exacerbated a basically unsound situation. Christopher Cox, chairman of the SEC, bears a lot of responsibility for what happened on his watch, but he and his staff have basically been ignored, as if the task of securities regulation were above their pay grade.

If the SEC was unable to catch Bernie Madoff after receiving a specific written complaint, how can one expect the agency to notice, let alone do anything about, many of the lesser schemes that have been perpetrated (and are probably continuing today)? In our judgment, the full Madoff story remains to be told. There is no way that one man, brilliant and perverse as he may be, can steal fifty billion dollars without others being in on the plot.

We will see what the investigators discover, and which accomplices can be turned in exchange for a lighter sentence or immunity from prosecution. . We predict that the unity of the Madoffs will be put to the test, if its members are forced to choose between cooperation and prolonged imprisonment. How much of the missing $50 billion was paid out to early investors or Madoff favorites, how much of the rest was spent on yachts, homes, and charities, and how much is salted away around the world? Hopefully, we will learn. It would also be helpful to find a new lock for the barn door. Was it ever locked before? It seems that it was wide open.

We have a suggestion: rather than pay all the investors, now creditors, pro rata, something more should be done for relatively small investors who have lost all their retirement savings. It is the giant banks who can more easily absorb losses, and on whom the burden of due diligence rests more heavily. We also propose that the Securities Investor Protection Act coverage be expanded from $500,000 to $2 million, with higher insurance premiums to be paid by investment managers. That should be enough to keep all of those Florida seniors from ending their days in the poorhouse or the caddyshack.

This protection, however, should only cover theft, not the bad judgment of investment managers—which is one of the outcomes possible in a free market. The risks which investors assume should be made crystal clear to investors when they put down their dollars. Many seniors – and others – are unaware of what they are getting into. Perhaps they should be asked to read and sign a declaration that they have not put all their eggs in one basket. There are different classes of investors, in wealth and in sophistication. Some have advisers who seek to enrich only themselves. These are issues which should be addressed by regulatory agencies.

The public has a feeling of disillusionment, both at the failings of the national government, which has already suffered massive repudiation at the polls, and also at the dysfunction, corruption, favoritism, and falsehoods of local officials. In an effort not to depress your spirits too much before New Year's Day, we will reserve comment on what has happened in our neck of the woods until early January. “Sufficient to the day is the evil thereof.” Matthew 6:34

We at New York Civic, Salmon, LeeRoy, Northside and StarQuest, wish all of you a very Happy New Year. Do not be unduly distressed by what you read; the fact that we are here and that we are able to read it and understand it are blessings which should be appreciated while we enjoy them.

No comments:

Post a Comment