The Great American Ponzi Scheme (Part II) 18 comments
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(Continued from The Great American Ponzi Scheme: Part I)
The government didn't step in to regulate these credit default swaps because a boom in all these industries makes people happy - happy enough to re-elect those in office, happy enough to pay more taxes. By the way, because the economy was doing so well in the early stages of this Ponzi scheme, the tax base grew and taxes could be cut on things like capital gains without the effects really being felt, even while the government itself was spending just as recklessly as many consumers.
Eventually, though, like all Ponzi schemes, the mortgage companies and the building developers simply ran out of people on whom they could perpetuate the hoax. Those left to take out new mortgages became worse and worse credit risks. Housing prices started to level off. This meant no new value was being created and added into the system. No more home equity loans were being taken out to finance home improvements, new entertainment systems, or new cars. People slowed down in their purchase of big ticket luxury goods. Gas prices shot through the roof coincidentally, which drained even more cash from the average paycheck, and at the same time many of those earlier mortgages came due to reset their terms. You remember, the ones that the buyer couldn't afford, but thought they could refinance based on the increased value of their home.
Companies started laying people off because of lower sales revenue, people started defaulting on their mortgages, and the banks that had promised to "insure" and credit defaults found they didn't have nearly enough cash available to pay the "insurance" they had issued. These banks faced collapse. Since many companies rely on those same banks for their day to day operating funds, a collapse of the banks would mean a great number of other companies would collapse as well. Millions of jobs would be lost and the whole thing would spiral out of control. The government had no choice but to step in and rescue these banks from their own greed and stupidity. The most important banks were propped up or forced into marriages with other healthier financial institutions. Then, because the easy money for new cars was gone, the car companies found themselves floundering. With millions of jobs again at risk, the government had to step in again.
This week, the Wall Street Journal reported that building developers are asking for their piece of the bailout pie, with an extra scoop of ice cream, please. Thank you, very much. This is where the line in the sand gets drawn. The developers are among the principal provocateurs of the current mess. They helped fuel the fires, and continued building more and more homes, until they began to ruin the value of those they had already built.
If we could have, we would have let the banks fail, and let the auto industry fail, but the consequences to the average American would have been too great to have them all collapse at once. If they fail at a rate of one or two a year for the next decade then so be it, but not all of them right now. As for the developers, their bankruptcy will not collapse the economy. It won't be pleasant, but it will be a smaller blow. Let these developers go under if they must. The only reason the government should offer corporate bailouts is to protect the integrity of the greater economy.
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The construction industry is different. It is an extremely fractured industry. It has a surprisingly low barrier to entry. I have often seen a construction company fail, only to have its key employees immediately start a new company. Construction jobs are not going oversees. Companies from other countries cannot ship houses or office buildings to the United States. The jobs stay here, but only if there is a reason to build. If we let industries such as the automakers move to other countries, we will have less reason to build and won't need those builders.
> jack
All this Home Depot collapse nonsense aside...construction will go under the table..where much of it should be anyway. Skilled workers...finish carpenters, framers, masons, tile, etc...can start to build the small remodel and build to suit stuff they should be doing anyway..They'll make more and take a career step they'll feel satisfied about.
IF YOU REALLY WANT AN INDUSTRIAL BASE AND A COUNTRY THAT CAN ONCE AGAIN BUILD THINGS..STOP TELLING EVERY HIGH SCHOOL KID THEY NEED TO GO TO COLLEGE. University is largely a joke run by people who couldn't change a flat tire if their lives depended on it...but don't have any trouble intimidating their students and ranting about how rotten regular people are...Bring back shop class and trade schools!
I agree. Little to no time seems to be spent discovering what kids are good at, where their strengths lie. All the focus seems to be meeting arbitrary competency scores. The trades are where "losers" are shunted (kids who don't get good grades).
Tradespeople are largely devalued. Listen, when my roof leaks, or the furnace dies, it's a damned valuable person who comes out to fix the mess. We could use some brighter people in those industries, people whose skills complement the work that needs to be done... not just the guys who couldn't cut it anywhere else.
Furthermore, I live in a northern client and I am shocked at how completely inefficient home design is. "Energy Star" ratings are a joke, and provide very little, marginal value. The design of homes needs a complete, fundamental overhaul with regards to energy efficiency.
Was it a Ponzi? Sure. Were Bankers and Wall Street Greedy? What else is new? But Did our own government enable all of this with the misguided notion that lenders should abandon the principles that had kept them in business to lend money to people they knew would probably not be able to pay it back? You bet it did. Whatever happened to that bottom line on mortage applications that reminded applicants that it was a federal crime to make misstatements on the form?
Of course, universities are largely a joke to you. You can become whatever you wish simply by writing a few lines.
Experimental Psychologist? only in your dreams apparently.
Trade Schools are a great idea especially now when so many are unemployed. After all, we pay High School students if they get passing grades. At least, they will learn a trade while they get paid to go to school. IMO
The second half of this double Ponzi scam is now being played out in Washington. Having scammed the public with cheap paper (ARM's, CDO's, and SIV's ) it then became necessary to pay them back with even cheaper paper. This was accomplished by the brokerage houses (AIG,Lehman, Goldman Saks, Bear Stearns, etc.) creating and issuing insurance policies on the value of the cheap paper mortgages in the form of "Equity Default Swaps" (EDswaps) which guaranteed payment of these mortgages if they defaulted (i.e. for $100,000/ yr. you could insure $5 million in poor mortgages). The main problem was that the brokerage houses issuing these policies took the insurance premiums but never put any of this money aside to cover possible future losses.
instead, they listed such premiums as added profits and executives paid themselves huge bonuses on this supposed new income. Thus, when the mortgages started to fail there was absolutely no funding to cover these EDswaps ,panic resulted and brokerage houses were going under. Now comes the "Fun" part. One of the main architects of the EDswaps vehicles was none other than Mr. Henry Paulson of Goldman Saks who was chosen by Mr. Bush to become Sec. of the Treasury to oversee the distribution of a $700 billion bailout package to help these “poor brokerage houses” stay solvent. Isn't this like putting the Fox to guard the Henhouse?? No wonder AIG was given $123 billion in aid while they held a $400,000 meeting at a resort hotel and are now asking for another $40 billion to give large bonuses to the remaining executives while the stockholders and the public are gasping for air. So much for honesty and integrity in our present system ! ! Don’t some of these folks belong in jail for misleading investors?
When companies fail, their assets and industry do not spontaneously vanish into thin air, their ownership is just transferred to others. The investors and management of the failed companies lose out, and those who purchase the assets have a chance to correct the problems brought about by the mismanagement of the previous owners.
Bailing out failed enterprises of any sort requires money and resources. These must come from another productive sector of the economy. It thus penalizes productive companies and individuals to prop up, even reward, mismanaged enterprises. This misallocation of resources cannot be good for the economy as a whole.
"auto companies - it's an industrial base problem. we gotta have a viable industrial base in this country or we won't be able to fight all the wars that are coming at us.
> jack"
"rm" also
Tradespeople are largely devalued. Listen, when my roof leaks, or the furnace dies, it's a damned valuable person who comes out to fix the mess. We could use some brighter people in those industries, people whose skills complement the work that needs to be done... not just the guys who couldn't cut it anywhere else.
Modern technology has de-valued human crafsmanship. Let's all join the
financial services or healthcare industries. Maybe the old school way wasn't
so bad? Maybe our world would be a little better off without so many financial,
legal, developer, military,real estate, corporate, and tax experts? Maybe middle class America added a stability and value to this country that has all but vanished? Maybe the complexity of modern society with lots of help from technology will come back to haunt humans.
as Andrew Mellon said "liquidate everything" and start over. Consolidate
the banks, the auto makers, retail ,etc. Why bailout developers- we
have years of over production as we speak. Real estate booms come along
very 20 years- we are dead in the water for another 6-10 years. Plenty of
urban sprawl left courtesy to this last artificial "boom".
I've learned from reading online, mostly here, much about the whole ponzi scheme that is the Fed. I believe that underlies much that is wrong, since their fiat financing of WWI, propping up of England through inflation in the 20's and on and on....(Bernanke's Great Lie: The Gold Standard and the Great Depression, Jake Towne, SA, 12/26).
The suits have had almost a century to proliferate themselves and make themselves rich and "indispensable" in our present bs economy. It's all ponzi schemes, top to bottom now.
Malinvestment is everywhere. For one example, I fail to see why large chains of corporate businesses drive out all the mom and pops, since IT can be used for central warehousing and inventory control to address the small business. Except artificial tax breaks that would make you sick.
The geniuses propping themselves up in shameless regal style with bailout help have devalued useful skills in this system and countless proud American manufacturers have gone under during the last century unable to profit under the insane regulatory, tax, legal and healthcare costs while competing with the third world.
That's where so much fiat money went as it multiplied in our ponzi system and if our betters actually earned their ill-gotten gains, they would have considered the human waste of labor ill-suited to our paper-pushing society.
I, like many others, felt that the house of cards had to collapse sometime, but never imagined the breathtaking nerve of the overlords' world-record heists of bailout money.
We are now ill-adapted to a real-world economy; what will all the fancy suits do, who can't "change a flat tire if their life depended on it?" Who are now fashioning the "solutions?"
The American public hasn't learned to even vote out the jerks who continue to dig us deeper. Even if it takes several elections to finally get decent candidates, the first step must be taken.
I am grateful for this forum. It gives me some hope as the traditional media succumb to the natural traits of their corrupt monopolistic status.
On Dec 26 11:21 AM Greg Pinelli wrote:
> Why would anyone think the big auto makers represent a "viable industrial
> base???" What? Until March 2009? Bailouts of individual companies
> is bad business. ALL the builders won't go under..you'll see the
> stronger ones like Toll Bros. survive..and I'm not surprised..the
> product I see them finishing in San Jose is excellent..and will sell.
>
> All this Home Depot collapse nonsense aside...construction will go
> under the table..where much of it should be anyway. Skilled workers...finish
> carpenters, framers, masons, tile, etc...can start to build the small
> remodel and build to suit stuff they should be doing anyway..They'll
> make more and take a career step they'll feel satisfied about.<br/>IF
> YOU REALLY WANT AN INDUSTRIAL BASE AND A COUNTRY THAT CAN ONCE AGAIN
> BUILD THINGS..STOP TELLING EVERY HIGH SCHOOL KID THEY NEED TO GO
> TO COLLEGE. University is largely a joke run by people who couldn't
> change a flat tire if their lives depended on it...but don't have
> any trouble intimidating their students and ranting about how rotten
> regular people are...Bring back shop class and trade schools!