A Nation of Debtors

Despite the failure of several financial institutions, the decline in worldwide stock markets, and unprecedented foreclosure activity, the average American still has no idea how much trouble we're in. America has become beholden to the international community’s willingness to lend us money. I haven’t seen anyone coin “OCM” as a phrase, so I am going to do it right now and take credit for it. Whenever you see someone using their credit card, mention OCM - Other Countries’ Money.

OCM means realizing our money isn’t ours because of the massive deficits our government has incurred through its spending. Having a deficit means we are borrowing other countries’ money through the form of Treasury and bond sales. By running deficits and spending more than we make/collect, each cent we make no longer belongs to us - it belongs to our international creditors. As a result, we have lost financial control of our own country. If we had a surplus, for example, national healthcare would be a no-brainer. But after Iraq and the bailouts, we are now a nation of beggars. As the old saying goes, “beggars can’t be choosers.”

How did we get to this point? Less than a decade ago, we had a surplus. In 2001, President Bush inherited a 128 billion dollar surplus. Now, we have almost a half a trillion dollar deficit—and that’s just for the year 2009.

It gets worse. Overall, people agree we have a debt of at least nine trillion dollars, although some entities, like the Peter G. Peterson Foundation, peg our national debt at an even higher number, 52.7 trillion dollars. The numbers have gotten so large, they seem almost imaginary, like Monopoly money, and that’s the danger - at a certain debt and spending level, the American dollar will lack credibility against the Euro, yen, and Swiss franc, not to mention gold (GLD). If the American dollar loses credibility, the entire worldwide financial system will be at risk. If that sounds too “Mad Max” for you, you just need to understand this key concept: we are debtors, and debtors don’t get to make the rules.

When I hear people say they want to tie restrictions and regulations on AIG (AIG), Merrill Lynch (MER), Fannie Mae (FNM), and Freddie Mac (FRE) in exchange for taxpayer money, I cringe. It’s not “taxpayer” money any more than the money given to you by your credit card company is “your” money. The money belongs mostly to the Japanese and Chinese, who have lent us trillions of dollars by buying up U.S. debt, bonds, and preferred shares. If we want them to continue financing our lifestyle - which they will do, because few other places contain citizens so willing to spend - they set the terms of the bailouts, not us. Thus, I have no interest whatsoever in what regulations and rules Americans believe should be passed prior to doling out the money to AIG et al. It’s not our money we’re giving to AIG et al, it’s the creditors’ money, and creditors make the rules because they hold the purse.

I am far more interested in what the Japanese and Chinese think about the bailouts. The fact that they are not demanding major restrictions is a pleasant surprise. Singapore and other sovereign wealth funds have lots billions loaning money to MGM Grand (MGM) and other American companies. It’s a miracle they are not demanding more concessions or protection for loaning us money. The equivalent of what just happened - especially with Japan's Mitsubishi recently willing to buy up to 20 percent of Morgan Stanley (MS) - is like you and me going on a shopping spree, running up 1000 dollars in debt while unemployed, and coming close to declaring bankruptcy, only to have our credit card company reward us with a higher credit line and no punishment.

In large part, international investors are willing to forgive our transgressions because of the bailouts. The bailouts wiped out stockholders (held mainly by Americans and non-Asian investors) and preserved Fannie Mae’s and Freddie Mac’s bonds (held mainly by Asian and international investors). Thus, the bailouts were designed to convince our creditors America was a safe place to invest.

Only as a secondary effect might the government intervention, using taxpayer money, help American homeowners by increasing liquidity (“liquidity” being dependent on Japan and China continuing to put us in more debt by giving us more of their money). Government intervention worked - Asian markets recently swung back from double-digit declines, and liquidity is being restored to the worldwide economy. Some Americans have used this increased stability post-government-intervention to believe that deregulation itself was a bust or the cause of our financial collapse. Nothing could be further from the truth.

No rule or law could have saved us from ourselves and our greed. Remember that Warren Buffett himself called financial derivatives “weapons of financial mass destruction” in early 2003—over five years ago.

If someone with Mr. Buffett’s profile and connections pointed out the problems in the financial sector using language signifying the severity of a nuclear bomb and was unable to get anyone to take him seriously, what hope would a law have against this kind of indifference?

We had and have numerous laws to prevent financial and mortgage fraud. Laws against fraud exist in every state, and even if no express state statute exists, common law fraud can be pled in any county courthouse. Also, if you live in a company-friendly town, you can bypass your local state court judge and go to federal court under a 1968 federal law, the Truth in Lending Act [TILA]. Thus, state and federal laws already exist to prevent financial fraud against consumers and homebuyers.

Yet, no law could have prevented a bank from having lax standards for granting loans. Even if such a law existed, it may have forced a working class family to become permanent renters by requiring excessive upfront capital. In other words, laws don’t fix problems, they just arbitrarily create winners and losers. Furthermore, no law could have changed the common practice of mortgage brokers and real estate agents falsifying loan applications. Even if every D.A. in every county had dropped homicide cases in favor of prosecuting mortgage fraud, there would have been plenty of fraud to go around.

The problem wasn’t and isn’t a lack of regulation, but a lack of ethics and honesty. Unfortunately, there is no law that can curb the human appetite for greed when everyone is seemingly making money. Even a casual student of economics has heard of “tulip mania,” which took place in the year 1637. Back then, the price of a tulip contract sold for more than 20 times the annual income of a skilled craftsman; in other words, people were happy to exchange 41,600 hours of hard labor for a flower that you can now get for a buck at Home Depot. Financial bubbles happen, and then they pop. Unless a law can remove humanity’s attraction to getting rich, another bubble will occur, and more people who bought late in the game will be wiped out.

Overall, deregulation has helped the American consumer. Just twenty five years ago, the idea of an average college student being able to fly to Iceland and back was laughable. But the government deregulated airlines, and consumers have received low prices - just check out Southwest Airline’s (LUV) deals. And that cell phone you have, with the cheap 1000 minutes a month? If the government hadn’t broken up Mama Bell in order to deregulate the telephone industry, you’d be paying twenty cents a minute because of regulations designed to help AT&T (T) maintain a monopoly.

Deregulation is devastating only when unethical people are involved. For example, energy deregulation in California was working initially, until Enron decided to actively steal from Californians and intentionally increase the price of electricity through various shenanigans. The common factor in any bubble’s existence and inevitable collapse isn’t deregulation, but a lack of ethics. Stories from yesteryear indicate that local bankers knew more about their debtors than the local church. Whether apocryphal or not, the very idea that a banker today knows all of his debtors’ financial situations intimately is amusing - and that kind of ignorance should scare all of us.

It wasn’t just leverage that caused this financial collapse, it was the attenuated way in which various people could make money. For example, a mortgage broker could loan hundreds of thousands of dollars over the phone to an applicant or after meeting him for half an hour and filling out some forms. After this initial contact, the broker had no interest whatsoever in the applicant/debtor. The broker received a fee from the bank for giving it the loan, and the bank sold the loan it generated to other investors as part of a larger package. The story is old now, but deserves to be told, because too many people miss its crucial point: attenuation leads to irresponsibility.

The financial debacle had nothing to do with regulations, or lack thereof. It has to do with society itself, and how year after year, cities get larger, neighbors rarely see each other, and no one can reasonably promulgate a set of core principles each and every American believes in. We have become so reliant on laws rather than personal trust that we've had to pass laws to protect people when they help others. Many states have passed laws protecting Good Samaritans from being sued for helping others if their assistance unintentionally results in further injury. In other words, in some states, if you help a woman on the street replace a tire, and her tire happens to blow up in the middle of the street through no fault of your own, you can be sued for negligence and lose your life’s savings as a result. When a law has to be passed to counteract other laws that discourage others from lending a helping hand, something is deeply wrong, and the absence of laws is clearly not the problem.

I wish I knew the solution to our modern economic problems. I am too pessimistic to decree an amorphous form of morality as the solution - morality is so vague and subjective, it can masquerade as homophobia, Jim Crow, anti-Mormonism, or anti-whatever-the-minority-is. But capitalism, we too often forget, relies on mutual trust. I trust that when I make a loan, it will be paid back. I trust that when I give you a dollar, the paper will be honored by the next establishment when I want to buy something. I trust that a mechanic won’t rip me off if I go to get my car fixed and if I don’t trust any mechanics, that means I have to do it myself and not spend any money, which restricts the economy. As another writer once pointed out, currency has value because it flows, like a current. Value is created when money moves from person to person and is worth nothing standing still.

If I had to venture a guess about how to increase trust and ethics, I’d try to fix two problems: one, a non-stop treadmill of working hours that takes people away from their loved ones and their friends, creating higher living expenses and less time for parents to teach their children anything; and two, a lack of corporate responsibility to long-term shareholders and customers, as more people change residences and products more often, which results in corporations chasing the bottom line, knowing they might never see a particular customer or resident again.

How do we fix these problems in an era of increasing competition? That’s the trillion dollar question. Unfortunately, we won’t get an answer if we wrongly frame the debate in terms of what laws to pass and how to increase regulation. The debate should be about OCM and realizing we are debtors who have made our children beggars because of our fiscal irresponsibility. It’s a painful truth to admit, but admit it we must - the first step to overcoming addiction to OCM is admitting we have a problem.

Comments

[timmywampus...:]

interesting perspective, it is unusual to get such a philosopically thought provoking article. debt is out of control. it would be nice if this credit crisis acted as a catalyst that dragged people from a debtor mindset to a savings mindset, but habits are hard to change. interest rates have to go up - a lot to make people save. if the dillema is to save 20,000 at 2% interest or spend in advance of inflation at 4%, the losing solution is to save. policy must reflect an advantage to change habits, but perhaps the weaning of credit below 8% is incentive enough to halt borrowing as a first step to encouraging savings?

2008 Sep 24 08:46 AM

[A Man:]

This is the diagnostic for this patient (U S of A). Now what is the medicine? I am sure it will not taste good.

2008 Sep 24 08:55 AM

[notsosmart:]

there may not be a cure for this sick patient.this paper cancer is spread far & wide.

2008 Sep 24 09:01 AM

[carey_jim:]

These things are so complicated that historians argue their causes for generations and never come to generally accepted conclusions.

For example,

Gibbon thought that Christianity was the cause of the collapse of the Roman Empire.

Other historians think it was due to lead poisoning: The Romans used lead pipes to deliver drinking water to their homes.

Arnold Toynbee and other historians of civilization have come to the conclusion that civilizations are similar to people who rise to power only to become soft and corrupt with luxury and excess and fall into ruin as a consequence. He concluded that civilizations need challenges to rise to greatness.

America is supposed to be a Christian nation where 90% of the people believe in God and yet America is known the world over for its wars of aggression, its prostitution, homosexuality, drug use, obesity, racism, inequality and injustice, and for the dysfunction of its legal, educational and medical systems.

Yes, everyone wants to come to America, but not for its lofty ideals. They want to come to America to make money, by any means.

Freedom, equality and justice? They go begging in the streets of America: "Hey man, can you loan me a dollar?"

2008 Sep 24 10:49 AM

[Marginal:]

Finally.....Mr.Rafat deserves ownership of 20% of AIG's newly issued preferreds just for his sheer intelligence to state the obvious.
I have been wringing my head over outrage by politicians in the name of U.S. "taxpayers'" for the government putting them on the hook for speculators' debt..Mr. Rafat hits the nail on the head: The US government's foreign creditors would bail from all and any further future US investments and we'd be sitting on our trillion dollar deficit without any chance of recouping a penny from our trusted foreign sources.
when all is said and done, the government will reap a nice reward in m its preferreds' interest and me, Miss USA- AIG and Freddie 100 K shareholder ( the "Wall street speculator?") is the one who lost out --all I can do is consider it my patriotic sacrifice ...

2008 Sep 24 11:26 AM

[henarl:]

A cynical dissertation on the inherent greed, avarice, and general stupidity of the human race. Sadly, I agree with it.

2008 Sep 25 01:09 AM

[Vijaykg:]

US is a spoilt child and the whole world is its mother for now. Its helping US for it feels that it will be hurt with the loss of the child. When the world learns to live without its life revolving around its spoilt child(US), it will stop pampering US and the world will be a different place. Its upto the child to smarten up and strengthen the "love"

2008 Sep 25 03:00 AM

[Ives:]

Regarding "The problem wasn’t and isn’t a lack of regulation, but a lack of ethics and honesty."

Oh dear. Ethical and honest people would not be promoted in these firms. If the object is make money and nothing else, then the biggest sociopath wins.

Now I'm just an average wage earner being asked to fork over my "Chinese" (that I nonetheless must labor for) money to pay for this god-awful mess. I'm not an economist or investor. But the "human nature" argument doesn't explain this. If everyone were as "naturally greedy" as the predators on Wall Street, the human race would have been extinct many moons ago.

Institutions that reward people whose greed knows no bounds will always find some greedy people to do their business. You can wag a moral finger at them all day long. A society may need banks to finance productive activity. It does not need a mountainous unregulated speculative finance industry that threatens the existence of innocent bystanders. So, sorry to disagree, but these gambling casinos posing as "banks" need to be reigned in. 30+ years of deregulation have brought us to the edge of another Great Depression.

Let's see, cheap flights to Iceland, and cell phone minutes as against:
1. De-industrialization
2. Stagnant Wages.
3. Outsourcing of blue-collar jobs.
4. Outsourcing of white-collar jobs.
5. Potential Financial Armageddon

I'll take the regulation thank you.

2008 Sep 25 02:57 PM

[OctoberFaith:]

belinda66
I think i am in the same boat as you. but at least I have my preferred stock still. that was the point of this whole thing, so I could get that back. trust in a good company is hard to find.

notsosmart
nah not really. but I am creative ; )

A man
what? I got preferences so what?

use to have a credit card account with a 18% "loan" rate. unfortuanately the debt service got out of control one time. so instead the company then decided to keep me on the hook for the account balance... yep kept me on the repayment plan for that one. took two years before the company finally just decided to cancel the account holder for it.

good thing I'm a saver now. wouldn't want to make the same mistake twice. wouldn't have money to purchase a good companies preferred stock. whenever I come accross another one

use to have stock in taiwan manufactoring ltd, a great chinese company. but it went under, cost me everything I ever had. sure glad I wont make that same mistake twice.

any other questions?

timmywampus
you are off base.
and your calculations are wrong... there were no equities issued like that.

henarl
sounds like you have your own issues with greed? I however like mine as they are. they protect me from other kinds of "financial" losses that I use to be invested heavily in.
any other questions?

Jim Carey
Whatever challenges it takes to make you face your fears right? tell you face them you can never conquer them.

henarl & vijak
dont like it, leave.
I however am damn proud of America. Given what it's had to work with it has done just fine.

Good spot for me to go back to working on what I have been doing. Learning what my parents didn't teach me. All kinds of "Financial" matters. That's what they didn't teach me. All kinds of "Financial" matters.

Ives - I have got to agree with you.
Maybe you should read the greedy nature already posted above.
I think A man already explained it.
Maybe it's even why I think ethics are now even more important in your "Financial" matters. You wouldn't want to have misuse of control over the environment. If you did it once, you might never have control over the environment again. Especially, if you did that early on say, and then were trying to fix the environment. all that would rack is instead a huge "debt" service to constantly repay back. Interest rate on that would be sky high. Spend all your "Financial money" on just paying off the debt.

Any other questions?

2008 Nov 01 11:59 PM