It's tough all over

Anybody follow the news? I've been deliberately avoiding it for a while now. I got tired of being exposed to the idiocy of reporters, and let's face it. Most of what you read in the news either doesn't affect you or does affect you, but you can't do anything about it.



I've gotten pulled back in this weekend. Here's what I found out. The US economy is in bad shape. Not just a little bit bad, but "hide your money under your mattress" bad.



I might be exaggerating a little, but not all that much. Here's my understanding of the whole mess.



Fannie Mae and Freddie Mack were going to become unstable. They had too many bad mortgage lines out. The Treasury department steps in and gives them 200 billion bucks to keep them afloat. In return the Treasury department takes control of the two companies.



Then companies like Merrill Lynch, Countrywide, and Lehman Brothers start going under. Bank of America comes in and takes over Merrill Lynch and Countrywide. Lehman Brothers is the odd man out, so they just send their employees home.



Next AIG says they're headed for bankruptcy. This time the Federal Reserve loans $85 billion just to keep them afloat long enough to sell off their assets. The Treasury department gets 80% of the proceeds of the sale.



What the hell is going on here?



It seems pretty simple to me. The housing market has been inflated for a long time. Our homes are not worth what we think they are. It was nice when you could buy a house, keep it for two years, sell for twice your purchase price, buy a more expensive house, then repeat.



Unfortunately it's a game of musical chairs. Actually it's more like a pyramid scam. It sounds great, but it eventually comes crashing down.



We've been borrowing so much money over the past years it has become big business. Banks are making a lot of money off our loans. Wall Street is trading the stocks of these lenders. Brokerage houses are making a lot of money. Everything is hunky dory…until people can't pay on their loans anymore.



So, the lending institutions are screwed. Why the brokerages? They have too many positions in the financial stocks. Don't worry though. They hedged their risk. They invested in CDS (Credit Default Swaps). Kind of like an insurance policy. Guess who underwrote them? AIG. Nice.



Now the White House announces a plan to save us all. They want $700 Billion to purchase the bad loans from the banks. The Treasury department would be in control. Sounds cool right?



Here's the problem. It's freaking insane. You can't keep propping up an insolvent system unless you want to go down with it. It's like dealing with rising gas prices by suspending taxes. It does nothing to solve the problem. It actually exacerbates the problem.



The price of gas artificially goes down so demand goes up. Since demand is up and supply is limited, supply goes down, therefore prices go up. Voila. Very nice.



How politicians don't understand this I don't know. How do we lower gas prices. One of two ways; increase supply or decrease demand. We have a limited supply, so the answer is…USE LESS GAS!



What about the financial market crisis. How do we fix that? Here is the problem (in my humble opinion). Just like the housing market our entire economy is built out of smoke and mirrors. We keep moving paper around and patting ourselves on the back because we think we are producing wealth.



We are not. We are borrowing from the future. Don't worry though, it looks like the bill is almost here. Again, how do we fix the problem? One of two ways; produce more or consume less. I don't mean produce more via the Enron model; simply move numbers around until you have a profit.



I mean actually produce more tangible products or services. You know the things we used to make like cars, electronics, planes, machinery, etc. Or we can produce more of the services like landscaping, cleaning, laying brick, etc.



Currently we import the products, and import the slave labor for the services.



I advocate consuming less rather than producing more. We actually produce plenty. Just not in proportion to what we consume.



One thing I'm pretty sure of though. Gimmicks and tricks won't fix this one. Sorry to be doomy and gloomy on a beautiful Sunday. That's why I stopped paying attention to the news.