Goldman Sachs vs. The People? How about the entire banking and brokerage business vs. the people. I think so. First, I am astonished at which people have bought off on the idea that we need a $700 Billion bailout. What for? The big wigs like Paulson would have you think this is 1930 all over again, but it isn’t! I will describe the differences:
1930’s: Large corporations were merging like crazy and the number of solvent corporations dropped from the thousands to about 200! The remaining companies were hoarding cash into their accounts like crazy. Workers made enough to live but few saved and even if they did it could disappear in a local private bank when it went under. There were fewer and fewer jobs because of massive automation and fewer companies to employ people. As the economy turned upside down, Congress passed laws to grab much of the gold in the country and hold it in the reserve to guarantee the dollar. However, within a short period of time they took the dollar off the gold standard and by law repriced the dollar at half it’s previous value, thus creating inflation but increasing the value of the gold reserves! All in a few years. Only about the top 1% of the wealthiest people in the country had cash. Real estate had collapsed because of borrowing from stock accounts, previously run up in value, which collapsed as cash constraints prevented investors from covering margin and withdrawing to make payments on real estate (Glass-Steagall). At the beginning of the Great Depression there were few laws on the books regarding the handling of money, the Treasury, and controls. Most came into being over the next 10 years.
Today: In comparison, there are many companies employing many people, in very diverse markets. Most markets segments can weather the storm of a banking downturn. I know for sure, since I study corporate earnings reports, that many companies have been increasing cash deposits dramatically over the last 4 years or more, a major red flag of the Great Depression. Why? Because the dollar was becoming cheap and at the same time hard to spend as corporations became more efficient. So they banked it and started earning interest. Many companies today could have negative earnings and growth but still show a positive net because of the amount of interest they earned on cash and cash equivalent accounts. It is not likely we will reach anywhere near 20% unemployment. We could in fact see a dramatic slowdown with a true depression in much of the world but not in the United States, because we have laws and regulations on the books which didn’t exist before the Great Depression. Many individuals have cash in accounts, money markets, retirement accounts and they don’t need more debt or credit. Not everyone has a bad mortgage. Another big difference is that middle market business, those below $200 Million in valuation, have also been saving cash and finding alternative lines of credit, mostly from private accredited investors, for several years and they are prepared to go somewhere other than the bank for cash flow needs. The Fed is not in the business of a gold grab at this time, the dollar has already fallen, and we are likely to see the dollar increase in value rather than collapse. However, the dollar could collapse if the Fed decides to print too many of them anyway. Still the amount of cash in the system, the number of jobs currently filled, the breadth of business of all types, the lack of a Dust Bowl, although we have had Hurricanes, and many more things do show that the last thing the general public needs is more debt!
All this being said, and the understanding that we are not going to fall back into a Great Depression with massive unemployment and a dramatic lack of real cash in the trading and consumer markets, the fact that companies and regional banks have increased cash deposits, makes one wonder why they need the $700 Billion to bail out the big international firms. And it really is for them, more than for the citizens. There are a lot of wrongs in place and this huge debt/credit increase will just simply allow them to continue to run a market that is overbuilt on credit. Why would anyone want that? Why give the Treasury, Goldman Sachs, Bank of America and more a brand new shiny credit-card? We all need to get off the credit wagon and back to the basics of buying what we can afford.
Just think about what has been happening to all that money in the first place, prior to the need for a bailout. Much of it goes to large bonuses to CEO’s and other corporate managers. It disappears into leveraged accounts which balloon up the credit lines as much as 9times the deposit in some cases, and then can be margined again in other accounts, many times, by using repurchase agreements and insurance. The money was used to speculate on oil, gas, corn, ethanol, and many more commodities. They bet on higher and higher prices in futures contracts until citizens had to pay over-inflated prices for everything. Much of this inflation comes from this activity as well as China absorbing higher and higher commodity amounts and jumping into the futures markets. And remember that much of the money, obviously a significant portion, comes form sub-prime mortgages thanks to Freddie Mac and Fannie Mae. Whew! What a deal! They were betting that the poor people of the country could pay enough of their 100% loan mortgage payments to keep this monster fed for higher and higher prices!
Now think about this! They want us to fork over $700 Billion more so that they can snap up all the bad debt, mortgages, homes… however they categorize the final assets, and then they want to hold them until prices go back up? Not all properties are worthless, but many are on this basis, and many are too expensive to be sold back into the market, since there are no buyers (unless prices go lower). In order to sell this junk real estate back to the citizens, they want to artificially maintain a higher price on these properties, than they are worth. In the end they are price fixing real estate at higher than market prices, attempting to maintain and maybe continue the junk mortgages. Everyone forgets that there is a time cost here. As the properties remain vacant, who will maintain them so that they can retain value? The Fed? No, probably a new Federal Agency.
If they would just let the properties fall in value, to where speculators can purchase and maintain them at a reasonable price, and put them back on the market, this would all be over much, much quicker. The population does not need artificially maintained higher bubble prices. If they pass the bailout, and futures contracts begin to trade again, as they did before, then why would we expect commodity prices to not bubble up again? That would be crazy, since one definition of crazy is doing the same thing over and over again but expecting different results.
There is enough money in other parts of the markets, few people have to worry about their accounts, and why should we bail out the bad? It shouldn’t be done! Not now, not ever! So instead lets do something much smarter. Companies need to use less credit, citizens need to use much less credit. And big international firms need to stop cramming it down our throats.
But they are likely to pass it, now that they are in such a hurry. In the end, either way, the markets may still correct, earnings may still come down, and people may still worry.
Copyright 2008 Michael P Arnold, MPArnold