Editorial comment

	Vol. 230 No.4
PERRY A. FISCHER, EDITOR

Horse hockey and other equine economics

I remember it almost to the day: It was in December 1981. I was hammering on a roof, listening to the radio, when it suddenly became OK to flaunt wealth. It was just revealed that President Ronald Reagan’s “supply side” economics were really “trickle down” economics that weren’t even endorsed by his budget architect, David Stockman. Previously, it had been relentlessly explained that, as long as the rich were getting richer, even if the money had to come from the poor and middle class (with the help of governmental policy), everyone would somehow get richer—you know, a rising tide floats all boats. In reality, it worked out more like corralling water from a big lake into a relatively small, but very high-priced, and exclusive, marina. It lowered the lake level.

In effect, the idea was that if you fed a horse gilded oats, a much more beneficial product would fall in the furrow. But it was in fact horse hockey, sold under an ideological banner, and later summed up by the movie Wall Street: “Greed is good.” The idea was contrary to everything that my Depression-era parents and grandparents had taught me.

The ensuing shrinking middle class and upward redistribution of wealth was made possible by wealth creation through debt creation. These ideas were predicated on the notion that all government was bad, which, in practical terms, meant that regulation and “watchdog” agencies were the overfunded enemy of self-regulation. Such oversight had to go, or at least be diminished. And it was.

The flow of debt increased. On the governmental side, Reagan proceeded to double the national debt; President Bush Sr. doubled it again, then Bush Jr. doubled it again, and it is very possible that President Obama will double it yet again. Throughout, private, loose money followed, which meant that you could have it all, right now, without the need to save or wait. Buy that big house, big car, fine clothes, furniture, travel, and there was someone who would give you a debt deal. Of course, that someone did it because it made them richer.

I don’t blame anyone for this financial crisis. The blue-collar father or the single, working mom should have bought that 3,600-sq-ft house, even though they only made $32,000 a year. You’re supposed to get the best deal that you can, right? And I don’t blame them for picking the lowest payment on their “Pick a Payment” statement, wherein you choose $500, $1,500 or $2,500 to pay on your mortgage, credit card or whatever. I don’t blame them for not reading the six pages of fine print that cryptically explained that by picking the low payment, they were in fact increasing the size of their debt. I don’t blame the banks who then claimed to be “richer” because now more debt was owed them.

I don’t blame the financial “geniuses” who engineered such schemes. I don’t blame the “investment” banks that schemed and paid politicians to rewrite the laws so that they could become “too big to fail.” Starting in 2000, they could sell mortgages, then package them in bizarre ways and resell them as securities, and then sell insurance on those securities, and then sell swaps against the insurance so that they would supposedly have a net zero liability, all the while creating fantastic leverage and wealth out of thin air.

I don’t blame the credit rating agencies, Moody’s and Standard & Poor’s, for rating packages of crummy debt highly, instead of as the junk they were. And so on. All of it makes perfect sense under the umbrella that “greed is good.” But as we now know—and should always have known—greed is not good. Greed is a beast that must have reins and a bit in its mouth so as to steer it and pull it back when it gets out of control. It can be a powerful force for good, but only if recognized as ruthless at its core. Unbridled greed is as destructive to democracy and capitalism as is the communist idea of a command economy.

What is needed is a return to simple ideas of finance, living and law that are based on conservative principles. Don’t buy it until you can afford it. Keep a nest egg—save money. Eliminate Pick-a-Pay predatory systems, the jumbos, the interest-only, the ARMs and all the other creative mortgages. Hire auditors and bond credit raters from a pool, indirectly. Strictly enforce the percentage-of-income rules that used to apply to home ownership. Stop government from being a stepping stone to high-paying, influence-peddling jobs; make it hard to buy and sell politicians.

Regrettably, none of these things will happen on principle or by coaxing or altruism—the instant gratification horse has left the barn. It will take a hefty amount of careful re-regulation to rein in the extremes in greed that we have laid bare. This is not yet being done. Glass-Steagall must be reinstated—insurance-bank-securities dealers should return to a pre-1999 state, Antitrust must stop rolling over for ever-bigger mergers and quashing of competition, and companies should never get too big to fail. Commodities margins should be maintained at a minimum 30%, while “mom and pops,” massive speculative positions and swaps should be kept out of commodities deals. The value of “valuable liquidity” has clearly been exceeded in commodities markets.

And since no one else will say it, I will: Most countries have a minimum wage, it’s now time for a maximum wage. Additional wages could be paid, but it would have to be given away to charity. When 90% of a nation’s wealth is owned by 10% of its people, but only 1% of its wealth is owned by 50% of its people, it’s time to ask: Where does it go from here? Should a country continue policies that redistribute wealth upward to so few? Is 99% of the wealth owned by 2% of the population too much?

AIG (aka Altogether In Greed, Arrogant Insured Grifters, Again It’s Gone) has gotten the brunt of public outrage worldwide, deservedly so. Since all of the US bailout is supposedly about American jobs, it’s worth noting that AIG doesn’t employ even half as many Americans as does GM, yet GM has to grovel for a “mere” $13 billion, while AIG gets more than $170 billion without begging or even a plan.

All of the greed and largess of recent years has made a remarkably few people remarkably rich by policies of easy money, leverage, debt creation and diminished oversight. Now all of it has to be paid back by the taxpayers of the world who have been saddled with debt—and if you will allow me one last equine adage—rode hard and put up wet. Enough! 

.