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Posts Tagged ‘Economy’

Remember Barack Obama’s inauguration? An enormous number of people turned out to see the new President who had promised to save the nation. It was like the second coming of Abraham Lincoln, and after the devastation that had been wrought upon the country by George Bush’s inability to understand economics and the government’s  complete lack of oversight of the financial industry, people were breathing a sigh of relief that this new, stunning speech-maker had the vision, boldness, and determination to do whatever was needed to save the sinking ship. Unfortunately, we found out that the man who had been put upon a pedestal had feet of clay after all, and his greatest gift was sadly, speech-making. Remember the promise to close Guantanamo? We don’t hear much about that anymore, do we? Well, what about the economy? He fixed that didn’t he? I suppose, at least he stopped the car from going over the cliff – something George Bush could not do. But he ignored the advice of Nobel Prize winning economist, Paul Krugman and instead listened to Timothy  Geithner and Larry Summers, both of whom were part of the problem, because it was the policies of these people, and others, that directly led to the economic catastrophe. The result has been a tepid “recovery”, if you can call it that. 

And then there are the new rules about the government now having the power to arrest and detain indefinitely any U.S. citizen who it suspects might be a threat to the country. And – it is the military who will detain you indefinitely, without trial or any other rights guaranteed to all citizens under the Constitution. And Congress looks the other way. And the Supreme Court looks the other way. And everyone else goes back to watching football or baseball, soon forgetting all about these new, un-Constitutional rules. But the U.S. government hasn’t forgotten, and Barack Obama hasn’t forgotten.

Sure ,Obama has created a sort of National Health Care system – nothing that could compare with those of Canada or Europe or Asia, but he got what he wanted: the elimination of the possibility of being rejected for health insurance because of a pre-existing condition. I guess it was because his Obama’s mother had such difficulties with that issue that he wanted to make sure that U.S. insurance companies couldn’t do that to someone else’s mother or child. 

OK. So, Barack, is that it? Are you done? You seem to think the economy is OK. I don’t hear much more about health care reform. You nailed Osama bin Laden, you left Iraq, and you are about to leave Afghanistan. So….any other ideas? I was just wondering, how are you going to get unemployment down to a number like 6%? Is there a plan or do we just punt? By the way, how are things at Guantanamo? Oh, and can Americans who are picked by the Army be imprisoned there now? Or do they go to some secret military prison, never to be heard from again? I think it’s time for another speech.

And then there’s Romney. The father of Obamacare, he now vigorously denies being the parent of this odious thing that is the object of Republican loathing and retching. But he is. And he thought it was a good thing too. So, what is Romney’s plan – other than, “let’s not tax the job creators”. That would be him and his cronies, I suppose. Here’s the thing I don’t get: if Bain Capital takes over a company and makes it prosperous by outsourcing its jobs to China or India, how many U.S. jobs are they creating? Or, when he says he’s creating jobs, is he including all those jobs in China and India too? Here’s another thing I’m not too sure of: do the “job creators” really use their personal income to create jobs for other people? I mean, let’s say you work at Bank of America – that would be a good job, right? So, did you get that job because the President and CEO of Bank of America opened up his wallet and paid you a salary? That would be really generous, wouldn’t it? But, I thought they used the money from investors to create the jobs – you know like when you buy BoA stock, then they take your money (thank you very much) and they hire people. And if the Bank doesn’t do well their stock goes down and you lose your money. But the job-creating President and CEO still gets his mega-million dollar salary, doesn’t he? And my man Mitt wants the President and CEO to pay almost no taxes because he “created” your job. Awww…isn’t that special? I guess that how our Capitalist system works, right?

Actually, it doesn’t work quite the way Mitty would like you to believe. Basically, he just wants the rich folk, who already own the Congress and the Supreme Court to also own the Presidency. The really interesting thing is that about half the American people seem to want that too. Not sure why…wouldn’t it just be easier to have a king and get rid of the sham democracy? And Barack, well he just wants to be President – not too sure why, he doesn’t seem to have any ideas about what to do. He hasn’t mentioned a new scientific leap forward like the space program that John Kennedy started.  He hasn’t mentioned anything of the magnitude like the Interstate Highway System like Eisenhower started.  He hasn’t mentioned anything like the Great Society and Civil Rights for all that Johnson started – oops, sorry, that one really bothered the Southern half of the country, didn’t it? Remember Johnson saying that he thought he had just turned the solidly Democratic South to becoming a Republican voting block? Well, ol’ Lyndon was right about that, wasn’t he? Being a Texan, he would know, too.

Anyway, Obama seems plumb out of ideas, now that his single idea of “no pre-existing conditions” has been enacted. I guess he’s just exhausted. And Romney, the opportunist, venture capitalist? Ahh, no ideas there either! At least he’s not talking about any…. Of course not, those venture guys aren’t going to share their secret plans with you or me – at least not the real plans.

So where are we? Obama did a lot of things we never expected and didn’t do a lot of things we expected. We can probably expect the same from Romney – so, it really doesn’t matter which is elected because they will wind up just doing whatever they want anyway – which will have little to no relation to their campaign promises.

So, wouldn’t it be simpler to just have a king?

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As another nation, Ireland, now peers into the abyss of economic chaos, once again governments are being called upon to bail out the banking industry. Does this sound vaguely familiar? Of course it does . We have been hearing this tune for the past couple of years, perhaps the most loudly in the U.S. where those bastions of our economy like Goldman Sachs, Bank of America, and many more were once facing oblivion and financial Hell. A fate, perhaps, well deserved – but avoided by the intercession of our government. This act of semi-divine intercession is about to be repeated in Europe as that which must not come to pass is prevented from coming to pass.

Of course, I am referring to the collapse of the banking industry in Ireland. The current Irish government, similar in philosophy to the Bush/Cheney Republicans of the U.S., enjoyed the ride while they could. The run up in housing prices, the run up in wages, the run up in credit. It was all a bubble, no different from America’s bubble and equally unrecognized by the Republican economic philosophers at the time. Everyone thought it could go on for ever, except for a few economists. America had its Cassandra economist, Roubini.  Ireland had its Cassandra, McWilliams. Both were right. They called the collapse long in advance, but neither government will admit it, and neither will seek the advice of these bright economists to this day.  Why? We can only wonder.

Here’s another “why”. Why did the U.S. government feel the need to bail out the banks and why does the European Union feel the same? Does anyone know how to spell oligarchy? We are led to believe that the banks are the sine qua non of our economy. The loss of our banks would spell doom for civilization as we know it. Really? Just the banks, I suppose.  Oh no,wait. General Motors too. We couldn’t live without them either. But what about the thousands of individuals who lost their homes? What about the millions who are out of work? Do we not need them also? Apparently not. At least not with the same sense of urgency as the banks.

So let’s take a look at the banks. What, in essence, do they actually do? Well, at their core, they are a source of money. They make loans that people and businesses need in order to carry on their lives. But how does that work, you say? Here’s an example. Suppose old J.P. Morgan had a lot of money (which he did) and he decided to use that money to open a bank (which he did). You go into his bank and you borrow $1,000. Great! Now you only have to pay it back in easy installments of $49.99 for a period of about twenty – two months. Twenty-two? Wait, shouldn’t it be about twenty? Ah, we’re forgetting the interest of about $100, aren’t we? See, you borrow $1,000 but you have to pay old J.P. back $1,100. That’s how he makes money. As Ebenezer Scrooge said, “It’s business.”

But, here’s where the magic comes in: After you pay back old J.P. his money plus interest, he pockets his profit and then what does he do? He loans out that same $1,000 again! Yes! Isn’t that amazing? J.P. can loan out the same money over and over again and make money each time he does so, and his $1,000 never wears out! The best thing for old J.P. is that he doesn’t have to do any work to make money. He doesn’t produce a product, he doesn’t farm any land, he doesn’t build anything, he doesn’t even sell anything. Being a banker has to be just about the best job in the world because you don’t have to work to make money! Even better, bankers make more money than anybody and if they screw up and made stupid loans where they don’t get paid back, the government gives them all the money they lost so they can start lending all over again.

Now imagine you were a banker – like those Payday loan guys. You could loan out money  at $300% interest and get it back in a week! Or, what about if you were a different kind of banker – a credit card banker? You could loan money at 30% interest and it would take years and years for people to pay you back – maybe even a lifetime. Of course you would get your principal back pretty soon, but the poor credit card holder will be paying interest for a semi-eternity. But that is the beauty of the system – you can then loan out the original amount over and over again! And you don’t have to take risks like building televisions or cars that might not sell, or refrigerators that might be defective and people want their money back. No, banking is the ideal business for making tons of money – and the best thing of all is that our governments won’t let you fail! Who could want anything more?

How about the American people? Wouldn’t we want something more, something different? One might think so, but I don’t hear a lot of people complaining about our banking system. I guess that’s because if we change anything it would make us communist or something even worse – just like with health care, and public schools. Still, I have to wonder…why can’t our government run the entire banking system like a utility?  Do we really need privately owned banks that produce no tangible product and charge the highest interest rates possible? Why can’t we just get loans from a government bank at 0% interest? Why not? It would be our money anyway – you know: our tax money. Isn’t that a good use for our tax dollars? If the government, via the Federal Reserve, can print all the money it wants and then give it to the banks at extremely low interest rates, why can’t the government do the same thing for the citizens and eliminate the middlemen bankers who bleed us and our economy while doing no productive work at all? Is it really so un-American to even think about a redo for America’s banking system? Think about it….

Why wouldn’t it work?

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One year ago, the entire American banking system was on life support.  It was only through the intervention of the Federal government, using the promise of a semi-infinite supply of tax dollars that some of the banks survived.  If this infusion of billions and billions of dollars of cash had not been made our entire banking system would certainly have collapsed. The question we need to ask – but we haven’t – is this: is there a message here?

Thanks to the extreme measures the Federal Government took with the TARP program we still have some functioning banks, but a more important thing to consider is this: do we have a functioning economy?  The answer to that question is to be found in the history of the Dow Jones Industrials average for the past forty years.  The thing to note is the behavior of the Dow before the year 2000 and after the year 2000.  Notice anything? How about those two massive bumps?  I mean the one about ten years ago and the one a year ago. You know what those are? Those are bubbles, the signs of an economy that is being artificially and irrationally stimulated – an economy on drugs.

The other thing to note is that Bump #1 didn’t start in the year 2000, it started long before, its roots were in the 1980’s. Until then the Dow had been pretty tame, slowly inching upward ever since World War II. So what happened in the 80’s? The government created 401k plans and artificially stimulated massive investment in the stock market by average people who would have otherwise never invested in the market.  The same thing happened again with the 529 plans.

However, for the people who run our government that wasn’t enough. So they changed the tax laws again to provide a massive income tax credit for anyone who sold their house – and they made a provision so that you could do that every two years. That artificially fired up the housing market.  Then we had also the tech boom – a boom that the Fed actually opposed.  They didn’t like all these upstart companies on the NASDAQ sucking up all the investment money from the old money firms that made up the DOW.  So, the Fed killed Tech by ratcheting up interest rates until Tech collapsed.  After Tech was a smoking ruin, the Fed drastically cut interest rates and thereby fueled the housing bubble even more.

The thing to realize is that our economy, for the past twenty or thirty years has been a dying economy, kept alive by infusions of money from unsuspecting citizens contributing to their 401k plans and their 529 plans. It has been kept alive by people buying and flipping houses every two years.  It has been kept alive by one scheme or another while the true engine of our economy, manufacturing, was exported to China.  But nobody cared because you could buy Chinese stuff cheap at Wal-Mart and everyone was doing well in the stock market or the housing market.

Well, the party’s over, isn’t it?  True, the banks are alive again, having dined on the lifeblood of the taxpayers.  However, there are very few green shoots out there. Does anyone have an idea where our new economic engine will come from? Is it possible for our government to think of another economic scam that will power the country for another ten years? Or, are they running out of ideas?  Does anyone really think we can get by on our American manufacturing capability?  Let’s face it we just don’t make enough stuff anymore.  The future of manufacturing, at least for the next twenty years or so is in Asia, not North America. So what is our government thinking? Well, since the only thing they saved is the banks, one must assume that they figure that’s where the money will come from – i.e. lending at interest. But, let’s face it, the lendees are unlikely to be Americans, are they? No, the money (that’s your tax dollars that you gave them as TARP rescue money) will go to developing countries so they can develop their businesses and then pay back the banks at high interest rates.

Meanwhile, back at the ranch, what can we expect?  The truth is: not much. Our Capitalist engine doesn’t have a transmission anymore. In fact we lost it a long time ago.  We’ve just been coasting along.  The thing we don’t want to…don’t like to…admit, is that we are witnessing the failure of Capitalism.  Unregulated Capitalism – something we have had from many years – soon morphs into Predation: the strong preying on the weak. We have witnessed that. The Predators in our society, i.e. the financial community, have feasted on us.  There’s not much blood left to drink anymore.  They’ll move on, looking for victims in other countries – still propped up by our government.

Here, in the USA, we won’t admit Capitalism has failed – we can’t – it’s like denying religion or something. It’s like being unpatriotic.  It’s like stepping on the flag.  Capitalism is sacred in America – beyond criticism. It’s hard to figure why – after all, can’t we all see that it doesn’t work?  We can’t we simply acknowledge that it is an economic theory and system that just doesn’t work?  I know, I know ,we’re all afraid of the other two “isms”, Socialism and Communism. So we stick with our belief in Capitalism, even though the wheels have come off and we no longer have an engine for our economy – we still believe. We believe. We believe even though we are in a screaming nose dive.

If the past twenty or thirty years have proved anything, they have proved that unfettered Capitalism is a disaster. For proof just look at your bank account.  If we can’t bear to consider Socialism or Communism, then there is only one solution.  We need a new “ism”.  Call it Americanism if you like.  We need a new approach to economics. We need creative minds in our government who can see beyond the payoffs from lobbyists and the pressures of the fat cat bankers.  We need a new voice in economics, a voice of intelligence who can lead our economic recovery with a sound understanding of what went wrong. We don’t need idealogues, whether they are Capitalists, Socialists, or Communists; we need realists: practical, intelligent people who can understand what is broken and fix it. We simply need a new way of running our economy, a new economic theory for the 21st Century.

The question is this: do we have the intelligence and the courage to change the way we do business? Because if we don’t, it won’t be long before we don’t have any business.

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In 1776, a group of revolutionary minded people, many of whom were Freemasons, created the United States of America.  This new country was to be a break from the past. The leaders of the movement: George Washington, Thomas Jefferson, Benjamin Franklin, John Hancock, and many more were Freemasons.  They were informed and inspired by some of the tenets of the Freemasons, tenets that were at odds with the established manner of world governments at that time.  Many of the governments of various European countries had a long established and close relationship with one branch or another of the Christian church.  Most of the governments had kings or queens, whose right to rule was based upon their ancestry.  The American revolutionaries had a different concept in mind – a democratic, elected  government that had no association with any religion.  It was a daring concept, and a complete break from the European view of government.  These Freemasons even documented this break from traditional government when they made the Great Seal of the United States and when they printed the one dollar bills that we have today. One each of these bills are printed the words: Novus Ordo Seclorum, i.e. A New Order of (0r for) the Ages.

The New order that was founded by these Freemasons created a Republic where the principal ideas and visions were centered on individual liberty.  A key concept was that the government was not made up of the elite or the wealthy or the influential or the religious leaders. The government was changed regularly, based upon a schedule of elections, and anyone could become a member of the government – as long as they could convince their friends and neighbors to vote for them.  This concept of a republic also implied something else, there would be a distance, a division, between the will of the wealthy and the will of the government, i.e. the will of the people.

Today, as our economy lurches towards a dubious recovery from a worldwide economic meltdown, we can observe that there has been a key change in the Novus Ordo that was created by the Freemasons.  There is no longer a distance between the government and the wealthy. Indeed, it was the closeness of the wealthy to the government that directly led to the meltdown.  It was the money in the pockets of the our governmental representatives that led to the relaxation or the complete annulment of laws that had protected us from nefarious economic practices by the banking industry.  It was the government’s Securities and Exchange Commission that looked the other way when Bernie Madoff ran his gigantic Ponzi scheme.  Over the years, the wealthy had established a cozy relationship with the representatives of our Republic – all for the purpose of gaining more money for themselves and less for the average citizen.

Today, the wealthy have almost a stranglehold on our government.  Some would say it is more than that.  They say we have an oligarchy – a situation where hidden, wealthy people rule through a puppet government and all laws are made to benefit the small, wealthy elite.  All you need to do is look.  Our American companies have become multinational. Our once good paying jobs have been moved to other countries where the cost of labor is much less.  Our government has “reformed” our tax laws allowing millionaires and billionaires to pass on their fortunes from one generation to the next while not a cent of tax is imposed on this transfer of wealth.  The wealthy have used the government to create income tax cuts for themselves and income tax increases for the middle and lower class.

The New Order created by the Freemasons is fast dying.  Today, our multinational companies, owned by the wealthy, fabricate our goods in China- creating no jobs for American workers – except those who work for Wal-Mart.  Our multinational companies pay little or no tax to our country, because they are officially located in the Bahamas or some other idiotic legal location.  And our government just winks and says, “OK”.  Our country has been transformed without our even realizing it.  We have a new world order that we never saw coming.  In this new world order, it is the wealthy who rule and it is the poor who pay taxes.  In this new world order everyone can vote, but it hardly matters who you vote for. Money flows like water from the mighty Mississippi into the pockets of our Congressional representatives who pretend to ask for our opinions but then vote the way they are told.

The Novus Ordo Seclorum of the Freemasons has gone, and we didn’t even see it go.  We can only sit and watch, dazed, as the government tires to stimulate a dying economy, knowing in our hearts that we are only surviving on financial life support.   How can our economy ever rise again when the wealthy have sent all our jobs to China?  How can our children ever compete again when our schools can’t compete with those in Malaysia or Norway?  How can we lead and inspire the world when so much of our television and radio news is now filled with the lies of the wealthy media owners, propaganda, and gross distortions of truth?

The new order of the world is here.  It is the multinational companies of the world who now make the economic rules. It is China that will be the world’s supplier of almost everything anyone needs.  We are to be the consumers, borrowing money from banks in order to live – while living forever in debt.  Meanwhile the people of the wealthy class return to their rightful place: Rulers of the World.  And the elected leaders of our Republic grovel before them and do their bidding – all for a pocketful of change.

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Failure is very much in the eye of the beholder, because whenever there are winners there are also losers.  Winners always think that things are just great, but the losers often have a different opinion.  If there are lots more winners than losers we can usually say that something is a success, and when things don’t turn out so good and there are lots more losers than winners we can judge something to be a failure.  It seems that an awful lot of people in Europe think that American Capitalism is a failure these days, and they intend to express their opinions to President Obama when he visits London on Tuesday.

There is little doubt that the present worldwide economic catastrophe has brought grief to millions, if not billions of people, and there is little doubt that the blame for the meltdown of the world’s economy can be laid at the doorstep of no-rules, Capitalist America.  However, the question we should be asking is whether this current situation is a one-time thing or is it sort of like a chronic disease you have that remains silent for years and then, every once in a while, goes berserk and the your body is covered by oozing sores.  It’s a good question because, if we care to glance back in time for a moment we can see that we have had similar economic catastrophes in the past  – and all have been linked to no-rules capitalism.

It wasn’t for nothing that the richest men of the 19th century, like John D. Rockefeller, Cornelius Vanderbilt, Jay Gould and many others were called “Robber Barons”.  All of these people built up huge fortunes because there were no regulations that could control their activities.  The robber barons built monopolies and squeezed out their competition and then charged whatever price they liked for their goods or services.  The country utterly depended on them – they were “too big to fail”, because the loss of any of these companies would spell ruin for America.  Sound familiar?

It might be helpful to step back for a minute and consider the words “American Capitalism”. The reason they need to be considered is because there are a lot of wealthy people out there, like John McCain, who use these two words as if they are interchangeable.  If you ask John McCain, or Rush Limbaugh for that matter, I would guess they would tell you that to be an American is to be a Capitalist.  Capitalism is the American way – it’s who we are.  Actually that isn’t exactly true.

If we look at the very first English settlers who came to America, the Pilgrims in Massachusetts and the colonists in Virginia they were far from being Capitalists.  These states, and others were called “commonwealths”, i.e. the governments existed to promote the common good. In New England the early towns all had areas of land called the town common where anyone could graze their animals – the land was owned in common. Not very Capitalistic is it?  The first battle of the American Revolution was fought on such a “Common”, Lexington Common, also called Lexington Green.  So, I have to ask John McCain and his buddies: were the Pilgrims actually un-American?  Weren’t they more like Socialists, and doesn’t that sort of make them equal to Communist Pinko Russians or something?

When did “no-rules Capitalism” take on the equivalence of the word “American”?  It’s certainly not part of the philosophy of the founders of our country.  It is only in the 19th Century, with the rise of the robber barons and the lack of governmental controls that no-rules Capitalism began to appear in America.  It seems that it rose not by design but by default – no one realized at the time that rules and regulations might be required for some industries because they could easily become monopolies.  No-rules Capitalism reared its head again shortly before the Great Depression when people were able to buy huge amounts of stock on margin without having the assets to cover a loss.  This no-rules environment led directly to the stock market crash and the following Great Depression.

When Ronald Reagan became president he set about dismantling the government in the belief that “government is the problem”. As I noted in an earlier blog, he completely deregulated the airline industry with the result that today our airlines are barely surviving, our commercial airplane industry is barely hanging on, and while the wealthy enjoy the luxury of their corporate jets, the average person detests flying because of the lack of legroom, food, blankets and any other creature comforts that in the past made transcontinental travel enjoyable.

Now we are embroiled in a monumental economic disaster of such magnitude that only the printing presses of the United States Treasury can save us or the world.  Of course the bill will come due for all this money – and guess who will pay? Not the 21st century robber barrons; no, it will be the taxpayers – the common people.  The common people of the commonwealths of America have been indoctrinated to believe that no-rules Capitalism is the definition of “American” and anyone who questions this ludicrous fallacy is un-American.  The truth is that no-rules Capitalism only serves the ultra-wealthy, the people who can manage to seize control of a valuable resource and build monolithic industries that exterminate their competition.  In the end, no-rules Capitalism morphs into a giant game of Monopoly – and that is not capitalism anymore – nor is it American.  It is a tyranny, a tyranny of oligarchs, by and for oligarchs, masquerading as freedom.

The message the people of Europe will soon be shouting to President Obama is this: the restoration of power to the ruling oligarchy is a mistake. No-rules capitalism has again and again been shown to be a dangerous and unsuccessful economic system.  If there is one guiding principle that defines the true American philosophy of the founders of this country it is not total Freedom, it is Liberty.

John McCain, Rush Limbaugh, and their wealthy Republican buddies, not to mention the oligarchs, should learn the difference.

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Dear TV Network News Financial Analyst,

I am a faithful watcher of your news network and I particularly enjoy hearing your analysis of the terrible events that are happening in our business markets. Because I have complete confidence in your views I wonder if you might answer just a couple of questions I have about my 401k portfolio?

1. I have really taken your message to heart about my 401k; you know, the one where you say “buy and hold”? I think that is really good advice because the worst thing to do is to panic and sell just because everyone else is. I am now in my “hunker down” mode, and I want you to know you can count on me – I won’t sell anything for years because I trust your judgment.  Here is a list of my current stock holdings, note that I have heavily favored financial stocks because they have out-performed so well in the past:

Lehman Brothers

Indymac Bank

Washington Mutual Bank

Wachovia Bank

Bear Stearns

Merrill Lynch

AIG

Fannie Mae

Freddie Mac

To tell you the truth, with all the bad financial news these days, I’ve been afraid to look at my 401k statements for the past few months, but I am sure we can ride this out with the buy and hold strategy you keep talking about. 🙂

2.  I do have just one other question. You know how you have that chart that shows how if you invested $1000 in the DOW thirty years ago you would have about a trillion dollars now if you just stayed invested? Well, I was wondering about one thing. I know that one of my favorite stocks, AIG, had been a part of the DOW, but just recently, after it’s unfortunate, but I’m sure temporary slip, it was removed from the DOW!!!

I noticed that during the last few weeks that AIG had been a part of the DOW the DOW average had been really dropping fast, but now that AIG is no longer part of the DOW it is doing a lot better.  I was just wondering if you thought that there was any relationship between the removal of tanking stocks from the DOW and then replacing them with stocks that are doing really well has any relationship to the way the DOW has historically done so well over the last thirty years?

Thanks for you help. I really appreciate your insights.

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Here’s a question for you: when a mortgage melts down, where does the melted money go? Is there some sort of giant drain in the economy where it all flows? The experts are saying that before the current meltdown is finished the total losses, from the banks alone, never mind the poor guy whose house was foreclosed, will be in the trillions of dollars. That is a virtual flood of melted money. But, I ask again, where does the money go? Are there only big losers in this process or are there big winners too?

If you read one of my previous blogs you might remember that I had mentioned that there is a law of conservation of energy in physics. I am willing to bet there must be a similar law of conservation of money in economics. Let’s face it the money went somewhere; it didn’t just vaporize, right? OK, now for my second question. I turn once again to the immutable laws of physics, Maxwell’s equations to be precise. Remember the one that says Div B = 0? No? Really? Well, let me refresh your memory. It is interpreted as meaning that there is no such thing as a magnetic monopole. In other words for every magnetic north pole there is a corresponding south pole, and vice versa. Taking this law and confidently applying it to economics, there must be a law that says if someone loses a bunch of money then there is somebody else who gains the same amount, and vice versa.

I thought it might be interesting to try to figure out who are the big winners and losers in the great mortgage meltdown of 2008. Let’s see if we can understand this by looking at the purely hypothetical case of Fred Smith. In 2006 Fred attended a seminar entitled “How to get rich buying and flipping houses”. Fred learned that he didn’t need to have any money, a job, credit, or anything, except a pulse, in order to get a loan from his friendly neighborhood bank’s loan officer. That’s because the loan officer had gone to the same seminar Fred had gone to, and it was common knowledge that everyone could make a ton of money by buying and flipping houses. Our friendly loan officer was happy to OK a loan for Fred of $300,000, the full purchase price of the house, and Fred moved in a week later. So where did the money go?

Well, it didn’t go to Fred, except for about one heartbeat. Then it went to the contractor who built the house who turned around and banked some of it in his own, ever-growing bank account, and then gave the rest to his workers who built the house, a few of whom were actually American citizens. Eventually this money found its way to Wal-Mart because these workers needed to buy school clothes for the children and in turn Wal-Mart sent the money to China, after taking a nice profit and putting that in their bank account. The Chinese factory owner took his profit and banked it and then paid his Chinese workers who put their tiny paychecks in their bank accounts.

About six months later, Fred, who hasn’t sunk a dime into the house and has never made a mortgage payment and who hasn’t been able to flip the house for $400,000 learns that the bank is foreclosing and taking possession of the house so they can sell it and get their money back. Except, it’s not the bank he borrowed the money from that is foreclosing, it’s a big European Bank who bought the mortgage, thinking it was AAA rated. It turns out that this was only one of about 10,000 such mortgages this bank bought.

Unfortunately, after Fred is booted from his house, the big European Bank is not able to sell Fred’s house, nor can it sell the remaining 10,000 houses it has foreclosed upon. This bank now has huge losses on paper and the people who have savings accounts in this bank get scared and start withdrawing their money and the bank has to get rescued by the national government, which promises to pay all the bank’s debts. The government raises taxes on everybody in the country and pretty soon the bank is back on an even keel and everybody is happy, except that the citizens of that European country will be paying higher taxes for about…oh…let’s see…the rest of their lives. Meanwhile, don’t worry about Fred because he was able to get another loan and is now living in another house.

So is that what happened? In some cases, yes, but in other cases, the U.S. banks held onto the less toxic mortgages themselves or sold them to other U.S. banks, or more likely sold them to those great big mortgage magnets Fannie Mae and Freddie Mac. Can you see where this is going? As we all know Fannie Mae and Freddie Mac now own a ton of these toxic mortgages. (That is a new mortgage classification. The classes go from AAA to C and just below that they are officially called Toxic). The money that Fannie and Freddie paid to the U.S. banks has flowed into the U.S. economy as explained above, in enormous amounts, and everybody whose hands the money passed through took their cut starting with the contractor, then to his employees, to the stores they shopped in, to the factory owners in China, then at last to the low paid Chinese worker who banked his rewards from the Global Trickle Down Economy. Now, as Fannie and Freddie are looking at staggering losses we can take comfort in knowing that it won’t be the stockholders of these organizations who will bear the brunt of the losses. I mean, why should they, right? Our far-sighted government recently took steps to make sure that our government stands ready to bail out Fannie and Freddie with the semi-infinite resources of the U.S. Treasury. Oh, by the way, do you know where the U.S. treasury gets its money from? Yep, that’s right, but let’s keep it to ourselves, OK?

You know, it’s interesting, I saw a full-page ad in the paper today. It said that if I attend a seminar I could learn how now is the time to make money in real estate by buying foreclosed properties and fixing them up and selling them. I’m thinking this might be the time to buy – I mean, after all, I don’t see how I could lose. What do you think?

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