Thursday, November 6, 2008

While we were sleeping...

Last week I was so spun up by the impending election I couldn't sleep. By election night I'd accumulated at most 9 hours of sleep over the previous 4 days. While switching channels through the parade of network anchors droning on in front of the electoral map I dozed off for a bit. Suddenly I sat bolt upright as my subconscious mind processed these words: "Barack Obama has won!" I started to cry. I could see Oprah was crying. People in New York City were crying. People in Chicago were crying.

I think a collective sigh of relief was shared by everyone who voted for Barack. What I feel now is that we can't slack back and expect him to do all the heavy lifting. There's too much that needs to be fixed.

During my sleepless hours I've been working on a blog observing how the real estate meltdown impacts my hometown of Phoenix. Until I complete that here's some food for thought regarding the ongoing global financial mess. Ellen Brown's book, The Web of Debt, describes some recent history for our neighbors to the south when they received a "bailout". Though a wealthy country with its own oil reserves Mexico got snared in international currency traps that cost them big-time:

In 1994 when President Ernesto Zedillo suddenly announced a 13 percent devaluation of the peso, the peso eventually dropped by 300 percent – 15 times the predicted fall. What followed sounds familiar (my bold):
The Mexican bailout was engineered by Robert Rubin, who headed the investment bank Goldman Sachs before he became U.S. Treasury Secretary. Goldman Sachs was then heavily invested in short-term dollar-denominated Mexican bonds. The bailout was arranged the very day of Rubin's appointment. Needless to say, the money provided by U.S. taxpayers never made it to Mexico. It went straight into the vaults of Goldman Sachs, Morgan Stanley, and other big American lenders whose risky loans were on the line.

Straight into the vaults? Gosh, that sounds familiar. Huh. Hey, wait a minute! Is that the same Goldman Sachs where Henry Paulson worked until recently?

And now consider what happened next:

The austerity measures that the U.S. government and the IMF forced on Mexicans in the aftermath of last winter's assault on the peso by short-sellers in the foreign exchange markets have been something to behold. Almost overnight, the Mexican people have had to endure dramatic cuts in government spending; a sharp hike in regressive sales taxes; at least one million layoffs (a conservative estimate); a spike in interest rates so pronounced as to render their debts unserviceable (hence El Barzon, a nation-wide movement of small debtors to resist property seizures and to seek a rescheduling of their debts); a collapse in consumer spending on the order of 25 percent by mid-year; and, in brief, a 10.5 percent contraction in overall economic activity during the second quarter, with more of the same sure to follow.

What we experience will soon feel like austerity cuts. I must have remarked a dozen times in recent weeks on the disconnect between prices and value here in central Phoenix. Downtown homes are located close to the city government, public parks, shopping centers, and a new light-rail transportation system. Yet in many cases these houses are selling for pennies on the dollar. Ellen Brown notes: "As in the U.S. depression of the 1930s, the actual value of Mexican businesses and assets did not change during this speculator-induced crisis." Welcome to our newly deflated market and the wondrous effect this will have on government revenues.

Describing the Mexican bailout as the Tequila Trap, Asia Times writer Henry C.K. Liu mentions some now familiar names in an article titled "The Fed and the Strong Dollar Policy":

The ESF (Exchange Stabilization Fund) was the conduit used by the Clinton administration to provide assistance to Mexico to avoid default in the peso crisis of 1994 to prevent huge losses to US lenders after Congress rejected the proposed Mexican Stabilization Act. The crisis was triggered by an abrupt devaluation of the Mexican peso by newly installed president Zedillo to reverse the former Salinas administration’s tight money policy...

Bear Stearns chief economist Wayne Angell, a former Fed governor and advisor to then Senate majority leader Bob Dole, first came up with the idea of using ESF funds to prop up the collapsing Mexican peso. Bear Stearns had significant exposure to peso debts that would cause significant losses in the event of a peso collapse.
Senator Robert Bennett, a freshman Republican from Utah, took Angell’s proposal to the Fed Chairman Alan Greenspan and Treasury Secretary Robert Rubin, both of whom rejected the idea at first, shocked at the blatant circumvention of constitutional procedures that this strategy represented, which would invite certain reprisal from Congress. Congress had implicitly rejected a rescue package in the form of Mexican Stabilization Act earlier that January when the initial proposal of extending Mexico $40 billion in loan guarantees could not get enough favorable votes. Greenspan advised Bennett that the idea would only work if Congressional silence could be guaranteed. Bennett went to Dole and convinced him that the scheme would work if the majority leader would simply block all efforts to bring this use of taxpayers’ money to a vote. It would all happen by executive fiat.
The next step was to persuade Dole’s counterpart in the House, Speaker Newt Gingrich. The two congressional leaders consulted several state governors, notably then Texas governor George W Bush, who enthusiastically endorsed the idea of a bailout to subsidize the border region in his state. Greenspan, who historically opposed bailouts of the private sector for fear of incurring moral hazard, was clearly in a position to stop this one. Instead, he used his considerable independent power and congressional influence to help the process along when key players balked. The controversial 2008 bailout of Bear Stearns by the Fed was not the first.
Looks like practice makes perfect, or maybe not.
Henry C.K. Liu goes on to observe this dangerous trend to the Fed's behavior:

Financial markets are not the real economy but its early dawn shadow. The shape and fidelity of that shadow are affected by the position and intensity of the light source that comes from market sentiments on the future performance of the economy and by the contour of the ground shaped by data on leading economic indicators. Yet the institutional bias of the Fed over past decades has been drifting toward more allegiance to the speculative effects on the financial markets than to the health of the real economy, let alone the net benefit to long-term investors or the welfare of all the people.
The Fed's liquidity joy ride has been to reward speculators rather than investors, and to favor transactions rather than growth. Further, the economy is not homogenous throughout. In reality, some sectors of the economy and segments of the population, through no fault of their own, may not, and often do not, survive the down cycles to enjoy the long-term benefits, and even if they should survive the down turn, they are permanently put in the bottom heap of perpetual depression. Periodically, the Fed has failed to distinguish a healthy growth in the economy from a speculative debt bubble in the financial markets.
It seems if you feel like you've been punked by the Federal Reserve and the banking elite, you're in good company. Misplaced faith that we are uniquely blessed by Providence has led Americans to be complacent as a financial storm built up towering waves on our own shores. We didn't see it coming our way because we didn't think it could happen here.

President Obama will have to deliver the wake-up call that some Americans still won't want to hear. Fortunately it is clear he knows that the young people are already wide awake and listening.

To our conservative friends I would say clinging to the appearance of success isn't going to help us now. But I do see real value, not just in homes, but in our creativity and productivity, struggling to survive beneath the weight of the speculators' economic rubble. We need to rescue that value now before it is suffocated by confusion, indifference, or despair.

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