Tuesday, November 25, 2008
We All Pay A Big Price
Unfortunately, talking about economics is very different than talking about two plus two or gravity. If a mathematician or a physicist appeared on one of the many news shows on TV and said that two plus two is no longer four, or that the law of gravity is suspended during the present administration, most people would say something out loud or under their breath, but few if any would just sit there and accept it. This is not the case when it comes to economics or for that matter a discussion of the present financial and economic crisis.
For the most part, the talking heads on TV news programs are just that, talking heads. They pick up some of the jargon and they ask sometimes a few very good questions, but for the most part the politicians that appear on their shows and talk about economics, the markets and regulations that have been “burned”, don’t know what they are talking about, or, have a political philosophy that they cling to, regardless of how stupid that philosophy might sound, when measured against the reality of the present financial and economic situation.
If I was the producer of these TV news shows, I would add in addition to the political analyst, an economist with a knowledge of banking and the markets. Unfortunately, Paul Krugman has another job teaching economics at Princeton University, or he would be my first choice, and I would tell him not to pull his punches. When Krugman is on one of the TV news shows he is so careful to be polite. TV news needs more not less economic commentary from people who know economics. Politicians and political analysts do not know economics, but they might think they do.
There are still people appearing on TV news show telling the audience that regulation is the problem and no one is brought on to rebut this nonsense.
Building a house with 50% fewer supporting studs than structurally required and then placing a heavy tile roof on top of such a structure and being surprised when the weight of the roof brings down the house, is about what we have in our surprise of the shape of the present financial crisis. The asset-backed bond market was built on bond ratings that did not support the “weight” of these poor quality bonds. When the bondholders ran for the door to sell their asset-backed bonds, the buy side had no interest in bidding on the junk they had sold.
They, the TV commentators, talk about Wall Street and Main Street, as if they are two separate places, is a little misleading. Wall Street underwrites the securities and sells them, and Main Street buys them. The people on the sell side of the investment business have always thought they were smarter than the people on the buy side. Wall Street sells on the “ask” side of the market and buys on the “bid” side, while Main Street buys on the “asked” side and sells on the “bid” side. The difference is the spread that the Wall Street firms, the brokers and traders, make on one side of the transaction. They put up their capital, the firm’s capital, to position their inventory. When their inventory becomes almost worthless, they need a bailout.
“Burning” up the guidelines that were set down in law in the 1930’s and 1940’s that dealt with investment securities has lead to the present financial crisis. Anyone who tells you that regulation, oversight and transparency is not needed in the investment securities industry is full of shit. Much of what has happened to this country, its people and their economy could have been avoided had the current administration and Congress had an understanding of financial markets and a little more knowledge of economics. Stupid people pay a big price for their stupidity, and for all of us, it is running into the trillions.