Tuesday, November 11, 2008

By Chester Campbell

Some of my colleagues here have been expounding on hot topics of the day, like elections and gun control. But nothing is hotter these days than the economy. Unfortunately, the guys in Washington and on Wall Street don’t seem to get it that our problem is we’ve been addicted to debt for far too long. They want to add more. The question for writers is what’s the fallout going to be for us?

I’ve been following a financial advisor who paints a scary picture of what lies ahead. He says American consumers have the right idea about the problem. They want to get rid of debt, curtail spending, and save more. But when they do, our leaders in Washington scream:

“No! Don’t do that! Borrow and spend more so we can keep the economy going.”

He says most investors realize the error in their ways. They got involved in risky stocks and new-fangled securities, and their response is to head for safety. But Wall Street’s reply is:

“No! Don’t do that! Stay invested, support the market, so we can keep the party going.”

He says bankers are getting the same push from government authorities, who say:

“Sure, you want to stop making loans that look risky. That’s being prudent. But now you need to create more cheap mortgages for high-risk homeowners, keep those credit cards rolling out, and make cheap commercial loans to whoever asks.”

So far, the U.S. Treasury and Federal Reserve have loaned, invested or committed nearly $2.7 trillion to bail out our troubled financial system. But that’s a drop in the bucket compared to the $51 trillion of outstanding interest-bearing debts in the U.S., or the estimated $596 trillion in worldwide derivatives (no one knows how much because there’s no one minding that store).

This financial analyst points out the Treasury has announced plans to borrow a record $550 billion in the fourth quarter, but Goldman Sachs estimates it will soon need to borrow $2 trillion to finance the deficit, fund purchases of bank assets and roll over $561 billion in maturing securities.

The government can’t print money fast enough to get out of this mess. If it tried, investors and lenders, fearing currency debasement, would dump bonds and loans on the market, pushing their value down, making Uncle Sam need to borrow more.

He says the government will ultimately have to wave the white flag and admit it cannot prevent the unpreventable. The scary part is that so far he has been right about what will happen. He called the housing collapse ahead of time and the subprime loan debacle. His position is that we should let unsound businesses fail and provide funds for promising new companies to grow and hire workers and get the economy moving again. In the end, he contends, America should come out better than ever.

So where does that leave the market for mysteries? He makes no predictions on that, but I think the conventional wisdom is that in perilous times, people want to escape reality by reading fiction in which the world is set right in the end. That’s where mystery writers come in.

We have a corner on that market.


Ben Small said...

Chester, you beat me to it, the subject that is. Good job.

I was talking to Ken Fisher's people yesterday. Fisher runs a huge financial management company, the first recommendation for money management from Schwab, and he's written the investment column for Forbes for over twenty years.

They feel, like me, that the bailout wasn't necessary at all, that we should have let the markets absorb the losses. Our financial system is strong enough. And the companies that are being bailed out, allegedly, since there's no report from Treasury and apparently little if any accountability, are international companies, but it's the U.S. taxpayer who's paying the freight. And what good did it do? Banks and bonding companies are still tight on loans. My son is a contractor. He can't get bonding on public projects because bonding companies don't want the financial exposure. Evidently, with the influx of cash, banks and financial institutions are considering their investments, not plunging new money into the system.

I don't think our leaders have a clue what to do. It's foolish to blame the president; Congress has control of the purse strings and the economy. It's Congress which dropped the ball on oversight and outdated regulations. And with all the supposed transparency we had built into our system, why was there no early notice?

Just wait until the plaintiffs' lawyers start filing their lawsuits. Talk about expense. The transaction costs alone will exceed any payout.

So glad you posted this.

Chester Campbell said...

I agree, Ben, it was primarily Congress that set us up for the fall. Republicans had a bill to rein in Fannie Mae and Freddy Mac in 2005, but the Democrats, led by Senators Schumer and Dodd and Rep. Barney Frank, voted it down. Now they're the guys running the show. Who knows what will happen next.

Jean Henry Mead said...

Amen! It's going to get a lot worse before it gets better, if it ever does.

Beth Terrell said...

You are so right, Chester. If only Congress would get their fingers out of the pie and let things unfold, I think this mess would get straightened out. The more they try to "help," the worse they make it.