Wednesday, September 14, 2011

Jobs, jobs, money, jobs

Here it comes, another bill to create jobs and save the economy.  Corporate banks and really dumb insurance companies destroy the economy, devastate the job scene, and wreak havoc on our dollar's value in the global economy - all while tearing apart our country's AAA credit rating.  Our government's response over and over and over again?  Let's use taxpayer money to pay for their mistakes.  Interesting approach.  Let's look at this deeper and we might get an understanding of how this policy became the go-to strategy.


In order to understand what is happening, we have to look at a concept known as Politico-economics.  This is something that I have not seen a lot of people talk about but I believe that this is the only way to explain what we are seeing right now.  It is what it sounds like:  The influence of politics on economics, and vice-versa.  Let me explain, because it sounds like a migraine when you first look at it.

In our current situation, we had a political decision made in the 90's.  This decision was an attempt to get more people to own houses.  Not a bad goal and I truly believe that the bill was passed with good intentions.  It essentially gave incentives to free up credit for people who's credit was not perfect.  This section of people (called "sub-prime") was not necessarily poor, they just had some trouble at one point in time with paying bills on time.  The idea was to get companies to lend to more people and then more people could buy homes, driving the price of real estate up.  This is where the economics of it come in.  Companies started lending to more and more people.  These mortgages were earning good interest rates (for the lenders) over long periods of time (30 years or sometimes even more).  In the end, a $100,000 house would cost a person $250,000 (not necessarily a real number, but these guys were making some serious cash - I know from my own experience during this craze).  This is a huge profit margin (150%) and could be used to get the money back in the pocket of the bank to lend more money.  They did this by selling the mortgage to other companies who happened to want the steady monthly income for $150,000 - $200,000 a pop.  Because of the profit margin on these, more and more companies (mostly investment banks) wanted more and more of these mortgages.  Lenders started packaging hundreds and eventually thousands of these "sub-prime" loans together and selling them.  The insurance companies (especially one that won't be named but has three letters and starts with "AIG") saw all the money being made and wanted to get in on the action.  So, they insured these sub-prime mortgages.  Basically, if the lendee (the person receiving the loan) defaulted on the loan, the insurance company would pay for the default.  This freed up the lenders to make more and more loans because they no longer had to worry about if the person could pay or not.  So, on it went.  Credit was flowing free and the economy was growing at record rates.

The Crash

Then, the exact thing that everyone said would never happen but the financial world knew that it would be detrimental if it did, happened.  The prices of houses collapsed.  People who could afford the "teaser rate" (the initial rate given out to sub-prime lendees) could not afford the regular rate.  Or the people that couldn't afford the "balloon" (a system in which the payment stays low for a while, but gets expensive after a set period of time) were struggling when it came around.  Whatever it was, people couldn't afford their payments.  When those same people couldn't sell the house, they had no choice but to default.  At first, the lenders weren't concerned.  It wasn't their problem.  The insurance companies were the ones taking the hit.  Lenders kept lending.  The insurance companies were taking quite a loss and said they couldn't insure the loans any more.  The lenders racked up massive losses on sub-prime mortgages that they could no longer sell.  The companies who were buying those loans were collapsing under the strain of these things they purchased that were now worth nothing.  At the same time, their share prices were dropping to next to nothing.  In essence, their multi-million (some of them billion) dollar companies were now worth about as much as my checking account right now - nothing.

In September 2008, the credit markets froze.  No one had money to lend, and investors were pulling out left and right.  The financial came as close to collapse as it had ever been.  Without action, a system that was producing $14 trillion per year was about to no longer exist.  The next steps where driven by politico-economics.  We (the United States taxpayer) bailed out the financial system.  We (everyone who lost their house, job, lives) took the brunt of the screw-ups of others.  The government had to have a response.  That response was TARP.  Most everyone has a good idea of everything that happened between then and now (although I may talk about that in a future post).


Now, 3 years later, we still haven't recovered.  President Obama took over in an economic situation that was awful.  He is now facing another election in a year, and the latest polls show that 58% of people don't feel like they are in a better position now than they were at the worst of the economy problems.  It is tough to get re-elected in that environment.  So, we go back to politico-economics.  Try to use the politics to drive  the economy.  We propose a bill to create jobs in the short-term so we can get re-elected.  Trying to make a long-term economic plan is almost impossible because our politicians are so focused on the next election.  We are spending money we don't have to pay for jobs that we won't sustain.  But, our economy will see relief for a couple of years.  Just enough time to get re-elected.  For some people, that couple of years will be a much-needed respite from a nightmare that has crushed everything they worked for.  I am not saying that is a bad thing.  But at the same time, can we continue to afford to put short-term bandaids on a long-term problem?  The President says that this jobs bill is already paid for.  That is not true.  If it were true, then how come we still have a $1.5 trillion deficit?  Shuffling money around is not the same as paying for something.  That mentality is how we ended up here in the first place.

In the end, I still wonder how it is that we haven't put the economic bill on the companies that caused the problem.  We don't want to hit them with the entire bill all at once, but we just need to let them know that the money we have spent on stabilizing them is now considered a sub-prime mortgage.  They need to make the payments, or we, as taxpayers, can foreclose.  I would love to see a politician who has the guts to get that done.  That would be the "Change I Believe In".