The Wake

I won’t trouble you with reductive binaries (good, bad, rich, poor) regarding the contentious nature of our current economic situation. As far as I can tell, with my head buried in books and hands juggling student loan, scholarship and study abroad applications, the so-called crisis is turning out to be whatever we make it.

In the course of the last two weeks, I have been interviewing concerned students and professors and reading through our quintessentially American disparate literature on the subject, only to realize that a metaphor from quantum physics is the best I could come up with to characterize the matter. Quantum mechanics asserts that matter propagates like a wave and interacts like a particle. This creates the Heisenberg “uncertainty” principle, which amounts to the fact that scientists can tell you where a particle most likely is within space-time. But we can never know it completely; we know either its position or its momentum. Similarly, once we focus on certain aspects of the economic crisis, others are obfuscated.

I spoke with Roger Feldman, Blue Cross Professor of Health Insurance. He completed his Ph.D. in economics at the University of Rochester. He described the predicament as four-leveled. This is, he said, a “housing crisis, it’s a mortgage crisis, it’s a financing crisis, and an insurance crisis. Not only that, but it’s an international crisis because all these things are connected.” You’ve heard of trickle-down prosperity? This was like the bio-accumulation of mercury, a trickle-up economic meltdown.

The account I will give here is by no means exhaustive but will help in mitigating the various perspectives on what to do about our problem. Essentially, during an economic boom in the ’90s, the United States Department of Housing and Urban Development (HUD) encouraged Fannie Mae and Freddy Mac to “increase the proportion of loans that they write to clients of not adequate credit rating” (think sub-prime). HUD loosened restrictions on the home-owning and therefore the mortgage lending process, in the quixotic belief that more Americans should own their homes. This questionable optimism was buffered by a federal subsidy allowing mortgage interest to be deducted from one’s income tax. Concurrently, the Federal Reserve maintained very low interest rates when “it usually tilts the other way and starts to raise interest rates,” said Professor Feldman. This enabled couples making $100,000 in income to own houses worth $400,000. That’s a 4-to-1 income to home value ratio. This phenomenon was widespread throughout the nation. Many of your parents either made bank during that time in the real estate sector or are currently up shit creek with two holes in the boat if that white picket fence isn’t panning out quite they way they had imagined.

The explanation of why the housing bubble popped is a bit tricky. The best way to think about it is – it wasn’t sustainable. How long can you really expect to live in a McMansion with a McDonald’s income? So mortgage companies and lending banks like Washington Mutual descended upon these loosened regulations and their unwary borrowers, tossing out sub-prime loans. To make matters worse, these banks would then bundle up these various mortgages, which would have been outrageous in different, more realistic economic times, with decent mortgages to balance their risk with accrediting agencies—agencies, mind you, that mortgage banks would choose. The accreditations of these mortgages were, arguably self-approved. Then the banks would sell these mortgages as securities to investment banks around the world – remember this. Their reasoning: if home sales continued skyrocketing and their prices followed suit, these mortgage-backed securities would pay out well to foreign and domestic investors. The result: a feeding frenzy on the investment bank side of things. Simultaneously, insurance companies like AIG wanted in on the action and positioned themselves accordingly by insuring these speculative loan securities.

As the housing bubble deflated, mortgage owners began to default on their mortgages because interest rates rose to compensate for money being lost on falling home values. People thought to themselves, “I’m not paying for this, this isn’t what we signed up for” or “Shit, we can’t afford this.” At this point, mortgage companies were not receiving the money they’d been promised. And if they sold the mortgages as securities to investors, the securities certainly weren’t appreciating
anymore.

Now everybody is fucked. Everyone from the mortgage lenders to the investment banks to the foreign investors were so heavily leveraged on these shitty mortgage securities that even a small reduction in the securitys’ values meant big losses. The consequence is that essentially no one has the money they thought they were going to have. The financial system in America is based on the lending of short-term assets and loans to companies who use the funds, conduct their business and pay back the loan. With no money floating around in the economy, companies aren’t loaning anybody money. This is what’s meant by the impending “grinding halt.”

According to Patrick Bajari, a professor of economics at the University of Minnesota, this shouldn’t be a big deal. In our religion of free-market capitalism, those “who made poor decisions deserve to suffer the consequences.” Goodbye, AIG, Lehman, etc. According to Professor Bajari, we can just let this go, let the companies sink and brace for whatever impact may come. He characterized this option as an answer to a common divisive question for economists: how can we control the economy? He was skeptical that an intervention was needed.

This is an interesting perspective, especially if one has been watching the news lately. “Great Depression,” “grinding halt,” “economic fear” —these buzzwords have been circulating faster than rumors about the identity of the real biological mother of Sarah Palin’s latest exquisitely named child.

The answer to that question (How we control the economy?) is largely contingent on context. In a context of paranoia, people are liable to make some questionable decisions. In a context of lucrative financial bailouts, people are liable to make self-serving decisions. I do not profess to know the nature of this context, but I do know that Representative Brad Sherman of California blatantly exposed the fear-mongering of the ever invisible “them.” If you don’t know what I’m talking about, YouTube that shit. In an atmosphere of panic and worry, he said the bailout could be passed. Now – it has passed in the Senate.

In the words of Ron Paul, it’s remarkable that the Senate has taken a “bad bill and made it worse.” The bailout proposal ballooned from 3 to 451 pages, with $100 billion in pork barrel spending, contributing to a total damage at about $800 billion. I don’t even want to list the outrageous tax breaks offered to organizations as disparate as wooden arrow makers and Exxon Valdez. Let’s just say McCain binged on the bacon, after he promised to veto any pork barrel propositions that came his way. Obama voted for it as well. So pick your business party, “my friends,” because I don’t think anyone is really listening to us.

The bailout was initially designed to throw $700 billion dollars at investment banks and mortgage companies to buy up their faltering mortgage investments and securities. Here we return to the foreign investors. Since foreign companies are invested in these loans, we the taxpayers are bailing out foreigners who have made bad decisions. This seems, as I believe Professor Bajari would agree, anti-capitalist and anti-American. We are saving defective companies that aren’t even our own. Then again, if we live in a trickle-down system of wealth it may be necessary.

Well then, you might be wondering, “How has this money been used by these U.S. companies?” We just gave AIG $85 million dollars, $400,000 of which was spent on entertaining top sales reps last week in California. An additional $5 million was given to the CEO for his performance bonus. I’m sorry, which performance?

Still, economists, pundits and indeed professors are characterizing it as a necessary evil. Meanwhile, journalist andactivist Naomi Klein has stated that the “Wall Street crisis should be for neo-liberalism what the fall of the Berlin wall was for communism.” She attributes the meltdown to the deregulation (think HUD and the loosened sub-prime mortgage lending provisions) that has been rampant since the days of Milton Friedman.

To return to quantum physics, as we focus on one dynamic of the economic situation. If we focus on this bailout and its dicey ethics and slimy payouts, we may be obscuring other sides of the issue, like whether or not it was a necessary evil given the nature our economic system and its need to increase short-term liquidity.

How is this going to affect us, the college kids? If you’re a liberal arts major, like me, you’ve probably resigned yourself to financial despair, ’cause we’re not getting jobs, anyway. But as it stands, “…think about it from your angle. Home prices going down is a good thing for you,” says Professor Bajari. Professor Feldman might agree, as the abundance of empty pockets across the nation will inevitably lead to responsible money management (weird!). Home prices and mortgage loans will return to safer, more realistic values. Contrary to Professor Bajari’s opinion, Professor Feldman and others think that while homes may become cheaper, loans will be harder to acquire. Just ask my financial adviser; hell, ask my parents for that matter, because I certainly don’t want to talk about it. Credit, no doubt, will be much more difficult to establish.

The question regarding our jobs isn’t easy to answer. Unemployment has recently hit 6.1 percent. This likely has to do with massive layoffs by the commercial and investment banks we have been talking about, as well as in other industries that have suffered from the amount of short term assets (loans) not going around, as well as industries who sell elastic—some would say unsustainable—commodities, like, I don’t know, SUVs? Professor Feldman recommends students enroll, in droves I would bet, into fields economists call inelastic. Fields such as health, medicine and you know…scientific fields. People will always need their doctors and their pills, so let’s capitalize! Auxiliary fields such as nursing and physician’s attendant are also good choices. Another thing you could do is start up an investment bank, ruin people’s lives and then “bail out” in your golden parachute, because I’m telling you, that shit works.