payback time

Is anyone surprised that Goldman Sachs made another fortune? First the government bails them out and then they let them get away with business as usual. No regulation for bankers! A virtual slap on the wrist and some nice rhetoric from Obama was punishment enough for the financial tycoons.

That is what you get when you pay big money for election campaigns and inauguration ceremonies. In the meantime the country is suffering, people are losing their jobs, homes are being foreclosed, while the bankers are churning through whatever excess wealth is left to generate commissions and profits.

Expect another round of excessive bonuses. That is what bankers get when they bring in the goods. And as long as the regulators let them get away with it, they will succeed in bringing in more. This charade will only end when there is no more wealth to be shifted. Since the bankers do not produce anything, and since they don't even finance productive companies, the country will eventually run out of resources to pay their fees. But that will be someone else's problem. We have some "useful" time left before that happens.

What we are seeing is a new financial crisis in the making. But for now, that is something the bankers won't worry about too much. Now they will concentrate on how to spend their lavish bonuses. Why would anyone worry with a safety net like bankers have? The tax payers will foot the bills so Wall Street can extend the party for another couple of years.

denial and anger

Elizabeth Kuebler-Ross a Swiss physician did what many believe is pioneering work with dying people. She wrote a book called "On Death and Dying," describing the emotional states people go through when confronted with a terminal illness. It has been said that these states also apply to other significant life events. I am not sure if anyone has ever postulated that these states also apply to entire populations. The Western world, and especially America is one such population that is now faced with a terminal event.

The five key states are denial, anger, bargaining, depression, and finally acceptance. It appears America is largely in denial. This isn't happening, there must be a mistake, the turn-around will come, we "may be" in a recession, we have bounced back before, it will be short-lived, etc, are all statements typical of this state. Some of our more "advanced" citizens have already made it to the anger, "why us and not them?" stage.

Soon-to-be-ex President Bush is clearly in denial. As a matter of fact, Mr. Bush's middle name is denial. He for one, never seems capable of progressing. Although he did show some signs of minor anger -or at least annoyance- at some questions that were repeated too often, he is a rock of stability when it comes to denial. The lone cowboy.

The financial system is also in deep denial. So are many policy makers trying to bail them out. Although the government already owns the worthless banks, nobody wants to say we nationalized them. That would be admitting death of our fabled economic system. The right word for such behavior is denial. A denial so profound that Mr. Paulson and Mr. Bernanke, without admitting the error in their way, finally agreed to purchase shares in these undead banks. Earlier these geniuses -maybe they too were bewitched by W?- had proposed a simple handout to their former colleagues.

However, even when they bought shares, they had to forgo buying common stock and getting a board seat. That would be admitting failure. It is also the only reasonable thing to do. The symbolic gesture is of great importance, because it sets the stage for further mayhem. A denial akin to alcoholics with liver cirrhosis who can't stop drinking.

Some Republicans have expressed anger, but they are angry at the bail-out and having to pay for it, not so much angry at the demise of American style capitalism. When it comes to that, those very same Republicans are in very strong denial. These are the type of believers who will go to their grave without ever leaving phase one.

Many in the Obama administration forgot about denial and blew through their brief anger periods. They are now trying their hand at bargaining. Bargaining as in bargaining with fate. Please dear god, if you cure me of this illness, I will rebuild the bridges and highways and make America great again. 

If anything, we need to dismantle America's infrastructure and rebuild it in a more sensible way. A way that favors public transportation. A way away from cars. Depression comes next in case you wonder.

Here is some quick arithmetic to cure your current denial. Most financial institutions in the country are undead. They are lifeless but they keep wandering around sucking away our savings. The sooner they drop dead the better, because until they do, we are wasting our hard earned tax dollars trying to keep them afoot. They need a stake through the heart, and have their heads cut off too.

Half of the American households have zero net worth. You can give them rebate checks and tax cuts all you want, but they won't start spending again. They are done, period. The best you can do is give them a reasonable job so you won't end up paying for their retirement. Most of them promise to be around for another 15-20 years for sure.

The more jobs we cut, the worse it will get. Another quarter of the American public is teetering on the brink of zero net worth. Keeping these people employed should be priority number one. Forget about corporate profits for now. Forget about what you learned in economics 101. It does no longer apply.

An economy driven by consumer spending is no longer an option. The consumers are done spending. The sooner we realize that, the better.

Rather than revamping America's infrastructure, we need to redo it. The current layout is problematic. It depends on cheap energy and is unsustainable in the long run. It is also environmentally destructive. We need to dismantle it before it does us in.

main street blues

Wall Street's crisis may be contained--for now, but main street's problems are only just beginning. Thousands of layoffs from financial institutions are likely to hit main street pretty hard. Here is a group of well-to-do individuals who tend to splurge on housing and cars, that will suddenly find itself out of work. Since a fair number have already splurged in a rather excessive manner, expect another round of foreclosures to hit the market pretty soon.

Going forward, the reduced spending will ripple through the economy. It is the famous trickle-down effect, Republicans are so keen on. Only this time it works as a gusher, and in reverse too!

Job losses, high food prices, high gas prices, and a credit crunch will all add up to a perfect storm. Not to mention all the tax increases we are likely to see to pay for all the bail-outs in the financial industry.

The main street effects of this crisis will not be felt for another four to six months. Furthermore, it is by no means certain that the financial crisis is over. I would give it at best a 5-10% chance. I am not even sure it is fully contained yet, let alone solved.

I am starting to think that a bank-run a la 1930 is no longer a far fetched scenario. Washington Mutual (WaMu pour les intimes) experienced a mini bank-run of sorts yesterday, despite the FDIC insurance. The trouble with such herd-like panic behavior is that it can cause even a well-run and well-capitalized institution to go under (I am not sure if WaMu is or not, but that is another matter). If all depositors claimed their deposits banks would effectively have to shut their doors.

I assume there are many analogous situations out there. Situations where a sudden panic could lead to the demise of otherwise sound businesses.

Cash flow is what matters here as many California businesses are starting to realize. Having no state budget for months can do you in, even if you run a sound enterprise that isn't leveraged the way Lehman Brothers was.