posted by Curt, on October 17, 2008 07:48 am

The causes of our current financial crisis have been discussed ad naseum these days. Lots of the talking heads you see on T.V. or the opinion leaders you read online are now admitting what many of them ignored during the credit boom years: that these problems are all a result of years and years of ridiculously loose credit policies, practices, and irresponsible borrowing. In an even more remarkable acknowledgment of the failure of the credit and consumption creed, many are even admitting that the U.S. economy needs to wean itself off of credit. But, even with this acknowledgment, these individuals, almost to a man still support massive (and continued) government intervention. Why? Because, according to them, quick deleveraging (i.e. debt destruction) would be disastrous for the economy. We need government intervention, they say, to ensure orderly deleveraging of the debt--otherwise we'll be plunged into another Great Depression.

Putting aside the question of whether "orderly deleveraging" is just another phrase for prolonged economic pain, one might well ask himself whether it is moral, or even possible, to have manic, highly leveraged growth on the way up and orderly deleveraging on its way down? Latching on to the assumption that economics really is a "science," applicable laws would suggest that an equal and opposite reaction is required for recovery. I have my doubts that we can have a period of orderly deleveraging that lets us all down slowly from the highs of our 30-year credit binge. But our fearless economic leaders are certainly giving it the old college try. I just don't think they'll succeed. If the idea of skyrocket up and float softly down isn't clearly contrary to the laws of economics, it certainly seems contrary to the Law of the Harvest.

Since we're not willing to boom and bust, probably can't boom and deleverage orderly without pain, I suppose we're left with the choice to try and regulate bubbles out of existence. But, knowing the little I do about human nature, I'm pretty convinced that won't work either.

posted by Curt, on October 13, 2008 10:22 am

The world's governments have gotten together and somehow managed to guarantee everything. No bank or major company will be allowed to fail during the next year, and they'll hand out as much money as the world's banks want to take on. Nobody is really sure where all the money is going to come from in order to do this. But that's irrelevant at this point since the stock market is rising (for now).

The FASB now allows banks and other companies holding mortgage-backed securities to value those assets at whatever they think they are worth (they can "use their own judgment"), therefore making the problem balance sheets just disappear before our eyes.

Pelosi is angling for yet another stimulus package, proving that her leadership response to an economic crisis is to hand out $150 billion in "free" money once every four months until the economy improves. And only a couple of our representatives from either party will even try to oppose her.

Obama and McCain are falling over themselves to try and be the most generous with money that they don't have, both insisting that they can continue to increase spending while guaranteeing mortgages, keeping bankrupt Americans in "their" homes, and offering tax breaks to millions.

General Motors is on the brink of failure and is considering merging with one of two other American automakers that are also on the brink of failure. And boy oh boy is the market cheering it all.

The icing on the cake is that our leaders are actually patting themselves on the back??!!

As much as I say that nothing will surprise me anymore, I am surprised at the speed and joy with which we are sowing the final seeds of our own financial destruction (most of it has already been assured, but, believe it or not, this can make things much worse).

As a fellow online commenter said, this has reached the point of complete madness. In years to come, people will look back at this crisis and just shake their heads at our response. It's more than ridiculous.

posted by Curt, on October 8, 2008 07:04 am

Wikipipedia defines The Law of Unintended Consequences as follows:

The "law of unintended consequences" (also called the "law of unforeseen consequences") states that any purposeful action will produce some unintended consequences. A classic example is a bypass — a road built to relieve traffic congestion on a congested road — that attracts new development and with it more traffic, resulting in two congested streets instead of one.

This maxim is not a scientific law; it is more in line with Murphy's law as a warning against the hubristic belief that humans can fully control the world around them. Stated in other words, each cause has more than one effect, and these effects will invariably include at least one unforeseen side effect. The unintended side effect can potentially be more significant than any of the intended effects.

The law seems to be in full operation regarding the U.S. government's recent efforts to stabilize the economy. In order to build support for the bailout, Bush, Paulson, Bernanke, and Congress all told people that the world was going to end if they didn't act immediately. We'll never know what would have happened without the bailout, though I believe that the consequences of not acting probably would have been severe.

But what it seems clear that the government's actions have done is caused an even greater general financial panic. When the bailout didn't work immediately, people panicked even more. And now, it seems that any further government action on the economy simply convinces people that their panic is justified. All this results in people pulling their money out of the stock market, and, perhaps more importantly, hunkering down and refusing to spend--maybe accelerating the move of the problems from "Wall Street" to "Main Street." At this point, you really have to wonder how much control the government retains over the whole situation. Ironically, it's numerous attempts to control the situation may have resulted in the economy being more out of control that it might otherwise be. How significant this potential unintended consequence is, in relation to the alternative, still remains to be seen.

Now, Bernanke and Paulson are smart guys. They know that their actions will have unintended consequences, and I think they weigh the potential benefits of each decision against its potential costs (e.g. growth potential v. inflation potential for a rate cut). But I wonder about the extent to which they fully considered the potential psychological impacts of their actions, and the resulting impact that mass fear mobilization could have on their ability to retain whatever level of control they had over the course of the U.S. economy.

Now no one can foresee all the consequences of their actions. It's obvious that just because your actions may result in something happening that you don't expect you shouldn't quit acting altogether. But the government response to this crisis may provide yet more evidence that it is not always better to "do something, anything now" as opposed to waiting to do something better later.

posted by Curt, on September 30, 2008 06:02 am

Even though I suppose some might say it shows a lack of sophistication, I'm a big fan of the old T.V. series legal drama Perry Mason. I've seen just about every episode. In those shows there were always three things you could count on: (1) someone would die within the first 15 minutes; (2) Perry Mason's client was always innocent; and (3) the murder would inevitably be caused by an attempt to blackmail. Watching Wall Street and our illustrious political representatives (a good number of whom, for principled reasons or not, actually stood up and voted Wall Street down yesterday) I feel like I'm on the receiving end of a Mason-type blackmail attempt.

The American people, through the House of Representatives basically thumbed their noses at Wall Street yesterday. The Street's first response was disbelief. Their second response seems to say, "well, if you're not going to give us the money we want, we're going to show you just how bad things can get." I get this unsettling feeling that the banks supposedly at the heart of this crisis are trying to play chicken with the government and the people.

Don't you think that the banks have a vested interest in preventing the collapse of the financial system? If the system is in danger of collapsing because credit has dried up and banks refuse to lend to each other, then why won't they do some lending to prevent a collapse? As I ponder this question, the only conclusion I can reach is that they don't want to. They want the bad assets gone, and they want them gone at much, much more than the current market value. And they are going to bluster and threaten and refuse to lend until the government comes through with the money. I think they are convinced they have us over a barrel and they aren't going to budge until we do what they want. And I have a bad feeling that the government will come through later this week--although I was admittedly very surprised about what happened yesterday, so I'll speak in less certain terms than I have heretofore.

I'm not a conspiracy theorist, but I must admit this whole bailout has me very suspicious of motivations. Let me explain it to you as I now see it, two weeks down the line.

• Paulsen and Wall Street have known they had a really big problem on their hands for a while, probably at least since the government was forced to take over Fannie and Freddie.
• They devised the solution that basically died in the House yesterday, but were faced with the problem of how to drum up support for an ugly, expensive bailout. (And this is where the conspiracy part kicks in).
• So they let Lehman Brothers fail in order to create fear and urgency in policymakers and get support for the bailout.
• AIG was then not allowed to fail (although allowed to come close) because it would have too severely harmed the banks the plan was trying to save (but it was handled in a way that also created panic).
• When this was not quite enough, the powers that be decided that WaMu would have to fail (after hanging on for weeks), suddenly, overnight (and on a Thursday after all other banks had "failed," meaning been seized by the FDIC on a Friday evening or over the weekend) in order to create some more panic and more support for the bailout (I don't know if Wachovia was part of the same pattern or not).
• Now they are simply refusing to lend to each other, thus driving down markets throughout the world in an attempt to create sufficient fear to get the votes they need to seal the deal.

Maybe I'm completely off base, but until someone can give me a good reason why these banks can't lend right now, despite the apparent fact that their own fate and the fate of the world financial system depends on it, then I don't know what else to think.

And if we are in a giant game of "chicken" with Wall Street, it seems to me that we'd better make our stand now.

All this reminds me of a scene in Frank Capra's It's a Wonderful Life:

GEORGE BAILEY: Just remember this, Mr. Potter, that this rabble you're talking about . . . they do most of the working and paying and living and dying in this community.

Well, it is too much to have them work and pay and live and die in a couple of decent rooms and a bath?

Anyway, my father didn't think so. People were human beings to him, but to you, a warped, frustrated old man, they're cattle.

Well, in my book, he died a much richer man than you'll ever be.

. . .

I know very well what you're talking about. You're talking about something you can't get your fingers on, and it's galling you. That's what you're talking about, I know.

Well, I, I, I've said too much. I... You're, you're the Board here. You do what you want with this thing.

There's j-just one thing more though.

This town needs this measly one-horse institution if only to have some place where people can come without crawling to Potter.

Come on, Uncle Billy.

UNCLE BILLY: Oh boy, that was telling him, George, old boy. You shut his big mouth. You should have heard him.

BAILEY BUILDING & LOAN EMPLOYEE: What happened? We heard a lot of yelling.

UNCLE BILLY: Well, we're being voted out of business after twenty-five years.

Easy come, easy go.

Kind of fits in with McCain and Obama's populist rhetoric these days, though the part about providing loans for housing to indigent people is kind of ironic, given the current crisis. But I feel a little bit like Wall Street is playing the part of a modern-day Mr. Potter and trying to force this rescue right down our throats by threatening us with utter collapse if we don't go along with them.

America had a "George Bailey" moment yesterday. For George, the consequence of standing up to Potter was that he gave up his schooling to stay home and run the Bailey Building & Loan after his father's death. There will be consequences for not passing the bailout too. We'll see if we're willing to face them (though as I've always maintained the bailout will be worse than the cure).

posted by Curt, on September 28, 2008 07:12 am

With the second apparent approval of a bailout deal, I just thought I'd post this photo of our illustrious legislative representatives. Today they have achieved their greatest success: fleecing the American taxpayer for the benefit of Wall Street. Very soon, I predict, many of them will be out of office. The photo is from the New York Times.

posted by Curt, on September 25, 2008 12:44 pm

A while ago I posted the following quote from a satirical article in The Onion:

"Every American family deserves a false sense of security," said Chris Reppto, a risk analyst for Citigroup in New York. "Once we have a bubble to provide a fragile foundation, we can begin building pyramid scheme on top of pyramid scheme, and before we know it, the financial situation will return to normal."

Today, with the approval of this bailout bill, we are doing exactly that: we're trying to rebuild the credit economy on top of the collapsing credit bubble. The United States' excessive "prosperity" over the last 30 years has been nothing but a mirage; a mirage created by nearly unfettered access to easy credit. Finally, the credit largess in this country became so unsustainable that, as President Bush noted last night, the credit markets froze.

The credit markets did not freeze because, as President Bush implied, we all panicked. The credit markets are frozen because the money they loaned out isn't getting paid back. These credit markets should be frozen--or the money flowing out of them should be slowed to a trickle from a flood.

The market is trying to tell us something. And it's trying to tell us more than "the housing bubble and deregulation caused all of this mess."

This is the message that the market is trying to send to America: start living within your means now, or you will be forced to.

Our policymakers didn't listen. And you should vote every single one of them that votes for the bailout out of office at the first possible opportunity.

We have now added $700 billion more (at the very least) to the bubble that was already so big that it was too painful for us to let deflate. This money will be nominally borrowed from foreign investors who, for some strange reason, are still determined to finance US debt. But, in reality, the money will be taken, a few cents at a time, from the dollars in your wallet and savings account through inflation. The cost will be tremendous, and it will be born in a disproportionate amount by the prudent and responsible.

posted by Curt, on September 22, 2008 07:22 am

A reasonable question was posed to both candidates over the weekend: with $700 billion plus is "unforeseen" bailout expenditures, do you believe you can still pursue your financial plan as you promised earlier in the campaign. Here are some excerpts of their responses, courtesy of the New York Times:

First, from Senator McCain:

But Mr. McCain said in an interview here with CNBC and The New York Times that he would press on with his plan to extend the Bush tax cuts and to cut others. Contrary to the warnings of fiscal analysts, he said he believed he could do so and balance the federal budget, which was falling deeper into deficit even before the financial crisis, by the end of his first term.

"I believe we can still balance the budget," he said. "I think that it is restraint of spending, and I think it’s growth of government and the economy, and the recovery of our economy. And anything you do that would take more money from the American people who are hurting more now, I think, would be a serious mistake."

Mr. McCain also stuck by his support for allowing workers to invest a portion of their Social Security payroll taxes in stocks and bonds, an approach that Democrats call privatization and that Mr. Obama has used to suggest Mr. McCain would subject retirees to excessive market risk.

And now, from Senator Obama:

In a separate interview earlier in the day, Mr. Obama said that despite the huge new government obligation, he would press ahead with his plans to overhaul the health care system to insure more people, make college tuition more affordable, give a tax cut to the middle class and raise taxes on those making over $250,000 a year.

"The problem that we have," Mr. Obama said, "in part has to do with wages and incomes that have been flat. And so homeowners and ordinary families out there have been working very hard, but it’s tough for them to pay the bills and stay afloat with rising gas prices and health care.

"So if we don’t address our long-term competitiveness, if we don’t address some of the inequities in the tax code, if we’re not addressing some of the things that weakened the family budget, then we’re not, over the long term, going to solve these larger problems in the financial markets."

Are you kidding me? The total cost of this bailout is almost certain to go over $1 trillion (and could very possibly go to $2 trillion), and yet both candidates want to go on as normal? Either one of these guys could have gained some instant credibility with my by admitting that this throws a big wrench into things and that the government would have to cut back on its spending (or its tax reduction plans). But, to do so in an election year . . . I guess I was just hoping for a little too much.

And after all, is it really that much more absurd to say we'll do these things while we're $9 trillion in debt to say that we'll keep on keeping on when we're $11 or 12 trillion in the hole? Maybe not, but eventually you've got to have the trillion that breaks the camel's back . . . don't you? Even if the camel is a really big one?

posted by Curt, on September 20, 2008 08:48 am

I've recently been working my way through James McPherson's outstanding history of the Civil War, Battle Cry of Freedom. As you would expect a comprehensive treatment to do, the book begins by focusing on the years leading up to the Civil War, beginning with the end of the Mexican-American War in the 1840s. As part of his introductory history, McPherson discusses the elections in 1848, 1852, 1856, and 1860. Lincoln was, of course, elected in 1860 and was the first President elected from the newly-formed Republican Party. The Republican Party replaced the Whig party, which was, ultimately, destroyed by the crisis over slavery.

We've had no major party "births" or "deaths" in the last 150 years. There is always talk about forming a third party, of course. But, historically, that doesn't generally seem to be what happens. Instead, once in a blue moon, you get the death of one party and the emergence of a new one. Both of the current parties have survived through the Great Depression, World Wars 1 & II, Vietnam, and Iraq. They also survived the Great Inflation of the 1970s and early 1980s as well as the Cold and Korean Wars. All this makes me wonder, what is it that causes a party to die and be replaced by another one? And is there any possibility that a new party could be born out of the current financial crisis?

I'll have to do a lot more thinking about this. But I'd appreciate any thoughts (or directions on some reading I could do).

posted by Curt, on September 19, 2008 06:50 am

Up to now, I've been very outspoken, in an online sort of way, in saying that our own overconsumption is to blame for this credit crisis. I still maintain that. But we are not to blame for the government's irresponsible and unfair bailout response. That's all on the policymakers, who felt they had to "protect" the economy in an election year by putting everything on the back of the taxpayers without so much as even asking about it.

And now they've banned short-selling in the market, given a government guarantee to every Wall Street corporation and the market is surging--All on the back of the American taxpayer and his children. While it's generally an overused phrase, this is an outrage.

If the government is going to take this course, THESE MANIPULATED MARKETS SHOULD BE SHUT DOWN! No one should be trading now.

posted by Curt, on September 17, 2008 07:14 am

No news flash here: we live in a nation that rewards consumption and penalizes saving. You get tax breaks from buying things, not from staying prudent. Interest rates are so low that the return on money in a savings account is outstripped by the rate of inflation, so that you lose money you don't spend or invest.

Why do we do this to ourselves? Because it's been an article of faith that encouraging consumption "grows" the economy.

Well, now seems about as good a time as any to question this holy tenet of economics. Consumption grows the economy in the sense that the numbers get bigger and there are more economic transactions (which do put people to work). But it appears that this growth can come with an unacceptable cost. The growth is imbalanced. It doesn't reflect any actual production or contribution. It's like a big ponzi scheme. We're just told that, as long as we keep spending, everything will continue OK. Doesn't that sound MLM to you? That's not how an economy is supposed to be, is it? Perhaps I'm showing my ignorance here. But that appears to be were the "consumption should always increase" article of faith has got us.

Right now, we're seeing the fruits of all the consumption incentives of the last 30 years. Surprise of surprises, it seems it is possible to over-consume to such a point that the risks far outweigh the rewards. In the best of worlds, the American people would come to this realization on their own. But, if they can't or won't realize what's causing the current crisis, it seems we need to change the incentive structure.

Consumption is good, and economically beneficial. But a headlong consuming rush "grows" the economy on a sandy foundation, and when that over-inflated piece of credit begins to topple, great is the fall of it.

Oh, and I can't talk about AIG. I'm so mad that I've almost been rendered dysfunctional. But I'll recover.

posted by Curt, on September 15, 2008 07:54 pm

Today's collapse of Lehman Brothers has me (and a lot of other people) thinking about "what went wrong." A lot of people are blaming President Bush for the current credit crisis. And I can't really blame them for wanting to. Bush has been a complete and total failure financially. He has been one of the most recklessly irresponsible money managers our country has ever had, and our children will pay for his massive deficit spending. But I'm not going to let people get away with blaming Bush for this one. With the little influence I have I'll speak out and tell anyone and everyone who can hear me that we are the ones to blame. Not Bush, not Clinton, not Reagan: us.

I think this is important to get the blame game right on this one because Bush will be gone in a few months, and if we don't place the blame were it belongs, things will never have a chance of changing. History-types like to use the phrase that goes something like this:

Those who don't learn their history are doomed to repeat it.

Allow me a little paraphrase:

Those who refuse to take responsibility for their mistakes are doomed to repeat them.

So, in the interests of trying to avoid this happening again (at least for a while), let me tell you why we're to blame.

This is not a Presidential economic crisis. It's not driven by tax policy, trade policy, ideology (in the conservative v. liberal sense), or even foreign policy. The current economic crisis is a credit crisis, driven by individual credit and purchase decisions. In other words, it's the end result of America's consumption-based value system of the last 30 years. And, though it was arguably facilitated by the loose-money policies of the Federal Reserve (only a quasi executive agency) since it's the result of individual money management (or mis-management, usually) decisions, it was certainly not caused by the Fed's policies.

No, the bubble, and its popping, resulted from that wonder of the economic world, the incredible American consumer, who spent at all costs and nearly singlehandedly brought the world's financial system to its knees. The credit bubble created by our financial overextension was so big and so fragile at the same time, that it only took a couple shocks (think declining asset prices and $4 gasoline) to its system for it to collapse. And the collapse is in process despite the government's best efforts to forestall it. Bush has done everything he legally could (and, arguably illegally) to prevent what has happened today. He's not the cause of it, we are.

All George Bush is guilty of, at least as far as this crisis is concerned, is the same thing that all of the other Presidents of the last 30 are guilty of: being unwilling to stand up, during a bubble and tell people that the prosperity is false and that the bubble's got to be popped before it gets any bigger. Of course, doing that today is equivalent to committing political suicide. We won't let any politician do that. The minute he tries, we exercise the franchise and strip him or her of power. Ultimately, the failure of our government to arrest the credit crisis before it reached epidemic proportions is all on us. The financial irresponsibility of the government is nothing more than a mirror image of our own bad fiscal habits, albeit on a much larger scale.

So, America, today we got the first installment of our bill for granite countertops, big SUVs, ridiculously expensive and inefficient trucks, four-wheelers, boats, designer clothing, and all the other forms of unnecessary, conspicuous consumption that you can think of. I predict that many of us will be shocked at the price tag. Eventually, this crisis will work itself out, as painful as it's going to be. But if we want to make sure it doesn't happen again, it's going to take more than switching parties in an election year. President Bush is the wrong target for our frustration. It needs to be turned around and focused straight on you and me. If we don't realize that, we're not going to solve anything, and we'll start building the next credit bubble as soon as this one is done popping.

posted by Curt, on September 9, 2008 12:44 am

The long anticipated bailout is now a reality. Most commentators now agree that the American taxpayer (really meaning the younger American taxpayer and his children) have now been saddled with some unknown billions in bad mortgage debt. A great number, especially here in Utah, are predicting the end of the United States as we know it. According to them, we're following Europe into the dark abyss of socialism (never mind that we've really been there for years already).

I just can't get too worked up about this one. Maybe it's because I'm worn out. Maybe it's because I'm happily settled in a nice, rented home in a good neighborhood and so I don't really feel a need to confront the housing market right now. Or maybe it's because, as repugnant as it seems, there's a lot of truth in the idea that the bailout was necessary in order to "save the economy." Trust me, I know that I'm affected. But, what can we do about it really? There is no candidate out there who will exercise anything remotely close to fiscal discipline. And most of us would try to string them up if they tried. It's not good for me to get worked up about it over and over again. I just can't feel continual passion and outrage over each continuous development once I have a good idea of the route we're going down. I'll write-in Ron Paul as my protest vote in this election and continue to advocate for fiscal restraint at the household level. That's about all I can do. But, even though I'm not worked up about the Mother of All Bailouts So Far, I remain an intensely interested bystander.

It seems to me that we have the US government putting all its resources into preventing a paradigm shift. What we have is a long line of credit excesses and the government is putting its full resources behind a broken system to try and keep it going as long as it can. I'm curious: how much longer can they prop it up? What we're seeing in the response to this economic crisis is the testing of the economic assumption of the last 30 years--we can always spend more because we're the USA; you're investments in us our safe, because the government will always make good. Now the government's trying to come through on its promise in a world that is remarkably different than the one in which the paradigm was developed. Can it do it? My own opinion is that it probably cannot. The real question for me is how long can it keep plugging holes in the dike? Everyone in Washington seems committed to doing it. So, we're in for the long haul, and the Fannie and Freddie bailout is just another step along what promises to be a most interesting road.

I suppose that all this sounds incredibly pessimistic. And I guess it is, generally. But I'm not a complete pessimist (although perhaps a bit over-realistic). I don't believe this economic crisis spells doom for America, so long as a significant number of people realize that the end-all be-all of life isn't new things. And I have confidence that they will, although it will be a painful proposition. As painful as it is all going to be, it should be a fascinating journey with many important lessons learned.

posted by Curt, on July 27, 2008 06:40 pm

We're only part way through the drama yet, but watching the government response to the housing crisis has been an eyeopener for me. It's made me realize that you should be wary making predictions about the outcome of a "game" based on the current set of rules because the rules can be changed mid-stream. The housing bubble, its crash, and the political response provides a good example. I became interested in the whole thing starting in 2003, shortly after I got married and was getting ready to graduate. My wife and I had some savings in the bank, and I had a decent job for a kid in college--but there was no way I thought that I was secure enough to buy a home. However, a substantial number of my friends were--many with no income outside of student loans or a part-time job that paid less than mine. All the lending excesses that were going on then are now well documented.

At the time, I just didn't believe the people saying that I could afford a home; perhaps in part because my own parents had some bad experiences with their responsible real estate purchases. I didn't think too much of it. I chalked it up to my risk-averse nature more than anything else. However, as time went on, I became more concerned that something was really wrong while I watched prices go up at an astounding pace. I like many others, was first worried that I would be priced out of a home. After just some basic investigation, however, I quickly realized that the whole thing was ridiculous and unsustainable. I just decided that I would wait until everything collapsed, and hoped that by the time it did I would be ready to jump into the market. I became a part of the wait-for-the-housing-crash crowd. As a group, I suppose that we fancied ourselves more intelligent than the average buyer and congratulated ourselves on knowing that the whole real estate bubble would come crashing down on itself. We knew that people wouldn't be able to afford their loans and that prices wouldn't go up forever. We knew that people were spending beyond their ability to repay. We knew that when the bills came do and appreciation slowed down, they would be in big trouble. And we were right about that.

But perhaps we weren't as smart as we thought we were. What most of us, including myself, didn't anticipate was a huge, government-financed bailout. Apparently, the bubble was too big to let pop. Perhaps it was too big to even let it slowly deflate. The government response has been massive. And while it remains to be seen whether it's enough to make a huge difference, there have undoubtedly been some that have been bailed out, and more that will be when Bush signs the housing bailout bill tomorrow. In my mind, I can hear them taunting me:

You thought you were smarter than us. Did you ever think that we saw the bubble too, realized how big it would become, and got in knowing that it was almost certain we'd be bailed out? Who's the one who's laughing now? You're now financing my extravagance with your tax money. You'll be paying for this one way or the other . . . don't you wish that you'd jumped in when you had the chance so that you could be bailing out yourself, rather than me?

Now, I don't regret my decisions. I'm comfortable, and in absolutely no immediate danger of financial overextension. I don't live like a pauper (at least I don't think so). We have plenty of food, and the financial and personal peace of mind that comes from knowing I've made good on all my obligations. I'm not ashamed to have people come to my home because it's too extravagant and my kids can walk on the carpet with wet shoes and I don't worry too much. That's a nice life. I value it more than granite countertops and a two-sink master bathroom or home theater. What I am suggesting is that it seems like it's no longer good enough to understand the rules that govern a game. The rules change. How can you make sound financial decisions when you don't know the rules that will govern your choices? You can't predict outcomes based on on changing game. Under the current "moral hazard" type of framework, you've got to predict what will happen under the present system, and then predict how that is likely to precipitate midstream change within that system in order to try and get the likely outcome. This to me seems to be quite a difficult, if not impossible, undertaking.

I don't think this is anything new, but it's a macro rule of life that I didn't understand before. I see it as the hidden part of the moral hazard problem. Everyone talks about how bailouts encourage irresponsible behavior. But, in my situation, I'm left wonder what they do to the responsible--those who have no desire nor inclination to engage in reckless behavior. Sure, we know that we end up paying for the bailout. But we're also left in a state where we're smart enough to realize what's responsible under the current system but, at the same time, are left uncertain about how we can responsibly proceed when the seemingly inevitable changes come.

So where does this leave us? Well, I'm one that happens to believe that there is a bigger rule-maker than the government, and that there are some basic rules of the game of life that can't be changed, no matter how much influence, lobbying power, or importance that one has. The law of the harvest, i.e. you sow what you reap, is pretty darn immutable (at least in the long run). Same with the golden rule. I'll plan my life according to those rules. But, beyond paying for them, the lack of predictability engendered by bailouts is certainly a frustrating thing.

posted by Curt, on July 17, 2008 09:56 pm

I thought I would post this very amusing quote from a new article by The Onion: Recession-Plagued Nation Demands New Bubble To Invest In

"Every American family deserves a false sense of security," said Chris Reppto, a risk analyst for Citigroup in New York. "Once we have a bubble to provide a fragile foundation, we can begin building pyramid scheme on top of pyramid scheme, and before we know it, the financial situation will return to normal."

You can read the whole, and highly amusing, article here.

posted by Curt, on July 11, 2008 05:25 pm

A few months ago, people were debating about whether the US economy was really in recession. It looked like, perhaps, the Federal Reserve had staved off financial collapse and that, even with the demise of their "housing ATMs," the American consumer was still spending enough to get the economy through its rough patch with minimal or stagnant growth. In addition, increasing US exports (fueled by the weak dollar) were propping up American industry, inflation was moderate (so we were told), oil was rising, but not yet out of control, and the government was getting ready to hand out checks via its stimulus package. Even though the housing news was bad, the economic situation didn't look extremely dire--in fact, it looked better than it did in other recessions, which seemed to get much less press.

It seems as though the debate is now over. The lack of the "traditional" bad economic news (i.e. hundreds of thousands of job losses), instead of showing that the economy was withstanding the housing bubble, really just betrayed this as what it is--a different kind of economic crisis: one not based so much on the cyclical economic cycle, but one rooted in the continuous abuse of credit and debt leveraging by both American businesses and consumers. This is a collapse of a system, not a normal downturn within the system. These collapses build up slowly and occur with relatively little warning (at least to those who aren't paying attention). I think people have sensed that this is what is going on, and that this is why the economic news has gotten so much press, even though much of it has been fairly mild (outside of the housing price decline).

These types of systemic collapses are not all that rare. They've happened before, and more often that just in the Great Depression. And when they come, they're painful. The last time America had this type of collapse was 70 years ago. Yes, that's right, in the Depression. And I suspect that we may be headed for another one. Hopefully not as severe, but I'm becoming more and more certain that it's going to be more severe than anything we had since 1929.

So what does this all mean for housing prices? They've already declined significantly, but what's so interesting (and scary) is that thus far the decline has been entirely self-induced. The decline in home prices has not resulted from any weakness in the broader economy. People still have their jobs: unemployment remains low. No, the "losses" in home values so far as just the elimination of the bubble excess. The whole problem is that many Americans have relied on those excesses, and can't take their elimination. We haven't even hit the bottom of housing prices in a good economy, and it's scary to think how far they could fall if the economy turns bad, and it looks like it's starting to. If the economy turns bad, and people start to lose their jobs, they'll have to start putting their homes on the market. The increase in supply will drive prices lower, especially when combined with tight credit and high mortgage qualifying standards, which are rapidly becoming the norm rather than the exception. Things will get even worse for homeowners if the Federal Reserve raises interest rates. The run up in value was driven primarily by cheap credit, not wage increases. If credit becomes expensive, sellers will be forced to lower their prices because higher interest rates will make a $300,000 home much more expensive (monthly payment wise) than it was back in the heady days of 2005 and 2006. This will further shatter the construction industry, already reeling from the current home price declines and $4 per gallon gas.

It's not a pretty scenario, and I haven't even mentioned inflation and lack of savings. If even part of this unfolds (and I suspect that it will), I would not be surprised to see home prices fall another 30 percent.

Now, one thing I've learned from watching this whole thing is that government intervention can be a game changer, and that you can't just assume that things will unfold according to the status quo. But it appears that even the massive resources of the federal government might be unable to steer us away from this one--even as willing as they seem to be to try. But you need to be aware that they are going to try (probably unadvisedly) and plan accordingly.

Even though citizens in a democracy should get what they want good and hard (see prior post about H.L. Mencken), they don't very often. But, sometimes they do. It seems that years of government softening the consequences of easy consumer and business credit might be finally coming home to roost. I have a feeling that we're about to get it good and hard and that there's not much anyone, the government included, can do to prevent it.

posted by Curt Bentley, on June 26, 2008 06:22 am

I just had to post the comment that I found on Marketwatch.com. I thought it was one of the funniest things I have read in a while. People certainly seem scared about things . . . more so than I ever remember. I haven't been able to make up my mind as to whether this time is scarier than normal, or I just wasn't paying attention during any of the other recessions. In any event, enjoy the humor:

Ladies and Gentlemen:

This is your Captain Ben Bernake speaking. Welcome to the now-bankrupt U.S.A. Air, flight number 1929, non-stop service to Depressionville.

After reaching a cruising altitude of 5.25 percent, we'll steadily drop down to 2.0 percent and hold it there for a long time before crash landing at Depressionville.

For your safety, please bundle-up Treasury Bills and stay in dollars. Federal law prohibits speculating in commodities.

Our in-flight entertainment will feature two Market Watch films, "2 Dollar Gas," starring Rex Nutting as comedian, and "Bull Run," starring Mark Hulbert.

In the unlikely event we loose cabin pressure, there will be a ten dollar surcharge to use the Oxygen mask.

After reaching the cruising altitude, we will be serving you complimentary doses of Prozak and Maylox.

If there is anything we can do to reduce your inflation pain, please do not hesitate to contact one of our flight attendants to receive a low CPI number.

Thank you for choosing U.S.A. air for your final destination, sit back and rest in peace.

posted by Curt Bentley, on April 3, 2008 07:35 pm

It's been hard to miss the gloating over the economy--both by those who are convinced that we are about to enter into a major, major recession and those who criticize the doom and gloomers. My prior posts leave little doubt that I find myself more aligned with the former group. Both sides seems convinced that recent events have shown that they've been right all along. The doom and gloom crowd can point to Bear Stearns and bad economic data and the more optimistic group can point to . . . Bear Stearns and somewhat better economic data. So, is the sky falling or isn't it, and what will it take for this thing to be finally resolved?

Nobody doubts that we're going/have gone through a rough time. It appears that the doom and gloomers were right about that. If you take government officials seriously, apparently the entire financial system came close to collapse (whatever that means) with the run on Bear Stearns. However, the more optimistic group views that same news with optimism. The entire point, to them, is that there has bee no financial Armageddon; the government institutions set up to prevent that reality stepped in and did their job. While it's not going away, the liquidity crunch fears that were so palpable in the immediate aftermath of Bear Stearns seem somewhat diminished. So, are we out of the woods or not? That's what millions of Americans, including yours truly, want to know.

Let me weigh in with my two cents. One of the hard things here is that it is impossible, in my view, to know what's really going on. People thought we were coming out of the woods right before Bear Stearns collapsed. One of the problems here is a tremendous lack of reliable information. I suppose that's inevitable when so much of the functioning of the financial system depends on the maintenance of confidence. Now, it seems, many realize that the confidence we had might have not been well-placed. At one level, the credit crisis is a confidence crisis. Nobody knows the exact financial condition of the banks that drove the easy credit economy of the last five years--perhaps not even the banks themselves. That's a scary thought--and people are starting to confront it. Could there be another Bear Stearns around the corner? Perhaps, perhaps not. Whoever it might be certainly won't tell us about it beforehand. And, if there is, how many more can the Federal Reserve engineer a rescue for? These are big, unanswered questions . . . and it appears that nobody can answer them right now (or at least no one reliable is stepping up and claiming that they can, and that, should tell you something).

The second huge unanswered question out there is what the Fed's actions mean for our future. Article after article talks about the taxpayers being "on the hook" for Bear Stearns now. What exactly does that mean for the next couple years and what does it mean for our future? What does it mean for us if the Fed steps in to act in a second, third, or fourth Bear Stearns situation? The whole thing strikes me as a rather ominous precedent that (even though it is getting some significant media attention) is not really getting the attention that is deserves. In the collective sigh of relief that went up upon the saving of Bear Stearns, we may be evaluating the action a little bit uncritically. We're told it was necessary to save the Wall Street fat cats in order to protect John Doe middle class. The "we had to save the bad guy to protect the good guys" rationale is unconvincing at the best of times, yet it seems like it is being embraced a little too readily in this case.

So, is the sky going to fall? I'm not entirely sure any more. At one time I was completely convinced that it was. So, I've moderated my views a bit at this point (and give Bernanke a little more credit for intelligence than I did before, although I still disagree with him on principle). But, despite my uncertainty about the short-term economic result, I am completely convinced that the landscape that we operate in is going to be significantly changed by our love affair with houses, big trucks, boats, and credit cards. It strikes me that, during the last few years, we made many promises that we're still going to have to keep and that there's a long way to go before we can sleep knowing exactly what type of bed it is that we've made for ourselves. Hang on for the ride, and, for once, America, live on the cautious side. We should all at least be able to agree on that.

posted by Curt, on March 21, 2008 05:47 pm

I've mentioned before that I am reading a book titled Devil Take the Hindmost: A History of Financial Speculation. I've even quoted from it in some of my other posts. This week I've been reading the chapter on the speculation leading up to the stock market crash in 1929 (and subsequent depression). Some of what I read was startling in the way it tracked almost exactly what we are seeing today. I'm not the only person who has noticed the parallels. People are writing about it all the time, wondering if we're headed for another Great Depression. Some say that we are, others say that the financial protective structures we've set up during the last 80 years make it almost impossible--in their minds the Great Deperssion was close to a once in history event that involved the coincidence of so many unusual factors that it will never be repeated. They may be right . . . I'm not sure. But what is remarkable is the extent that the last few years parallel the 1920s. Here's some history. Judge for yourself.

The first premise of the "new economics," as it was otherwise called, was that the busines cycle--the periodic undulations of trade first observed in Sir William Petty's successions of "dearth and plenty" back in the seventeenth century--had been effectively abolished by the establishment of the Federal Reserve System in 1913. Before this date, financial crises in the United States had been exacerbated by the absence of a central bank to provide funds to the banking sector durinf periods of instability. The Federal Reserve, with its ability to control itnerest rates and conduct "open market operations"--buying and selling government bonds in order to affect the supply of money available to banks--was hailed in the 1920s as "the remedyto the whole problems of booms, slumps, and panics." As a result, bankers and speculators alike were lulled into a false security which led them to operate irresponsibly, exacerbating the severity of the ensuing crisis (page 192).

Another:

Radios, fridges, cars, and clothes could all be purchased on credit. By the end of the decade, when outstanding installment debt had risen to $6 billion, it was estimated that around an eighth of all retail sales were made on credit. There was a decidedly speculative element in the growth of installment credit: present consumption was being financed with anticipated earnings. Put another way, in their appetite for immediate gratification, the consumers of the 1920s were devouring their future. When the future eventually arrived, they found the cupboard bare. At the time, however, installment purchases were seen as yet another beneficial new era development. Credit and consumption, it was argued, formed a virtuous circle since from the immediate increase in prosperity would come the ability to pay off debt. (page 198)

Some more:

The Federal Reserve in Washington--the institution that had supposedly abolished panics--had inadvertently ignited the stock market boom by lowering interest rates in 1925. This policy was intended to accommodate the Bank of England, which was suffering from an outflow of gold after a disastrous return to the gold standard at the prewar exchange rate. In the summer of 1927, the Fed bowed once more to British demands (backed by the French and Germans) and lowered the discount rate to a record low of 3 1/2 percent. Faced with the growth of speculation, the Fed changed tack and from February 1928 successively raised the discount rate until it reached 6 percent in August 1929. Yet the profits from buying shares on margin were simply too enticing. As long as the market continued rising, speculators were prepared to pay more for their margin loans. While interest rates remained too low to restrain speculation, they became too high for the economy as a whole (or what in the nineteenth century used to be called "legitimate commerce").

This sounds familiar to those of us who watched the market this last week:

In the face of minor stock market panics--in June and December 1928 and later in March 1929--the bull forces succeeded in regrouping. They came out stronger for their trials, until the point was reached when speculators became deaf to warnings they did not wish to hear and developed a belief in their own invincibility. Instead of reasoning, they thrived on countless rumors of fabulous wealth gained in the stock market by valets, chauffeurs, cattlemen, actresses, farmers' wives, and so on. In Only Yesterday, Frederick Lewis Allen described the trance into which the average American had fallen by the summer of 1929:

He visioned an America set free from poverty and toil. He saw a magical order built on the new science and the new prosperity: roads swarming with millions upon millions of automobiles, airplanes darkening the skies, lines of high-tension wire carrying from hilltop to hilltop the power to give life to a thousand labor-saving machines, skyscrapers thrusting above one-time villages, vast cities rising in great geometrical masses of stone and concrete and roaring with perfectly mechanized traffic--and smartly dressed men and women spending, spending with the money they had won by being far-sighted enough to foresee, way back in 1929, what was going to happen. (page 213)

And, finally, a long but good one:

Although stocks continued to slide until the middle of November, Hoover's administration acted promptly to mitigate the fallout from the Crash. The President's public pronouncements were consistently upbeat. He convened business leaders and urged them to maintain wages in order to sustain demand; private and public organizations were asked to bring forward their construction plans; and Treasury Secretary Mellon announced a small tax cut in November. The banking authorities also acted speedily. On 31 October, the Federal Reserve reduced the discount rate to 5 percent (followed by a further reduction of half a percent two weeks later). The New York Federal Reserve Bank oversaw a massive shift in the call loan market, as outstanding margin loans dropped by 50 percent between September and November. Foreign and corporate lenders continued to withdraw their funds from the call loan market, and were replaced by the New York banks which maintained low rates on loans and reduced margin requirements to 25 percent. There were no significant banking or brokerage failures in the immediate aftermath of the Crash, apart from the Industrial Bank of Flint, Michigan, which was forced to close its doors after it was discovered that a cabal of employees had stolen $3.5 million and lost it in the stock market. American corporations also did their best to steady nerves. The day after Black Tuesday, U.S. Steel and several other companies announced increased dividends. Samuel Rosenwald of Sears, Roebuck and Samuel Insull declared they would guarantee their employees' margin accounts. When General Motors announced an extra dividend on 14 November, the news was greeted jubilantly and the Dow Jones stepped off its low of 198 and rose by nearly 25 percent over the next few days.

Optimism was quick to resurface. On the day the market turned, Bernard Baruch cabled Churchill to inform him that the financial crisis was over; although this was of little comfort to the future prime minister, who lost more than L10,000--roughly L300,000 at today's values--in the Crash and was obliged to live frugally for the next few years. Baruch's was a conventional opinion shared by many of the smaller market players who believed the Crash presented them with yet another buying opportunity. The news was mostly positive. Turnover in the stock market was lively at five to six million shares a day; many corporations announced record profits for the previous year; and mergers in banking and utilities continued, as did the property boom. People took comfort in the fact that the major banks appeared well-capitalized. In New York, J.J. Raskob continued with his plans for the hundred-story Empire State Building, which he described as a symbol for "a land which reached for the sky with its feet on the ground." In his ambition to build the world's tallest building Raskob faced competition his fellow speculator, Walker Chrysler, who was building his own 1,146 foot high skyscraper. Meanwhile, William Crapo Durrant busied himself with new stock ppols. In March 1930, President HOover announced that "the worst effects of the crash upon employment will have passed during the next sixty days." The following month the Dow Jones broke through the 300 barrier, up nearly 50 percent from its post-Crash low.

Yet the "sucker's rally," as it was later called, came to an end in the spring of 1930 and the market resumed its downward course until the summer of 1932, when the Dow reached a low of 41.88 on a turnover of under 400,000 shares. In the intervening period, the country's gross national product had fallen by 60 percent from its 1929 level, and unemployment had risen to twelve and a half million. Over a third of the nonagricultural workforce was unemployed.

As the nation sank into depression, the apotheosis of the businessman came to an end (pages 217-219).

Some remarkable parallel's, huh? I'm not sure what will happen this time. I doubt it will be a 60 percent decline in GNP . . . but who knows? It's an uncertain time, and it seems to me as though it's time to go back to the basic, certain principles as much as possible (if you ever left them).

posted by Curt, on February 18, 2008 10:28 am

When I've had a spare moment lately, I've been reading a book on the history of financial speculation titled The Devil Take the Hindmost. It starts with the Tulip Mania in seventeenth century Holland, and talks about all the major speculative events up to the dot com bubble of the 1990s. I just finished reading about the railway speculation in 1840s England. I found some quotes from newspapers of the time that I thought pretty accurately described the economic attitudes of the last few years. Here are some of them:

There is not a single dabbler in scrip who does not steadfastly believe--first, that a crash sooner or later is inevitable; and secondly, that he himself will escape it. When the luck turns, and the crack play is sauve qui peut, or devil take the hindmost, no one fancies that the last mail train from Panic station will leave him behind. In this, as in other respects, "Men deem all men mortal but themselves."

And another:

It is only the play of children, trying to lift one another in the air at the same time . . . It is the simpler part of the public which is deceived.

One of the other things that was interesting about the chapter on railway speculation was that the author noted that it took "nearly two years for the full impact of the

And finally, ending with a quotation from none other than Bill Gates:

Gold rushes tend to encourage impetuous investments. A few will pay off, but when the frenzy is behind us, we will look back increduously at the weckage of failed ventures and wonder, "Who funded those companies? What was going on in their minds? Was that just mania at work?"

That seems to be just what people are saying right now.

Anyway, for anyone interested, I recommend Devil Take the Hindmost. If you have the inclination, buy it from Amazon. As always, if you use the link below, I get a referral fee :)

posted by Curt, on January 16, 2008 11:29 am

It seems like the economy is the thing on everyone's mind these days. The Iraq War has really faded in to the background, partly because it has been shoved out of the picture by fears of recession but primarily (at least, according to me) because the troop surge has cut casualty rates to almost nothing (although there has been some bad news the past couple days).

Most people seem to accept the idea that the economy is headed for a recession, now. Poof! There goes the only potential bright spot of the Bush legacy--at least his immediate legacy. Time will tell as to how people think he did on terrorism. I know people think he has failed miserably now, but the passage of time has resulted in some pretty substantial shifts of opinion before.

The real question for me is: how long is it going to take before we really start to feel the effects of recession in Utah? By all accounts, Utah's economy is booming right now. People are still moving in and companies are starting up and things are generally good--at least that's what we're told. I, for one, am already feeling a pinch. Food prices are up, and gas prices don't feel like they've really gone down this winter (although they have receded from their high of $3.25 during the summer). Also, new home construction has basically slowed to a stop in my area of Provo (and I'm not sure it's any better anywhere else in the valley). It won't take long for these effects to start rippling through the local economy.

In any event, we will soon find out just how much of Utah's rosy economy of the last few years was driven by real estate. I suspect it is a substantial amount--more substantial than many people think. It seems like one of every 3-4 people I meet are either in the construction or real-estate industry. Both of those industries have been driven mainly be two things: (1) investment and (2) credit. Now, with the extension of credit coming back to earth and the flood of investment from California, Florida, Arizona, and Nevada becoming a small trickle, these industries are going to take a hit. This hit, combined with bad economic news from around the country will put us in the classic downward spiral. I think we're going to see some substantial negative effects here in Utah. Our economy here, like those in most other places, was built on property investment and consumption. The combination of the decimation of the residential construction industry with inflation is bad news for Utah--in my humble opinion.

As a final note, I find it instructive (and sad) to think back on President Hinckley's comments in the October 1998 General Conference. Here's a quote:

Now, brethren, I should like to talk to the older men, hoping that there will be some lesson for the younger men as well.

I wish to speak to you about temporal matters.

As a backdrop for what I wish to say, I read to you a few verses from the 41st chapter of Genesis.

Pharaoh, the ruler of Egypt, dreamed dreams which greatly troubled him. The wise men of his court could not give an interpretation. Joseph was then brought before him: "Pharaoh said unto Joseph, In my dream, behold, I stood upon the bank of the river:

"And, behold, there came up out of the river seven kine, fatfleshed and well favoured; and they fed in a meadow:

"And, behold, seven other kine came up after them, poor and very ill favoured and leanfleshed. . . .

"And the lean and the ill favoured kine did eat up the first seven fat kine: . . .

"And I saw in my dream . . . seven ears came up in one stalk, full and good:

"And, behold, seven ears, withered, thin, and blasted with the east wind, sprung up after them:

"And the thin ears devoured the seven good ears: . . .

"And Joseph said unto Pharaoh, . . . God hath shewed Pharaoh what he is about to do.

"The seven good kine are seven years; and the seven good ears are seven years: the dream is one. . . .

". . . What God is about to do he sheweth unto Pharaoh.

"Behold, there come seven years of great plenty throughout all the land of Egypt:

"And there shall arise after them seven years of famine.

". . . And God will shortly bring it to pass" (Gen. 41:17­20, 22­26, 28­30, 32).

Now, brethren, I want to make it very clear that I am not prophesying, that I am not predicting years of famine in the future. But I am suggesting that the time has come to get our houses in order.

So many of our people are living on the very edge of their incomes. In fact, some are living on borrowings.

We have witnessed in recent weeks wide and fearsome swings in the markets of the world. The economy is a fragile thing. A stumble in the economy in Jakarta or Moscow can immediately affect the entire world. It can eventually reach down to each of us as individuals. There is a portent of stormy weather ahead to which we had better give heed.

I hope with all my heart that we shall never slip into a depression. I am a child of the Great Depression of the thirties. I finished the university in 1932, when unemployment in this area exceeded 33 percent.

My father was then president of the largest stake in the Church in this valley. It was before our present welfare program was established. He walked the floor worrying about his people. He and his associates established a great wood-chopping project designed to keep the home furnaces and stoves going and the people warm in the winter. They had no money with which to buy coal. Men who had been affluent were among those who chopped wood.

I repeat, I hope we will never again see such a depression. But I am troubled by the huge consumer installment debt which hangs over the people of the nation, including our own people. In March 1997 that debt totaled $1.2 trillion, which represented a 7 percent increase over the previous year.

In December of 1997, 55 to 60 million households in the United States carried credit card balances. These balances averaged more than $7,000 and cost $1,000 per year in interest and fees. Consumer debt as a percentage of disposable income rose from 16.3 percent in 1993 to 19.3 percent in 1996.

Everyone knows that every dollar borrowed carries with it the penalty of paying interest. When money cannot be repaid, then bankruptcy follows. There were 1,350,118 bankruptcies in the United States last year. This represented a 50 percent increase from 1992. In the second quarter of this year, nearly 362,000 persons filed for bankruptcy, a record number for a three-month period.

We are beguiled by seductive advertising. Television carries the enticing invitation to borrow up to 125 percent of the value of one's home. But no mention is made of interest.

President J. Reuben Clark Jr., in the priesthood meeting of the conference in 1938, said from this pulpit: "Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands, or orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you" (in Conference Report, Apr. 1938, 103).

I recognize that it may be necessary to borrow to get a home, of course. But let us buy a home that we can afford and thus ease the payments which will constantly hang over our heads without mercy or respite for as long as 30 years.

No one knows when emergencies will strike. I am somewhat familiar with the case of a man who was highly successful in his profession. He lived in comfort. He built a large home. Then one day he was suddenly involved in a serious accident. Instantly, without warning, he almost lost his life. He was left a cripple. Destroyed was his earning power. He faced huge medical bills. He had other payments to make. He was helpless before his creditors. One moment he was rich, the next he was broke.

Since the beginnings of the Church, the Lord has spoken on this matter of debt. To Martin Harris through revelation, He said: "Pay the debt thou hast contracted with the printer. Release thyself from bondage" (D&C 19:35).

President Heber J. Grant spoke repeatedly on this matter from this pulpit. He said: "If there is any one thing that will bring peace and contentment into the human heart, and into the family, it is to live within our means. And if there is any one thing that is grinding and discouraging and disheartening, it is to have debts and obligations that one cannot meet" (Gospel Standards, comp. G. Homer Durham [1941], 111).

We are carrying a message of self-reliance throughout the Church. Self-reliance cannot obtain when there is serious debt hanging over a household. One has neither independence nor freedom from bondage when he is obligated to others.

In managing the affairs of the Church, we have tried to set an example. We have, as a matter of policy, stringently followed the practice of setting aside each year a percentage of the income of the Church against a possible day of need.

I am grateful to be able to say that the Church in all its operations, in all its undertakings, in all of its departments, is able to function without borrowed money. If we cannot get along, we will curtail our programs. We will shrink expenditures to fit the income. We will not borrow.

One of the happiest days in the life of President Joseph F. Smith was the day the Church paid off its long-standing indebtedness.

What a wonderful feeling it is to be free of debt, to have a little money against a day of emergency put away where it can be retrieved when necessary.

President Faust would not tell you this himself. Perhaps I can tell it, and he can take it out on me afterward. He had a mortgage on his home drawing 4 percent interest. Many people would have told him he was foolish to pay off that mortgage when it carried so low a rate of interest. But the first opportunity he had to acquire some means, he and his wife determined they would pay off their mortgage. He has been free of debt since that day. That's why he wears a smile on his face, and that's why he whistles while he works.

I urge you, brethren, to look to the condition of your finances. I urge you to be modest in your expenditures; discipline yourselves in your purchases to avoid debt to the extent possible. Pay off debt as quickly as you can, and free yourselves from bondage.

Remarkably prescient, huh? But what else would you expect from the Prophet. What I think is sad is that it is pretty clear that the members in Utah generally ignored his counsel. The house of the average member of the church in Utah today is more "out of order" than it was in 1998. We've had our 7 years of prosperity since 2001, and now the bill for our consumer debt is coming due.

I just hope it's not too high of a price to pay.

posted by Curt Bentley, on October 20, 2007 10:17 am

Yesterday was the 20th Anniversary of Black Monday in 1987, when the stock market dropped over 500 points in a single day. Well, the stocks dropped over 360 points yesterday, which might be the biggest one day drop in the last 20 years. However, a comparison of the two statistics shows just how the stock market has increased during the intervening time.

When the market dropped on Black Monday, the 508 points lost was a 22.6 percent decline in the market. Yesterday's drop of 360 points (just over 70 percent of 508) only lowered the total value of the Dow Jones Industrial Average by 2.6 percent. Just with my initial calculations, the Dow Jones is "worth" almost ten times more than what it was in 1987. Does that strike anyone else as remarkable? It seems to me that no one should be surprised that the stock market is correcting itself. That type of growth seems, to me, to be unsustainable. But, then again, I am not a financial analayst, and base all my conclusions off of the basic principle of the Law of the Harvest, which my dad taught me when I was a kid.

I've been saying for a while now, but I am really pessimistic about the future of the economy. I think the growth of the last few years has been built on an unsound foundation--people trying to reap what they haven't sown--and that we are headed for a major correction. I am pretty sure it will be a major correction because I think that only a major correction will effect the change in behavior necessary to get people back to sound principles. In my mind, the chickens are coming home to roost. Only part of me hopes I'm wrong.

posted by Curt, on October 16, 2007 07:22 am

This article showed up on MSNBC.com this morning, and says some things in line with what I've posted about a couple of time (see here and perhaps here). This whole article is about whether the crash of 1987 could happen in the stock market again. I particularly liked this quote from the end:

While it’s unlikely that either the stock market or the credit markets will replay the scripts that led to their collapses, nothing can rule out the possibility of future panics. The stage for both events was set by hubris as the wizards of Wall Street thought they had somehow outsmarted the risks that had reined in their forebears. Investors — both individuals and institutional money managers — willingly went along for the ride. Once that confidence began to unwind, the resulting panics fed on themselves, fueled by fear.

So as long as investment decisions are ultimately made by human beings – governed by those primal emotions of fear and greed — there’s little chance that financial markets can be insulated from future panic-driven sell-offs.

The only thing I potentially disagree with is whether it's unlikely that the market will crash again.

posted by Curt, on October 15, 2007 08:15 pm

Bernake today warned investors that the Federal Reserve might not bail them out again with another interest rate cut at the end of the month. He said (very truthfully) that it's not the Fed's job to protect investors and that its questionable as to whether the Fed could even do it if they wanted to. While it's good to hear those things coming from the Federal Reserve, I won't be convinced until I see the Fed ignore the pressure from Wall Street. Bernake said the same things last month prior to cutting interest rates. We'll see whether he's serious this time. I hope so. I, for one, have seen enough of the easy money economy. It makes me nervous to think that money was given out so easily, and it makes me even more nervous when people act like we can erase a few years of bad economic decisions with a couple of cuts in the relevant interest rates. I'm no economist, but I understand the principle of the law of the harvest well enough, and, if people don't start behaving responsibly with their money, the consequences will come.

posted by Curt Bentley, on October 15, 2007 07:58 pm

Interesting story from Fox News -- the first of the Baby Boom generation filed for social security. I must admit to being a little taken aback . . . I had always thought my dad was part of the baby boom generation (even though I consciously knew he was not, since he was born in '42), and he has been retired for four years now. The fisrt of the baby boomers will turn 61 sometime this year. The youngest of the generation (born in '69, I believe) will be 38. So, for the next 23 years, they'll be beginning to retire. The floodgates are about to open.

While just about everyone agrees that social security is "broken," no one apparently can agree on how to fix it. The real question is what that means for people like me, part of the next generation. I really don't know, and to be honest with you, haven't thought about it much. I don't think I've contributed much to social security (given that I've been in school all my adult life). The only time I think about it is when it's in the news or when I get the informational letter every year around tax time.

It seems to me the most prudent course of action for individuals like me is to assume that social security will not be there. For people in their thirties, that's a viable option. We have enough time that, if we take retirement seriously, we'll be able to get along without social security . . . at least, that's what I think. I'm not planning to rely on it at all. The people who are really in a bind are the people at the tail end of the baby boom generation. Their in their early forties to early fifties. They may have planned on social security to finance a substantial portion of their retired life. It seems to me that we only really have to try and fix social security for those individuals . . . the rest of us can probably get along without it. Of course, such a decision flies in the face of the very principle that social security is "legitimated" on: that when you're young you pay in and when you're old you draw out. This makes it very easy for people opposing what seems like the commonsense solution--all they have to do is use this contradiction to get people really riled up politically. So long as they can do that, it will take a real emergency before the people will be united enough over the social security problem to prevent politicians from using social security as a divisive issue to generate political capital.

So what do I think this all means? I'm really not sure, but I suspect it means that we won't see social security reform until the system is pretty much bankrupt . . . likely right about the time that the middle of the baby generation retires (maybe ten years from now). Then we'll see just how reliant people are on social security. If they're not all that reliant, then the system might just go relatively quietly into the good night. If not, it should be an entertaining political battle. But, I'm planning on the death of social security within the next 25 years. If it lives, I'll get something of a bonus. But if not, I plan to take care of myself, by myself.

posted by Curt, on September 25, 2007 12:09 pm

Apparently, stocks are "edging up" today, despite the bad economic news, because Wall Street investors are betting that the bad economic news will spur the Federal Reserve to cut interest rates even more. You can read about it here.

I must admit, this all seems really remarkable to me. Either there is some real economic trouble ahead (for more than overextended home buyers and New York investors) or else there is an incredible sense of entitlement on Wall St. Both may be true. Still, I just can't help but think that the answer to this potential crisis lies in more of the same thing that created it.

I suppose I understand the argument that we need to soften the broader economic impact of the housing market crisis with easier credit, and that, as the housing market improves we gradually move interest rates upwards . . . such a strategy seems consistent with the Federal Reserve's rate decrease last week. But it appears as though Wall St. wants something more drastic, and I, for one, worry what that is going to do to the economy.

I'm certainly no economic expert, but even I can see and feel inflation and nervousness--and I'm seeing and feeling both. Now seems to me like a time to move away from the easy credit economy. Everyone acknowledges the problems it created, and yet, it seems like we don't know what else to do but continue down the same path. I'm beginning to think that it is going to take a major disruption to bring people back to sanity . . . 1929 level--I hope not, but I don't see it being any less than what happened during the restructuring of the 1970s.

Am I crazy? Maybe just overly pessimistic? Please let me know. I could use some optimism . . .