A Disclaimer (again): I am not, nor do I purport to be, a financial expert, or even a well-educated person when it comes to finance. The thoughts I put here are merely the way I see things, and the trends that even my uneducated self is able to see that the (apparent) experts may not, or do not want to see.
That being said: I see a free-market economy (which the U.S. still purports to be, even with the massive stroke of socialization that’s been happening over the last few weeks) as something akin to a large forest. It’s an ecosystem. Self-sustaining and self-maintaining. Trees that have been around long enough, but not too long, continue to grow. New species try to take a foothold, and succeed, if they’re strong enough. A smaller species may come along and provide enough competition for an old, established tree that it fails and falls, sometimes taking out some other trees with it, eventually providing light and food for others to take its place.
And every now and then, a fire. Fire is good for forests. It removes much of the flammable material that has fallen off of the trees in the intervening years between fires. It eliminates dead trees. It clears underbrush, allowing seedlings to take root and grow into established trees. In pine forests, a fire helps to open the pinecones, allowing the trees to seed and create more trees. A fire keeps the forest healthy and fosters a continual process of renewal.
Fires are also ugly. They are a painful experience. Many beautiful, old trees are consumed and die. Animals that were not able to flee to safety will die. Those that did escape will find their homes destroyed, as well as their food sources if and when they attempt to return. The blackened, scorched ground takes time to recover and become fertile again. In rare cases, species that were in danger of extinction will disappear forever.
Nobody is ever going to say fire is easy. But it needs to happen.
Forestry management up until around 10-15 years ago was focused on one thing: Prevent and stop fires at all costs. This had the benefit of creating beautiful, long-lived forests that could be enjoyed by everyone. On the other side, however, these managed forests were continually building up a veritable powder keg of flammable materials, stuff that should burn off periodically. Over the time of forestry management, it became more difficult to extinguish fires as they appeared before they destroyed significant acreage. Eventually, in some cases, it got to the point where the fire could not be stopped by any means. The only thing forestry management could do in these cases was attempt to reduce the damage wherever possible.
After a few of these massive, unmanageable fires, the DNR realized that an occasional fire was a good thing, and needed to happen in order to maintain a healthy and stable ecosystem within these forests. In some cases, the DNR is even taking a pro-active approach and creating small burns where they detect the balance is shifting toward flammability. This allows them to very carefully manage where and when the burn happens. Fires are good. Fires are needed.
Now, translate all of this to the current state of the U.S. economy, particularly the financial markets. Since the end of the Great Depression, the markets have been in a steady upswing. On July 8, 1932, the Dow Jones Industrial Average was just 44.82 points. Over the last 76 years, the market has steadily increased, year after year, with many minor, and a few major bumps. All of these bumps have occurred as a natural part of the financial ecosystem. In the 1980s, we had a big crash, a natural correction, a fire if you will (see where I’m going with this?)
Later, after the advent of automated trading systems (a natural progression of the financial ecosystem), there was a slide in the 1990s that caused these systems to start selling assets. The more assets were sold, the faster the systems sold them. Again, the market was on fire. This time, however, the natural ecosystem was not allowed to progress. The fire was put out, trading was halted for several hours while programmers and analysts attempted to put into place checks and balances that would prevent the automated slide from occurring again. Economic forestry management was now in full swing.
In 2001, as I’m sure everyone is aware, the U.S. was subjected to a coordinated terrorist attack on lower Manhattan and Washington D.C. After some of the proverbial and literal dust settled, the markets re-opened, and quickly slid as nervous investors pulled out their money for more stable pastures. A moderate fire ensued, which allowed the system to settle into a solid rhythm and begin its normal progress again.
In late 2005, it was discovered that the avarice with which mortgage and real estate companies attempted to capitalize on a healthy economy was coming around to bite them. Housing prices began falling. Consequently, a large number of 5 and 7 year ARM (Adjustable Rate Mortgages) began coming due for their scheduled readjustments. Suddenly, homeowners found themselves staring down the barrel of a gun loaded with 100 to 500 percent increases in house payments. They turned to their banks to refinance into more stable, classical loans (30-year fixed FTW), only to be turned away because their credit still had not recovered enough, and/or their house was not worth as much as was able to be refinanced. Foreclosures started skyrocketing, neighborhoods began vacating, and investment companies found themselves holding billions of dollars in worthless mortgage assets.
Lightning had struck, and it was time for a big fire.
Enter the economic forestry service.
In the roughly three years since the problems with the financial markets was discovered, the federa government has injected approximately 125 billion dollars into the financial markets to keep them from sliding. Fannie Mae and Freddie Mac, holders of more mortgage guarantees than any other company in the world, are now under nearly complete control by the U.S. government. Extraordinary efforts have been put forth to stop the burning. And so far, they’ve managed to succeed.
This spring Bear Stearns, one of the oldest and best established financial companies started to burn. Once the fire had burnt itself to a manageable level, J.P. Morgan swept in and bought out the entire company at pennies on the dollar, extinguishing what was left of the fire, but also leaving the landscape previously occupied by Stearns barren and unlivable.
Two weeks ago, Lehman Brothers found themselves burning, and badly. The government did the right thing, and allowed the company to be split up, its assets liquidated, its section of the forest burned, but available for recovery. Very shortly after that, the largest insurance company in the world, AIG announced that they were on fire. But, rather than let economic nature take its course, the government stepped in and handed them 85 billion dollars, extinguishing the flames (for now).
Our wonderful treasury secretary, Henry Paulson, has decided that the U.S. taxpayer needs to put up 700 billion dollars in economic forestry management, extinguishing and preventing the fires that have been imminent for 799 companies. No longer will the large fires be allowed to start, clearing out the ecosystem, and keeping the economic forest healthy. Forestry management is now in full swing.
What’s coming soon is something that nobody wants to see, and nobody will be able to prevent. There will soon be enough fuel built up within our economic forest that no amount of prevention will be able to stop the lightning from starting the mother of all forest fires. Before long, there will be an economic wildfire so big, so hot, and so powerful that only the very few absolutely strongest companies will survive. Many people will get hurt. Lives and homes will be destroyed. Jobs will disappear. It is going to be ugly.
The longer this method of economic forestry management keeps up, the uglier it is going to get, and the harder it is going to be to recover.
It is time to take action. The final vote on the bailout plan is expected to occur on Wednesday, October 1, 2008. I urge all of you to do your research and see where you come down on this issue. I would be surprised if many, if any, decide that this continued policy of management is a good thing.
Once you have decided, contact your legistlator. Tell them what their decision means to you. Make them aware that their decision this week will be remembered when their post is up for renewal. The only way we can fix this is if we take action, and quickly. Paulson told congress they need to act immediately. We need to do the same. There simply is not time.
The fire is coming, and the longer we wait, the worse it is going to be.