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Ian Briggs

Responsibility for Economic Debacle is Across the Board

(BALTIMORE - October 13, 2008) - How did we get here in the first place? I shall attempt to explain.

The Beginning

One cannot argue that with all of the rhetoric, political posturing and PORK being introduced to the general public over the last 2 weeks, we have been educated about one thing: we as a country are in a whole lot of trouble.  Yes, the bill for Banking Assistance (Bailout) was passed in both the House and Senate and signed into law.  But, the question that still remains is, how did we get here?  It would be easy to pile all the blame on the Bush Administration, which would be thoroughly justified.  But it goes deeper than Bush.  The first part of this catastrophe falls on Alan Greenspan and the Federal Open Market Committee (FOMC) members who directed Federal Policy during the turn of this century.  The second part falls on Bush and his attempt to be Regeanesque in creating his own form of Economics, Bushenomics.  The third part falls on Wall Street; the forth part falls on Congress; and last but not least, the fifth part falls on us.

Alan Greenspan and the FOMC                                                                     

To some Alan Greenspan was one of the best Fed Chairmen to grace our country.  However, time has proven that where we are as a country is a direct result of Greenspan’s policies.   When President Clinton left office in 2000 the Fed Funds rate was 6.5%.  Because of a perceived weak economy (brought on by the dot com bubble bursting--another Wall Street creation) Greenspan engaged in a relaxing procedure (i.e. cutting the Fed Funds Rate) on Fed funds.  In layman’s terms, by cutting the Fed Funds Rate, the Fed allowed the financial system to have way too much cash.  The one thing you do not want to have is a situation where Banks and Wall Street have too much cash.    This always results in the creation of products that invariably lead to economic trouble in one form or another.  In this case it was subprime mortgages (banks) and exotic risk products (Wall Street).  All this liquidity allowed Main Street to believe that Credit Wealth was real wealth that could be sustained forever---as long as house prices continued to soar.  Oh well, so much for that idea.

Bushenomics

Bushenomics is an economic philosophy that was predicated on fiscal irresponsibility coupled with a lack of any genuine plan, and lack of oversight has led to a financial society run amok.  The philosophy implies that we do what we want whenever we want without any fear or care of consequence in the future.  With this type of philosophy, which is a bastardization of any understanding of capitalism, the economic system became built like a house without a solid foundation. We may be able to live in it, but it wouldn’t take much for the house to fall.  It is safe to say that our economic house has fallen, and we are in no position to try and put it back together.

“Fall” Street

I say Fall Street instead of Wall Street because of how sudden this fall from being the envy of the capitalistic world to the villain has transpired.  Wall Street’s fall has been a direct result of a philosophy that “excessive greed is good”.  It was not OK to make just a couple billion in profits.  They wanted it all and by any means necessary.  The problem with Wall Street and the commercial banks in particular, was that they had way too much access to money (via the Fed’s economic policies), no real regulation (via Bushenomics) and a captive audience (a population that was “credit drunk” with riches).   With new products (Mortgage backed securities and exotic derivative packages), and an unending stream of mortgages from the banks (sub-prime), Wall Street did what it did best—make money.  But these products were not based on sound financial modeling.  When these products started imploding, neither Wall Street nor the commercial banks had an effective way to stop the bleeding.  So began the economic free fall.

Congress

We have people in Congress who call themselves leaders but have proven time and time again that they are followers.  When decisions are being influenced by Lobbyists and special interest groups (as was evident with the “pork” that was attached to finalized bailout package bill), it becomes increasing difficult to separate fact from fiction.  Fact: There are signs that things are not going right in the real estate market and it is time to act (2005-2006).  Fiction: It is just a blip and we should be able to survive any economic changes as “the fundamentals of the economy are strong.”   Congress is America’s driver and they fell asleep at the wheel.   Now we are in a car wreck that could have been avoided if only someone was willing to stay awake for the whole drive.

Main Street

The drive to achieve the American dream is what makes this country unique. Anyone, in theory, has the opportunity to own a home and enjoy all the perks that come along with home ownership.  But, part of the American dream is the responsibility that comes with home purchase and ownership.  The greed and lack of fiscal responsibility that had permeated our society has finally drifted down to Main Street (Bushenomics version of the “trickle down” theory).   So, in this new wild, wild west economy, that has become the American Financial system there was no responsibility requirements that were being enforced.  “Credit wealth” became the new economic class and Americans were happy to buy beyond their means.  However, the downside is that with credit wealth, money has to be repaid.  Products that were designed by the banks and helped created the credit wealth were now taking away wealth as quickly as it was accumulated.  So, now we are in a situation where all parties are under the gun and no one has any real solution for how this will end.

THE BOTTOM LINE

So what next?

So there you have it in a nut shell.  What happens from here?  That is a very good question.  Right now it looks like we will have a lot of economic pain for the next year at a minimum.  Hopefully, we will have done enough to take care of the Credit Crisis.  This is really important as if this Crisis cannot be curtailed in some shape or form, then it will spell the beginning of a Global economic meltdown.  However, recent events have shown that this Credit Crisis has already manifested itself globally and once stable economies are now starting to crumble.  We need the banks to stop sitting on the sidelines and do what they do best—lend money.  We need our leaders to start leading.  We need Main Street to try and hold out and try and ride out this train wreck.  Otherwise, we will be in no position to address the real issue with the American Economy---RECESSION!

Ian R. Briggs is the President of Global Market Investments, Inc. an international consulting firm which focuses on business in the US and the Caribbean.  He holds a Master's of Science in Finance.  He is the Financial Analyst for "Empower Hour with Doni Glover" on WOLB 1010 AM Radio (Tuesdays from 10 to 11 am) in Baltimore and a contributor to BMORENEWS.com.  If you have any questions or comments, he can be reached by email at ibriggs21117@yahoo.com .

Tags: economy