“Whoa Doc, This is Heavy”

I don’t mean to get heavy on you guys…ok, that’s a lie. I read a couple articles today that shook me a bit. Just in case we all needed to be reminded how lucky we are, here are a couple sobering tales.

Alexandra Penney is a successful author and former editor of Self magazine, and more relevantly, a victim of rogue money manager Bernard Madoff. Penney handed over her life savings to Madoff in the late-80’s and has been shoveling funds into her account every since. Now that money is gone. Finito. Arivederche. Her entire life savings wiped out. Now instead of spending the next 30 years of her life painting, traveling, and enjoying the fruits of her labors, she will be struggling to survive. Read Penney’s story in her own words here.

To most of us the auto bail-out is first and foremost a matter of $500-$1,000 or so of our tax dollars (if that), and secondarily an ideological question of the relationship between free market capitalism and government planning in American society. Well to some other people it’s the issue that will decide whether or not they can feed their children. The city of Lordstown, OH is what is called a “company town”. Meaning, the entire town (all employment, housing, and commerce) is built around one particular business. In this town that business is General Motors. The majority of the residents of this town work for GM and if the company goes under their plant will close and they will lose their jobs.

They’ll be dead broke with no other immediate employment prospects and no way to sell their homes because no one wants to move to a city that no longer has a reason to exist. The Washington Post does an interesting piece on the town and the human impact a plant closing will have. Now, my views on a taxpayer bail-out of GM are complicated, but I don’t think anyone can have a truly developed opinion on the bail-out (whether for or against), without at least acknowledging certain societal consequences of either course of action.

Not to be preachy, but that’s my two cents. Best to you and yours and have a pleasant Friday.

Recession Historical Perspective: Not Depression 1929, Try Panic of 1873

Credit crunch? Check. Banks hoarding money? Check. Bubble bursts on a severely over-leveraged construction industry? Check. Up and coming overseas power under-cutting larger economies with cheap labor and manufacturing? Check.

These were not the attributes of the Great Depression, but of the Panic of 1873. Turns out that nearly a century before a single mortgage broker had uttered the words “sub-prime”, the robber barons of the railroad industry had caused a massive financial panic through excessive construction and tricky financing of low-grade bonds that turned out to be worthless. Back then America was the rising commercial power saturating Europe with cheap goods stemming from abundant natural resources and labor force. This time around it’s China.

As this article in the Chronicle Review shows, striking similarities exist between our current situation and the Panic of 1873. That one lasted for four years. Hopefully there’s less in common here than we think.

Murky Bailout Gets Clearer(?)

The innate paradox of using public funds to preserve private business broaches many tough questions, one of which we find right before our eyes today. This morning, Illinois Governor Rod Blagojevich announced that all Illinois government agencies will immediately stop doing business with Bank of America, until it extends a line of credit to a Chicago-based business Republic Windows & Doors.

The scenario is this: Bank of America received $25 billion of taxpayer money from the bailout, the objective of which was to enable B of A to lend money out to businesses and debtors that needed the short term credit in order to survive (i.e., pay for inventory, payroll, and other necessary business expenses). Since there were few outright conditions to receiving the money, in theory B of A was supposed to be relatively generous with bailout funds, sometimes giving out riskier, yet reasonable, loans to struggling businesses in order to prevent job cuts and bankruptcies. Republic is exactly such a company and finds itself unable to keep business open and to pay recently laid-off workers their health and severance packages without borrowing the money from B of A.

On one hand, I applaud Gov. Blagojevich whole heartedly for holding B of A responsible. They accepted taxpayer money justified on the belief that they would lend that money out to struggling businesses and they need to be held accountable. It is incredibly refreshing to see our government monitoring the way our taxpayer dollars are used and taking tangible steps to ensure that they benefit individual hard-working Americans as opposed to special interests.

However, this scenario still raises an important issue. Does it really make sense for the government to force banks to neglect underwriting standards and make risky loans to businesses that have a high chance of default (I despise having to link to the National Review, but this posting is a good counter-point)? I mean, giving Republic, oh let’s say $3 million of taxpayer money via Bank of America ain’t such a great idea if Republic can’t pay it back anyways. Workers will get temporary relief and severance pay, but that’s only a temporary solution and soon enough that $3 mil will be gone.

Recent evidence suggests that the big banks have been excessively conservative in their lending and have not been extending credit even to companies that have solid prospects of repayment, so I’m suspicious of Bank of America in this case. Republic has been encountering financial difficulty (as have most retail businesses), but unless B of A makes a strong case that a Republic Windows & Doors bankruptcy is a near certainty, I believe the government should have the right to force B of A to loosen underwriting standards and make this loan in order to save jobs and honor severance agreements.

Nevertheless, this is a textbook case of the fascinating and complicated baliout-related issues that will be raised over the next few years. Hopefully Blagojevich and our other elected officials have the wisdom and the fortitude to answer these questions correctly, and if not, hopefully the American citizenry has the gumption to hold them accountable for their mistakes.

Elliot Spitzer May Be A Pervert But He Ain’t Dumb: Part II

Good ol’ Jacob Weisberg over at Slate has gone ahead and given the disgraced former Governor his own column. I love the defiance. This week Elliot takes on the bailout and its seeming perpetuation of our broken economic system. We had to save these banks because they consolidated and became too big to fail. So we went ahead and…consolidated them and made them bigger. Great. Just fucking great.

By the way, there was a guy named Karl Marx who once predicted that when power, wealth, and private property became too concentrated in the hands of a few monolithic corporations, the capitalist system would destroy itself. In other news, I’ll be contacting Marx for his college football picks of the week.