During my 40 years in the news and investment businesses I've seen a lot. There have been good times and challenging times but I've always remained an optimist. At the end of the day, America has always had too much going for it to stay down for long.
I must still feel that way because, as always, I'm fully invested for growth and I own stocks, real estate, and part of a car dealership that are all well run and should be successful over the long haul.
Having said that, the current political and economic environment just seem to be getting scarier and scarier. Most people know this. It's just our national leaders and those entrusted with telling us what's going on that seem to be clueless.
We get daily stories about the subprime mortgage crisis and the multi-billion dollar losses that have been realized by a number of financial institutions. Even as the data gets worse, the news media reports it as a contained problem and keeps predicting that we've reached the bottom. Their story line is simple: Too many poor people were loaned too much money and the lenders got in trouble. Too many rogue traders that weren't well supervised made crazy trades and cost their employers a fortune. But now the Federal Reserve is addressing the problem and things will get better.
President Bush and his financial team are telling us constantly that we are going through a little bit of a slowdown but help is on the way. Even as I write this, checks that will total $170 billion are on the way to Americans who will go on a huge shopping spree and turn things around. Treasury Secretary Paulson said today that 500,000 new jobs will be created as a result of this great plan.
The problem of course is that each of these statements couldn't be more wrong. And as we know, when our leaders declare "mission accomplished" and it's not, they stop looking for solutions to the real problems.
The housing crisis is not just a subprime phenomenon affecting low-income people who bought homes they couldn't really afford. It is widespread and affects millions of Americans, many of whom are not used to being poor. Unwise loans were made by many more people than subprime borrowers. The biggest loans over the last five years were made to middle and upper income homeowners (like me) who had small or no mortages (like me) but were tempted to pull equity out of their homes at low rates and use the low-cost money for other things. Many of those people (like me) now owe more on their homes than they paid for them just a few years ago and will be paying those debts off for years to come. I was lucky and locked in a fixed rate but even having done that, I will not be the consumer I once was over the next several years and certainly won't be pulling any more equity out of my home. The absence of that piggy bank will have a huge negative effect on the economy--much more dramatic than the subprime mortgage problem.
As far as the trading losses and banks and investment firms are concerned, those were systemic--not the result of a few bad apples. In recent years, trillions of dollars have flowed into hedge funds and other vehicles where the managers are compensated with bonuses related to the profits they generate. Those bonuses can run into tens or even hundreds of millions for those traders that guess right. If they guess wrong, they will probably lose their jobs but they're young and can always start over.
The infamous 31-year old French "rogue trader" who gambled $75 billion of Societe General's money on a stock futures trade that lost $7 billion would have made millions in bonuses if the trade had worked. When it failed, he got fired but, according to a news report this week, now has another job. The same is true for traders at banks in the United States where our government guarantees depositer's money if things go wrong but where the banks and employees make billions if they guess right. Is it any surprise that managers and traders took wild gambles with investor's money? The game was "heads I win, tails you lose" and they played it to the hilt.
Another daily story in the news deals with the skyrocketing price of gasoline and food. The root problem is the collapsing value of the dollar which is talked about much less. Since 2001, Congress and the President have adopted a disastrous policy of spending huge amounts of money, fighting a war, and cutting taxes sharply all at the same time. We have been running up trillions of dollars worth of debt (not counting trillion more for the war) without paying for any of it or making any provision for where the money will come from.
The financial markets figured this out right away and for years now the dollar has been plummeting in value against virtually every foreign currency. The news reports tell us that currencies such as the Euro and the Yuan are up by more than 50% against the dollar. What they don't tell us is that the Mexican Peso, the Polish Zloty, and the Israeli Shekel are all up more than 30% as well.
It was shocking to me that when Kristen and I were in Poland and Hungary several months ago and in Mexico recently, small merchants who used to be thrilled when you paid them in dollars all asked for zlotys or pesos instead of dollars and would only take the greenback as a last resort. Our guides and hosts all advised us to change our dollars into the local currency right away before it dropped in value during our short stay. It's hard to describe what that experience makes you feel like as an American.
All the politicians are now debating whether we should raise or lower taxes but the conversations seem to be totally disconnected from the real issue which is "how do we pay our bills." It seems so simple to anyone who has had to balance a personal budget--you can't buy things unless you know how you're going to pay for them. Why is the question never framed this way in the public debate? Bush and McCain talk about keeping the tax cuts in place as though the status quo was a viable option. Clinton and Obama don't have too much to say on the issue either other than that the rich should pay more. But that's not the point. The point is that we have to find a way to behave responsibly and no one discussing that.
The Economic Stimulus plan is in fact no plan at all. It's just another giveaway of $170 billion that we don't have and will have to borrow from our children. A true plan would address our crumbling roads, bridges, and infrastructure and create real jobs that will truly help the economy. But no one in Washington has time for that in an election year so instead we each will get a check so we can buy an I-phone or pay down our credit cards.
At our car dealership sales are down and many of our salesmen haven't had a real paycheck in months. One of them is living in his car. Customer traffic is down slightly but the real problem is that the banks and credit unions are only willing to loan money to people who truly don't need it. The pendulum has swung from one extreme to the other, as it always does. One of my business associates is in a two income family but they have had to drain their retirement accounts and get a second mortgage just to pay their bills.
As I said, I've been through some major ups and downs over the last 40 years but this is the first time that people I know personally and work with are struggling in these ways.
I still believe that in the U.S. we are blessed with a unique combination of capitalism and democracy that makes us a heavy favorite to bounce back as we always have. It would be a big help if our leaders in Washington had the guts and the insight to behave like grownups. It would also be nice if the news media was less worried about personal celebrity and more focused on making sure Americans understand what the issues really are and what it's going to take to solve our problems.
One thing is for certain. Since the solution could involve real sacrifice we are not likely to hear much until after the elections. And we'll be lucky if we hear it then.
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