The Meltdown On Bushs Watch - Road to the Middle Class

YOU CAN be a principled conservative and a loyal Republican and still be as angry as a Bush-derangement-syndrome Democrat over the mess in the financial markets.

You thought that the Republican Party was the safe-hands party, the party that you could rely on to manage the nation’s economic affairs in a competent and businesslike manner.

Yet here we are with the markets heading due south. At the beginning of last week they said that both Bear Stearns and Fannie Mae were having liquidity problems. A week later, Bear Stearns has been sold off to JPMorgan Chase at about 2 cents on the dollar.

It looks like a deal that would make mean old Mr. Potter’s offer for the broken-down Bailey Building and Loan generosity itself.

Now they are saying that Lehman Brothers is next. During Monday’s trading it was down almost 50 percent before closing at 31.75, down over 19 percent.

What price now for the fabled Republican reputation for managing the economy?

We have seen what happens to a conservative party that squanders its reputation for economic competence. Just ask the folks over at the British Conservative Party. Back in 1992 a big housing boom turned to bust just after a national election. Five years later the British voters were still mad as hell and the British Labour Party has now won three huge election victories in a row. The Tory Party still hasn’t recovered.

Of course there are plenty of excuses for the present mess. Let’s try out a few. Nobody thought that the securitization of mortgages would have been so slip-shod. Nobody could have foreseen what would happen when hedge funds started unraveling their highly leveraged positions in mortgage securities. Given the ludicrous subsidies for home ownership—tax deductions, the money factory at Fannie Mae, the 90 percent and higher mortgages—something bad was bound to happen sooner or later.

Here’s another excuse. Poor old Alan Greenspan couldn’t help himself. He had to crank up the printing press in 2001-02 to extract the economy from the tech crash and 9/11. You can’t blame the guy if he was a bit slow to crank up interest rates after the recovery started in earnest in 2003. After all, he had to help good old George get past the post in 2004.

Even if these excuses were worth a dime more than Bear Stearns, it doesn’t matter. Real-estate values are collapsing on Bush’s watch. Soon it will be jobs. Bush is a Republican, therefore Republicans are to blame.

Anyway, as Democrats have been telling us since 2000, Bush is a moron. Obviously Republicans are too stupid to recognize a moron even when he’s right in front of them. Why would you entrust the government of a nation to morons?

Nobody doubts that the Fed must now move aggressively to prevent meltdown of the banking system. That was the lesson of the Great Depression, when the 15 year-old Fed failed to fulfill its role of lender of last resort and let thousands of banks fail. In every credit crisis since, the Fed has printed enough money to prevent a meltdown. But the cost has been severe.

You can see the cost in the GDP numbers at MeasuringWorth.com. Back in 1900 the gross domestic product was $20.7 billion. But expressed in the dollars of the year 2000, the GDP back then was $378 billion. That means that the US dollar in 2000 had shrunk to about 5.4 cents on the 1900 dollar. Of course, if you prefer to figure the decline using the gold price, the dollar has declined from $20 an ounce in 1900 to $1000 an ounce today. That would leave us with about 2 cents on the gold-backed dollar of 1900, about the same as a stockholder in Bear Stearns is looking at today.

Don’t think this mess is just a US phenomenon. Housing prices are collapsing in Celtic tiger Ireland and in Spain. The European Central Bank has been bailing out Spanish banks, as in “ECB secretly rescues Spanish banking system.” There is still a fierce inverse yield curve on interest rates in Europe (i.e., short term rates are higher than mid-term rates), so we can expect that the blockbuster Mortgage Meltdown will shortly open in European theaters.

Barring miracles the US voter is going to blame Republicans for all this. So we conservatives are likely to get a good long opportunity to figure out what not to do next time.

Here’s a topic for early discussion. Explain why a bond is called a “bond” and most bond issues used to be covered by “bond covenants.”

Christopher Chantrill blogs at www.roadtothemiddleclass.com. His Road to the Middle Class is forthcoming.

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The Meltdown on Bush's Watch

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