Stimulus: Pissing in the Ocean?

Like many folks I’ve been trying to wrap my brain around the causes, effects, and consequences of the economic meltdown we are enduring while still trying to maintain a semblance of my own personal economic existence. As I’ve mentioned in earlier posts, I’m in the real estate business and I’m in south Florida, so I’ve been feeling the effects of this downturn for going on 4 years now. Business has been steadily declining since hurricane Wilma hit here in October 2005. For me, I manage because I have very low overhead and can operate in a variety of fields, but for real estate specialists, stand alone title companies, and real estate sales offices, well, there are a lot of shuttered storefronts they used to occupy. And there are a lot of empty homes around here as well with many more soon to come empty.

So I heard a figure regarding the amount of debt that is actually hanging out there waiting to fall all over us. The figure is incomprehensible to people outside the astronomy business. It’s 1.14 quadrillion dollars. That is a thousand trillion. Every trillion is a thousand billion and each billion is a thousand million. That 1.14 quadrillion (and I am intentionally NOT italicizing or otherwise emphasizing the number. If it doesn’t already pop your eyes out to see the word, then more emphasis won’t help) is the amount calculated to be owed to the end-holders of the so-called derivative debt held throughout the world. That is compared to the total estimated Gross Domestic Product of the entire world which is approximately 60 trillion dollars. Yes that is correct — the debt owed is almost 20 times the actual value of everything OF value on the planet. (I am also not making links here because a simple Google search of these figures will provide you with numerous references from all manner of sites, both reputable and otherwise).

I will once again make reference to my first assessment of the financial crisis in that it’s not really a problem of credit in and of itself. The problem is that so much credit has already been extended that there is no way that the collateral which backs it can ever hope to come close to even cover a bankruptcy level of pennies on the dollar. Value is the problem. There isn’t any. The banks blew it. They are dead. Giving them money to revive is a false hope. They are dead. Not comatose, not faltering, not on the precipice, not pinin’ for the fjords, but dead.

The bank bailout (TARP) was nothing it was billed to be in the sense of saving the economy — at least not in the long term. It was a very expensive stopgap. Or at least it seems expensive to us mere mortals. The purpose of the TARP had much more to do with stopping the imminent complete meltdown of the world financial system while the US was in the midst of a tumultuous presidential campaign. The failure to include oversight meant that instead of going to lending, it went to cover salaries of the banks’ employees. And yeah, also to immoral bonuses to executives who made bad bets because there was no downside to them for losing on such risk —hence executive life under the Bush administration. But mostly it probably went to salaries for bank tellers and the like.

Further payments to banks won’t solve the problem, and I can’t see how at this point any so-called “bad bank” can soak up the level of bad debt that is out there. I’ve heard it said that the mortgage crisis, the foreclosures being endured in the marketplace, don’t really infect everything like the “bad apple theory” says. But my understanding of how these derivatives work defines them as classic bad apples.

Let’s say you have a bunch of loans that were made in 2004. Some in that bunch were $500,000 no-downpayment loans, pic-a-pay deals allowing $400 per month regardless of interest rate. The unpaid interest gets tacked on as additional principle to be recalculated later. The buyer is an unemployed janitor but it’s a no-doc loan so no one is checking anyway. “Don’t worry in a few years of steady payments your credit rating will improve and you can refinance for a regular 30 year fixed at a better rate and for more than you’re borrowing now because the values always go up my friend.” Well 5 years later, the loan resets, the pic-a-pay option is no longer valid and now it’s a $3,000 per month payment on a house now worth $300,000. I don’t care where our friend washes floors now, he’s out on his ass pretty quick.

But his loan lives on because it was sold off in pieces long ago. Complicated math algorithms, which I admit I can sense more than explain, take pieces of the $500,000 loan, its expected interest, and the time at which they all accrue over a 30 year period, and bundle them together with other pieces of other home loans, commercial loans, credit card debt, and other instruments of financial encumbrance, into a package which then gets insured in similar pieces, and then bet on to either stay solvent or not. Soon it all becomes a giant greasy clot of financial promises which can never be kept. But as long as not too many of the internal debts go bad, the dishes can continue to be spun in the air. Well folks, too many went bad. The banks holding them can’t pay. We can throw money at them forever and they will never be worth anything. Unless we get to Zimbabwean levels of inflation of course, which is possible, and that might not still cover it.

I’m afraid the stimulus bill isn’t what you think it is either. It’s not intended to save the economy. $800,000,000,000 when you’re staring down the barrel of a $1.14 quadrillion ($1,140,000,000,000,000) is pissing in the ocean. You might feel warm where you stand, but it doesn’t last long or go far from its source. The bill is intended to keep people busy doing the important work of making sure this country can be self-sufficient when we get to the other end of this thing. Self-sufficiency is not the American way anymore. Premature globalization has made Ross Perot a genius as so many major industries no longer manufacture any products in this country anymore. And we don’t power the things we still do here with our own energy supplies. No one in power can say it because of the effect it would have on markets, though it gets slyly referred to all the time, but the world’s finances are already shot and we’re just now trying to get a jump on the cleanup before the full extent of the filth rolls over on us. If I’m right and that’s what the stimulus is really for, then it probably isn’t enough. More of these will come down the line as reality finally sets in. Whether the republicurs get on the bus as well will largely determine their survival as a viable party.

The stimulus is to pay paychecks for folks who will build whatever it is that’s about to get built. I’m wondering when the banks will finally be shuttered, our accounts guaranteed by that New Deal stroke of genius, the FDIC, and someone can tell us no one has a mortgage to pay anymore. THAT would free up some spending money. Especially if we don’t have to pay the credit cards off anymore either. If that happens, hell I’m selling off the gold necklace I have stashed away safely on ebay to someone in the Chinese Politburo and using the cash to open a community bank on my front porch.