|
|
Every time I pick up a copy of
the prestigious financial press, I can't help but read articles pushing Keynes
theories. Writers point or wag a finger at the lack of liquidity and the fact
that America
is in a Keynesian-feared "Liquidity Trap". Indeed, almost every
night, the talking heads on TV recite old quotes from textbooks taken out of
context and use them to brainwash the last two generations of American
college students with Keynesian notions. We can only marvel at the fact that
the theory is actually being sold to us as religious dogma, straight from
academics that have only lived through America's good times.
While these professional
economists are certain to draft future Federal Reserve and Treasury policy
for the next four years, they have never had practical business experience such
as lending their own money and surviving only if the money is paid back.
Without real experience, these Keynesians can't help but omit from the
discussion the stunning reasons why the economy is stuck in a credit
quicksand. Worse yet, they share the view that the only way out of this mess
is to print up massive amounts of money from the Fed and push government
spending to end the credit crunch, and get liquidity flowing again. If only
quick fixes were so easy.
Calling the situation a
liquidity trap is a misnomer. America,
and now the rest of the world, is in an insolvency (not liquidity) trap.
Banks don't want to lend to bankrupt consumers and businesses any longer
became for years there was too much liquidity, and they've already borrowed
more than they can ever pay back.
The first sign of just how bad
the situation really is was when Hank Paulson (known as "Mr. Risk"
at Goldman Sachs, and recently in charge of handing out $750 billion of goodies
to banks and Wall Street) appeared on public TV about a month ago. During
that broadcast he actually said, and I quote: "The economic problem
is that consumers couldn't borrow to buy the necessities of life".
Believe me, when you have to borrow to eat and pay the rent, you are already
insolvent and on your way to bankruptcy; you just don't know it yet!
Remember, it was Paulson and his Wall Street buddies at the major investment
houses who got us into this mess by pushing lending on mortgages to unqualified
people who could never afford them. When I heard Hank speak, it made me sick.
Let's take an honest look at
what's really happening to the economy. Over the last 15 years or so, we were
running a Hank Paulson-style economic model facilitated first by Alan
Greenspan, and now Ben Bernanke. It was liquidity, liquidity, liquidity, so
the average consumer could borrow against his house, buy a car for nothing
down, and live way beyond their income on credit cards. The magical fairy
tale, that housing prices only go up, was sold worldwide. Now, if you look
around, you'll see what's left of Bush's "Ownership Society".
Millions of Americans who fed into Bush's doctrine and craved homeownership
and the good life, are on the brink of disaster. Liquidity, liquidity,
liquidity, led to bad loans, bad loans, and more bad loans.
Businesses are suffering along
with consumers because they, too, assumed too much debt and are scrambling to
raise revenues to survive. Dwindling retail sales in stores and lower
consumer spending mean revenues are far lower than expected. In turn,
delinquent consumer and corporate loans cause major bank failure. State and
local governments are also gearing up for ever-rising tax receipts but with
the housing mess and escalating unemployment, receipts are way down. If local
governments don't get bailed out, municipal debt defaults will pile up.
Basically, excess liquidity has
left the private sector riddled with bankruptcy. We got here because far too
many loans were priced based on the probability of being refinanced and
not on the ability to be repaid! As long as liquidity was flowing, bad
loans could be rolled over into bigger bad loans, but now the music has
stopped for refinancing these loans. As in musical chairs where everyone
races to sit down when the music stops, one player will always be left
without a chair and is eliminated from the game. That eliminated player
represents the millions of Americans and business owners who are suffering
and can't face the music.
To say that America is facing
a liquidity crisis is like saying a man suffering a massive heart attack is
having chest pains. The Fed and Treasury are treating the economic symptoms
with a stimulus package and TARP money, which have the curative powers of
morphine and whiskey to deadbeats looking for handouts. Like a drug,
liquidity can only temporarily make the pain go away.
The obvious cure for the credit
problem is higher incomes, less credit, and more savings, just as the only
real cure for a heart problem is a healthier diet and regular exercise.
Neither are fun, and it won't be easy to change the habits of our
debt-addicted society. But our government will try to get the American people
to go along politically with the easy way out through massive government
spending, liquidity and borrowing.
Keynesian theory says the fun
never ends, and America
used Keynesian nostrums to push up private spending through credit. Now we
are going to use this same theory to justify creating new debt and spending
in the public sector.
So, if too much liquidity and
private borrowing caused mass insolvency, how can more liquidity, and public
borrowing, be sold as the cure? Ah, welcome to government double talk. The
government's motto is to never speak the truth, and by calling the insolvency
trap a liquidity trap - forcing the public to look in the wrong direction -
they can call out for fresh money without guilt!
If the Keynesian solution is to
move the bankruptcy of the private sector to the bankruptcy of the public
sector, how bad will that be for the taxpayer?
I estimate the bank bailout will
cost the American taxpayer $2 trillion to $3 trillion, not $750 billion. The
government will guarantee about $10 trillion of private assets, and will push
Treasury borrowing to $2 trillion in 2009. (This is a deficit equal to
about 14 percent of GDP). In order to save the banks and private sector,
the US
will be heading straight towards bankruptcy of the public sector. Insolvency
of the public sector means higher Treasury deficits and the endless printing
of money by the Federal Reserve, causing inflation. So I'll continue buying
gold because it doesn't go bust like a private sector mortgage bond, and it
doesn't get inflated away. What will you do?
Richard Benson
SfGroup.org
Richard Benson is the founder of The Specialty
Finance Group ("SFG") was founded in 1989 as a financial broker to
private finance companies, introducing them to major financial institutions that
would provide them with equity, subordinated debt, and senior credit
facilities using the Capital Market.
|
|
