2008 Volume 11 Issue 4

Editorial: Crisis in America: A Nation at Risk

Editorial: Crisis in America: A Nation at Risk

Middle-class Americans must rescue America to save themselves.

“It was the best of times; it was the worst of times. It was the age of wisdom; it was the age of foolishness. It was the epoch of incredulity; it was the season of Light. It was the season of Darkness; it was the spring of hope. It was the winter of despair; we had everything before us; we had nothing behind us. We were all going directly to Heaven; we were all going the other way.”

Charles Dickens, A Tale of Two Cities

Photo: Lilli Jolgren Day

The U.S. economy is in a “once-in-a-century” crisis, according to former Federal Reserve Chairman Alan Greenspan, who appeared on the September 14 episode of ABC’s “This Week with George Stephanopoulos.”[1] Little did we know how insightful Greenspan’s comment would prove to be; in the following weeks, we witnessed the entire U.S. financial system bordering on total collapse. On September 28, as the bailout bill languished in Congress, Warren Buffett, “The Sage of Omaha” proclaimed that the government must agree to bail out the economy or face the “biggest financial meltdown in American history.”[2]

The bailout bill finally did pass on its second pork-barrel-enhanced try to become the law of the land. Most economists were in favor of some congressional action, but a substantial number of economists were against the bill that was finally approved. Needless to say, the question remains whether the funds will be sufficient in financial terms or viable enough to save the teetering American, and world, economy.

It is important to recall the words of Karl Marx: “History is economics in action.” Congress’ current actions appear to be in deep conflict with America’s historical economic conduct. The nation is more socialist than at any time in its history. The government not only owns Freddie Mac and Fannie Mae (an event that doubled the total debt of the U.S. government overnight if properly accounted for); it also owns American International Group (AIG), and will shortly own an unknown portion of the U.S. financial system. There is no way to even estimate the magnitude of the bailout. The bailout bill (which went though Washington morph-speak on the second try to become the “rescue bill”) stands at over $700 billion, and that does not include the amounts advanced by the Federal Reserve (FED). It is even more remarkable that the FED does not know whether certain derivative investments (this does not even include the $55 trillion for credit default swaps, many of which the U.S. government is now liable for through ownership of American International Group [AIG]) are assets or liabilities to the financial institutions.

It appears that more than just the American economy is bordering on breakdown. It is far more significant that America its culture and spirit is in total crisis and bordering on collapse.

First finance is industry next?

The economic collapse is beginning to take its toll on American industry. Quietly and without fanfare (but preceding the financial system bailout), President Bush approved a $25 billion bailout to the “Big Three” automakers, General Motors, Ford, and Chrysler, the last of which was recently taken over by a well-connected, Wall Streetleveraged hedge fund. Like Wall Street, the automakers eschew terms like “bailout.” The two presidential candidates even referred to it as part of the overall investment in green technology. As Jim Press of Chrysler told ABC News: “It is not a bailout. It is a good investment between industry and government.”

This crisis in the financial sector will, of course, bring additional negative impact to the industrial sector. The September 1 Barron’s cover story said it all “Look Out Below!”[3] when it noted that the increasingly slow economy and scarce credit spell more disasters at debt-laden companies.

Unfortunately, the list of possible industrial failures is far too long to outline here. However, it should be noted that the problem is so large even General Electric (the highest-credit-rated industrial company in America) announced it is having difficulty securing credit to cover the $15 billion it needs to continue operating in these final months of 2008. GE, like Goldman Sachs, turned to Warren Buffet who is investing $3 billion in the corporation.

In early October, Standard & Poor’s Ratings Services announced that General Motors only has enough money to operate through December and, currently, it cannot raise funds. Is the federal government going to bailout industry as well? The states of California and Massachusetts are currently unable to secure sufficient credit to pay all their bills; other states are having difficulty as well. Is the federal government going to bailout states, too?

One major concern centers on whether further erosion is preventable. Congress seems quite willing to shower the privileged elite of American finance and industry with financial bailouts or loans that others cannot secure. Who makes these choices and are they fair to middle-class Americans? The answer remains unclear.

Americans have been polled many times on the bailout bill. Their opinions have vacillated sharply, depending on where the bill was and where the stock-market indices were on any given day. Even after its passage, the bailout bill remains utterly unacceptable to the majority of Americans.

What accounts for this depth of hostility and anger?

This anger and hostility represents, in my opinion, a critical moment in American history, when those who follow the rules realized they had been completely undermined by an unscrupulous and incompetent government that enjoys an incestuous relationship with the corporate and financial elite of the country.

This belief can be seen in the October 21 CNN poll that found widespread dissatisfaction of Americans with over 75 percent saying things are going badly in the United States. Similar numbers say they are both angry and stressed out. Two-thirds of those questioned said they were scared about the way things are going.

“It’s scary how many Americans admit they are scared” said Keating Holland, CNN’s Polling Director.

The message of government is clear: To hell with the rest of you. The message is followed by the realization that the government appears determined to destroy the middle class, the last obstacle threatening a controlled society.

A review of the mortgage meltdown clearly shows this orientation. The real beginning of the financial meltdown came when the Clinton administration wanted Fannie Mae to ease credit scores to allow increased home ownership among minorities and low-income consumers. These credit scores continued to deteriorate during the Bush administration, and under Alan Greenspan, the FED made this orientation into a major problem in the ongoing low-interest environment. Wall Street jumped on the bandwagon reselling these toxic loans without full disclosure, and the key regulators, the FED and the Securities Exchange Commission (SEC), chose to do nothing to stop this insane party. The minor regulators were pressured by the FED, the SEC, the White House, and Congress to take no action. Congress received kickbacks (also known as “Campaign Contributions for Better Living”) to block the minor regulators from their fiduciary duty. The day of financial judgment would ultimately come.

Many consider the failure to support Lehman Brothers as the defining day and moment of judgment in this crisis. Lehman Brothers’ failure resulted in the subsequent “bankruptcy” of certain money market funds that held Lehman Brothers’ commercial paper. This resulted in the run on many money market funds that caused not only redemption problems, but also Treasury bill interest rates to fall to virtually zero. Was Secretary of the Treasury, Henry Paulson whose net worth (accumulated while Chairman of Goldman Sachs) is estimated at $700 million trying to send a message of drawing the line or was he effectively destroying one of Goldman Sachs’ primary institutional competitors?

Who is representing Main Street?

The middle class, also referred to as “Main Street” has very legitimate reasons to question all of this conduct. Who is representing them? Can they rely on a very tainted Secretary of the Treasury? Can they rely on Christopher Dodd, Chairman of the Senate Banking Committee, who has received campaign contributions directly from Henry Paulson, Goldman Sachs, Freddie Mac, and Fannie Mae? The latter two even contributed during Congress’ attempt to enforce more regulation that might have avoided their collapse. It would not, of course, come as a surprise that Senator Dodd voted against the increased regulation. In the interests of fairness and full disclosure, seven (three Democrats and four Republicans) of the banking committee’s 21 members received campaign funds from Henry Paulson. I suggest that the members are just a group of his “friends and family.”

Can we even trust the new directors of the bailout plan? They almost all are ex-Goldman Sachs executives. Many have raised questions over this potential conflict of interest. At a House Oversight Committee hearing on the fall of Lehman Brothers in early October, Congressman Henry Waxman, committee chairman, criticized Paulson’s position; A spokesperson for the Treasury stated, “Bringing additional expertise to bear at a time like this is clearly in the best interest of the U.S. financial system and the U.S. economy.” To paraphrase Charlie Wilson of GM’s famous misquote: What is good for Goldman Sachs is good for America.

Congressman Dennis Kucinich, who sits on the oversight committee, also voiced his apprehension that putting Paulson (and other Goldman executives) in charge puts him “in a direct position where he can benefit the people that he worked with while he was CEO of Goldman Sachs.” This only reinforces the concern over Paulson’s questionable behavior towards both American International and Lehman Brothers.

Can we even have confidence in Warren Buffett? He touted the bailout bill, which could make him millions if not billions in his yet-to-be-consummated investment in Goldman Sachs? Can we even take Alan Greenspan’s words seriously? He is the man who may have caused the Greenspan-Bush Depression, but he claims that the housing bubble is the fault of unscrupulous bankers repackaging loans as securities and selling them to investors. That is typical of the Washington mentality it is always the other guy’s fault.

After months of not addressing his responsibilities as FED chairman to monitor and, if necessary, modify such banking activities, Sir Alan finally conceded to errors in his regulatory policies in late October. Many, including this author, firmly believe that he absolutely helped inflate housing prices by keeping targeted short-term rates too low for too long, which, in turn encouraged reckless lending and borrowing. The credit derivatives allowed even more reckless behavior by allowing the ultimate justification: You are insured against loss.

The FED is the regulator of bank holding companies as well as the lender of last resort. The FED has deep institutional relationships with the primary dealers of government securities, including all the major securities firms like Goldman Sachs. The FED, even while choosing to continue low short-term rates, could have exercised discipline in the financial community. But the FED chose not to regulate the derivatives, which allowed credit swaps to swell to a degree that certainly contributed to reckless Wall Street behavior.

The FED and the SEC could have used multiple methods to convey their displeasure to banking and securities firms; however, the FED and the SEC chose to do nothing. The call for new regulation is nonsense; we have enough regulation on the books to accomplish any task.

What America needs is a value-centered government that enforces rules and does not become beholden to those they are charged with regulating and taxing. Such beholden relationships develop into incestuous relationships that foster corruption.

Main Street knows that they have been had, and they are furious at the tainted kickback system between congressional members and the privileged elite of finance and industry.

Just how stupid do they think the American middle class is?

It is increasingly obvious that the implosion of Wall Street has created a new populist movement. Hopefully, this will change the political landscape and reshape the country’s economic policies, especially tax and trade. John Sweeney, of the AFL-CIO, commented on this populist sentiment: “One thing is certain. No one no politician, no investment banker, no television commentator, no economist should be able to say again with a straight face that here in the United States we just let markets do whatever markets do and everything works out for the best.”[4]

It is equally obvious that, in the corrupt economic system that is the current America, the economic “trickle down theory” does not work. All the American middle class has received is a “trickle down” in their standard of living. To quote Ross Perot, “the giant sucking sound” one hears is the sound of jobs leaving America in the great sellout.[5] Fair trade only works when the other guy also allows fair trade.

Most Americans believe that something is fundamentally wrong and that we are moving in the wrong direction. Americans want change now more than ever. This is quite true regardless of which presidential candidate one supports or which candidate is elected.

It is increasingly obvious that Americans are becoming very fearful of the economic crisis and its negative implications. The current administration is trying to curb this fear, but they are the ones who created it. They sold the bailout bill through fear tactics and this fear factor, which cannot be easily abated, has the potential to create real havoc. It is, without a doubt, one of the greatest blunders of this incompetent administration.

The next president must instill in all Americans, but especially in middle-class Americans, a sense of psychological well-being and a belief in America’s capitalistic system and democratic government. There are no financial panaceas that the government can undertake that will be successful without this belief. Many believe that America came out of the Great Depression not because of the programs undertaken but because Americans believed in their government by 1936.

“The incoming president will be facing many bigger challenges than any president since Roosevelt” said John Kamensky, senior researcher at the IBM Center for The Business of Government, in a CNN.com article. In the same article, it stated that 71 percent of people surveyed in a recent USA/Gallup poll feel the next president “faces more serious or much more serious challenges than any new president in the past 50 years.” According to the poll, two-thirds of those surveyed want stabilizing the economy to be the next president’s top priority; only 12 percent said managing the wars overseas comes first.

This disillusion in both industry and government by Americans can be noted in the statement of Professor Roubini of the Stern School of NYU. He stated that “We have reached the scary point where the dysfunctional behavior of financial markets has destructive effects on the financial system and much worse on real economies.” He further noted “so it is time to think about more radical policy actions and government interventions.”

Thus, the to-be elected President simply must provide forceful and effective leadership to reverse this dysfunctional behavior ominously present in America today.

As Will and Ariel Durant argued, “When the group or a civilization declines, it is through no mystic limitation of a corporate life, but through the failure of its political or intellectual leaders to meet the challenges of change.”[6]

The endgame message is clear: You must take care of yourself.

In these difficult economic times, it is worth remembering Charles Darwin’s observation. The species that survive are not the strongest or the smartest ones, but the ones most responsive to change.[7]

Time is of the essence. Do not delay.

It is time to be politically aggressive. Middle-class Americans must act to save themselves. Middle-class Americans must push government to be responsible, so they can believe in their government. Hopefully, everyone will act in heretofore-unimaginable ways, within the bounds of the laws of the land, to avert what may become The Greatest Crisis of America.

Middle-class Americans must rescue America to save themselves.

Good luck and God bless.

Please refer to my two most recent articles in the Graziadio Business Report: The Top 10 U.S. Economic Items to Monitor and The Top 10 Embracements for Difficult Economic Times. It is my firm belief that they will help in this most difficult of economic times.

[1] ABC News Blogs, Greenspan to Stephanopoulos: This is ‘By Far’ the Worst Economic Crisis He’s Seen in His Career, http://blogs.abcnews.com/politicalradar/2008/09/greenspan-to-st.html.

[2] CNNPolitics.com, “Buffett to Congress: Bail out economy or face ‘meltdown,'” http://www.cnn.com/2008/POLITICS/09/28/bailout.deal/.

[3] Andrew Bary, “Look Out Below!” Barron’s, September 1, 2008.

[4] Nina Easton, “Main Street turns against Wall StreetFortune, September 28, 2008.

[5] Andrew Farrell, “‘Giant Sucking Sound,’ Part DeuxForbes, July 15, 2008.

[6] Will and Ariel Durant. The Lessons of History, (New York: Simon and Schuster, 1968).

[7] Charles Darwin, On the Origin of Species by Means of Natural Selection, or the Preservation of Favoured Races in the Struggle for Life, (first edition, 1859).

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Author of the article
Darrol J. Stanley, DBA
Darrol J. Stanley, DBA, is a professor of finance at the Graziadio School of Business and Management. He is well-known as a financial consultant with special emphasis on valuing corporations for a variety of purposes. He has also rendered fairness opinions on many financial transactions, and he has been engaged by corporations to develop strategies to enhance their value. He has served as head of corporate finance, research, and trading of four NYSE member firms. He likewise has been the principal of an SEC-registered investment advisor. He has completed global assignments as well as having served as Chief Appraiser of International Valuations/Standard & Poor’s in Europe, Central Europe, and Russia.
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