The Omega Letter Intelligence Digest

Is the Sky Falling Yet?



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The Omega Letter Intelligence Digest
Vol: 18 Issue: 30 - Tuesday, September 30, 2008


Is the Sky Falling Yet?


Last week, I expressed my opinion that the current credit 'crisis' is a manufactured one. So, what do I think in the wake of the bailout failure followed by the largest one single-day drop in the Dow Jones Industrial Average in all of human history?


I think the current credit 'crisis' is a manufactured one. That is not the same thing as saying it isn't serious, or that there isn't a real danger that the global economy could slide into a recession or depression as a consequence.


What I am saying is that it was manufactured. This morning's edition of the Toronto Globe and Mail called this the "worst financial crisis since the Great Depression." Later in the same story it notes that both the Dow and the Toronto Stock Exchange lost 6.9% in yesterday's selling.


So, if yesterday's 6.9% sell off was the 'worst financial crisis since the Great Depression' when the market lost 40% of its value, then what was the Crash of 1987 -- when the market lost 25% of its value?


You begin to see what I mean. It isn't that I'm arguing its time to break out the champagne -- this is serious -- but it isn't the Big One -- at least, not yet. It could easily become the Big One, however, thanks to breathlessly irresponsible reporting like the one I quoted from the Globe and Mail.


USA Today's headline talked about the blame game ongoing in the Congress 'due to the failure of the bailout'. First off, it assumes the bailout was the panacea necessary to fix the problem.


I watched the vote. The Dow was already down almost 400 points when it still looked like the bailout would pass. It wasn't necessarily the failure of the vote that caused the market to tank -- odds are good it would have tanked anyway.


But according to USAToday: "The financial fallout was of the Armageddon proportions that some predicted if the $700 billion bill — which was promoted by the Bush administration as the best way to boost investor confidence and unclog frozen credit markets that have created a daily bank death watch on Main Street — failed to pass."


"It was the equivalent of a Category 5 hurricane," says Scott Black, president at Delphi Management."


Hardly. When one looks at percentages instead of numbers, yesterday's losses weren't actually the worst in history -- indeed, yesterday doesn't even rank as an official market 'correction'. The combined losses (Dow, S&P and NASDAQ) for yesterday are estimated at 8.8%.


I looked up the web definition for the term "market correction." A stock market correction is defined as a time when major market indexes drop between 10 percent and 20 percent.


Declines greater than 20 percent are considered to be bear markets.


In the past 10 years, Standard & Poor’s Composite Index of 500 Stocks has experienced a correction several times, and a bear market early on in the new millennium.


Yesterday's losses weren't even severe enough to meet the definition of a market correction, let alone a stock market crash.


But here is another place to take a reality check. So far, not one single banking customer in any of the failed banks has lost money. The 8.8% losses chalked up yesterday were real -- but they were EIGHT POINT EIGHT PERCENT -- that's not a Category 5 Hurricane -- its a minimal tropical storm.


That is NOT to say that all is well. All is NOT well. But it isn't a financial Armageddon. It isn't the worst financial crisis since the Great Depression. Not even close.


It isn't a stock market 'crash' and it still has to drop several points to fit the minimum definition of a stock market 'correction.'


But it's a political windfall for the Democrats if the public thinks it is.


So it failed.




Nancy Pelosi opened the vote by blaming the entire 'crisis' on the fiscal policies of the Bush administration and George Bush in particular.


"But only a part of the cost of the failed Bush economic policies to our country. Policies that were built on budget recklessness. When President Bush took office, he inherited President Clinton’s surpluses — four years in a row, budget surpluses, on a trajectory of $5.6 trillion in surplus. And with his reckless economic policies, within two years, he had turned that around."


Time for a reality check. First, 'four years of budget surpluses' caused the 2000-2001 recession. The recession didn't turn around until after 9/11 forced the US back into deficit spending.


The US economy is a DEBIT (debt-based) economy. A balanced budget guarantees a recession. Despite the Great Depression and the deficit spending caused by New Deal, by 1937 the US economy was very close to having balanced its budget.


This created "a recession within a depression". Roosevelt abandoned efforts to balance the budget and launched a $5 billion spending program in 1938.


By 1939, the national debt as a proportion of the GDP was at 40% and the Depression was soon over.


So if deficit spending is good for the economy, which of George Bush's 'reckless economic policies' caused the current 'crisis'? The one where he failed to overturn the Clinton economic policy that caused it.


It was Bill Clinton's economic policies that brought about the 1997 Community Reinvestment Act that required banks and savings and loans to lower borrowing standards and to offer mortgages to those whose income didn't meet minimum requirements.


Under the Act, banks were required to treat welfare payments, unemployment insurance benefits, alimony and child support payments as 'income' for the purposes of granting the mortgage.


And, since those on welfare or unemployment generally can't come up with 20% down payment, the Act required banks to finance up to 120% of the mortgage.


Suppose you bought a house for $100k and financed $120k so you could fix it up. Then the housing bubble burst and now your house is only worth $80k -- but you owe $120k.


So you're paying 40% more for your mortgage than you would pay to rent the same house -- and you have NONE of your own money at risk. What's to stop you from walking away?


Evidently, nothing. Which is why there are so many failed mortgages right now.


The current financial 'crisis' is not quite an official market 'correction'. It is the entirely the result of wrongheaded liberal thinking that if you give somebody something for nothing, they'll respect it as if they had earned it.


Finally, after the bailout bill failed, the Democrats have done a pretty creditable job of blaming the Republicans for not passing it.


To do a reality check on that charge requires only that one restate the obvious: The Democrats have a MAJORITY in Congress.


Therefore, Democrats could have passed that bill even if not one single Republican voted for it. That the Republicans could have tanked it is ludicrous on its face.


So, in the final analysis, the current credit crisis is NOT a meltdown. It was caused primarily by Clinton administration's liberal economic policies.


And, had the Democrats wanted to pass the bailout, they could have done so -- even in the face of unanimous minority opposition.


Does ANY of that stack up with what you are hearing on the news?

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