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Posted by on Feb 20, 2009 in Economy, Politics, Society | 30 comments

My Rant

Since Rick Santelli and Virg Bernero have had their chance to rant – one from the right and one from the left – now it’s my turn to rant.

I’m angry. Our whole economy is and has been little short of an elaborate Ponzi scheme since the 1980s. We have generated very little “real wealth” in over 20 years, most of it based on increasingly deceptive financial instruments designed to spread the risk into dubious nooks and crannies of the shadow banking world. It all began with the Garn-St. Germain Act of 1982 that deregulated the S&L industry and let it compete with mutual funds. Despite the disaster that befell the S&L industry in the 1980s, the deregulatory activists in the Reagan Administration, the Fed and increasingly in Congress (among BOTH parties) spread the virus of easy credit to other sectors. Finally, we “unleashed the power” of our financial markets by repealing Glass-Steagal and discouraging the SEC from poking their noses into the derivatives market. With interest rates low, and income taxes cut, the party was on.

It was all a fraud.

The Dow is now back to its 2002 low – and in danger of its 1997 level. In fact, it is very close to the point it was when Fed Chairman warned about “irrational exuberance” in 1996 – 6436.

But think a little deeper about what’s going on.

Take a look at the Dow between the early 1980s and 2006. Do you really think that America has increased its net value by 14X between 1982 and now – all the while remaining relatively stable through the great growth decades after World War Two?

Dow timeline

Does this graph reasonably reflect the value of the major companies in the United States?

No. It has never seemed right. The only reason the DOW (and the S&P and other indices) jumped so steeply after the early 1980s was the arrival of new leveraging instruments – all of which were enabled and encouraged by the Spirit of Deregulation. Feeding this virtual engine was a vast array of pension funds and other institutional investors who bet the entire world economy on the full faith and credit of Wall Street. Undergirding this great “expansion” between the early 1980s and 2006 was…a house of cards.

With one small exception – the development of the internet and the resulting net gains in real productivity – the entire boom over the last 25 years has been based on the promise of other people to keep putting money in the market. As long as new people enter the market and lend – regardless of whether or not anybody is actually making anything – the system will keep enriching those at the top. For a long time, people in the middle got a taste of the good life too. McMansions sprouted up all across the suburbs as once-middle management schlubs could now afford to live and drive in high style.

And now, like Bernie Madoff and Robert Stanford, the Great Ponzi Scheme has collapsed.

The things that we once thought were worth a lot of money we now understand to be worth very little.

I don’t pretend to be prescient, but I’ve also sensed something amiss about the nature of our “wealth.” I grew up in Northern Virginia and watched as millions of homes were built way out in the suburbs. Why would people want to live out there? The dream of homeownership! I lived and rented in DC for a few years after college and loved it…but I couldn’t afford to buy anything there. I had to buy at some point, right? To get the mortgage-tax deduction! To get “real equity”! That’s what the “responsible people” did. Move way the hell out to Prince William or Stafford County and buy some modular dump made of balsa wood because it would be worth something after a few years – never mind the fact that everybody wanted a new construction house and the quality of the homes was so poor that existing-home sales could never keep up.

Following on the exurban sprawl was the arrival of big box retailers and SUVs to carry absurd amounts of toilet paper and microwave popcorn from the Costco to the storage room in the house next to neighbors that nobody knew. It was the American dream!

Actually, it was a fake world of commercialism that fed on its own delusions. People “needed” all the things they saw on HGTV for their foyer. People “needed” all those flat-screen televisions and fancy cars. All you needed was some jive job at some office where you entered numbers in a spreadsheet and ran a bunch of calculations for some company that moved a lot of other people’s fake money around. Good times.

The reason why I think people like Rick Santelli are frauds is that they think if everybody just “took their medicine” and the government stopped “picking winners and losers,” the Great Free Market would return and lift all boats again. It won’t. The Great Free Market that enriched people like Rick Santelli for the last few decades was based on paper wealth built on phony instruments that made any “real” valuation impossible.

Rick Santelli gives his faux-populism rant but this is who he really is (from CNBC):

A veteran trader and financial executive, Santelli has provided live reports on the markets in print and on local and national radio and television. He joined CNBC from the Institutional Financial Futures and Options at Sanwa Futures, L.L.C. There, he was a vice president handling institutional trading and hedge accounts for a variety of futures related products.

Prior to that, Santelli worked as vice president of Institutional Futures and Options at Rand Financial Services, Inc., served as managing director at the Derivative Products Group of Geldermann, Inc., and was Vice President in charge of Interest Rate Futures and Options at the Chicago Board of Trade for Drexel, Burnham, Lambert. Santelli began his career in 1979 as a trader and order filler at the Chicago Mercantile Exchange in a variety of markets including gold, lumber, CD’s, T-bills, foreign currencies and livestock.

That’s right, Rick Santelli made his wealth trading in the shadow world – financial futures, derivatives and hedge funds. He is not “real America.” He made money by moving other people’s money. And now he tells us that President Obama is unfairly taking his hard-earned tax dollars and giving it to the “losers” who got foreclosed on? People like Rick Santelli built this bogus wealth world and people like Rick Santelli destroyed it. The poor fools who watch him on CNBC and channel his faux-populism are just collateral damage.

I have no idea what will get us out of this mess. I think we are still far too leveraged and housing prices will have to keep coming down. I can only hope that at that point we can start investing in real, exportable products like green energy or biotechnology and not useless financial instruments. At the very least, I know that the Big Party that began in 1983 is over and will not be revived for a long time. Rick Santelli can hold his Tea Party and his Brooks Brothers Riot with the other Gatsbys of today. The rest of us “losers” will plod on in the real world.

[UPDATE]

Let me make a few corrections to my late-night rant, thanks to the astute commenters below.

1) The chart inaccurately portrays stock market growth in the 1950s. It should be logarithmic. Point taken. Here is a more accurate graph from Mikkel’s link.

Dow growth

But Mikkel’s point about debt driving the 1980s/90s jump and real wage growth and productivity gains driving the 1950s/60s increase holds true.

2) On a related matter, Austin Roth notes that there WERE real productivity and GDP gains between 1982 and 2000, though there were very few between 2000 and 2007. That is true to an extent – telecommunications, IT and other newer industries, combined with a freer trade network overseas (post-Communism particularly) opened up real gains. But did those GDP gains match the stock market gains? Don Quijote points out that GDP grew fourfold between 1980 and 2000 while the S&P grew 10-fold. The reason for the disconnect is clearly the increasingly leveraged nature of equities markets.

3) DaGoat says I made an ad hominem attack on Santelli unrelated to his point about bailing out the undeserved. The reason I went there was that Santelli made a gross generalization in attacking foreclosed homeowners as “losers.” Yes, there are people who made stupid decisions to buy homes they could not afford. But there are also many, many people who got foreclosed on because they lost their jobs in this recession and their prime mortgaged homes have now fallen underwater because of the decisions by myriad other people. Those people do not deserve to be called “losers” by somebody who made his living in the very markets that encouraged sub-prime lending and securitizing. It’s the false-populism from Santelli that irks me more than anything else.

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Copyright 2009 The Moderate Voice
  • Well said! It’s good to hear someone vent good sense for a change.

  • mikkel

    Actually the market went up a ton between 1945 and 1965. The chart needs to be on a logarithmic scale.

    That said, if you look at income and debt, from 45-80 incomes were rising and personal debt had modest increases. It’s only since 80 that debt has exploded, and there have been falling wages over that period.

  • StockBoySF

    elrod, good post but I will say that derivatives do serve a useful purpose of used properly.

    mikkel, thanks for the chart.

  • Mike_P

    Thanks, elrod. As a witness to the last 29 years of this “market-driven, no new taxes, trickle down” BS, but one who understood it was all smoke and mirrors, and who spent many an early evening network newscast screaming at his TeeVee, I find I’m no longer able to compose a coherent rant on the fallacy of it all. I’d like to believe I was “forward thinking,” or remarkably insightful, but I can’t – there were millions of us. It was all so obvious. Too many wanted to believe we could get something for nothing, even as the S&Ls melted down, and we stopped actually making anything, other than our ideas, the manufacture and marketing of which were done somewhere else. Even while we declared ours an “ownership society.”

    What were we left with? Pushing around junk bonds, derivatives, hedge funds, and real estate futures. Charles Keating, Dick Fuld and Bernie Madoff are our economic icons. What are we saddled with? Crumbling infrastructure, an education system in chaos, crushing debt (to the Chinese, no less), and religious fundamentalism. Of course there’s always our still-thriving military-industrial complex to keep us warm at night, as long as we’re fighting someone somewhere. What’s good for Raytheon is good for America!

    I guess Reagan deserves his place on Mount Rushmore, right next to fellow historic bookend, George W. Bush. Wait, we’ll probably need another edifice – a rogue’s gallery, for them. Is there room on Stone Mountain in Georgia? Better yet, a New Orleans levee?

  • Don Quijote

    Not to hurt your feelings there, ELROD but you sound like a leftist, practically a socialist.

    Not that I disagree with your assessment of the situation.

  • greenschemes

    Yes we should get rid of all Republicans. They are evil, evil people. This country should be rid of them and there should only be one legitimate party who only has your best interests at heart. How dare those rascally republicans give homes to people that shouldnt have them. How dare they listen to people like Barney Frank.

    As Barney Frank and the Democrats did to GWB. So now are the Republicans doing to Barak Obama. Because of rants like Rick Santelli and Elrod in America.

  • AustinRoth

    Elrod – i think you need to shorten the time frame you are blaming the financial derivatives and their lk on, and reduce the claim of ‘no real wealth’ for that same time.

    Even allowing for the correction of 2000 – 2001 to rid us of the silliness around the “New Internet Economy”, the economy WAS driven from the mid-80’s up to the late 90’s by an explosion of new technologies and the growth of the digital economy (telecom, semi-conductor, computers). This lead to true wealth creation, along with huge productivity gains within existing sectors.

    Now, if we limit ourselves to looking at the 2000’s, then I think you are spot-on that no real major wealth creation occurred during that time frame- that expansion was smoke and mirrors driven by financial speculation and manipulations in a number of areas.

  • greenschemes

    Now, if we limit ourselves to looking at the 2000’s, then I think you are spot-on that no real major wealth creation occurred during that time frame- that expansion was smoke and mirrors driven by financial speculation and manipulations in a number of areas.

    CHEERED ON BY BOTH SIDES OF THE ISLE.

  • Don Quijote

    AR,

    In 1980 the S&P was at 114, the US GDP was $2,768,900,000,000.00.
    in 2000 the S&P was at 1394, the US GDP was $9,764,800,000,000.00

    So using the S&P500 as a proxy of the stock market, we can say that between 1980 & 2000 the value of the Market when up ten times while the GDP barely quadrupled.

    Assuming that in the long run that the market reflects economic reality, I wonder who got screwed during those twenty years.

    • AustinRoth

      DQ – I said that there was a needed correction in 2000/2001. Doesn’t invalidate the quadrupling of GDP. An that stock run-up was due more to Joe Average thinking he could be a day trader, not the combination of Congress and the financial sectors the 2000’s was affected by.

  • GeorgeSorwell

    I don’t expecially think finger-pointing is helpful.

    But people like Rick Santelli found a goose that laid golden eggs.

    Then they killed it.

    Now they’re expecting someone else to take the blame.

    Give me a break!

  • JSpencer

    Greed, stupidity, hypocrisy… all things considered negatives when I was a kid, somewhere along the line (the 80s?) started being dressed up so they could pass in polite society, until lo and behold, they became acceptable! Now we’re paying the piper. Unbridled capitalism is little more then the law of the jungle, and the rationalizing and defense of low standards eventually becomes no standards. Is it really any surprise we’ve arrived at this juncture? There is blame enough for republicans and democrats alike imo, but this is the time to work together in common cause, and not a time for wornout, divisive, ideological posturing.

  • $199537

    Boy where to even start here.

    The chart should be logarithmic.

    You make an ad hominem attack on Santelli because he worked with futures and options. That has nothing at all to do with the message of his rant.

    The housing market did not crash because of futures and derivatives. In reality there are several factors including ignorant or unrealistic consumers, poor government oversight, government encouragement of loans to poor risks, predatory lending and inaccurate grading of loans and properties.

    We are being asked to bail out all of these bad actors and that is what pisses people off. I understand the necessity of rescuing the housing market but people should be pissed off about it. Hopefully this will keep it from happening again.

  • Don Quijote

    We are being asked to bail out all of these bad actors and that is what pisses people off.

    But who is the bad actor?

    The guy with the HS diploma making 30K a year being offered a half million dollar mortgage with no money down and no income statement or the bankers who offered this mortgage.

    • $199537

      “But who is the bad actor?

      The guy with the HS diploma making 30K a year being offered a half million dollar mortgage with no money down and no income statement or the bankers who offered this mortgage.”

      Both are the bad actors, that’s the point. Both will receive our help although neither really deserves it. There are many places to point fingers. Hopefully reasonable people can plug all of these leaks and we can move on.

      We need to stop implying that people somehow deserve a house just by virtue of their existence. We need better oversight of lending practices. We need our politicians to stop encouraging bad loans, something they are coming dangerously close to with a lot of their bailout plans. The companies that graded these loans should be investigated. The assessors that valued some of these properties should lose their licenses.

      The reasonable people should be mad about this and not let it happen again. That’s what Santelli’s rant means to me.

  • greenschemes

    The guy with the HS diploma making 30K a year being offered a half million dollar mortgage with no money down

    I would actually like to see numbers on this. I dont believe this is possible. Using a mortgage calculator his payments with a 3 percent interest rate would have been 2108 per month which does not include taxes and insurance which should easily be 300 more per month for a house of this size..

    so 2400 per month just for a house on 30k?

    2400×12=28800 per year just for the house.

    Aint happening in anyones world. And if it did? Then yeah its the guy with the 30k a year job’s fault. There has to be some personal responsibility doesnt there? Well maybe not in the Democrats world.

  • Manchester2

    This has settled one thing in my mind: I’ll never touch the stock market again, not for retirement. Better to find a solid bank (see bankrate.com for strength ratings) and put away your money in an interest bearing, insured account. You may end up with only 1/2 a loaf when you’re done, but 1/2 a loaf is better than a false promise of two loaves.

  • denisedh

    Elrod,
    I am no economist. My understanding of economics, finance, etc., is rudimentary at best. I can tell you that when we bought our house in 1996, we were eligible for a loan that my husband and I felt we could not afford, which would have put us in a very big house. The person who made the loan pressured us to take the larger amount and made it clear she thought we were going to end up with a shack by taking a more modest amount. At the time, I wondered how many other people got sucked into borrowing too much… especially those with less income. I wondered for years how people could afford their homes, knowing the approximate costs of the house and their approximate earnings. Why would a bank make a loan to someone who could barely afford the mortgage? From the most simplistic view, don’t they care if they get paid back?
    Anyway, thanks for the rant.

    • $199537

      When a loan is originated the seller makes a commission which was their main focus.

      What happens is there’s a computer program that basically says yes or no to the loan. Some of the sellers became very skilled at getting the program to say yes. This gave them commissions plus the bank could resell the loans and make money. Once the loan was resold the original bank didn’t care if it got paid or not. This is where the “greed” comes in. A lot of money was made originating bad loans. Unfortunately this scheme was unsustainable.

      On top of that the government was encouraging banks to extend credit to people who really couldn’t handle it. This is where the bleeding heart aspect comes in.

      Finally the people themselves were greedy, stupid or both. Some of them undoubtedly were just poorly educated but many weren’t. Some were just trying to flip homes to make a buck. This is where lack of personal responsibility comes in.

      So to me it really makes no sense just to pick one aspect and be mad about it. The whole set-up was bad and the banks, the government and the people all participated.

  • Don Quijote

    greenhcheme,

    I heard a similar story on NPR a few weeks ago.

    A house was in foreclosure in Jamaica, NYC. It had been bought using a 500k Ninja Mortgage with no money down. The owner was a single mother of two making 20K a year and supporting elderly parents.

    DaGoat,

    Bankers are paid a lot of money and have a lot of people with Masters & Doctorates to determine risk and give credit, they have no excuses.

    • $199537

      “Bankers are paid a lot of money and have a lot of people with Masters & Doctorates to determine risk and give credit, they have no excuses.”

      I agree, reasonable people should be upset with them. I don’t like to see my money bailing them out but it looks like that’s what will happen. But if your point is that the people who actually took out the loans are blameless then I disagree with you.

      • Don Quijote

        But if your point is that the people who actually took out the loans are blameless then I disagree with you.

        There are no blameless people in this mess, but if we are to allocate fault, the guy who bought a house he couldn’t afford is the least at fault, even the guy who bought to flip is not anywhere near at fault as the bankers & regulators, he is just playing the game according to the rules available.

        So if we are going to assign blame:

        Regulators: 20%
        Financial Industry: 65%
        Buyers: 15%

        And the only reason I am being so generous towards the regulators is the fact that the Financial Industry spent a fortune buying politicians and worked overtime to reduce/eliminate regulations.

        • $199537

          “So if we are going to assign blame:

          Regulators: 20%
          Financial Industry: 65%
          Buyers: 15%”

          In my view this assigning blame is pointless, since undoubtedly the numbers you assign will be influenced by your underlying political beliefs. The left will likely assign blame to corporations and the right will likely assign blame to the individuals and government.

          The moderate approach would be to recognize the multiple factors and ask that they all be addressed – ie better oversight and control over loans and valuations, realization by the government they need to stop encouraging high-risk loans, and the expectation that individuals will live up to their agreements. If there is a way to punish the lenders without hurting the country further I’d certainly be open to that.

          BUT – as I said I am pissed off because no one in this scenario is blameless, and all of them are going to take our money.

  • StockBoySF

    greenschemes, “Yes we should get rid of all Republicans. They are evil, evil people….”

    Well I for one (and I’m sure there are many others out there) do not want to “get rid of all the Republicans”. I believe a two (or three) party system is essential and currently the Republicans are the biggest (but not necessarily the best) alternative to Dems. The current Republicans are a bunch of whiney children and need to grow up. Surely they can some up with a better plan than “just reduce taxes” as a panacea to all our problems. Also they seem to want the Dems (and Obama) to fail…. I thought they were suppose to be leaders and upstanding citizens with the interests of their constituents at heart. When Bush was in office and the Dems controlled Congress for the last couple of years Bush was able to pass a lot of legislation even though many Dems didn’t like it…. So some Dems voted for it, some against it. There was no organized Democratic blocking to stop everything Bush wanted, while there is a highly organized Republican blocking of all things Democratic.

    So I believe the Republicans are essential to our country…. But not when they place their own political interests and agenda above the best interests of their constituents. There’s a reason the Republicans have lost the last two national elections….. Many Americans are getting tired of them, too.

    My message to Republicans: Grow up.

  • greenschemes

    Well Don if thats true we cannot legislate stupidity.

    • Don Quijote

      Well Don if thats true we cannot legislate stupidity.

      When I bought my first house 15 years ago, the rules were simple and stupid:

      20% down
      mortgage payment less than 33% of Gross Income.

  • elrod

    DaGoat,
    I agree that blame must go to all parties involved. But some are more blameworthy than others – especially those that made this situation unique.

    Lenders that originated risky loans are blameworthy – but loansharks have been around forever.
    Borrowers who get above their heads and buy more than they can afford are a fixture of every economy – they should take the blame but they are nothing unique here.
    The government has encouraged expanded homeownership for a long time, which certainly contributed to this. But no singular policy or politician brought on this crisis.

    Where the blame really falls is on investment banks that thought the good times would last forever, and used sub-prime mortgages as leverage for the entire worldwide financial system. Part of this was government enabling and part of it was corrupt credit rating work. But the institutional decision to purchase, package and market sub-prime mortgage backed securities – made by Wall Street investment banks like Bear Stearns and Lehman Brothers – is most deserving of blame.

    Had they not used the sub-prime loans as leverage the way they did, the fallout from the sub-prime mortgage would be far more limited.

  • casualobserver

    Well, it looks like Obama and Geithner think the ABS/MBS model is the still the way to go………however, this time they won’t filter the losses through the private sector…..they’ll let the majority of the loss pass directly on to the taxpayers this time……..

    http://www.nytimes.com/2009/02/20/business/20lend.html?_r=1&ref=business

  • greenschemes

    When I bought my first house 15 years ago, the rules were simple and stupid:

    20% down
    mortgage payment less than 33% of Gross Income.

    You can legislate sanity though it seems.

  • marjoriejmarks

    A reverse mortgage can also be used to fund a life insurance policy that provides heirs and beneficiaries with far greater flexibility. Would your client prefer to leave a house worth $200,000 that needs to be sold, or $250,000 cash from a life insurance policy that was funded with a Karls Mortgage Calculator ?

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