Speculation with other people's money; 1929 and 2008

The Michael Douglas/Charlie Sheen movie "Wall Street" explains that the markets have only two emotions, greed and fear, basically the greed ran things for too long, so now fear is running rampant.

The problem really started with a thing called “the global pool of money.” And if the name “pool” makes you think of gambling, as in “an office football pool,” you’re not too far off. Much of Wall Street’s woes have to do with speculating, risk taking, in other words, gambling.

Families can’t afford to save much anymore, but companies and countries are always saving (sort of). Insurance companies save for a catastrophe, pension funds are supposed to save money for your retirement, etc. etc. All the world’s savings amounts to around 70 trillion dollars. Generally, you want your savings to grow, right? Throughout history, countries and major corporations made really safe boring investments- treasury bonds and municipal bonds.

Part of our problem is prosperity. Thanks to technology and globalization, lots of countries that didn’t used to have much money to save, started to. China, India, Saudi Arabia… whether they made their money selling us TVs or oil, they started doing as well as the US, Japan and Western Europe.

In fact, the global pool of money had doubled since 2000. In 2000 this was about 36 trillion dollars. It took hundreds of years for the world to get to 36 trillion. Then, in six years, to get another 36 trillion So there was twice as much money to invest- the world wasn’t ready for it. Twice as much money to invest, but there definitely not twice as many good investments.

For almost two decades, former Federal Reserve Chairman Alan Greenspan kept the prime interest rate at insanely low levels, as low as one percent. In some ways that was good, it staved off inflation and it meant that people could afford cars, computers, college and houses because the rates we’d have to pay on credit, financing and loans was low.

However, that’s also part of why our personal savings rate is so low- because it’s almost not worth saving money because it doesn’t earn much interest.

This meant that investors and fund managers weren’t going to make any money at all on US treasury bonds. So, they started looking around for some low-risk, high-return investment.

Homeowners were paying 5, 7, 9 percent to borrow money from banks.

Wall Street, already famous for “leveraging” and “short-selling” found a way. Leveraging means borrowing money to lend to someone else who’s a bad risk and short-selling is borrowing stocks so you can sell them now because you expect to be able to buy them back later at a lower price and return it to the real owner and pocket the difference between the two prices.
These money changers in the temple figured out how to get the global pool of money involved in high risk mortgages.

Brokers sell mortgages to small banks. Small banks sells them to big investment firms. The market firm takes thousands of mortgages and puts them together. They had thousands of mortgage checks coming in monthly. They counted on that river coming in for at least thirty years. These were called “mortgage backed securities.”

The problem is, this greedy monster demanded TONS of mortgages, so they started buying up mortgages. Banks couldn’t keep up, so they started lowering their standards. They loaned tons of people mortgages without checking their backgrounds. Many even offered “No Income, No Asset” (NINA) loans.

Bottom line, too many people were too anxious to make too much money too quickly.

Boils down to this, too much laisser-faire (hands off) policy for too long has turned capitalism (ordinarily a good thing) into a cancer. For almost thirty years now, we’ve been following a philosophy of giving tax breaks and unsupervised freedom to big corporations, financial institutions and the super-wealthy in hope that prosperity would “trickle-down.”

But what we see again and again is that rather than re-investing in the American economy and providing jobs- what they do with their profits is to gamble with it in hope of getting even richer, or moving their operations overseas. What makes it worse, is that they don’t just use their profits and their tax cuts- time and time again, they’re using our homes and our retirement funds.

Isn’t it time to return to a philosophy of “we’re all in this together,” “I AM my brother’s keeper,” and of noblesse oblige- “to whom much is given, much is expected.”

Maybe you prefer Reagan to Roosevelt, but I gotta tell you, I think that right about now Wall Street and Washington both need to hear two important quotes from FDR's first inaugural address-

"There is nothing to fear but fear itself" and

"in our progress toward a resumption of work we require two safeguards against a return of the evils of the old order; there must be a strict supervision of all banking and credits and investments; there must be an end to speculation with other people's money, and there must be provision for an adequate but sound currency."

Both McCain and Obama would do well to bone up on economics and read Roosevelt's speech. We certainly can’t afford to stay the course on this one. Let's all pray that we come through this storm safe, sound, and SOON!