More Whining About the Economy, Some Good Reading, and Some Humor

It seems that I spend a lot of time lately whining about the gaps in my education which leave important topics about which I know too little. One of these is, as I've said before, economics. Not only don't I understand it, but I don't think it's inherently understandable.

For instance, I've long believed that the underlying foundation (is that redundant?) of economics is psychology. Things have value only because we believe they do. Banks loan us the money for mortgages because they trust us to pay the money back with the interest they will use for other things (or, at least, that's how it used to be). We accept that the pieces of paper and discs of metal we call "money" will be accepted by others at a level of value upon which we agree. Lenders offer us credit cards with a certain credit limit based on their trust that we'll pay the money back...if not in full, then in part and on a regular basis.

Trust and faith are, thus, the basis of economics.

Or were, until recently. Now we know that the banks that gave out all those "toxic" mortgages never expected to be repaid, because they bundled all those problematic mortgages and sold them as "investments" to someone else who, theoretically, trusted that the payments on those mortgages would roll in as a regular source of income. When the mortgage holders defaulted, it wasn't the problem of the original issuing bank...it became the problem of whoever held the mortgage at the time...and since no one knows where all those mortgages are, bankers and investment houses no longer trust each other.

The true casualty of the economic crisis is, thus, trust. Banks don't loan to each other (or to you and I, any more) because they don't believe that the person or institution asking for the loan can be trusted to pay them back...and incredibly enough, even government payments of tens of billions of dollars directly to failing banks isn't enough to restore that trust. We don't trust our financial advisors to be competent, or to have our interests rather than theirs at heart. We don't trust our banks to be good stewards of the money we've entrusted to their care. And, of course, good old greed is at work, too, with banks waiting to see how much they can extort from the government before sighing and getting back to the people's work.

The First National Bank of Bilbo's Mattress is starting to look pretty good.

Steven Perlstein, writing in the Washington Post yesterday, said what I'd been thinking when he wrote this article: It's Wall Street's Turn to Bolster Confidence. In this wonderful article, he writes:

"If Wall Street were truly serious about convincing Main Street that we're all in this together, its top executives would have stepped before the cameras yesterday and promised not to cut lines of credits to long-standing business customers who have never missed a payment.

"They would have committed themselves not to foreclose on any homeowner who is willing and able to refinance into a new, government-guaranteed, fixed-rate mortgage set at 85 percent of the current value of the property.

"They would have offered to suspend dividend payments until capital levels had been restored to pre-crisis levels.

"They would have given us their solemn promise not to advise clients to hold on to their own investments while quietly dumping whatever they can from their own portfolios and shorting every security in sight.

"With the Treasury now desperate for help in managing its new rescue efforts, they would have volunteered, at no cost to taxpayers, the services of some of those investment bankers and financial wizards who now don't have much else to do.

"And the maharajas of finance could have set a wonderful example if they had all gotten together and agreed to work for a dollar a year until the crisis has passed."

As Mr Pearlstein asks at the conclusion of his article, where's the leadership on Wall Street to match the leadership shown (belatedly) in Washington?

Oh, well...

Humor is another part of psychology, and if we can still laugh (or at least groan) when everything looks bleak, perhaps it can help get us through. Therefore...

Question: what's the difference between an investment banker and a pigeon? A pigeon can still make a deposit on a new Ferrari.

You may have seen this photo of angry investment bankers demonstrating against the restrictions which accompany their government bailouts:

Two investment bankers were discussing their horrific losses in the collapsing Stock Market. "This is worse than a divorce!" moaned one. "How do you figure that?" asked the other. "I've lost half my net worth, and I've still got the same wife!"

I've got the same wife, too...but she's the best investment I ever made. At least I have something I can trust and depend on.

Have a good day. More thoughts tomorrow.

Bilbo