the destruction of the culture of accountability: a simple economics lesson part two

Last time we left off with large investment banks trying to pawn off these shitty mortgages to whoever would take them. From here, the Federal Reserve decided to take a number of bold steps beginning in the summer of 2007 to try to fix the situation. The first was to lower the rate that banks could borrow directly from the Federal Reserve. You see, a bank borrowing from the Federal Reserve used to be like a professional sports team holding open tryouts: you know the situation was in incredibly bad shape. The move to lower the rate encouraged a few of the more desperate banks to begin applying for loans from the Fed, yet the stigma involved with doing so was not removed. From there, the Fed proceeded to lower the federal funds rate from 5.75 to 1 percent, which it currently stands at now. The federal funds rate is simply the rate at which banks lend each other money. The reasons that banks would need funds is beyond the scope of this lesson. As this rate is lowered, it encourages people to save less(because they are getting a lower interest rate) and for them to invest and spend more.

After five rate cuts, the Feds realized that these moves were not working as well as they would have expected. From here, they began a series of moves that will be debated by both the financial community and general public for years to come. It began in late 2007 with the establishment of the term auction facility. As a side note, isn't it funny how they use incredibly vague titles to conceal the true nature of the beast? Basically, the term auction facility was used to "auction" off U.S. treasuries in return for the subprime mortgages that these large investment banks had acquired through risky gambles. In essence, the Feds quietly handed out a get out of jail free card to these large institutions through a fancy name and the ability to trade these US treasuries for cash if needed. This was far from the end though. In March, unsatisfied with the 70 billion they had already handed out, the Federal Reserve set up a new term auction facility to continue to hand out free money in exchange for worthless mortgages these companies had gambled on. It would be the equivalent of handing in all your failing grades in college and being able to get your tuition money.

March 16th will also remembered as a historic day. It began seven months of the destruction of the culture of accountability that we hold sacred in this country. It began with the federal involvment in the takeover of Bear Sterns. Essentially, Bear Sterns had run itself out of business by making far too many risky bets in subprime mortgages and was completely bankrupt. In turn, the Feds burned the midnight oil and eventually worked out a deal with JP Morgan in which they would assume a potential 29 billion dollars worth of losses from the subprime mess. Another handout gone wrong. In the next seven months, the Feds helped to bail out AIG, Merrill Lynch, National City, Fannie Mae, Freddie Mac, and Lehman Brothers. The defense time after time was that each of them was "too big to fail" or "too important to fail". All of them though? I'll admit that the rescue of Fannie and Freddie was probably necessary and Bear Sterns was possibly justifiable depending on who you talk to. As for the others though, it just seems to me that the Fed was overstepping its bounds by bailing out these companies. We live in a free market, capitalistic society. One of the assumptions of this society is that the companies that are the most productive using the least amount of resources will be the ones that stay in business. My question remains how can we justify that we live in a capitalistic society if we are not willing to accept the reprecussions of a major institution failing? Cries from far and wide said that without bailout packages we would enter another Great Depression. I would argue that the diversity of the financial instruments we have coupled with the lessons we learned from the Great Depression, the recessions of the 1970s, and major advancements in economic theory would have certainly prevented this. Without these packages, we would have certainly fallen into a recession. Workers would have lost their jobs. People ready to retire may have had to work several more years. It would have all come at a price that we will probably never know. And still I beg the question, was it better to destroy the fundamentals of market capitalism, the root of our economy, than to delay a recession for a year? That's all for now.



Until next time,

mh

the death of old dreams and the beginning of new ones

Time expired this weekend.




Like an eerie dream, the state of Pennsylvania was cast under a shadow of darkness on Saturday and Sunday. Naturally, I'm referring to football. In what seemed to be a juxtaposed nightmare both the Nittany Lions and Steelers had huge games ruined by interceptions on crucial drives. Moving backwards from Sunday, we can quickly examine what happened. The Steelers seemed to have the game in cruise control when they lead 17-14 with 1st and Goal on the 2 yard line. However, instead of using a little creativity, the boys played "typical Steeler football" and ran it straight up the middle three times in a row....only to be stuffed three times in a row. Memo to Mike Tomlin: Jerome Bettis retired two years ago. You aren't the run three times in a row and hope to get the first down kind of team that the Steelers were before acquiring Roethlisberger. And when you get to the goal line you have to have a little moxy and try something. A direct snap, a double reverse, hell even a play action once in awhile would make me feel better about our chances of getting into the end zone. Of course, Ben did throw an interception at the most inopportune time to set Peyton up to lead the winning drive. The reverberations from Iowa City seemed to reach into Pittsburgh that night...

Just one night earlier, Happy Valley fell silent. With one second left the Hawkeyes from the corn capital of the world destroyed a dream. You've heard the story by now. Up two with five minutes left. Driving deep into Iowa territory. And suddenly, Daryll Clark had a horrific Anthony Morelli moment that he may or may not be remembered forever. In what can only be described as one of the worst throws at the worst time, Clark sailed a ball over a Penn State receiver and into the waiting hands of a Hawkeye defender. I could just see the "Iowa shocks the world" headline in tomorrow's papers at that point. And with six seconds left, they did. Let's face it, football isn't life. Not even close. The sun obliged and rose the next morning with the hint of a winter chill. Something died out there in that cold Iowa night. The dream of a generation of Penn State students and alumni of a national championship that began in 2005 when Norwood, Butler, Williams, and Lee began playing together perished with the fall. Now we have to dream of roses and a trip back to California to play USC in a game whose tradition will be talked about for weeks leading up to the game(given Penn State wins out and USC doesn't play for the national championship). Finally, how about the crazy scenario that Pitt's hatred for all things Joe Paterno finally gets to surface in California, given the outside chance USC makes the national title game. Now we're talking crazy!

Moving on to happier things now. Barack Obama got elected. I don't sound more excited about it though because I just knew it was going to happen. The fundamental change that has happened in America over the last twenty five years will likely be named by future historians as something like the Openness Movement. Think about it: one hundred years ago, only white males could vote in this country. Now, we have a president of color about to lead the country. Never in the course of human history has radical, non violent change swept across the country so quickly. For the most part, the right for women and people of color came with much struggle but few deaths in comparison with some of the other major movements in history. It took the English seven hundred years to oust the Royal Family from power. Dynasties from China to Egypt ruled with iron(i guess it was more like bronze at that time) fists for thousands of years in lieu of any change. Yet since becoming a country, America has tried to bring a sense of humanity to the world. It's true, sometimes we overstep our bounds and try to radically push ourselves on other cultures. We truly mean good though; and anyone who says that America and its rise to power has been a mistake should examine how better off we are than people one hundred, two hundred, or even five hundred years ago. Tuesday night was one of those rare moments where you could not only feel that change come to fruition, but you could see it as well. As CNN put up the words "CNN projects Barack Obama as the winner" I had to quietly reflect for a moment. It wasn't just people of color that had come this far and brought about a sense of change. It was all of us.



mh