The Economics of Trust: Eroding Globally

political protestI read the newspaper today and many of the articles were dedicated to discussion about California’s economy.  The liberal newspaper I was reading was well-satisfied with Jerry Brown’s budget praising it as aggressive in cutting the necessary fat from the budget while suggesting reasonable increases in taxes to make things balance.  These articles mentioned the opposing view as mere obstructionist posturing, that the lack of adequate budget cuts proposed by Governor Brown and reliance on a special election to increase taxes were considered edicts from a holy see.

It made me think about Egypt. I thought about the violent efforts to overthrow the governments in Egypt, Tunisia, Lebanon, and Yemen.  It made me think about Great Britain and Ireland, Italy, Spain, Japan, and Portugal where there are huge economic troubles.  I thought about all the countries around the world where economic troubles threaten to change the status quo.

I thought about whether the economic crisis here in the US could really cause such dramatic global ripples and is that what we are really seeing?  I decided that it was possible and worth exploring.

The amazing thing is that if it is true that the fallen US economy and the resultant loss of confidence in institutions – both economic and political – then what we have happening is nothing less than a Greek tragedy on a global scale.  Greed is what upset the balance of world power, the greed of the average American, the greed of bankers, the greed of financiers, and the greed of foreign investors.

The rampant greed damaged trust and that I suggest is the important piece of the puzzle.  Since I was a child, I was taught that repaying debt was a moral imperative.  To borrow and not repay was tantamount to stealing.  It was a basic tenant of living that if you borrowed, you repaid.  Bankruptcies were a Scarlet Letter of a Hawthornian scale.   Loans were made based on trust.

I suggest to you that to erode the trust of the rich who loan the money is a fool’s game.  We are seeing that once the rich lose faith that the poor can be trusted to repay debts then lending is restricted to such an extent that nobody will be able to borrow. I’d also suggest that for the rich to covet their wealth too tightly leads to what we’re seeing overseas right now, also a fool’s game.

This is the state of affairs we are moving toward. So we all better be rich, or we’ll be forced to live out our poverty because nobody is going to lend us a dime.  Credit is the great veil.  Credit is the façade we erect to make ourselves and other people believe that we’re richer than we are.  Without credit we’re all a lot more materially impoverished because we have to live on our income.

protest in the streetsThe gap between rich and poor has become more evident than ever in my memory.  The middle class in this country has become a plastic mirage and the party is over.  Too many people are walking away from debt unafraid of the stigma of bankruptcy because there’s no longer any stigma. The trust in the system to recover is gone so people do not have faith to endure their fiscal troubles.

With each person who walks away from a mortgage, with each person who runs up credit and declares bankruptcy, the trust erodes a little more.  We are seeing now that the rich prefer to trust other rich people. 

Word on the street is that the wealthy and the banks were bailed by the Federal government.  If it’s true, that money has not come back down to the level of the average man, why is that and where did all the money go? Where is it?  I believe that the answer lies in the fact that the stock market is doing well.  The rich are betting on the rich, they are not willing to risk betting on the poor.

How will the US economy absorb the coming government cuts?  Over the past two years, the Federal government has spent-spent-spent and yet local and state government has had to cut severely in California.

Federal Government cuts will mean more losses in local jobs, losses in local taxes, losses in local spending among shops and restaurants.  More bankruptcies and defaulted loans are likely to follow in turn.

I suggest that loss of trust is causing the troubles and greed is at the root of this loss of trust. 

So what is causing the loss of control of Egypt’s government with a leader who has been in power for 30 years?  Is it that the people are feeling the pinch of the loss of trust?  Or is it that there’s a perception that the balance of power in the world has shifted giving courage to demand change?  I’m not well informed about all of that so I can’t answer those questions.  But I suspect it’s a combination.

What will happen if the general public understands that like Egypt the rich aren’t lending simply because they can choose not to and don’t trust the ability and/or the willingness of the poor to repay?

What will happen when the cuts begin to be implemented and California college tuition rises dramatically again for the umpteenth year in a row?  What happens when poor kids figure out that the education they’ve counted on to lift them from poverty is out of reach? 

What if the poor kids decide that they’re poor for good in this country just as other kids in other countries who are now protesting in the streets? What if they figure out that the education ladder to a better life has been taken away from the brick wall they’re facing?

Is what we’re seeing in Egypt and other countries foreshadowing?  The people of this country –rich and poor – need to spend some time on reflecting on what we’re seeing overseas.  We need to face the realities that wealthy people are wealthy at least in part because the masses allow them to be so.  The poor need to recognize that advancing to middle class relies on education and credit given on the basis of trust.

What happens when the ripples from loss of trust rock the unsteady boats we’re sitting in?

Time with Friends is Priceless

friends and beerI visited with my doctor this week about some pain in my hip.  I’ve been experiencing this pain for some time and last year when I saw this same doctor for a physical he told me that he thought it was arthritis.  A year later the pain was worse so I decided that I needed some answers to what it was and how to deal with it.  The doctor stuck by his diagnosis and sent me for an x-ray (which I don’t have the results of yet).  I bring this up because if the doctor is right, it’s a sure sign that my body is aging.  I don’t want him to be right. 

I want the pain to be caused by something like an old football injury, or an old fishing injury, anything except an infirmity that means I am experiencing the pains of old-age at the age of 51.  I plan to live a long time, I have lots to do, and I don’t want to live with the pain I’ve been experiencing for the next 70 years.  I want an answer and I want a cure.  Modern medicine owes that to me, I’ve paid it lots of money.  I want my youth to be extended until about the last 8 hours of my life.

I spent the evening with a couple of young friends today at my favorite place to drink beer in Sacramento.  For that matter, I’ve discovered no better place to drink beer in all my travels around America than the Rubicon Brewery on Capitol Avenue at 20th in Midtown Sacramento.

I say Rubicon is the best for two reasons, first is the beer is excellent.  Their IPA – admittedly a West Coast-style IPA – is second to none that I’ve tasted.  I can’t drink that much of it mostly because the strong hops cause me stomach trouble.  But it’s DELICIOUS.  I favor their CZECH Pilsner these days because it’s also excellent and easier on an old man’s stomach.

I got there late, but before my friends, and I ordered a Pilsner.  Sitting there reading the Sacramento News and Review (an article about a woman who has plans to create ten new Charter Schools in Sacramento) an acquaintance threw a napkin at me to get my attention and we had a nice conversation for a short while about football.  He’s a nice man, a Vietnam Vet, and a salesman about my age.

That’s what I love about the place.  It’s friendly.  It’s a Cheers-style neighborhood bar where everyone is accessible (some you may wish were not so much) and the atmosphere is noisy, busy, and everything they serve tastes good.

Sometimes, I must admit, I am blissfully distracted by the attractive young waitresses who are so kind, gentle and nice to me, not to mention very pretty.  I enjoy their attention and they probably enjoy my tips which I always go overboard on.  The bartenders are friendly and personable. They remember your name and what you like to drink.

My friends and I had a good time at Rubicon.  We talked and laughed and I enjoyed their company and in spite of the difference in our ages, me being old enough to be either of their parent.  They seem to enjoy my company too.  I feel blessed by them and I treasure our time together.  They’re nice young people, involved in interesting activities and careers, and they’ve managed to retain their positive youthful attitudes.  I find many people my age have lost their optimism leaving them sullen and cynical.  I don’t feel that way, and I still want to experience a positive outlook in my life which is why these young people are so wonderful as friends.

Civility is just Boring

After tonight’s State of the Union speech, I can see why politics is so mean, it’s because civil discourse is so boring.  The speech was boring, the audience was pretty boring – with the exception of the dynamic Generals’ reaction to Obama’s pointing out that they can now recruit Gay service members.  Those guys were at stiff attention in their seats; they resembled a sitting for Mount Rushmore.State of the Union

The Republicans rolled out a fresh-faced Paul Ryan to give the rebuttal. Ryanlooks like he just finished as valedictorian at the community college but bust my buttons if he isn’t already a career politician at 7 terms in Congress.

I didn’t get to see the Tea Party response but I read the transcript.  It was another ho-hum lambasting of Obama for failing to resolve the economic crisis within the first eight months of taking office.

 “Here are unemployment rates over the past ten years. In October 2001, our national unemployment rate was at 5.3 percent. In 2008 it was at 6.6 percent. But, just eight months after President Obama promised lower unemployment, that rate spiked to a staggering 10.1 percent.”

Really? Does the Tea Party fill their neti-pots with Rush Limbaugh loose leaf?  Honestly, with the seriousness of this economic crisis, it’s as though they expected Obama to have visited Diagon Alley for a wand then grandly wave it around to fix things right up.

It is purely a hypothetical argument – posed by people who think that the public is a bunch of imbeciles – to say that a Republican or a Tea Party resolution to the economic crisis would have been able to avoid 10.1% unemployment eight months after the stock market crashed. Even saying that the stimulus is a failure after less than two years is a deliberate under-selling the seriousness of the economic mess we’re in.

The fact is that the Republicans – if they were in charge – would have enacted a stimulus of some kind to stem the crumbling financial system. The fact that they didn’t use procedural rules to slow down or stop the one that was enacted tells me they went along for the ride because they were all terrified that the house of cards was about to crumble down on their heads.  People in power don’t fare well when the house tumbles.

I think they were all terrified.  I also think the Republicans were happy as hell to have a Democrat in power at that moment in time because the best thing to do was “something” and nobody had a clue what the best “something” was.  It was easier to allow the Democrats to do their “something” since they wanted the reins anyway (be careful what you wish for).

The sad thing about the politics of the situation is that if the Republicans had been in power and had been forced to make the tough calls to stop the economic crumbling the Democrats would be doing the same blame-game that the Republicans are doing now.

The fact is that the positions taken are more about political advantage in the next election than they are about admitting the seriousness of the situation we still face.  Everyone knew that the economic situation was too serious to reverse itself before the mid-term election and the Republicans used the single fool-proof argument to retake Congress, that being that the economic stimulus wasn’t working (so far), but nobody really thought it would reverse the damage within 18 months.

All the thematic goals used in the speech tonight by President Obama were more about trying to get everyone onto the same platform or under the same umbrella.  It was about getting people from all parties to nod about the stuff that should be foundational to both parties, the national stuff that’s indisputable. 

The devil is in the details about how to accomplish the themes and sometimes what forms those themes even take.  The level of pain involved in cutting budgets, in people’s expectations in government – in Social Security and Medicare primarily – may be so great that neither party has the guts to hold the knife and do the cutting.

But if tomorrow both sides decide that their set of details is more important than maintaining the agreement on the themes and finding compromise in the details, then we’re looking at some really tough times again as partisan politics kick into high gear and progress grinds to a halt.

Perhaps boring civility is what we need for a while, we need to be internally boring, having a civil meeting of the minds, a cozy circling of the wagons.  External challenges will happen without our help and we’re always ready to respond to those. External challenge always brings us together as 911 did.  I would think that during this internally-created crisis our leaders could see that the best way out is to work side-by-side.

Trickle Up Bankruptcy Part III

I wrote a long time ago about “Trickle-up Bankruptcy.” I wrote to Michael Savage about it and he is now using “Trickle Up Poverty” as the title of his new book.  Coincidence? Probably, he’s a smart guy.  I didn’t fall off a turnip truck and neither did he.  The impending economic crisis was obvious to the thinking man.

I hear the news about California needing to cut another $25-28 billion from the state budget.  This is before the Federal government makes the cuts they need to make, which can only negatively impact our state’s budget.

So I am wondering what is the REAL SCOOP on the California budget? I mean what are the cuts that need to be made after the Federal Government “sacks up” and makes the cuts they need to make before the Global credit markets come calling and put a stop to the borrowing.

If California has to cut more than 28 billion, what is the result?  I saw tonight on the news that the unemployment rates here in the Central Valley of California are nearly 20%.  This means that it could get a lot worse if huge cuts are made and the budgets of State, County, and City governments are cut.  These cuts would mean that more people are on unemployment, more people are in danger of losing their homes, more people go belly up on their credit of all kinds, fewer people have money to spend on eating out, buying stuff, applying for credit, etc.

The outlook is bleak no matter how you cut it.  The following facts are inescapable from everything I hear from people who ought to know:

  1. The Federal Government has to cut spending voluntarily or the global money markets will tighten up and force them to do it.
  2. Reductions in Federal spending impact every state negatively.
  3. California already has a huge budget deficit to take care of and increasing taxes to fix the deficit it is not an option.
  4. Fewer jobs and the eventual timing out of unemployment benefits is going to put additional stress on the state government for welfare benefits.

I saw some guy on the TV tonight who is in construction.  He said that home construction led us out of the last six economic downturns.  Well, that’s nice but this time we have a credit problem that I am not sure we’ve ever seen before.  The housing bubble was created by rich people lending money to employ poor people to build houses for other poor people who were lent money by rich people to buy houses they could not afford – yet, they were given the credit anyway.  The guy on the TV did not explain how the credit crisis, the resulting lack of confidence in people today to pay back their debts no matter what (instead of simply walking away from them) would be solved. 

In order for construction to bring us out of the current recession, there would have to be reconstruction of confidence in the moral integrity of the American people.  I don’t see that happening on mortgages.  I see that happening slowly – if at all – incrementally on small credit – if the American people even realize what the crisis is or how it impacts them long-term.  Do the American people realize how their own irresponsibility has damaged the credit markets?  Do they realize that each person who walks away from their home mortgage or credit cards or auto loans hurts everyone else?  Do they realize how it is damaging the long term ability of the economic system – based on credit and the honor system – to recover?  This isn’t the time of Dickens, there are no debtor prisons.

Since there are no consequences for fiscal irresponsibility and all fiscal ills can be resolved via bankruptcy, banks are going to be extremely cautious.  They are going to tighten the screws on borrowers until they can be assured that everyone gets the message that if you borrow, you WILL repay, no matter what.  Bankers might be greedy jerks but they’re not imbeciles.  They lend and expect a return on the money.  When people borrow and then are allowed to walk away without consequence, there are larger consequences for us all.  It’s harder to borrow or even impossible.

The fact that it’s harder to borrow tells me that the current recession is going to last longer than the other ones because construction can’t take us out of the crisis until the bankers have confidence in lending.  This means that there has to be a level of risk that is acceptable.  This level of risk requires that housing costs drop to the level of affordability for the average guy.  Housing costs have dropped, but they have not hit bottom – that is, the level at which the average schmoe can buy a house and the bank is assured that he can afford the payment.  Afford meaning a ratio of payments to income that leaves enough extra that the banks don’t have to worry about being repaid.

Housing prices aren’t there yet.  Houses are still way too high in price to be affordable in relation to lending confidence.  If there was a measure, I’m sure it would show that lending confidence is at an all time low. Until that confidence rebuilds, we’re in for more cuts to reduce a credit-induced deficit.  Everyone is going to suffer because rather than tighten our belts and make our payments, too many of us are choosing to walk away from debt and leave the bills for someone else to pay so we can have a bunch of presents under the Christmas tree or another meal out on the town.

We’re stuck in a downward spiral that will only be resolved through fiscal responsibility and moral uprightness.  Borrowers must make the commitment to repay their debts or we will never regain our economic health in this country.  Perhaps the lack of moral fiber that has become evident in other areas has now infected our society to such an extent that we’ll never recover.  I hope not, but I am not confident.