The US Economic Situation for the Complete Idiot

The US National economy is in the toilet.

I know, I know, you're shocked at this news and I'm sorry to be the one to have to tell you. But it's true and we need to face it.

But Jim, everything was going so well. How, how, did this happen? I hear you ask in that wounded whiny tone you have. Help us, Jim, help us to understand why the economy has turned on us in such an ugly and brutal fashion.

Well, I'll do my best to explain it, but be warned, the economy is a complicated beasty and only snotty elitists can fully understand it. Now, don't be scared, I'll speak slowly and wave my arms around a lot. If I'm going too fast, raise your hand and I'll try to use smaller words. No child will be left behind, folks.

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First, the Cliff Notes version:

Fundamentally, the current economic meltdown is based on the following principle: Never ever under any circumstance allow anybody to ask either of the following questions:

a) "Do I really need this? Do I?"

-and/or-

b) "Can I actually afford this without mortgaging my soul to Satan for all of eternity?"

Instead, starting at as young of age as possible, aggressively encourage individuals, organizations, business, industry, and government to chant boldly:

a) "I am full of self esteem and I deserve this!"

-and/or-

b) "My God! The neighbors will be so jealous! I've got to have this!"

* in the above explanation, "This" is defined as basically any product or service. "This" could be a $50K SUV with spinning hubcaps, gold trim, fur lined ass-massaging seats, and an engine the size of Nebraska, pulling a trailer full of recreational watercraft. "This" could be a 4,000 sqft McMansion in California wine country with a pool, sauna, and genuine Disneyesque Princess bedrooms. "This" could be a bizillion percent per annum growth in corporate wealth. Or "this" could be a pointless military adventure in a foreign land. The scale may change, but the basic idea remains the same.

And there you have it. Thanks for paying attention.

Now run right out and buy yourself something nice to make you feel all self-actualized and full of manly esteem. That's how you help the economy.

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What? You're still here. And still confused?

Well, hell, I told you it was complicated.

Sigh.

OK, I'll explain in detail.

We'll start with the following illustration to better help explain things:

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For this illustration of how the US Economy works, we'll use a quote from the best damned Danny DeVito movie of all time, Ruthless People:

The scene takes place in a home electronics store. Twenty-something year-old Joe Average America, a product of the "My Child is a Super Star Full of Self Esteem" bumper sticker generation, is trying to decide if he should buy a stereo system that he can't, no way, no how, afford but really, really wants:

Salesman (Uncle Sam, played by Wall Street): Check it out, my man! Thirty feet of thigh-slapping, blood-pumping nuclear brain damage!
Kid (Joe America): Bitchin'! Hey, what's it fucking cost?
Salesman: That's the bitchin' part about it! It don't matter! If you can't afford it, fucking finance it! So what if it's as big as a fridge and costs as much! You'll never have to get another one! This is gonna be with you for the rest of your life! And when you die, they can bury you in it!
Kid: Awesome, Dude!

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The above illustration describes, precisely, the fundamental principles of the modern American economy, which can be summed up as follows:

Take cheap worthless crap and convince people that they should spend piles of money on it in order to make themselves feel more empowered. If they don't have any money, give them some and pretend that they'll pay it back eventually, with interest. Convince other people that this process actually contains some kind of intrinsic value, and then sell the process to them. For extra credit, convince people that saving money and buying only those things you actually need and can afford is for unAmerican Croissant eating pisswillies.

Whoa! I hear you say, that sounds risky.

Not at all. See, take a something like a car, which has a basic, low, value. Now, in America, a car tells the world what kind of person you are - it's kind of like a wearable billboard that advertises the length of your manhood or the size of your womanly charms. Basic low value car, basic low value person, i.e. Loser. But, if you add some plastic fairing, gold rims, XM Radio, and slap the word "Limited RMS Titanic Edition" on the side despite the fact that you're making a trillion cars exactly the same, advertise that it'll go from dead stop to light speed in less time than it takes George W. Bush to lie, and then for good measure you super-size that sucker - well, it basically quadruples in value. Big Shiny SUV = Zoom Zoom, Winner!

The technical economic term for this process is: Whore It Up and They'll Be Saying "Awesome, Dude! I Gotta Get Me Some of That!" Whore it up enough, and they'll be saying "Screw the upside-down loan payments, I gotta get me a new one of those every two years!"

For the rest of this text, I'll refer to this process as the "PT" or "polished turd" principle. And the PT Principle applies at all levels of the economy, both large and small.

Let's take Wall Street for example.

Start with the basics:

1) Banks like money, especially other people's money.

2) Just like national intelligence reports, money can be created whole cloth from nothing.

3) Now, take something worthless and apply the PT Principle.

4) Convince investors that this is a good idea.

Step four sounds difficult, but it's actually the easiest part of the process. See investors like safe investments, but they also want to give the appearance of being true maverick devil-take-all risk takers who live on the edge, movers and shakers, and generally men about town. Now, historically investment banking is a risky business, but savings and loan banking is pretty safe. Only there's a catch - you don't make a lot of money in the savings and loan business, compared to investment banking anyway. And what money you do make takes a long time. Patience doesn't exactly fit into the maverick investor image. So, a while back, some bright guy got the idea to bundle those Savings and Loan mortgages together, then turned the resulting bundle into a bond, and sold that to investors at a big fat commission - and in the process dumped the risk on the investor.

Brilliant.

The bank loans money to a home buyer on a 30-year fixed mortgage at the current interest rate. If the principle was $180K at 5.5% annual interest, the total payback over 30 years is about $368K, i.e. the bank makes a profit of nearly $190K. The problem is that it takes thirty years. So, you take a bunch of those pink slips, bundle them together and sell them to an investment bank who uses them to power up Wall Street. Not only does the bank get their money now, they get a commission too.

For a bank, that's just about as good as it gets short of owning their own mint and printing press.

And in America, if it's good - well, then more is better, super-size me, Baby.

Now, at this point, those mortgages actually have some real value - the value of the physical properties they represent, and the promised moola over time. Bundle enough of them together, sort of like finding loose change in the couch cushions and putting it into coin rolls, and you're talking major bucks here. Trillions actually.

And everybody on Wall Street said predictably enough, "Hey! I gotta get me some of that!" And like crazed teenaged Hannah Montana fans rioting outside TicketMasters, investors rapidly began to lose their minds.

The problem was that there just wasn't enough people buying houses. How did they fix that? By applying the PT principle, of course. First, the S&L's started giving out loans to people who really, really couldn't afford them, using a variety of elaborate and convoluted scams like interest-only, balloon-payment, sub-prime mortgages to hide the fact that the buyer really never had any hope whatsoever of paying back the loan. Ever.

What? That's crazy you say? No bank is going to loan money to somebody who they know can't pay it back! That's insane.

Well, yeah, except that the S&L's didn't plan on getting their money back from the borrowers, they planned on getting it from Wall Street plus interest, and at the same time dump the inevitable loan default on the investment bank in one of the biggest bait & switch scams in history. And, they reasoned, nobody is getting hurt here, when the loans default the investment banks will repossess the properties in question, which we'll then buy back at bargain prices, and then sell those same batch of properties to another whole batch of suckers.

Shake, repeat as necessary until the cycle becomes self generating and self reinforcing - sort of like a perpetual motion machine of turd polishing.

Now, wait just a damned minute, Jim, say you in that outraged tone you use when you think I'm talking out my excretory orifice. That can't work, what about the second law of thermodynamics, you know, that bit about entropy increasing? No way your theory of cyclic turd polishing works.

Good, you're paying attention. And you are, of course, correct; perpetual motion machines always use more energy than they produce, always. But if you give them a big enough spin when you set them in motion, well, they look like the real McCoy - for a while, long enough to round up the suckers anyway.

See, for a while it looked like the whole complex mess was actually working - or in Wall Street terms, a bubble began to form. But it was just another scam, this time a pyramid scheme, because every time those mortgages cycled around in the perpetual motion machine they increased in value, and what was once a $180K property rapidly became an $800K property, or more. And the S&L's cheerfully kept handing out those loans.

But it was all an illusion, same as any perpetual motion machine, same as any good con. As with any con, they whored it up in window dressing, they gave the marks, er, sorry the investors the illusion of safety. In the banking industry that's called insurance. The investment firms bought insurance on the loans, exactly as a con artist does when he pulls out what appears to be his own money. In this manner they got the rating agencies to give the investments a AAA rating - and then they could go back to the investor and say, "This is a great and safe investment. But, don't take our word for it, see what the rating agencies say!" However, in this case, the investment firms were buying insurance from each other, and the money didn't really exist in the first place.

Sooner or later, every pyramid scheme collapse under it's own weight. Sooner or later every perpetual motion machine runs down. Sooner or later, you get overtaken by events.

The S&L's, the investment firms, the mortgage industry, they all knew that a certain percentage of those loans would default, hell, they depended on it to keep the machine turning. But it's a fine line, too little and there's not enough input to keep the flywheel spinning (i.e. not enough turnover to keep the demand tight and the value high), too much input and and the money just vanishes and you're left holding the bag.

And that's just exactly what happened. Energy prices soared. Everything suddenly costs more. All those balloon payments suddenly came due. People just couldn't keep up with all of that debt, and an increasing number began to default on their loans. Since the insurance was provided by the industry itself, and it all got called in at once, well there just wasn't enough dough left for a rainy day. So the industry started borrowing money themselves, from each other, and from overseas. They borrowed billions and billions and billions, and kept plugging it into the stock market, like a gambling addict pillaging his kid's college fund in order to keep playing online poker and hoping to hit it big. But it just didn't happen.

And the bottom fell out.

And here we are, standing in the wreckage and looking for someone to blame, and just who is that?

Well, nominally, it's the S&L's and the investment firms' fault. What they were doing was as dishonest as any scam artist.

But ultimately, it's every dumbass who bought into the PT Principle in the first place. You can't get conned unless you let yourself get conned, and the best marks are the stupid greedy ones - that's how come the Spanish Prisoner Scam (I.e. the Nigerian Letter Scam) is still going strong two hundred years after it first surfaced. Everybody that just had to have a shiny new house they really couldn't afford in order to impress both themselves and their neighbors, is the root cause of this mess. Everybody who actually thought they were going to get something for nothing is the root cause of this mess.

Did we learn anything?

No.

Not one damned thing.

You know how I know this? Because I'm watching Congress try to fix it right now...

Joe America: Bitchin'! Hey, what's it fucking cost?
Congress: That's the bitchin' part about it! It don't matter! If you can't afford it, fucking finance it!

...by borrowing billions from foreign nations to give it to the very same con artists who bilked us out of our life savings in the first Goddamned place.

Congress: This is gonna be with you for the rest of your life! And when you die, they can bury you in it!
Joe America: Awesome, Dude!

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Update: My proposed solution to the US financial sector crisis can be found here.