13 01 2008

I was driving to Nashville with my 18-year old grandson. We had about an hour on the road; it was the first time we’d been alone together in a while. I was curious to see what would arise between us, but I was a bit surprised when he asked me, “What is the deal with these subprime mortgages?” It’s just not the question I expected from an 18-year old, but I was gratified to know he was interested.

“It’s about human greed, stupidity, and shortsightedness,” I said. “The bankers figured that if they could sell the loans they made to somebody else, they wouldn’t have to worry about collecting on them. And the people they sold the loans to figured the same thing, and so on up the ladder. It’s a pyramid scheme, a hot potato.”

My grandson was amazed and dismayed to discover that so many supposed adults could be that stupid. I have to agree. What were they thinking? Well, if they were thinking that they personally could get away with it, so far they’ve been right. To pick the most egregious example, Countrywide Financial, which is responsible for a big chunk of the bad mortgages that are clouding the financial air these days, was just sold to Bank of America, and Countrywide’s CEO is getting not just a golden parachute but a whole golden airplane out of the deal, in spite of the likelihood that BoA was nudged by the Fed to buy Countrywide in order to avoid the beginning of a domino-effect chain of bankruptcies that would have left the US ecomony bleeding to death in short order.

What a world for my grandson to grow up into. How could so many people have believed that the value of their homes was going to go up forever? That’s why they signed on the dotted line for all those adjustable-rate mortgages–they figured that by the time the rate went up, their home would be worth more, so they could just refinance, pay off the old mortgage, and be sitting pretty. Meanwhile, savings plummeted and debt soared. There was always going to be somebody to borrow from when it was time to pay the piper. Then, one day, the bubble burst and housing prices started to slide. Oops.

The bubble was still inflating when the junta, with copious assistance from the Dimocrats, passed a bankruptcy bill so draconian that anyone filing for bankruptcy is pretty much opting for a lifetime of indentured servitude, not freedom from debt. Hey, bankruptcy is for deadbeats, right? Well, it’s also for people with overhwhelming medical bills and people whose jobs get outsourced. Banks don’t go for hard luck stories and good intentions. They want cash, especially when they’re not the hometown bank but some mutual fund in Germany that’s trying to make a fortune in CDO’s.

CDO–Collateralized Debt Obligation. In theory, it makes a certain amount of sense. I loan you money, but instead of waiting around to collected it back as you make payments, I sell the debt to Joe, who gives me a lump sum and collects your payments. In practice, several other things happen, leading to unintended consequences. One is that huge numbers of debts are bundled up and sold, with the buyer pretty much having to take the seller’s word that all the apples in the bag are good. Another thing that happens is that these bundled debts are in their turn bundled and sold, and then we have another round or more of that, which leads to a complete disconnect between the bank that holds the mortgage and the person who is paying it off. If you are talking to your local bank about the possibility of defaulting on your mortgage, your local bank is interested in making sure the community in which it does business stays healthy and viable, and is more likely to try and work with you to keep you in the house and making some kind of payment. If your debt is owed to some bank overseas somewhere, they could care less about what’s happening to neighborhoods in Cleveland, or wherever you happen to be. Furthermore, they are not in much of a position to do anything with the house they have kicked you out of, because the house is not worth the value of the note they are holding on it, so the house is likely to stay empty and gradually be vandalized until it really is worthless.

And, speaking of “worthless,” anybody or any institution that bought these rotten debt securities finds, as the mortgages go bellyup, that they have a worthless piece of paper on their hands instead of an asset. So that means that hundreds, maybe thousands of governments, retirement funds, banks, and other institutions wake up one morning and discover that they are worth a lot less than they thought. Bye-bye municipal services, welfare payments, salaries. Bye-bye new loans. Bye-bye pensions and medical insurance.  Good luck, run of the mill business credit!

If this were taking place in a country that was financially healthy, it could be contained and repaired, but the US is not a financially healthy country. Just as the Ottoman Empire was once “the sick old man of Europe,” so the US is now everybody’s sick, needy Uncle Sam, constantly borrowing from Peter to pay Paul (or, all too often, borrowing from China to pay China), making a little money from arms sales (the last intact chunk of our manufacturing sector), but not really paying our own way in the world. It is only because the US owes so much to so many that we stay afloat. It’s the last big bubble. Everybody knows that we’re in over our heads, but nobody wants us to drown fast, because we’d pull them down with us; so, they’re going to let us slowly sink. As peak oil kicks in further, we will be outbid for fossil fuels; as Europe’s saner fiscal and social policies keep it afloat, the Euro will supplant the dollar as the international currency of choice, and US bond offerings will go begging. When everybody knows the only reason you’ve got money to spend is because of the printing press in your basement, they get shy about doing business with you, y’know? Well, kids, that’s where the US dollar is headed. From the government’s perspective, the only way out of this mess is massive inflation. Visualize a shopping bag full of money…to pay for a shopping bag full of groceries. That, in my crystal ball, is where we are headed.

And what will this do to our vaunted world hegemony? You can expect to see the civilian sector get squeezed to maintain the military, whether “hundred years in Iraq” McCain or “invade Pakistan” Obama is elected, but things are going to get thin for the military, as well. Right now they’re just taking it out of veterans’ benefits, but you can bet that sooner or later lack of equipment and fuel will hinder the government’s ability to bully the world. You can see it looming in all the National Guard equipment that has been abandoned or destroyed in Iraq, and has not been replaced.

These are the realities that the next President of the United States is going to have to deal with, although it is certainly not what is getting talked about on the campaign trail. Expensive health care plans? Fuggedaboutit. The next president will either be cleaning up the Bush Junta’s mess or making it worse. In either case, he or she will be increasingly constrained by the twin choke chains of internal financial collapse and international moral and financial bankruptcy.

There is a certain perverse upside to this. The worse the financial situation in the US becomes, the less demand on the world’s resources we will make. With no loan money available, suburban development will dry up–but, with money tight, there may be an even stronger pull to harvest any natural resources–from forests to coal–that can be easily turned into cash–but there will be less demand for them. My crystal ball gets a little cloudy on this one.  Sorry…

If I were the financial adviser to a Green President of the United States, with a solidly Green Congress to back me up, what would I advise? Where would I begin to unravel this fine mess we’re in?

I’d start by repealing the bankruptcy act that Bush passed, and go back to the status quo ante coup when people really could write off their unpayable obligations by declaring bankruptcy. I’d pass a law that forbade mortgage holders from evicting people except under extenuating circumstances. I’d make stockholders liable for the misdeeds of the corporations they own, to encourage corporate responsibility. I’d institute a corporate death penalty for irresponsible corporate behavior, and replace big chunks of the banking, insurance, and health “industries” with credit unions, co-ops, non-profits, and single-payer health insurance. I’d pull the US out of all so-called “free trade” agreements and work to encourage local, sustainable self-reliance in all sectors–food, clothing, housing, manufacturing, transportation, communication, entertainment…what have I left out? And I’d demilitarize the US and unlock all the resources we have tied up in world domination to meet the multiple threats of global warming and peak oil. And one last thing…me and Dennis Kucinich are gonna carry this snowball through hell!

Yep, that’s about the chance we have of making the right moves in America, unless millions of people have a road-to-Damascus moment and something even more pervasive than the fall of Communism takes place here…the fall of Capitalism! It has a nice ring, but it won’t be an overnight phenomenon. The revolution, as Gil Scot-Heron famously said, will not be televised. On television and in the corporate media in general, there will be an insistent drumbeat that things are fine and all our problems are about to be solved. There will be increased security against “terrorism,” increased focus on trivial news (BRITNEY HAS HOT FLASHES, STRIPS NAKED AS THOUSANDS WATCH)….now, what was I talking about? Gee, let’s go to Walmart…they just sent me a credit card… long as I keep both my job at MacDonalds and the 7-11, I can keep up with the interest on one more card…maybe we can find somebody else to live here, with ten of us in this apartment the rent’s not bad….

Is that the future? Maybe, maybe not. Maybe it will be stranger than we can imagine. Maybe there will be a lot of self-reliant, interconnected people taking care of each other under the government’s radar, and “the government” will become increasingly irrelevant until it just fades away. Sooner or later, we’ll find out. I wish I had a better situation to leave to my grandson.

music: REM, “Fireplace”

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