I might have mentioned that I wrote the book proposal and the first two chapters for Peter Schiff (aka "Dr. Doom) and his increasingly prescient book "Crash Proof: How To Profit From the Coming Economic Collapse." Schedule conflicts made it impossible to keep working on the book, but Schiff finished it all the same, publishing it two years ago.
I'm glad he did. In the book, Schiff points out how it was a credit-driven consumer economy that fueled the technology bubble, and then the housing bubble right after it. As politicians figured out that demand for credit could be leveraged, with Wall Street's help, into a massive Ponzi scheme where everyone got what they wanted: consumers got houses they couldn't afford, politicians got plenty of votes and lobbyist money from book economic times, and Wall Street got plenty of business from borrowers. Lenders then turned those loans over to Freddie Mac and Fannie Mae, the chief buyer for home mortgages and chief enabler for both Wall Street and Main Street's addiction to debt.
Well, the bill has come due and the party's over. Look at the numbers: net mortgage issuance in calendar 2005 was $1.1 trillion. Net mortgage issuance in the 2nd quarter of this year, annual rate, was $80 billion. That tells me that Wall Street is already come to terms with what Schiff refers to as a "severe recession" that's barreling down the pike. Now, after 15 years of bull markets and unbridled growth, fueled by trillions in loans from foreigners, then using that money to buy assets (first dot-com stocks, then houses) back and forth from each other at ever-ratcheting prices, we have to get ready to face the music, too.
Last Friday, in advance of the failed House vote, Schiff had a good commentary on what's going to happen next, and why the failed $700 billion bailout wouldn't have mattered much, anyway (his point being the underling economic problems we're facing aren't going away until the free market disposes of them organically.)
I've excerpted part of his commentary here:
"What’s left of the Barry Goldwater wing of the Republican Party, which maintains its natural tendency to trust the markets and not government, has dug in its heels. But, Bush, Paulson and the Democrats have argued that our problems are so dire that free enterprise principles must go out the window. The struggle is historic, but the Congressmen are fighting a losing battle. Sadly, Americans now appear willing to abandon their economic heritage at the first sting of financial pain."
"Although passage does seem inevitable, it is nevertheless the wrong thing to do. Central government planning did not work in the Soviet Union and it will not work here. Only free market forces are capable of sorting through the mess. Political meddling will make the problems worse."
"The urgency for passing this bailout bill is based on the claim that the American economy will collapse if nothing is done. If the government were to stay out, and allow the market to function, there will certainly be a great deal of economic pain. Companies will go bankrupt, banks will fail, real estate and stock prices will keep falling, and many people will lose their jobs. However, government action will not prevent any of this. At best, it will merely delay the inevitable, but only at the cost of increasing the severity of the underlying problems, thus making their ultimate resolution that much more painful to endure."
"The bottom line is that there is no way to resolve our economic problems without a severe recession, and our politicians need to level with the public. As a nation, we gambled on the alluring riches of real estate and we lost. The price must be paid. Contrary to the Bush Administration rhetoric, the fundamentals of our economy are not sound. If they were, we would not be in this mess. Recessions are meant to restore balance, purge excess, and liquidate mal-investments. On that score we have a lot of work to do."
"We are being told that this plan will help the economy by keeping the spigots of consumer credit flowing. However, to really address the fundamental problems, those spigots must be tightened. Since we have already borrowed and spent ourselves into bankruptcy, the last thing we need is for consumers to borrow more."
"Our leaders maintain that without this bailout consumers will not be able to borrow money to buy cars. So what is wrong with that? We already have plenty of cars, and if we are broke, why do we need to buy more? Instead, we need drive our old cars longer, pay off our underwater auto loans, and produce more cars for export. It is also argued that without access to credit parents will not be able to borrow money to send their kids to school. That’s fine by me as it will force Universities to reduce tuitions to levels families can actually afford. They will either have to cut out all of that bureaucratic fat, or go out of business for lack of customers."
"In the end it is impossible for the American economy to be rebuilt on a sounder foundation of savings and production without a lot of economic pain. Government efforts to reinforce the shaky foundation of borrowing and consuming will result in the entire structure falling down around us."
Not exactly the spin the stock market and the technology sector wants to hear, but it's straight talk that should be heeded. Schiff has it right: to right this ship we have to purge the toxic debt that got us here in the first place.
The bailout will only prolong the inevitable - and make the inevitable worse in the long run.