Tuesday, October 7, 2008

Bad Money- a book report

Bad Money
Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism
By Kevin Phillips

Once again I have ventured forth in my ongoing search for answers. I have broken my word before, but I hope I can keep it this time. I’m not going to purchase and read any more books like this. There are many on the market available but after reading this, I cannot conceive that other books could enlighten me more than this one did. The others I wrote book reports about. Some are in my “The Last Angry Man’ book. Other more recent you can find by entering my web site at http://jackbwalters.blogspot.com
There is little to be gained by cramming more info into my brain since I am not in a position to do anything about it anyway. It doesn’t take that long to read. Wouldn’t you think that at least some elected officials would be curious enough to either read themselves or ask staff to read and then report or even call the author in for consultation? This and the other authors present blueprints to follow. Putting the various authors’ ideas into practice could start the healing process.
Mr. Phillips has enormous knowledge of the financial system and describes in great detail the names of the many types. I will not repeat them since I couldn’t interpret them with any semblance of authority. Perhaps you can. I know many of you are very knowledgeable about the industry. You are the ones who should read to add to your understanding.
The main theme that he points to is the emergence of finance as the major industry in our Gross Domestic Product (page 31). He shows a chart that plots from 1950 to 2005.
Manufacturing 29.3% 12.0%
Financial Services 10.9% 20.4%
Since the Financial Services Modernization Act of 1999 dissolved old legal separations and constraints, commercial banking, insurance, securities, and mortgage lending have intertwined… They are for all purposes indivisible. (Page 32) is another chart from 1950 to 2005. It shows dramatic increases beginning in the 90’s of mortgage backed securities.
For those in the stock market the years from 1982 to 2000 were heady. The Dow increased from 775 to 11,700. Most of this gain is due to unleashing the financial markets and loosening home purchasing requirements which created exaggerated increases in the value of property. The same house tripled or more in value creating the huge bubble which just had to burst at some point. That point as we all know is now.
He makes a strong point that since the 80’s investment in physical assets like plant and equipment has diminished while the growth has been in debt. He blames debt for three setbacks. The first was the S&L mess in the 80’s (cost 200 billion). The second was the rescue by the Fed of Citibank in 1989. This included a bailout of one billion provided by Saudi Prince Alwaleed bin Tawal. The third was the 1990’s bailout of junk bonds by the Fed.
What all of this proved was that the reckless behavior of the CEO’s could continue, realizing that the Fed’s would bail them out when the boat started tipping over.
On page 41 he has a chart that shows the increase in debt from 1974 to 2006. The numbers are billions.
Domestic $258/$14,184
Total household $680/$12,873
Federal Government $358/$4,885
Total U.S. financial and nonfinancial debt $2,407/$44/744
Another chart on page 45 shows domestic financial debt as a percentage of U.S. GDP. It grew from 12% in 1969 to 107% in 2006.
The crash in 2002/2003 of Enron, WorldCom and Global Crossing were the direct result of President Reagan’s deregulation of utilities. They were given free license to do as they pleased.
I have to add his comment on page 47 comparing WWII and Bush’s recession that he inherited as he took office. “In a caricature of the U.S. government’s WWII advice to the public to purchase war bonds, after 9/11 Americans were told to spend, charge away on their credit cards, or travel to help keep the private economy in a growth mode.” What a charade.
Mortgage debt increased 102% from 2001 to 2007, which amounted to $5 trillion. This was the equivalent of 40% of U.S. GDP. He describes this as a lot of soap and air enough to create a huge bubble.
He claims that somewhere around 1988 the Federal Government chose finance as the most important part of our economy, to the detriment of manufacturing.
Stunning charts beginning on page 65 show the unbelievable growth in wealth by the top tier, staggering sums of as much as $85 billion in 1999. You can guess how they have increased in the next decade.
In his chapter entitled Bullnomics he proves that the CPI is continually understated by about 2%. This is done deliberately and of course has an impact on any compensation tied to the CPI including Social Security. I don’t know about you but I have felt for a long time that the numbers being reported could not be true, another deceptive practice by your government.
I need to point out that this book was published in 2008 so it is not ancient history but an up to date analysis of current happenings. He predicted a drop in housing value of 15% to 20% this year. He refers to Hedge funds as “The Wild West”, for their reckless behavior and the results thereof.
He devotes a whole chapter to oil. Nothing new here, if you don’t understand what is happening then there is no sense in repeating.
Just two quotes from his chapter entitled The Politics of Evasion, “ the entrenchment in Washington of a staggering array of interest groups, which has engendered a soulless political dynamic of perpetually raising and dispersing campaign funds; and the further, bipartisan trend toward what can only be called a politics of inheritance and dynasty”. Sounds like something I wrote recently. He concludes this chapter with the following comment;
“That minimalist description certainly applies to the eight Republican years ending in 2008, during which global warming was denied, market forces and utopias were exalted, sober energy realpolitik was ignored, weapons of mass destruction and nuclear threats in Iraq and Iran were grossly exaggerated to support actual or possible energy-related invasions, and world opinion was offended. Over the last few decades, however, political ineptitude and misjudgment have been bipartisan phenomena. Energy, debt, and currency realpolitik has been missing among Democrats too, lost in their fund raising prowess and heavy petting with hedge funds; naiveté about pseudo- greening of Chinese, Indian, and Brazilian economic growth, and troubling faith in their own parties brand of job growth, and utopianomics”:
In comparing our current status to the rise and fall of other dynasties like Spain, Holland and England, he finds similarities in that finance became dominant over real production, advances in science and arts. We don’t have much time to put our house in order and at the present time I see a government putting out fires but not tackling the fundamentals that brought us to where we are today.
This is not a difficult book to read if you are willing to study as you go. How to get elected officials to read is the challenge.

Jack B. Walters
3961 N. Hillwood Circle
Tucson, AZ 85750
(520) 722-2958
October 7, 2008

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