Ivory Tower

This dedication is for American financiers and the complicit lawmakers who got our economy into the current mess: “How can a poor man stand such times and live,” by Blind Alfred Reed

OK, the financial markets got the $800 billion government bailout they wanted. Didn’t help, did it? Those same markets continue to gyrate wildly, up 500 points one day, down 700 the next. So what gives?

Analysts say it will take the economy some time to stabilize. That’s true. The economy always adjusts itself, to whatever stimulus made it shake in the first place. It normally takes about a year and a half to return to normal. But guess what — the market would probably return to normal after 18 months even without the bailout. We would just see different adjustments.

It’s obvious that investors don’t really trust the bailout. And why should they? It only keeps bad bankers in business, instead of letting the market purge the failures out of the system. Some of them might learn their lesson, more likely they’ll only keep making the same bad decisions that got them in trouble.

Of course, we can’t blame just the bankers. The government changed lending rules and restricted interest rates in order to make low-interest loans available to low-income people, “because they should not be deprived of the American Dream of owning their own home.” Sound familiar? I’ll bet your own legislator had uttered those very words in recent years when announcing some new government-guaranteed loan program.

Banks charge higher interest to higher credit risks (when they can) because they know some people won’t be able to make the payments. The higher rate helps the banks absorb the losses when those defaults occur.

Back to the bailout. People tend to lose track of money once the numbers get really big, so let’s put this bill in context; $800 billion is more money than the entire economic output (gross domestic product) of Israel, Chile, Hong Kong and North Korea combined. Bill Gates would have to multiply his net worth 15 times over to have that much money — and we’re talking pre-crisis dollars.

That’s a lot of money, and the government doesn’t even have it. Remember that we’re financing the war in Iraq by borrowing from the Chinese, and paying out Social Security and Medicare by deferring the costs to our grandchildren; our own lawmakers are saying this. To bail the banks out, the government is doing exactly what the banks did to get themselves in trouble in the first place: lend money they don’t have, and pray that nobody falls behind in the loan payments.

To deal with this, the Treasury will also have to do just what the bankers would have — and should have — done on their own.

They would sell off some of the debt in order to bring in some cash and keep operating. And it wouldn’t be hard to do. There’s an entire industry of people out there that buys up loans and other financial notes. The process is called arbitrage. They buy notes at a discount, and the banks are willing to sell. It’s called selling short, and they do it because they often can make more money with the cash in hand if they can invest it into something that brings in more money than the original note. They’re utilizing the present value of the money, and regaining liquidity.

For example, let’s say a bank has a mortgage or student loan, which traditionally carry low interest rates. If the bank had the money back it might be able to invest it in something that brings more money. So it’s willing to sell a $10,000 note for, say, $9,000, if the expected yield will offset the lost principle on the loan. The arbitrager buys the note because he’ll get the full $10,000 plus the interest when it’s paid off. If he buys enough notes and most of them pay through maturity, the difference is worth waiting for.

And don’t believe that credit will suddenly dry up. Interest rates might rise and bad marks on a credit report might weigh more, but people can still get money. After all, regardless of what’s happening on Wall Street, real estate brokers still have properties to sell. Car dealers have vehicles on the lot. Furniture companies have sofas to move. If they can’t sell their inventory they go broke. So we can expect more companies to self-finance, offer rebates and discounts, or use other enticements to attract sellers.

Some people will be affected — those looking to sell a home or retire soon. The house will be harder to sell and the worker might want to stay on the job for another year to let the pension plan regain its value — and it will.

Otherwise, just think about how much this market crisis has directly affected you. More than a month has passed since the credit bubble burst. Has your life changed in that time?

The difference will be felt at tax time, when we all get a bigger bill to pay for the fix. And to think that it was government that broke it in the first place.

Carlos A. Rodriguez is opinion editor for Valley Freedom Newspapers. Contact him at (956) 982-6681 or by e-mail at crodriguez@brownsvilleherald.com.

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