Archive for November, 2009

the offshore financial tsunami

November 24, 2009

In other news it is time to revisit February 12, 2004. That day Gregory Mankiw from the Bush White House economic department said something to the effect that outsourcing US jobs offshore was a good long term economic idea. I suppose five years later is getting on to long term, and It matter of fact does not look like such a fine idea. A article on that date states that 2,000,000 jobs were lost to that point during the Bush presidency. Many of these were good paying middle class positions. You may remember trickle down economics from the Reagen – Bush era. You can’t remove 150,000,000,000 from the middle tier of any economy without some serious trickle down effects. In the communities where these positions were lost the impact was fairly immediate. The all night grocery store became the 8:00AM to 9:00 PM grocery. The classy car rental agency became rent-a-wreck. Restaurants closed. People lost their homes, cars, whatever. Some lost their families. Others moved in with relatives. In other places no one noticed. The market was up because companies could now pay bigger dividends. No one particularly noticed they were selling less stuff. Investors cashed out of the bubble and cashed in on the homes of displaced technical workers who once made $75,000 or better per year. Many of those displaced workers from 2001 either retired or worked part time for maybe 15,000 per year. Flippers flipped bargain basement foreclosure real estate for obscene profits to people with hidden balloon payment mortgages. Everyone was happy, except for those who had already lost everything. Bushie, Inc. was re- elected and all was good. Or so they thought. The free market crowd declared all the agencies which helped move the country out of the great depression could be disbanded, and all of that would have happened had Democrats been less successful in the 2006 election. No one but the affected voters had notice the brewing catastrophe. Voters had to some degree however, noticed, and a few of them were not particularly happy. But all was generally thought to be well, until those balloon payments on adjustable rate mortgages came due. By this time however the investor class had flipped out of the housing market into commodities, particularly oil. Bankers and their collateralizing friends were left to collect the profits in the wake of the flippers. All was thought to be well in the financial world. A couple hurricanes caused temporary shortages of gasoline and oil in the south eastern United States. This translated into a historic profit opportunity for the investor class, and they did not fail to take huge speculative positions in oil. The price of ramped up. For many months the retail price of gasoline would touch $3.00 per gallon in the United States. Demand would tank, and the price would fall back. This toying with disaster continued. Credit cards were maxed out buying gasoline for the big SUV. In the spring of 2008 retail gasoline prices again crossed the $3.00 threshold. A number of factors natural and otherwise kept the retail price of gasoline climbing this time however. The gas guzzling SUV was parked, sold, or traded for anything more fuel efficient. Demand trended down, but the price of oil kept climbing. All was well with the investor class, because everyone had to have oil. Everyone had to go to work to keep those ballooning ARM’s paid. Speculation pushed the price of oil toward $150 per barrel. The retail price of gasoline crossed $4.00 per gallon. Auto sales crashed, along with sales of most everything else. As sales collapsed, profits collapsed, and with profits, payrolls, which completed the feedback loop. Home foreclosures, already bad, hit record levels. Home prices most recently supported by the buyout cost of attached mortgages went underwater, shutting off US consumers home equity loan funds, and lots of credit cards. Adjustable rate mortgages went into foreclosure as their balloon payments came due. As ARM’s failed the underlying securities known as derivatives also failed. Investment banks in particular were forced into precarious positions, and many failed.

It is true there were many reasons for this chain of events. Mainly it was the final product of unbridled greed within the investment community, but it started with the movement of good US jobs offshore, and became a tsunami which wiped out main street and much of Wall Street.