Sheridan: Con-Law

BATTERED DOWN PRESIDENT

Pres. George W. Bush is down to his last few months as president.  His successor is chosen the first Tuesday in November and is sworn in on January 20.  Such a president is called a lame duck.  There's not much left that he can do.

Pres. Bush is unpopular because the war he started against Iraq has proved costly, unproductive of any good to the country that we can see, and based on a false premise that Saddam had WMD.  Saddam no doubt had wanted his people and his neighbors to think he had WMD (nuclear, biological and chemical weapons) but it appears after the fact that he did not.  But, he was a bad guy, says Pres. Bush, and we're better off without him.  True, but we supported him when he was a bad guy who DID have, and use, chemical weapons against his own people and against Iran.  We liked Iran even less back then, in the 1970s.  In 1979 Iranian revolutionaries against the hated Shah stormed our embassy in Teheran and took hostage our diplomats, holding them for over 400 days.  So we supported Saddam.  Later we took him out.  Life on the big chessboard is rough.

Pres. Bush is also unpopular at home because of the failure of the administration to respond impressively, or at all, to Hurricane Katrina, when it devasted New Orleans, Mississippi, and the Gulf Coast extending to far inland.  "Attaboy Brownie, you're doing a helluva job," is what he told FEMA secretary Brown who hadn't a clue as to what he was supposed to be doing.  He became a laughingstock, as did the administration.

Bush has been smug and certain in his sense of his own rectitude.  The psychiatrists can try to figure out why he seemed impervious to criticism, correction, an ability to see the other side, apparently, and a sense that because we're the United States, what we do is automatically good, or so it seems.  It doesn't quite work that way in real life, emphasis on the real.

Every evening for years the David Letterman show has run a feature on President Bush, comparing his verbal presence to the likes of Pres. Franklin Delano Roosevelt, John F. Kennedy and Ronald Reagan as they made presidential pronouncements such as "The only thing we have to fear is fear itself" (FDR, Inaugural Address), and "Ask not what your country can do for you, but rather, what you can do for your country," (JFK Inaugural Address), and "Mr. Gorbachev, Tear down this wall." (RR, at the Berlin Wall).

Next would appear a clip of Bush saying something off-handed, mumbly, and not making a lot of sense.

As if more proof were needed, he appeared as a bumbler.

Not confidence inspiring at all.

To make it worse, his own presidency got off to a poor start, as there'd been a close election which was thrown into the Supreme Court to decide and they appointed him, not Al Gore.  Bush parlayed this Court victory into an election victory four years later when John Kerry was unable to unseat him, especially after being Swift-boated.

So, at the end of his eight year term economic disaster rolled over us like a tsunami and it came time for Bush to speak to the nation to dispel panic, project calmness, and restore confidence, he didn't have a lot of strength to work with.  He'd become the victim of a perfect storm, largely of his own making.

When, at last, he spoke out in favor of the $700 billion bailout bill, socialized medicine for Wall Street, the panic persisted.  Neither the president nor the bill he signed with bipartisan support seemed to have instant effect.  We'll have to wait a year or eighteen months, cautioned Treasury Secretary Hank Paulson.  That may be so, but it doesn't appear that we have eighteen months before the comet strikes.  And so we are left with the president's leadership and there doesn't seem to be any.  He'll be playing Hoover in contrast to Obama's FDR.  McCain's ship appears to be lagging behind Obama's fleet, sea-anchored to Bush as Hoover.  Hoover, of course, was the president on whose watch the Stock Market crashed in 1929 followed by panic and the Great Depression. 

Although a good man, Hoover stood at the head of a party (the GOP) more famous for representing the interests of large corporations and Wall Street than the concerns of the working stiff, of which America was largely made.  FDR swept him out in the 1932 election and inherited the Great Depression up until World War II produced a manufacturing frenzy which saved the world, along with the American fighting man, against Hitler and Emperor Hirohito after Pearl Harbor, and in the process, ending the Depression.  During the 'Fifties we knew unprecedented growth and prosperity.  Now this, an even greater crash and an even greater depression, if our fears materialize, and so far they don't seem to be going away any time soon, sad to say.

All of this seems, at last, to have effected Pres. Bush, so that when he speaks, we hear him, but do not respond.  He's the picture of powerlessness.

The article is below.

THIS AMERICAN LIFE AND THE GIANT MONEY POOL

Ira Glass, of This American Life, tells wonderful stories from Chicago Public Radio, on NPR.  One of the most notable is the one recently aired called "The Giant Pool of Money," about how the mortgage brokerage industry sold so many loans backed by homes to people who couldn't pay the mortgage, but not before the brokers resold them to Wall Street which sold them to the world, thus bringing down the economy. 

Ira Glass and his team go out and interview the mortgage sellers.  They're main interest is in earning the commission on the sale.  It doesn't matter to them whether the buyer performs his end by paying the mortgage because they're not left holding the note, since they've resold it to a company on Wall Street, such as Bear Stearns or Lehman Brothers who sold it to school district in Finland as an allegedly safe investment.  This is why those investment companies went belly up and schools are closing in Finland, since they can't pay the teachers.

There's a follow-up account Episode 365: Another Frightening Show About the Economy, which describes how the problem is so big that we don't know how big it is, nor which banks owe the money.  The result is that banks, which normally trust each other automatically, and thus have no problem lending each other huge sums overnight for peanuts, no longer do.  They don't trust each other any more and no longer lend to each other, or anyone else.

This is called the credit crunch. 

If a bank doesn't trust another bank, why should it trust you?  Because you have a job? 

Your job may be in the toilet next week, for all you know.

Forget about that loan you wanted to buy a house or keep your business operating.

This is why people have stopped buying cars and dealerships are closing.

Meanwhile Rep. Henry Waxman of Los Angeles has been conducting hearings before his House Oversight Committee on Governmental Affairs.  The former chair of Lehman Brothers, Richard Fuld testified that he didn't see the comet coming.  He's been left holding 10 million shares of the now bankrupt company, regrettably.  Had he seen it coming, he'd have unloaded, i.e. sold to you and me.  But he stuck.  Not to worry, however.  He took home a 22 million dollar bonus earlier this year.  And $500 million since 2000.  And put in a bid for $20 million in bonuses for the executives on the sinking ship just before it went under.

Meanwhile you and I are walking around like we've been told a comet is going to blow up the world pretty damn soon.

What do we do next? 

Throw a going away party?

Below is the transcript of "The Giant Pool of Money." 

GORILLA DUST

How do you get voters to vote against their economic interest?

Impossible you say?

We do it all the time in America.

Instead of having them focus on what's important, all you have to do is to divert their attention to some non-economic issue that you build up int a wedge-issue of iconic proportion.

Abortion, for example.  Before 1973 this was a non-issue in national political affairs.  Each state had its own laws on the subject.  Then along came Roe v. Wade (1973) recognizing a woman's right to choose whether to abort as a matter of individual liberty and guess what.  Those opposed to abortion, particularly social conservatives, the religious right, the GOP base realized that money was to be made and votes gathered by appealing to the like-minded in huge mailing campaigns.  The Republic is going to hell in a handbasket, babies are being murdered, through abortion.  Send money and vote for the following.  Voters sent money and elected George W. Bush, and his father before him, and Ronald Reagan.

What does abortion have to do with whether we go to war or the economy collapses?  Nothing, except that it helps elect social conservatives (who are against abortion and gay rights such as marriage) and social conservatives are more likely to vote for right-planted candidates who are harmful to their economic interests (George W. Bush, for example) than center or left planted candidates who may help them with, say health care legislation.

The problem with health care legislation, politically, is that right-wing opponents can deride it as "socialized medicine," as they have since the 1960s, if not earlier.

But last week, Congress voted to save the economy, a few days after the House voted not to save the economy (the House flip-flopped) to the tune of $700 Billion in the famous "Cash for Trash" program, which hasn't seemed to help, as the market is diving down this morning.

By focusing on abortion instead of the economy, the government stands accused of taking its eye off the ball, just as voters took their eyes off the ball.  The result is that the ball is being driven out of the park outside the foul lines.

Ross Perot introduced the term "gorilla dust" when he ran as a 3rd party candidate against Bill Clinton in 1992.  I hadn't heard it then and haven't seen it since except last evening reading Jack Beatty's "Age of Betrayal," in which he describes the decades following the Civil War when the nation abandoned not only the poor blacks recently freed from slavery, but the poor whites who were no better off economically. 

This was the age where those who controlled the railroads, mines, Wall Street, became obscenely rich while those who did the work with their hands lapsed into penury.  Never had extremes in wealth grown so far apart.  The government was captured by the wealth.  Jay Gould ran the government from Wall Street. 

Efforts were made to curb the abuse (the Sherman Anti-trust Act of 1890) but its teeth were removed by a Supreme Court in which vacancies were filled by presidents of both parties beholden to Wall Street.  No matter which party won the White House (Republicans mostly) Wall Steet won. 

As America changed economically, expressed in a huge expansion of rail and mines and industry, plus a rising labor movement marked by innumberable strikes to protest the abuses (long hours, low wages, unsafe conditions, child and women labor) broken up by the national guard and private goons, the voters responded to "waving the bloody shirt" of the Civil War, in which voters were reminded to vote for the party of Lincoln (the GOP) and not the Democrats who were soft on the war when not actually opposed.

Beatty reintroduces the term "gorilla dust," later coined by Perot, to describe how the voters voted against their economic interests when distracted by the bloody shirt.

An article by Howard Myerson in this mornings' Washington Post provides the latest example of throwing gorilla dust to influence a presidential election, as the McCain supporters feel the need to change the subject away from the economy, where McCain dies, to the fact that Obama has an acquaintance who was a Weatherman during the Vietnam war.  The Weatherman were home-grown American terrorists (the Weather Underground) who bombed public offices to protest the war, killing a number of people in the process, some innocent and some of their own.  Decades later two of these people are university professors but this doesn't mean they've repudiated their past, necessarily.  One was reported as commenting that he wished he done more to protest the war but it came out sounding as though he may have wished he'd done more bombing, or so say the McCain people.  Obama is stuck with this character, unfortunately, and McCain and his attack-dog, Palin, are on the hunt, using it to bash him from now to election day, as though the Obama had endoresed the former terrorist rather than the other way around.

Perhaps if Obama could get Ayers to endorse McCain he'd be onto something.

Meanwhile, watch out for the gorilla dust.  It's a bit like the football lineman who throws dust from the field into the eyes of the player he's blocking, taking him out of the play.

If you don't want to be taken out of the play, inoculate yourself from the gorilla dust.

THE BAILOUT

The House reversed itself today by approving the $700 Billion bailout bill it rejected resoundingly on Monday.  Treasury Secretary Henry Paulson had warned that the roof was about to fall in but the House declined to approve the Administration backed, bipartisan bill.  The House was responding to a lot of angry constituents who felt that the little guy shouldn't be taxed to save the fat-cats on Wall Street who got us into this mess with their gambling on mortgage backed securities where the mortgage brokers were lending to homeowners who couldn't repay the loan, especially when housing values fell.  The value of these collateralized debt obligations (CDOs) became so large, and were sold so world-wide, that their value amounted to the TRILLIONS of dollars.  If they went bad, and they were looking pretty sick, then not only the U.S. economy but the world economy was headed for the toilet.

It took a week for the taxpayers to realize that when the ship sinks, even though the first class passengers caused the ship to sink, the taxpayers in steerage are going down with the ship, as well, through no apparent fault of their own, apart from allowing their elected representatives to sleep at the switch by approving more financial deregulation and encouraging a complete lack of oversight as to the new financial products that ultimately overwhelmed the system.

The last time we had a major overhaul of the financial system was the result of the Market Crash of 1929 followed by the Great Depression of the 1930s.

The last time before that was the result of the Panic of 1907 when J.P. Morgan practically single-handedly saved the system (because we had no central bank, then), in the sense that he rounded up the usual suspects on Wall Street (investment bankers), locked them in a room, and refused to let them out until they ponied up all that they were worth to save the system.  It took years of hearings into the causes of the debacle, and the possible cures, before Congress established, in 1914, the Federal Reserve System we know and love today.

Why did we not have a central banking system?  Because Pres. Andrew Jackson, a backwoods debtor (and plantation owner, the Hermitage, outside Nashville) hated banks and bankers, as did many of his ordinary-citizen supporters who were getting killed by fluctuations in the economy and especially the dear cost of money, i.e. credit.  He killed the Second Bank of the United States, headquartered in Philadelphia.  He was at war with the president of the bank who was trying to defeat him.  Jackson won, but the nation lost, in the sense that it had no financial flywheel to keep the economy in balance and to level out the peaks and valleys.  The result was a series of panics (depressions) every few years.  With a central bank, we've only had one major depression (the 1930s) until what we may be about to experience now.

Alexander Hamilton, a hard-headed, far-seeing businessman and economics expert (he'd studied Adam Smith, whose Wealth of Nations was published in 1776, just as we were declaring independence and fighting a war and setting up a country (which went into business in 1789 in New York on Wall Street, as a matter of fact) recommended establishing a central bank.  Congress, under George Washington as president, accordingly established the First Bank of the United States, with a twenty year charter.

It was immediately controversial because nowhere in the Constitution did the States (or the People) give to the central government the power to establish a central bank which might threaten to overwhelm the states (and the People) with its potential power to regulate the money supply, credit, etc.

Nevertheless, the bank was rechartered and called the Second Bank of the United States, with another twenty year charter.  This one was challenged in a Supreme Court case that has become famous, McCullach v. Maryland (1819).  The Thomas Jefferson supporters, by now a political party (the Democrat-Republicans) opposed the bank and thus took the position that Congress had not been granted the power to establish a bank.

Daniel Webster, arguing for the bank (he'd been supported by the bank and its president, Nicholas Biddle, secretly, for years, and for years to come) argued that Congress had been given the power to regulate commerce, coin money, and thus to regulate the economy, and run the government.  Thus it was reasonable, then, for Congress to be deemed to have the power, by implication, to set up a bank if it thought this necessary for the successful operation of the  government and the country.  He pointed to Article I, Sec. 8, Clause 18, which gives the Congress the power to do all that is "necessary and proper" to carry out all of its other powers, listed above that clause and elsewhere in the  Constitution.  This is thus the "elastic clause," which gives Congress broad powers.  It represents a broad, not a narrow or strict interpretation of the Constitution.  The South seized on the need to insist on a strict interpretation in order to protect its peculiar institution of slavery.  But Thomas Jefferson, one of the original strict constructionists when it came to the Bank, disregarded the lack of power to acquire new territory when he was president by purchasing Lousiana Territory from Napoleon, who needed the money to continue invading all over Europe.  The deal was too good to pass up, so the Constitution took a back seat and no one made a fuss, certainly not one that would result in a case that would come before the Supreme Court. Can you imagine the Court ordering that the purchase be rescinded and the Louisiana Territory given back?  Neither can I.

In the Court's opinion in McCullach, authored by Chief Justice John Marshall, he adopted Webster's argument giving Congress expansive authority to do all that it deems necessary and proper to carry out its other powers, such

The  Wall Street Journal article reporting the House action (the Senate approved on Wednesday) and the President's signing of the bill, which is hoped to reassure Wall Street, which more and more means Main Street, is below.

Good luck.

SEEING ACROSS TIME

What's your most important asset in times like these?  Bay Area venture capitalist Gordon Ritter observes:

"The most important asset during times like these is the ability to see across time," Ritter said.

"Markets go through cycles - do not panic.

Focus on what you do best in the world and keep doing it, and you'll wake up in a year or two or three and be glad you did."

The article is below.

HOW THE CREDIT CRISIS UNFOLDED

The current catastrophe on Wall Street (for which you may now read Main Street) developed not as a stock market crash, although there was that, but as a freeze in the pipelines of credit.  Nobody was lending.

It's one thing when the banks don't trust you to repay the money you borrowed, and so stop lending more to help run your business, and quite another when the banks are afraid to lend to each other for fear of nonrepayment.

If you can't trust your correspondent bank, who, then, can you trust?  Not very much, I'm afraid.

The NYT has a lengthy treatment of how the economy slid downhill on today's front page, in an article reported by Andrew Ross Sorkin, Diana B. Henriques, Edmund L. Andrews and written by financial columnist Joe Nocera, reprinted below.

Incidentally, do you know where banking came from?  I don't mean a geographical location, but an economic reality that required borrowing and lending.  Hunters and gatherers may have needed a good lender from time to time, like when game was scarce and their families were starving, but we don't know whether they had good lenders.

After women began farming, while the men were out hunting, the food supply became more dependable.  Food surpluses in the form of grain which could be stored in jars over the winter required new political, military and economic forms of protection.  Castles, such as the palace at Knossos,  Crete, Greece, were built around which fomed dwelling and places where peddlers sold, later called shops and stores, the agglomerate being called a "city."  Civilized people were those who lived in cities.  Walls were built around cities and grain storage facilities, manned by troops who worked for the king of the city.  Surplus grain meant that you survived the winter, ready for the planting for the next year.  Even though the grain flow was interrupted by the non-growing season, the grain you had stored in the bank tided you through.

A bank is a place where we store today's financial equivalent of grain so that we can use it to plant next year's crop, or if we're fortunate, to buy another patch of land over in the next valley in case something happens to ours, such as a flood or an invasionl.  We hedge against risk by placing separate bets on other parts of the board.  To hedge means to protect against risk.  The form of hedging can be economic, political, military and many more.

Let's say you're a farmer who plants in spring and harvests in autumn.  Some years you win, others you lose, and others you break even.  But in spring you need money for seeds.  In summer you need to weed and fertilize, which costs labor and money.  In autumn you need to hire workers to bring in the harvest.  You need to transport it to market.  Where does the money come from to do this?  Where do you get cash before you sell the crop? 

You guessed it.  You have to borrow the money against the crop, which doesn't arrive for sale until October.  You go to the bank and take out a crop loan to run your farming operation.  You repay the money when the crop is sold.  The bank has a lien on the sale proceeds, guaranteeing it is paid first.  No bank, no planting, no crop, no cash, no eat.

That's the idea behind banking.  All else is a derivative of that idea.  Banks supply money now for repayment out of effort later.

TRUST VANISHES, AUTO SALES DROP

After every explanation of why we are in financial panic mode comes another even less obvious explanation.

The head of the Fed,Ben Bernanke, is an expert on the Great Depression of the 1930s, the one that followed the market crash of 1929.  There is no agreement on what caused this mother of all depressions.  Bernanke theorized as a young academic that it must have been because when the local bank in a small town closed, the knowledge of its officers as to who was who in town died with it.  No longer could a bank assess who was a good risk and who was a deadbeat posing as a good risk.  No out of town bank would lend to anyone out of fear of being fooled, and so even good investments died for lack of funding.  This turned the depression into the Great Depression according to one observer quoted in the article by David Leonhardt, a financial columnist for the New York Times, below.

Leonhardt's explanation for todays crisis (the Senate votes today on the bill turned down by the House earlier in the week to the surprise of all and consternation of some, but not to the disappointment of those who saw it as a $700 Billion bailout of fat cats on Wall Street.

The problem may be deeper than that, however, referring to the problem of saving the fat-cats from drowning.  It's a bit like the passengers in steerage telling their first cabin shipmates that their end of the boat is sinking.  At some point, both rich and poor have enough stake in their common lifeboat that they both need to start bailing regardless of whom is better off when the ship is saved.  This is our problem today, only the steerage customers have prevailed on Congress to stop the bailing while the first class portion of the boat sinks.

Here's an excerpt from the Leonhardt column:

The current fears can certainly seem irrational. Most households and businesses are still in fine shape, after all. So why aren’t some banks stepping into the void and taking advantage of the newly high interest rates to earn some profit?

There are two chief reasons. One is fairly basic: bankers are nervous that borrowers who look solid today may not turn out to be so solid. Think back to 1930, when the American economy seemed to be weathering the storm.

The second reason is a bit more complex. Banks own a lot of long-term assets (like your mortgage) and hold a lot of short-term debt (which is cheaper than long-term debt). To pay off this debt, they need to take out short-term loans.

In the current environment, bankers are nervous that other banks might shut them out, out of fear, and stop extending that short-term credit. This, in a nutshell, brought about Monday’s collapse of Wachovia and Glitnir Bank in Iceland. To avoid their fate, other banks are hoarding capital, instead of making seemingly profitable loans. And when capital is hoarded, further bank failures become all the more likely.

See the rest below.

WONDER WHY WE'VE BEEN BLIND-SIDED?

Among the reasons for the economic debacle we're starting to recognize and maybe even do something about, are these:

The really, really clever Wall Street types, the ones they call "rocket scientists," in charge of inventing new financial "products" to peddle to make rich people feel even more secure in their trading activities, came up with a form of insurance policy to sell to the people who bought mortgage based securities.  These CDOs, for collateralized debt obligations looked good when the mortgages being bundled were being paid faithfully by homeowners who had jobs and could pay.  But when mortgage brokers began paying borrowers to sign on the dotted line so the broker's agents could earn commissions, the owners of the junk-CDOs really needed the insurance.  This is how AIG's London office could afford to pay a million a year to 377 employees, by hiring them to sell junk insurance to cover remotely (they thought) potential defaults in mortgage payments on the bundles held by speculators.  When people began losing jobs and homes were going into foreclosure, depressing further the value and sale-possibilities of homes, these bundles of mortgages were going into default.  This means that the insurance carrier, AIG, was going to have to pay on the policies they wrote for investors all over the world.  Not only are these investors going belly-up, but so was AIG until the American taxpayer bailed it out.

The problem is that these CDOs are not just held by a few big players on Wall Street, to use the abstraction for big finance, but also by your little bank on main street, and various pension plans and investment funds used to send your kid to college down the road a bit.  This is how the crisis hits you, and not just the big boys.

So while I may rail about the injustice of asking little guys (middle class taxpayers) to subsidize the big boys (the ones living the life of someone having more money than he ever imagined), the fact is that the problem has become so widespread that we can no longer restrict the remedy to the worthy and exclude the unworthy.  We're all worthy and we're all unworthy, it seems.

Why didn't we see this coming?

Because unless you work in a "Wall Street" type investment and insurance firm, you have little daily contact with these strange terms we're becoming used to.

The deals are made over the phone and confirmed by private email or wire.  The deals are not reported on a public exchange.  Whether they go worldwide or not, whether value is in the millions, billions, or trillions (it's the latter), we don't get to know until we pick ourselves out of the avalanche that just roared by.

Not only are the private deals kept private, but their value is open to dispute.  What is the value of a promise to cover your loss if the mortgage you purchased from a lender, and is bundled with 99 otthers to make a round lot, goes into default?  How about two of the component mortgages?  Or fifty?  Or all of them.  What are the chances of that happening?  What premium should we charge for making this legal promise?  Should we set some of the money aside in case we have to pay?  Of course not, we'll never have to pay (they thought).  Until they did, and now they have no reserve set aside out of which to pay.  Enter Uncle Sam.

This is part of the reason the House voted down T-sec'y Paulson's $700 billion bailout plan.  It didn't find the bottom of the hole, it bailed out the big boys and not the individual homeowner, and it had both Democrats and Republicans hollering 'foul.'  The Dems because they know that the Republicans believe that if you go broke it's because it's your own damn fault, you drank, or were weak, or God didn't smile on you.  The Republicans because they believe this and hate the idea of government bailing out losing bettors.

I don't suppose taking out a few bankers and insurance executives and shooting them to encourage the others is apt to work, greed being as pervasive as it is.  A little greed?  Good.  Too much greed?  Bad.  Where draw the line?  You got me, pal.

The article below helps to spread the dark a little.  Someday we're going to understand this mess.  But not today.

PLAYING WITH DYNAMITE - AIG

If someone paid you a great deal of money to play with dynamite, you'd probably love playing with it as you enjoyed your walk to the bank.

But it might explode, and you'd die, a friend might warn.

It never has so far, you might reply, noting how safe dynamite has become to handle in recent years.

So you continue and your family and friends delight in your financial success.  Then,

BOOM!

You just exploded.

Well, these things happen, alas.

This is the story of how the biggest insurance company in the world, 116,000 employees in countries all over the world, let its London unit play with dynamite until it exploded not only the London unit but the worldwide company.  The head of the London unit doesn't even appear to recognize that he was playing with dynamite.

The whole thing depended on whether American taxpayers could continue to afford to pay the monthly mortgage on their home.  Most homeowners do manage to do this, even at the expense of the boat, the car, the second car, the vacation home, and even their kids college tuition.  But not if the loan they took out was unaffordable even as they took it out.   Why would someone take such a risk in buying a house?  Because housing prices kept going up and up and up, for years, even after the dot-com bubble came and went around 2002.  So you bought and flipped, meaning it mattered little what you paid so long as you made up the loss after you repainted the place and sold it at a higher price so the next person who needed a home, or worse, for the next bigger sucker who thought he'd replant the lawn and sell for even higher a few months later.

The London unit hadn't counted on home prices falling in the U.S., and marginal borrowers being not only unable to pay the mortgage, but unable to sell without losing their shirt.  So they walked away and the banks foreclosed.  Now the bank owned the white elephant.  Banks can't keep properties, especially many homes, properly maintained the way the homeowner does who seeks to keep the investment he lives in clean and shiny.  So the homes become rundown.  This blights the neighborhood.  Pretty soon the neighbors who are paying the mortgage feel as though they are living in a run-down neighborhood en route to becoming a slum.

This downward spiral drives down home values even more.  The guy in London has failed to foresee the homeowner in Stockton, CA, failing to meet his payments.  The guy in London, meanwhile, has been selling insurance in which the bet is that home prices will always either go up or remain stable.  Instead they went down.  The London guy's religion has proved to be based on a false god, that home values cannot fall.  Unforturnately, the London guy sold his religion around the world and the rest of the financial world placed faith in it, including some of the supposedly smartest guys around, such as at Goldman Sachs and JP Morgan, who dreamed up the product in the first place.  As long as you're making tons of money off the new god, why try to prove that he's not real, the way we do with all of our other gods?

Faith is such a wonderful thing.  As Archie Bunker famously said, faith is believing in something that no one in his right mind would believe.

The article detailing the fall of the House of Mo Greenburg, AIG, which got an $85 BILLION taxpayer bailout last week from the Treasury Department, appears below.  Ask yourself why you, a renter or mortgage payer in the U.S. should be required to support guys in London who were making a million dollars a year for peddling crap, when you weren't even invited to the annual cocktail party.

MARXIST CAPITALISM

This was in response to a post on a site for people who teach Conlaw.

I must say that I'm amazed at the whole concept of "too big to let fail."  The little guy (the taxpayer) is being asked to bail out the big guys who've probably screwed him, while the big guys continue to receive platinum bonuses and golden parachutes. 

What would Premier Deng Xiaoping (of Reform and Opening fame, not to mention Tiananmen) have called this? 

Capitalism with socialistic characteristics?

Or Reagan?  Trickle-down socialism for the rich?

By the time the bailout reaches the little guy who actually pays the mortgage every month (w/ no observable relief in sight), much less his about to be foreclosed neighbor with the "Short Sale" sign on the vacant house, there'll be nothing left.

Forget the hypothetical anti-Semitism [suggested as a reason for bring a lawsuit under the new proposed bailout plan, which prohibits lawsuits, even presumably to protest irrational or unequal treatment to identifiable groups] under the current plan. What about the actual anti-Little Guy bias, the guy whose taxes bail out the guy sitting on him?

I believe it was Tolstoy, in reference to the serfs, who wrote to the effect that the landholding aristocracy was willing to do anything for them except the one thing they really needed, to get off their backs.

I wish someone could explain to me how it is that bailing out "Wall Street," is going to help the guy paying, or not able to pay, the mortgage, not to mention the credit card.  Help the little guy and it's either creeping (or rampant) socialism.  Help the big guy and it's Advanced Capitalism.  Remember when the American Medical Association opposed government subsidized health-care on the ground it was socialistic?  What's their position now, I wonder.

Isn't this throwing "moral hazard" (heads you win, tails you lose) out the window?  What kind of crap game is Wall Street where if you're big enough, it's "heads I win, and tails all the little guys can bail me out."

I well remember my surprise at hearing Prof. Norman Redlich teach years ago that the Constitution does not, however, ordain that our economic system be either Capitalist, or Socialist, or something else, given all I'd heard about the evils of Socialism.

Call me financially ignorant, but I'd feel a lot more comfortable about a trickle-up bailout than trickle-down.