The American People Can Handle the Truth About the Economy: Can Washington

Armstrong Williams

8/30/2011 12:01:00 AM - Armstrong Williams

Who does the Fed think it’s kidding? Somehow we are supposed to believe it that the economy is growing, inflation is under control, and the big banks the Fed has been breastfeeding are somehow more solvent than they were two years ago. Fortunately, we live in a country where, despite the old adage, it is rarely possible to fool all of the people even some of the time.

That’s especially true of people who’ve already been fooled several times in recent memory. First it was the ratings agencies, whose reckless and conflicted business depended upon receiving billions of dollars in revenue from the very companies that they were supposedly rating. If that’s not an incentive for willful blindness, if not outright fraud, what is? The effect was that they were complicit with the big banks in duping the so-called ‘dumb money’ (read public and private pension funds under mandate to invest only in highly rated securities) into investing workers’ hard earned savings into what turned out to be worthless junk securities. When, finally, one of the agencies dared dip its’ toe in the waters of truth and recently downgraded U.S. sovereign debt (which, given its calamitous risk exposure, is still too highly rated), it was met not with a soothing reassurance that it was doing the right thing, but a baptism of fire and brimstone. In its’ vindictiveness, the U.S. Government immediately set to work supposedly investigating S&P of for its misdeeds. Where were the righteous Feds in 2007, when all of the ratings agencies gave Lehman Brothers AAA ratings right up until the day it collapsed? Why hasn’t there been a global discrediting of the ratings process after fully 90% of all the mortgage backed securities rate AAA by all three major ratings agencies have been downgraded to junk status?

The absolute absurdity of the ratings agencies’ is but one of the foolish schemes the general public seems no longer willing to believe. The second glaring joke is that inflation is low. While that might be true on aggregate, and mainly because the rapidly deflating housing sector is bringing down all ships, inflation for almost everything else the average consumer uses is going through the roof. Take for instance the almost doubling of gas prices over the last three years. Add to that the skyrocketing cost of food and clothing, and you have an American consumer that is facing fast rising prices amidst rapidly falling income and dwindling net wealth. How can the Fed really term their process of diluting the value of the American dollar by running the printing presses a ‘stimulus’ for the economy?

No, let’s just start calling it what it really is: a stimulus for the banks that got us into this mess in the first place. The only people that seem to have benefitted are the banks, which used the bailout money, not to lend to homes and businesses, but to reinvest at a significant profit in Treasury securities, thus making a risk-free profit from your and my tax dollars for almost three years. And then to add further injury and insult to insult and injury, instead of using the easy money they made to shore up their imploding capital and bolster loss reserves against the impending doom of the mortgage portfolios they hold on their books -- they paid themselves record bonuses instead. This is the problem with the moral hazard we created by allowing our government to just bail these guys out, especially without any quid pro quo whatsoever. Now we have a situation in which the banks are not only less stable, but more concentrated in terms of their power over the political process. And thus, they are likely to continue their reckless behavior because they know they have the power to induce Uncle Sam to bail them out once again.

Were it not for the fact that Europe currently faces a more desperate state of chaos than the United States, giving international investors no other place to go, the massive infusion of Government debt would have caused budget crushing interest rate hikes by now. Add to that the fact that Fed subsidies to the few remaining too big to fail banks -- both explicit (lending money at zero interest), and implicit (that it has signaled publicly that it won’t let the banks fail) – are preventing the workout of the housing debacle, which continues to drag on with no end in sight.

The Federal Government and the big banks keep insisting that a global settlement to the mortgage fraud issue is at hand. And yet, after more than six months of wrangling with the states attorney generals (who, by the way, were the only governmental authorities who had the courage to stand up against the banks’ fraud in the first place), there is still no feasible solution. Add to that the fact that the banks are suffering from a general decline in deposits (because Americans are flat broke and out of work), and less demand for debt (because Americans are overleveraged and out of work). Add to this Banks unknown exposure to European sovereign debt that is sure to default sooner than later, and it’s no wonder investors have refused to believe the Banks self-diagnoses of good health and begun to dump their stock. Again, moral hazard creeps back in. These banks had months, if not years, to shore up their invested capital, and instead find themselves again teetering on the brink of collapse as investors flee.

The American people are just plain tired of the lies at this point. No amount of Fed goosing the economy is going to bring back the consumer without more jobs. It’s time to realize that the overall economy has decoupled from the stock market. Despite what the companies look like – flush with cash and impressive balance sheets, one is hard pressed to find major industries with actual demand growth. It’s even rarer to find industries that are hiring people. Most of the newfound fitness in corporate America has come from cutting the fat, and laying people off. But corporate belts have reached the last loophole. They’re as tight as they can get without cutting off their own circulation.

Let’s just call this what it is. It’s not a ‘Great Recession’ anymore. This is a classic depression – a state of the economy when individuals and corporations have to sell their long term assets to fund current necessities. Let’s do away with all the double-speak, and false confidence-inducing rhetoric (stimulus, quantitative easing, low headline inflation, jobless recovery, and all that) and come out and level with the American people. Come on. They already know, and they just want you to say it. Surely there are a few good men in Washington who can handle the truth.