by Victor Davis Hanson
I confess I don’t know all that much about the theory of economics, and have done some unwise things in the strict financial sense the last thirty years — remodeled an ancient family farm house that will never be appraised at what was sunk into it, both farmed and rented out a 40-acre Thompson seedless vineyard whose returns usually did not pay the property taxes, irrigation taxes, infrastructure upkeep, and depreciation—and in unthinking fashion kept up my modest monthly 401(k) contributions through the height of inflated Wall Street stock prices. I could go on, but will leave at that.
My point? Many of us who have little abstract financial or economic sense are nonetheless baffled about the bad news from the economic front — and the inability of so-called experts to clarify issues. Let me list some troubling items.
1. 1984 Redux. I feel like Winston Smith in Oceania, confused about all the doublethink coming out of Washington. Great Depression — no Great Depression. Recession for years; its end at the end of this year. Signing statements bad; signing statements good. Fundamentals hardly strong; fundamentals really sound. Earmarks terrible; 8,000 wonderful. Bush’s $500 billion deficit reckless; Obama’s $1.7 sober and judicious; Iraq horrific and the worst whatever; Iraq suddenly quiet, democratic, and hopeful; highest ethical bar in an administration ever — Richardson, Daschle, Killefer, Solis, etc. cannot meet the lowest; Guantanamo a Stalag; Guantanamo open for a year, pending the recommendations of a “task force”; Guantanamo a torture place for unlawful combatants; Guantanamo a nice place without unlawful combatants; Obama not to be blamed for massive collapse of stock prices since November; Obama to be praised for modest gains last week. At some point, someone in the media must be getting embarrassed that they are all working at the Ministry of Truth.
2. Stimulating the Stimulated. I am also confused the various stimuli, bailouts, and guarantees. We all support some type of federal guarantees for some banks, lest like a house of cards they start falling seriatim.
Yet, I have not seen signs yet (unemployment, deflation, crashing GDP, etc.) that we are in the Great Depression, or even close to the hard times that supposedly will last “for years” as warned by President Obama. Are there not self-correcting mechanisms and natural stimuli at work that simply are ignored by the media and the administration in this madcap race to socialism?
Cf. hundreds of billions saved, both collectively and by the government, when oil prices crashed from $147 a barrel to around $40; billions more were saved when 6-month U.S. treasury notes, sold to finance the debt, crashed to about a half-a-percentage point in interest (allowing us free use of money, given that what we pay out is less than the rate of inflation); then there are the preexisting stimuli, given that Bush left with a $500 billion annual deficit.
Before we charge our grandchildren with another $3-5 trillion in aggregate debt over the next four years, cannot we take a deep breath, stop the hysteria, and let these stimuli have a chance to work — on the real chance we are in a 1981-3 serious recession, but hardly at 1929-41 Great Depression?
3. We all work at the DMV now. But debt is not the only problem. When we expand the percentage of government-controlled GDP in the overall economy far about 20% to near 40%, the change-over will guarantee for generations that we have less productive workers, not subject to the pressures of supply and demand of the private sector? We learned out here that even in our near $40 billion meltdown that California in extremis continued to hire new employees, and gave raises to state workers as it went broke. As someone who farmed for well over a decade and was a professor at a state-run institution for 21 years, I can attest that the government cannot approximate the market. I met many farmers who would have been delighted to have state-guaranteed jobs and very few government workers who would have preferred to be self-employed. I’ll leave it at that. But the DMVing of the economy is a terrifying thought.
4. Madder than Hell — and? There is a populist anger out there, hard to calibrate exactly, but growing nonetheless. Here’s what I think people are saying: Wall Street gets bailed out, despite billions that the masters of the universe skimmed off. Meanwhile our retirement accounts are crashed. Then the government bails out those ‘homeowners’ who failed, often due to their own greed and foolishness, not those who played by the rules: so default on your over priced home that you should have never bought, and the fed is there to bail you out; put away $1,000 a month in your 401(k) — and tough luck.
No new taxes of course for “all of us” except the evil “them,” but rumors still somehow abound that health care benefits will be taxed, carbon emissions will be taxed, and even veterans will pay for their care via private accounts before drawing on VA resources. And why would not Obama resort to more bait and switch to pay for a $3.5 trillion budget — when that proverbial evil 5% simply does not have the wherewithal to make up for the 50% who pay no federal income tax at all?
This growing unease is a weird sort of prairie-fire populism, focused on both Wall Street and still more the government. (Who is worse, the AIG execs that praise capitalism, then want federal handouts to ensure their bonuses, or the incompetent and unethical government who feeds them the cash (”hope and change”?) — or we the poor fools who will keep working to pay for all this?
Where it all leads I don’t know. But Team Obama does itself no good when it nominates grandees like Daschle, Geithner, Richardson, etc. who suffer the additional wage of hypocrisy that all tax-dodging and insider-profit-making egalitarians earn. There grows the perception that as a Roman demagogue — try Catiline — Obama is intimate with the lower classes and equally so with the hyper-wealthy of Hollywood, Wall Street, and America’s richly endowed families, with whom he navigates so well, but does not have a clue about the middle-classes, the clingers and bible-readers and gun-owners that are a world away from both the Daschles and the Kerry-Kennedy clique, and the bread-and-circuses world of Rev. Wright.
5. Madoff Mysteries. A lot of us are confused about the Madoff meltdown. How did a man in his 60s fake millions of records and thousands of accounts, without a legion of enablers? Surely, twenty, thirty, or more, entire teams no doubt, must have been needed to perpetuate the scam? Most of us cannot even keep track of a few government forms — much less run a Ponzi scheme on our own to defraud thousands out of billions.
Second, was the loss really that famed “$50 billion”? Surely that figure is the zenith of the aggregate inflated accounts, factoring in the phony 10% and above annual returns the past few years. Given that Madoff started in the 1990s (by the latest), and given that these accounts were doubling every seven or eight years at these mythical rates of return, isn’t it more likely that the real losses are $20-30 billion? By that I mean, if someone put in $1 million in 1990, and got a normal, but very steady and impressive 3-5% return, he might now have closer to $2 million rather than the artificial $4 million?
Third, in all Ponzi schemes there is a sort of static pool of money that the schemer enjoys. E.g., a new billion comes in this week to pay the phony 10% return for the already duped others. As long as the market climbed and thus people had no worries about their money, Madoff got new eager takers — especially due to his brilliantly diabolical self-construction of being reluctant, diffident and having to know Bernie to “get in”.
The meltdown came when that one proverbial person woke up after September 15 and thought, “Hmmm, 10% on my money was great these years. But even Bernie may have losses and it’s time to get out.” Once he tried and failed to liquidate his winnings, the news spread like fire and the pyramid went up in smoke.
And yet, and yet, where still is that mythical pot that surely was sorta static for Bernie’s own use? Granted he stole the new Paul to pay the old Peters, but there was still a capital core gaining interest somewhere under his control whose size was beyond even Madoff’s ability to spend? Even if only $10-20 billion can be found, it may be enough to give many 75% or so of the original money they invested (Their losses cannot ethically be calibrated at assuming a Madoff’s annual 10% return: just because their “statements” said that, doesn’t make it true). The feds surely will subpoena all the principle participants, and search the off-shore and Swiss accounts of his family and associates where many billions unspent must rest.
In an odd way, the fact that the money was simply rotating (while it gained interest in bank accounts?) may have been about what Wall Street was doing with our 401(k)s — not really earning anything, just counting on each day’s new infusion of payroll cash deductions to keep the sham up, and ensuring more got in than got out of the market. In Madoff’s case if his core theft fund was in cash, let us hope there is something for all those whose trust he so deplorably shattered.
Bottom line: Never in the last half century have so many had so little trust in their financial institutions, Wall Street, the Congress, and the government. I have about as much faith that my retirement portfolio statement is accurate or based on real information as I do that the executive and legislative branches will do tomorrow what they promised today.
I don’t know whether to be more upset at the woman in front of me at the Selma food market on Monday, who, with iPod in hand, pulled out her welfare food-stamp credit card to buy quite a sumptuous cart of groceries, or the AIG whiz who trumped her 1000x in taking a bonus for running his company into the ground. The former is a petty con-artist but in your face; the latter is toxic and lethal and quite dangerous, but abstract and distant.
God help us all!
©2009 Victor Davis Hanson