Meanwhile, on Wall Street

Americans are so fucked. But first, these messages...

Until recently, there was a major housing bubble in the US: normal working-class houses would sell for a million dollars or more. Banks offered subprime mortgages, multiple mortgages, and interest-only mortgages with minimal credit check, which encouraged many Americans to buy houses they couldn't afford. Some call it NINJA financing: "No Income, No Job: Approved!" As long as the price of houses kept rising, they were solvent because they could theoretically sell the house and make a profit. Investment banks like Bear Sterns began trading mortgages, insurance on mortgages, and other pieces of paper as if the housing industry were a stock market, and this kept driving up the price of homes. Homeowners acquired more and more debt to avoid losing their houses, so superficially the money supply kept growing. At some point, though, too many people started missing mortgage payments, and all those pieces of paper became worthless overnight ("loss of investor confidence"). At the end of the day, a few dozen people on Wall Street became billionaires and many Americans lost their life savings. To add insult to injury, the US government bailed out Bear Stearns but not homeowners, so the fraudsters got another $2 billion windfall. Fast-forward to this week: the US government just stepped in and nationalized the $5 trillon mortgage giants Fannie Mae and Freddie Mac. If their assets are made of air like those of Bear Stearns, the US public debt will double overnight, and all that money will go to the people who are responsible for the crisis in the first place.

The subprime mortgage crisis is not the end of the story; there is a similar crisis looming with consumer debt (credit cards, installment debt, etc). We all know people with several maxed-out credit cards they'll never pay off. Sooner or later, a critical mass of creditors will call in their debts, credit card holders will go bankrupt, and the apparent wealth of the nation will evaporate. Obama's VP Joe Biden has deep connections to the credit card industry, so a government shakedown is very unlikely.

I won't waste my breath highlighting the massive injustice of all this. It's clear that those responsible deserve to work in a rice paddy the rest of their natural lives. The point I'm trying to make is this: the US government itself is very shaky financially, and soon it won't be able to backstop the "failures" of the economy any more.

For 200 years, the fastest way to get rich in the US has been to take over an essential service, run it into the ground, and wait for a government bailout (cf railways, Lockheed Aircraft, Chrysler, Savings & Loan, Enron, Bear Sterns). When the industry becomes profitable again, it gets sold back to the private sector for cheap because a profitable government agency is "socialism". The stakes are bigger than ever now because of all the corporate mergers. But now, the government itself is broke due to decades of corporate handouts (especially via the pentagon) and tax cuts. It has stayed solvent by taking on more private and foreign debt--an additional $2 trillion or so since 2000. A leftwing administration could redistribute money back from Wall Street to the public purse, but there is no American Left to speak of. Besides, there needs to be serious, longterm investment in education and infrastructure before the US can become economically self-sufficient again.

So where will it end? What happens when an essential service fails and Japan and China aren't willing to underwrite a bailout any more? Will we discover that all the non-imaginary wealth in the US is owned by a few hundred thousand people, like 1929? And what will happen to the rest of us?


September 20 update: Since I wrote this post, the US government has pledged another 800 billion dollars of bailouts for Wall Street. No word yet on where all that cash will come from. This raises the US debt ceiling to 11.3 trillion dollars, $32 000 for every man, woman, and child in the US.

I wonder when this will start to qualify as odious debt.