This is a system?

We now are witness to the slow-motion collapse of major sectors of the global economy, led by the mortgage sector in the US, soon to be followed by the credit card squeeze and the car loan crunch. No one should be surprised; for years our economy, stretched as tight as a balloon skin, has been deeply shaken by minor events, such as Alan Greenspan's use of the phrase “irrational exuberance”, attacks on minor oil production facilities in faraway places, or a stray 30.06 round accidentally fired into the Alaska pipeline. The IMF, World Bank, and various countries have dumped tens of billions of dollars on the market, to little avail. The interest rate has been repeatedly cut – notwithstanding Japan’s sad story of cutting its interest rate to zero twenty years ago, with no significant effect on their markets. In the face of such undeniable frailty, the public keeps being reassured with nostrums revolving around a “jump-start the economy” theme. This is a system?

Let's look for a minute to the housing credit situation and the stock market. Many homeowners are not able to keep up with mortgage payments, and banks are faced with acquiring title to hundreds of thousands of homes; this would be a financial disaster. On the other hand, when all those homeowners labor and pay their mortgages, the bank takes that money, and pools it with lots of other home owner's money (or debt, actually), and sells it to the secondary market, usually other financial institutions. They, in turn, agglomerate this debt into a variety of funds and other derivative financial instruments and it gets reinvested in yet a tertiary layer of investments. At the top of the investment chain are the hedge funds, which are restricted to very wealthy investors or institutions and have far fewer restrictions. The promise of the homeowner to pay one bank has now been combined with others into a promise from one - or many - financial institutions to pay their investors back on their investments into, say, housing. The billions of dollars in investments (that is, of the homeowners’ debt) are at risk, stretched to the breaking point, but invested in and flowing to ventures of all sorts all over the world.

So the solution is to give money to the beleaguered homeowners, not to keep them in their homes for their own sake, but thereby to protect the institutional investors. Foreclosures have been rising steadily for years, but the losses could thus far be shifted onto the homeowner, who lost his house (and bank could resell it). Those days are gone. There are too many foreclosures, and the possibility of their combined loss has perturbed the global economic system. So some money will be given to the homeowner – just enough to keep them in their homes, and their jobs, in fruitful service to other interests further up the financial food chain.

And, one could say, meeting their legal obligations. After all, they signed up; shouldn't they bear some responsibility for getting in over their heads? Perhaps, but indictments have already been issued for deceptive and predatory lending practices. We can let the justice system sort that out. Forbes magazine though, doesn't want to wait; they squarely put the blame on the consumer, for not spending enough money. They should be out purchasing washers and dryers and automobiles and furniture, and this is how they are to be expected to spend the rebates.

But ordinary folks may choose, or be forced by straits, to make other decisions, such as spending it on food and energy. A recent poll by Harris Interactive commissioned by Commerce Clearing House (a private legal and economic publisher) indicated that fifty-four percent would spend the rebate to pay down debt, twenty-nine percent would save it, and only seventeen percent would spend it.

It seems in my case, and that of many others, that I am merely a conduit for the money - from the government, through me to the bank, and then up the financial ladder, to the exceedingly wealthy (who are not known for their patience or reluctance to complain).

Overshadowed in the press by these rebates are the giveaways to business. They total "only "$44.8 billion dollars (out of $152 billion) and they come in the form of raising the amount of “deductible Code Sec. 179 expensing” (“expensing” is the cost of depreciable personal tangible property used in business), nearly doubling it from $128,000.00 to $250,000.00, it’s highest level ever. There also is provision for raising the ceiling at which the deduction benefits start to phase out (making more businesses eligible), although the rules do exclude huge corporations. They do not rule out luxury cars, though; the new rules provide for $11,000.00 as first-year depreciation on business-use vehicles purchased in 2008.

States stand to lose billions in revenue from these “business incentives” because of linkages between federal and state tax codes. When “bonus depreciation” (one of the incentives) was passed in 2002-03 many states “unlinked” in whole or in part, to avoid the revenue hit. The Center on Budget and Policy Priorities predicts that much of the stimulus will be dissipated through resulting budget cuts or tax increases at the state level.

Now let’s go back to the stock market for a final note. New Federal Accounting Standards Board rules require that financial institutions disclose how much money they have invested in the tertiary markets. People will get their first idea of just how vulnerable these institutions are to losses in these markets. This is a particularly bad time for losses in the brokerage houses right now – they need the money. One of the major brokerage houses has set aside more than twenty billion dollars for bonuses to their hedge fund managers – some of the individual bonuses are to exceed one billion dollars. These are the people we’re protecting from financial ruin, not the homeowners.