Our economy is having a Wile-E Coyote moment...
We've been racing along, full speed ahead and suddenly find ourselves, like Wile-E Coyote, over the cliff, suspended in mid air, looking down!
And in a desperate attempt to save ourselves, we have whipped out our national credit card and are frantically trying to craft an emergency landing out of dollar bills...
And they are flying everywhere.
The last time a crisis of this magnitude was seen in the U.S. was during the Great Depression. And in an attempt to save the American economy, FDR spent 100 days crafting the "New Deal".
75 years later, we find ourselves confronted with a crisis of similar magnitude and a president who whips out our national wallet and presents his own "new deal" in one day...flat. To the tune of $700 billion dollars. At the very least.
So where does that money come from?
It comes from "The Fed", the bank of all American banks, also known as "the Federal Reserve". The Federal Reserve is our country's central bank. It is where we go for money, as a country, when we need a loan and some extra spending dough. And right now, in order to pay for this bailout on Wall Street, we need a half a trillion dollar loan. And since we can't find anyone willing to lend us that kind of money, we've gone to the Fed, our central bank, which is why the Fed is also known as "the lender of last resort".
As a matter of fact, the Fed called a "special ops" meeting at the New York Fed last weekend with the CEO's of Merrill Lynch, Lehman Brothers, AIG, Morgan Stanley, Goldman Sachs and Bear Sterns' JP Morgan (though the savvy CEO of Merrill Lynch, upon learning the scope of the problem, quietly excused himself from the Fed's meeting, made a quick phone call to Bank of America's CEO in North Carolina, lined up the sale of his own shop, and then stepped back in to the Fed's meeting).
According to the Wall Street Journal, in this meeting, it became clear that massive effort was needed to stabilize Wall Street and the contagious credit crisis (now being called "toxic waste" around the world), so all of these men agreed: Yep. We need a bailout. We"ve made some bad bets. Loan us more money. So the Fed, our nation's central bank, agreed and promised these CEOs an estimated seven hundred billion dollars. Can't you hear Dr. Evil saying it?
Where does money of that magnitude come from? Does the Fed even have half a trillion dollars? Is $500 billion sitting in their bank account?
In order to bail out the boys on Wall Street, to save the CEO's who levered up their financial houses, exposing themselves to unprecedented risk in an effort to maximize profits (source: International Herald Tribune), our government essentially structured a cash out refi using our taxpayer dollars. And as we highlighted in Momonomics 101, we borrow this money from China, the UK, Japan and the Saudis in order to refi the US banking system. And guess whose name is on that refi? Ours. Yours, mine and every neighbor that you know. We've just been signed up for that debt, as taxpayers.
What that means is that every household in America -- from every apartment in Manhattan to every farmhouse in Kansas has just signed a financial obligation for somewhere between $7,000 and $10,000 per household to bail out the boys on Wall Street. That's right, as taxpayers, without our informed consent, we've all just turned over thousand of dollars each to Wall Street in order to provide more money to these cash strapped banks, because the banks gambled theirs away.
Every taxpayer in the country, one hundred million households across America, just gave our financial system money so that the banks can continue to make loans...to each other...while "Uncle Sam becomes the repository for the radioactive leftovers of bad real estate bets". That's supply side economics at its finest. We supply the banks with money, they loan to each other, they loan to us, the money trickles down, greasing the wheels of the economy (Like W, I was raised on supply side economics in Texas under "McCain"s econ brain", Phil Gramm (source: CNN Money)).
The problem is that this didn't happen. The banks have made some sketchy loans, too, so they are hoarding the cash. Can you blame them? I mean, if someone loaned you ten thousand dollars right now (not to mention hundreds of billions!), would you turn around and loan it out to the next guy? Me neither. Well, guess what? The banks feel the same way. So the billions in taxpayer dollars that we've just handed them over the last week is now being hoarded...in their bank accounts and no loans are being made.
So what does that mean to Main Street? How does that impact a family in Houston or a farmer in Iowa? It means that it is going to become harder to borrow money since the banks don't want to make loans. We're already seeing this in the housing market, as it's become harder to qualify for a home loan or to qualify for a cash out refi. As banks start to tighten their lending standards, it is going to become harder to qualify for loans on everything from cars, to dishwashers, to education to those for small businesses. "Buy now, with 0 percent financing" could become obsolete as banks become more and more apprehensive about lending money.
So what can be done? Since our country is up to its eyeballs in debt, and we, the taxpayers, are on the hook for it, you may want to think about getting your financial house in order. Should you finance that new refrigerator or delay the purchase until you can pay cash? Do you need two cars or could you take public transportation? Instead of doing another cash-out refi to pay off that credit card balance, maybe you could pack a lunch or eat a few more meals at home during the week and put that extra spending cash towards paying down that credit card balance.
That way, you'll be sitting on the right side of the table, when they start playing that old Kenny Rogers' song, "The Gambler":
You got to know when to hold 'em, know when to fold' em,
Know when to walk away and know when to run.
You never count your money when you're sittin' at the table.
There'll be time enough for countin when the dealins done.