Robert Stein 1924-2014

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Monday, March 02, 2009

The Melting of American Wealth

How did we get so poor so fast? Under the radar of stimulus bills and bailouts, economists are toting up the damage and super-investors like Warren Buffet are still trying to figure out what happened.

Now we learn the economy is shrinking twice as fast as originally thought--at an annualized rate of 6.2 percent in the last three months of 2008 rather than the original estimate of 3.2, making it the worst quarter since 1982.

The downward spiral, reflected in a sinking stock market, has troubled banks taking taxpayer money but hesitating to lend and nervous companies laying off workers (an expected 700,000 job losses in February) leading to deeper consumer cuts in spending that will deprive businesses of revenue and more falling behind on house, car and credit card payments, multiplying losses throughout the financial system.

Looking back at how all this happened, even the Sage of Omaha is blaming himself for doing "some dumb things" but aiming most of his scorn at derivatives devised by “a nerdy-sounding priesthood, using esoteric terms such as beta, gamma, sigma and the like...Beware of geeks bearing formulas.”

With typical Warren Buffet bluntness, he concludes, “Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal disease: It’s not just whom you sleep with, but also whom they are sleeping with.”

But Buffet's aw-shucks posture of earthy wisdom is too easy on himself and lesser investors who thrived in a world where manipulating money was the most prized skill of all, at the extremes allowing con artists like Bernard Madoff to bilk so-called savvy investors of billions.

Now, as the government tries to move money into the real world--agricultural subsidies from corporate farms to feeding poor children, students loans from private banks to direct Pell grants--much of the effort is still going into propping up "too big to fail" entities like AIG, the remnants of a financial system that detached itself from reality and shows few signs of finding its way back.

When the stimulus money finally starts flowing into the hands of people who work and make things or help sick people or teach children, that will be a sign that the downward spiral may finally be ending.

5 comments:

Anonymous said...

Another $30 billion for AIG.... geeshh! I guess our money has to go to the company that insures the banks, but why then are we giving the banks money too? Is the AIG going to actually give more of our money to the banks?

You're certainly right that someday perhaps the money we are shelling out may find its way to the people who actually consitute 2/3rds of the economy and who actually produce the wealth. And is that the Wall Street speculators? No, that's the shrinking middle-class!

Thanks for connecting the dots. I'll stay posted!

GRCOH said...

You are indeed right to put "too big to fail" in quotes. Every time I read that phrase or hear it in the "newscasts" I get this pounding in my head that says "Baloney! These people have already lost $150 Bilion in the last three months of the year...THEY HAVE ALREADY FAILED.

R. S. Abrinaud said...

Here's a novel concept: If the government is going to shell out taxpayer dollars to these banks, then why not put a time limit on that money? I teach at a public high-school, and ever year, the English Department gets X amount of money to go towards purchasing equipment and supplies for the department--including things like purchasing books in translation for ESL students, or classroom sets of novels so that lower-income students don't have to struggle to find them in the library or purchase them. If a portion of that money doesn't get spent by a certain date, then we get less money the next year.

Why not tell the banks that they have to loosen up on the money they've been given, and that they *must* funnel that money into lending and other transactions that will get the economy moving again? If they don't do it by a certain date, then they don't get any more. Period.

Anonymous said...

it's already over for america, there will be no recovery.
all the so called experts didn't see it coming and they do not really have a clue about how to rectify it.
Lie, cheat and steal, what did you think was going to happen???
What will happen needs to happen and bigger is not better...
WAKE UP! It's NEVER GOING TO BE THE SAME AGAIN!!!

The stock market WILL NOT RECOVER!!!

ryorkport said...

The answer to the question of how we arrived at "The Melting of American Wealth" is pretty simple (unlike most of the economic details):

The wealth "created" in the last 15 years was fake.

"Wealth" of the last decade was not created by production and creativity. Most fortunes were made by playing with numbers. Not with real goods and new ideas.

Rick York