Brother, Can You Spare $85 Billion?

This isn't a sexy subject, I know, but what to make of this crashing stock market of ours? I've never seen anything like it. Huge, bedrock investment banks like Bear Stearns, Lehman Brothers, and Merrill Lynch -- Merrill Fucking Lynch -- going bankrupt in a matter of hours and needing to be sold at bargain basement prices. Yesterday someone told me that the sale agreement for the Lehman Brothers buyout was only a few pages long and looked like it had been written by a first grader. They did it over a weekend. Normally those agreements would take weeks to complete, would have 20 lawyers working on them, and would have all kinds of internal conditions, promises, disclosures, and cover your ass provisions. But when your price is falling every second and you want to do it quickly, you don't negotiate.

This whole thing is disconcerting, to put it mildly. The market tanked 450 points yesterday and 504 points the day before that. This is the biggest freefall since after 9/11. And now with AIG, one of the largest insurance companies in the world, crashing and needing a buyout, who knows where we're going? AIG insures everything from Hollywood movies to oil rigs in the middle of the ocean. It employs thousands of people. If it went under, everything I'm hearing is that it could have had a terrible ripple effect on other companies and the economy as a whole. Now they're saying Morgan Stanley and Goldman Sachs could be next. We're through the looking glass people. They poop money at Goldman Sachs. I heard a rumor that the bathrooms over there are made of gold and instead of toilet paper they use $50 dollar bills. Now they're in trouble. Say it isn't so!

Apparently, we don't need a terrorist attack for our financial system to come tumbling down. All we need is some good old fashioned capitalist excess. The chickens, as they say, have come home to roost. What's responsible for this mess? It's fairly simple on a macro level. These companies held investments in risky instruments like subprime mortgages, auction rate securities, and derivatives, which have become worthless for a variety of reasons. When there's no market for a product, you can't sell it. When you can't sell it, you have to eat the loss. When you have to eat the loss, it eats up your cash. When your cash is gone, you can't pay for things like employee salaries, the rent on your buildings, and $50 toilet paper. When that happens, you become a debtor and eventually you have to disclose it to your shareholders (i.e., the public at large). Then you go bankrupt. Three things then happen: a quick death, where the company is heard from no more, a buyout from a larger company with sufficient cash on hand, or a government bailout where our taxpayer dollars are used to save the company from extinction. That's what's happening with AIG. We just bought AIG for $85 billion. Don't you feel proud?

Which brings me to my next point. Saving these companies from their own stupid decision-making is beyond ironic in a capitalist country like ours. Here in the United States, people get scared shitless when they hear the word "socialism." For years, well-intentioned people have tried to solve our messed up health care system by proposing alternatives similar to the health care systems in Canada and Europe. These alternatives go nowhere because the insurance companies lobby Congress and the President who, in turn, start using the "socialist" word, calling the new proposals "socialized medicine." "That's socialism!" they cry. "We don't want socialized medicine in America!"

Funny, people don't want socialized health care, but they don't mind having our government bail out investment banks and insurance companies when they take stupid risks and go bankrupt. I'm sorry, isn't THAT socialism? I thought the free market was all about survival of the fittest? Those who do best thrive, those who don't, fail and disappear. If Lehman, Bear Stearns, and AIG, screwed up, why should they be saved? And more importantly, why should U.S. taxpayers save them, in AIG's case? Or in the savings and loan debacle of the 1990s? These kinds of bailouts are something you're likely to see in China or in one of those "socialist" European countries. Under a capitalist system, failing companies are supposed to die and be replaced by more efficient companies who do it better. So, when push comes to shove in our capitalist system, when things are going down the toilet, why aren't we acting like true capitalists and making our markets more efficient by allowing these companies to disappear? Well, one reason is because to do so could lead to a worse domino effect than we already have happening. You see, there's a lot of psychology involved in economics. If people start believing we're headed to a Depression, then that's exactly where we'll go. To turn this around, people have to stick their heads in the sand and ignore the Bad Man Behind the Curtain. The power of positive thinking is very important in a capitalist system. That's why we had that lovely tech bubble in the late 90s followed by the real estate bubble. People thought there was no ceiling on the good times. Of course, bubbles eventually burst. And now we're paying for it. Literally. The other reason why we're not letting these companies die is because it's all a game. We're capitalists when we want to be, but socialists when it suits our interests. We just don't call it socialism. We call it a "government bailout." Our cause is noble: we're not taking money from people (even though we are); we're saving respectable companies so that people won't lose their jobs and confidence in our system won't be catastrophically eroded. It's a little socialized medicine for our sick capitalist system. Just don't call it that. And no, we still don't want socialized health care.

Now, maybe you don't care about any of this. Maybe you think it doesn't affect you. You don't own any stock and you keep all your money in a mattress. Sounds comforting, but the reality is, the current economic crisis is affecting everyone in this country. If you own stock or participate in a 401(k), obviously, you're taking it up the butt right now, and they're fresh out of Vaseline. That's a lot of people. Most people plan to retire on 401(k) plans, and 401(k) plans own mutual funds, which are comprised by a swath of individual stocks. Even teachers and government workers own pension plans today. Pension plans invest in, you guessed it, stocks and municipal bonds (among other things). If you don't own stock, then you're still affected because major banks are failing and that's created a crisis of confidence in the entire U.S. economy. Try getting a loan right now. Your FICO score better be pristine, or you can forget about it. Banks have learned their lesson (temporarily) and they're not taking risks. If you're a college student trying to get a job, someone who just got laid off, or a parent thinking about your kid's college education, you're impacted by this mess, whether you know it or not.

The good news is, after 9/11, when the stock market lost 14% of its value, it rebounded back to where it was in less than two months. More likely than not, this freefall won't last long. But if there's another terrorist attack soon, or if more companies start crashing, this could get even worse, and it may take a long time for things to turn around.

Hope you've got lots of canned peaches stored in that bunker of yours. I know I do.