It used to be that the term “Bank Heist” meant a gun, a mask, and handing the teller a note that said “Your money or your life.” Now it means bank execs who have been totally reckless in their pursuit of this quarter’s income statement with no regard for what happens next quarter going to Washington and handing all of us a note that says “Your (bailout) money or your economy.” And like the bank robber of old, you still might get shot anyway.  In this case, it means that the banks who took our money under threat of imminent economic collapse by the extinction of credit will still refuse to lend money to the small businesses that drive the innovation that will create the next recovery.

The millionaires will still get their bonuses and their new luxury box offices. The best and brightest whose greedy fraud started this whole mess and wrecked the balance sheets of not only their own companies but every homeowner and everyone with a 401k or IRA as well won’t suffer at all.

The current economic downturn is largely tied to the bubble in the mortgage and housing industries. It started innocently enough. Washington felt that mortgage companies were refusing to lend to blacks based on race, not on statistics. Fannie Mae and Freddie Mac were set up to back up and insure the banks for mortgages they would not have made otherwise. The banks still weren’t comfortable with the idea. So an industry evolved where new companies originated the mortgages and then sold them to other companies who had to actually collect the payments. The originating companies worked on ways to get creative and making people appear to be qualified, and didn’t care if they went too far because they wouldn’t have to collect the payments. The banks were happy to buy the mortgages because they could honestly tell Washington that they had no say in who got approved and who didn’t, and there was insurance for the defaults anyway.

So for awhile, everyone was happy. Since more people than ever were being qualified to get a mortgage, housing prices were rising fast. Builders were in heaven, because the price of housing is not a function of the cost of construction. The same leaky, energy-inefficient piece of crap that was profitable to build at $150,000 was now immensely profitable at $300,000.

Competition in the mortgage industry led to ever more creative ways to get less qualified people into ever more expensive homes lead to even more creativity on the banking side. Subprime mortgages (read: “We know there’s no way in hell these people will be able to keep up with what these payments will be in year two, but they believed us when we told them they could afford it.”) were packaged into derivative securities so opaque even financial professionals had a hard time figuring out what they were buying, but everybody else was making money off of them, so we might as well too. The came the “credit default swaps” designed to protect against the first derivatives being the 2000’s answer to junk bonds. Except that they were ultra junk bonds, because a huge percentage of the gimmicky mortgages either are or will be in default. They are loans that should never have been made.

This grand pyramid scheme started to unravel as early as 2006. But the builders kept building, and those local banks that had most of their business in loans to those builders didn’t adjust quickly enough either. Eventually, the credit default swaps started to be called in, and AIG and other companies could not make their payments either.

Congress and state legislatures keep talking about “stimulating the housing industry” as though we could go back to January 2006 just by throwing dollars at the problem. The problem is that just about every house purchased in the last five years was NEVER worth what was paid for it. The mortgage and mortgage-backed securities scams created an artificially high demand that created artificially high prices.

As for builders: if you didn’t put away anything from the glorious profit years, then you’re as dumb as Congress was during that time running deficits during an economic boom. Tip: use your down time to figure out how your company can make energy efficiency improvements to existing structures a better investment than with anyone else. That’s going to be the next bubble. If you get there before it becomes a commodity, you can become very profitable and make the world a better place.

As for the banks: “Too big to fail”? No, too big to succeed. “The best and brightest”? Not likely. More like the greediest and most selfish. By propping up the dinosaurs, we are making it harder for smaller companies with innovative ideas to get the space they need to grow the right way: by helping to create real wealth, not just paper gains.

So who should we help? The companies that invested heavily in instruments they did not understand? The companies that created those instruments precisely because no one could understand them because anyone who did understand them would never buy them? The people who bought homes they should have known they could not afford? The mortgage “professionals” who told them they could afford them?

Personally, I am tired of bailing out the perps and not the victims. There is a group that is not talked about in all this – the people who bought houses in the past five years who can afford them (even though the scams did make them pay more than they should have) who can’t refinance now at the low interest rates because they owe more than the current market price of the house. These people should be able to have their current mortgage holder adjust the rate/terms on their mortgage without going through thousand of dollars in fees. You should just have to document current employment, and not have ever been behind on your payments. If you have been keeping up current payments, then obviously you can afford LOWER ones. Banks could go a long way toward earning their citizenship back by doing this on their own rather than waiting for Congress to drag this out of them kicking and screaming. This savings for middle class families would then go back into the economy in other ways, like art classes for talented child or seed money to start a new business.

“All this has happened before and will happen again.” Unless we do something differently.

There is much debate at the moment over President Obama’s budget proposal and what it would do to the budget deficit.

First off, some basic economic theory that I haven’t seen mentioned by politicians of either party or any of the alleged “news” media. Capitalism has up and down cycles. It always has, and it always will, because each cycle gets exaggerated by a different bubble or bubbles.  The Cylons have a saying:  “All this has happened before and will happen again.”

So how do these bubbles start?

They start with a new idea that works, which then gets copied enough to become mainstream, at which point it is no longer wildly profitable unless you come up with a marketing twist that adds no actual value to the world other than to move money around. Eventually enough people realize that the emperor has no clothes, and the bubble bursts. It happened with the dotComs, it happened with the Enrons and MCIs. Those were traumatic to a few people and industries, but the economy as a whole recovered quickly enough because the middle class in general was not threatened by those scams. When it happened with gimmicky mortgages, the whole world got screwed. This will be a whole article on its own very soon.

What should government’s role be?

Government’s role in these cycles should be to move “anti-spinward” to try to keep the cycles from going too far off center. When the economy is booming, government should be running at a surplus, so that when a down part of the cycle is reached, there is money available to pump into the recovery. At that point, government runs at a deficit until the economy recovers, at which point government should then pay down any overall deficit incurred and resume building a surplus for the next cycle.

The problem we face now is that during the prosperity of the mid 2000’s our government ran at a deficit instead of a surplus. Never before in history has a country fought two wars while cutting taxes. We gave tax breaks to oil companies while they were recording record profits on historically high oil prices in part caused by the wars we were fighting with borrowed money.

So we are now faced with a situation where the government should be running at a deficit to alleviate the worst economic downturn in a long time. We should be coming together to fix things. Instead we have politicians who would rather things got worse as long as they can’t get credit for fixing them. And a media and public who can’t seem to tell the truth from the blame game (I am referring to the Republican response of “See, he’s being partisan” to Obama stating “I inherited this mess”.)

So we bail out the “too big to fail” corporate perps who got us here, and debate moving forward vs business as usual under the guise of people vs small business. That’s the biggest PR lie since “trickle down economics”.  Senator Judd Gregg (R-NH) said “It is the individual American who creates prosperity and good jobs, not the government.” What he should have said was “It is the individual American who creates prosperity and good jobs, not the government or the large corporations it works for.” Because the rest of his platform calls for business as usual, which means people and small business get to keep subsidizing bonuses for committing fraud.

The Georgia Legislature continued to show its contempt for its citizens and support for its corporate sponsors by passing HB 480.  This bill will eliminate the sales tax and the annual ad valorem tax on cars purchased in Georgia after the end of 2009.  In its place, a 7% fee will be charged for titling the vehicle, with a cap set at $2000.

What’s wrong with this?  For one thing, it means that cars costing $28,571 and up all pay the same fee.  So the biggest tax breaks go to the most expensive cars, and luxury cars and SUVs are the worst offenders in terms of gas mileage and pollution.  Great public policy!  Of course this should be expected from one of the states where the Governor is considering rejecting Federal stimulus money because he doesn’t want the state to be held accountable for how it is spent.

Secondly, this new title fee would apply to private sales of used cars.  Currently no sales tax is charged. Who benefits from this?  Car dealers, and only car dealers.  When you sell a used car to a dealer, you pay less than it is worth.  When you buy a used car from a dealer, you pay more than it is worth.  Private sales benefit both parties involved,  but they rarely involve anyone in a position to buy votes, so guess who’s side the Georgia Legislature is on?

Some have expressed concern that this will cause more dealerships to fail because people wait until 2010 to buy new cars.  Probably part of the plan.  The largest dealerships will have the best chance of riding out the year, and in 2010 there will be less competition and higher prices for everyone.

One law for the rich is alive and well in the state of  Georgia Power.

There is new voice advocating a part of the Legislative Accountability Amendment:  www.readthebill.org

It’s common sense really – if ignorance of the law is no excuse for those who have to follow it, how much more important is it that those who vote on creating the law have actually read what they are voting on.

It is also important for concerned citizens to have an opportunity to read and contact their representatives on the details of a bill, not just the (usually misleading) title and the ten second sound bite of what the bill’s sponsors (and/or anti-sponsors) claim it will do.

Publishing the complete text of each bill for 72 hours before debating/voting will make government more transparent and more responsive to the will of the people.

To those of you who say “Who cares?  I haven’t got time to read that stuff anyway”, then support my idea of limiting bills to no more than 2 pages.  Much easier to read and much harder to hide special interest catering.