December 22, 2008
What the Heck Happened?By Randall Hoven
It was springtime in the US. The most recent unemployment number was 5.0%, a slight tic down from the previous month and in line with the previous 12-month, fairly low, average of 4.8%. We were in a quarter of positive real economic growth, a 2.8% annual rate, following a previous quarter of positive growth. On May 19, the S&P 500 hit 1427, the highest point since January 3 and essentially where it ended the previous year.
On the foreign front, the surge in Iraq was clearly bearing fruit. The number of US military deaths in Iraq in May was the lowest since the war started. The fatality count of Iraqi civilians was also at or near an all-time low. The Iraq war, Barack Obama's initial campaign theme, was losing its steam as an election issue.
On the political front, the Republicans had picked their nominee in all but formality: a sitting US Senator with 26 years of experience in national elective office, a war hero and a political centrist. The Democrats were closing in on one of two candidates: one with a little more than one term in the Senate and the other with just over half of one term, both extremely liberal (American Conservative Union lifetime ratings of 7.71 and 7.67, respectively), and neither one having any military or executive experience.
As spring turned to summer, there was some nervousness about banks in trouble and increases in the unemployment rate. The S&P 500 hovered between 1200 and 1300 for most of June through August. On September 2, the first trading day after John McCain announced his VP pick of Sarah Palin, and as the Republican Convention began, the S&P closed above 1300, about the average level for the whole year up to then.
The very next weekend, September 6, the federal government announced that it would take over Fannie Mae and Freddie Mac. But it appeared to have little effect on the markets or politics. John McCain, now teamed with Sarah Palin, was rising in the polls. In fact, the McCain/Palin ticket had taken a slight lead over the Obama/Biden ticket about then. As the markets closed on Friday, September 19, the S&P 500 stood at 1255, still about where it had been for months.
By mid-September, the latest GDP figures had been revised upward and showed a fairly strong second quarter. In fact, we seemed to be missing the recession happening in Europe at that time. Iraq was looking ever more like we were reaching a successful end-game. The markets were mostly steady, maybe showing some nervousness that could be explained by the uncertainty of the coming elections. The race was close, with McCain actually enjoying a slim lead.
Then on September 21, Treasury Secretary Henry Paulson went on Meet the Press to announce the urgent need for a $700 billion bailout of banks. Seven. Hundred. Billion. $700,000,000,000. Over one quarter of the entire federal budget, after bailing out Freddie, Fannie and AIG and before the sweeteners were attached. Over five Marshall Plans, even after adjusting for inflation.
The world has not been the same since.
President Bush and both presidential candidates voiced support for the bailout and by October 3 the bailout was law. The bailout enjoyed bipartisan support. We would never see the S&P above 1200 again. On November 4, Election Day, it closed just above 1000. The election results came in that night. So long, 1000.
In the three months after Paulson went on Meet the Press, the S&P 500 fell almost 30%, from 1255 on September 19 to 888 on December 19. A bear market on top of a bear market. The London FTSE fell 19%; Hong Kong's Hang Seng fell 22%; the German DAX fell 24%; the French CAC 40 fell 25%; Japan's Nikkei fell 28%; and Singapore's market fell 30%.
The financial collapse was global. Banks were failing everywhere. By mid-November, there were riots in Iceland due to the financial crisis.
Riots in Iceland.
In December there were riots in Greece. So much so that Greece ran out of tear gas trying to quell them.
What the heck happened? One day we're cruising along with 3% real growth, the stock markets are steady, we are winning in Iraq and John McCain is leading in the polls. The next day we are in global financial collapse and Barack Hussein Obama is President-Elect of the US.
Was Henry Paulson so prescient that he really did time the crisis almost perfectly, announcing the urgent need for a bailout almost exactly as the financial system really did collapse? Or did he cause that collapse?
We'll never know, but I think Paulson and his bailout only made things worse. I think McCain would have won the election if he had come out against the bailout. I think President Bush would have had a very defendable record over his two terms if he had not supported every bailout ever conceived in his last four months in office. But now, even I, who had been one of his few supporters, have to regard Bush as a failure.
To add insult to injury, Secretary Paulson now appears totally confused about his own bailout. First he said it was to relieve the credit crunch by buying bad debt. Then he changed his mind about the "bad debt" thing and said, "we must make sure we fully understand the nature of the problem which will not be possible until we are confident it is behind us." (Translation: Just give us $700B and we'll figure it out as we go along.) And recently he said it's all over. According to CNBC,
TARP stands for Troubled Asset Relief Program. But I thought the adjective "troubled" modified "asset". Now we find it really modified "program."
So I guess we're done. Mission accomplished. Well, except for the auto bailout, which itself is a flip-flop.
A 30% or so decline in global wealth in just three months since Paulson went on Meet the Press. A looming trillion dollar deficit. Riots in Iceland. Greece out of tear gas. President-Elect Obama. Mission accomplished!
Where does George W. Bush find his Treasury Secretaries? Paul O'Neill (pal of Bono's, author of a Bush-bashing book), Hank Snow, Henry Paulson. Was Bernard Maddoff unavailable?
Regardless of the immediate financial effect of the bailout, it changed our budgetary psychology completely. Everyone is now talking in units of trillions. Bailouts for banks. Bailouts for states. Bailouts for cars. A car czar. A trillion bucks for infrastructure. Imagine: a Democratic President, a Democratic Senate and a Democratic House, just after the Republicans presided over $8 trillion in cumulative bailouts. We're driving 120 mph and we just disabled the brakes.
This is your budget on drugs. This is your government on crack. Spend like there's no tomorrow, because, well, there's no tomorrow. Medicare's broke now and Social Security will be within a decade, so throw a trillion at roads and bridges -- to nowhere or to anywhere. Drug czar. Car czar. Carbon czar. What's your problem? Whatever it is, a trillion bucks and a czar ought to fix it.
The real kicker to all this is that the top Republicans, President Bush and presidential candidate John McCain, were totally in favor of every bailout ever proposed. Billions, trillions -- who cares? We had to destroy the economy in order to save it.
Were we taken over by pod people in early September? Did I miss the UFO invasion?
Did you ever hear of a guy who was happily married with six kids, only to find out none of the kids is his? I think I know how that guy feels. My Republican Party was the town party girl.