Trusting those who got us into this mess to get us out

The Baltimore Sun

In brooding about the current financial meltdown, the question occurs: Why is it we are supposed to believe that the same "experts" who led us down the path to financial ruin are capable of constructing strategies, policies and bailouts that will turn us around and head us toward solvency? It makes no sense. We are assured that Federal Reserve Chairman Ben S. Bernanke is on top of things because he won his spurs as a scholar of the Great Depression. This isn't a replay of the 1930s, though; it's something new, something perhaps even bigger. Seems to me he's on top of things like a cowboy clinging to the back of a bucking bull. Like the bull rider, he won't be there long.

As my longtime listeners know, I have been quite taken by oracles of financial and societal decline over the years. The analyses of people such as Jim Davidson and Lord William Rees-Mogg in their 1993 book, The Great Reckoning, and of William Bonner and Addison Wiggin in the more recent Empire of Debt and Financial Reckoning Day, ring true to me. I believe the Austrian School economists are on the mark with their insistence that "money out of nothing is money that is eventually worth nothing." Fiat currency is always doomed to eventually be worthless, and we've been operating with currency divorced from its necessary ties to things of actual value - gold and silver - since 1971. So it's been with some amazement that I've watched the clever ones fill their pockets during the successive booms in dot-com stocks, housing and commodities.

Here's a tip gleaned from the heady days of people quitting their jobs, first to devote themselves to the more lucrative pastime of "day-trading" stocks and later to "flipping" real estate for fun and profit: Remember the sage advice that if something seems too good to be true, chances are it is.

What I have learned over time is that the power of the status quo is incredibly immense because it is the framework within which the rich and powerful prosper. They will do anything to maintain it, whether it's by the simple expedient of propagandizing the masses that one can prosper by assuming ever more debt, or by having their servants, such as longtime Fed Chairman Alan Greenspan, steer the economy away from collapse when the stock market tanked at the beginning of this decade. To accomplish that, he slashed interest rates 14 times, until they were far below the rate of inflation.

This "cheap money" fueled the buying panic in residential real estate; prices rose relentlessly until they didn't rise anymore and instead started falling, leading us to the present worldwide unwinding of credit, or what some call "deleveraging." Leverage is a wonderful thing when what one is buying on time is increasing in price. But when the price of the thing declines, the leverage becomes a nightmare. Ask the folks at Constellation Energy Group.

And now the government, by which we mean the taxpayer, is on the hook for hundreds of billions of dollars to bail out the institutions that leveraged themselves into this mess while generating billions in bonuses for their executives. Ordinary people seem largely susceptible to the notion that their political leaders can straighten out this crooked thing, even though they are the ones who created it. What else are they to think? Certainly these people must know what they're doing, right?

The truth is often sad, and the truth here is that the Wall Streeters and the politicians have no more idea how this is going to turn out than the man on the bar stool at the corner tavern.

Let me leave you with a positive spin: Banking panics, recessions, depressions, bailouts and other manifestations of economic malfunctions are nothing new. They've occurred time and again in this country, and we've always come out the other side with restored confidence and renewed growth. Maybe that will happen again. Besides, the current estimated cost of the taxpayer bailout of financial institutions is only $700 billion, about the price of another few years' stay in Iraq.

Ron Smith can be heard weekdays, 3 p.m. to 6 p.m., on 1090 WBAL-AM and WBAL.com. His column appears Wednesdays in The Sun. His e-mail is rsmith@wbal.com.

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