Commentary: Hangovers, greed and the not-so-great Depression
This article first appeared in the St. Louis Beacon, Feb. 5, 2009 - It is becoming increasingly apparent that Gordon Gekko was wrong. Gekko, you'll recall, was the ruthless corporate raider artfully portrayed by Michael Douglas in the Oliver Stone film, Wall Street. At one point, he famously intones, "Greed, for lack of a better word, is good."
If recent financial news is any indication, it turns out that greed, for lack of a better word, is bad.
Like the other deadly sins, it is a self-consuming vice that ultimately devours its practitioners and wreaks havoc on the innocent bystanders whose lives it touches.
We are currently suffering from what former President George W. Bush characterized as an economic "hangover" from a binge of Wall Street greed. While I appreciate W's metaphor -- I like explanations that put abstract ideas into familiar terms and I'm intimately familiar with hangovers -- I wouldn't limit its application to Wall Street.
Main Street, you see, went to the party as well.
For years, we middle-classers played a game of smoke and mirrors with our household finances. We knew we weren't rich, but affluence - or, at least, the trappings thereof - was our American birthright.
If you "needed" a flat-screen hi-def TV to watch the big game and couldn't afford it, the answer was simple: charge it. Of course, when the bill came due and you still didn't have the money to pay for your indulgence, you took the easy way out and made the "convenient" minimum payment. That payment consisted primarily of interest the bank charged for carrying the unpaid principal -- a sum that rolled over, month by month, into perpetuity.
Multiply that process by appliances, vacations, the latest fashion necessity and the occasional unanticipated home or auto repair and pretty soon the card's maxed out. That should have been the point at which the bartender turned up the ugly lights and announced that the party was over.
But you had an ace up your sleeve because, while you were living beyond your means, your house was doing likewise. It was increasing in value by an average of 4 percent a year, and 4 percent of a $200,000 house is $8,000. You could thus re-finance every couple years, fold the loan's closing costs into the new mortgage, cash out the equity you "earned" by living indoors to pay off the consumer debt and begin the game anew.
Meanwhile, the bank booked its unsecured credit card debt as assets while bundling and selling its mortgages as asset-backed securities. Everybody made out - it was free market magic. In fact, it was exactly like magic because the entire process was illusionary.
The only thing keeping this ship of fools afloat was the equity in your house. And the only way to realize that equity -- and thus accurately determine its worth -- was to sell the house. As long as the housing bubble expanded, the books balanced. When it began to contract, all that imaginary equity disappeared and oceans of black ink turned blood red. That's where we are now.
Thus far, government interventions have failed to thwart the downward cycle. Last spring, President Bush lobbied Congress for a stimulus package in which everybody but me would receive a $600 check from the Treasury. That $165 billion effort seems to have slowed the decline in the consumer index for the second quarter of 2008 but had no lasting impact.
In September, Treasury Secretary Hank Paulson announced that the global banking system would collapse unless he was given $700 billion to spend as he saw fit. The "Give Hank the Money and Don't Ask a Lot of Awkward Questions" initiative passed with bipartisan support. The banking system did not collapse (yet), but the economic decline continued unabated.
Now, President Obama has Congress working out the details on a new stimulus program that will wind up costing well over $1 trillion. This is seen as the best of a series of increasingly grim alternatives.
Setting aside the fact that the government doesn't have any money, and ignoring for the moment the illogic of trying to borrow your way out of debt, the fundamental problem with all of these efforts is that they seek to return us to where we were. And where we were is what got us to where we are. To return to the original analogy, it's a bit like the drunk deciding to avoid a hangover by continuing to drink.
For all of FDR's heroic labors, the Great Depression didn't end until the outbreak of World War II when able-bodied young men went into the service and everybody else went to work to supply them. The New Deal was essentially a jug of Gatorade and a bottle of aspirin to ease the pain of the hangover from our last binge of unregulated capitalism.
I said at the outset that greed is a self-consuming vice. The corporate hogs of Wall Street spent the last few decades down-sizing and out-sourcing their way to ever higher quarterly profits, thus inflating CEO bonuses and the value of their stock options.
Deregulation was the mantra du jour and people who believed -- as did Henry Ford -- that a well-paid work force was good for business in the long run were considered to be dinosaurs in the new global economy.
Now, it appears that the swine have eaten their seed corn, thereby ensuring ultimate starvation. With Main Street over extended and increasingly unemployed, nobody is left to buy the goods and services the corporations produce. George Will has termed this phenomenon "The Paradox of Thrift": When consumers are forced to behave responsibly, an economy founded on wretched excess falls apart.
Given that greed has brought the wolf to the door, it's debatable whether sobriety is still a virtue.
M.W. Guzy is a retired St. Louis cop who currently works for the city Sheriff's Department. His column appears weekly in the Beacon.