Nope this isn’t an analysis of the War Between the States in the US. Although that war and its causes and aftermath might offer some useful guideposts for our friends across the pond. Let’s talk about the current conflicts and disagreements among the Eurozone countries and their current dilemma in working out a solution to the disparity between the countries who follow a relatively frugal approach to their fiscal policies and those that have a much more laizzez faire attitude about the seemingly endless flow of funds from government to support their lifestyle.
You have read accurately that there is a divide already existing between the countries of the Eurozone on a North-South axis. Those to the North are generally in much better shape than their neighbors to the South. The southern edge of Europe covers Greece, the Balkan countries, Italy, Spain and Portugal. Of course Ireland and Iceland have had their difficulties but those appear on the mend and their debt problems were small compared to the avalanche of debt bursting out of the southern countries now. Those are the areas of immediate and longer lasting concern to the Eurozone nations because of their debt loads relative to their ability to service those debts even at the still historically low interest rates for their soverign bonds. Do you think it is mere coincidence that the northern tier of countries are in better shape than their southern neighbors?
For several centuries this divide has been true. In Roman times it was different and it was still true that the South was dominanat during the Medieval period but those days are longs gone. Italy as a single entity has only been around about 150 years. It as a nation is younger than the US. Before Garibaldi it was a hodge-podge of principalties and city-states going back to the Dark Ages. All of Europe follows essentially the same welfare-state philosophy but by culture and tradition the northern tier has been more industrious and hard working than their sourthern counterparts. Blame it on geography or climate or any other factor you wish but those are the facts. The Southern group likes to bask in the sun a bit more and expects more from the government and other people’s money. The northerners are inclined to be more independent and self-sufficient and even though they do have welfare states they have over the decades limited to reach of the government share of their economy and culture. This barrier became most clear with the advent of Thathcher in Great Britain. But then other more “conservative” governments and attitudes slowly infused the body politic in Europe in the North anyway.
The Eurozone itself was a creature from the leaders of the Northern tier of countries. All the southern countries were an after thought. France, the Benelux countries and Germany were the original backbone and still are of the Eurozone. The bulk of the rest of the economic strength still comes from the North with Finland, Sweden, the Danes and even Great Britain even though it is not part of the Eurozone currency system but it is a vital member of the Euro community.
Just as we had our divide and war between north and south it is nor beyond the pale that the North and South in Europe will likewise break and there will be secession talk. In fact there has already been secession talk but it isn’t called that. Italy is a good examplar of this situation. It also is divided along north/south communities. The south of Italy has since its inception been the economic drag on Italy. It produces at best around 30% of GDP but receives more than 60% of government largesse. The north is more urban and industrial and has been for a long time. The people there are the worker bees and the southerners are the beneficiaries of politicians payoffs in exchange for votes. (sound familiar?) In fact this discontent became so intense that it resulted in the formation of the Norther League. That political movement was and is centered in the major northern industial cities of Italy. There was and still is talk of breaking the country into two parts, separating the North from the South. This polical party was the base that led to the victories of Berlusconi of recent note. The political rise of the Northern League was not so much about taxes, policy or the welfare state; it was about not having to carry the South anymore on their backs. They believed the South didn’t fairly contribute their fair share to the economy and that they took out far more than they put into the hopper. Those are indeed the facts. The South of Italy was getting a free ride on the backs of others and spending other people’s money. The government built “infrastructure” projects with alacrity and assured the North this would benefit everyone. But after several decades of this p0licy the facts on the ground haven’t changed. The South is still a drag on the nation.
Much of the current debt of Italy has been accrued due to the enomous sums it has expended in the South for these projects. If you read the back pages and follow some of the foreign news sources you will note these complaints of the North. The same complaints have application generally to the northern tier of Eurozone countries. Brussells has been spending far more money in the “underdeveloped” southern tier of countries and many in the northern areas feel that they are being short-changed. Who knows if Italy will divide at some point but the odds are surely much higher that the Northern tier of the Eurozone will decide at some point in the near future that the cost of including the southern tier of countries is not worth the candle. There won’t be a war but intense and bitter acrimony and trade wars could be on the European horizon and the North could decide to secede and form its own smaller but much more vibrant and healthy trade and currency economic organization. Let’s see how it plays out over the next decade. The European problems will not be solved anytime soon. There is a limit to how much of the debts of the South the North will pay and when that is reached then scramble to re-shuffle the deck will begin.
The recent recess appointments by BO are an assault on the Constitutional relationship between the branches of government. It goes far beyond party or ideology. The painful and slow process of our divided government has served us well for over 200 years. We have a President who must follow and obey the Constitution; he is not a King who rules by edict. Where is Robert Byrd when we need him? I didn’t even like his politics at all but I will admit he was an ardent defender of the Senate and its privileges and Constitutional powers. He would have screamed at this action. www.olcranky.wordpress.com
Burning the candle at both ends means one is overextending one’s self or being overwhelmed from two directions at once. We seem to have that problem now with our economy. On the one end we are facing the problem of credit. We have as individuals and as a Nation relied on it too much for our own good. Prudent use and application of credit for personal and business reasons is a sound use of future earnings and potential and a way to acquire and accumulate wealth. The classic example is buying a house and keeping it for many years. Over the long haul it will appreciate and an affordable mortgage is worth it. Running up credit card debts into the thousands of dollars for disposables is not a wise use of credit and will negatively impact the ability to amass future wealth. Instant gratification is fun for a few minutes but certainly not the way to plan a budget or build wealth. On the other end of the candle we are not saving enough. Too many of us have virtually no savings at all. Change and unexpected events do occur and we should plan for them with savings. After all you don’t expect a fire but you do have a fire department. Further, those savings are used for capital investments. When you save those funds are used by the bank or brokerage firm to make loans that fund new companies creating jobs and opportunities for others and also for you even though indirectly. Remember money is never stagnant. It moves. Money in your money market is not sitting still it is at work. Unless you literally take your money in cash and hide it under the mattress it is always on the move. Historically, a subtantial portion of our savings has come from the little people’s money; and that money is in turn being used to build our national economy. Our Government has no savings. It hasn’t for years. The so-called Trust Fund for Social Security is not a trust fund at all. That is a myth. If it were a real trust fund the trustees would be prosecuted for fraud for cooking the books! The Government quit saving decades ago and now merely prints more money when it is short. Yeah, I know about the Treasure Bills etc. but the reality is that it prints money. It doesn’t have a store of value to draw upon.
Another darn good reason to have savings and a balanced budget is Murphy’s Law. You know if something can go wrong it will sooner or later. If subprime loans can be a problem they will eventually won’t they. The warnings went unheeded by those in Congress for too long. A little forethought goes a long way when making economic plans and making Federal laws. They will say they had good intentions because they wanted more marginal credit risky Americans to own a home. We all know that those good intentions are the paving stones to Hell. And no good deed goes unpunished as some wise man opined long ago.
Making a virtue of necessity is something that the politicians are very good at doing. They come up with their plans and schemes but sometimes when faced with real world circumstances they will adopt a contrary position and sing its praises as though it were their own. Of course it can also be said that necessity is the Mother of invention. When faced with really hard facts we humans can suddenly become quite creative. With our current economic woes you can be sure that proposals bandied about now by the politicians will be reversed or quashed entirely and they will act like the new direction is the greatest thing since sliced bread. Naturally the new direction will be clothed to make it appear like something similar to their original idea even though it is not. The original promise will be “delayed” or “improved”. If you can deal with it, it is quite humorous to see those folks making a virtue of necessity. The dips and wiggles they make with the King’s English are often breathless in their obfuscation.
Lastly for today’s lesson we offer that old standby–Robbing Peter to pay Paul. It means doing harm to one to allegedly do good for another. Or to put it another way to take from some for an announced purpose but then using those proceeds for another purpose. That seems to be the order of the day for some politicians. I remind you that Robin Hood was a myth. He was in fact was a brigand, murderer and thief. He definitely did harm to some then doled out only a portion of his ill gotten gains to his chosen “special interest group” and it actually only hurt one group and didn’t ultimately help anyone else but his band of merry men (government).
The current debate about a bailout of the financial mess with subprime mortgages reminds me of that scene in The Bridge Over the River Kwai when William Holden is ordered to jump into Jap territory on the mission to destroy the bridge with Jack Hawkins. Holden’s character had never jumped before and when they looked into it they decided that the odds of injury were too great on a practice run so that he would have to just go the first time. So he was told you’ll just have to jump and hope for the best. Holden replied “with or without a parachute”? I have already expressed my opinion about bailouts generally and I oppose them. They won’t solve the problem as efficiently as the market and will inevitably lead to more Government oversight which just means more opportunity for the Government to manipulate our economy and make things worse. You are reminded again that the majority of the subprime loans bought up by Fannie and Freddie were those that were mandated by the Government in the first place to support the politically correct goal of affordable housing for those who couldn’t really qualify for a loan. The Government got what it asked for–an increase in home ownership among certain groups in our society regardless of the merits of the loans.
This is like the situation in the S and L meltdown we had in the mid ’80’s and that is something I know a little about up close and personal. I was very active at that time representing many land developers, bank holding companies and individuals in those industries. You must remember then that oil had been pushing up hard for years. The last Arab oil embargo was only a couple of years removed and the disasterous way it was handled by Carter and the FERC agency created by the Government to “solve” the problem was still skewing oil markets. As usual the solution of the Government with its regulation to help everyone just made things much, much worse with shortages and even higher prices. After all, the Government couldn’t regulate the world markets for oil. Oil was expected to hit the astonishing price of $100.00 per barrel in 1982. Inflation had been rampant but was finally ebbing some due to Reagan’s policies. I attended seminars where the topic was the price of oil and how it was going to change the face of America in that decade. The suburbs were going to die because no one would be able afford commuting and everyone would be moving back into the inner cities. The auto industry was gearing up as fast as it could for smaller cars and that is when the Japanese cars first made a significant impact on the auto market. Then as now the price of everything was influenced by oil prices because it is utilized in so many of our products. The price however did not continue to go up; it peaked in 1982 at just under $40.00 per barrel. Inflation was coming down, the country was more confident than it had been in years with Reagan in the White House and the Arabs were willing to sell us all the oil we wanted. They wanted to make up for the lost revenues from the two embargoes on oil they imposed in the ’70’s. Most of the country was enjoying a real growth spurt and especially in the Sunbelt of the west and southwest. The Rustbelt was continuing its slow decline that has been going on since the end of the War.
There was a new and high binder bank in Oklahoma City called Penn Square. It wanted to grow and it did by making loans to every oil man with a rig or even a dream of a rig when the price looked like it was going up forever. They also heavily promoted themselves as a depository and their capital base grew. Then when the price of oil hit the wall, everything changed quickly. Suddenly those oil deals weren’t so good with oil at $15.00 a barrel rather than $35.00 or more. Their loans started going south. The deterioration was fast. The FDIC came and shut them down to show everyone a lesson that was in that financial business. Many other banks were in the same business in the southwest and even though they operated much more prudently they were beginning to hurt. Things were not desperate but tough for them. There were lots of headlines about Penn Square and their risky loans. Some were risky, some weren’t so much so. Investigative reports were made by the media. Calls for punishing the greedy were loud. The FDIC deposit insurance was only $25,000.00 at that time and some folks lost their money. So now the Feds were on the warparth. Just so happens the next bank up on their list for audit was one in Abilene. It had made many loans in the oil patch and some of those loans had become shaky but nothing that couldn’t be managed over a period of years and some reworking of the loans. The FDIC decided the Abilene bank was under capitalized and gave them a weekend to raise and additional $20 million in capital. They managed to raise $10 million in two days and asked for a couple more weeks for the balance. The Feds said no and shut in down that monday morning. There were more headlines and outrageous allegations of phony loans, bribes, etc. None of which turned out to have any merit. But as always it was several years later before that was determined. But the Feds had “taught” those high flying banks and S and L’s in the southwest that they were going to be punished for imprudent loans. Everyone from the Congress to the media forgot that markets in any industry have cycles and that those drops in oil prices would adjust upward a bit later. But no, everyone forgets history and only lives in the “now” and that is what the Government did at that time. They were already finding the scapegoats for making the banking regulators look bad to the media. It was about perceptions more than sound policy.
During those early years of the ’80’s there was a tremendous building boom going on in the southwest. Fueled in part by the oil industry growth and the increasing migration of those snowbirds from the Rustbelt to the southwest. We forget that then the majority of newcomers to the southwest were Americans moving from the northeast. The S and L’s and banks were making loans for building deals hand over fist. They were for residential projects, commercial buildings, apartments and raw land deals for future development. The land and improvements were there as collateral and the lenders started to take the land as it only collateral and not require personal guarantees from the developers. The competition among the banks was very intense in the early ’80’s for the real estate deals. I had many clients who were contacted first by the bank asking them if they needed to borrow some money for one of their deals! Can you believe that. All of this was known to the bank regulators and Congress and was encouraged. They wanted that economic activity and thought it was good for America to build, build, build. The encouragement cut across party lines. Each had their own motives but the result was applause for such phenomenal growth. There was some jealously in the Rustbelt because it was in decline and they resented the “rednecks” making all this money.
We are going to stop today but continue this tomorrow. You really do need to understand this episode in our financial history to guage your opinion of today’s headlines about Government regulation and bailouts. It will give you a better perspective. Many of you were not even born then or were only children. I lived through this time and don’t have to consult archives–I lived it with my clients. We will examine the FDIC and the FSLIC and bank examiners more tomorrow. Naturally, we will take a look at the politicians and their views and actions to fix that meltdown and take a look if there had to be a meltdown at all and if the Government helped or hurt the situation.
My peach tree leaves are beginning to really show the color now. The pin oaks are starting to have that dull brown tint to them. Even if you live in the city you might start watching in a couple of weeks for the geese flying south. They often flying at night but you can hear them. With all the background noise and lights of the cities we often miss them entirely but they will be there. Very comforting to know that some things do remain constant.