Thursday, September 12, 2013

From 1 to 99

Five years ago this week the world changed.  A series of events occurred in the first 2 weeks of September 2008, sparking what’s known as “The Great Recession.”  In the mid to late zero’s (00’s) I was part of the 1%, falling within the upper echelon of wage earners in the U.S., owning multiple properties and investments while giving away 20% to various charities.  I worked hard providing 7-figure returns for the companies I was managing.  I was laid off in January 2009 and did not obtain regular and consistent employment until December 2011 – three full years later.   In that time I lost savings, 401(k), all my properties, investments and ultimately filed for personal bankruptcy.  I went from the 1% to the 99%.

I’m not the only one.  The typical family in America lost $50,000 to $150,000 based on a study released this week by the Fed.   

What brought this on this devastation was a most eventful month, with several key decisions by the Government:

·         On September 7, 2008 the U.S. government tookover Fannie Mae and Feddie Mac – effectively nationalizing the mortgage market. 

·         One week later the U.S. government engineered Bank of America’s buying of Merrill Lynch.

·         The Government didn’t help Lehman Brothers and it collapsed the next day, filing the largest bankruptcy in US history.

·         The next day AIG was downgraded followed by the U.S. government lending $85 billion to the company, saving it from bankruptcy.

·         A week later Washington Mutual is seized by the Government (FDIC) which facilitated the sale of its assets to JPMorganChase.

·         On September 29 the Emergency Economic Stabilization Act goes down to defeat while -Citigroup tried to acquire Wachovia (that ultimately went to Wells Fargo, thanks to the Government’s change in tax law).

·         On September 30 the US Treasury Department changed the tax law (without approval or consultation from Congress) to allow a bank acquiring another to write off all of the acquired losses for tax purposes.

·         On October 3 President Bush(43)  signs a slimmed down one-page resolution, HR1424 that took the place of the failed measure the week before that authorized a $700 billion bailout.  There were rules, policies or protocols included.  It becomes known as TARP – Troubled Asset Relief Program in the hopes that the funds would be used to help out distressed assets.  Instead the bulk of the funds are used to recapitalize the now larger US Banking institutions.

The review of these major events is stunning at the level to which the U.S. government thwarted capitalism.  When companies fail – whether it’s through mismanagement, fraud, stupidity or even circumstances beyond its control, they must fail.  They must collapse for it’s only out of the rubble that something new can be built.

Today the U.S. cobbles along with a weak economy, shored up by trillions of dollars “printed” by the Fed.  The American economy was once driven by consumerism, profits and losses of companies and now it is nearly totally dependent on the policies of a Central Bank, lending rates, and monetary availability.  China and Russia similarly have economies driven by Central Bankers.

Had the companies that were failing been allowed to crumble the pain would have been momentarily greater, but it would be over.  Consider the Hostess Company last year – it dissolved, was broken up and less than a year later Twinkies are back on the shelf from another owner.   People lost their jobs, but new ones were created.

My own personal experience was years of difficulty because I tried to maintain a life that I didn’t realize I would no longer afford.  Had I known regular employment was so far off many choices would have been different.  Ultimately when it was clear I was going to lose everything, I did.  Today I am going strong, just with a different lifestyle, a different focus in a different city.  No regrets.

The U.S. must do the same – it must allow capitalism to work and allow pain to happen.   Fundamental changes to the regulatory environment haven’t happened, and in fact may be worse.  The institutions that were “too big to fail” are even larger today.  More risks exist today.  Government must stop holding onto those halcyon days of the early 00's.  The lessons of 5 years ago must be learned by Government to make sure that the U.S. doesn’t go from being a 1st world nation to one of the other 99.

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