Bad Times Coming


People in New York and Washington who know a great deal more than I do about high finance are apparently scared. Like passengers on an airplane, when the pilot, co-pilot and flight engineer get scared, it’s time for us to do likewise.

The bailout of the Bear Stearns investment bank was done for one reason: There was widespread fear that if Bear Stearns went belly up, it would set off a chain reaction among the investment banks and lead to a financial meltdown.

In addition to bailing out Bear Stearns, the Federal Reserve has handed out $260 billion in short-term loans to American banks since December. Now there is open talk that some of the regional banks could fail. It sounds very much like a severe recession at best or another depression at worst.

Of course, there is nothing we can do about it. If certain mistakes that were made by the financiers, the Federal Reserve and the U.S. government are going to produce this effect, then the debt bomb has already exploded. The overpressure and heat blast just haven’t reached us yet.

Economic collapses are not events that practice egalitarianism. If you are very wealthy, chances are you won’t be affected at all. I’ve often compared the economy to a stick floating upright. When it starts to sink, those near the bottom of the stick drown first, while those at the very top usually stay dry. You remember Daddy Warbucks in "Little Orphan Annie"? He stayed rich in the midst of the Great Depression.

My own father, though he was never rich, did manage to keep a job throughout those bad times. The unemployment was about 20 percent. Banks, businesses and even local governments closed shop. After all, a government can’t collect taxes if nobody is making any money.

We as a nation have been living on credit, and I fear the buzzards of debt have come home to roost. The housing bubble has burst, and there is an inventory of unsold homes and homes foreclosed on that will be years getting rid of. That, in turn, affects the construction industry, as well as the building materials, furniture, appliances and so forth. It affects local taxes.

Bad mortgages were bundled and sold as securities, and have, like a virus, spread throughout the financial system. A lot of banks that hold some of this paper have no idea what value to put on it. A lot of bad loans will have to be written off. A lot of collateral is turning out to be worthless.

The best of all possible worlds for the individual is to own property, without a mortgage, and have a stash of cash. I’m country boy enough to know that as long as you have even a bit of land and a roof that doesn’t leak, it’s hard to starve, although the nation’s obesity problem might vanish in the process.

The worst of all possible worlds is to be working for a salary and not own anything that isn’t mortgaged or otherwise not paid for. Many Americans unfortunately live off their cash flow from one paycheck to the next, with every cent obligated for stuff they’ve bought on credit. If times get really hard so that people who get laid off can’t find jobs, such people will lose everything.

The Federal Reserve is pumping so much paper money into the system to avoid bankruptcies and deflation, I don’t see how it’s going to avoid inflation. At the same time, our own beloved federal government has run its debt up beyond all reason and enacted so many entitlement programs, they alone will soon be sucking up every penny of tax revenue.

Pacifists, at least, will gain a new tool in their struggle for peace. All they will have to do to stop war is cut off the credit, since the U.S. government will eventually be too broke to buy bullets or bombs, much less billion-dollar airplanes.

Charley Reese [send him mail] has been a journalist for 49 years.