Connect the Economic Dots Part III

With the previous two posts, you can see how things lined up to create potential for our economic disaster.  Now, we can add two other data points:  Oil prices going straight up and the incredible hubris of the investment community.

Oil prices first.  There is a limited amount of oil on the planet controlled by what is essentially an oligarchy that does whatever the hell they want to.  In the past two years the price of gasoline, the final product of the oil companies, has more than doubled then fallen by roughly the same amount.  Over the summer of 2008 gasoline hit $1.42 a litre in Mississauga from a low of $.71/l in the spring.  Diesel fuel, Jet-A and bunker oil did more or less the same thing. 

You saw it yourself where you live and if you think back to the spring, most businesses that rely on fuel to conduct their operations added a "Fuel Surcharge".  The airlines did it a year or two earlier, as fuel costs for Jet-A makes up about 60 percent of the cost of your ticket.  Air carriers are very sensitive to fuel prices:  To the point that almost all the major air carriers worldwide buy options on fuel to keep their prices as stable as possible. 

Who do they buy options from?  Wall Street of course, the same place where the airline stocks live.  Would Wall Streeters swap stories about how well, or how poorly airlines were hedging fuel prices?  Please don’t make me laugh; my lips are chapped.  Of course they did and that added to the guidance, whispered street numbers and the other data-flotsam of Wall Street.

But back to oil prices.  At some time over the early spring of this year people clued into how much they were actually paying for gas for their vehicles.  It was going from a cost of being a car owner, to a significant portion of their weekly earnings.  There was no good reason why oil prices spiked.  There was no Katrina-like shortage of oil or gas from a natural disaster.  There was no mammoth refinery shutdowns or global labour strife that closed down ships and pipelines. 

The reason oil prices spiked was oil company greed, nothing more.  Pardon me, it was the "free market at work" and prices reflected what the market would bear. 

It turns out that at that precise moment, consumers went "WTF?  I’m spending $100 to fill my SUV, twice a week?  $800 a month on gas?  That’s half my mortgage payment!"  The SUV got parked and a For Sale sign was put on it. 

People looking to buy a new vehicle were no longer looking at SUV’s or pickup trucks.  They couldn’t afford the gas.  Small cars are now the desired norm, but the Big Three don’t make small cars that the sane will buy.  The Big Three make gas pigs big enough to blot out the sun.  Don’t expect to be let out of your lease, unless you die, as that is where the Big Three make their money.

Meanwhile back at the ranch, the Masters of the Universe hubris of the Wall Street Captains took a turn for the worse.  All those Asset Backed Commercial Paper loans started to look like a Very Bad Idea.  It would seem that Standard and Poor’s ratings were, at best, fanciful.  Forclosures were up.  Not just a little bit, but significantly. 

It would seem that homeowners couldn’t actually make their payments, what with jobs being sent to China, or rationalized out of existence, gas prices spiking, food prices spiking (because the food travels by truck) and the cost of living in general was increasing. 

Unfortunately, wages never did seem to increase, as paying more for employees is a ‘cost’ that Wall Street does not recognize as part of a well-run organization.  "If only that company would rationalize their supply chain, then we could recommend their stock, but…"  Companies responded in the only way that Wall Street would accept:  They cut staff, cut costs and cut services as fast as Wall Street demanded, usually to the point of the company going all but out of business.

There was our Perfect Storm.  Fuel prices spiking for no good reason.  Wall Street demanding instant gratification from any investment.  Asset Backed Commercial Paper mortgage loans going into the toilet at a record rate.  Three greed-based economic situations, all more or less stage managed by a bi-polar Wall Street who wanted to get a slice of both ends of the transaction. 

Where was the SEC?  They are the overall regulator of the investment industry are they not?  As best as can be determined, the SEC is viewed as a fluffy white kitty by Wall Street.  The SEC has all the regulatory authority and legislative spine of bacon flavoured aerosol cheese:  Looks fine, in a cheesy way, smells bad, tastes worse and shouldn’t actually be consumed by sentient beings.

The US Treasury?  Considering that the head of the Treasury is a long time Wall Street insider, this is like the money in the bank vault being guarded by an armed robber.  Who appointed him?  The Decider who Decides the Deciding about Deciding.  The same guy who told the SEC to back off and let the free market Decide things as that is the American Way.

Then one morning Wall Street woke up and discovered a hard financial truth:  In order for a mortgage loan to be worth anything, there has to be someone who pays down the mortgage every 30 days.  Problem:  The ‘little people’ on the furthest end of the economic transaction were being laid off, because Wall Street demanded instantaneous financial performance by the companies Wall Street invested in. 

This is like curing migraines by amputating the patient’s head.  It does ‘cure’ the migraines, in that there are no symptoms reported by the patient.  The patient can’t report symptoms, as the patient is missing their head and is quite dead.

The most egregious part of the whole economic perfect storm is that Wall Street is the author of their own demise.  At the same time Wall Street is getting a multi-billion dollar bailout for being stupid enough to believe in Wall Street.  Nobody in the positions of authority have been fired.  Nobody in the transaction chain have had their bonuses cancelled, or been forced to refund any fees they’ve grabbed in the heat of selling shit to flies.  Wall Street is actually rewarding themselves for their own greed, mismanagement and general stupidity. 

Worst of all, the US Treasury department, using now-scarce taxpayer money, has written Wall Street an essentially blank cheque to bail themselves out of the mess they created for themselves by being greed heads and playing with things they refused to understand. 

Now if this strikes you as almost identical to the Big Three auto industry, you would be right, with one exception:  The Auto Industry does not have Hank Paulson on the speed dial.  Wall Street is getting rescued with your tax dollars.

But wait, there’s more!