Pogo Economics: To PetSmart and Back

As Pogo so famously said,"We have met the enemy, and he is us."

What's that mean in terms of the current economics crisis?

Simple: We are the problem. If we want something different, we will have to do something different.

We will have to change.

Knowing what to change becomes a little easier when we understand how we got into the current economic mess.

Because this is a dog-centered blog, I will focus on a how a few pet-related purchases play out in the global economy.

1. We go to PetSmart or WalMart or Target and buy a load of low-cost Chinese stuff: a new pet bed, a new dog travel crate, a new leash, two rubber chew toys, and a slicker brush. Total cost: $100. We are thrilled at the good deal we have gotten on everything. We do not pay too much attention to the fact that everything we have bought is made in China. Nor do we give a moments thought to the fact that the rivers in China run brown with pollution, the skies are grey with smog, and the children are stunted from working 18 hours a day behind sweat shop walls. We are just so happy we got such a great deal.
   
   
2. On the way home we listen to talk radio where the host is interviewing someone from a right-wing think tank we have never heard of before. The interviewer and interviewee are bloviating about the unalloyed benefits of free-trade, the evils of regulation, the stupidity of protectionism, and the high cost of nannying environmental laws. Tired of all the babble, we switch to country radio and listen to Lee Greenwood extol our national virtue.
   
   
3. On the other end of the world, a Chinese fellow buys one copy of Time magazine, a used copy of "Politics in America," and a second-hand copy of an Adam Smith tract on free-market economics. Total cost: $12. Total U.S. trade deficit generated from the above two economic transactions on opposite ends of the world (minus PetSmart's considerable profit): $30.
   
   
4. The Chinese, now richer by $30 due to our $100 PetSmart transaction, need to park their money somewhere. Not trusting the stability of their own government or economy, they decide to put $20 of their recent $30 gain in U.S. banks. This decision is repeated 50 million times a day for years on end.
   
   
5. U.S. banks, now flooded with Chinese money, extend large loans with weak underwriting to almost anyone who can create a paper trail, no matter how tenuous or clearly fabricated that paper trail might be. McMansions spring up everywhere.
   
   
6. Huge loan portfolios with weak underwriting standards are universally recognized as bad investment risks, and are hard to sell in the marketplace. In order to ease the sale of massive debt portfolios to institutional investors, insurance companies like AIG insure them against default. Some Wall Street investment firms do likewise.
   
   
7. A significant number of loans go bad, hundreds of thousands of homes are repossessed, and housing prices tank in a number of key markets. More loans go bad as increasing numbers of home owners find themselves "upside down" in the real estate marketplace, with houses worth less than the loans borrowed against them. Even more home owners default.
   


8. As the number of loan defaults rise, portfolio insurance clauses are triggered. So many loan clauses are triggered that the value of the insurance calls exceeds the value of the companies underwriting them, resulting in a panic on Wall Street as brokerage houses tank overnight, and the massive insurance giant AIG teeters on the edge of insolvency. The stock market plunges 500 points on Monday and 450 points on Tuesday.
   


9. The U.S. Government lets old Wall Street investment firms like Lehman Brothers and Merrill Lynch faulter and sink, but on Wednesday it decides to extend an $85 billion life preserver to AIG in order to "stabilize the market." In effect, U.S. taxpayers have just bought 80 percent of AIG's risk pool which may involve trillions of dollars of future economic liability.
   


10. Wall Street realizes that AIG will now sell off the "good loans" that still have a market value in the real world, leaving Uncle Sam and U.S. taxpayers holding a bag of broken bits worth less than what was paid.
    


11. Wall Street is ecstatic at having once again privatized the profit and socialized the risks and costs. On Thursday the Dow Jones bounces back up 400 points on the news.
    


12. Reeling from the economic roller coaster that has been this week, we worry about our economic future. Nonetheless, we are thankful that all the stuff we need to buy is still cheap at Petsmart, WalMart and Target. John McCain says the fundamentals of our economy are fine. We decide to celebrate Thursday's uptick in the stock market by going to WalMart to buy a new Lee Greenwood CD and an American flag to put up on election day. We do not notice that both are made in China.

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Update at Noon

from ABC News :

"The Bush administration has decided that the country's financial crisis is too big and too urgent to fight piecemeal and is working on a massive government bailout that could cost taxpayers as much as $1 trillion. The plan would have Uncle Sam purchase virtually worthless mortgage-backed investments that have been plaguing Wall Street and the U.S. economy for months."

Update at 4 PM from Marketwatch:

U.S. stock market rejoices over bailout plan: U.S. stock indexes rocketed higher Friday, with the major stock indexes wiping out a week of shattering losses, as Wall Street cheered the government's effort to unfreeze credit markets as well as plans to move against short sellers. The major stock indexes climbed above the level at which they stood before the start of the watershed week, which saw the Dow Jones Industrial Average lose about 800 points in the first three days of trading.
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