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At Issue
Fools and Their Money: The American Debt Problem Lingers
Tuesday, September 16, 2008
My question is whatever happened to "the blob"? Did it expire in thousands of showers and drinks of water over a 23-year period, diffusing into the bodies of everybody in the watershed? Or is it still there, dormant waiting for a day with a vengeance? Or is it out of sight and out of mind? I dunno. However, I got to thinking about it this past Monday when Lehman Brothers, the 158 year old investment banking firm bit the dust. The blob of sub prime mortgage debt so sore on our world's horizon, hit home once again. Forget Fannie Mae and Freddie Mac from last week. This blob of sub-prime mortgage debt just won't go away.
I think it is a great analogy. We've had Bear Stearns, we've had Fannie Mae and Freddie Mac and now we've got Lehman Brother and the "bullish" Merrill Lynch being bought out by the Bank of America. It should serve as a lesson; the blob of sub-prime mortgage debt cannot be forgotten. It's out there like a blob and it wants to be serviced. Ignoring it like the perchlorethylene blob on the bottom of the St. Clair River won't suffice.
Answer me this question. How does the 158 year old Lehman brothers go from never having a quarterly loss before last June and being valued at 41 billion last year but suddenly vaporize over the weekend into bankruptcy protection? It's serious stuff folks; many of you might surely know it based on the stock market meltdown last Monday.
Of course as I've said many times, "its easy to be the smart guy now." I'm sure all of you read my analogy last week and weeks before where I talked about everybody paddling and not getting to shore. By bailing out Freddie Mac and Fannie Mae, the US government drained the ocean. However, for those poor buggers at Lehman brothers there is going to be no such luck. Those holding the bag for this one are getting an anchor thrown in their canoe. Phooffff!
The effect in Canada is manifesting itself in a lower dollar, lower oil prices and a stock market acting like it fell off a cliff. The TSX fell 515.55 points on Monday, enough to parse a few thousand dollars off everybody's RRSP. Needless to say, everybody's wallet should be jittery.
Our Prime Minister has responded by saying everything is fine, and if we were going to have a recession it would have happened by now. Translation, he'll be watching markets Tuesday to refine his statements. Clearly, this is a wildcard for him in this election campaign. It has the capacity to send him hind end over teakettle out of government.
That at first glance would seem a stretch. Stephane Dion might be one of the smartest people I've ever met, but the optics of the green shift has been tough. Harper has been hammering him at every juncture with carbon tax, carbon tax, and carbon tax. Needless to say as every Canadian knows, we've had carbon taxes on fuel seemingly forever. Having another one isn't going over.
However, this is Stephane Dion's chance. Forget the Green Shift for now and hammer Harper on the economy, the economy, and the economy. Hey, why not even compare this debt blob to the real blob on the bottom of the St. Clair River. Money in or out of our pocket book awakes Canadians every time.
We'll see. This thing might be far from over. For instance AIG, the largest insurance company in the US needs a $40 billion loan to keep afloat and some of my economist cousins say there is still half a trillion dollars worth of sub-prime debt "blobbing" around in the American economy. Where it will go next, is our next problem.
The question of course is how did it come to this? If you've read this column, you know. Simply put, several years of cheap money or cheap credit made money so easy, some people thought it was free. For those of us who cut our teeth on 23% interest rates in 1981, it seems that way. However, for others, especially those fat cat American bankers who should have known better, it was like they were printing money. Needless to say, they were fools with the money and now they're parted. The bad part is regular folks are going to be stuck picking up the pieces.
Philip Shaw, farms 830 acres near Dresden, Ontario. He holds a Masters of Agricultural Economics and Business Degree from the University of Guelph and is a well-known commentator on agricultural issues in print, on radio and over satellite in Canada and the United States. In the Chatham-Kent Times, Phil will use his frank and forthright writing style to address political and economic issues from the local to the international stage. He is a keen observer of political life at all levels, reads widely and has travelled the world to gather fodder for his column. See what's At Issue this week.
