Eliot, Be Good

Eliot Spitzer, former Emperor's Club VIP, returned from the dust heap of recent history Wednesday to write a slam dunk, right on article about the current bailout for Slate. I myself have done my best over the past few months to tell you exactly what I think about the mess, but my limited knowledge of economics makes me very much like Bambi- I can sense when something's amiss, but I can't tell you why exactly I'm running. Eliot, ex-Wall Street fighter he was, knows why it is amiss. Let's start with what's wrong with our economy:

Our trade deficit has ballooned from about $100 billion to more than $700 billion annually in the past decade, and our federal deficit now approaches $1 trillion. These twin deficits leave us at the mercy of foreign-capital inflows that may diminish as Asian nations, in particular, invest increasingly at home.

Our household savings rate has been close to zero—and even negative in some years—not permitting the long-term capital accumulation required for the investments we need; China's savings rate, by comparison, is an astonishing 30 percent of household income.

U.S. middle class income has stagnated over the past decade, while the middle class in China—granted, starting from a lower base—has seen its income growing at about 10 percent annually.

Our intellectual advantage could soon turn into a new "third deficit," as hundreds of thousands of engineers are being created annually in China.

We are realizing that the service sector—all the lawyers, investment bankers, advertising agencies, and accountants—follows its clients and wealth creation. This, not over-regulation, is the reason investment-banking activity has begun to migrate overseas.

Yes, yes! So true, especially that last one. All the white-collar yos who are out of work right now who think they have it bad? Wait until ten years from now, when most of their industries follow the money to India, China, or Europe. It was one thing when high-school guys lost their industrial jobs. Not much tear-crying by the degreed powers-that-be. But when a Burnett copywriter is serving up lattes at Starbucks? Ladies and gentlemen, there will be a symphony orchestra playing at every street corner.

Gotta get into the studio to lay down 'Brother, I'll Tell You How To Make Some Dimes'.

Spitzer goes on to state that we're propping up dinosaur industries- not just Detroit, but the lot of them. I've believed this, too. I know we need to bring money into the market because the banks are tighter than a Catholic school paycheck, but why are we putting the money into the same failed institutions?

A more sensible approach would focus not just on rescuing pre-existing financial institutions but, instead, on creating a structure for more contained and competitive ones. For years, we have accepted a theory of financial concentration—not only across all lines of previously differentiated sectors (insurance, commercial banking, investment banking, retail brokerage, etc.) but in terms of sheer size. The theory was that capital depth would permit the various entities, dubbed financial supermarkets, to compete and provide full service to customers while cross-marketing various products. That model has failed. The failure shows in gargantuan losses, bloated overhead, enormous inefficiencies, dramatic and outsized risk taken to generate returns large enough to justify the scale of the organizations, ethical abuses in cross-marketing in violation of fiduciary obligations, and now the need for major taxpayer-financed capital support for virtually every major financial institution.

Eliot, my man! So in short, prop up credit markets with new vehicles. Do NOT give money to the chuckleheads who drowned the baby and now can't find the telephone. Dude may have hired some ladies of the evening, but you know, leadership comes from strange places. This is by far the most well-reasoned piece I've read about our current plight.

You heard it here first. Eliot Spitzer. US Attorney General. 2012.

Meet Our Creditor

The man above is Gao Xiqing. He manages $2 billion out of the $2 trillion we owe China. James Fallows interviews him in this month's Atlantic. What does he think went wrong with his debtor friends across the pond?

People, especially Americans, started believing that they can live on other people’s money. And more and more so. First other people’s money in your own country. And then the savings rate comes down, and you start living on other people’s money from outside. At first it was the Japanese. Now the Chinese and the Middle Easterners.

We—the Chinese, the Middle Easterners, the Japanese—we can see this too. Okay, we’d love to support you guys—if it’s sustainable. But if it’s not, why should we be doing this? After we are gone, you cannot just go to the moon to get more money. So, forget it. Let’s change the way of living. [By which he meant: less debt, lower rewards for financial wizardry, more attention to the “real economy,” etc.]

We're the guy who wants the filet mignon on our $70 a day salary. He's the guy reminding us when the rent's due. Better start saving, America. 'Cause when Gao wants his money back, we'll think the events of the last two months were the good times.

I have to say, I kind of like our creditor. Give this to the Chinese, without having to appeal to voters or shareholders they rate very low on the bullshit scale.

Whither Iceland? (UPDATE)

We in America are in tough straits economically. Unemployment is growing. Credit is next to impossible to obtain. The domestic auto industry stands outside our homes with a hat out for change. My generation has never seen our fiscal security look so bleak. But we at Shambollocks are always keen to look at the bright side of things.

We're not Icelanders.

The country of Iceland is bankrupt. Yes, the entire country. Last month, citizens were unable to use their credit cards. Icelanders on holiday found themselves stranded, with no bank willing to exchange their currency. Their stores sat bare, as they fought to even achieve the bare minimal goal of feeding themselves.

How does a Western economy find itself completely broke? The Financial Times over the weekend had a great account on what life is like in Bjork Country.

Picture a pig trying to balance on a mouse’s back and you’ll get some idea of the scale of the problem. In a mere seven years since bank deregulation and privatisation, Iceland’s financial institutions had managed to rack up $75bn of foreign debt. In his address to the nation, Haarde put the problem in perspective by referring to the $700bn financial rescue package in America: “The huge measures introduced by the US authorities to rescue their banking system represent just under 5 per cent of the US GDP. The total economic debt of the Icelandic banks, however, is many times the GDP of Iceland.”

And here is the nub. Iceland’s banks borrowed more than $250,000 for every man, woman and child in Iceland, and placed an impossible burden on the modest reserves of the central bank in the event of default. And default they have.

OK, so things most definitely could be worse for all of us. We are still looking for a leader to emerge from our economic struggle, but at least we can still buy food. In fact, at this very moment I have a casserole almost done which smells delicious. I plan to dig in and give thanks that as bad as everything is right now, I know tomorrow will be better. And I'm sure that will hold true for the industrious Icelandic people.

But just in case, next Sigur Ros show you attend, bring some canned goods. They may need it.

- UPDATE: On Sunday, protests broke out in Iceland over the arrest of a protester. They eventually degraded into a clash with police. Cue the Stones' 'Street Fighting Man'.