I am no economist but I can't help but be shocked by recent financial events and the American government's reaction to them. We stand on the precipice of what could be the biggest financial meltdown of the modern era. Freddie Mac and Fannie Mae have failed along with such luminous names as AIG and Lehman Brothers. These huge ships crashing into the rocks threaten to cause a depression the likes of which we haven't seen in generations. Should anyone be surprised that the CEO of Fannie Mae actually took home $13.4 million dollars in 2007 (a 7% raise over the previous year) while the company itself lost $2.1 billion dollars that year? Not to be outdone while his ship was sinking Freddie Mac CEO Richard Syron took home $19.8 million in compensation last year. Lehman Brother's CEO Richard Fuld made a full $22.1 million last year as well. AIG's relatively new CEO had the courage to decline his $22 million dollar severance package after less than a year on the job. No wonder considering the company took a nose dive of over 90% even if it was mostly due to conditions put in place by the former boss Martin Sullivan. Martin wasn't so shy. He took home over $13 million in 2007. So while these financial giants were being run into the ground the people at the top responsible for making the decisions were pocketing a small fortune.
So who is going to pay for the mess they left behind. Why the American taxpayer of course. What's a few more billion to a government that as I write this is $ 9,789,513,626,309 in debt (feel free to check the current debt here http://zfacts.com/p/461.html ) But that is not enough. Now the American government would like to step up to the plate with a 700 Billion dollar bailout of the financial industry as a whole. Given their debt situation this is not money they have sitting around on hand. This is money they will have to borrow and pay interest on further driving up their debt. In addition the US government is also pushing through somewhere between 25-35 Billion dollars in interest free loans for the auto sector. Let's not forget the Iraq war continues at an overall cost in the Trillions at the same time. The net effect is that the American government is spending money far faster than it can make it.
We have seen on a personal level what happens when people are induced to spend more than what they have. They buy houses and think they can afford them but as their debts mount they become bigger credit risks and their interest rates go up. Mortgages go into default and people lose their homes creating the situation that caused these large companies to go belly up but just what is the result going to be when the world's largest economy hits the credit wall? The likelihood is a worldwide recession the likes of which we have never seen which is why we should all care.
So just how well do government bailouts like this work? Well it was only a few months ago that the US government went into debt sending out “Stimulus Checks” in a brave plan to head off a recession. Supposedly putting a bit of money in people's pockets would get them spending and fix the economy. It was estimated to have cost $152 billion in 2008 and an additional $124 billion over the next ten years. 6 months later the economy has gotten even worse and the cheques are only just a memory. Does this sound like the results of a successful strategy?
Maybe I am naive but I do wonder if maybe there was a better way. What if mortgages hadn't been handed out at unrealistic interest rates? Maybe then people would have bought the house they could afford or not at all. Instead the economy was artificially inflated by getting people into houses they couldn't afford with dream loans that had expiry dates. For that matter what if the rates hadn't been jacked up to unrealistic proportions later? We are dealing with banks that are complaining that they lost money when they foreclosed and threw people out of their houses. Maybe the better solution might have been to meet somewhere in the middle on the interest rates and come up with a payment that the homeowners could continue to afford. Instead the government in the US is bailing out the people who now need handouts and housing and the banks who threw them out and spending money like there was no tomorrow. The only problem is that their government debt will have to be repaid someday and you can't artificially prop up an economy forever. Sooner or later we will all have to pay our debts. It is just a bit unfortunate that the CEO's of the companies that created this current crisis got so richly rewarded for running up debts everyone else will be stuck paying for.
Footnotes
Fannie Mae CEO Salary http://www.reuters.com/article/bankingFinancial/idUSN0434145720080407
Freddie Mac CEO Salary http://money.cnn.com/2008/09/23/news/companies/freddie_mac_exec_comp.ap/index.htm
Lehman CEO Salary
http://money.cnn.com/2008/03/05/news/companies/lehman_proxy/index.htm?postversion=2008030519
AIG CEO's
http://www.forbes.com/markets/feeds/afx/2008/04/04/afx4857306.html
http://biz.yahoo.com/rb/080922/financial_aig_willumstad.html
