Cartoon Capitalsim

Bill Bonner, The Daily Reckoning, www.thedailyreckoning.com  08/01/08

Last week, purely in the spirit of mischief, we brought up a sore subject: America's largest mortgage finance companies, Fannie and Freddie. The two have so much water in their lungs it will take at least $25 billion of the public's money to save them. Possibly $300 billion. Were it up to us, we'd leave them on the beach.

But, last week, the U.S. Senate bent down and pressed its large mouth onto those gaping traps of the mortgage twins - gurgling into them a corrupt breath of life. Since the two hold one out of every two mortgages in the nation, in effect, Congress is nationalizing the U.S. housing stock itself. Henceforth, citizens will pay not only their taxes to the government, but their mortgage payments too.

In America itself, how this came to be is the subject of little concern. But despite the lack of interest, it is the subject of the next 500 words or so.

At a speech in Vancouver, James Kunstler seemed positively delighted. Finally, gasoline over $4 a gallon was going to do what generations of artistic scorn could not - destroy Fannie and Freddie's collateral. Kunstler's critique of American suburban vernacular architecture is that its products are not real houses at all - but "cartoon houses." They have porches that look like real porches from a distance, but they are too narrow to sit on. They have shutters too - nailed to the wall, making them completely useless. They may have "picture" windows…looking out on nothing…or no windows at all. And they wouldn't exist at all were it not for cheap credit and cheap gasoline.

Of course, the same may be said of America's - and Britain's - entire economies during the last 20 years. The loose credit that built cartoon houses also constructed cartoon economies; they look like real economies, but they are essentially perverse, consuming wealth rather than creating it.

For proof, we return to Fannie and Freddie. Here were two companies that appeared to be helping Americans own houses. But since they were created, homeowners' equity - that portion of the house actually owned and paid for by the homeowner - fell from 70% to below 50%. Currently, Americans' total equity is lower than their mortgage debt. As a whole, the nation's homeowners are "upside down," in other words. Nearly 9 million Americans have zero or negative equity already - and house prices are still falling.

How comes this to be? The answer is simple: lenders lent more than the houses were worth to people who couldn't pay it back anyway. This Looney Tune approach to finance radiated to all points of the economy. People pretended that they earned more - spending more and more money to buy more and more goods and services - but wages did not really increase. Then, they bought houses - believing the roofs over their heads were investments, rather than consumer items. With no down payment, no proof of income, and zero interest loans - for most of the new buyers, home ownership was merely a dangerous conceit. Now that the roofs have caved in, it is a staggering burden.

The "consumer economy" was always a mockery. No serious economist ever suggested that you could get richer by consuming wealth. But that didn't make consumerism unpopular. The more people consumed, the more GDP went up. GDP measures output, not wealth creation; but who could tell the difference? In a cartoon economy - no one. Besides, spending made people feel as though they were getting richer.

Then, whenever the consumer threatened to come to his senses, the feds rushed to "stimulate" him - by giving him more of what he least needed, more credit. More spending kept the cartoon economy running - allowing the consumer, the businessman and the speculator to add to his burden of debt. In 1971, when the United States went off the gold wagon, household debt was less than 50% of GDP. Now, it is more than 100%. And now, the poor consumer's knees buckle; he will be forced to work the rest of his life just to keep up with his debt burden, let alone pay it off.

Even the rentiers were bamboozled by their own claptrap. Stocks rose from '82 to 2000…fell heavily to 2002 and bounced back. For the last 10 years, shareholders have gotten little for their effort. In July of '98, the FTSE hit a high of 5,458. This month, it has reached 5,625. And in America, if stock prices were quoted in gallons of gasoline, the Dow would take the driver no further in 2008 than it did 40 years ago.

The cartoon capitalists did it all backwards; they are supposed to exploit the workers, not be exploited by them. But while consumers and investors were going nowhere, corporate managers and Wall Street hustlers were getting rich. The two Bozos running Fannie and Freddie, for example, pocketed about $32 million between them last year - during a period in which the companies lost almost $5.2 billion - not to mention the losses to shareholders. And on Wall Street, managers paid out $250 billion in bonuses in the 4 years leading up to the credit crunch. The firms declared a profit and paid bonuses when the bets were made; they didn't wait to see how they turned out. Thus did the big banks and big brokers become capitalists without capital, dependent on the gullibility of investors to keep them in business. And when investors began to wise up, they turned to the public for capital support.

What kind of scam is this? It may look like capitalism from a distance. But this is not real capitalism; this is cartoon capitalism - run by clowns, who sell freak investments to chump investors, and encourage the lumpen householder to ruin himself.