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Little known fact: I have a degree in economics.  I went to one of the top three economics schools in the country, and graduated with honors.

Caveat: The area I studied was WAY academic.  Rather than adhere to market economics, my school focused on the inherent rationality and irrationality of actors in markets.  In other words, it focused on the role of investors and their individual and collective emotions as market drivers in and of themselves, completely outside of principles of accountancy or market math.

So with that, over the fold and I'll give my dumbed-down impression of the state of the economy and markets.

I'll try to forget that I've just heard Boehner, Blunt, and Cantor blame Pelosi's SPEECH for the failure of the Rescue Bill.

And make no mistake - this is a rescue bill.  Stop thinking of its central premise as that of a "bailout".  While some "bailing out" will, by necessity, occur, the rescue is the key focal point of this bill.

I tried to explain this to Mr. RenaRF over the past ten days or so.  Here's what I want you to picture:

Yep.  The human body, from an anatomical perspective.  

Imagine now that that human body, pictured above, in its entirety, is the economy.  Different parts of the body represent different sectors of the economy.  So maybe an arm is the pharmaceutical sector.  And maybe a leg is the IT sector, and another leg the energy sector.  But the central system to the human body is the heart.  If it doesn't function, all other systems in the body shut down.

So go back in time about nine or ten years and think of the dot economy.  I'm going to grossly oversimplify here, but as a member of the IT industry in my professional life, I saw the bursting of the bubble up close and personal.  Long-standing practices of moving companies to initial public offerings (IPOs) were abandoned in the boom.  Prior to the easing in lending regulations and standards, a company generally needed five years of business history and some consistent quarterly performance that indicated a path to profitability before it would be considered for IPO.  Yet in the make-money-fast culture of the late nineties, those standards were abandoned.  Companies with mere months of business history and no discernible path to profitability were being approached for IPO.  Underwriting financiers would take preferred stock interest in those companies and amass stock for literally pennies per share.  When the company publicly launched, those same underwriters would turn around and push the stock and cause its value to go up.  They would wait until their best estimate of a peak and sell out, making ridiculous profits.

The whole house of cards caught up with the bubble and the segment itself returned to some level of reality.  But remember - in my example, I made the IT industry a leg.  You can lose a leg and still live a full, functioning life.

It is fundamentally different with the financial services industry.  Because you can't cut out a heart without death of the remainder of the body that it supports.

Blood that flows to and from the heart is comparable to money that flows through the market.  The availability of money to leave the heart and travel to other areas of the body - market sectors - is what drives the overall economy.  It touches EVERY area of the economy.

Let's say you own a successful dry cleaners in your town.  You're profitable, you manage your expenses well, and you've provided some number of jobs back to the community.  All of your financial fundamental are in place for expansion.  You've scoped out an area where competition will be minimized and where your proven business model is likely to thrive.  You don't personally, however, have the money to take a lease on space and hire enough people to run your second location with all of its equipment requirements and the like.  You need to borrow that.  In a functioning economy, a lender would be happy to lend you the money to expand.  You're a great risk - you have a business model that has proven to be successful.  But you can't get the money.  And you can't get the money because there IS no money to lend.

Another example.  Let's say you work for a large, multi-national IT company.  Let's say further that the market has been kind to you.  Your profit projections have consistently been spot-on quarter over quarter.  All of your underlying financials are strong.  You are in the top one or two in your market segment, and you certainly don't have your personal business invested in mortgage-backed securities.

Only in many ways, you DO have your business invested in mortgage-backed securities, at least tangentially.  Because you do what many business of your size do on a daily and weekly basis.  You borrow money to keep your daily operating costs covered.  That means payroll, benefits, etc., are covered in the short term with full knowledge that, at the end of, say, a quarter, you will fully pay those short term loans back.  But the business bank who underwrites your short-term operating line of credit IS a member of the financial services industry.  And because that industry is tainted by bad debt, and because THAT has caused credit of any kind to tighten, you now cannot take a 7-day loan to cover payroll.  You and your 280,000 employees now are not able to meet your payroll obligations.

A final example.  Your car blows up.  You don't live in an area where public transportation is readily available.  You have a good job and a good credit history.  You need a loan to get a new car so you can keep going t work and keep working.  Only you can't get that loan.  It has nothing to do with your personal credit-worthiness - it has to do with the fact that money simply isn't available to lend to you for buying a car.

The financial services sector is the heart of the economy.  They have fucked up badly in the last couple of years, but really, they've generally fucked up because we have allowed it.  Companies don't exist to provide good jobs or good benefits.  Companies exist to turn a profit, and public companies exist to return value to their shareholders.  They are made to do this on a quarterly basis.  A good quarterly report returns profit to shareholders.  A bad one returns no profit to shareholders (generally).  So why would we think, after removing regulations and failing to enforce most of those that remained in place, that Wall Street would do anything beyond what we have made it possible for them to do?  And that, in a nutshell, is to work the system - mostly within the law - to return insane short-term quarterly profits and therefore shareholder value.  The idea that business would think a) long term (when we are painfully short-term focused from a market perspective; and b) do things to benefit people rather than their own bottom line is counter-intuitive because we don't reward business for behaving in that fashion.

Right now, we are literally on a tightrope called credit.  Whether or not you have a job to go to tomorrow, and a job that can actually honor its payroll obligation, is an open question.  If your company has enough cash on hand to pay its operating expenses, consider yourself lucky.  Many other people, who work for good companies, will find that there isn't money for them to be paid.  The heart will have stopped pumping blood to all extremities of the body economic.

And a final few notes - this idea that Republicans have that the market can bear this out is ludicrous.  Further ludicrous is the idea that some kind of mortgage insurance construct would work.  If companies could make money with that methodology, they would have already been doing it.  No one's biting because no one can underwrite this debt for the amount of time it will require for the paper amount to match the value of the underlying collateral.

And the idea that all of these Representatives are getting "50 to 1" phone calls against the bailout does NOT remove them of their fundamental responsibility to be stewards of the American economy and the American public as a whole.  This shit is complicated.  The idea that the average person can fully understand the implications and the intricacies defies logic.  I have the requisite education background and I don't fully understand all the details around the current economy and the implications of any rescue legislation.

This is a sad, tragic day for America.  Legislators decided that their need to be re-elected exceeded their responsibility to the Americans they represent.

I would suggest that those who believe we have to hold our nose and save the heart of the economy reach out to our Congresspeople and tell them so.  Best of luck to everyone.

Update [2008-9-29 19:9:2 by RenaRF]: First and foremost - I really apologize if the diary title offended anyone.  I had been talking to my husband before writing this about the whole thing and he got aggravated and told me I was talking too fast and using too many "inside baseball"-type words.  So I tried to come up with something to which he could relate - that's where the analogy and the title came from.

Second - I don't think I was clear - I don't think this bill is a solution.  I think it is more akin to emergency surgery necessary to keep the patient alive before taking a holistic approach to healing the body.

Originally posted to RenaRF's Random Ramblings on Mon Sep 29, 2008 at 12:59 PM PDT.

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