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The Trickle Up Theory

by : Daveparts
Thursday May 7, 2009 - 19:23

The Trickle Up Theory By David Glenn Cox

Wonderful news, the recession is over and we won! Of course, when I say we I mean Wall Street and the big banks.

May 6 (Bloomberg) — A peak in the number of jobless claims signals the worst U.S. recession in half a century may end in June, according to Thomas Lam, an economist at United Overseas Bank Ltd. in Singapore.

May 6 (Bloomberg) — U.S. stocks advanced to a four-month high as investors speculated banks don’t need as much capital as had been projected and a report showed employers cut fewer jobs than economists estimated.

The job losses were at 491,000 for last month and Citi-group shares surged 17% on news that the bank would only need five billion more dollars. Isn’t that wonderful? Citi, having been already lent forty-five billion along with government loan guarantees in excess of over three hundred billion, now only needs five billion more to pass its stress test! And the economy only lost half a million jobs instead of the expected six hundred and fifty thousand jobs the private economist’s estimated. (Actual job losses 603,000)

God, the news is so good it makes me want to go buy a new Pontiac, quick, before they disappear. GM posted its eighth straight quarterly loss and laid off another twenty-one thousand employees, but that’s part of their plan for recovery, to eliminate employees. You see? That’s good news, the economy is on the mend. Walt Disney shares surged 12%, its biggest rise in six months after they cut staff at their theme parks. I suppose it’s Snow White and the Five Dwarfs now, and I guess Minnie is a stay-at-home mouse and Mickey delivers pizzas at night!

Yes, it is a rosy picture indeed, as the economy comes roaring back to life from death’s door. Sadly the recovery isn’t uniform, there are still those few pockets of our economy not benefiting from government assistance. Mainly workers, the self employed and even those who once thought themselves rich, they continue to struggle in this reviving economy. All in all probably 95% of the population is still struggling; this minority’s misfortunes are caused by their lack of influence in Washington.

Where once employees were given pink slips, employers now find themselves in trouble. The number of jumbo mortgages in default surged by 127% in the first ten weeks of this year. Jumbo mortgages are loans in excess of $417,000. Chuck Dayton put down almost twenty-five percent when he purchased his $950,000 home a block from the Pacific Ocean in Newport Beach, California. Chuck was earning a cool half million a year in his drywall business. Mr. Dayton defaulted in January on $46,000 in back payments.

Damn, and John McCain was going to cut his taxes, too. But what is missing from Mr. Dayton’s plight? Now don’t get me wrong because I went through the exact same situation Mr. Dayton is facing now, only with smaller dollar amounts. But what is missing is the scorn and derision. Where are the pundits and politicians who excoriated sub-prime buyers, calling them dead beats who mislead innocent bankers by trying to buy a home that they could never afford?

If the poor and middle class should have known better, then why not the Chuck Daytons of the world? I sympathize with Mr. Dayton; it’s hard to take a fall, and the higher up you are the harder the fall. He is a victim just as the millions of ignored and invisible Americans are victims. I’m sure it is some small comfort not to be called a bum every night on the six o’clock news because you lost your house. But there is a distinction; Mr. Dayton lost his home because of the hard times outside Wall Street and the banks, and this caused his business to fail. The rest of us just made bad financial decisions.

Home sales in the Hamptons on Long Island fell 67%, the largest number since numbers have been kept. Ninety of those million dollar homes in East Hampton and South Hampton are in the foreclosure process and yet not one call has gone out to fire those responsible for such risky lending practices. Then, to add insult to injury, President Obama’s mortgage assistance plan has no provisions for jumbo mortgages. The irony is bitter-sweet, that those who campaigned the loudest against mortgage bailouts now complain, “How come I’m not included?”

But what we are dealing with is a cancer; the disease is metastasizing itself and spreading throughout the economy. The companies that no longer needed workers now no longer need executives or contractors or surveyors or engineers. Ready for a wake up call? Type “profits fell 95%” into your browser and watch what happens. That’s the news that’s not news because it’s not the news they want to be the news. How long can companies sustain losses of 95% of their profits? If the dry wall contractors are going broke then what of the companies that make the dry wall?

But it is every segment of the economy, from dry wall to biotech, from theme parks to beer companies. Everyone except Wall Street and the big banks, for them the crisis is over, except for maybe an additional $15 billion that Wells Fargo needs or the $11.5 billion that GMAC needs. But they have no doubt where the money will come from. For the rest of the minority of 95%, we wonder how long they can pour money into a leaking bucket before they realize the futility of it.

The Obama administration might long be remembered as the administration that saved the banks but lost everything else, to have saved the ship’s wheel but lost the ship. Mired in the plutocracy and unable to rise above insider politics, they serve only those that feed them.

The Home Owners’ Loan Corporation, established by FDR in 1933, saved over one million homes from foreclosure by 1935, at a time when America only had 125 million inhabitants and the rate of home ownership was much lower. They established the principle of the 25 to 30-year fixed-rate loans. Until that time private banks would offer no more than 15-year loans. How much did this big-spending, leftist program cost the long suffering American taxpayer? 100 million? 500 million? A billion dollars? It cost them nothing; it cost the American taxpayer not one dime. When it went out of business in 1951, it returned a small profit to the US Treasury.

But it stopped the slide in home values; it stopped the forclosures. It stopped the hemmoraging of the banks. It was the trickle up theory, that you build a society from the bottom up. A strong middle class guarantees the future for the wealthy bankers while assisting wealthy bankers guarantees nothing for anyone, not even those bankers being helped, and the cancer will continue to spread.

“For want of a nail the shoe was lost, for want of a shoe the horse was lost, for want of a horse the rider was lost. For want of a rider the battle was lost, For want of a battle the kingdom was lost, and all for the want of a horse.”

Today that would read, for want of a nail the bank was lost, so we gave them enough money for billions of nails and when they lost that we gave billions more until the kingdom was lost.

“This market is not even close to bottoming out, in my opinion. It continues to drop.” (Chuck Dayton)



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