Borrow and Spend

The so called Wall Street protestors have been an enigma to most people as were the Viet Nam war protestors in the 60’s. They were a disorganized group of mostly young people but they had a common message from the start. They wanted the war to end and to bring the troops home and to end the draft. The current protestors had trouble developing a theme but have settled on “we are the 99” which is pretty good. As they evolve, a clearer message is emerging. They are upset with the difference in money and power between the citizens and the elite. These differences have grown over the past 50 years starting with the fact that about 90% of our congressmen are reelected and much of the incumbent advantage is the result of gerrymandering.
Back 30 years ago the CEO salary was about 25 times that of the employees but today it is 250 times. This is not the result of increased performance by these execs but because they sit on each other’s boards and give each other raises.
Unions started out with the legitimate goal of help employees to negotiate with employers and that brought many badly needed changes in the work place. Then the old adage of power corrupts took over and unions began to hurt companies and finally the legacy benefits became so overwhelming that the companies could no longer compete. This was especially evident in the auto industry.
Public unions started with the same goal of helping employees but they too corrupted the system. They used their power to elect the vary officials they would later negotiate with and got themselves legacy benefits that were unsustainable.
The investment industry invented new products that were so sophisticated that the regulatory people could not keep up and the result led to procedures that gave the upside of profits to the investors while reserving the downside loses to the taxpayers. This skewed the risk to return ratio and allowed people to speculate and call it investing, the so called moral hazard. This led to the too big to fail syndrome.
And last, we the citizenry spent the last 40 years borrowing and spending, a process which was accelerated by the rising home prices and the use of credit cards.
Now comes the day of reckoning and we must prepare to pay the piper. It will take us a while to get through the blame game since there is plenty of blame to go around but eventually we must all learn to get by on less. We will slowly and painfully move from a consumer driving economy to a save and invest economy. In the long run this will be a positive but in the short run it will require sacrifice. Get ready, the world is changing.