It’s Hammer Time

The great motivational speaker Earl Nightingale once said that if you want to keep a huge secret from the American public, simply publish it in a book and park it in the library. Nightingale’s point was that as we get older, most of us quit educating ourselves about the world around us. Yes, information is everywhere – but, increasingly, what passes for information is not factual.

Bad News Bears’ Fingerprints

A great case in point involves the current state of our economy. You may remember that in late September we were hearing daily that the world’s credit markets had seized up – even someone with good to great credit might find getting a new car loan difficult. And the news-consuming public was hearing this from people whose credentials ostensibly made them authorities on the matter: Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke. So why wasn’t everyone shocked when the September data the Fed released last week showed that consumer debt actually rose?

Or did most people not connect those mutually exclusive positions? The experts and thus the media claimed credit couldn’t be had – but the facts show that consumer credit was available and in fact expanded.

This habit of misinforming us is hardly new. Early this year, all of the so-called experts were being quoted daily saying that the primary cause justifying crude’s ever-higher prices was oil supply problems. But that just didn’t align with facts that anyone could easily find: Oil was plentiful – while demand was falling worldwide.

Remember the experts’ telling America that we could become energy independent by using alternative fuels, such as ethanol? During America’s greatest ethanol sales boom, the facts show, ethanol did nothing to slow or reverse the high price of gasoline. In fact, until the economic malaise first started showing this spring, America was actually importing more oil than we had before ethanol became mandatory.

And for the last two months the experts have been prophesying that we could be about to endure another Great Depression. The media, doing their job, have duly reported the experts’ fear that economic Armageddon is just around the corner. And the public, doing its job, has just as duly ducked and covered – clutching its wallet.

As many, if not most, consumers absorbed the gloomy reporting, they pulled back on major purchases overnight, effectively making the experts’ prophecies of future economic contraction self-fulfilling.

It’s hard to remember a time when so many have received so much bad news so fast. This alone is primarily why Detroit is in the trouble they’re in today. Yes, financially Detroit was not set to have a great year anyway – but this rash of "end of the world" economic reporting has certainly compounded their problems.

But the Sky Didn’t Fall

Almost two months ago Secretary Paulson and Fed Chair Bernanke went and begged Congress for $700 billion to bail out Wall Street. They warned Congressional leaders that if they didn’t act immediately, the worldwide financial system could collapse at any moment – if they didn’t get the bailout that day. Well, it came almost two weeks later, and even now not much of that money has been disbursed. But, although economic slowdowns are happening everywhere, did anyone notice that the world’s financial systems didn’t melt down within days of their dire warning?

Almost two months have passed, in fact, and some things seem to have gotten better. Oh, with one exception: Consumers still aren’t spending, because the experts successfully convinced everyone that things really were that bad. Does anyone believe that GM’s sales would have fallen by 45 percent in October if consumer confidence hadn’t dug a new bottom?

Moreover, our confidence didn’t plummet just because the media reported on these issues; that’s their job. It fell because the only ones being quoted, people we trusted as authority figures, left us wondering whether the problems could be controlled at all.

And no one doubted them.

Oblivious Greed

Again, don’t be misled. The financial outlook was not good, and real fear existed that the whole situation might spin beyond correction. The problem is that while this was happening the Treasury, the Fed and other experts were all pointing the wrong way, and they knew it: "This whole problem was caused by the subprime mortgage mess," they chanted. Then and now, however, the fact is that if you added every subprime loan that went bad to every Alt-A mortgage that either has gone or will go bad, that’s at most a $1.4 trillion problem. And yet in just the week that that $700 billion bailout was passed, we committed around $2.7 trillion to the markets – including the $1.4 trillion in short-term commercial paper and liquidity commitments for banks – or almost twice as much money as the mortgage "crisis" required.

In case you were wondering how much money that is, it works out to around $8,438 for every man, woman and child in America – enough to buy every family in America a brand-new Chevy Malibu. If we did that, we could sell 108 million cars this year, and one would think that would kick-start our economy fairly quickly. Or at least Detroit’s.

But of course the solution to the mystery is much simpler: There had to be far bigger problems than the mortgage issue for the financial system to require that big a monetary injection.

As for the experts’ position that this might be leading us into another Great Depression: As I stated last week, the sequence of events we’ve seen looks more like the Long Depression of 1873 – but either way, it wasn’t likely as the government’s presence in the economy is now far more active.

Notice I didn’t say government safeguards were in place to prevent it from happening again. For if that were true, regulators would never have allowed Wall Street to harm the nation in such a stupid, obviously selfish fashion.

Cocktail Party Hammer

Heeding Nightingale, I have been reading a lot lately about the Panic of 1907; the Great Depression; the Recessions of 1958, 1974 – 75 and 1980 – 82; and the Savings & Loan Collapse of the late ’80s. And a trend jumped out at me: With the exception of the Recession of 1980 – 82 (a direct result of bad fiscal policy of the '70s ignited by the Second Energy Crisis), almost every major downturn in the American economy seems to have come after at least six years of a Republican administration.

Really. The Panic of 1907 came after McKinley/Roosevelt, the Great Depression after Harding/Coolidge, the Recession of 1958 in Eisenhower’s second term, the Recession of 1974 – 75 after Nixon/Ford. The S&L and housing collapse followed Reagan, and the subsequent recession lasted more than half of Bush I’s term. The current problem comes at the end of Bush II’s time in office.

Stunned at this historical fact, I overlaid the charts of new car sales. This was less exact, because for any period before 1931 accurate figures don’t exist. But in 1933, the Great Depression’s worst year, Americans purchased 1.787 million new vehicles, and by 1941 sales had grown to 4.665 million. The year before the 1958 recession we bought 8.48 million vehicles, and while that recession’s effects had worn off by 1961, car sales that year still dragged at 6.9 million vehicles.

Nine years of Democratic presidents later, we bought 12.338 million new cars and trucks. Then the 1974 – 75 recession dropped sales from 14.57 million vehicles to only 10.2 million. But in Jimmy Carter’s first year in office, Americans rushed into showrooms and bought just shy of 15 million vehicles. Now that’s a recovery.

True, from the 10.54 million vehicles we bought in the year Reagan took over, sales had increased to 16.3 million by 1986. But they fell every year after that until, you guessed it, Bill Clinton came into office. And during Clinton’s terms car sales fell in only one year — by 300,000 — and they hit an all-time high in his presidency’s final year.

Burying the Good News Because …?

If Washington wanted to, they could stop part of the panic that they encouraged. How? They could tell us what they have fixed that is going right.

The Treasury-Euro spread, a key indicator of interbank lending, has fallen dramatically over the past month, meaning banks are starting to trust each other gain. This was a huge problem, and its resolution appears to be under way: Why not announce that?

Most of the banks we’ve lent money to in this bailout didn’t need any cash and said so. So why not tell the public that many of our largest and most respected banks were not in any sort of trouble at all – that they don’t really need our money?

"Experts" said credit was tight; but ask any mortgage agent and you’ll hear that mortgages are available, just as car dealers will tell you they can too still get car loans.

So I leave you with this question. Why is it that Washington is spring-loaded to telling the media how bad things are, and equally silent about what’s improving or going well?

My guess is that you can’t loot the Treasury with full disclosure.

© 2008 Ed Wallace

Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, given by the Anderson School of Business at UCLA, and is a member of the American Historical Society. He reviews new cars every Friday morning at 7:15 on Fox Four’s Good Day, contributes articles to BusinessWeek Online and hosts the talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF. E-mail: wheels570@sbcglobal.net