ECONOMIC ILLUSIONS

I'm a big fan of optical illusions. For instance, the picture above...a menacing skull of death or two jesters sitting together enjoying champagne. I love artists and photographers who see things and objects in different ways than most. It's wonderfully eye-opening to me. Never fails to put a grin on my face or even illicit an "oh that's cool" comment as well.

Economic illusions however, not so much. I was driving to work this morning listening to the news, and analysts and experts are talking about college tuitions rising whenever the economy drops. Proponents calling for lower tuitions in tough times and raising admission costs during economic upswings. So I started to think about these alleged tough times we're all in now.

I find it astonishing that in the last 6 months we have seen the Federal National Mortgage Associaction (Fannie Mae) and the Federal Home Mortgage Corporation (Freddie Mac), AIG, Bear Stearns, Shearson Lehman, some of, if not the biggest players in the finance and investment industry, countless banks, and now the American Auto Industry, all hit the skids. All needing billions upon billions of dollars from the US Government tax dollars, aka you and me. Pretty incredible timing, don't you think?

To me this all started with Fannie and Freddie, which have been having problems for years now, and were created by our not-so-financially-savvy government. Fannie Mae was created in 1938 in the wake of the Great Depression. The collapse of the housing market discouraged private lenders from investing in home loans. Fannie Mae was set up to provide banks with federal money to finance mortgages to raise levels of home ownership and the accessiblity of affordable housing. Fannie Mae was able to borrow money from foreign investors at low interest rates because of the financial support they received from the US Government which is what allowed Fannie Mae to provide fixed interest mortgage with low down payments. Fannie Mae made a profit from the difference between the interest rates homeowners pay and foreign lenders charge. Sounds simple enough.

For the first thirty years they held a veritable monopoly over the secondary mortgage market. In 1968 due to fiscal pressures created by the Vietnam War, Lyndon B. Johnson privatized Fannie Mae in order to remove it from the national budget. Here's where the illusions start. At this point Fannie Mae began operating as a government sponsored enterprises (GSE) generating profits for stock holders while enjoying the benefits of exemption from taxation and oversight as well as implied government backing. Pretty sweet deal. In 1970 Freddie Mac was created to offset the monopolization of the market. Another illusion since they were both basically one in the same. Together they control about 90% of the nation's secondary mortgage market.

In 2002 the assets of those two companies combined for a total 45% greater than that of the nation's largest bank. On the other hand, their combined debt was equal to 46% of the national debt. This is when things went awry. Congress, the Justice Department, and the SEC stepped in, finally, to examine the financial practices of these GSE's. They are the only two Fortune 500 companies not required to inform the public about any financial difficulties they might be having, though in the event of the collapse of either of these companies, US taxpayers could be held responsible for hundreds of billions of dollars in outstanding debts. That arrangement seems grossly autonomous to me, in that, they're using taxpayer dollars but don't have to divulge anything to the taxpayer. In 2002 the SEC and and the Justice Department uncovered accounting errors at Freddie Mac to the tune of 4.5 to 4.7 billion dollars resulting in the termination of three top executives.

From my perspective, the whole mess was brought about by creative financing and leveraging. Many people crunching their own budget have tried likewise. The difference here is that instead of going in and cutting back on expenses way back when, like the rest of us do when our budget is tight, greedy overpayed executives that had gotten very comfortable in this secluded and lucrative arrangement continued to operate at breakneck salary levels with the bottomless pit of financing known as tax dollars...so reveals the illusion.

A few months ago we experienced a fuel shortage. Fuel prices shot through the roof and SUV's were automotive pariah. Come to find out, there wasn't really a fuel shortage, just the illusion of a fuel shortage. The stock market slides, fuel prices are chopped in half, and everyone can drive happily. But there remains a garage shortage of sorts since the housing industry has tanked. All of the sudden, Americans can no longer afford to house themselves and foreclosures are rampant. People crying to the Government to step in, lower their mortgage commitments and interest rates, and let them keep their suddenly unaffordable home. All of this burden again falling back on the taxpayer. The taxpayer that can't afford gas, college, or their house. Hmmm.

How much of this economic crisis and recession is real and how much is illusion? I'm no Wall Street genius by any stretch of the imagination. I am, however, blessed with a limitless amount of common sense. My biggest pet peeve is people who complicate things that aren't complicated. Executives making 10, 15, even 20 million dollars a year are now crying about the financial problems of their companies and scuttling to Washington for a portion of this 700 billion dollar golden calf. Ridiculous.

Perhaps there is something I am missing here. I listen to and read everything I can to try and get a common sense understanding of this conundrum but I continually come back to basic greed and spending of dollars that don't exist.

So is this financial crisis being experienced throughout the world a menacing skull of financial death or merely two jesters sitting together enjoying champagne? One thing is clear, America is fueled by illusion...and of that fuel, there will never be a shortage.