Bob Giaquinta for Congress

The Economy

Volumes of books have been written on the economy, and I will try to highlight what the state of our economy is at this time and how we got here. Most of the problems are the result of government's inappropriate choices of the past and present.

For the past sixty years, better than half of our federal spendings have gone to the military, rather than improvement in our infrastructure, social programs, and a sound energy program. Add to this the 1950's program of “urban sprawl”, creating the use of suburbs for housing, while oil was controlled by the major oil companies, and was cheap, helped put us in a tenuous situation. In 1971 U.S. “peak oil” was attained, we had used up most most of our oil resources. At the same time our currency was taken off the gold standard. In 1974 the Persian Gulf oil states agreed to sell oil in dollars, the petrodollar, in return for U.S.'s providing regional military protection, both internally and externally. These states were to invest most of their monies in the U.S. and tied U.S. currency to oil. In the 1980's Japan, Taiwan, and Korea reinvested in treasury notes in exchange for military protection. In the 1990's China invested in bonds to bolster the consumerism of the U.S., to whom most of their products were sold. Since the demise of the USSR our military has become an oil protection force, costing the U.S. much financial upkeep.

Globalization has helped destabilize our economy. Manufacturing has dropped to 12% of our Gross Domestic Product (GDP), which traditionally had been over 20%. Multinational corporations have used foreign labor for manufacturing, paying about one dollar a day per worker, and adding to the “carbon footprint” of everything we purchase, in the name of profit. With the advent of the Internet, outsourcing has also reduced the wealth of the U.S. Things such as technical help, reservations, reading radiographs, accounting, etc. is being sent overseas. The loss of jobs has been substantial.

The financial portion of our economy has grown to over 20% of our GDP. Wall Street, banks, investment companies, credit card companies, insurance companies, and mortgage companies dominate over one fifth of our GDP. Most of this wealth is not based on a production of anything, but encourages debt, and its profits are achieved mainly by someone else's loss.

U.S. Consumerism also has a large role to play in our economy. With the omni-present advertisements we are told that it is our right to have anything that we want. President Bush, just after 911, encouraged everyone to go out and spend money, even if it put you in debt. The total debt of the private sector, including personal, home mortgages, and corporate debt is approaching 50 TRILLION dollars. Personal savings versus debt is in the negative, we have forgotten how to save, and to buy things when we can afford them.

The government with it's subsidies to energy and agriculture companies, military build-up and wars, “free trade” deals, lack of an energy strategy, and disregard for anything other than their re-elections has managed to give us a nine trillion dollar governmental debt, and we continue to borrow, with no end in sight. Many of the problems we face today are due to deregulation, which started with Reagan, continued through Bush I, Clinton, an Bush II, and “Wall Street Socialism”. Over the years they have bailed out many corporations. In the 1970's Chrysler was rescued. In the late 1980's the Savings and Loans fiasco was saved by the Resolution Trust Corporation, at a cost of 250 billion dollars to taxpayers. At about the same time Saudi cash saved Citibank. In 1990 the Federal Reserve Board cut rates to rescue “junk bonds” and real estate. In the mid-nineties, Clinton used government funds to rescue the Mexican Peso, which helped limit Wall Street's loses after over-investment in Mexican bonds. The Glass-Stegall Act of 1930's, which blocked common ownership of banks and insurance companies was repealed by the Clinton administration. Big business also loved the deregulation of holding companies, the telecommunications and energy industries, and credit card operations. In 2002 Congress passed the Commodity Futures Modernization Act, pushed through by Senator Phil Gramm during the night with no oversight, which included the “Enron Loophole”. Recently, Gramm was McCain's chief financial advisor and is slated to be his Treasury Secretary if McCain becomes president. This bill allowed unregulated futures trading in energy. Guess who was paying for this, that's right you and I.

The misrepresentation of the inflation rates is a also a trouble. We all know that inflation hasn't been between 2-3% for the past thirty years. In my occupation, I know that prices have increased close to one thousand percent, and I'm sure that you have the same feeling. Inflation is the “silent” tax. The government prints more paper and uses it to pay off bills before inflation catches up.

The stage was set for economic decline. The politics of evasion, the over-use of debt and leverage, the stock market and then the housing bubble, globalization, expansion of private and governmental debt, the economic dominance of the financial sector, and the dishonesty, incompetence, and negligence of our government were ripe for a trigger. Bush pulled the trigger with the Iraqi War. Bush's energy strategy was to invade Iraq, and install a puppet government which could supply cheap oil. This angered the other gulf states, and his power play backfired. This, along with their realization that “peak oil” was now, and that they would be producing less oil in the future, has helped increase the price of oil,which in turn raises the prices of most other commodities. This has jeopardized the oil standard, thus lowering the value of the dollar. The price of oil in other parts of the world, which uses other currencies to buy dollars, did not rise at the same rate as in the U.S. It is the loss of value of the dollar that caused most of the increase in the price of oil. In 2007 the dollar dropped 10% against the Euro and pound sterling. Add to this the unregulated energy commodities trading, and oil prices are going out of sight.

Most countries have invested in the U.S., they believed that the currency was stable. Over the past six years the evidence was mounting that it was not. The sale of Collateralized Debt Obligations (CDO), which are huge bundles of mortgages that could be sold, cost many foreign investors dearly. The public use of home equity as a ATM card, further depreciated the dollar. The stock market, although looking good dollar-wise, when measured against other currencies is not preforming very well. Earnings of the top seven largest financial firms dropped 65% in 2007. The bailout of Bear Stearns by the Feds printing more money did not go unnoticed by foreign investors.

Now the Persian Gulf states are not investing in the U.S., in fact Kuwait has dropped its dollar “peg” from its currency (so much for loyalty to the First Gulf War). The global respect for the U.S. has dropped, both morally and financially, due to our mid-east military overreach, the lowering of our moral convictions, such as torture, extraordinary renditions, etc., and our negative stance on environmental issues. OPEC, the Shanghai Cooperation Organization, including Russia and China, and Venezuela's promotion of an organization in South America are realigning the oil “old world order,” which is putting pressure on the U.S., and keeping the U.S. out of the oil loop.

So what do we see in the future? Many of these problems aren't going to go away in the near future. We can expect rising prices for anything imported from other countries. Any products that need transportation will be more costly, due to the price of oil. But the good news is that we will probably have an increase in exports. With the loss of stature of the dollar our products will be cheaper overseas. One of the most obvious hopes that we have is the production of alternate sources of energy. Our energy strategy should include developing new energy sources, federal investment in energy technology, conservation, and regulation of greenhouse emissions. These items should increase the mobilization of the U.S. economy, by producing millions of jobs, with the added by-product of a cleaner and safer environment. If we could get off the power grid, by the use of individually owned solar receptors, wind electric turbines, etc., we will be more self reliant, and a whole new industry can be developed, producing millions of new jobs.

The government must control the financial institutions, not allowing them to be negligent in their duties, and taking chances. If the financial institutions are in a win-win situation, the fact that the government will bail them out when they overextend, then the government should treat them as a “public utility”, with strict guidelines.

We must disengage from Iraq, and reduce our military presence throughout the world. The major defense contractors will be forced to “re-tool” and produce constructive rather than destructive items. We cannot be be naive as to the intentions of other countries, but let's have some dialog with our potential enemies. Maybe if our military are removed from the 700 bases that we have in foreign countries, their neighbors would feel less threatened, and we will be able to settle our differences diplomatically.

The wealthy should take it upon themselves to invest in items that will be good for everyone, and not focus on short term profits. Labor unions should be given more leeway to get fair wages for the constituents.

We are at a critical point in our economic viability. We need sane governmental policies to try to get back on the right track, or government must confront these problems and not bury their heads in the sand.

Update
September 23, 2008

With the recent devastation of our financial system, the problem hit the fan sooner than I expected. Within the next few weeks we may well add one trillion dollars to our national debt. I don't know what the outcome will be at this time, but hopefully:

Secretary Paulson will not get carte-blanch without judicial and congressional oversight, this country is not yet a dictatorship! By the way, he, as CEO of Goldman-Sachs, increased their risk obligations from 20 billion to 100 billion dollars. He retired in 2006 with a “golden parachute” worth almost one half billion dollars. Is he the right man for the job?

The people who are in foreclosure should be able to renegotiate with their lenders, with federal backing, so that they will not lose their homes. FDR did this in the 1930's, and the government actually made a profit in the long run, and people kept their homes.

The bailout of Wall Street firms should have interest rates charged, or the government should own a piece of the company.

The Glass-Steagall Act should be reintroduced. If I wanted to gamble my life savings away, I could go to a casino, at least I could get free drinks to drown my problems.

I don't know if is constitutional, but I would introduce a bill taxing the super-rich who made huge amounts of money with total disregard to the populace. An income averaging for the past eight years should be enforced to get some tax money back, they were averaging 17% taxes on their income.

The Gramm-Leach-Bliley bill of 1999, which cancelled the Glass-Steagall bill of the 1930's, and the Commodity Futures Modernization Act of 2002, which included the Enron, Foreign Market, and Swaps loopholes, were supported by these Nevadans in the legislature at that time: Jim Gibbons, Harry Reid, Shelly Berkley (no doubt that “follow the leader” Jon Porter, had he been in the House at that time, would have followed suit), Ensign was on hiatus at the time. As you can see, we had a bipartisan agreement to destruction.

Is it any surprise to you that the financial sector donated 100 million to political candidates this year, evenly divided between the major parties. Our legislators have benefitted as follows:

Reid – $2.6 million

Ensign – $2.3 million

Porter – $1.6 million

Berkley – $1.1 million

Heller - $440,00
As is said, just follow the money!

I don't know where this will end, but I'll try to keep you informed.

October 3, 2008

Congress showed its ineptitude again, and in no uncertain terms showed how it operates. They have added 150 billion dollars in earmarks to pass the bailout bill. Earmarks are "payola" for legislators; "listen, if you vote for my bill I'll give you money for your pet project" must have been said many times in the past week. We have gone from about 20 billion dollars to 170 billion dollars in earmarks. How arrogant of our legislators are, they blatantly showed us how they operate, with no shame. Most said that they thought it was a terrible bill, but they had to vote for it. Does that make sense to you? The "fear factor", which has guided our foreign policy for 60 years, is now being used in the economic sector. It works well with our uninformed public.

If the bailout was so important to pass, it should stand on its own merits. There should have been inspection of this bill, and other alternative opinions should have been explored. Why wasn't the use of preferred bonds and/or preferred stock in the companies given money explored? At least the taxpayers would have some possibility of recouping our monies, it would also prevent the ordinary stockholders from getting paid before the taxpayers.

Our national debt has increased one trillion dollars in the last two months. Each man, woman, and child in the US is in governmental debt of nearly $50,000.

The bailout was changed to a more politically correct name, rescue, while in actuality was a rape of the taxpayers. Aren't you tired of bending over.

I'm sure that I will be talking to you again, this is only the tip of the iceberg.

October 20, 2008
Understanding the Swaps loophole - I'll try.

Credit default swaps are among the major reasons responsible for the financial collapse of the global economy, a 60 trillion dollar gamble. This amount of money is about equal to the total yearly Gross Domestic Product of the WORLD!

As I stated before, this was added to the Commodity Futures Modernization Act of 2002 on the last day of the session, promoted by Senator Phil Gramm, and ratified by all Nevadan legislators present at that time.

Commodities were allowed to be sold “over the counter” with no regulation at all. The leveraging allowed had never been so lax. A buyer only had to put up 7.5% to buy these securities, meaning that only $75,000 could control one million dollars of trade. The Federal Government's lack of regulation was further enforced in the bill by banning state laws to regulate these sales. The concept was so volatile it probably could have been regulated by the gaming regulations of the states.

Swaps are a form of non-regulated insurance. If an investor buys bonds, CDOs (collateralized debt obligations), etc. and is wary that they are safe, it can buy insurance (credit default swap contract) in case there is a default. The problem evolved because, since the insurance companies were not regulated, there was no adequate capital to back up the payment of this “insurance” when things went bad. Added to this was the fact was that speculators didn't have to own the security to take out the insurance. It is similar to taking out a life insurance policy on a person who weighs 400 pounds, has a history of heart disease, smokes three packs a day, and is a couch potato, and you don't even know him. If he dies you can collect the insurance. These “policies” were traded over the counter with no regulation. This led to high risk gambles by many speculators that things would go wrong. As you know things did go wrong.

So what happened (in lay terms)? Mortgage brokers gave mortgages on houses, many of which were at inflated prices, at low interest rates, these rates would increase in a few years. Many people who bought these homes couldn't afford the future interest increase, and had little equity in the homes (small or no down payments). The mortgage brokers made money with upfront fees, and sold these mortgages to investment banks at inflated prices. The investment banks then packaged these mortgages and sold them as a kind of stock or bond (CDO's). Other banks, pension funds, etc. bought these securities to get the interest that they would produce when the interest increased. They took out insurance in case the securities defaulted. Other speculators took out insurance, even though they didn't own the securities. The insurance companies charged a fee for this insurance and made some money. Then the interest rates increased for the home owners, and many could not pay and they went into foreclosure. Since there was little or no equity in the homes, and the houses were probably bought at an inflated price to start with, the securities fell in price. Thus the insurance companies had to pay the difference in the deflated price. The insurance companies did not have the capital to make up the differences lost to those who owned the security, or who had speculated with the insurance. Thus, the buyout of the insurance company AIG, and Fannie Mae and Freddie Mac. The scale of the problem could not be determined, and the confidence in the economy became suspect. Banks stopped lending and the stock market declined rapidly, jobs are being lost and so on and so forth.

The 700 billion dollar bailout may stabilize the economy for a while, but since these mortgage loans were given until late 2007, we still will have the foreclosures through 2009. So be prepared for more bailouts, and a failing economy.

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