One of the speakers at the conference came to tell us about the housing market and why the $700 billion “bailout” is necessary (note: I hate the word bailout, and I refuse to use it from this point onward. This whole thing is one giant investment, which I will explain later).

First, you need to understand a brief history of banking. At the beginning of the Great Depression, people began to realize that their money wasn’t safe in a bank, so they ran to the bank and took all of their money out. Unfortunately, most banks at the time kept a minimal amount of actual cash on hand. So when every one of their customers came to take their money back, they found that the bank was dry. Before the bank could get more cash, they collapsed. At the time, there was no FDIC (Federal Deposit Insurance Corporation), which now protects your money in case your bank fails (or at least $100,000 of it…but really, who has that kind of money in their checking account?). So, in the ‘20s and ‘30s, if your bank failed and you didn’t pull your cash out soon enough, you lost all your money. You may as well have set it on fire.

Today, banks are required to keep a certain proportion of their assets in cash (sometimes referred to as a bank’s “liquidity” or “liquid assets”). As a result of the latest crash in the housing market, a lot of banks do not have excess cash on hand. It’s all dry. They have the required amount of cash on hand, but nothing extra that they can lend to people. What does that mean? It means there’s no credit. No more loans. No more business ventures based on a person’s or corporation’s credit rating. The average credit rating today is higher than it was five years ago, but the banks don’t have excess cash to lend to people.

The $700 billion dollar investment is designed to do two things: (1) take the bad debt off the books of the banking industry, and (2) give excess cash to the banks that they can loan out. It’s a shaky proposition, but this is the best idea they can come up with. Really, there aren’t a whole lot of options at this point. If they don’t do this, the banks cannot lend any money. If the banks don’t lend money, the whole economic system (largely based on borrowed money in the United States) could come to a screeching halt, and ultimately collapse. Then we would see a spike in unemployment (perspective check: right now, unemployment is at about 6.2%, which is above the standard goal of 5.5%, but well below the 25% that it was during the Great Depression. So, yes, it’s bad, but it’s not Great Depression bad.).

The government isn’t giving $700 billion to the banks. They are buying an investment. Ultimately, the government intends to either collect on the failed mortgages, or sell them off at a substantial profit at some point in the future. If all works out as planned (or hoped, rather), this $700 billion could turn into a substantial profit of several trillion dollars at some point in the future (estimates range from 7-25 years, depending on who you listen to…other estimates range from “immediately” to “never”). It’s a risk, and the country is largely divided on whether or not it’s a good risk, or an appropriate risk to take with taxpayer money. But keep in mind, our taxes have paid for crazier things than this, and nobody complained. Taxpayers once unknowingly funded a $300,000 study to determine which brand of ketchup was thicker…I poop you not. I mean really, these are the same people who brought you the proposal for the “Bridge to Nowhere.” It shouldn’t surprise anyone that a $700,000,000,000 cash infusion is a viable option (THE viable option, I should say).

Along those same lines, the AIG deal is not an $85 billion loan. It’s not a gift. And it certainly is not a socialist tactic. The deal is this: the government is giving AIG $85 billion as an advance. AIG is flat broke and needs money to keep operating while they find people to buy their subsidiaries. Don’t worry if you have insurance with AIG; your insurance is covered under a different subsidiary and cannot default in case you need it (always remember: insurance is HEAVILY regulated, unlike the investing market at the moment). AIG is using the $85 billion to stay afloat and find people to buy their pieces. If they fail to do so in a reasonable amount of time (which is totally undefined at the moment, but we’ll find out soon enough), the government reserves the right to buy an 80% controlling interest in AIG, presumably to take it over and sell off the subsidiaries faster and recover their $85 billion advance. It’s not a loan, and it’s not socialism; it’s a loan shark deal. If AIG doesn’t act fast, the government is going to track them down and start cutting off their fingers.

With Feddie Mac and Fannie Mae (Ha! Her name is Fannie!), the government has assumed temporary ownership of the company, presumably to clean house and get them back on their feet. It’s like when a kid in his mid-twenties gets fired and has to go live with Mom and Dad for a while. It’s not a fun idea. Nobody is enjoying themselves. But Mom and Dad let the kid run wild, and he screwed up, so now he has to live with the ‘rents and stop drinking and smoking for a while until he can get a new job and get back on his feet. It sucks, but what can you do?

So, basically, it seems that a lot of these problems are institutionalized a lot more than I originally thought. It’s obviously going to take a while for us to fully recover, although I do think we will start to see the beginning of a turnaround after the first 100 days of the next president. It would happen a lot quicker and a lot less painfully if people would stop using words like “socialism” and “worse than the Great Depression” when those terms obviously don’t apply.

Also, it might help if we didn’t use the same name for large companies that two-year-olds use for various parts of their anatomy. But that’s just my thought.

UPDATE: As of Monday, September 29, 2008, Congress decided the $700 billion deal wasn’t such a good idea in its current form. They’d like to talk about it for a bit longer. It’s somewhat like an opera: they can’t do anything until they sing about it for a long time first. As I said last week, I wouldn’t expect anything to happen until after the election. Everyone is too fragile right now in their campaigns, and the average voter doesn’t understand what this bill means. All the average voter hears is “Giant corporate thieves are stealing your taxpayer money because they can’t handle their own.” So they call Congress and say, “I ain’t payin’ no taxes to bail out no corporate thieves.” And then the congressperson has to vote “no” because every single constituent has called in to explain that if the bill gets passed, the congressperson is likely to lose the race. And progress moves forward (or not) in a fully functional democracy (or not) full of educated citizens (or not) where we’re out of options and out of time, but still continue to piddle around because we enjoy the opera.

Love, Michael

P.S. As a result of congress’ inaction today, the Dow Jones dropped over 770 points. To keep this in perspective, it’s important to remember that as a result of the events of September 11, 2001, the Dow dropped over 680 points. In short, this is bad. This is really very bad. A lot of people are going to lose their jobs over this. And not just at jacked up financial institutions like Wachovia (Hurray for more buyouts!). A lot of telecommunications and energy companies are now talking layoffs. I think it’s fair to say that we might be in a recession.

P.P.S. I would be willing to bet that opportunistic investors will drive the market back up soon (perhaps by the end of the week, like they did two weeks ago). However, I could be wrong. It happens sometimes.

Most nights, we discuss world news and I make him tell me versions of everything in simplified terms. He’s kind of like a walking CliffsNotes, so I thought it would be perfect to begin having him contribute, to Minus Five, his insights on the economy.

Today’s lesson begins now:

When MF asked me to “in layman’s terms, explain what is going on in our economy that is not in a recession,” my first impulse was to start with Monday, September 17, 2008. But that would be jumping the gun. Yes, the Dow lost 500 points that day (504, actually). As I’m writing this (Wednesday, September 17, 2008), the Dow has just lost another 449 points. It’s the lowest the Dow has closed in over three years. It’s the most dramatic loss in eighty years. That’s important to take in, but it’s really the last chapter in the book.

The economy has very natural cycles of growth and stagnation. Important people with advanced degrees and really thick glasses watch the economy every day and somehow manage to take the numbers that mean nothing to anyone else and turn them into words like “bull market” or “booming economy” or “the most god-awful recession that nobody wants to call a recession except for Warren Buffett” (I wrote the last one). In any case, Americans did very well for ourselves during the Reagan years, and had a very natural stagnation/recession during H. W. Bush (which wasn’t handled well, so it turned into a recession followed by another recession). During the Clinton years, the economy saw the most solid piece of growth ever. And then in about 1998, the economy started to stall out after the e-commerce bust (but mostly because it was a very natural time for stagnation after a large, unprecedented growth period). Think of the cycle like this: when kids go through growth spurts, they eat a lot more, they have more energy, they’re more anxious, and generally just exploding in both size and cost. Then their bodies relax a bit and they eat a bit less and tend to calm down for a while before the next growth spurt. The economy does much the same thing. And in 1998, it was time for a bit of a rest. It has less to do with which political party is running which branch of the government, and more to do with financial/political leaders paying attention to the cycle and providing aid when needed—otherwise known as feeding your child. Both major political parties are equally capable of taking care of the economy, despite exceptions to the rule (always remember: we elected Eisenhower and Clinton, and we elected Bush and Carter–both parties have their bad players).

Then we elected a president who has a very “hands off” approach to the market. The theory is heavily weighted with the principles of capitalism (which is good, of course), but it didn’t work out very well. First, they deregulated a lot of different markets. The most obvious one, of course, is the housing market. So, people who otherwise would be denied a home loan were suddenly qualifying for hundreds of thousands of dollars (at a variable interest rate, of course). As the interest rates went up, the people found that it was no longer possible to pay for the house and eat at the same time. Those who got hungry enough (or who had children to feed as well) opted for food rather than shelter. They lost their homes, and likely their credit rating in the process. It wasn’t due to “irresponsibility” as McCain would claim, but rather buying into a bad deal in a deregulated market.

So, now a lot of people are homeless (or renting, or living in less expensive homes) with bad credit. There are foreclosures piling up. There are builders who don’t want to build any new houses because they know they won’t be able to find anyone to live in the house and they’ll wind up with the expense which will bankrupt their business. Ordinarily, this would be the end of the story and it wouldn’t be such a big deal, except that there are these things called “Mortgage-Backed Securities.”

Here’s what you do: get a bunch of people and/or banks and/or investment companies and you all pool your money together. Then you lend the money to people looking to buy a house. The people to whom you loaned money pay back into the pool every month (ideally). They’ll pay back the principal loan amount, plus interest, so you make money if you had money in the pool. Historically, it’s a great investment, and very rarely winds up collapsing major financial institutions, let alone several major financial institutions within a few months of each other.

What happened? Well, the loan officers, who were supposed to be making sure the people getting the loan were qualified, didn’t do their job. They didn’t have to. Nobody was looking at them. There were no regulations; just money to be made. The people in charge of the interest rates got a little trigger-happy. There was money to be made. More interest means more money. More money in the pool means the people who bought Mortgage-Backed Securities get more return on their investment. More people getting more return on their investment means more people throwing more money in the pool and more money for the investment companies who take a piece of every investment going in and every investment coming out. It means more of everything for everyone because the housing market was deregulated. Hurray!

And then what happened? The interest rates went too high. People stopped paying their mortgages altogether. People declared bankruptcy so the mortgage companies couldn’t go after them for the loss. No mortgage payment means less money in the pool. One or two lost mortgages won’t matter much. But when you have tens of thousands of foreclosures and bad mortgage debt, it drains the pool pretty quickly. All the individual investors who had money in the pool lost their money. And all the investment companies and all the banks that had money in the pool lost their money. All the boys and girls who were getting rich so quickly and so easily in a deregulated market suddenly found they had lost their jobs.

That’s how “138-year-old pillar of financial stability” Lehman Brothers can suddenly be worth only $1.75 billion (that’s what British bank Barclay’s paid for a piece of their bankrupt shell today). That’s how “international insurance giant” AIG (which covers people, property, and investments in 130 countries worldwide) suddenly needs $85 billion from the Federal Reserve Bank to stay afloat while they sell off their assets (and don’t panic about that—it’s only a loan that they will pay off as they find people to buy their subsidiary companies). That’s why Merrill Lynch agreed to a buyout by Bank of America.

You see, regulations are somewhat of a “Catch-22.” On the one hand, they slow down the process of making money by making people follow certain rules. On the other hand, they prevent people from making bad decisions like the ones described above, and thus crippling the American economy and, in turn, the worldwide economy. When there are too many rules, nobody wants to play the game. When there are too few rules, too many people are playing the game (and a lot of them suck at the game and a lot more of them cheat). It all boils down to the people at the top not looking ahead, not listening to those who have been playing the game for a long time (who know what rules should be in place), and generally not caring about it at all.

So, we’re in a recession. I would agree with McCain that the fundamentals of the economy are strong, in that we’re still alive and we all have the desire to not die. That’s essentially what you need to rebuild: a desire to do so. It’s going to take a while, but I’m sure things will begin to pick up shortly. Usually, after the first 100 days of a new president, things begin to pick up (regardless of which party gets elected). In the case of this election, I would say, as far as the economy is concerned it doesn’t matter who gets elected, with one qualification: as long as whoever gets in office reinstates the regulations that helped the economy grow in a controlled manner, we’ll be fine. If the system is allowed to run itself with little to no intervention, we will continue to spiral downward. The economy will come back to life regardless, but it will come back much faster if someone gets in office that can inspire people to get up and get going. The workers at the bottom of the chain need jobs. The people at the top of the chain need to feel secure that if they invest in a business, they’re not going to lose their shirts. The people in the middle need to know that someone somewhere gives a damn about them at all.

The good part of this whole catastrophe is that people are starting to figure out that the rules, while inconvenient at times, are there for a reason.

UPDATE: As of Friday’s close, the Dow had pretty much gained back everything that it lost earlier in the week. If you weren’t already aware, you cannot use the stock market as any indication of economic security. The market is all based on fear and rumor. Generally, the market will grow with the economy overall, but the day-to-day state of the market is so volatile, it’s not a clear indicator of how the economy is truly functioning.

Also, you probably shouldn’t expect the politicians to do anything about any of this until after January 20, 2009. It’s an election year, so they don’t want to do anything that might cause a panic amongst their constituents this close to Election Day. Historically, this is when Congress gets even less done than usual. Plus, nobody (Democrats or Republicans) wants to attribute any “fixing” to Bush. They’d rather just attach the “fail” to him and let the next president take credit for fixing it.

As far as viable solutions, my suggestion was to reinstate the regulations they tossed out in the first place. Obama and Biden seem to agree (at least, that’s the message I get from their speeches…no action has yet been taken, despite the fact that they are both currently senators and could reasonably be expected to do something). Palin wants to reinstate the regulations in order to “get the government out of the marketplace,” which doesn’t really make sense, given that regulations come from the government and the government hasn’t been in the marketplace at all for almost a decade now. McCain wants to set up a 9/11-style commission to investigate and find the source of the corruption, which doesn’t really make sense, given that there is no corruption. There were no rules to break, so nobody really broke any rules. Election speeches are fun.

Love,

Michael

I broke my woodburner doing it, but I was still excited to find that I could engrave/melt records and that I could cut/melt them into squares and drill/melt holes in the side to allow for stitching. It makes the edges weapon-like, but those can easily be sanded down with an electric sander. The sander is also capable of rounding the corners.

I, of course, don’t follow directions very well, so my stitching will frighten most any legitimate bookmaker. But I kind of like it.

I finally decided that I will teach those apprenticeship kids how to make their own sketchbooks and then every week, I will show them a new process. We’ll go out that first day and pick out our covers from the cardboard boxes that have been thrown out, curbside. Brooklyn trash contains the best boxes and have the coolest vegetable and fruit and soy prints that cover them.

I’ve been warned that introducing middle school kids to box cutters and x-acto’s and stitching needles can be dangerous, but I figure I’ll just kick them out if they start stabbing each other.

I don’t know if it’s illegal to take pictures in public schools, but sometimes I do. My super-small church, where even shorts, t-shirts, and flip flops are welcome, meets on Sunday mornings at a nearby elementary school. Like everything up here, the school old and outdated. Whether I go in the front door or the secret backdoor I learned about only weeks ago, my eyes find something I want and just like that I’ve broken a Ten Commandment and coveted my neighbor’s school. There’s the wooden lunch lady desk, the real wooden office chairs on wheels and the big steel teacher desks that are virtually unmovable, but my favorite thing has to be the kids’ drawings that line the hallways.

I like to find the most jacked up drawings and imagine what that kid must be like. I’m fascinated by the simplicity of their thoughts. How they use a million colors that never match, but still, somehow go together. And I love it when they write overly structured sentences with misspelled words.

Since school started, there have been about twenty self-portraits that have lined the front cases. Apparently, the assignment was to draw yourself and then write a memory you have about that school. Now most kids had the, “I remember when we had recess and…” or “I remember when we got to see Fantom of the Opra,” but the one featured above probably resulted in a parent/teacher conference.

One special memorie I remembered was when I was angry and alone Moby came to a company me.

On one hand, I feel sorry for this kid because I know how tortured he has to feel around all of his alleged peers and I know how alienating it can be when your mind exists on a completely different plane. On the other hand, I’m excited for him. His life will always be hard, but he’ll live in his pipe dreams.

Students qualifying for free/reduced-price lunch: 73%

Students meeting proficiency standards:

in English: 36%
in Math: 41%

Demographics:

African American: 48%
Latino: 40%
Other: 12%

This is the school where I will be teaching, starting in a couple of weeks.

A few weeks ago, I heard about Citizen Schools. It’s an organization that was founded in Boston in 1995 by two guys who wanted to give kids in separate-but-unequal schools an opportunity to learn a little bit differently. Volunteer teachers go into the schools for an hour and a half, one day a week, for a whole semester, to lead their group of middle-school students through a real project that culminates at the end. It’s basically an apprenticeship. You teach them what you know about whatever field it is that you work. There are lawyers, financial people, forensics investigators, dietitians, book publishers, etc from big, fancy companies you’ve heard of a million times. And then there’s me. The lowly Minus.

In a couple of weeks, we’ll all go present the logistics of our particular apprenticeships to these kids and then they get to choose which project they want to be a part of. Throughout the semester, you work towards a particular end product that they will present to an audience at the end.

I don’t have any idea what I’m going to have my apprenticeship be about, so that’s what I’ll be trying to figure out during these next couple of days. Whatever it is, it won’t be boring.

This is the first year for Citizen Schools in New York, and there are four schools participating. Two in Harlem. Two in Brooklyn. It’s a really great program and a cool way to learn. It also helps them to see what kinds of jobs they can have by using the things that they’re already good at and interested in. Did you know that 50% of the kids in this country aren’t graduating high school? Seriously. 50%. 50% of our childs are left behind.

The real estate office that occupies the storefront of my building. They also have The White House listed as one of their properties up for rent and a poster of all of the former presidents of the United States with a monkey in place of Little George.

Part of a shuffleboard game that I found in a pile of trash on the sidewalk. I tore up the rest of the game just to get the best part. I’m going to cut it into smaller pieces and use it as covers for some blank books I want to make. I figure I can get at least 4 books out of this.

A book I made today.

Which all leads me to this random story from yesterday that has nothing to do with any of this. I went into the city to meet with two girls/ladies about some freelance. They were going on and on about how funny my site was and how entertained they were with my writing. I, of course, politely thanked them, but being that I’m the funniest person I know, this wasn’t anything new. What was new was when we reached the halfway point of our meeting and one of them felt comfortable enough with me to confess the following:

“I have to tell you this. When I went to your site, I started reading it and I couldn’t stop. I went from page to page and I thought to myself, ‘Oh my gosh, I am so in love with him. I’ve found the man of my dreams. He’s so funny and the way he writes and the things he says…” and then I saw that your name was, Sarah, and I was like, ‘Damn.’”

My reaction? Hysterical laughter. And then, “You realize you’re going on the blog for this don’t you?”

A Phone Call From This Past Weekend

Brother: What are you doing?

Minus: I’m trying to write Mildred’s (my dog who now lives with my mom) life story as a children’s book, but there’s no way this is going to end up children’s book material.

Brother: Why not?

Minus: Well, I’ll start with the first line, “The abstinence program failed Mildred’s mother, so when the doctor gave her the news that she would be having quindecaplets–that is, 15, little puppies–she knew her welfare check wouldn’t come close to covering all that would be needed to raise that many responsible young dogs.

And just yesterday, I was telling Angie about this whole wooden postcard series I’ve been obsessively making with my woodburner and I told her I thought I might mail them to random strangers or leave them around the city for people to find and take home, but that I wanted them to write me back so that I know where these things end up.

Minus: I’m going to call the project, “I thought you might die, so i sent you an email.”

Angie: Whoa. Umm, maybe you shouldn’t do that because random strangers might be freaked out if that arrived in their mail.

I tried to explain to her that the strangers wouldn’t know that that’s what I named it. Only I would.

Whether people are freaked out or not, I think it’s a good name for my latest obsession that takes up nearly all of my time from morning until night. Woodburning is a serious time sucker, but it combines many of my favorite things: wood, burning, tools, balsa wood, drawing, stamps, and the postal service.

I don’t know that there are many more people who love the postal service as much as me. I decorate almost everything I mail–sometimes even the landlord’s check. I tend to shy away from envelopes or at least the regular white ones. And my stamps are selected as if my future were dependent upon their size, placement, and reaction of their recipient. I tell myself sometimes that people aren’t going to notice or care that I picked out the Captain America stamp just for them. I know this. It’s okay. Really. But I still have to do it.

Email is fine for regular, everyday business, but if it’s something that matters–something that’s important, don’t send a freakin’ email. To me, it’s the coldest form of communication.

Only the best and the brightest use Craigslist.