Truths about the economy that few want to hear

… first are some thoughts on where we’re at, second some points on where we need to go.

1. THE BAILOUT WOULD HAVE BEEN A GRAVE MISTAKE. The right thing happened today. We should be proud of the brave Congresspeople who voted against the bailout in the face of extreme pressure to approve it. The package did nothing to fix the underlying problems but everything to encourage the need for unending future bailouts. Passing the bailout would have been the ultimate slap in the face to responsible Americans who have made good choices and lived humbly while others gambled and lived large. When companies’ profits were cruising ever skyward, I heard no talk of siphoning off some profits for the rest of us. Why should the reverse make any sense, other than as an attempt to soften the blow temporarily, only to trigger a long, slow bleed? It would be like putting Neosporin on a poisonous snake bite- you might feel good for a few minutes, but the pain will be unavoidable unless you get the right antidote.

2. THERE IS NO FREE WAY OUT. But, you say, our entire system is at stake. Well, the taxpayers will pay now in the form of stock market losses, or pay now and maybe forever to breastfeed these undeserving investment companies. Given that choice, I’ll take today’s hit and deal with it. Incentivizing bad behavior never works. Of course the markets tanked today: the investment community thought they were on the brink of pulling off the biggest heist in American history. Running a decade-long ponzi scheme and getting the government to pay MORE than their junk loans are worth. We just dodged the bullet, big time. The investors can only hold out for so long- if it becomes clear that we won’t pay them for their failures, they’ll be back at it again, assessing market values for the usual array of legitimate and perceived reasons.

3. MARKET MECHANISMS ARE WORKING. Survival of the fittest is working just fine. Bankruptcy, buyouts—all the normal methods of disposing of failed enterprises will get us through this. WaMu and Wachovia have been absorbed by better players and consumers are not the worse for wear. Shareholders took on risk and sometimes risk does not work out well. Failure must become acceptable again- the jig is up. The higher this house of cards builds, the farther it has to topple.

4. FINANCIAL CRISES HAPPEN, AND COUNTRIES RECOVER. LET’S STUDY THEM AND ASK THE EXPERTS WHAT TO DO. Our last one was the tech bubble- does anyone actually miss all those internet start-ups? I know I won’t miss seeing more new cheap, ugly townhomes trying to sell for over a half-million dollars apiece pop up in my neighborhood. Good riddance to excessive profit scheming at the expense of quality and reality. Guess what? Chile , Argentina, Southeast Asia, Japan, Sweden, and LOTS of other countries have had financial crisis in the last few decades. Maybe we should study those examples and seek the advise of those who helped navigate the way out of those: senior staff at the IMF and World Bank, for example. By contrast, we should not rely on the economic opinions of ANYONE running for reelection in the next few weeks, or anyone affiliated with them- the inherent conflict of interest is too big.

5. NEW GEOPOLITICAL REALITIES ARE EMERGING (AS THEY ALWAYS DO). The U.S. has been on a downward slope vis-à-vis other rising players for years. We may cement our new lesser status more quickly by the loss in confidence in our system coupled with decreased demand for products from abroad. The dollar may need to be further devalued for this to all shake out- if we keep issuing bailouts, eventually we’ll have to either print more currency undermining its value or rely on foreign funders more. Either way, U.S. stature decreases. We’ve been living beyond our means and our youngest generation is not well-positioned against the harder working rising middle classes in India and China. This does not have to be terrible. Europe has stabilized as reliable world powers that know their limits and for the most part it’s working out just fine for them. It may allow us to breathe a sigh of relief- maybe everyone everywhere won’t expect us to do everything or criticize us heartily if not. People are getting sick of us and being somewhat irrelevant might not be so bad. Maybe we can finally just sit outside and read a novel by a fountain in the middle of the day like everyone in Barcelona seems to do daily.

6. IT’S GOING TO HURT. Some pain must be felt. John Smith in his 5-bedroom view McMansion should have to downsize if he can’t make payments. There are plenty of more modest homes and apartments out there- just ask those of us who have been living within our means through these times and we’ll tell you where to find them.

So what needs to happen?

1. HOUSING VALUES MUST DECLINE FURTHER TO STABILIZE. Spending more money just isn’t the way to fix this, any way you slice it. Housing is still overpriced. Unless wages go up dramatically (not happening) or foreigners decide to buy up lots more of our mid-sized cities’ suburban properties (not happening), housing prices must come down as painful as it might be. Example: I live in a major west coast city. I rent an apartment. Buying a comparable place would cost double or even triple the amount I pay per month. It makes no sense for me to buy unless the prices drop about 50%. And I am a fairly high-income earner with no kids- I could buy if I wanted to (I used to own a condo, in fact), but it would be a bad financial decision unless I was counting on increased equity- which would be nuts at this point.

2. BANKS SHOULD BE BANKS AGAIN. Let’s get banks back to being banks. You deposit money, they hold onto it for you. You need a service like a loan or mortgage, they provide it. They do not commoditize, leverage, and repackage it 45 times into bizarre, almost fake, entities sold to other companies. This would help decouple the system so that when some people’s bad choices or bad luck some home to roost, it doesn’t crumble the system for the rest of us.

3. LET’S GET READY FOR MORE BY WISING UP. More bad news: there are more crises on the way. Local and state governments across the country are facing severe fiscal nightmares that are projected to get much worse. Let’s not bail them out because again- this would just delay the inevitable reckoning. Let’s pay for what we can pay for, and balance the budgets no matter how painful. If we can get finances back in line, we can expand services and programs as we are able to.

4. LET’S BUDGET SMARTER. Instead of the classic one-year budget, let’s also build in long-term investment and capital portions. This way we can set vision and strategy for our country and actually fund ways to do it. Clean energy and sustainable solutions require long-term thinking- many investments will pay more than their weight in dividends if we can just get started. Heck, maybe the green revolution can be the next bubble to prop up our economy on (ha ha).

5. SOME HEADS SHOULD ROLL. Plenty of people knew this was coming. Some were just complicit to their own advantage; others took advantage and crossed lines. I lived in NYC at the height of the boom and heard more than one person forecast exactly what’s happening right now. For accountability and consumer confidence, we need to see some people held responsible through prosecution and/or being voted out. How about those members of Congress that refused to regulate Fannie and Freddie a few years ago when John McCain proposed it? It is truly ironic that the Bush administration- of which I’m no fan- has been sounding this alarm for years to the deaf ears for ACORN- supporting politicians committed to pushing home ownership for those who couldn’t afford it. Of course the Bush administration could and should have done more as well. But the Democrats’ narrative defending themselves- when they took the most money from these lobbyists, and went out the bigger housing-at any cost-for-the-underclass limb- is utterly dishonest. All sides should own up and work quickly to change the underlying policies. As for all their urgency on passing the bailout packing- Congress was scheduled to end their session tomorrow to go home and campaign this month. While there are certainly lots of good intentions out there, on the whole the Exec and Congress just can’t be trusted these days.

6. LET’S ELECT THE RIGHT PEOPLE FOR THE JOB. Spending more is not the answer at a time like this. We simply have to cut spending to survive. It is not the time to raise taxes on our fragile businesses- large and small. Obama’s fine print makes clear that is part of his plan. Similarly- increasing union membership will raise costs dramatically and drive companies out of the U.S. within a short time. There are reasons the south has been gaining jobs while the north has lost them- they are labor unions and tax policy. It may be harsh, but if we can’t afford ourselves at the high rates we desire, someone somewhere else will fill the gap. It really is sink or swim- let’s think through these strategies beyond tomorrow. A few cocktails might taste good but the hangover could be killer.