The Obama Bubble

It’s ironic to witness history repeating itself. But unfortunately those who do not learn from history are condemned to repeat it.

 Just less than ten years ago we watched dozens of “can’t miss” high tech companies evaporate in the Dot com bubble. As the collateral damage mounted, the Wall Street Journal listed dozens of entrepreneurs who went from being worth hundreds of millions to being worth nothing in a few short months. More recently we have watched dozens of mortgage-based banks and Wall Street titans, who a few short years ago were virtually printing profits, slide into the dustbin of history. And again the list of high-flying multi-billion dollar companies being sold for pennies on the dollar is long and stunning. Oh, how the mighty have fallen!

My purpose and thesis in writing this is to suggest that the very same flaws and factors that created two of American history’s most severe financial disasters are currently at work in inflating a political bubble that, like its economic cousins, will undoubtedly end in calamity.

To attempt to understand mass psychology is certainly beyond my pay grade, but Abraham Lincoln had it pretty close when he said, “You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time.” Realize this: We are all capable of being fooled. Many people walk around in their smug, self-assured, self-confidence totally unaware that they are unaware. For some reason, in the late nineties investors assigned astronomical values to companies with little or no revenue. And again, a few years later in selected housing markets in the U.S. people acted like prices would always go up and that “promises to pay” were as good as gold.    Go figure.

The central elements in every bubble are: a product with an unsound premise, extraordinary promises to the participants, promoters who stir people’s passions, profiteers, pressure, panic and pain.

 The housing bubble is a perfect illustration. It started in the ever vulnerable residential real estate market. But in this case, rather than the typical run-up and collapse of home prices as has happened previously in hundreds of speculative real estate markets, this time the product was a virtually unconstrained expansion of mortgage credit. Traditional qualifying metrics such as income and down payments were set aside and replaced with new features such as zero down, teaser rates and negative amortizations all designed to fuel an enormous growth of mortgage credit. At one end of the bubble, the explosion of mortgage credit brought in lots of participants – first-time (often-unqualified) home buyers, home builders, speculators, homeowners eager to tap their home equity, foreigners eager to catch the wave and even the creation of investment funds designed to capture the tremendous profits promised from the spectacular growth in housing and housing prices.

At the other end of the bubble were the creators, promoters and peddlers of the latest and greatest permutations of mortgage-backed (i.e. collateralized) debt obligations (CDO’s). From massive mortgage originations in firms like Countrywide, Washington Mutual and Golden West Financial, ever-growing “promises to pay” were sliced and repackaged into CDO’s by an innovative Wall Street. Complicit profiteers in the rating agencies blessed as “Triple A” what is now derisively known as toxic waste. In turn, these products were sold throughout the globe, helping to soak up some of the American dollars that were being spent overseas on billions of consumer products, and helping to further inflate the housing bubble. The realtors profited, the loan originators and refinancers profited, the investment bankers profited. The home buyers and the homebuilders profited.

It was the arrival of the miraculous, too-good-to-be-true, money machine….until the pressure of reality intervened. The cracks in the scheme started to appear as the housing market’s climb started to stall from its own weight as more and more people could no longer afford their escalating, monthly commitments. People who had counted on being able to sell and close-out their housing bets at any time found the market for their over-priced houses was gone. Defaults led to foreclosures which led to vacancies and thousands of unsold homes which led to housing price declines which in turn fueled more defaults, unsold housing inventory and even further price declines. Panic started to enter the scene as the market for CDO’s, which depended upon the cash flow from people actually paying their mortgages, collapsed. And the pain became widespread. People lost their homes, builders lost their jobs, realtors and bankers suffered losses and lost jobs, and Wall Street and investors lost billions.

In hindsight, the pattern seems obvious and the outcome totally predictable. Like a massive Ponzi scheme, an unsustainable proposition was put into motion by literally millions of people and having run its course, totally collapsed. Many of these people who joined the Housing Debacle were themselves participants, victims or at least observers of the Dot Com bubble. The fact is that the Nasdaq’s meteoric rise in the late nineties worked for everyone in the game – until it didn’t. Likewise, all of the players in the American Mortgage Scam reaped huge dividends – until they didn’t. Lincoln was right when he said “you can fool some of the people all of the time and all of the people some of the time”. But the reason that he added “that you can’t fool all of the people all of the time” was based on his wisdom and the unavoidable historical fact that a fraud is a fraud is a fraud.  Eventually what is unsustainable, no longer is sustained and reality replaces illusion.

But no sooner are we busy recovering from the deflation of one enormous bubble than another bubble starts to emerge. Like a Three Ring Circus, one act is barely over and the next one goes into full swing. But we are not talking about theatrical entertainment and make-believe but rather the financial well-being, freedom and welfare of millions, if not billions, of people.

The next bubble is the Obama bubble. It began with a too-good-to-be-true product: an inexperienced, charismatic street organizer who makes his way to the top of the political heap as a kind of rock star making incredibly ambitious promises. If it sounds too good to be true, it probably is. But still his promoters step forward to silence our doubts, to marginalize the deniers, and to satiate the masses who have bought into his illusions. The profiteers who stand to gain from the power of expanded government all salute, mindlessly, as their leader effortlessly tasks them to commit previously unthinkable sums to his schemes. We are promised new sources of energy that will replace the power of fire. We are promised health care for all from a totally capable federal bureaucracy. We are promised ethics and transparency and a college education for all without expense. We sign-on for this and submit to that. It is a blitzkrieg of inspired rhetoric and mind-exhausting change. We hear the cheers, the historic parallels, and endure a non-stop assault on our tradition of time-measured change. Sincerely and earnestly he tells us to hurry and rush to spend more money in a single splurge than has ever been spent before on something no-one, not even he, has yet to read. Without time to digest this, we are fed another massive bailout for mortgages, and then another course of largesse, and yet another…. Keep eating, keep swallowing, take it in, pile it on. Hurry, hurry, hurry.

The Obama Bubble is expanding rapidly as his massive agenda is confidently and quickly being put in place. Hindsight will make his sleights of hand clear to all. As for me today, and many other Americans observing the daily usurpation of their property and economic futures, I am not fooled. The markets are not fooled. There is no free lunch and money doesn’t grow on trees. A fraud is a fraud is a fraud.