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American Politics and the Faltering Economy

A small percentage of Americans ever heard of the peloton; the tight-knit pack of riders leading a bicycle race. But Americans generally are clueless about so much of what the rest of our trading partners understand: the United States has dropped to the back of the world economic peloton.

Democratic candidates for president have it right: the responsible party for stripping the gears from the US economy is over there, on the other side of the aisle. Americans do understand what is happening close to home. For that reason alone, by November the next president of the United States will be a Democrat.

Who knows what Congressional Democrats are doing now, trying to cobble together rescue plans to stop a tidal wave of homeowner foreclosures. People are clamoring for help. So is industry, in particular the homebuilders and their supply chain whose enthusiasms-directed primarily through contributions to Republicans-succeeded in inflating one of the biggest bubbles in US economic history.

Whatever Congressional Democrats might propose, it is not enough to prevent the long-delayed recalibration of the economy.

The New York Times reports that a bill drafted by Senate Democrats, objected to by Republicans and the Bush White House, “would have provided $4 billion for state and local programs to rehabilitate abandoned housing; $10 billion for states to raise low-cost mortgage money through tax-free revenue bonds; and another $200 million for counseling services to help homeowners renegotiate their loans.”

It is like building a lean-to against a hurricane.

There are certain immutable truths, for Democrats. One is the same for politics as it is for common investors: don’t try to catch a falling knife.

The best counter that Congressional Republicans can muster: make the Bush tax cuts permanent.

For the rest of common shareholders, last week stocks fell for the fourth straight month. The dollar declined to a record low against the Euro. The Wall Street Journal reported that the FDIC is advertising to hire retired experts, in anticipation of a rash of bank failures. The Fed is finally acknowledging the rampant inflation that has been coursing through food and energy costs for many years. On the Champs Elysee, a bottle of water costs $10 US dollars. Precious metals are on a ride to the moon.

In the peloton there is speed in numbers. But when one at the front of the peleton goes down, the whole pack tangles in a mess of skin, blood and asphalt.

Stranger than fiction, then, that the hedge fund of the year, crowned only last month, was called the Peloton ABS Fund, run out of London by former Goldman Sach’s managers. Last week, it was forced to close by creditors.

The $2 billion lost by Peloton Fund is a droplet in the context of losses, so far of about two hundred billion from the collapse of the secondary market for securitized mortgages.

Last week, Citigroup extended $500 million in emergency funds to its Falcon fixed income fund. This came in the wake of its seizure of Florida-based Tequesta Capital, and its well publicized parceling of $7.5 billion equity to Abu Dhabi’s sovereign wealth fund. Separately, KKR, the world’s largest publicly traded private equity firm, announced massive write-downs last week, asking its investors for “patience”.

Among the world’s largest financial institutions, patience is a commodity in very tight supply. Federal Reserve interest rate cuts have scarcely budged loan rates to the end user. Everywhere, credit is tightening. One can deduce, something akin to panic has set in.

So far, the modern version of financial panic is different from the 1930’s version-with account holders drumming the doors of shuttered banks.

In my hometown, Miami, empty skyscraper condominiums are still being topped off by immigrant workers who pile into the city by day and disappear at night. City and county commissions are still clapping hands and approving the permitting of more and taller. The height of folly is measured in Hurricane Alley.

The world at large forgets that Republicans intended Florida, whose production homebuilders propelled Jeb Bush to the governorship in 1998, to be the micro-model for limited government that spurned regulation, that plowed under wetlands and destroyed aquifers and rivers and streams, all to foster campaign contributions that would create a permanent majority in the states and in Congress and in the White House.

Florida was the incubator, then, for the Grover Norquist/Karl Rovian plan for the Republican century that has come to naught-scarcely reported by the mainstream media even then and certainly not now, as local publishers ponder how to explain that so much equity vanished, evaporated in secondary mortgage markets servicing such pie-in-the-sky cities like Miami and causing the world’s largest financial institutions to struggle to maintain capital reserves adequate to their own survival in London, Frankfurt, Madrid or Paris.

To be sure, if you are a US homeowner who surrendered or is facing foreclosure, or, if you are a homeowner facing negative equity in your mortgage and, worse, a home equity line of credit tied to a value that has not yet adjusted to market reality; you are already side-lined; no longer speculator, you are a spectator praying for job security and hell to the Republicans.

Last year the Peleton ABS fund returned 86.61 percent. Its principals were the toast of London. Peloton made its money from betting billions against subprime mortgage securities, leveraging successful bets with collateral from high quality mortgage derivatives.

But the subprime waste turned even the high quality derivatives toxic to investors and to lenders.

Peloton guessed that the fall in the top-ranked slice of the market for housing debt was temporary and “purely due to technical factors”. Florida water managers have played the same game for decades with Big Sugar’s pollution of the Everglades. There is a moral to Fleet Street and Wall Street from the environment it long spurned: the solution to pollution is not dilution.

The Wall Street Boyz (to borrow from Jim Kunstler) believed once the worm in the apple was excised, the rest would maintain the value of a new apple. There are hundreds of hedge funds in the same position (and managers whose tastes in pieds a terre have sent London, Paris and New York real estate into the stratosphere); with debt tied to the bet that money could be made by collateralizing high rated mortgage debt in order to short sell low rated debt.

As lenders began panicking about the value of their assets, they started tightening credit policies against borrowers like Peloton.

One hedge fund manager told Financial Times, “We are now in a period of the market where what were previously perceived to be less volatile credit assets are dropping significantly in price, so anyone who is employing more highly levered strategies is going to be seriously hurt.”

In other words, it’s not the Peloton Fund that is in trouble: it’s the entire peloton.

Which brings me back to the Democrats. If they are smart-they will know that the various rescue plans being offered in subcommittee will have no effect of ameliorating crashing credit markets whose totals, including various forms of consumer debt that are also at risk, are well in excess of $1.5 trillion.

It is another way of saying: Republicans who stirred up the evangelical base with doomsday scenarios are getting paid back in spades: but the day of reckoning doesn’t look like anything from the wings of avenging angels. It looks like a solid economic thumping, the likes of which the United States hasn’t seen since the 1930’s.

In the curious conduct of American politics, the presidential race is still about who can best lead us into the future. Meanwhile, the business of Washington goes on; it is still a political order and a race that the Bush White House and Karl Rove set, nearly ten years ago.

For Democrats in the peloton, some advice: until November, best to stay out of the way with hands close to the brakes. Come next January and the inauguration of a new president, you will need all your skill to form a new peloton.

ALAN FARAGO of Coral Gables, who writes about the environment and the politics of South Florida, can be reached at alanfarago@yahoo.com.

 

 

 

 

 

 

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Alan Farago is president of Friends of the Everglades and can be reached at afarago@bellsouth.net

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