It’s hard to imagine something more egregiously offensive than the upcoming baseball strike, which features billionaire owners and millionaire players competing for our sympathy, but the Bush administration has managed it nevertheless.
We like to think that we live in a free society, but the truth is that we do not. Just try buying a new car with that paper that says “this note is legal tender for all debts, public and private” and you’ll soon find out how flexible the government’s definition of private property has become. And as the recent bailout of Brazil quite clearly demonstrates, the idea that we live in a free market economy is another misconception. My Econ 101 days are a bit hazy, I confess, but I can’t imagine Adam Smith describing banker’s loan insurance as a proper function of laissez faire government.
In fact, even the description of the recent International Monetary Fund’s action as a “bailout of Brazil” is a misnomer. The bailout is not for the benefit of the Brazilian government, much less its people, but for large American banks like Citigroup, J.P. Morgan Chase and FleetBoston which are faced with the prospect of writing off $25.6 billion in bad loans should Brazil default on its debts. This is why the IMF recently handed over $37 billion to Brazil with the approval of President Bush and Treasury Secretary Paul O’Neill despite candidate Bush’s supposed opposition to such bailouts.
Nor is this the first time that American taxpayers have been forced to bail out Brazil, as the country of progress and order received $15 billion last year, in addition to $41 billion in 1998 under the Clinton regime. It makes no difference if there is a Republican or a Democrat in the White House – if the large international banks get themselves in trouble, the politicos of both parties come running to heed their masters’ call.
The fact that this comes at a time when so many Americans were unwise enough to put their entire savings into the stock market on the advice of their financial advisers and CNBC gurus only makes the Bush administration’s corrupt decision that much more despicable. One expects this sort of thing from an openly dishonest man like Bill Clinton, but I can understand if some of you hoped for more from his successor.
What is perhaps most ludicrous about the entire episode is that Citigroup and J.P. Morgan Chase bid fair to go down in flames anyhow. Morgan is the most likely casualty, as their derivatives exposure is $23.5 trillion according to the U.S. Office of the Comptroller of the Currency. To put this in perspective, the entire U.S. economy is considered to be about $10.4 trillion annually!
An important part of Morgan’s exposure appears to be linked to the gold market (the bank owned 68 percent of all bank-owned gold derivatives earlier this year), so if the price of gold manages to puncture $330 sometime despite the best efforts of the central banks, shorting JPM would probably be a very, very good idea. One investment analyst who began researching Morgan’s massive derivatives exposure about nine months ago claims to have already made almost 400 percent through a series of JPM shorts.
Unfortunately, J.P. Morgan Chase is not alone in its financial mismanagment. In fact, the 30 companies that make up the Dow Jones Industrial Average have only $728 billion in book value compared to $3.3 trillion in liabilities, according to their quarterly reports. So put that in your 401(k) and smoke it!
Though we obviously don’t have an entirely free market, I suspect the Invisible Hand still packs enough punch to take down more than a few of these mishandled corporations. Unfortunately, in the process, many will have to suffer for the evil machinations of an egocentric few. Should that day come, I have no doubt that many impressive words will be spewed by Democrats and Republicans alike, but don’t let the rhetoric blind you to the fact that it’s those holding the leashes at Citigroup and J.P. Morgan Chase who created the disaster in the first place.
In the meantime, please keep in mind that a portfolio divided between large caps, small caps, growth funds and hedge funds is not a diversified portfolio. Money markets, real estate and gold are all integral parts of properly managing investment risk even in the best of times, much less in times of war and a rampaging bear market.