I knew when the Bush tax cuts ran out we would have a recession. But the lack of common sense in smaller units, such as municipalities and school districts in trying to copy Wall Street was the unknown kicker. This pure foolishness made the layers of economic support crumble far further than anyone predicted.

Being an engineer the most important point must remain finding useful solutions, which, in this case, would be the current 2008 financial crisis.  

Interesting enough, much of what people perceive as “justice”, or rather what the Bush people thought was just and what the average person thinks is just turned out to be quite opposite. Bush thought the contest between winners and losers was the important issue, while the average worker is more worried about paying the bills and retirement. The differences, in what is just, always remains the underlying issue.

Some where around 1770 B.C.E. the sixth king of a Babylonian dynasty proclaimed a collection of laws intended to establish truth and justice for the society to “enhance the well-being of the people.” 271 of these laws (of the 282) still exist. The Bush people saw the enhancement of well-being as letting the laws of decency and morality lapse while specifically mentioning this was a good thing. The more competition, the more selling, the more fun, the better the result for the people, which they saw as a just thing to do. Was this free-for-all contemplated by Hammurabi, or was protection of the people from unrepentant and rapacious managers and salespeople. We need to carefully construct what is a just system if this kind of wastefulness should happen again. Most unfortunately, nothing happens without a crisis and the Bush boys sure created a crisis. So, almost 4000 years later, the same issues require attention of what a society considers just.

Since most of the reasons for the financial crisis are not financial, but rather social and cultural, we need to look at underpinnings of the financial actions. The following theories are necessary for understanding today’s crisis and preventing future melt-downs. Any question regarding these theories just requires observation; they are easy enough to prove by yourself. Warriors and intellectuals cannot help but act in certain ways even if they know others are watching them examining their methods and perceptions. Read the paper or watch a TV evangelist. I assure you: they cannot not help being who they are and cannot fake being something they are not, thus making analysis much, much easier. We need to look at a few characteristics of the warrior and intellectual segments.

Warriors need to fight to be “a man”. Winning is not as important as fighting. Three ideas are prominent to a warrior: confront, conquer, and control; the ideas important to an intellectual: winning, commerce, caring. To each group belongs a different concept of justice.

Warriors, although great fighters, are terrible administrators; Intellectuals are good administrators, but they annoy the warriors by insisting on individual rights and independent ideas. In many economic cycles the warriors spend until nothing is left and then they turn the country back to the intellectuals for fixing: an economic cycle.

This time around the warriors created such a large crisis they may never be allowed back into office for a long time and never have the “freedom” for such fun with other people’s money. The average taxpayer (including most warrior taxpayers) has no time for these disasters with children to raise and retirement to consider. The young will vote for jobs and the unemployed and retired will vote for national health care, both totally antagonistic to the warriors. Things are not half as much fun when people watch their money and don’t care to have it lost by the “unbridled competition is more fun” crowd. And the most serious effect of the Bush economic policies: concentrations of wealth and power always cause political turmoil. Playing with money is more fun than really investing for the future. This large crisis, unfortunately, is very real to very real people and it will permanently change peoples’ attitudes toward the warriors.

Here’s a good example of warrior profile confrontation methodology: management and labor. Most of the big labor unions and their management are very much in tune with: “if I win then you must lose”: a very warrior approach. A continued warrior approach said the union was not responsible for making the company better. The management said it’s a war out here and soldiers are expendable; it’s not my responsibility to make sure they have work, only allow them, the lucky people, to have a job when I have one for them. And the intellectual just wonders why they can’t get their acts together in creating a win-win situation. It’s a social process affecting the financial process.

Intellectuals believe in logical thought, cooperation, and winning. They prove themselves by being successful in commerce and quality of government. Fighting is always the last option, which of course means fewer chances for warriors to prove their patriotism and value to their group. Intellectuals generally believe if you talk logically for long enough warriors will understand. Warriors never do understand, only seeing a confrontation taking place. Confrontations are not meant to solve problems, only conquer, which is why warriors need intellectuals, to build up the wealth to afford to fight.

The third affinity group is tribal, which in this instance is not a major influence in this case and will not be discussed further here.

Although many other factors contribute to the 2008 financial crisis, the main reason was allowing the yappers to take charge of our wealth. Yappers (Yappers are very good at talking and selling, although they rarely care about what they are selling, and worse, cannot perceive the future in any manner. They are the opposite of engineers who only care about their products without any idea how to sell) dislike any regulation due to regulation’s desire to avoid having yappers play with our wealth. The Bush administration allowed yappers to play without regulation as you would expect from warriors. The Bush people made a basic assumption that the more competition, of any sort, results in a better economy - with the largest rewards going to the winners. Regulation, in their view, would diminish the thrill of the conflict, although verbally they claim it hurts the economy with a great deal of sincerity. After all, only losers would get hurt. And why should winners care about losers. The idea of a paternalistic/maternalistic structure is anathema to the competition/confrontation model. After all, a win/win situation means a clear winner will not be produced, and if you don’t fight, how will you know who won?

The direct line of social influences to today’s financial crisis begins in 1972: the end of manifest destiny. That is, the easily accessible and cheap land was basically gone, causing real estate prices to climb faster than inflation, manifesting itself 30 years later with 2000 land and building costs started to put prices of housing above the affordable level of the average tax payer.

Although many important events occurred during the 70’s, only the movement of wealth, through high interest rates to the people with savings, which put a great deal of wealth into the upper middle class and helped these people afford housing and retirement.

In the 80’s, the Reagan tax-cut was the prime event. Its principle effect was financing development of the computer, which from 1990 allowed the creation of the financial instruments never before possible.

In 1983 I spent time researching Wall Street. I attended a presentation by the SEC on the new derivatives. Besides me only four people from Wall Street attended. After the presentation I asked the speaker if, indeed, this was not gambling. He said it was but they could do little about it.

Not until the computers and communications improved to allow instant derivative creation and the ability to offer the derivatives to many institutions did this activity become dangerous.

Advance to the future for the Bush tax cuts. Instead of going into investment, most of this tax cut went to consumption: large houses, fancy parties, yachts, dot coms, with something left over for the middle class. The investment that should have been made in this country redirected to China. And, worst of all, financial instruments started to expand the apparent wealth without increasing real wealth. If the multiplier effect of derivates did not appear, the cost of building housing, as well as other buildings, was beyond the ability of people’s incomes and society’s real wealth. Too much multiplied/generated wealth flooded society causing many distortions that could only be relieved by a financial crisis or strict regulation to make sure the tax cuts would be used for investment.

Additionally, with so little actual manufacturing in the US, little room was available for real investment, such as new plants to meet increased demand. And investment in companies such as Google did not create manufacturing jobs and did nothing but drive a stock price higher and created more phantom wealth. The financial people instead would create new methods for financial instrument based investment for all the excess money in circulation, even if resulted in a Ponsi scheme without real foundation. If availability of real investment vehicles drove on the American highway maybe something useful could have resulted.

Side note: wealth is comprised of 5 parts:

1.      Natural resources

2.      Saved wealth brought into the present

3.      Future wealth brought into the present

4.      Human resources

5.      Cash flow

Another multiplier of wealth concerns the Chinese trade deficit. Now why would a trade issue create phantom wealth? Artificially holding on to constructs such as currency exchange rates as well as the Chinese buying government US bonds purchases at very low interest rates which effectively postponed Chinese consumption and allowed Americans to keep purchasing products at very low rates. (Obviously this must reverse at some point, although how much wealth is involved can be negotiated.) Nevertheless, the combination of US and China did produce a great modern manufacturing capability. Unfortunately for the U.S., it’s not here. (If the new factories would be under the same taxing jurisdiction, the trade deficit could be eliminated through tax and fiscal policies.)

Many people thought using the trade deficit as a wealth multiplier was a good idea, while others had their voices drowned out.

 So the Bush tax cuts found nowhere to go except to consumption and playing games until the whole financial structure rotted out. We must look for the silver lining: things are so bad that corrective and maintenance actions will be invoked which otherwise could not before occur.

One of the wonderful accounting tricks relates to the national debt, which no one seems to put on their balance sheet. Individuals carried the bonds sold to the public as assets without any matching liabilities. Then this money was expanded with financial instruments so more people put assets on their balance sheets without, once again, the corresponding liability.

I think what caught people off-guard was the quantity of multiplied assets without liabilities. Usually enough time remains in a crisis to stop the bottom falling out. This time, the regulation mechanisms were purposely disregarded and an important warning path was made useless. Many people have different ideas of multiplying structures.

Alan Greenspan assumed all people had morality – his morality. Turned out the people with an engineer’s morality were fired, mostly for having morals.  Conservatives said government and regulation would interfere with the wealth creation process. Using these ideas through bully-pulpet-ing the people with worries were made into an evil construct. Any questions on financial activity were classified as evil. Evil, of course, ‘should not be listened to’.

And, although obvious at the time to many people, alerting anyone to the dangers would be regarded as evil. The real estate bubble, for instance, in hindsight is particularly clear.

Let’s assume retail mortgages started 100 years ago. Seemingly, this would provide a good deal of historical data. The end-point of this collection of data strongly indicates around 30-35% of income should be allocated to housing. Even assuming the end of cheap land in the 1970’s changed the landscape, basically, a median, middle-class family needed to spend around the 30-35% range. If this percentage increased, something basic changed: the amount of money forced into real estate loans as little other investments that could meet the expected investment return. A direct result of the Bush tax cut too much money in the hands of the savers, not investors nor consumers, created a financial distortion exacerbated by the lack of morality allowed by the lack of regulation. In other words, the financial world became dominated by yappers, the salespeople, whose morals consist of the next sale, as opposed to the engineers who cared about the products and other people’s money as if it were their own. Hmmm.

I watched and waited for the Bush tax cuts to dissipate and then a return to a reasonable normalcy. Nevertheless, I was with the disbelief pack who failed to realize to depth of foolishness. That makes me a foolish optimist. How was I supposed to know small municipal governments were borrowing money to buy financial instrument sold by people who didn’t have to care? Only after the fact the breadth of this nonsense surfaced. The amount of excess money relating to the level of real underlying wealth, did create real, yet temporary, increase in wealth. The concept of the day said it was easy to replace the money into the future. Turned out it really is not easy.

And although Bush Republicans were following the normal warrior “spend until everyone drops”, I really am impressed with the amount of wealth consumed in so short a time period. A “drunken-sailor” never has a chance to improve on this spending spree. (I do discuss where the wealth went at the end of this paper.)

So, basically: the computer arrived, got connected, financials as end to themselves began, tax cuts and municipally borrowing brought wealth in from the future, flooded into multiplier schemes, lots of cash-flow wealth was created, money concentrated resulting in too much consumption, our regulator’s idea of justice is a free-for-all resulted in yappers non-morals, our industrial investment was moved to China, and when things collapsed a long fall results until slightly lower than normal demand is reached and we start replenishing again. Not necessarily the most fun time in the world, yet certainly not boring. 

Now appears the time for the engineers to come back and repair things, as has happened again and again in many previous cycles at many times and societies throughout world history. Warriors are very bad administrators. But they know how to sound good when solid times are left by the Intellectuals. Truly, being earnest is important. Can these cycles be allowed to repeat in the future, especially with modern communications? Remember: only a crisis will create change. The question is how badly this crisis deepens and how much the affect on the future.

As this is page five, time for conclusions and recommendations.

1. An increasing population injects the spending of the young into any equation

2. Young people vote for jobs, retired people vote for national health

3. Never let the yappers be in charge, intellectuals are better administrators

4. Assume people really care about their money and they will never be so hoodwinked in the near future

5. Intellectuals need to understand leading the warriors. Warriors must leave the confrontation behind that always creates enemies.

6. Negetivism on American manufacturing is unwarranted and annoying. The idea we cannot be competitive is ridiculous and insulting.

7. The net compression of the financial aspect of society to a normalized commerce rate is not pleasant and requires major changes in what is moral and allowed by regulation and non-government structures. The morality? When handling other people’s money a person has a responsibility to the greater good of the group.

8. Growth of about 2% results in a very good long term growth rate.

9. A good economist should be able to predict consumption based on the size of the middle class. Should it include the municipal workers or not?

10. Get rid of incentives and commissions. If you do a bad job you should be fired. No carrot should be needed to do a good job.

American industry may not be old time manufacturing. What could be the American advantage?

1.    Where did the Money Go?

1. Think about all the restaurants like Applebee’s. People started eating more food than they needed and food types that required very extensive industries, such as the shrimp which has become omnipresent at every affair and middle level restaurant. Eat enough shrimp and more wealth than you realize is, well, eaten up. And now, at the end of a consumption cycle, what do we do with the fishing boats? More wealth rots away with the unused hulls. On the other hand, we might say the fishing boats and transporting costs of the shrimp are no longer being consumed.

2. Where did wealth dissipate in the real estate market? After all, the housing is still standing. It went to carpenters and building supplies, and inflated price of land. Yeah, the house is still there, but the cost of building the house is more that the intended purchaser can afford after the crisis started. Additionally, the housing was the wrong type of housing for the normal person, without inflated wealth: much too big. You want to see the wealth drain away? Go to Long Island’s Hamptons to check out the unneeded McMansions.

3. The middle class, instead of preparing for the future, went into a loan propelled consumption spree. How many snow-mobiles does society really need? Or Jet skis, or large trucks and SUV’s for personal use? How often are all those boats in Marinas all over this country?

4. People purchased so much in the last 15 years it may take years before normal consumption levels resume, meaning factory orders will be down until people want to start buying again. How many pairs of sneakers do people own, how many sweaters, blouses, hats, and other apparel are hanging in closets? Cars don’t wear out after 3 years any more. People can easily extend their purchasing cycles without affecting much in their lives (except emotionally).

5. How many sports stadiums were built in the last 20 years? From high schools to colleges and professional sports.

6. Everywhere you look, we were so wealthy consuming at maximum spending meant nothing: it was supposed to be normal. So people created projections of future worth, which increased consumption.

7. And the cost of housing went to carpenters and plumbers and builders who immediately took expensive vacations and drove big, gas hungry trucks and investors who did the same thing.

8. A good deal of consumption went to entertainment, not just the movies, but also the NASCAR races, WWE and other wrestling presentations, world sailboat racing, and even the Olympics.

9. Consumption even involves letting public employee salaries and benefits to rise faster than the same people in the private sector.

10. Letting States and small government entities borrow to meet budgets.

11. Keeping health care concepts active when new ones are needed to lower costs and improve service.

12. Every business and wealthy individuals gave quite a bit of money to their favorite causes, and, while not a bad idea, it produced a good deal of consumption.