NY Times: Is Obama Socialist?

The NY Times recently did the unthinkable: it asked Barack Obama if he was a "socialist." Obama bridled at the question. Is he a socialist? Of course he is. The man has surrounded himself with Marxists, including his childhood mentor "Frank" (Frank Moore) and self-described "communist" (small "c') Bill Ayers. Obama's political hero, Franklin Delano Roosevelt, was surrounded by socialists and a few Stalin-adoring Communists.

Roosevelt believed that the government was better able to create jobs -- and "redistribute wealth" -- than private industry. That belief dovetailed with FDR's desire to win perpetual re-election -- a desire Obama obviously shares. FDR, like Obama, had a marvelous gift-of-gab. Unfortunately, in both cases, rhetorical skills have functioned as a substitute for real accomplishments. [Note: If you visit this blog with any frequency, please join the followers group, which you can go by clicking on the sidebar -- top-right. Thanks.]

What went wrong during both the Great Depression and the first decade of the 21st century?

Consider Chicago-based electric power magnate Samuel Insull, who became fabulously wealthy -- on paper -- during the boom times of the 1920s. A few years after the Depression commenced, Insull had lost his fortune, largely because of (1) deflation; (2) FDR's hatred of private power companies. Insull had believed in the future of electric power, that demand for it would keep on growing – and over the long term he was right.

However, Insull's philosophy of growth was based on leverage -- on borrowing money. He once said, “Take on debt as fast as you can.” Unfortunately, when a businessperson – or a homeowner – does that, he or she had better hope that the market never takes an extended dive. Of course, such a sustained downturn is exactly what happened in the 1930s – and what we’re experiencing now. As long as markets keep going up and up, every investor looks like a genius.

In our time, the big commercial banks and the big investment houses took on massive amounts of debts, assuming that sustained growth would allow them to pay it back. They never contemplated a period of deflation.

Consider Lehman Brothers, a once seemingly invincible merchant bank, which was one of the first Wall Street dominoes to fall. Previously, it had been extremely profitable – on paper. However, it took on an almost unimaginable load of debt. In fact, its ratio of debt to capital was 30 to 1. When all of a sudden, its debts came due – in a time of deflation – it was unable to pay them. And its days as an independent business were over.

Although its actions apparently weren't criminal – just stupid and selfish -- Lehman's approach was somewhat similar to Bernard Madoff’s. Unlike Lehman, Madoff had an all-out Ponzi scheme, where he paid off yesterday's investors with new investors’ money – taking out enough cash to get rich himself. As new investors became scarcer, Madoff was no long taking in enough in to pay off the older investors. At that point, he may have had nightmares of wearing not $6,000 business attire, but rather an orange jump suit.

In both the 1920s and our own recent times, the approach was to borrow, borrow, and then borrow some more. The assumption was that markets – as well as housing prices – would continue to go up almost forever. When they ceased going up, the mighty fell – fast and hard.

As regular readers have seen, MotleyFool.com had a piece called “Who Should Go to Jail?”

That's a harder question than it seems. Should the people formerly known as “The Smartest Guys on Wall Street” end up in the hoosegow? That depends on whether being extremely stupid qualifies as a crime. Should the man down the street go to jail, the one who fibbed about his income so he could buy a million dollar house because he “knew” it would go to a million-five and he would then sell it at a big profit? (Note: That house is now worth, say, about $700,000 and change . . . and the foreclosure notices have started arriving.)

I used to have people look at me with straight faces and say, “Look, they’re not making any more land, right? So, housing prices are never going to go down, right? Or at least they won't go down for a long period of time, right?" Well, no, wrong!

Remember, before “toxic assets” were known as, well, toxic assets, a lot of them were seen as “good investments.” Who knew what they were really worth was -- theoretically -- a good question, but in practice, nobody cared.

Everybody was buying, right? Not anymore. “Those were the days my friend; we thought they’d never end.” Another saying has prevailed: "All good things come to an end."

[More to follow tomorrow on what FDR did that hurt the economy -- and how Obama is doing the same things in our time.]