10 Commandments for the first 60 Days or What if we can’t spend our way out of this mess (and it only makes things worse)?

1. 10 Commandments for the first 60 Days
or
What if we canʼt spend our way out of this
mess (and it only makes things worse)?
by Juan Enriquez

2. What if subprime
mortgages were only
part of the problem in
the housing market?
Even at the height of the real estate
bubble in 2006, sub prime mortgages
represented less than 25% of the
total mortgage market.
10 COMMANDMENTS FOR THE FIRST 60 DAYS
JUAN ENRIQUEZ

3. What if we were all
buying homes that we
couldnʼt afford and
using the value of our
homes to fuel unbridled
consumption?
Over the last 10 years home
mortgages almost doubled as a
percentage of personal debt when
compared with the average over the
previous 50 years.
Source: Milken Institute
10 COMMANDMENTS FOR THE FIRST 60 DAYS
JUAN ENRIQUEZ

4. What if the banks did
not care how much
debt we took on as
long as they could sell
our mortgage to
someone else?
Securitizing mortgages spread the
risk of default. Lenders stopped
caring about risk because they
could sell risk to others. This
practice surged between 1980 and
2008, growing to encompass 59%
of a market over 11 times its original
size. The result was a race for
volume: quantity over quality.
10 COMMANDMENTS FOR THE FIRST 60 DAYS
JUAN ENRIQUEZ

5. What if the banks
borrowed against
these bad loans 10x
or 20x to expand
record profits?
Selling loans as assets meant
companies were leveraging their
Levers work both ways
capital 10x, 20x…up to 40x.
(on the way up and on the way down!) This meant that one bad loan
could cause losses a dozen
times, in a hundred different
places within the financial
system.
10 COMMANDMENTS FOR THE FIRST 60 DAYS
JUAN ENRIQUEZ

6. Value of Credit Default Swaps Outstanding
($ Trillions)
What if the market
for securities to
insure these risky
loans grew bigger
than the economic
output of the entire
globe?
The credit default swap market
nearly doubled each year from
2001 – 2007 from less than $1
trillion to almost $55 Trillion
dollars, slightly more than Global
Source:ISDA
Gross Domestic Product. The
Total World GDP 2007 = $54.3 Trillion
total market for unregulated
Value of all stocks on NYSE = $50.5 Trillion
derivatives is $655 trillion.
10 COMMANDMENTS FOR THE FIRST 60 DAYS
JUAN ENRIQUEZ

7. $ What if the collapse
of this market
crippled every single
one of our economic
partners around the
world?
= “You can now buy the free float of
the entire Russian energy sector
$ with the market cap of Coca Cola…
and still have enough change to
buy all the Russian banks.”
Bloomberg: Merrill Lynch & Co. emerging markets
equity strategist Michael Hartnett.
10 COMMANDMENTS FOR THE FIRST 60 DAYS
JUAN ENRIQUEZ

8. What if we saw it coming but were making
too much money to do anything about it?
10 COMMANDMENTS FOR THE FIRST 60 DAYS
JUAN ENRIQUEZ

9. Some argued it was safe…
“The use of a growing array of derivatives and
the related application of more-sophisticated
approaches to measuring and managing risk are
key factors underpinning the greater resilience
of our largest financial institutions…derivatives
have permitted the unbundling of financial risks.”
Alan Greenspan, 2005
“Risk Transfer and Financial Stability”
Federal Reserve Bank of Chicago
Forty-first Annual Conference on Bank Structure
Chicago, Illinois
10 COMMANDMENTS FOR THE FIRST 60 DAYS
JUAN ENRIQUEZ

10. Others saw it differently…
“Unless derivatives contracts are collateralized
or guaranteed, their ultimate value also
depends on the creditworthiness of the counter-
parties to them…derivatives are financial
weapons of mass destruction, carrying dangers
that, while now latent, are potentially lethal.”
Warren Buffet, 2002
Berkshire Hathaway
2002 Annual Report
10 COMMANDMENTS FOR THE FIRST 60 DAYS
JUAN ENRIQUEZ

11. Warren was right.
With no trust left in the system, credit markets froze.
Even borrowing
overnight became
very expensive
with businesses
charging each
other almost 5x as
much as they had
earlier.
10 COMMANDMENTS FOR THE FIRST 60 DAYS
JUAN ENRIQUEZ

12. What if this has happened many times
before in other countries?
10 COMMANDMENTS FOR THE FIRST 60 DAYS
JUAN ENRIQUEZ

13. It has happened before….
Country after country in our position followed the
same process during economic crisis:
1 Denial
2 Spend, Borrow, Borrow More
3 Go Broke
4 Brutal Adjustment
5 Rebuild
10 COMMANDMENTS FOR THE FIRST 60 DAYS
JUAN ENRIQUEZ

14. Japan 1986–2008
After years of
bailouts, stimulus,
and keeping
moribund
companies alive,
the value of the
Japanese stock
market is about ¼
of what it was 18
years ago.
10 COMMANDMENTS FOR THE FIRST 60 DAYS
JUAN ENRIQUEZ

15. But it could never happen to us right?
10 COMMANDMENTS FOR THE FIRST 60 DAYS
JUAN ENRIQUEZ

16. Current View:
What if?
The cause is subprime. The cause is larger than
It is a temporary subprime. There is too
dislocation of credit much debt—public,
markets.
corporate, personal.
The problem is liquidity.
We have been living
beyond our means for
The solution is decades.
stimulus, bailouts,
We need to get serious
more debt. And all
can go back to about saving, cutting,
normal.
working.
10 COMMANDMENTS FOR THE FIRST 60 DAYS
JUAN ENRIQUEZ

17. Denial (2001)
Having proposed a $1.6 trillion
tax cut, Bush said, quot;Our budget
is fiscally responsible. If enacted,
it will reduce the deficit by an
unprecedented amount over the
next four years.”
Tax cuts did not help.
10 COMMANDMENTS FOR THE FIRST 60 DAYS
JUAN ENRIQUEZ

18. A tax cut is not a tax cut
Unless you pay less,
And I pay less,
And our kids owe less.
Otherwise
Itʼs just a deferred loan,
With a high interest rate.
And now the bill has come due.
10 COMMANDMENTS FOR THE FIRST 60 DAYS
JUAN ENRIQUEZ

19. Spend, Borrow (2008)
Having proposed a $1 trillion
stimulus package, Bush said,
“I'm confident that this rescue
plan, along with other measures
taken by the Treasury
Department and the Federal
Reserve, will begin to restore
strength and stability to
America's financial system and
overall economy.”
We need to recognize that this is
a systemic debt crisis. Adding
more debt and not cutting it, can
be fatal.
10 COMMANDMENTS FOR THE FIRST 60 DAYS
JUAN ENRIQUEZ

20. We are living beyond our means.
As a nation, when you add government debt, plus
private, plus personal, we are now almost four times
what the entire economy produces per year.
10 COMMANDMENTS FOR THE FIRST 60 DAYS
JUAN ENRIQUEZ

21. And our options are shrinking quickly.
The $1 trillion bailout just cost us another 5-10 years
Sometime
The Bailout moves this Mandatory spending between 2030 and
date forward 5-10 years exceeds revenue 2040 mandatory
spending will
exceed govern-
ment revenues.
The cost of the
bailout will move
this date forward
giving us even less
time to get out of
this mess.
10 COMMANDMENTS FOR THE FIRST 60 DAYS
JUAN ENRIQUEZ

22. So what have we got left?
The dollar has to remain credible in medium to long
term, or else it becomes the ultimate short.
10 COMMANDMENTS FOR THE FIRST 60 DAYS
JUAN ENRIQUEZ

23. We need to act. Right now.
10 COMMANDMENTS FOR THE FIRST 60 DAYS
JUAN ENRIQUEZ

24. We donʼt have much time…
The next President has a margin of 30-60 days to act,
to signal, to tell the world…
That we are serious about our currency
That we will try to live within our means
That our standard of living will reflect what we earn
Otherwise the dollar is toast…
10 COMMANDMENTS FOR THE FIRST 60 DAYS
JUAN ENRIQUEZ

25. If we donʼt act…others will force us to.
Foreign governments own most of the debt that has
fueled our spending binge.
10 COMMANDMENTS FOR THE FIRST 60 DAYS
JUAN ENRIQUEZ

26. 10 Commandments for the first 60 days
1 We have to save the dollar (AAA rating in jeopardy).
2 We have to fundamentally and brutally restructure debt.
3 All entitlements are fair game.
To begin with:
– Age 60–65: you probably just lost big chunk of your nest egg, your
Social Security/Medicare benefits are intact
– Age 55–60: we need two more yearsʼ work from you
– Age 55 and under: we need three more years
4 Cut back military by 3% per year for ten years.
5 Cap medical costs at 18% GNP.
10 COMMANDMENTS FOR THE FIRST 60 DAYS
JUAN ENRIQUEZ

27. 10 Commandments for the first 60 days
6 We have to triage our support for companies (do not
attempt to save dying whales).
7 The program has to be bipartisan. It has to make both
Democrats and Republicans unhappy.
8 Simplify and broadly apply Sarbanes Oxley, apply it to
government, apply it to hedge funds.
9 We will invest in growing start up companies (which
create most jobs).
10 We will treat education as a varsity sport (and
continue to recruit foreign PhDs).
10 COMMANDMENTS FOR THE FIRST 60 DAYS
JUAN ENRIQUEZ

28. What can I do?
1 Check out the complete presentation:
http://www.poptech.org/juanenriquez/
2 Share this information with your friends and family.
3 Join the growing community that is demanding an
honest debate around our economic future:
http://hub.poptech.org/groups/29
4 Participate in shaping the 10 Commandments:
http://poptech.wiki.zoho.com/
Special thanks to Pop!tech & frogdesign.
10 COMMANDMENTS FOR THE FIRST 60 DAYS
JUAN ENRIQUEZ