More on this story... hat tip to Thomas.
CHINA AND THE BUZZ OF A PENDING BANK DEFAULT
Let’s put the pieces together here. Just this past weekend China announced that State Owned Enterprises (SOEs) will be allowed to default on commodity derivative contracts. Think of that. China has given the green light and authorized the defaulting on commodity derivative contracts.
This story broke over the weekend but has not gotten much mainstream media attention on this side of the pond. (North America). The only inference to it was the talk or “buzz” on the Wall Street floor that another bank was rumored to be close to defaulting. As Art Cashin of UBS Securities indicated in the video clip I posted earlier, normally when a market sells off on a rumor and the rumor turns out to be false, the market will tend to correct itself. IT DIDN’T.
The Reuters report cited 6 foreign banks that received letters indicating that the Chinese State Owned Enterprises would be given the green light to default on their derivatives.
A look at what a derivative actually is may be useful here. A Derivative is a financial instrument that is derived from some other underlying asset, index, event, value or condition. Rather than trade or exchange the underlying itself, derivative traders enter into an agreement to exchange cash or assets over time based on the underlying. A simple example is a futures contract: an agreement to exchange the underlying asset at a future date. Commercial and investment banks make up the foundation of the over the counter (OTC) derivatives market. Investors use derivatives to protect against risks, such as sudden changes in price or value of the underlying asset. Others tap derivatives to take on extra risk, in the hope of extra gains.
Well China owns billions of these products and it has finally come to light they have had enough of having the value of their derivatives manipulated by the manipulation of the price of the underlying asset. They have finally woken up to the fact that these derivatives have been bundled together like junk in a manner that resembles the mortgage backed derivatives that brought down the world markets last year.
Back to Reuters. Some of the State Owned Enterprises that stated their potential intentions to default were Air China. China Eastern and Cosco. Mainly in part because they took major derivatives losses over the past year but also, concerns are arising that the derivatives that they were sold by these foreign institutions are garbage, underwater and may never see the light of day. So why continue to pay for them? So the concern in the financial world is that holders of these losing products may just walk away, not unlike a home owner with a $600,000 mortgage on a home valued at $475,000 deciding to just hand in their keys. However, read on...this has nothing to do with morgtgage backed products. This time, the concern may be over Oil.
They (Reuters) cited 6 foreign banks.Where the story gets really intriguing is that among the major derivatives providers according to Reuters but also widely known in the industry, are Goldman Sachs, UBS and JP Morgan.
Here is the looming problem. These products are worth billions. One report that a good friend of mine did showed that if Goldman Sachs for example were to take this one up the rear, they could stand to lose 15 billion dollars. (This number is by no means confirmed)
An important history lesson is needed here. “Potential default” was the concern that sparked and prompted the most recent economic crisis. These intricately weaved products along with highly speculative CDOs and CDSs began to fall apart when the bubble that was in large part significantly contributed to and created by the financial institutions that were packaging this junk started to fall apart.
Imagine the impact for a brief moment if you will, on the impact to the financial landscape if China were to say “we are walking away” from those products. I would imagine that China, being the biggest purchaser of US debt, could surely collapse the US institutions that were at one point deemed too big to fail if they decide to go ahead with this plan.
This is why I don’t take tonight’s news that China purchased 50 billion dollars of IMF bonds lightly. In fact, I take it very seriously. This is why I take the buzz on the floor over the past two days very seriously as well as I do the incredible spike in Gold today. Most importantly, I do not take lightly the recent 25% correction we have seen in the Chinese Stock Market. Can all these events be interconnected some how? Is the Chinese stock collapse giving us a hint?
The Reuters story came out on Mon Aug 31, 2009 at 7:42am EDT. I find it quite interesting that the mainstream media did not take this more seriously. Reuters reported that the above noted Chinese companies have already issued letters to the banks. The Reuters article cites 4 clear points.
• State-owned firms may default on commodity hedges - report
• Bankers dismayed, confused by report; seek more details
• Lawyers question legality of the move
• Traders suspect lurking losses may have prompted warning (Adds analysts comments)
Analysts are fearing that if these three big companies came out and spelled out their losses and dismay at these products then this might prompt other large Chinese corporations to do the same.
Let’s take a closer look at the companies that have been mentioned in these news articles out of China. They are Air China, China Eastern and Cosco. If you ask me, this conundrum might have to do with oil. I deduce from this that if there is a problem brewing it has everything to do with their Oil Derivatives business.
Here’s a brief overview of what might happen should these companies, and others, default. The banks, namely Goldman Sachs, J.P. Morgan and from other accounts possibly Deutsche Bank will find themselves LONG on oil futures with no customers on the short side of the derivatives. This will most likely lead the banks to sell the excess oil futures without a care for the price. This is no different than what happened when Bear Stearns was forced to sell off their gold futures in March of 2008 which then resulted in a sharp downturn in the price of Gold.
Reuters stated:
Spokespersons at Goldman Sachs (GS.N) and UBS (UBSN.VX) declined comment, and media officials at Morgan Stanley (MS.N) and JPMorgan (JPM.N) were not immediately available for comment. All are major global providers of commodity risk management.
We have yet to hear their commentary. A Chinese statesperson was quoted as saying “"If we were among the banks receiving that letter, we would be very angry.” You bet your bottom dollar. You don’t think the firms listed above are angry, or, are they frightened that if the Chinese State Owned entities start taking affirmative action it could theoretically bring down some of the biggest remaining names on Wall Street?
Remember Reuters initial story was titled Beijing's derivative default stance rattles market. Read it thoroughly for more information.
Then, read the story that broke last Saturday to get a clearer perspective before the political and corporate spin started to enter the story. China warns banks on OTC hedge defaults –report.
“BEIJING, Aug 29 (Reuters) - Chinese state-owned enterprises (SOEs) may unilaterally terminate derivative contracts with six foreign banks that provide over-the-counter commodity hedging services, a leading financial magazine said.
China's SOE regulator, the State-owned Assets Supervision and Administration Commission (SASAC), had told the financial institutions that SOEs reserved the right to default on contracts, Caijing magazine quoted an unnamed industry source as saying.”
On September 1, 2009 Reuters said that the Banks, not the commodities would be at risk if China followed through.
Yes, legal battles would ensue should this happen and we can also expect to have Chinese political figures downplay the story in an effort to avert panic. However, if they can prove that these derivatives or the underlying asset was manipulated in a manner to profit the bank that issued the product then that may even do more damage than the default themselves.
Perhaps the “buzz” on the floor is indeed true. Perhaps we are going to see action that could annihilate one of the biggest Wall Street firms ever.
If there is one thing I have learned of late is that when the Chinese speak, we must listen. Their list of allies is ever growing and they are simply fed up of having to swallow the US garbage that has turned out to be toxic and dangerous to their highly controlled and coveted state owned enterprises.
I leave you with these thoughts that I alluded to above. The Chinese market has corrected 25%. This news broke this past weekend. New York saw a sharp sell-off on Monday. Buzz of a bank default hit the floor. The rumor did not abate and the selling intensified. The selling carried over into Tuesday. Gold, a classic hedge against troubled times has broken out to the upside, China has purchased 50 billion in IMF bonds and has been questioning the US dollar now for upwards of a year. China was up 5% overnight and Gold has continued to climb this morning.
Where there is smoke there is often fire.
Showing posts with label thomas. Show all posts
Showing posts with label thomas. Show all posts
4 September 2009
29 July 2009
Globalization in Retreat
Hat tip to Thomas.....my guess....everything is changing but most of all an anglo stranglehold on the global architecture is ending....
It is now clear that the global economic crisis will be deep and prolonged and that it will have far-reaching geopolitical consequences. The long movement toward market liberalization has stopped, and a new period of state intervention, reregulation, and creeping protectionism has begun.
Indeed, globalization itself is reversing. The long-standing wisdom that everyone wins in a single world market has been undermined. Global trade, capital flows, and immigration are declining. It also has not gone unnoticed that nations with insulated financial systems, such as China and India, have suffered the least economic damage.
Furthermore, there will be less global leadership and less coordination between nations. The G-7 (the group of highly industrialized states) and the G-20 (the group of finance ministers and central-bank governors from the world's largest economies) have been unable to respond effectively to this crisis, other than by expanding the International Monetary Fund (IMF). The United States is also less capable of making these institutions work and, over the medium term, will be less dominant.
This coincides with the movement away from a unipolar world, which the downturn has accelerated. The United States will now be focused inward and constrained by unemployment and fiscal pressures. Much of the world also blames U.S. financial excesses for the global recession. This has put the U.S. model of free-market capitalism out of favor. The deserved global goodwill toward President Barack Obama mitigates some of this, but not all of it.
In addition, the crisis has exposed weaknesses within the European Union. Economic divergence is rising, as the three strongest EU nations - France, Germany, and the United Kingdom - have disagreed on a response to the crisis and refused pleas for emergency assistance from eastern Europe. The absence of a true single currency has proved inhibiting. And the European Central Bank has emerged as more cautious and less powerful than many expected.
Such lack of strength and unity in the West is untimely, because the crash will increase geopolitical instability. Certain flashpoint countries that rose with the oil and commodity boom, such as Iran and Russia, will now come under great economic pressure. Other, already unstable nations, such as Pakistan, could disintegrate. And poverty will rise sharply in a number of African countries. All this implies a less coherent world.
The expected prolonged severity of the global recession is central to understanding these likely geopolitical impacts. The world's three largest economies, the United States, the EU, and Japan, will not be able to generate a normal cyclical recovery. The pervasive financial damage will prevent it. As a result, nations dependent on those markets for growth, such as those in eastern Europe, will also face a long recovery. And many of the developing economies, which depend on foreign capital, have been hardest hit.
Anatomy of a crisis
Start with the United States, whose GDP is still nearly double that of any other country. Whereas most recessions follow a sequence of rising inflationary pressures, monetary tightening to counter them, and a slowdown in response to higher interest rates, this one is a balance-sheet-driven recession. It is rooted in the financial damage to households and banks from the housing and credit-market collapse.
U.S. households lost 20 percent of their net worth in just 18 months, dropping from a peak of $64.4 trillion in mid-2007 to $51.5 billion at the end of 2008. Approximately two-thirds of this reduction involved lower financial asset values, and one-third was tied to home values. This is a big drop when juxtaposed against a median family income of $50,000 (which has been shrinking in real terms since 2000) and unprecedented household debt (which reached 130 percent of income in 2008).
A painful recovery
The recovery in Europe will be even weaker. Although the United States is expected to register marginal growth in 2010 - Goldman Sachs is forecasting 1.2 percent - the Eurozone may contract again, by an estimated 0.3 percent. This reflects Europe's more exposed banking systems, historical factors, and the region's weaker policies.
Europe entered the recession later than the United States did and, logically, will emerge later. The housing and credit markets imploded in the United States, and then this implosion moved east. For example, Europe was still growing in early 2008, whereas the United States was not. Europe's banking system is proportionately larger than the United States', and its banks were more exposed to weakening emerging markets in eastern Europe and Latin America. And to date, European banks have recognized a smaller share of total likely write-downs than U.S. banks have.
The developing world has been hit hardest. Inflows of investment and financing have plunged, exports are very weak, and commodity prices are way down. The countries of central and eastern Europe are particular victims, as they ran large balance-of-payments deficits and depended on external borrowing to finance them. Several of them, including Hungary and Poland, have resorted to emergency loans from the IMF. Meanwhile, Africa has seen capital inflows nearly come to a halt.
The overall picture is a grim one: a deep, truly global, and destabilizing downturn, with world GDP falling for the first time in the postwar period. Given rising populations, such an outright contraction is stunning. As of this writing, it may have bottomed out, but the next three years will be painfully slow. The geopolitical consequences are now coming into view, and they will be profound.
After globalization
First, the era of laissez-faire economics has ended. For 30 years, the Anglo-Saxon model of free-market capitalism spread across the globe. The role of the state was diminishing, and deregulation, privatization, and the openness of borders to capital and trade were rising. Much of central and eastern Europe adopted this model, as did swaths of East Asia and diverse nations from Ireland to Mexico.
Second, globalization is in retreat, both in concept and in practice. Much of the world now sees it as harmful. Those nations, especially developing ones, that embraced increased capital flows and open trade have been particularly injured. Those that insulated themselves, such as India, have been less scarred. The global spread of goods, capital, and jobs is reversing. Global exports are falling sharply. The World Bank reports that exports from China, Japan, Mexico, Russia, and the United States fell by 25 percent or more in the year leading up to February 2009. Capital flows are plunging, too. Emerging markets are projected to receive only $165 billion in net positive capital inflows this year, down from $461 billion in 2008. Furthermore, financial and trade protectionism are spreading. Both the World Bank and the World Trade Organization recently reported a movement toward higher tariffs, higher nontariff barriers, and an increase in antidumping actions, designed to protect domestic jobs. Brazil, India, Russia, and numerous other states were cited. Moreover, various states' fiscal stimulus plans include subsidies for exporters and "buy domestic" provisions. And discriminatory actions against foreign workers are spreading. Immigrant workers, who are particular victims of this crisis, are returning home in waves. Japan and Spain are offering them cash to leave, and Malaysia is forcing them out.
Third, the world may be entering a new global phase marked by less leadership, less coordination, and less coherence. The world was already moving away from its post - Berlin Wall, unipolar condition, but this crisis has accelerated that process. The United States has turned inward, preoccupied with severe unemployment and fiscal pressures. Its economic model also is now out of favor. President Obama has made a triumphant overseas tour and is hugely popular everywhere. But his attention and political capital must be reserved for domestic issues, such as stabilizing the banking industry, handling the budget, and reforming health care.
Fourth, this crisis likely will increase geopolitical instability. Dennis Blair, the U.S. director of national intelligence, has asserted that the downturn already has produced low-level instability in a quarter of the world. The IMF has warned that millions will be pushed into unemployment, poverty, rising social unrest, or even war.
Key commodity-centered nations, such as Iran and Russia, rose with the oil and resource boom and flexed their geopolitical muscles accordingly. But now, they are coming under severe economic pressure. This year, unemployment in Russia is projected to reach 12 percent, and five million of its people will likely fall into poverty. Nearly half of its monetary reserves, although they are still ample, have been spent to stabilize the ruble and prop up state enterprises. Iran's oil and gas revenues will fall to $33 billion this year, from a 2007 level of $82 billion. At current world oil prices, Iran is actually running a current account deficit. Inflation is at 20 percent in the country, and Iran is unlikely to grow in 2009 or 2010. How these economic pressures will affect its upcoming election and the nuclear issue is unclear.
Countries in Africa have been hardest hit of all, and instability will likely rise there. Fragile states, such as the Democratic Republic of the Congo and the Central African Republic, have seen their social problems exacerbated by the crisis. Foreign reserves in the region have dwindled. The Congolese government will soon be unable to import essentials, such as food and fuel. The Central African Republic is already unable to pay the salaries of its civil servants. In 2007, African countries raised $6.5 billion selling bonds on the international markets. This year, the figure will be zero. Private capital inflows could fall by nearly 90 percent, and the Overseas Development Institute, a British think tank, has projected that official aid will decline by $20 billion, as donors retrench. The commodity price crash, combined with the related slowdown in growth, the cutoff of private capital inflows, and diminished official assistance, has pushed the continent's collective current account surplus of four percent to a deficit of six percent in just two years. A World Bank study estimated that 53 million people living in emerging markets will fall back into absolute poverty this year. More frightening, according to the same study, up to 400,000 more children will die each year through 2015 on account of this economic crisis.
The Chinese model
Only China has prevailed. China's growth did diminish but now may be picking up again. Recently, electricity consumption, freight shipments, and car sales in China have all increased. Its financial system is insulated and relatively unleveraged - and has thus been largely unharmed. This has allowed China to direct a recent surge in lending for stimulus purposes. Beijing's unique capitalist-communist model appears to be helping China through this crisis effectively. And measured by its estimated $2.3 trillion in foreign exchange reserves, no nation is wealthier.
It is increasingly clear that the U.S.-Chinese relationship will emerge as the most important bilateral one in the world. The two nations have similar geopolitical interests. Neither wants Iran to acquire nuclear weapons, North Korea to be destabilized, or Pakistan to become a failed state. There is no reason, therefore, why their relationship cannot be a cooperative and globally stabilizing one.
This economic crisis is a seismic global event. Free-market capitalism, globalization, and deregulation have been rising across the globe for 30 years; that era has now ended, and a new one is at hand. Global economic and financial integration are reversing. The role of the state, together with financial and trade protectionism, is ascending.
Pro-growth leaders who seek to limit this phase must lead by example. One key is to promote aggressive stimulus measures to shorten their own countries' recessions and restart world growth. Beijing, London, and Washington are all moving impressively in this direction. Second, financial deregulation went too far, and so moderate reform is now needed to prevent a recurrence of the abuses and regulatory failures that resulted. Washington will shortly launch such a legislative effort, and Europe is moving even faster. A third key is President Obama and the enormous global goodwill he enjoys. He has a uniquely influential podium, which he could use to espouse the benefits of globalization and market liberalization. It is too soon to know whether he will use it that way. Let us hope that he does.
http://www.devex.com/articles/globalization-in-retreat
It is now clear that the global economic crisis will be deep and prolonged and that it will have far-reaching geopolitical consequences. The long movement toward market liberalization has stopped, and a new period of state intervention, reregulation, and creeping protectionism has begun.
Indeed, globalization itself is reversing. The long-standing wisdom that everyone wins in a single world market has been undermined. Global trade, capital flows, and immigration are declining. It also has not gone unnoticed that nations with insulated financial systems, such as China and India, have suffered the least economic damage.
Furthermore, there will be less global leadership and less coordination between nations. The G-7 (the group of highly industrialized states) and the G-20 (the group of finance ministers and central-bank governors from the world's largest economies) have been unable to respond effectively to this crisis, other than by expanding the International Monetary Fund (IMF). The United States is also less capable of making these institutions work and, over the medium term, will be less dominant.
This coincides with the movement away from a unipolar world, which the downturn has accelerated. The United States will now be focused inward and constrained by unemployment and fiscal pressures. Much of the world also blames U.S. financial excesses for the global recession. This has put the U.S. model of free-market capitalism out of favor. The deserved global goodwill toward President Barack Obama mitigates some of this, but not all of it.
In addition, the crisis has exposed weaknesses within the European Union. Economic divergence is rising, as the three strongest EU nations - France, Germany, and the United Kingdom - have disagreed on a response to the crisis and refused pleas for emergency assistance from eastern Europe. The absence of a true single currency has proved inhibiting. And the European Central Bank has emerged as more cautious and less powerful than many expected.
Such lack of strength and unity in the West is untimely, because the crash will increase geopolitical instability. Certain flashpoint countries that rose with the oil and commodity boom, such as Iran and Russia, will now come under great economic pressure. Other, already unstable nations, such as Pakistan, could disintegrate. And poverty will rise sharply in a number of African countries. All this implies a less coherent world.
The expected prolonged severity of the global recession is central to understanding these likely geopolitical impacts. The world's three largest economies, the United States, the EU, and Japan, will not be able to generate a normal cyclical recovery. The pervasive financial damage will prevent it. As a result, nations dependent on those markets for growth, such as those in eastern Europe, will also face a long recovery. And many of the developing economies, which depend on foreign capital, have been hardest hit.
Anatomy of a crisis
Start with the United States, whose GDP is still nearly double that of any other country. Whereas most recessions follow a sequence of rising inflationary pressures, monetary tightening to counter them, and a slowdown in response to higher interest rates, this one is a balance-sheet-driven recession. It is rooted in the financial damage to households and banks from the housing and credit-market collapse.
U.S. households lost 20 percent of their net worth in just 18 months, dropping from a peak of $64.4 trillion in mid-2007 to $51.5 billion at the end of 2008. Approximately two-thirds of this reduction involved lower financial asset values, and one-third was tied to home values. This is a big drop when juxtaposed against a median family income of $50,000 (which has been shrinking in real terms since 2000) and unprecedented household debt (which reached 130 percent of income in 2008).
A painful recovery
The recovery in Europe will be even weaker. Although the United States is expected to register marginal growth in 2010 - Goldman Sachs is forecasting 1.2 percent - the Eurozone may contract again, by an estimated 0.3 percent. This reflects Europe's more exposed banking systems, historical factors, and the region's weaker policies.
Europe entered the recession later than the United States did and, logically, will emerge later. The housing and credit markets imploded in the United States, and then this implosion moved east. For example, Europe was still growing in early 2008, whereas the United States was not. Europe's banking system is proportionately larger than the United States', and its banks were more exposed to weakening emerging markets in eastern Europe and Latin America. And to date, European banks have recognized a smaller share of total likely write-downs than U.S. banks have.
The developing world has been hit hardest. Inflows of investment and financing have plunged, exports are very weak, and commodity prices are way down. The countries of central and eastern Europe are particular victims, as they ran large balance-of-payments deficits and depended on external borrowing to finance them. Several of them, including Hungary and Poland, have resorted to emergency loans from the IMF. Meanwhile, Africa has seen capital inflows nearly come to a halt.
The overall picture is a grim one: a deep, truly global, and destabilizing downturn, with world GDP falling for the first time in the postwar period. Given rising populations, such an outright contraction is stunning. As of this writing, it may have bottomed out, but the next three years will be painfully slow. The geopolitical consequences are now coming into view, and they will be profound.
After globalization
First, the era of laissez-faire economics has ended. For 30 years, the Anglo-Saxon model of free-market capitalism spread across the globe. The role of the state was diminishing, and deregulation, privatization, and the openness of borders to capital and trade were rising. Much of central and eastern Europe adopted this model, as did swaths of East Asia and diverse nations from Ireland to Mexico.
Second, globalization is in retreat, both in concept and in practice. Much of the world now sees it as harmful. Those nations, especially developing ones, that embraced increased capital flows and open trade have been particularly injured. Those that insulated themselves, such as India, have been less scarred. The global spread of goods, capital, and jobs is reversing. Global exports are falling sharply. The World Bank reports that exports from China, Japan, Mexico, Russia, and the United States fell by 25 percent or more in the year leading up to February 2009. Capital flows are plunging, too. Emerging markets are projected to receive only $165 billion in net positive capital inflows this year, down from $461 billion in 2008. Furthermore, financial and trade protectionism are spreading. Both the World Bank and the World Trade Organization recently reported a movement toward higher tariffs, higher nontariff barriers, and an increase in antidumping actions, designed to protect domestic jobs. Brazil, India, Russia, and numerous other states were cited. Moreover, various states' fiscal stimulus plans include subsidies for exporters and "buy domestic" provisions. And discriminatory actions against foreign workers are spreading. Immigrant workers, who are particular victims of this crisis, are returning home in waves. Japan and Spain are offering them cash to leave, and Malaysia is forcing them out.
Third, the world may be entering a new global phase marked by less leadership, less coordination, and less coherence. The world was already moving away from its post - Berlin Wall, unipolar condition, but this crisis has accelerated that process. The United States has turned inward, preoccupied with severe unemployment and fiscal pressures. Its economic model also is now out of favor. President Obama has made a triumphant overseas tour and is hugely popular everywhere. But his attention and political capital must be reserved for domestic issues, such as stabilizing the banking industry, handling the budget, and reforming health care.
Fourth, this crisis likely will increase geopolitical instability. Dennis Blair, the U.S. director of national intelligence, has asserted that the downturn already has produced low-level instability in a quarter of the world. The IMF has warned that millions will be pushed into unemployment, poverty, rising social unrest, or even war.
Key commodity-centered nations, such as Iran and Russia, rose with the oil and resource boom and flexed their geopolitical muscles accordingly. But now, they are coming under severe economic pressure. This year, unemployment in Russia is projected to reach 12 percent, and five million of its people will likely fall into poverty. Nearly half of its monetary reserves, although they are still ample, have been spent to stabilize the ruble and prop up state enterprises. Iran's oil and gas revenues will fall to $33 billion this year, from a 2007 level of $82 billion. At current world oil prices, Iran is actually running a current account deficit. Inflation is at 20 percent in the country, and Iran is unlikely to grow in 2009 or 2010. How these economic pressures will affect its upcoming election and the nuclear issue is unclear.
Countries in Africa have been hardest hit of all, and instability will likely rise there. Fragile states, such as the Democratic Republic of the Congo and the Central African Republic, have seen their social problems exacerbated by the crisis. Foreign reserves in the region have dwindled. The Congolese government will soon be unable to import essentials, such as food and fuel. The Central African Republic is already unable to pay the salaries of its civil servants. In 2007, African countries raised $6.5 billion selling bonds on the international markets. This year, the figure will be zero. Private capital inflows could fall by nearly 90 percent, and the Overseas Development Institute, a British think tank, has projected that official aid will decline by $20 billion, as donors retrench. The commodity price crash, combined with the related slowdown in growth, the cutoff of private capital inflows, and diminished official assistance, has pushed the continent's collective current account surplus of four percent to a deficit of six percent in just two years. A World Bank study estimated that 53 million people living in emerging markets will fall back into absolute poverty this year. More frightening, according to the same study, up to 400,000 more children will die each year through 2015 on account of this economic crisis.
The Chinese model
Only China has prevailed. China's growth did diminish but now may be picking up again. Recently, electricity consumption, freight shipments, and car sales in China have all increased. Its financial system is insulated and relatively unleveraged - and has thus been largely unharmed. This has allowed China to direct a recent surge in lending for stimulus purposes. Beijing's unique capitalist-communist model appears to be helping China through this crisis effectively. And measured by its estimated $2.3 trillion in foreign exchange reserves, no nation is wealthier.
It is increasingly clear that the U.S.-Chinese relationship will emerge as the most important bilateral one in the world. The two nations have similar geopolitical interests. Neither wants Iran to acquire nuclear weapons, North Korea to be destabilized, or Pakistan to become a failed state. There is no reason, therefore, why their relationship cannot be a cooperative and globally stabilizing one.
This economic crisis is a seismic global event. Free-market capitalism, globalization, and deregulation have been rising across the globe for 30 years; that era has now ended, and a new one is at hand. Global economic and financial integration are reversing. The role of the state, together with financial and trade protectionism, is ascending.
Pro-growth leaders who seek to limit this phase must lead by example. One key is to promote aggressive stimulus measures to shorten their own countries' recessions and restart world growth. Beijing, London, and Washington are all moving impressively in this direction. Second, financial deregulation went too far, and so moderate reform is now needed to prevent a recurrence of the abuses and regulatory failures that resulted. Washington will shortly launch such a legislative effort, and Europe is moving even faster. A third key is President Obama and the enormous global goodwill he enjoys. He has a uniquely influential podium, which he could use to espouse the benefits of globalization and market liberalization. It is too soon to know whether he will use it that way. Let us hope that he does.
http://www.devex.com/articles/globalization-in-retreat
12 April 2009
Veteran journalist William Greider on the current financial crisis and what he calls "the great deflation of Wall Street."
Watch the program here.
BILL MOYERS: With me now is one of America's leading chroniclers of money, power, and politics, who says what's happening is the disgrace of Wall Street, its excesses paid for by people like those in Cleveland and millions like them around the country.
William Greider has spent forty years examining how powerful institutions affect ordinary people. Once a top editor of THE WASHINGTON POST, a columnist for ROLLING STONE, and now National Affairs Correspondent for THE NATION, he has produced a series of best-selling books: SECRETS OF THE TEMPLE: HOW THE FEDERAL RESERVE RUNS THE COUNTRY, ONE WORLD, READY OR NOT: THE MANIC LOGIC OF GLOBAL CAPITALISM, WHO WILL TELL THE PEOPLE: THE BETRAYAL OF AMERICAN DEMOCRACY, and this one, THE SOUL OF CAPITALISM. He's working on a new book with the title: COME HOME, AMERICA.
Good to see you in person.
WILLIAM GREIDER: Thanks Bill.
BILL MOYERS: What were you thinking as you saw that report from Cleveland?
WILLIAM GREIDER: Made me angry all over again, even though I know the story. And then I thought, "This is usury." This is a living example of what the Bible prohibited, which is the sin of usury. Most Americans have never heard of it probably.
BILL MOYERS: Usury?
WILLIAM GREIDER: Usury, to be clear about it, is rich people taking advantage of poor people by lending them money on terms that are sure to make them fail. All three of the great religions, Judaism, Christianity, Islam, had a moral prohibition against usury because they recognized that society can't function like that. People of great wealth and their institutions like banks naturally have the power to overwhelm people of lesser means. And you can't allow that in a decent society. It won't survive.
BILL MOYERS: Where were the gatekeepers? Where were the watchdogs? Why did it take the Fed so long to put an end to-
WILLIAM GREIDER: Well-
BILL MOYERS: -predatory practices?
WILLIAM GREIDER: To make the story overly crude, Congress repealed the law against usury. It was done in 1980 by a Democratic Congress, Democratic President. And, of course, the Republicans all piled on and voted for it. And that was the first stroke, only the first of many, in which they stripped away the regulatory laws from the financial system and from banking.
And that allowed the free market modernized gimmicks of one kind or another, all these things we're now reading about, to flourish. And that's where we are. I mean, the gatekeepers said to the banking industry and to the financial industry, "We don't think federal control or regulation is good for you, so we're, therefore, liberating you to do your own thing."
BILL MOYERS: So why did they do that in 1980? I mean, there was, of course, the rise of the backlash to regulation from 40 years of Democratic rule-
WILLIAM GREIDER: The-
BILL MOYERS: -there was the rise, the arrival of the conservatives with their free market ideology.
WILLIAM GREIDER: Right, right.
BILL MOYERS: What was the issue?
WILLIAM GREIDER: Well, the driver then, and it was a powerful driver, was inflation. And through the '70s, for lots of reasons inflation, which tends to undermine the value of financial wealth and money, was out of control. The Federal Reserve had lost control of it, not entirely its fault. But that set up a political climate that said the government is not working and that wasn't wrong at the moment. Let's get the government out of the way.
And that was very appealing as framed by Ronald Reagan and other conservatives. But I think it's fair to say most Democrats yielded to it against whatever their original instincts were because of political necessity. And then the third dimension, maybe the most important, was that you had this very powerful industrial sector, that is banking and finance, that wanted and had pushed for years to get out from under the regulatory controls, limits on interest rates, the law against usury, the merger of commercial banks with investment banks, which had been prohibited in the New Deal because it caused the disaster of 1929.
I can go on and on. But you see the pattern. And the point I keep trying to make to people is that history learned the hard way that you do need prudential controls on industries like banking 'cause they're so central to everybody's well being.
BILL MOYERS: Left to their own devices, they go too far?
WILLIAM GREIDER: Yeah. They will use their power to their own advantage. And that's what we're witnessing now, a kind of recklessness that was set free by political retreat and people, some of them were sincere. Some of them were just on the make. But here's our great American tension. We want an economy that's dynamic, that's growing, puts more jobs out there for people to get, rising wages, all that good stuff. And at the same time, we want an economy that's stable. And that means no inflation, steady as you go, so forth and so on.
And this is the, you know, this is the mortal condition. You're not going to escape that tension. Government is a powerful intervener that tries, ought to try, to balance those two desires. For many years, the Federal Reserve served that role and tried to strike a balance.
BILL MOYERS: And then what happened?
WILLIAM GREIDER: During the last generation, 25, 30 years ago, the Federal Reserve, the central bank that regulates money and credit, tipped hard in one direction.
BILL MOYERS: Toward?
WILLIAM GREIDER: Crudely put, toward capital, in favor of capital and against labor. It not only hardened the value of money by suppressing inflation, but it participated very aggressively in the role of stripping away regulatory breaks on financial system and banks. Declined to enforce many of its own regulatory powers that exist in law. And meanwhile, sort of kept a foot on the brake about economic growth and full employment and all those good things that might help working people by encouraging rising wages.
BILL MOYERS: So at the same time the Fed was helping to keep wages down in order to keep inflation from escalating, its policies were, nonetheless, helping banks and investors to inflate the cost of their-
WILLIAM GREIDER: Right.
BILL MOYERS: -the value of their assets beyond reality-
WILLIAM GREIDER: That's it.
BILL MOYERS: -right?
WILLIAM GREIDER: That's it. At one point, writing in "The Nation," I somewhat playfully and wickedly referred to Alan Greenspan, the Federal Reserve chairman, as the "one-eyed chairman." He can see inflation and wages and goods and services, the prices that consumer prices, even when it doesn't exist. And he'll put his foot down on the brake. But he doesn't see the inflation in the financial system at all.
And the inflation in the financial system is the value, the prices, of financial assets, most obviously stock, rose fantastically over 20, 25 years, two, three times the growth in the real underlying economy. Something's wrong there, right? How do these financial assets, which supposedly reflect the economy, suddenly become worth three times more?
BILL MOYERS: Yes. How did they?
WILLIAM GREIDER: Well, now we're back in the game, aren't we? With deregulation, with the help of the Fed, and with the success of the Super Bull market, everybody's animal spirits in the financial system became more animal. And they and they went for it, and they said, "If you'll get this rule out of the way or you let us make this kind of weird little gimmicky paper innovation, we'll do even better."
BILL MOYERS: Yeah, you-
WILLIAM GREIDER: And you had this force rising up, driving things higher in the stock market while, in many sectors of the economy, if not everywhere, people are saying, "Gee, this doesn't feel that good to us." And particularly working people.
BILL MOYERS: You've written about a fantasy, an illusion that led to the housing bubble. You wrote about a fantasy that was sold, an illusion that led to the housing bubble. Whose interest was it to sell a fantasy?
WILLIAM GREIDER: Well, the merchants of financial paper, to put it bluntly. I mean, the illusion was that you could dismantle or disregard fairly old-time traditional rules of proper banking and stewardship and that that would definitely allow prices, profits, everything to go still higher. But that they could somehow dissolve the risk in that for the society, not just for the society but for themselves.
One example of that was what you heard about in the sub-prime mortgage thing. Who is holding this mortgage that's been lent to these people who we know are going to fail 'cause their incomes just aren't sufficient? Well, it's kind of hard to say because this mortgage is designed as a securitized package of 1,000 mortgages. And you sell it in the financial market to investors all over the world.
And then they sell it to somebody else, and it moves round literally. So what you've done with this innovation is you've distanced the lender from the borrower. Each party, the guy who sold the mortgage, the bank, then the next, the guy who buys the bond, takes his returns upfront, sells it on, and you stripped away the responsibility for that lending. And that's a pretty good microcosm of what happened generally in the financial system.
BILL MOYERS: How is it that these banks wind up holding the rotten mortgage securities that of Fannie Mae and Freddie Mac?
WILLIAM GREIDER: There is a level of fraud here which shouldn't be neglected that, I mean, people lied to their customers' banks-
BILL MOYERS: -mortgage-
WILLIAM GREIDER: -banks, mortgage houses, lied to the people they were selling these bonds to. But as we heard, they also lied to the people who were borrowing the money. I mean, this is fraud with the conflicts of interest. There's an investigation underway now with a number of the biggest banks stuck with all this bad paper, this rotten mortgage securities. Who can they sell them to?
The otherwise savvy investors around the world have gotten burned already, so they won't touch them. I know. Let's sell them to our customers. And so they're literally taking the bonds out of their own portfolio as a bank and selling them to the banks' closed customers. Now, that's going to stop, too, because now everybody's onto the secrets.
WILLIAM GREIDER: I think you can get lost in the mechanics of how all this works. And it's pretty sometimes pretty dizzying stuff. I think the bigger message is that what some of our old folks knew turns out still to be true.
BILL MOYERS: Which is?
WILLIAM GREIDER: Which is the process of lending, borrowing, investing, all of those things, require a personal hands-on knowledge of what you're doing but also a level of integrity that, put it bluntly, does not exist at this time in our financial system.
BILL MOYERS: You see a direct connection between what happened to those people in Cleveland and across the country and the cozy relationship that you've often written about between Wall Street and Washington?
WILLIAM GREIDER: Yeah. Yeah. The point I want to make, though, is that this is deeper than politician rolling over for his campaign contributor, the guys who finance the Democratic Party or the Republican Party. They do that, too. But they were sold a fantasy, an illusion, which sounded wonderful about how markets make better judgments than government and the public. And that liberating finance and business from prudential rules that society imposes upon them will produce a bigger, better economy and better returns for everyone.
All those fantasies have been destroyed by these events, I mean, wiped out. And if you think about it, as we go through the hard months ahead, America's going to have to take some pain, right? In one form or another. The government's going to have to probably ask for some sacrifices.
How do they do that when the American people have just seen the government rush in three days, five days or less, to bail out the biggest, most powerful institutions in the country? That is, the financial investment houses and banks and major banks.
BILL MOYERS: In your opinion, the bailout of Freddie Mac and Fannie Mae, good or bad?
WILLIAM GREIDER: I think it's bad. I mean, I think the way they're doing it is terrible. It's not done in the public interest. The bailout is necessary. They are failing at the bailout. And I believe they're failing because they haven't gone far enough.
They need to start thinking of, okay, how do we save the folks? That is, the broad interests of the American people as a nation, as workers, as family, blah, blah, blah. And the way to deal with Fannie Mae and Freddie Mac and some others like it is to nationalize them. Make them agencies of the federal government. That's what they were originally. And they performed for many years a really valuable service to housing markets.
They sort of re-circulated the capital and the mortgages and so forth. Make them a sub-agency of government. Let the shareholders of Fannie Mae and the rest eat their losses. They were playing risk taker shareholders. Let them suffer the consequences of their wrong bets. And go back to a more normal configuration.
Not a casino. No private shareholders. Look, the bailout of Fannie Mae that they're proposing says, somewhat generously I think, we'll put $300 billion on the table to buy the shares of stockholders in Fannie Mae and Freddie Mac. And just us saying that should give them a lot of confidence. Well, yeah, wouldn't it if you've just had the federal government promise to buy your shares if you don't want to hold them anymore.
BILL MOYERS: Maybe that's why all the foreign investors rushed in yesterday to buy Fannie Mae and Freddie Mac-
WILLIAM GREIDER: It might have some connection, yes.
BILL MOYERS: -if they know the taxpayers are going to put the money in, they've got a pretty good-
WILLIAM GREIDER: They've got what you might call a no-lose proposition. And the other part of that, and this would be simple. You could pass this in three days. Restore the federal law against usury. That won't have too many details to it at first. But it'll be a general statement that the federal government is prohibiting the kind of outrageous predatory practices, which have become general in this country, of not just banks but other financial firms.
BILL MOYERS: Credit card companies and-
WILLIAM GREIDER: Credit card - yeah, it's a long list. We know those abuses.
BILL MOYERS: Put some limits, some boundaries?
WILLIAM GREIDER: Well, eventually you have to draw very precise boundaries, I think, and restore some structure that says, okay, you can get a return of X on credit cards, but you can't get a return of triple X, right? And that kind of regulation. And that's not easy to draw. It takes a while.
But the first law that would just reassure the public, we're against usury. Muslims are against it. Christians are against it. Jews are against it. And we're going to develop a government laws that prohibited and penalized these institutions when they get caught doing it.
BILL MOYERS: Excessive interest, owned loans.
WILLIAM GREIDER: Excessive-
BILL MOYERS: That's what you mean by usury?
WILLIAM GREIDER: That's the narrowest meaning. But the larger meaning is wealthy people, whether they're banks or individuals, ought not to be able to use their power, their wealth to exploit people who don't have wealth, great wealth. That's not too complicated. And I'm not being utopian here. I'm just saying that you can reestablish legal-slash-moral limits on the behavior of finance and their wealthy patrons. And if they don't want to observe those rules then they need not apply for emergency loans at the Federal Reserve or the Treasury Department.
BILL MOYERS: In other words-
WILLIAM GREIDER: You see what I'm getting at? And-
BILL MOYERS: Yeah, in other words, so-
WILLIAM GREIDER: -and this is a-
BILL MOYERS: -if there's a bailout, certain conditions on that bailout.
WILLIAM GREIDER: Absolutely.
BILL MOYERS: Not just a free pass.
WILLIAM GREIDER: And what they've done in the last year, now two or three times and they're going to do more is to say, "Oh, my goodness, the biggest investment bank, houses are in trouble. We don't usually lend directly to them. We only lend to big banks, but they're in trouble, too. Let's lend to both of them. Let's open the windows and pour out the capital, the liquidity, and so forth." And there wasn't a day that where they paused to say, "What are we getting in return? That these guys promise not to fail?" You see what I'm getting at? It's-
BILL MOYERS: I do.
WILLIAM GREIDER: -it's a wildly grotesque transaction where the public guarantees the life of these firms, and there isn't any effort that we know of to say, "And in return, you're going to behave in the following ways for the next ten years or maybe forever. We'll pass a law later that spells that out more clearly, but this is our starting demand." And I suppose they would say, "Well, we don't have time to do that. This is a crisis, blah, blah, blah." I don't buy that. I think that's a way to avoid those questions is not even mention them.
BILL MOYERS: You have been writing for a long time now that America's moving toward a corporate state. If we become one, can we exercise the self-correcting faculty that prevents us from hitting the iceberg out there?
WILLIAM GREIDER: One of the reasons I think politics is going to change fairly dramatically is that the Federal Reserve, accompanied by the Treasury Department and I think will be accompanied by the Congress, has crossed a very dangerous line in their bailout. They have essentially said, "We will put money on the table, taxpayers' money on the table, for any financial institution or business that is too big to fail." That is, if it fails, it'll send dangerous ripples through the economy.
And we've got a list now of maybe 30, 40, depending on how you count them, that we will be there to save you. I regard that as profoundly dangerous for the American Republic because once you cross that line and you have this special club that's privileged, that has benefits from government that nobody else can get, where do you stop it?
I mean, if I were running a big manufacturing company, I would have quickly run out and buy a subsidiary that's a bank or a financial firm that looks like a bank. And I would then try to get myself on that list. Who wouldn't? What's going on right now it's gotten a little attention - the union SEIU is fighting it, is these private equity firms, which are huge money pots of investors that take over and change corporations and come away with huge profits. The private equity firms are trying to buy into the banks and financial firms.
BILL MOYERS: And what would that mean?
WILLIAM GREIDER: That would mean that this private unregulated equity fund would be participating behind the door, so to speak, in the management of our regulated banks. But it would also, in a pinch, if it's big enough, maybe have a tap into that federal guarantee that if you're too big to fail, we'll be there for you.
BILL MOYERS: Even if-
WILLIAM GREIDER: You see what I'm getting at? And-
BILL MOYERS: I do. This morning in the "New York Times" one of the big stories in the business section is the financial industry is organizing to stop Congress from trying to regulate excessive speculation on oil and energy. They don't want this capacity for exploiting-
WILLIAM GREIDER: Well-
BILL MOYERS: -people's needs.
WILLIAM GREIDER: Well, I could lay us alongside that the Securities and Exchange Commission, which, remember in olden days, was supposed to defend us innocent investors against the guys running corporations. And that's why we have all these reports and so forth and so on. They announced this past week that they're going to go after the short sellers in the stock market.
The short sellers are the guys who say these folks at the corporate headquarters are lying to you or the folks at Citigroup are still not telling the truth about their losses and liabilities. So you see what I'm getting at. It's equivalent to saying we don't want anybody bad mouthing us in the middle of this trouble. And we'll try to penalize them if we can. Isn't that contradictory to the public interest?
BILL MOYERS: Have we hit bottom?
WILLIAM GREIDER: I don't think so. But I think the short answer is nobody knows. My sense is, partly because the rottenness, the bad assets and so forth and the inflated housing prices and all the other defaults have so much more to play out - I think they will then feed back, and are already, into real economic consequences for the general life of the economy.
BILL MOYERS: Meaning?
WILLIAM GREIDER: Well, people lose jobs. Unemployment will rise.
BILL MOYERS: Like Cleveland. Yeah-
WILLIAM GREIDER: And like, you know, a perhaps less vicious story because it'll be more gradual than what's happening in those neighborhoods in Cleveland. But then as that happens, the losses feed back into banks because they've got consumer loans, they've got car loans, they've got business loans. And even banks that have been more or less virtuous in their behavior will be impinged by that. So I'm not making some grandiose calamity prediction. I'm just saying we got a lot more pain to take in this society before this works out.
BILL MOYERS: Both parties have put the watchdogs to sleep, right?
WILLIAM GREIDER: A better metaphor, instead of putting them to sleep, would be castration.
WILLIAM GREIDER: I don't know what you want, I mean-
BILL MOYERS: Both parties of complict-
WILLIAM GREIDER: Putting them to sleep is just a metaphor that stops me-
BILL MOYERS: Both parties have been complicit in tipping the balance of power to capital, right?
WILLIAM GREIDER: I'm afraid so. That's right. I mean, if you go back over the last 20, 25 years, it was always portrayed as a cause of conservative Republicans, even right-wing Republicans. And that was, of course, true. But I think a majority of the Democrats were in collusion virtually every step of the way, and sometimes they led the way.
BILL MOYERS: Do you think Washington really knows what's going on? Do you think they really understand what's happening out there in Cleveland and places like that all over the country?
WILLIAM GREIDER: The short answer is, no, I've been in Washington as a citizen and resident for 40 years. And I'm still occasionally shocked by its ignorance of the rest of the country. And some of that is willful, of course. But some of it is just, it's a very nice life in Washington. You get used to certain protective qualities.
We saw that recently with these political players, who got good mortgages. How do they do that? Well, we know how they did it. And in any case, Washington doesn't yet see the depth of the problem.
If you ask me, well, who's figured this out? Who understands, at least in general terms, where we are? The guys in Washington? The politicians and their governing policy advisors? Or the dimwitted public? I would say the public. And I think there's a lot of evidence in that. You know, they keep seeing these polls where the public expresses doubt about this, about-
BILL MOYERS: Eighty-one percent of the people in the most recent polls say we're heading in the wrong direction.
WILLIAM GREIDER: I call that an extreme consensus. Why do the newspapers not celebrate that? They're always looking for consensus politics. Here's the American public, they've got an eighty-- you know, that's extraordinary.
WILLIAM GREIDER: We have an opening in this crisis for, this is really going to sound grandiose. We have an opening in this crisis for a deep transformation in American politics. I don't say it happens this year, next year, or it's going to take a number of years. But we are in the shock of reality. And people get it everywhere and see the blood in the streets. And you tell them how this worked and who did what to whom, and that's a basis for a new politics.
But it requires people - this is the hard part - to get out of their sort of passive resignation to, "Well, we follow the Democrats" or "we follow the Republicans" or "we let this group or that group tell us how to think" and engage among themselves in a much more serious role as citizens. And when, as they do that, they have to be willing to punish the political powers, in smart ways or crude ways, however they can, first, to get a place in the debate. But, secondly, to force the changing values of the system.
And I, this may be wishful, but I think in the next year, two years, five years, you're going to see both political parties floundering. What do we believe about all this stuff? We've told folks this, you know, lovely story for 20, 25 years about the magic of the marketplace. Do we still want to kind of prop that up? That's where they are now. They're still trying to prop up the marketplace vision and make it work again. It's over.
I think events will demonstrate that. So if they're not willing to change then we need to change the politicians. And that's all a bloody process and doesn't happen quickly. But that's why I'm optimistic.
BILL MOYERS: Bill Greider we look forward to your new book, the title of it will be-
WILLIAM GREIDER: "Come Home, America"
BILL MOYERS: And you come back to the Journal.
WILLIAM GREIDER: Thanks.
BILL MOYERS: With me now is one of America's leading chroniclers of money, power, and politics, who says what's happening is the disgrace of Wall Street, its excesses paid for by people like those in Cleveland and millions like them around the country.
William Greider has spent forty years examining how powerful institutions affect ordinary people. Once a top editor of THE WASHINGTON POST, a columnist for ROLLING STONE, and now National Affairs Correspondent for THE NATION, he has produced a series of best-selling books: SECRETS OF THE TEMPLE: HOW THE FEDERAL RESERVE RUNS THE COUNTRY, ONE WORLD, READY OR NOT: THE MANIC LOGIC OF GLOBAL CAPITALISM, WHO WILL TELL THE PEOPLE: THE BETRAYAL OF AMERICAN DEMOCRACY, and this one, THE SOUL OF CAPITALISM. He's working on a new book with the title: COME HOME, AMERICA.
Good to see you in person.
WILLIAM GREIDER: Thanks Bill.
BILL MOYERS: What were you thinking as you saw that report from Cleveland?
WILLIAM GREIDER: Made me angry all over again, even though I know the story. And then I thought, "This is usury." This is a living example of what the Bible prohibited, which is the sin of usury. Most Americans have never heard of it probably.
BILL MOYERS: Usury?
WILLIAM GREIDER: Usury, to be clear about it, is rich people taking advantage of poor people by lending them money on terms that are sure to make them fail. All three of the great religions, Judaism, Christianity, Islam, had a moral prohibition against usury because they recognized that society can't function like that. People of great wealth and their institutions like banks naturally have the power to overwhelm people of lesser means. And you can't allow that in a decent society. It won't survive.
BILL MOYERS: Where were the gatekeepers? Where were the watchdogs? Why did it take the Fed so long to put an end to-
WILLIAM GREIDER: Well-
BILL MOYERS: -predatory practices?
WILLIAM GREIDER: To make the story overly crude, Congress repealed the law against usury. It was done in 1980 by a Democratic Congress, Democratic President. And, of course, the Republicans all piled on and voted for it. And that was the first stroke, only the first of many, in which they stripped away the regulatory laws from the financial system and from banking.
And that allowed the free market modernized gimmicks of one kind or another, all these things we're now reading about, to flourish. And that's where we are. I mean, the gatekeepers said to the banking industry and to the financial industry, "We don't think federal control or regulation is good for you, so we're, therefore, liberating you to do your own thing."
BILL MOYERS: So why did they do that in 1980? I mean, there was, of course, the rise of the backlash to regulation from 40 years of Democratic rule-
WILLIAM GREIDER: The-
BILL MOYERS: -there was the rise, the arrival of the conservatives with their free market ideology.
WILLIAM GREIDER: Right, right.
BILL MOYERS: What was the issue?
WILLIAM GREIDER: Well, the driver then, and it was a powerful driver, was inflation. And through the '70s, for lots of reasons inflation, which tends to undermine the value of financial wealth and money, was out of control. The Federal Reserve had lost control of it, not entirely its fault. But that set up a political climate that said the government is not working and that wasn't wrong at the moment. Let's get the government out of the way.
And that was very appealing as framed by Ronald Reagan and other conservatives. But I think it's fair to say most Democrats yielded to it against whatever their original instincts were because of political necessity. And then the third dimension, maybe the most important, was that you had this very powerful industrial sector, that is banking and finance, that wanted and had pushed for years to get out from under the regulatory controls, limits on interest rates, the law against usury, the merger of commercial banks with investment banks, which had been prohibited in the New Deal because it caused the disaster of 1929.
I can go on and on. But you see the pattern. And the point I keep trying to make to people is that history learned the hard way that you do need prudential controls on industries like banking 'cause they're so central to everybody's well being.
BILL MOYERS: Left to their own devices, they go too far?
WILLIAM GREIDER: Yeah. They will use their power to their own advantage. And that's what we're witnessing now, a kind of recklessness that was set free by political retreat and people, some of them were sincere. Some of them were just on the make. But here's our great American tension. We want an economy that's dynamic, that's growing, puts more jobs out there for people to get, rising wages, all that good stuff. And at the same time, we want an economy that's stable. And that means no inflation, steady as you go, so forth and so on.
And this is the, you know, this is the mortal condition. You're not going to escape that tension. Government is a powerful intervener that tries, ought to try, to balance those two desires. For many years, the Federal Reserve served that role and tried to strike a balance.
BILL MOYERS: And then what happened?
WILLIAM GREIDER: During the last generation, 25, 30 years ago, the Federal Reserve, the central bank that regulates money and credit, tipped hard in one direction.
BILL MOYERS: Toward?
WILLIAM GREIDER: Crudely put, toward capital, in favor of capital and against labor. It not only hardened the value of money by suppressing inflation, but it participated very aggressively in the role of stripping away regulatory breaks on financial system and banks. Declined to enforce many of its own regulatory powers that exist in law. And meanwhile, sort of kept a foot on the brake about economic growth and full employment and all those good things that might help working people by encouraging rising wages.
BILL MOYERS: So at the same time the Fed was helping to keep wages down in order to keep inflation from escalating, its policies were, nonetheless, helping banks and investors to inflate the cost of their-
WILLIAM GREIDER: Right.
BILL MOYERS: -the value of their assets beyond reality-
WILLIAM GREIDER: That's it.
BILL MOYERS: -right?
WILLIAM GREIDER: That's it. At one point, writing in "The Nation," I somewhat playfully and wickedly referred to Alan Greenspan, the Federal Reserve chairman, as the "one-eyed chairman." He can see inflation and wages and goods and services, the prices that consumer prices, even when it doesn't exist. And he'll put his foot down on the brake. But he doesn't see the inflation in the financial system at all.
And the inflation in the financial system is the value, the prices, of financial assets, most obviously stock, rose fantastically over 20, 25 years, two, three times the growth in the real underlying economy. Something's wrong there, right? How do these financial assets, which supposedly reflect the economy, suddenly become worth three times more?
BILL MOYERS: Yes. How did they?
WILLIAM GREIDER: Well, now we're back in the game, aren't we? With deregulation, with the help of the Fed, and with the success of the Super Bull market, everybody's animal spirits in the financial system became more animal. And they and they went for it, and they said, "If you'll get this rule out of the way or you let us make this kind of weird little gimmicky paper innovation, we'll do even better."
BILL MOYERS: Yeah, you-
WILLIAM GREIDER: And you had this force rising up, driving things higher in the stock market while, in many sectors of the economy, if not everywhere, people are saying, "Gee, this doesn't feel that good to us." And particularly working people.
BILL MOYERS: You've written about a fantasy, an illusion that led to the housing bubble. You wrote about a fantasy that was sold, an illusion that led to the housing bubble. Whose interest was it to sell a fantasy?
WILLIAM GREIDER: Well, the merchants of financial paper, to put it bluntly. I mean, the illusion was that you could dismantle or disregard fairly old-time traditional rules of proper banking and stewardship and that that would definitely allow prices, profits, everything to go still higher. But that they could somehow dissolve the risk in that for the society, not just for the society but for themselves.
One example of that was what you heard about in the sub-prime mortgage thing. Who is holding this mortgage that's been lent to these people who we know are going to fail 'cause their incomes just aren't sufficient? Well, it's kind of hard to say because this mortgage is designed as a securitized package of 1,000 mortgages. And you sell it in the financial market to investors all over the world.
And then they sell it to somebody else, and it moves round literally. So what you've done with this innovation is you've distanced the lender from the borrower. Each party, the guy who sold the mortgage, the bank, then the next, the guy who buys the bond, takes his returns upfront, sells it on, and you stripped away the responsibility for that lending. And that's a pretty good microcosm of what happened generally in the financial system.
BILL MOYERS: How is it that these banks wind up holding the rotten mortgage securities that of Fannie Mae and Freddie Mac?
WILLIAM GREIDER: There is a level of fraud here which shouldn't be neglected that, I mean, people lied to their customers' banks-
BILL MOYERS: -mortgage-
WILLIAM GREIDER: -banks, mortgage houses, lied to the people they were selling these bonds to. But as we heard, they also lied to the people who were borrowing the money. I mean, this is fraud with the conflicts of interest. There's an investigation underway now with a number of the biggest banks stuck with all this bad paper, this rotten mortgage securities. Who can they sell them to?
The otherwise savvy investors around the world have gotten burned already, so they won't touch them. I know. Let's sell them to our customers. And so they're literally taking the bonds out of their own portfolio as a bank and selling them to the banks' closed customers. Now, that's going to stop, too, because now everybody's onto the secrets.
WILLIAM GREIDER: I think you can get lost in the mechanics of how all this works. And it's pretty sometimes pretty dizzying stuff. I think the bigger message is that what some of our old folks knew turns out still to be true.
BILL MOYERS: Which is?
WILLIAM GREIDER: Which is the process of lending, borrowing, investing, all of those things, require a personal hands-on knowledge of what you're doing but also a level of integrity that, put it bluntly, does not exist at this time in our financial system.
BILL MOYERS: You see a direct connection between what happened to those people in Cleveland and across the country and the cozy relationship that you've often written about between Wall Street and Washington?
WILLIAM GREIDER: Yeah. Yeah. The point I want to make, though, is that this is deeper than politician rolling over for his campaign contributor, the guys who finance the Democratic Party or the Republican Party. They do that, too. But they were sold a fantasy, an illusion, which sounded wonderful about how markets make better judgments than government and the public. And that liberating finance and business from prudential rules that society imposes upon them will produce a bigger, better economy and better returns for everyone.
All those fantasies have been destroyed by these events, I mean, wiped out. And if you think about it, as we go through the hard months ahead, America's going to have to take some pain, right? In one form or another. The government's going to have to probably ask for some sacrifices.
How do they do that when the American people have just seen the government rush in three days, five days or less, to bail out the biggest, most powerful institutions in the country? That is, the financial investment houses and banks and major banks.
BILL MOYERS: In your opinion, the bailout of Freddie Mac and Fannie Mae, good or bad?
WILLIAM GREIDER: I think it's bad. I mean, I think the way they're doing it is terrible. It's not done in the public interest. The bailout is necessary. They are failing at the bailout. And I believe they're failing because they haven't gone far enough.
They need to start thinking of, okay, how do we save the folks? That is, the broad interests of the American people as a nation, as workers, as family, blah, blah, blah. And the way to deal with Fannie Mae and Freddie Mac and some others like it is to nationalize them. Make them agencies of the federal government. That's what they were originally. And they performed for many years a really valuable service to housing markets.
They sort of re-circulated the capital and the mortgages and so forth. Make them a sub-agency of government. Let the shareholders of Fannie Mae and the rest eat their losses. They were playing risk taker shareholders. Let them suffer the consequences of their wrong bets. And go back to a more normal configuration.
Not a casino. No private shareholders. Look, the bailout of Fannie Mae that they're proposing says, somewhat generously I think, we'll put $300 billion on the table to buy the shares of stockholders in Fannie Mae and Freddie Mac. And just us saying that should give them a lot of confidence. Well, yeah, wouldn't it if you've just had the federal government promise to buy your shares if you don't want to hold them anymore.
BILL MOYERS: Maybe that's why all the foreign investors rushed in yesterday to buy Fannie Mae and Freddie Mac-
WILLIAM GREIDER: It might have some connection, yes.
BILL MOYERS: -if they know the taxpayers are going to put the money in, they've got a pretty good-
WILLIAM GREIDER: They've got what you might call a no-lose proposition. And the other part of that, and this would be simple. You could pass this in three days. Restore the federal law against usury. That won't have too many details to it at first. But it'll be a general statement that the federal government is prohibiting the kind of outrageous predatory practices, which have become general in this country, of not just banks but other financial firms.
BILL MOYERS: Credit card companies and-
WILLIAM GREIDER: Credit card - yeah, it's a long list. We know those abuses.
BILL MOYERS: Put some limits, some boundaries?
WILLIAM GREIDER: Well, eventually you have to draw very precise boundaries, I think, and restore some structure that says, okay, you can get a return of X on credit cards, but you can't get a return of triple X, right? And that kind of regulation. And that's not easy to draw. It takes a while.
But the first law that would just reassure the public, we're against usury. Muslims are against it. Christians are against it. Jews are against it. And we're going to develop a government laws that prohibited and penalized these institutions when they get caught doing it.
BILL MOYERS: Excessive interest, owned loans.
WILLIAM GREIDER: Excessive-
BILL MOYERS: That's what you mean by usury?
WILLIAM GREIDER: That's the narrowest meaning. But the larger meaning is wealthy people, whether they're banks or individuals, ought not to be able to use their power, their wealth to exploit people who don't have wealth, great wealth. That's not too complicated. And I'm not being utopian here. I'm just saying that you can reestablish legal-slash-moral limits on the behavior of finance and their wealthy patrons. And if they don't want to observe those rules then they need not apply for emergency loans at the Federal Reserve or the Treasury Department.
BILL MOYERS: In other words-
WILLIAM GREIDER: You see what I'm getting at? And-
BILL MOYERS: Yeah, in other words, so-
WILLIAM GREIDER: -and this is a-
BILL MOYERS: -if there's a bailout, certain conditions on that bailout.
WILLIAM GREIDER: Absolutely.
BILL MOYERS: Not just a free pass.
WILLIAM GREIDER: And what they've done in the last year, now two or three times and they're going to do more is to say, "Oh, my goodness, the biggest investment bank, houses are in trouble. We don't usually lend directly to them. We only lend to big banks, but they're in trouble, too. Let's lend to both of them. Let's open the windows and pour out the capital, the liquidity, and so forth." And there wasn't a day that where they paused to say, "What are we getting in return? That these guys promise not to fail?" You see what I'm getting at? It's-
BILL MOYERS: I do.
WILLIAM GREIDER: -it's a wildly grotesque transaction where the public guarantees the life of these firms, and there isn't any effort that we know of to say, "And in return, you're going to behave in the following ways for the next ten years or maybe forever. We'll pass a law later that spells that out more clearly, but this is our starting demand." And I suppose they would say, "Well, we don't have time to do that. This is a crisis, blah, blah, blah." I don't buy that. I think that's a way to avoid those questions is not even mention them.
BILL MOYERS: You have been writing for a long time now that America's moving toward a corporate state. If we become one, can we exercise the self-correcting faculty that prevents us from hitting the iceberg out there?
WILLIAM GREIDER: One of the reasons I think politics is going to change fairly dramatically is that the Federal Reserve, accompanied by the Treasury Department and I think will be accompanied by the Congress, has crossed a very dangerous line in their bailout. They have essentially said, "We will put money on the table, taxpayers' money on the table, for any financial institution or business that is too big to fail." That is, if it fails, it'll send dangerous ripples through the economy.
And we've got a list now of maybe 30, 40, depending on how you count them, that we will be there to save you. I regard that as profoundly dangerous for the American Republic because once you cross that line and you have this special club that's privileged, that has benefits from government that nobody else can get, where do you stop it?
I mean, if I were running a big manufacturing company, I would have quickly run out and buy a subsidiary that's a bank or a financial firm that looks like a bank. And I would then try to get myself on that list. Who wouldn't? What's going on right now it's gotten a little attention - the union SEIU is fighting it, is these private equity firms, which are huge money pots of investors that take over and change corporations and come away with huge profits. The private equity firms are trying to buy into the banks and financial firms.
BILL MOYERS: And what would that mean?
WILLIAM GREIDER: That would mean that this private unregulated equity fund would be participating behind the door, so to speak, in the management of our regulated banks. But it would also, in a pinch, if it's big enough, maybe have a tap into that federal guarantee that if you're too big to fail, we'll be there for you.
BILL MOYERS: Even if-
WILLIAM GREIDER: You see what I'm getting at? And-
BILL MOYERS: I do. This morning in the "New York Times" one of the big stories in the business section is the financial industry is organizing to stop Congress from trying to regulate excessive speculation on oil and energy. They don't want this capacity for exploiting-
WILLIAM GREIDER: Well-
BILL MOYERS: -people's needs.
WILLIAM GREIDER: Well, I could lay us alongside that the Securities and Exchange Commission, which, remember in olden days, was supposed to defend us innocent investors against the guys running corporations. And that's why we have all these reports and so forth and so on. They announced this past week that they're going to go after the short sellers in the stock market.
The short sellers are the guys who say these folks at the corporate headquarters are lying to you or the folks at Citigroup are still not telling the truth about their losses and liabilities. So you see what I'm getting at. It's equivalent to saying we don't want anybody bad mouthing us in the middle of this trouble. And we'll try to penalize them if we can. Isn't that contradictory to the public interest?
BILL MOYERS: Have we hit bottom?
WILLIAM GREIDER: I don't think so. But I think the short answer is nobody knows. My sense is, partly because the rottenness, the bad assets and so forth and the inflated housing prices and all the other defaults have so much more to play out - I think they will then feed back, and are already, into real economic consequences for the general life of the economy.
BILL MOYERS: Meaning?
WILLIAM GREIDER: Well, people lose jobs. Unemployment will rise.
BILL MOYERS: Like Cleveland. Yeah-
WILLIAM GREIDER: And like, you know, a perhaps less vicious story because it'll be more gradual than what's happening in those neighborhoods in Cleveland. But then as that happens, the losses feed back into banks because they've got consumer loans, they've got car loans, they've got business loans. And even banks that have been more or less virtuous in their behavior will be impinged by that. So I'm not making some grandiose calamity prediction. I'm just saying we got a lot more pain to take in this society before this works out.
BILL MOYERS: Both parties have put the watchdogs to sleep, right?
WILLIAM GREIDER: A better metaphor, instead of putting them to sleep, would be castration.
WILLIAM GREIDER: I don't know what you want, I mean-
BILL MOYERS: Both parties of complict-
WILLIAM GREIDER: Putting them to sleep is just a metaphor that stops me-
BILL MOYERS: Both parties have been complicit in tipping the balance of power to capital, right?
WILLIAM GREIDER: I'm afraid so. That's right. I mean, if you go back over the last 20, 25 years, it was always portrayed as a cause of conservative Republicans, even right-wing Republicans. And that was, of course, true. But I think a majority of the Democrats were in collusion virtually every step of the way, and sometimes they led the way.
BILL MOYERS: Do you think Washington really knows what's going on? Do you think they really understand what's happening out there in Cleveland and places like that all over the country?
WILLIAM GREIDER: The short answer is, no, I've been in Washington as a citizen and resident for 40 years. And I'm still occasionally shocked by its ignorance of the rest of the country. And some of that is willful, of course. But some of it is just, it's a very nice life in Washington. You get used to certain protective qualities.
We saw that recently with these political players, who got good mortgages. How do they do that? Well, we know how they did it. And in any case, Washington doesn't yet see the depth of the problem.
If you ask me, well, who's figured this out? Who understands, at least in general terms, where we are? The guys in Washington? The politicians and their governing policy advisors? Or the dimwitted public? I would say the public. And I think there's a lot of evidence in that. You know, they keep seeing these polls where the public expresses doubt about this, about-
BILL MOYERS: Eighty-one percent of the people in the most recent polls say we're heading in the wrong direction.
WILLIAM GREIDER: I call that an extreme consensus. Why do the newspapers not celebrate that? They're always looking for consensus politics. Here's the American public, they've got an eighty-- you know, that's extraordinary.
WILLIAM GREIDER: We have an opening in this crisis for, this is really going to sound grandiose. We have an opening in this crisis for a deep transformation in American politics. I don't say it happens this year, next year, or it's going to take a number of years. But we are in the shock of reality. And people get it everywhere and see the blood in the streets. And you tell them how this worked and who did what to whom, and that's a basis for a new politics.
But it requires people - this is the hard part - to get out of their sort of passive resignation to, "Well, we follow the Democrats" or "we follow the Republicans" or "we let this group or that group tell us how to think" and engage among themselves in a much more serious role as citizens. And when, as they do that, they have to be willing to punish the political powers, in smart ways or crude ways, however they can, first, to get a place in the debate. But, secondly, to force the changing values of the system.
And I, this may be wishful, but I think in the next year, two years, five years, you're going to see both political parties floundering. What do we believe about all this stuff? We've told folks this, you know, lovely story for 20, 25 years about the magic of the marketplace. Do we still want to kind of prop that up? That's where they are now. They're still trying to prop up the marketplace vision and make it work again. It's over.
I think events will demonstrate that. So if they're not willing to change then we need to change the politicians. And that's all a bloody process and doesn't happen quickly. But that's why I'm optimistic.
BILL MOYERS: Bill Greider we look forward to your new book, the title of it will be-
WILLIAM GREIDER: "Come Home, America"
BILL MOYERS: And you come back to the Journal.
WILLIAM GREIDER: Thanks.
31 January 2009
Academic scans former Master of Universe
I had dinner last night with a guy whose career wandered through nearly a half-dozen major brokerages. He was at ground zero of the securitization and creation of the alphabet soup of the real estate market. He ushered these new era inventions past the lawyers and regulators, launching them with the ringing endorsement "We don't see any legal reason why you cannot do that." He attained the level of CEO of a major banking subsidiary, until jumping ship a few years back as it became clear the game was over. He is still actively involved with the Fed trying to help sort out this mess.
I should first provide my impressions of the man. To some, this guy is Lord Voldemort. I was fully expecting to find him repugnant, arrogant, insufferable; I was prepared to either bite my lip bloody or do battle, whichever seemed more constructive. In a ping-pong-like exchange that spanned five hours, however, I found him remarkably endearing, humble, and contrite. Oddly enough, at no point did I find myself casting blame on him. Many of his actions--actions that were clearly extreme in retrospect--were shockingly understandable in context. In short, I really liked the guy. This will be hard to understand (and certainly draw scorn) based on what follows.
So what did I learn? Wall Street and the banking system is every bit as nuts as we all think. A bunch of twenty somethings with little or no adult supervision came up with ideas akin to extreme sports you see on Youtube. They did it because they could. You want leverage? Imagine a 20 billion dollar portfolio of mortgage backed securities with a capital base of $10k--literally 2 million-fold leverage. Imagine the shock of the inventor as he watches as his successors expand similar portfolios up to $900 billion. After running out of gullible Japanese bankers (and the Japanese were indeed pissed off before it was over) these young cowboys began trolling for other pools of gullible buyers: hedge funds, pension funds, and University endowments sufficed. They even found some local suckers. While sitting in a meeting listening to some guy within his own firm rant about some great tranche he just purchased for the firm, my dinner guest jumps up and blurts out, “That's the dogshit that we sold into the open market you idiot. You don't eat your own dogshit!� Squareds and cubes were described with the same level of astonishment that I was experiencing listening to the details.
How did we go so far off the tracks? He offered a few nuggets that seemed to explain the credit bubble. To reiterate, there really was no adult supervision. The guys putting these packages together certainly had some sense that they were crazy but nobody said stop. Government regulators being paid $100k couldn't tell guys making $20 million to take a hike. The senior managers loved the money flows. Cubicles--millions of cubicles--were staffed with engineers, chemists, physicists, and mathematicians from the best colleges in the country with no knowledge of the history of markets, fat tails, and past human follies, only how to finanically engineer.
Several critical mutations occurred over time:
(1) The average career age in the business is something like 7 years. A twenty year veteran is a very old man. The creators of these new-fangled products understood the toxicity at some level. As they retired, however, the next generation of twenty somethings had zero sense of risk. They were simply told which button to push and which lever to pull to make money. Nobody was driving the cab at all.
(2) The money overwhelmed the system. It was like when the computers gained consciousness in Terminator. The money pushed all regulations aside. It bought deregulation, politicians, and anything else necessary to keep the money machine growing. Nobody dared yell stop because so damned much money was being made.
(3) Greenspan became a believer--he lost consciousness. (This has some bias from me; the evils of AG were not refuted.) As to whether he understood what he was doing or knowingly let the scam run remained unanswered. (I personally suspect that arrogance and incompetence mixed toxically to produce a world-class dickhead.)
So where are we now, and where are we heading? This is the bad part: I thought I was the pessimist. Sheesh. He was describing a system infected by flesh eating bacteria. Every day looks more dire than the previous day. The solutions being proposed look feeble, and the Fed looks both powerless and confused. The good bank/bad bank model that lit up the market yesterday was suggested to be flawed because the good banks would turn bad soon thereafter. When asked about seemingly stable local banks, he suggested they too would become infected. I expressed shock that JPM not only didn't bring the system to its knees but was the last bank standing. That Jamie Dimon is quite a guy, eh? Apparently, I inferred from the answer (am nervous about explicitly attributing by quote) that JPM is on a don't ask/don't tell policy; the Fed simply cannot handle another mega-catastrophe while they wrestle with the fully-insolvent Citigroup and Bank of America. I suspect that JPM was told to keep everything looking peachy to buy time. (Maybe this was what caused the delayed reaction of Bank of America when it should have been gagging on its own vomit months ago.) Jack Welch got very low grades for engineering his balance sheet, moving to shorter duration debt to make GE profitable. The car industry is DOA. Germany and the UK are battling for the bottom rung of the sovereign ladder (above Iceland hopefully.) Why has the NYC housing market held up? Supposedly, it is only a matter of time: “New York may look like Detroit in ten years.� When peers claimed housing would bottom after a 40% drop, he asked “Why will it stop there?� No answer. Last but not least, the failed German bond auction was deemed catastropic: Who is gonna buy up our trillions? No answer.
In short, he sees no way out of this mess without serious pain. Despite a deflationary slant today, he sees inflation and spiking interest rates as the risk going forward. (I am short treasuries at a token level: Booyaa skidaddy!)
He finished on an upbeat note. He sermonized to my class, noting that the HR people at his last employer nicknamed the young employees the e-generation. What does the e stand for, they were asked? Entitlement! He urged the students to bust their asses, eat buckets of shit when necessary, and plan on working hard for a living. He reminded us that, by any measure, the US still has the resources and political system to dominate the globe. The healing will require retooling the workforce and educational system. The most critical part of the healing process may be a severe beating. Hard to argue with any of that if you ask me.
There you have it folks.
I should first provide my impressions of the man. To some, this guy is Lord Voldemort. I was fully expecting to find him repugnant, arrogant, insufferable; I was prepared to either bite my lip bloody or do battle, whichever seemed more constructive. In a ping-pong-like exchange that spanned five hours, however, I found him remarkably endearing, humble, and contrite. Oddly enough, at no point did I find myself casting blame on him. Many of his actions--actions that were clearly extreme in retrospect--were shockingly understandable in context. In short, I really liked the guy. This will be hard to understand (and certainly draw scorn) based on what follows.
So what did I learn? Wall Street and the banking system is every bit as nuts as we all think. A bunch of twenty somethings with little or no adult supervision came up with ideas akin to extreme sports you see on Youtube. They did it because they could. You want leverage? Imagine a 20 billion dollar portfolio of mortgage backed securities with a capital base of $10k--literally 2 million-fold leverage. Imagine the shock of the inventor as he watches as his successors expand similar portfolios up to $900 billion. After running out of gullible Japanese bankers (and the Japanese were indeed pissed off before it was over) these young cowboys began trolling for other pools of gullible buyers: hedge funds, pension funds, and University endowments sufficed. They even found some local suckers. While sitting in a meeting listening to some guy within his own firm rant about some great tranche he just purchased for the firm, my dinner guest jumps up and blurts out, “That's the dogshit that we sold into the open market you idiot. You don't eat your own dogshit!� Squareds and cubes were described with the same level of astonishment that I was experiencing listening to the details.
How did we go so far off the tracks? He offered a few nuggets that seemed to explain the credit bubble. To reiterate, there really was no adult supervision. The guys putting these packages together certainly had some sense that they were crazy but nobody said stop. Government regulators being paid $100k couldn't tell guys making $20 million to take a hike. The senior managers loved the money flows. Cubicles--millions of cubicles--were staffed with engineers, chemists, physicists, and mathematicians from the best colleges in the country with no knowledge of the history of markets, fat tails, and past human follies, only how to finanically engineer.
Several critical mutations occurred over time:
(1) The average career age in the business is something like 7 years. A twenty year veteran is a very old man. The creators of these new-fangled products understood the toxicity at some level. As they retired, however, the next generation of twenty somethings had zero sense of risk. They were simply told which button to push and which lever to pull to make money. Nobody was driving the cab at all.
(2) The money overwhelmed the system. It was like when the computers gained consciousness in Terminator. The money pushed all regulations aside. It bought deregulation, politicians, and anything else necessary to keep the money machine growing. Nobody dared yell stop because so damned much money was being made.
(3) Greenspan became a believer--he lost consciousness. (This has some bias from me; the evils of AG were not refuted.) As to whether he understood what he was doing or knowingly let the scam run remained unanswered. (I personally suspect that arrogance and incompetence mixed toxically to produce a world-class dickhead.)
So where are we now, and where are we heading? This is the bad part: I thought I was the pessimist. Sheesh. He was describing a system infected by flesh eating bacteria. Every day looks more dire than the previous day. The solutions being proposed look feeble, and the Fed looks both powerless and confused. The good bank/bad bank model that lit up the market yesterday was suggested to be flawed because the good banks would turn bad soon thereafter. When asked about seemingly stable local banks, he suggested they too would become infected. I expressed shock that JPM not only didn't bring the system to its knees but was the last bank standing. That Jamie Dimon is quite a guy, eh? Apparently, I inferred from the answer (am nervous about explicitly attributing by quote) that JPM is on a don't ask/don't tell policy; the Fed simply cannot handle another mega-catastrophe while they wrestle with the fully-insolvent Citigroup and Bank of America. I suspect that JPM was told to keep everything looking peachy to buy time. (Maybe this was what caused the delayed reaction of Bank of America when it should have been gagging on its own vomit months ago.) Jack Welch got very low grades for engineering his balance sheet, moving to shorter duration debt to make GE profitable. The car industry is DOA. Germany and the UK are battling for the bottom rung of the sovereign ladder (above Iceland hopefully.) Why has the NYC housing market held up? Supposedly, it is only a matter of time: “New York may look like Detroit in ten years.� When peers claimed housing would bottom after a 40% drop, he asked “Why will it stop there?� No answer. Last but not least, the failed German bond auction was deemed catastropic: Who is gonna buy up our trillions? No answer.
In short, he sees no way out of this mess without serious pain. Despite a deflationary slant today, he sees inflation and spiking interest rates as the risk going forward. (I am short treasuries at a token level: Booyaa skidaddy!)
He finished on an upbeat note. He sermonized to my class, noting that the HR people at his last employer nicknamed the young employees the e-generation. What does the e stand for, they were asked? Entitlement! He urged the students to bust their asses, eat buckets of shit when necessary, and plan on working hard for a living. He reminded us that, by any measure, the US still has the resources and political system to dominate the globe. The healing will require retooling the workforce and educational system. The most critical part of the healing process may be a severe beating. Hard to argue with any of that if you ask me.
There you have it folks.
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