The Good Old Days
Perhaps. I do have a hard time buying into the notion that this is the end of the world as we know it. However, the almost terrifying and maybe corrupt decisions being made by the New Leader of the Free World, Henry Paulson, has to give me pause. He is taking a normal very bad situation and shockingly creating unprecedented global chaos. If this doesn't make one miss that Reagan appointee snake charmer Alan Greenspan, nothing will.
Greenspan managed to be the boss over several Presidents and Treasury Secretaries. Somehow he was able to talk his/(our) way out of every financial crisis he/(we) faced during his 20 year run (the '87 crash, the 1990s real estate crisis, the Mexican Peso crisis, the '97 Asian crisis, the '98 Long Term Capital and Russian collapse crisis, the Internet bubble crisis, and the 9/11 crisis). Many say he caused most of those problems he needed to solve (that might imply that Volcker presided over the making of the 1987 crash, but for some reason that is never said). He did this without setting the stage for nationalizing economies. He also minimized the fear the world could have had during a crisis. Remember the manly man club "Moral Hazard Men Against Greenspan"? Rather quaint that he was criticized for jawboning banks into not letting Long Term Capital take down the system, isn't it?
I wonder what those same folks think about the actions taken by Paulson and Bernanke in comparison? Whether he believed his snake charming chants, or was simply "uber clever" and understood the world just needed to see a confident guy during a crisis, we will likely never know. But there is absolutely no rational basis for believing this crisis is of a magnitude fundamentally greater than anything he dealt with. Lets not forget, many banks went under during his reign. The fact that we have to remind ourselves is itself telling.
Chaos Theory
In contrast, Paulson's and sidekick Bernanke's actions have the appearance of being ad hoc and chaotic, thus materially contributing to the problem they are trying to solve. As "chaos" is the word that comes most to mind when I observe what they have wrought, I decided to "google" the phrase "quotes on chaos".
Two quotes, one by Charlie Mingus, the so called "Angry Man of Jazz", and Edward R. Murrow, arguably the founder of broadcast journalism, express my sensibility on how to view this crisis. Needless to say, these quotes are both taken out of their context and being placed in mine. Language is flexible that way. Mingus said "making the simple complicated is commonplace; making the complicated simple (even) awesomely simple, that's creativity". Murrow said "anyone who isn't confused really doesn't understand the situation". A third quote comes from my recollection in reading Economics books. It is from economist Herbert Stein. "Economists do not know very much, (but) other people, including politicians who make economic policy know even less about economics than economists do".
That pretty much sums it up.There is no doubt Paulson and Company have broken Mingus's law of simplicity (which of course is traceable back to William of Occam's famous law of parsimony called "Occam's Razor"). Does my statement even need to be defended? How much less simple can we get? Paulson does pass round one of Morrow's confusion test, although I am not persuaded that his or Bernanke's confusion yet rises to the level of understanding. As far as Stein's observation goes, I would add a corollary "politics trumps economics every time".
Two weeks ago in Where is Cool Hand Luke When You Need Him I stated that "once they have the money who is going to stop them from doing what they please". Well that sure was a "duh" statement if there ever was one. My main critique of the bailout bill was it was very unclear how the "mechanism" of buying $700-750 billion of mortgages, supposedly the poor ones at that, had any link at all to solving the crisis in the financial markets. They sent Josh Brolin out to tell the world that Apocalypse Now was approaching, but if we bought these mortgages pronto the Government would make money and all would be saved. The only logical inference one could possibly make, therefore, was that the underlying fundamentals of the crisis were in fact contained, and that we are now merely suffering a crisis in confidence. Yet this was never said. There was no persuasion going on, just brute insistence this bailout bill needed to be passed now. Nor was it explained why it was better for the Government to make this money, rather than the current mortgage holders.
It's the Confidence Stupid
My analysis suggested total losses from defaults will approximate $600 billion of which $500 billion has already been written off by global banks. Economist Mark Zandi of Economy.com guesses the losses will total $650 billion and George Friedman of Stratfor (www.stratfor.com) notes that adjusted for the size of the economy, the S&L bailout of the early 90s was larger than today's bailout. These are shots in the dark guesses assuming the world does not permanently fold back into its current hibernation cave. Total global net worth approximates $250 trillion. We should be able to handle this.This is all consistent with solving the Paulson-Bernanke paradox. The paradox is that since most of these losses have already been taken, we are now really just suffering a crisis in confidence. This crisis has lead to an enormous "liquidity trap". (Please read "Cool Hand Luke" for more on this, so I avoid even more repetition). In order to restore confidence, the Government undertakes an action it would not otherwise need to do were there not a lack of confidence. Circular reasoning for sure, but sometimes that is what's needed to break the spell.
But to pull that off you need to be calm when every one around you is not. The number one job of financial leaders is to reestablish confidence. It really hardly matters how this is done, within reason of course. All the President's Men are currently failing miserably at this. They are taking a laughably mundane, albeit large, speculative housing bubble concentrated almost exclusively in Central and Southern California, Florida, and Phoenix and are some how managing to do their best to turn this into the next great depression. It truly staggers the mind.They are a Marxist wet dream. Words fail me in my attempt at expressing my utter disbelief. This is Brother Theodore Goes To Washington.
I have no idea what these guys are doing or why.They keep telling us not to worry, while their faces ooze panic and even a touch of sleaze. They have managed to suck the Europeans in, who are now salivating at the chance to become part of their long desired "New World Order". The likely next USA president, "the One", is right out of New World Order central casting (unless Joe the Plumber can pull off a miracle) and will use this to create every left wing Government fantasy ever conceived of by the New York Times. Presidential politics hovers like a phantom in the background, silently influencing everything that is going on.
Bait and Switch
What is the first thing Paulson does with his $700 billion dollar mortgage bailout kitty? Out of nowhere the first $250 billion goes to purchasing fiat preferred stock in banks!! Where did that come from? Analysts were plodding through the 600 page monstrosity of a bill to see if it was permitted. I gather something in there permits it. (I am shocked, shocked). What the hell happened to the so called "toxic mortgages"? Why are they even doing this?
They absurdly tell us they are forcing the 9 largest banks to sell preferred stock to the Government in order to hide from the public the ones who really need it. Didn't we just send a bunch of Internet bubble CEOs to jail for this stuff? Aren't we about to go on a Witch Hunt to end all Witch Hunts for similar willful obfuscation? Yes, my friends, where is the outrage? One thing we know for sure is that Goldman Sachs is one of the banks that would have failed as sure as you are reading this. What's good for Goldman Sachs is good for the country. Beyond incredible, Paulson will not even release the minutes of the meetings with the banks because apparently there are none. They tell us there was no secretary to take notes. "My dog ate the damn homework, you idiots", is what he seems to be saying.
Just think, we have at least another $450 billion to go. Speaker Pelosi, from the great Suspect Zero state of California, is already drafting more new era Obama legislation which she would like passed in the Autumn before "the One" is even sworn in. The story of all stories---or How California Created a World Crisis---will never be told, or so it seems. There is even talk of how we need Paulson to stay on in an Obama Administration. Why not?
What is to Be Done?
Anyone who got this far is probably wondering what I would do if in their situation. Of course, I do not really know that, since I am not. But The Angry Man of Jazz points the way. Less is so much more. Also understand that we cannot affirmatively solve every problem. Unintended consequences abound. Let the pain of the first set of mistakes be absorbed before we embark on a vast series of of unknown financial adventures. Accept the Murrow pronouncement that recognition of confusion is the first indication of understanding. Think before you communicate and communicate before you act. Have some faith that we have gone through these problems before and have managed to emerge on the other side. Thousands of financial institutions have gone under. We have mechanisms to deal with this. We already did before this bill was even passed, as the various mergers demonstrate. Housing sales in California are at a 10 year high as are foreclosures, albeit at prices 60% off their highs. But that is good, not bad. The "healing" process is already in full swing. That is, the clearing price is being rediscovered as it always has in the past. Just let it be or at least make us aware that you are aware.
I do not know if that mindset would have worked. But this whole thing started going south big time as soon as they decided to push this bill down our throats. I must reiterate, the bill per se does not matter, it is how the whole thing has been conducted. They have conducted this in a "hiding in plain site smoke filled back room". When Senator Chris "Fannie Mae" Dodd came out of a meeting with Paulson and Bernanke, he conspiratorially told the press "wink, wink" this is "really bad". When Harry Reid had his discussion with the duo, he needed to knowingly tell the media that some unnamed insurance company was going down, sending insurance stocks in a tail spin.
Despite my irritation, I do not think these befuddlers will take down the system, although they are extending the process for sure. As much as Buffett politics get my goat Gates-Buffett--choice for me but not for thee, I have always trusted his acumen on "values" in markets. It is good to see someone express rational exuberance. Financial systems exist on a foundation of belief, and little else. It is of course true that "bubble" speculation seems to be the hand maiden of Capitalism. Life sucks and then you die. We adapt and try to improve. That's the way it is.
The Prescient Ones
Certain commentators would have you believe they saw this coming all along. This is the Fred Sanford really big one, even worse, far worse, than the great depression. Anything can happen, of course, primarily because we make it happen. That Mega Fraud, George Soros, is peddling the notion that we are undergoing some cyclical great deleveraging. Whatever that means. He continues to be outraged and condescending that no one takes his "sun rises in the east" notion of "reflexivity" seriously. The new ultra fake wunderkind of Doom Forecasting, Nassim Taleb, says he has "endured insults" for 12 years for predicting just this. What are these guys talking about? These problems always happen. I will make a prediction too. Within another 10 years we will have another crisis. Except that dopey, moronic, hick, hockey mom, President Palin, will actually have a clue. As Keynes said, and as I have quoted before, "... human decisions affecting the future, whether personal or political or economic, cannot depend on strict mathematical expectation, since the basis for making such calculations does not exist ... it is our innate urge to activity that makes the wheel go around ..."
Dopes like Palin understand that. Geniuses like Paulson do not. Not all geniuses are like Paulson, and not all "plain spoken" people are like Reagan and, I believe, Palin. But that is just the point. One needs to look beyond the superficial and get to the essence. Our men in DC seem not to recognize the "abnormal" is the normal. Reagan appointed Greenspan. Something there must have clicked. Maybe I ought to take a second look at Ayn Rand. And maybe read Reagan's now famous letters while I am at it.
Dopes like Palin understand that. Geniuses like Paulson do not. Not all geniuses are like Paulson, and not all "plain spoken" people are like Reagan and, I believe, Palin. But that is just the point. One needs to look beyond the superficial and get to the essence. Our men in DC seem not to recognize the "abnormal" is the normal. Reagan appointed Greenspan. Something there must have clicked. Maybe I ought to take a second look at Ayn Rand. And maybe read Reagan's now famous letters while I am at it.
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