Monday, September 22, 2008

who are we that this happened to us?

Who's to blame for the financial crisis that the US Treasury is now trying to mitigate? Its seriousness is obvious enough. How else explain the restraint our politicians are struggling to achieve? How even comprehend the quantities of money involved -- a trillion dollars or more in Federal payments and guarantees?

Press coverage is, understandably, vast. I note only three: two by a Washington Post business columnist and one by a hedge fund operator. Reading them I wonder what's happened to us? What's happened to US citizens, we who once prided ourselves on thrift and now are overwhelmed with mortgage and credit card debt? What happened between the Depression generation of tightwads and those intervening generations of more and more laid back consumers?

The press writes as if Americans who spend the earnings tomorrow may never bring are simply victims. What does that say about our collective intelligence and integrity, our collective power as voters in this democracy? Many of us seem to have caved in, given up, stopped t_h_i_n_k_i_n_g.

I also wonder about the rest of the world, so intertwined with the US economy that they suffer with us, some even more than us. And the rest of the world, too, who sustain our outrageous debt -- our government, household, and and corporate debt that cannot be funded without this foreign support. Have they become so dependent on the US as the world engine of prosperity that they cannot do otherwise?

I wonder but am unable to predict what will happen.

After my comments on the three commentators, I've put some info on Charles MacKay's old and interesting book.

In the first article, commentator Steven Pearlstein says that "when you strip away all the complexity and trappings from the magnificent new global infrastructure, finance is still a confidence game." But he says the bankers wouldn't have been able to work their con if the US economy hadn't been artificially buoyed up by low interest rates over the last decade. And he says Greenspan and the Fed were able to keep interest rates so low because foreigners remained willing to buy American debt instruments, American securities, American real estate and other assets of all sorts. Low interest rates provided Americans with cheap money. Households borrowed heavily "to buy houses, cars and college educations, along with more health care, extra vacations and all manner of consumer goods and governments used the cheap money to pay for services and benefits that citizens were not willing to pay for with higher taxes." When this credit bubble began to frighten foreign investors, the big New York banks found a way to keep these investors happy by inventing new credit instruments and working their con to keep the bubble growing. That meant that the inevitable bursting was a much more serious event than almost any previous meltdown (it's being compared to the 1929 crash of course).

Pearlstein says that the financial restructuring that we're now seeing should "force some financial discipline on the majority of U.S. households that relied on borrowed money to maintain their lifestyles," but he says it probably won't.

In the second article Pearlstein says the scale of the event is mind boggling but not so great that it can't be controlled. This week should show us life being lived normally in most US households and most companies outside Wall Street. The securities markets should return to normal. The main effect will prove to be a new way of looking at free market ideology: "There is little doubt we are witnessing a once-in-a-generation sea change. It will no longer be an easy applause line for a politician to declare that government is the problem and that markets always know better than regulators and politicians. Debates about the competitiveness of U.S. financial markets will focus less on how little regulated they are and more on how much protection and transparency they offer to investors. It will be harder to deny essential government agencies the talent, money and respect they need to do the job right."

He closes by addressing the confidence of foreign investors in the US economy: "No doubt there will be those who see in this crisis further proof of the inevitable decline of the United States as a world economic power. In fact, it may be just the opposite. The wild swings over the past week in financial markets from Moscow to Mumbai, were only the most recent reminder of the increasingly global nature of capital flows and the risks of financial contagion. They also were a reminder that, in times of stress, global investors still seek refuge in the safety of the U.S. dollar, U.S. Treasuries and the skillful crisis management of U.S. policy makers."

The opinion piece by the hedge fund operator is Calling Out the Culprits Who Caused the Crisis, by Eric D. Hovde. He's an interesting character. A financier who's wealthy enough to own both an investment bank and commercial banks, and also runs a hedge fund, he's not a sleazy character, but rather one who strongly supports charitable activity here and abroad. It's also obvious from this article that he's one who is blunt in his criticisms of his own industry.

Like Pearlstein he says the historically low interest rates put in place by the Greenspan Fed created a toxic environment for the US economy. The New York bankers who took advantage of this environment simple threw away all the internal checks that traditionally kept the banking business sound. He say the price of all this greed is an estimated $1 trillion and more in losses. While giving Greenspan much of the blame, he also says "One has to wonder why Treasury secretaries under Presidents Clinton and Bush -- Robert Rubin and Hank Paulson, respectively -- took no action to curb these abuses."

He says we might have gotten some help from congressional oversight if the financial industry hadn't corrupted congress: "The Wall Street investment banking firms, their executives, their families and their political action committees contribute more to U.S. Senate and House campaigns than any other industry in America. By sprinkling some of its massive gains into the pockets of our elected officials, Wall Street bought itself protection from any tough government enforcement."

He leaves us with no prognosis but only a wish: "there has not been a time since the 1920s when Wall Street has enjoyed as much influence over Washington as it has for the last 12 years. Let's hope that this influence fades rapidly -- and that this financial crisis doesn't end the same way as the one of nearly 80 years ago."

Here's the old and ever-popular book I mentioned at top. MacKay was one of the first to notice how easily people get carried away and how dreadful the results can be.

Memoirs of Extraordinary Popular Delusions and the Madness of Crowds

1. Money Mania.—The Mississippi Scheme
2. The South Sea Bubble
3. The Tulipomania
4. The Alchymists (file a.)
4. (cont.) The Alchymists (file b.)
5. Modern Prophecies
6. Fortune-Telling
7. The Magnetisers
8. Influence of Politics and Religion on the Hair and Beard
9. The Crusades (file a.)
9. (cont.) The Crusades (file b.)
10. The Witch Mania
11. The Slow Poisoners
12. Haunted Houses
13. Popular Follies of Great Cities
14. Popular Admiration of Great Thieves
15. Duels and Ordeals
16. Relics
About the Book and Author

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