Bozur
Amicus
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Post by Bozur on Nov 5, 2008 16:51:54 GMT -5
Why I'm Happy the Stock Market Crashed
esquire.com — A political consultant explains how cheap cash and quick loans of the past exposed three myths for a better financial future. More… (Business & Finance)
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November 3, 2008, 4:02 AM Why I'm Happy the Stock Market Crashed Buzz up!
A political consultant explains how cheap cash and quick loans of the past exposed three myths for a better financial future.
By Ken Kurson
Here's how repulsed I've been by the inane decoupling of risk and reward in the financial markets over the past five years: I quit. I spent a decade clawing my way into prominence as a financial journalist and commentator--a television gig, books, a column in this magazine. And the reason I quit opining about finance for a living basically boils down to disgust. Mostly with Alan Greenspan's pathetic desire to preserve his own reputation by flooding the globe with cheap dollars, no matter what the long-term costs. But also with the market's willingness to accommodate those dollars, regardless of how obvious it became that such madness was unsustainable. When I wrote in Esquire's October 1998 cover story that this market was going to crash and stay crashed, I mocked the idea that "Greenspan at the wheel" guaranteed an ever-strengthening of the economy. I said "stock prices are ridiculous," but I had no idea that our Federal Reserve chairman and the presidents who employed him and the financial institutions that were fattened by his largesse were jointly capable of such delusion. We all have our favorite example: a friend with horrible credit who suddenly lives in a big house with a no-money-down, interest-only mortgage. Deadbeats defaulting on their mortgages so they can make their car payments. A homeowner besieged by his own bank--his partner in ownership--to take a home-equity loan that'll boost his loan-to-value ratio to 110 percent. A stupid business expanding so fast that it literally has stores on opposite corners (both of which sell coffee for three times what the Pakistani guy across the street sells it for), because banks are begging it to take cheap cash.
And now I'm happy. Not that people are hurting or that retirement accounts have been massacred or that many will lose livelihoods. No, I'm happy about the return of a little bit of goddamn common sense. The next treasury secretary will inherit a dramatically changed financial landscape. He will have to resist the temptation to create regulations that slow American business to a crawl. The idea that we can achieve reward while forbidding risk is as childish as the idea that put us in this pickle--that all the reward had been achieved without assuming risk. He should immediately erase the bailout safety net: You lever your bank past the point of danger, you don't get bailed out, you get taken over. And prosecuted.
And the next Fed chairman, or this guy if he stays on, should be a big enough man to accept the "blame" if his tenure includes a recession. Allowing the dust to settle from time to time--which Greenspan lacked the courage to do--will separate the viable ideas and reasonable expansion plans from the interest-only loans and Starbucks.
The sky is not falling. Things are going to be fine. This tectonic shift will probably spell the permanent end of several cherished American financial axioms. And we'll be better off for their demise.
Myth: Investment banks are an indispensable source of "innovation" and liquidity.
There are now no (major) investment banks. And no one will miss them. Like lawyers, these parasites basically create nothing, add no value. And now they don't exist. The global financial system will survive not giving tranches of ten thousand combined mortgages from the farthest-flung sections of America. And whoever invented these CDOs, these "collateralized debt obligations," should . . . find meaningful work.
Myth: Home ownership is an unalloyed good.
It's not. Not just because it's expensive and illiquid, but because it's inappropriate for many kinds of people. And I don't mean just in a class-division way. (Although that's true, too, and Fannie and Freddie never should have been tasked with the social mission to "improve" the lots of poor people by saddling them with loans they couldn't repay.) I mean for economic reasons. Fifty percent is about the maximum number of households that should ever own homes in a society. A modern, efficient workforce needs its members to be mobile and nimble and not tethered to homes they barely own and cannot sell.
Myth: "Deregulation" caused this.
We're so, so, so not deregulated. The institutions that are failing are some of the most heavily regulated in the world. Investment banks are regulated by the SEC, the Federal Trade Commission, state attorneys general, and state banking commissions. But too many regulators are as bad as no regulators--none of them feels responsible since a failure can be blamed on all the others. Hedge funds are a great example. For years, people have been crying about the wild world of hedge funds. But hedge funds have actually held up well during this meltdown. Effective regulations are needed and possible. But any rush to clamp down willy-nilly will result in an even deeper freeze on liquidity and push this crisis deeper and longer.If you're an investment banker or a mortgage broker, yes, these will be prolonged and difficult times. You should consider coaching Little League. But the rest of us? On October 10, I bought GE stock for $18.77 and Altria for $16.58--wildly profitable companies with price-earnings ratios under 10 and yields of about 7 percent. There are great American companies paying out suddenly valuable American dollars as dividends. I just can't cry too hard when the stock market is holding the greatest sale of my lifetime. It's enough to make me want to write a bullish finance column.
Ken Kurson is a contributing editor at Esquire and executive vice-president of Jamestown Associates, a political-consulting firm in Washington, D. C. www.esquire.com/
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Bozur
Amicus
Posts: 5,515
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Post by Bozur on Nov 5, 2008 16:53:09 GMT -5
Related:
The End of America’s Capitalist Fantasy and the Shape of Banks To Come
November 3, 2008, 9:03 AM The End of America’s Capitalist Fantasy and the Shape of Banks to Come Buzz up!
In the end, it was taking no risk that created the greatest risk of all -- giving stupid people free money.
By Richard Medley
Kelley & Meyers/Getty
We can get complex about this if you want (no, thank you), but what happened to the global economy is disarmingly simple: Free money makes you stupid.
It was true in Japan during the 1980s, when bar drinks featuring ice from glaciers were going for $250 per. It was true in Mexico in the early nineties, when you could get kidnapped and still turn a profit. And it was true in the late nineties in the United States, when Internet companies were so prosperous, they destroyed the concept of wearing a suit and tie to work. You can see where that got us.
But the free-money-will-make-you-stupid doctrine became systemic to the global economy only after the dot-commers had hocked their last foosball table. The last six years have been a stunning collision of greed, technological advance, and free-market fundamentalism that produced an economic supercollider.
There's nothing new about greed -- when Chuck Prince, who then headed Citigroup, said in 2007, "As long as the music is playing, you've got to get up and dance," he was just saying what every person who had any access to capital was thinking -- but technology comes in waves, and it made this intersection of tech and the free market particularly toxic.
From time immemorial, we've had a financial system run mainly by men in their fifties and sixties that worked like this: Banks made money by loaning capital and making deals and taking the risk that they would not be paid back or that the deal would fall apart. That was simple enough. But then along came the math geeks who convinced many of us that instead of making loans and taking risk, we could make loans, "securitize" them, and then sell those securities to idiots in Europe and China.
When the old guys asked how that would work, they were shown sheets of paper with equations on them, and instead of saying, "I don't understand one damn thing on this page," they said, "So you're sure it'll work?"
That opened the door to an entirely new concept for banking: Let's make loans to deadbeats and sell them off in "tranches" to idiots in Europe who don't even know what a "tranche" is but like the idea that the S&P rates them highly and that they can make 6 percent a year on one with no risk. (Come here, little kitty.) As long as everyone looked the other way and stock prices kept rising, there was no pressure to do anything differently. Once the house of cards collapsed, all they were going to have to do was claim to have been blinded by science and point to the nerds who designed the strategy. (Which is exactly where Congress's investigation is heading.)
It's popular to blame Bush (it's actually just plain fun, but it's getting a little old) for the lack of regulation that allowed this circus to develop. But it wasn't Bush. The French did it, the Brits did it, the Russkies did it, too. And so on. Two-bedroom apartments in Mumbai were going for more than $3 million. Let me repeat: Mumbai.
The only people who didn't get sucked into this morass were the Japanese (who now, once again, have all the money in the world), but that's only because the bubble didn't last long enough to suck them in.
This was a global frenzy of financial-market freedom that we all participated in. Try to find someone outside of Al Qaeda who complained about the game we were playing.
The odd thing now is that people are trying to pretend everything's okay. It's like those idiots who stay on barrier islands when a hurricane hits. They get to the eye of the storm and say "cool," only to get swept away as the back side of the storm barrels through.
It will be a generation before we return to anything like the giddiness of the last ten years. The boomers, a generation averse to saving, are exiting the consumption equation, and that, along with the end of the fantasy that borrowing eighteen times your annual income is a good idea, means growth will slow to a crawl.
You want the perfect indicator of this? Illegal immigration has plummeted recently. That's a very sensitive leading indicator because -- whatever you may think -- illegal immigrants risk everything to come here, and if they're less willing to do it now, it's because they are hearing from the bottom level of our economic pyramid that things suck and are unlikely to get any better. Taking them out of the equation means less demand for housing, cars, and everything else.
We are not going into a new Great Depression. Central banks, finance ministries, etc. have acted with remarkable speed to counter the financial crisis. As a result, the recession -- which is just starting -- is going to be just as long and painful as recessions normally are.
The fantasy of global free-market capitalism is over. Countries will revert to their historic behaviors: The U. S. will sell off its publicly held assets as soon as feasible (which may be a decade, but still). The Europeans will use it as a reason to go back to communalism, and the North Koreans will use it as a reason to test nuclear warheads over the Sea of Japan, no matter what they tell Condi Rice.
U. S. authorities are going to have a hell of a time balancing the absolute ocean of money they've created with the fact that slow growth is going to be with us for a while. This is how inflation happens.
Finally, we will re-create an entirely new banking system under the ruins of the current behemoths. Thousands of smaller banks will rise to fill the demand for loans, but they will be prudent and do silly things like demand you have an income and an ability to pay back the loan. People will have to live on their incomes, and that will slow growth but make us a sounder economy. These smaller banks will be rooted in communities they know. Ten years from now, the American financial sector will look like it did thirty years ago -- all those little banks will do what banks used to do: lend money to people who both need it and can afford to pay it back. Imagine that.
Richard Medley is the chairman of Medley Capital and a former business partner of George Soros's. He teaches from time to time at Yale University. www.esquire.com/
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