Sunday, March 15, 2009

Business Lost Its Cool

Michael Douglas' Gordon Gekko told us "Greed is Good," in 1987 and the idea survived the aftermath of the bubble of 95-01, mainly by getting into what became the housing bubble. However, "greed" – and the idea of making money at any cost, by any means – has lost its charm in the current economic crisis. Some derivatives of our free market system are not so good. This was made evident when Jim Cramer appeared on The Daily Show with Jon Stewart.

And the blogs went wild.

Jon Stewart appeared on Crossfire, condemned their deck chair arrangement on what appeared in the fall of 2004 to be a Titanic political ship of state – little did we know then – and the next thing you know, the show is off the air. America got itself stuck in another no win situation and who was eventually caught in the crossfire? Seemed their political bantering became so irrelevant and Stewart deflated all the gas out of the gas bags and suddenly CNN had no show to show.

And now he and his show have attacked CNBC.

His attack is on CNBC for not reporting at least something of the coming collapse struck a cord with the fashionable cognoscenti. I mean how could something so big go so unnoticed? Others saw it coming or saw something coming. Krugman at the NYTimes kept commenting on when the bubble was going to burst. As Stewart said, they were part of the problem not part of the solution.

Are they a news organization or a bunch of cheerleaders?

Jim Cramer and his friends no longer get to sit at the cool table with all the cool kids. Business has lost its cool. Business is a bunch of geeks and nerds who were never really cool but appeared that way for a short period because they were successful. But they are not successful now.

In fact, they got us all in a lot worse situation than before. How cool is that?

Sunday, March 08, 2009

Dear Mr. Rich

Today's Frank Rich opinion in the NYTimes brought out a comment from me. Here is what I posted.

Before the bubble burst, during loan negotiations from my local bank, I thought they were going to require me to give blood and hand over my first born. Now, I understand my local bank is sound while wilder, more speculative but significantly larger banks are at risk of default.

The current crisis pales in comparison to a greater threat we overcame recently: Communism. The economic structure of communism was a threat to the foundation of capitalism. However, planned economies, no matter how many 5-year plans, could not out perform the randomness of free markets, and by the last quarter of the previous century, this became evident even to the most common of men in all countries of the world. Communism died without the bloody necessity of the Second World War against fascism.

Tyranny will be with us as long as the power > corruptions connection holds true, but threat of a change in the structure of our economy has passed – for now. What we didn't tell all those peoples that chose free markets over a planned economy was a good cop/bad cop form of self-regulation known as boom and bust.

Planned economies remove the busts, everyone shares equally, we all suffer equally together, but they also remove the booms, and this is what gave free markets their edge in the recent competition. Right now, it's hard for us to remember that when the next boom comes, it will return more than was lost in the bust – and for longer too.

Testing FDR's Legacy (Part 2)


In my last post I offered up some of FDR's legacy, policies developed from the cause or impact of the Great Depression, which are being tested in the current unpleasantness. I have another one that I did not mention but certainly needs mentioning.

Lots of bank failures occurred during the Great Depression. People no longer trusted banks as a place for simple savings accounts. According to Wikipedia, some 4,000 banks failed at the beginning of the Great Depression at an average asset value of $900,000 each, which according to my math results in total asset value of $3.6 billion – both of these numbers are off the scale of their respective axes of the above chart.

The Federal Deposit Insurance Corporation was set up to protect deposits so people would go back in banks and put their money in them so it could be used to loan out again and get the economy rolling. The message since then has been banks may fail but your money was safe. As the chart shows, the FDIC is now being tested like it has never been tested before – or at least since the 1950's.

The number of banks that have failed is no where near the number that failed after the burst of the savings and loan bubble, peaking in 1989, but a whole lot more assets have been put at risk. The FDIC has never faced anything like this before. The amount of assets at risk during the saving and loan bubble of the early 90's is not even 10% of today's assets at risk.

I keep hearing stories that local small banks are in good shape. They were not the ones loaning out money to people who really couldn't afford them to pay for property that is now no where near what the original loans was worth. They were not the ones buying sub-prime loans backed investments. It was the big banks, the really big banks. That's why the red line is so low in 2008 and the blue line is so high. Of the axis stretching assets in 2008, two banks account for 90 percent of that, Citibank and Washington Mutual Bank.

How the FDIC will fare in the current crisis remains to be seen. Since it is back by the U.S. government it will not fail. Everybody covered by the FDIC will remain whole, and the economy will be the better for it. No matter how great this depression is, the FDIC, and as noted in my previous posts, unemployment insurance and Social Security will lessen its greatest. They are the FDR legacies from his administration of that Great Depression.

I wonder what lessons we have learned from our recent crisis. What policies may come from this? Maybe the rating agencies such as Standard and Poor should work for the buyer and not the seller. If only those sub-prime backed investments had been rated to reflect their uncertainty instead of to gaining favor – and further business – from the seller, this might not have ever happened.