By John Grant
What many see today as an economic miracle of productivity-led growth may prove to be a mirage. Our perceived prosperity may be nothing more than a grand illusion built on speculation and leverage.
—Don DeVitto,” Irrational Markets and the Illusion of Prosperity,” 2001
The particular road to hell on which Americans were embarked at the debut of the 21st century was a feature of their own unique situation.Â A half-century of economic progress and a 25-year bull market had led them to believe things that were not true and to expect things that they were not likely to get.
—”Financial Reckoning Day: Surviving the Soft Depression of the 21st Century,” 2003
America has become a divided society, in which an anxious majority is wedged between an underclass that has no hope and an overclass that denies any civic obligations.
-John Gray, “False Dawn: The Delusions of Global Capitalism,” 1998
In 1930 John Maynard Keynes wrote: “We have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand.” The true scarcity in his world — and ours — was therefore not of resources, or even of virtue, but of understanding.
-Paul Krugman, “The Return of Depression Economics,” 1999
I have never understood finance. Like other right-brain people, when presented with all those numbers my eyes glaze over and my mind wanders. Boredom sets in. Despite this handicap, in 1980 I applied for and got a reporter job with the Philadelphia Business Journal. I became a business and finance reporter.
I quickly taught myself what a balance sheet was. I had to understand enough, or be able to fake it, that I could ask a corporate CEO or an analyst from Merrill Lynch an intelligent enough question to get back an answer worthy of a story. Then I had to write the story. As it turns out, it seems many of our financial wizards have been faking it as well.
My other encounter with finance came from my father, with whom I had a long argument that spanned from my adolescence to the day he died in 2000.
After serving in the Pacific as the captain of a PT boat, my father came home, bought a small house and settled his wife and young son into the new Victory Culture. I was born then — Number Two.
Of stoic New England stock, my father chose to live simply and cheaply. He began to put his money into the stock market, often referring to Wall Street as “the citadel of entrenched greed.” He tried to interest me in this, and though I was a poor acolyte, some of it must have rubbed off. He died in 2000 the night before the historic dot.com bubble burst. Looked at on a 55-year chart, it looked like he died at the peak of Mt Everest.
In finance and American politics, my father was pure Bull. In both these cases, as my father’s son and as a business reporter, I was a contrary force. It took me a long time to realize that when it came to American politics and finance, I was pure Bear.
After 18 months, I was fired from the Business Journal because I wanted to write the wrong stories.Â I insisted on covering the black boycott of Coke products and the Coke bottling plant in Philly for its white ownership monopoly.Â I wanted to write about economic development and the struggles of poverty with wealth, stories that didnâ€™t fit in a conservative publication like the Business Journal.
My resume, then, included two published short stories in Penthouse magazine, and Iâ€™m convinced that mislead the Republican Mainline editor to hire me.Â â€œBusiness is like sex, right?â€ she asked me in the interview.Â I was a bit nonplussed, but I wanted the job, so I said, â€œSure, I can see that!â€Â She was thrilled by boardroom intrigue, while I wanted to cover the underdog and screw the big shots.Â Her assistant editor on the paper, a woman slumming after being cashiered as a reporter at the Philadelphia Inquirer, looked at me one day and said: â€œJohn, you know what your problem is? You donâ€™t know on which side your bread is buttered.â€
I told her I liked the phrase and would use it as my epitaph.
MAY HE REST IN PEACE
I was fired soon afterwards for failing to turn the struggle for the CEO position at a small company into an episode of Dallas.Â I reported the facts, but the question who was doing whom bored me to tears.
In my fatherâ€™s case, he couldnâ€™t fire me.Â We fought for years over things like the Vietnam War, colonialism, poverty and race â€“ the great American issues of justice and empire.Â Over time we realized neither of us was going to change, and we made a truce.Â We still argued, but it was on cordial and often humorous terms.Â Once when I was deported from Honduras during the Contra War with five others for political reasons, he picked me up at the airport and, that evening reading the Wall Street Journal, noticed a two-sentence news item on the front page.Â He loved it and enjoyed telling people his middle son was the only Grant to make it onto the front page of the Wall Street Journal.
Because of this background and in hopes of responsibly managing the inheritance my father left me, for the past eight years Iâ€™ve read a lot about finance, especially the growing debt crisis. I avoided the bullish self-help viewpoint like the plague and gravitated to the Wall Street bears and anti-imperialist, sustainability pundits.Â I concluded a reckoning like the current crisis was inevitable and put my money in the very safest and insured places.Â I bought a gun.Â I read up on alternative energies and looked over simple â€œgreenâ€ housing plans that in the back of my mind I would build on some plot of land in the woods for when the social contract really came unglued.
I listen these days to people who suggest this reckoning is somehow analogous to 9/11, that itâ€™s a case of something striking us innocent Americans â€œout of the blue.â€Â Well, thatâ€™s garbage.Â This social disaster has been in the making for quite some time, the worst of it blindly brewed under the guiding light of George W. Bush, â€œthe first MBA President.â€
Just like the stifling and shutting down of contrary views after 9/11 and during the lead-up to the Iraq invasion, thereâ€™s a whole army of Cassandras out there who tried to call attention to this disaster.Â It was like talking to a crack addict.Â The sense of American exceptionalism has so clouded the minds of so many Americans that, with the help of the leaders they elect, most Americans seem unable to even conceive there is any kind of problem that cannot be solved by a combination of forgetting, insisting on seeing only the positive and sending in F16s.
But reality has now overwhelmed the bullshit machines and bitten us in the ass in the climactic month of a critical Presidential election campaign.Â The timing is incredible.Â If I believed in God like Sarah Palin does I think Iâ€™d wonder whether He had anything to do with the timing.
Whoâ€™s bailing out whom?
On one level the current crisis is rooted in all the hedge funds, derivatives, credit default swaps and all the other goofy financial creations few of us understand. More immediately, itâ€™s about mass psychology.
â€œCrowds can only know things in their crudest, most dumbed-down form,â€ writes bearish financial analyst William Bonner. â€œSince the truth is infinitely complex, it follows that what a crowd thinks is almost always reduced to a point where it is more lie than truth.”
If youâ€™ve ever watched a school of thousands of tiny fish or a huge flock of tiny birds, youâ€™ve seen the mass respond to some real or imagined stimulus and instantly react by shifting into a new direction as if the stimulus message had been electrically transmitted through the mass of individuals.
Experts suggest the much-touted Free Market operates like a school of little fish, over a less instantaneous, but still relatively rapid, response time.Â In the current situation, we might say the notion of public confidence in the credit market is the rock or piece of information tossed into the schoolâ€™s midst.
One thing we have learned from this mess is that short-term credit virtually runs this country, and once the credit market panics, it clamps up, and it is this freezing effect that reverberates through the economy slowing things down or bringing them to a halt.
Obviously weâ€™re not little fish, and when human markets react quickly based on mob â€œwisdomâ€ their movements cause other unexpected circumstances that, then, cascade into still more unpleasant and, often, lingering conditions.Â As it becomes clear the â€œexpertsâ€ are really clueless, trust in the system can plummet.Â As our MBA President lectured us recently in one of his rare, furtive appearances from hiding under his bed in the White House, â€œItâ€™s like a house of cards.â€
Chairman of the Federal Reserve Ben Bernanke painted this picture for members of Congress, specifically as it applies to the international credit market.Â When I took Economics 101 back in 1972, I seem to recall â€œliquityâ€ meant cash.Â But in Alice In Wonderland financial language liquidity now refers to potentials of cash and mirages of buying power, artificial means of keeping the exchanges of goods and services fluid and moving.Â The rule is: donâ€™t stop the carnival.Â As George Bush told us early in his Iraq War, be patriotic and buy more crap.Â It all must keep moving, or that house of cards will come down, which means businesses fail and people lose their jobs.
Itâ€™s not coincidental that confidence (the term from which the â€œconâ€ in con game comes from) is the fuel this system runs on.Â All confidence games and ponzi schemes work for a while, for the early investors.Â Then when confidence is no longer enough to sustain the game they come crashing down, and the sharpie whose brainchild the scheme was and who has cleaned up skips town.Â The pain is felt by the poor, complicit schmucks who bought in too late.
Beyond the ponzi crisis, the real problem, here, is the fact we have a marketing-based, consumer-driven economy run by these smart and powerful confidence men and women, who are driven not by concern for the whole, but for self-interest.Â Not the well being of the many, but the profit of the few.
My father used to call these people Bright Guys.Â The greatest accolade he could put on somebody was to say, â€œHeâ€™s a bright guy.â€Â Being a Bright Guy was about more than intelligence.Â A Bright Guy was ruthless and used his intelligence to accumulate money.Â Compassion and things like sustainability were inefficient and for pansies.Â The Market ruled.Â In my Dadâ€™s world, GEâ€™s Jack Welch was the ultimate Bright Guy.
Sadly, the revelation of the economyâ€™s fundamental unsoundness shows that many Bright Guys arenâ€™t really so bright, and their unfettered greed tends to encourage con games that turn into financial bubbles of one sort or another.Â The current real estate debt bubble followed the dot.com stock bubble.Â The debt bubble was based on the creation of more and more baroque debt schemes to put more and more of that stuff called liquidity into the system to support more and more consumer binges of houses people canâ€™t afford and crap our marketing wizards tell us we need to buy.
All so a whole lot of Bright Guys could haul in lots of dough and live like mini potentates.
It should be clear the solution to this problem is a matter of finding the political will to check and undermine the ambitions of all these Bright Guys motivated by self-interest and profit enough to give a fighting chance to a society operated â€œas if people mattered,â€ to borrow the subtitle from E.F. Schumacherâ€™s famous book Small Is Beautiful.
Hereâ€™s a taste of Schumacherâ€™s thinking:
“Ever bigger machines, entailing ever bigger concentrations of economic power and exerting ever greater violence against the environment, do not represent progress: they are a denial of wisdom. Wisdom demands a new orientation of science and technology towards the organic, the gentle, the non-violent, the elegant and beautiful.”
Free marketers shrug people like Schumacher off, but if more of this kind of thinking had been incorporated into our system we would not be where we are today facing a slow and painful economic decline from the heights of hubris our Bright Guy leaders have led us.Â Thereâ€™s a good reason why itâ€™s called a â€œsustainabilityâ€ movement.
Mark Leonard in What Does China Think looks at the situation from China.Â â€œThe Western world is abuzz with talk of managing Chinaâ€™s rise,â€ he writes. â€œBut few Westerners realize that their anguish about Chinaâ€™s rise has its mirror image in Beijing.Â A debate is stirring among Chinese scholars and officials about how to manage the Westâ€™s decline.â€
China now holds over $1 trillion in US debt and will be asked to pick up much of the $700 billion in debt now approved by Congress to keep the debt balloon from deflating too quickly.Â Anyone who thinks this is not a picture of managed decline needs to have an episode on the couch to face reality.
Do we have leadership up to this task?
Paul Krugman, the economics professor turned columnist for the New York Times, recently said the crisis was so serious he felt after the election the new administration â€“ he hoped led by Barack Obama â€“ would have to start working right away, before it was even inaugurated, to address this debacle, a challenge that if you canâ€™t lead, then get out of the way.
Reduced to its essence, this is a profound leadership crisis.Â In the spirit of the appointment of Michael Brown to the helm of FEMA, two months before Katrina hit New Orleans in August 2005, President Bush named Christopher Cox, a former conservative Republican congressman from California, to head the Securities and Exchange Commission, the agency created in 1934 following the de-regulated excesses that led to the â€™29 crash and the subsequent depression.Â The SEC was designed as a watchdog to restore confidence in the financial system and, specifically, to avoid crises like we now find ourselves embroiled in.
Itâ€™s now an old story; instead of watchdogs, we get foxes overseeing the hen houses.Â With all the savvy and skills of â€œAtta boy, Brownie,â€ Cox oversaw the gutting of regulations that were designed to prevent just this sort of credit debacle.Â Cox is a Harvard MBA and lawyer who worked with the California law firm of Latham & Watkins, specializing in venture capital and corporate finance.
In 2004, while he was one of the five commissioners on the SEC board, at the request of the five monster finance institutions now bankrupt or floundering, Cox voted to gut the net capital rule, which was designed to provide a dike against the over-leveraging of debt.Â At Bear Sterns, the leverage ratio — a measurement of credit debt to real assets — soon rose sharply to 33 to 1, which meant for every dollar in equity it held it was now carrying $33 of debt.Â The same was true at Goldman Sachs, where current Treasury Secretary Henry Paulson was the CEO.Â Paulson, who had advocated gutting the net capital rule, personally hauled a half-billion dollars out of Goldman Sachs.
In its free market wisdom, the SEC was confident the five monster finance firmsâ€™ computers would flag any problems.Â Basically, the SEC told these firms to cut all connections with the Earth and print their own money made of air.Â It was like giving a crack addict an unlimited supply of what it craved and telling him to ease up if things seemed to be going badly.Â Two years after the gutting of the net capital rule, President Bush named Paulson secretary of the treasury.
As the fundamentals of the debacle became clear, George Bush looked out from under his bed in the White House long enough to assign Bright Guy Henry Paulson the task of fixing it, whereupon the guy who helped cause it came up with a $700 billion bailout plan, which our Congress in its wisdom eventually expanded from three pages to 450 pages and for good measure added some $150 billion in pork and tax cuts to attract Republican holdouts.
A week later a house panel grilled Richard Fuld, CEO of now bankrupt Lehman Brothers, one of the five institutions that sought to gut the net capital rule.Â Fuld crawled out from the bankrupt wreckage with $250 million.
â€œBased on the information we had at the time,â€ Fuld told the house panel, â€œI believed these decisions and actions were both prudent and appropriate.â€Â He said it all went wrong because of â€œdestabilizing factorsâ€ like a lack of investor confidence, rumors and credit downgrades.Â In other words, it was a failure on the part of the great-unwashed masses to appreciate the brilliance of his leadership.
Rep. Henry Waxman shook his head and summed it up this way: â€œWe canâ€™t continue to have a system where Wall Street executives privatize all the gains and then socialize all the losses.â€
Economist Krugman and others now tell us the $700 billion bailout is failing to instill the confidence in the frozen credit system it was meant to do.Â The Dow continues to fall.Â At this point, a sane and reasonable person should not be surprised.Â Why, in the name of Sergeant Bilko, knowing what we now know, would anyone expect a plan proposed by men like Paulson and Fuld to instill confidence?
This is how Doug Noland sees the $700 billion bailout.Â He writes the weekly â€œCredit Bubble Bulletinâ€ for The Prudent Bear website:
â€œRegrettably, this is a classic case of throwing good â€˜moneyâ€™ after bad.Â Not yet understood by our policymakers, literally trillions of new credit will at some point be necessary to finance an epic restructuring of the U.S. economic system.â€
If he is right, The Reckoning has only just begun, and the $700 billion was a shot in the dark dreamed up by Mr. Paulson and friends to cover their soiled trail.
Prudent Bear Noland again:
â€œOur economy will have no choice but to adjust to less household spending, major changes in the pattern of spending (i.e. less â€˜upscaleâ€™ and services), fewer imports, more exports, and less energy consumption.Â Moreover, our economy must adjust and adapt to being much less dependent on finance and credit growth â€“ which will require our â€˜outputâ€™ to be much more product-based as opposed to â€˜servicesâ€™-based.â€
That is, we gotta stop playing with funny money and start making stuff again.
Whether or not panic can be forestalled, the only long-term solution for America is, Noland says, an â€œepic restructuringâ€ of the economy away from services and credit to making real products and pay-as-you-go spending.Â In other words, we need to focus more on all the true â€œconservativeâ€ tenets of what is called the sustainability movement: alternative energy, community-based agriculture and manufacturing and, the really big one, pulling in those very-expensive imperial tentacles that reach all around the world.
â€œIn America, all the restraints, inhibitions and modesty of the old republic have been blown away by the prevailing winds of the new empire,â€ write William Bonner and Addison Wiggin in Empire of Debt: The Rise of an Epic Financial Crisis.Â â€œIn their place has emerged a vainglorious system of conceit, deceit, debt, and delusion.â€
My father is probably rolling over in his grave right about now, but not over anything Iâ€™m saying.Â Â No, the old man would be royally pissed at what these phony conservatives have done.Â Â It would be like the time I returned home from college when Richard Nixon was on the ropes and my fatherâ€™s alliterative hero Spiro Agnew had been brought low for taking a bribe of a freezer-full of meat.Â I walked out to the backyard of the house in the pine and palmetto scrub country of south Dade County, Florida and noticed an old toilet seat nailed to an Australian pine.
I lifted up the seat cover and there was a portrait of Richard Nixon.Â My father was beaming, and we both had a good laugh.Â He was fine with colonial and corporate exploitation, but arrogance, cheapness and stupidity were just too much.Â Nixon and Agnew had failed as Bright Guys.
Iâ€™m convinced he would now pass the very same verdict on George W. Bush and his hubristic gang of thugs.Â I have no doubt he would have voted for Bush had he not died when he did, but he was honest enough to know when something was wrong.
We are now learning of the reverberations around the world from this debacle.Â Europe is digging in as the credit slowdown hits there.Â Even our international nemesis President Hugo Chavez of Venezuela, who gloated at first, was sobered when he realized the suction from a sinking supertanker can pull everyone and everything down with it.
â€œThe world will never be the same after this.Â A new world has to emerge, and it is a multi-polar world,â€ he said.Â Then, true to form, he went too far, adding: â€œWe are de-coupling from the wagon of death.â€
While the United States is not really sinking, and our economy will remain a huge factor in the world market, all signs seem to indicate the nation is facing a slow decline, meaning the challenge for our smarter leaders will be how to manage that decline and how to deal with the rest of the world at a time we need international cooperation.
Those of our leaders who preach denial and scapegoating and seek regeneration through military violence will, hopefully, find a chastened public tired of the same old self-destructive policies.Â As the progressive left has suffered for decades, letâ€™s hope our natural political cycle is shifting and the forces of imperial delusion will be beaten and driven into the political desert.
The rest of the world, especially the Third World, has little or no patience for our current expressions of pain. Third World governments know only too well of the US-controlled IMF and World Bankâ€™s notorious history of draconian austerity demands known as â€œstructural adjustmentsâ€ when Third World economies ran into fiscal trouble.
Keith Hart, author of Money In An Unequal World, sums up the history this way:Â â€œThe 1980s and afterwards saw a massive transfer of money from the Third World to the West in the form of interest repayments that often amounted to as much as a third of government revenues in any given year. â€¦ The governments of poor countries were caught without any alternative to playing along.â€
Brazil was one of those countries.Â It is now a major developing world giant like China and India.
â€œWe did what we were supposed to do to get our house in order,â€ Brazilian President Luiz Inacio Lula la da Silva recently said.Â â€œThey (the US) spent years telling us what to do and they themselves didnâ€™t do it.â€
Instead of confidence, what we need a big dose of is leaders committed to truth-telling.Â That will re-build confidence.Â And, maybe, more than anything else, we need something weâ€™ve tossed aside for too long: humility.
John Grant is a Vietnam veteran and a member of Veterans For Peace.Â He lives in Plymouth Meeting, Pennsylvania.