by Gilles d'Aymery
"Is anyone ever going to wake up to the fact that there is a lot of larceny in the human heart and that there are a lot of sheep waiting to be shorn and that regulation is not a bad thing? Or will we just lurch from massive meltdown to massive theft and on and on? Is anyone ever going to get it? Anyone? Anyone?"
—Ben Stein ("The Unending Allure of the Free Lunch," The New York Times, February 10, 2008)
(Swans - February 11, 2008) BAILING OUT THE GAMBLERS: Once again Chairman Ben Bernanke and the Fed showed their hand when they lowered the federal funds rate by one half of one percent two weeks ago in the wake of a three quarter of one percent cut a week earlier. The financial markets prevailed at the expense of fixed- and low-income families, the middle class, and inflation. By shoring up Wall Street the Fed hopes to reverse the credit crunch and by pouring liquidity in the market put a brake on the economic slowdown through increased consumption. In other words, the subprime swindlers get a pass on the back of those who have been most hurt by those financial shenanigans and who will continue to bear the full brunt of these long-held and failed monetary policies. The wealth of the nation keeps being sucked to the top of the food chain, and, hey, what about getting some help from inflation. Here's a little shocker.
PROPANE HEAVEN: Last November 20, 2007, this household paid $2.8745 per gallon for a delivery of propane. As I noted in my Blips #62 it was a 77.44% hike in four years. Well, in January 2008, just over two months after our November delivery, we've paid $3.2385 per gallon. That's a 12.66% increase in two months and a 100% hike in four years. We had to disburse $600 -- or $300 a month -- to keep one bedroom warm and cook dinner (I've shut off the bedroom heater and added a layer of blankets to the bed). Now, I worked for almost a decade in the LPG field (Liquefied Petroleum Gas) as a refiner, a trader, and a broker. I sure know that propane is less than 1% of the top of the barrel (of oil). So some people are making a killing out of this stuff, no doubt about it. Incidentally, my Oregonian neighbor and Swans columnist Carol Warner Christen only paid $2.549 per gallon at the very same time we were charged $3.2385 -- a 27.05% difference. Let's put it this way: We're both being gouged, but it hurts more in Northern California than in Oregon. Where did our money go? I don't know the American distribution system of this stuff -- how many intermediaries there are between the refiners and the local dealers -- but we all know that the refiners (oil companies) have once again reported record profits.
EXXON MOBIL'S 2007 net income was a paltry $40.6 billion, the largest profitable year of any company in American history. In the fourth quarter alone, Exxon's profits rose 14 percent, to $11.7 billion, or $2.13 a share. (Interestingly, these record profits come at a time when these companies are producing less oil and are unable to replace the oil they bring to market with new sources.) Hopefully, Carol Christen holds a few shares of Exxon or Chevron (I do not). That's most probably where our money went. Unfortunately, and as I've related in past Blips, it's not just the cost of energy that's rising through the roof. The other day I bought a Franco-American baguette and a 1/4 pint of pasta salad at a local store in Boonville: Cost: $7.48. But, don't worry, Mr. Bush says that our economy is strong, so strong indeed that according to the International Monetary Fund the US GDP in 2003 was 32% of the world's GDP and four years later it is down to 25%.
NOT EVERYTHING'S BAD, though. Last weekend, some 1,000 Very Important People flew on their own private jets to Phoenix, Arizona (global warming, anyone?) to attend the XLII Super Bowl that took place in a state-of-the-art stadium fully paid with tax dollars. In 2007, a 30-second commercial was worth $2.5 million. This year, $2.7 million did it. Some people do live a dream life. Others miss out on the opportunity: Over 20% of Arizonan children and 40% of Indians (aka Native Americans) live below the poverty line. Life's a ball when you are in the fast lane! (Again, 90 percent of Americans were better off in 1973 than they were in 2005.)
WANT LETTERS TO THE EDITOR? Simple enough: write about the Israel Lobby, conspiracy theories (especially the ones related to 9/11), the bad, badder, baddest Bush, and America's deeply reactionary and psychotic culture. You'll get reactions by the bundles. Another topic that will get you in the collimator is criticizing Libertarianism, which has a huge following on the Internet, even if its proponents never fully flesh out the specifics, aside from the live and let live mantra, no taxes, no government, private charity, free market uber alles, and, at least in the U.S., a series of ideological, rather ugly anti-civil rights policies (cf. Ron Paul). Above all, many libertarians have a predilection for advocating the superiority of their knowledge (or is it fuzzy thinking?) and assailing the "stupidity" of the masses. Take Justin Hinkley's letter in which he berates the lack of sophistication of borrowers. "If the masses would pay attention," asserts Hinkley, we would not need the John Paulsons of this world "when people are doing something stupid." Of course, the government is the culprit. Says Hinkley: "Government is fundamentally the problem here (the stupidity of certain borrowers is also a necessary condition, but the former is the only one known to be resolvable)." Gosh, how the world would be so much more refined if we did not have to deal with all these "stupid" people and evil governments, and we would be as rational as the dogmatic, know-it-all Justin Hinckley!
THIS NOTION OF STUPIDITY was interestingly enough also entertained by a far more equanimous reader, Big Gav from Down Under, whose erudite writing on energy issues I regularly follow. Gav writes that in relation to the credit/housing bubble, "the borrowers were (to a large extent) greedy and stupid, while the lenders were (without exception) greedy and stupid." He actually offers a much harsher judgment on the lenders and brokers than he does on the borrowers. To him, "some of the lenders (and brokers) were simply criminals who should be harshly dealt with for ripping off both borrowers who could not afford to repay the loans and investors who bought the bundled-up toxic debt they issued."
WHILE I DISAGREE with both letter writers, I find it much more comfortable to address Big Gav's opinion -- Mr. Hinckley's letter oozes much too much disdain and condescension for the "low-life masses" and dogmatic faith (an oxymoron, I suppose) in his own superior thinking. There's also something to be said about people who may not see eye to eye on policy making (I am by far NOT a libertarian) and yet do not feel the need to resort to argumentum ad hominem to make their points.
GREED is certainly a factor but not a particularly determining one in a culture that for the past several decades has praised it as the ultimate value in human nature. Readers must recall the ads vaunting greediness and self-indulgence -- "Greed Is Good," "You Deserve It," etc. Nothing new that I've not covered time and again (e.g., see "The Tribulations Of The Toads," July 2002). So greed is a given, but a distinction ought to be made among the various actors. The greed of the major lenders was incommensurably larger than that of the borrowers, and within the latter another distinction should be made among real estate speculators (high greed), middle-class investors, and homebuyers. Each category would deserve a lengthy analysis, but in short: The major lenders (financial institutions) were motivated by their quarterly profits and each individual actor by his/her year-end bonus, and the herd mentality -- traders (remember I used to be one) are only concerned with short-term profits and their own financial advancement. (Many books have been written on the age-old toxic trilogy of money, sex, and power.) The real estate speculators tend to fall in the same category though they are more industry-focused than the big financiers. Middle-class investors were more preoccupied with preserving their savings; and the homebuyers were attempting to realize the American Dream, that false bill of goods that has been sold to them for generations. Big Gav is obviously correct when he and his fellow libertarians wish for "people to be better educated and more rational in their decision making" -- not a libertarian-centric wish, by the way -- but that does not make those people "stupid" per se. Actually, that singularly rapid conclusion ignores the wider cultural mindset within which individual decisions are made and avoids addressing the issue of financial deregulation, the main culprit behind this fiasco of potently ominous consequences for all (at varying degrees of grief).
THE VAST MAJORITY of Americans, age 65 and younger, has only known one economic paradigm, that of material progress through spending and borrowing, coupled with the endearing trait of the American character -- optimism -- and the less-endearing other trait -- more is better; a mixture that is leading the uncontrolled, and perhaps uncontrollable freight train that's driving the world over the cliff. But, when that's all you know, you cannot be faulted for the ignorance of not knowing what you do not know or even do not know you don't know (it reminds me of good ol' Rumsfeld!).
THE MIDDLE CLASS INVESTORS who got caught into the jaws of this current critical crisis were not "greedy." They wanted to improve and safeguard their belongings. Some had been burnt by the tech bubble of the 1990s, others were not sophisticated enough to play the stock market, their 401-k remained flat at best, and their bank savings were being devastated by the low interest rates (saving accounts were getting a paltry 1% interest or less). What were they to do? One could argue they should have paid back the mortgage on their home and lower their credit cards' red ink, but that's not the American way of life. It's simply anachronistic in modern-day America
MIDDLE CLASS FAMILIES had very few choices aside from churning their hard-earned dollars in the economy. And the economy for the past several years was depending on the housing market -- and, of course, the military-industrial-congressional complex. The more modest borrowers and homebuyers were simply trying to fulfill the American Dream. They were being offered amazing teasing deals by mortgage lenders and being told again and again through TV ads and real estate agents how much they faced an opportunity of a lifetime. It was a frenzy all along the chain. Why those folks would be deemed "stupid" beats me. What happened to these good folks is that they got hit with a quadruple whammy (more supra).
THE FINANCIAL TRADERS were far from being stupid either, but they certainly were divorced from the whole picture -- something that should not surprise anyone who has ever dealt with trading. Each trading desk performed to par and more to maximize profits. Once the creative financial instruments, rated AAA by Moody's and other ratings agencies (S&P's, Fitch, etc.), hit the markets the demand for these financial papers soared all over the world. The brokers did their job (remember year-end bonuses?) and asked for more. The subprime brokers were glad to oblige (remember year-end bonuses?), real estate brokers were in trance (Mercedes and BMWs piling in their garages and driveways -- most garages in the U.S. are filled with junk and have no space left for cars). Homebuilders were salivating at the prospect of more and more business.
WHAT'S FASCINATING, to me at least, is the inversion of the frenzy that took place. It began with the rising housing market and subprime loans, which led to the creation of these repackaged highly-rated financial instruments. In turn, the high demand for these bonds worldwide (remember the world was awash with cheap credit) led to a demand for more subprime loans. I'm not sure how it worked exactly but that inversion certainly occurred. It looks like the compartmentalization of the various sectors was such that nobody could see the big picture. The bond traders were relying on the expertise of the subprime brokers, often within the same firm but in different departments. Bernard Shaw used to quip that a specialist was someone who knows a lot about something and that, at the limit, a specialist is someone who know everything about nothing... In some twisted way all the actors were being quite rational within an irrational, though quite exotic edifice. But then that's what bubbles are all about, isn't? (By the way, the very people who sold those toxic bonds are now buying them back at 5 to 15 cents on the dollar...)
MONDAY MORNING QUARTERBACKING is a favorite sport but honestly very few people saw the crisis coming. As late as the summer of 2007, Fed chairman Ben Bernanke was playing down the extent of the damages. He told Roger Lowenstein (The New York Times Magazine, January 20, 2008) that he had "failed to foresee that the sudden rise in homeowner defaults...would have such far-reaching effects." There were not many John Paulsons to look at the big picture, which in retrospect was pretty obvious: The bundling of subprime junk into highly-rated financial papers and other derivative instruments. It ballooned and it unraveled faster than anyone ever expected.
QUADRUPLE WHAMMY: Homeowners could hardly expect to be hit by so many adverse events. The Fed had raised the inter-banks interest rate; the mortgage teaser rates began to be replaced by the much higher, at times predatory, interest rates; the cost of energy more than doubled and the price of foodstuff shot upward; and as the housing market was softening banks put the brakes on home equity loans. In short, the proverbial feces hit the fan from and in all directions. Subprimers who had been prodded from President Bush down to enjoy life and go the Mall should not be faulted or blamed for their failure to have predicted in 2001-2005 this quadruple whammy in 2006 and 2007.
WHAT WOULD BE MORE satisfying to this observer than an explanation based on greed and stupidity is to hear the opinion of my libertarian readers (and others) on the consequences of the absence of regulations in these financial markets on the extent of the mess. In other words, has the absence of regulatory supervision contributed -- how much? -- to that crisis and caused so much economic and societal mayhem? Methinks the free-market fundamentalists out there have some explainin' to do...
. . . . .
Ç'est la vie...
And so it goes...
La vie, friends, is a cheap commodity, but worth maintaining when one can.the life line won't hurt you much, but it'll make a heck of a difference for Swans.