Saturday, September 12, 2009

Remembering the Recent Real Crisis As Well As Imaginary Ones That Also Hold Lessons for Us

In Wall Street's New Gilded Age, the historian Niall Ferguson has written a review and critique of the events of the past year in finance. On first read, I find little with which to disagree. One of the things I like about Dr Ferguson is that I can't make out his politics other than that he appears to be for truth and justice (I can't say "and the American way" both because he's from the British Isles and because it's not clear anymore-if it ever way- what the "American way" is).

Near the end of the article, Ferguson lists health care reform as a reason that financial reform likely will not occur.

The DoctoRx critique is that the insistence on health care "reform" as a "distraction" from financial system reform is part and parcel of the essential nature of what this blog has called the Bushbama Continuity. The whole point of health care reform is insurance-an essential part of the FIRE economy.

The concept of the "FIRE" economy - - "Finance, Insurance, and Real Estate" - - was propounded years before the current Great Financial Crisis. All of these products involve manipulation of money and "promises, promises". The fire insurer promises to pay you if your house is devoured by a fire that you do not deliberately set. In the meantime, the company and its employees live off of your money. What if the insurer goes bust? You have neither the money you paid the insurer nor your house. Much better not to engage in risky behaviors such as smoking in bed or not tending to electrical problems than to have a burned house.

(Thus the emphasis as EBR upon healthy life-styles and appropriate, non-coercive government actions to encourage those as has been done to discourage cigarette smoking and drunk driving. The real reforms involve eating better, exercising more, not smoking, avoiding unnecessary stress, keeping the environment free of toxins, etc. Much more of medicine is damage control than politicians want to tell you.)

The essence of the FIRE economy is that it produces nothing, with the exception that the acronym takes liberties by having real estate included; the point was that modern real estate is an extension of finance given how little equity "owners" are (were until very recently) expected to have. It merely takes and redistributes, giving society back a cut of society's own action. It's like the Mob. It "protects" you, whether or not you want the protection.

For example, until a year ago, no Australian bank or depositor was burdened with the costs of deposit insurance. The banks were that prudent. (This changed due to risk of capital flight in the post-Lehman collapse panic.) Why has there been so little official debate about socializing the losses from the GFC and recharging the credit cards of Big Finance to do it again? The public basically "gets it" but is powerless.

In other words, the FIRE economy is getting a twofer from the Bushbama Continuity. First, the gamblers in Big Finance roll on, sucking massive real resources into their pockets (and sending some of their winnings to Swiss gold vaults), while pretending that things are good in the land because they have manipulated the "market" back to S&P 1000. Then the insurance companies get tens of millions of new customers. Forget the rhetoric that these companies are "villains". A President who loves Big Finance and Big Pharma does not hate Big Insurance.

All this support of the FIRE economy is being done on the backs of savers suffering near-zero interest rates on their deposits and borrowers who in effect are borrowing their own money back from the banksters who obtained it at little or no cost in a shell game from them through their governmental and financial institutions. All with the support from a President who in his initial speech to Congress asserted that this country was all about "credit".

No, Mr. President: it's all about productive work and saving, then using those savings to generate a virtuous cycle of improved productivity, higher living standards, and more savings that finance more real growth in the real economy, not the current parasitic FIRE economy. If one reads Dr. Ferguson's book, The Ascent of Money, one will learn that usury laws had as one justification the point that if, for example, a venture required a 10% interest rate to pencil in from a risk-reward standpoint, then it was simply too risky and should not receive financing. Something about a bird in the hand: real capital is valuable; it takes risks to obtain and preserve it. In the modern way, the powerful get infinite numbers of mulligans.

Nancy Pelosi mumbled some stuff about holding a new "Pecora Commission" several months ago. Ms. Pelosi is a rich woman whose private affairs include investing with the wildcatter, financier and loudmouth Boone Pickens in a "clean energy" venture.Are you holding your breath for explosive Congressional hearings? (I'm not.)

What next?

Perhaps the scriptwriters of Casablanca can provide context:

Strasser: Captain Renault, are you entirely certain which side you're on?

Renault: . . . I blow with the wind, and the prevailing wind happens to be from Vichy.

Strasser: And if it should change?

Renault: Surely the Reich doesn't admit that possibility?

Right now the prevailing wind is aiding the gamblers. Might it change?

From an investment standpoint, I can emulate Captain Renault and blow with the wind, but unfortunately the breeze is too selective for my taste. Stocks of plain-vanilla financial companies such as Northern Trust (NTRS) and UMB financial have miserable charts. They also carry high P/E's, relatively low dividend yields, and relatively high price-book ratios. They also can be somewhat analyzed as companies, unlike Citigroup or Wells Fargo. If "investors" (how many true investors remain?) are uninterested in these companies' stocks, then I say that it's only gamblers who are in Citigroup and Wells Fargo stock.

What next? Will the Victor Laszlos of the current situation somehow win out? And will it take the financial equivalent of the horrors of World War II for that to occur?

One more quote, from Star Trek II: The Wrath of Khan--

IN foreground; chillingly, Khan rises INTO SHOT by the main console. He is horribly burned, and it is clear that he is clinging to life.

KHAN No... Kirk. The game's not over.

Khan then sets the doomsday machine ("Genesis") to detonate and destroy the Enterprise. Khan dies of his wounds.

DoctoRx back on Earth. Just one year ago, Big Finance appeared to be a dying Khan that like him threatened us with mutual assured destruction if it were not saved. But unlike Kirk and Spock, who got the Enterprise "out of danger" while Khan's ship exploded harmlessly, the authorities rushed to Khan's aid and partnered with him. The elite got their Hollywood ending; the rest of us got the shaft.

We need a modern Pecora Commission; and we need to channel Kirk, Spock, and Victor Laszlo.

Remember who caused zero job growth in the last 10 years in America while China and India began to boom; remember whose gambling caused the Great Financial Crisis; and remember who's profiting from it.

(As Spock said to Dr. McCoy in The Wrath of Khan:)

"Remember . . ."

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