by Jerome a Paris
Thu Aug 9th, 2007 at 12:36:40 PM EST
The fun continues in the markets today, after a day of respite yesterday, following announcements by BNP Paribas, France's largest bank, that it was suspending 3 funds that had lost over 20% of their value, and a WSJ article suggesting that Goldman Sachs had lost significant amounts of money in some of its quant funds, and the European Central Bank's decision to inject an unprecedented 130 billion dollars of liquidity.
Who can be blamed for this?
One might naively think that "Bubbles" Greenspan, and his sidekick and replacement, "Helicopter Ben", can be blamed:
We're even hearing nostalgic cries for the return of Alan Greenspan, who is remembered fondly for supplying liquidity during the credit crises of his era. But what these cries forget is that the Greenspan Fed is one reason for the current mortgage mess. It's tempting to blame Wall Street and other bankers for all those bad residential loans, and they are paying the price now. But they were also lending into a housing asset bubble fed by easy monetary policy. Risky mortgages always look better when home prices look like they'll never decline.
Current Fed Chairman Ben Bernanke was along for the Greenspan ride, so he's hardly blameless.
Keep throwing money at financial markets whenever there is a crisis of any kind, and bankers soon learnt that they'll be rescued from their reckless behavior - and they will take bigger risks to try to earn more, as it essentially costs them nothing to do so. It's what's been called the "Greenspan Put". Taking bigger risks invariably leads to poor decisions and real losses - but as they are borne by someone else, why care? Central Bankers' job is to prevent such behaviors, not to encourage them, and Greenspan failed miserably. And very few in the financial markets will be brave enough to blame him for that, given that financial players are the main beneficiaries of that casual attitude.
I hope that the lesson of this great unravelling will be that asset inflation is a lot more dangerous than the wage inflation all decision-makers in business, politics and finance have been obsessed with over the past 25 years.
One might also point fingers at greedy,reckless and downright fraudulent lenders:
perhaps the most absurd aspect of the US subprime mortgage market in recent years is that lenders became so generous with credit provision for out-of-pocket borrowers that very few checks were ever made.
That left the system extraordinarily vulnerable to widespread fraud, a possibility that federal and state prosecutors across the US have begun to look into. With the subprime crisis expected to cost investors between $50bn (£24bn, 36bn) and $100bn, according to the US Federal Reserve, these investigations could transform it from a market correction to a full-blown national scandal.
Fraud has been detected up and down the financing chain: just as borrowers have lied to get better rates and larger loans, mortgage brokers and loan officers have lied to borrowers about the terms of their loans and may also have lied to the banks about the qualifications of the borrowers. Appraisers, likewise, have lied about the value of the properties involved.
"The recent rapid expansion of the subprime market was clearly accompanied by deterioration in underwriting standards and, in some cases, by abusive lending practices and outright fraud," Ben Bernanke, Fed chairman, recently told lawmakers.
Just look at the names that were invented: "ninja loans", as in no income, no job, no assets. How on earth can you justify lending 100% of the value of a house (and sometimes even more) to people that demonstrably do not have any way to repay them unless real estate prices go up? You do not bet an economy on ever rising house prices.
Unless, of course, you need to hide the fact that revenues are stagnant for most, inequality is growing, and the money oh-so-kindly loaned to those that could not keep up otherwise allows to hide the inconvenient underlying truths of policies aimed exclusively at the haves and have mores.
Nah, you gotta create yet another diversion and blame - who else? - the liberal media:
If one guest or expert is a "bull," then the other must be a "bear," to keep things fair. Or, if there is a single guest on air, the host often takes the other side of the issue in order to keep things balanced.
a super-duper majority of professional forecasting economists believe the economy will continue to expand during the next year and have believed so for the past four or five years. (...) Americans have been bearish on the economy for quite some time.
If the actual economic data, the views of professional economists and the self-proclaimed personal financial situation of a majority of Americans have improved this much, why are people so worried about the economy? Why do people assume they are the exception rather than the rule?
Given that this article is titled "Fair and Unbalanced", we know that what follows only applies to non-Fox News media:
A randomly selected pairing of economists from The Wall Street Journal forecasting panel would pit two rather optimistic forecasters against each other in debate. But having two economists debate about whether GDP will grow 2.1% this year or 2.4% is downright boring. As a result, the producers of business news spice things up. They arrange for debates between a bullish economist and a bearish economist.
I don't think you hear bearish news very often on business TV. In fact, one gets an endless stream of CEOs, CFOs, analysts, traders, etc..., the vast majority of whom benefit from bull markets and thus mostly behave as cheerleaders for their companies or for the markets in general. So the complaint that there is a 50/50 "balance" between bullsih and bearish analysts is laughable on its face.
In fact, the incessant, hysterical, hiping of market performance as the sole proxy for the state of the economy has largely contributed to the dominance of the financial world over the real world (what I have called the Anglo Disease) and the ideology of greed (you are worth what the markets say you are; if you are poor it's because you deserve it; society does not exist; tax and transfers are 'inefficient' and need to be eliminated so that corporate profits and market value can go up; and of course, wages must be cut as they cut in aforesaid profits and market value; while extravagant CEO income is fully justified by these rising market values) that has both fed the bubble and made it possible to hide its consequences for so long.
To have the media blamed for the dismal opinion most Americans have of the economy is deadly accurate, but not quite for the reasons purported in that article. Most Americans, despite the flashy headline numbers for growth and unemployment, know that their incomes are stagnant, and see the ever widening gulf between them and the small minority of financiers and top managers that gorge on the "efficient markets" and feature so prominently on business news. They have absorbed the ideological model pounded 24/7, have joined, per force, the rat race (sorry, the quest for efficiency and ever higher productivity) and dream, mostly vainly, of coming on top. Mostly, they feel they don't have a choice - that, in fact, it is almost unpatriotic and un-American to question whether the Dow Jones is the appropriate measure of prosperity for all. The media sure provides incessant notice of that, day in and day out, not just via the totemisation of the Dow Jones and the idolisation of financial analysts (the grand priests of our capitalist religion and sole holders of the truth these days) but also by focussing so relentlessly on the lifes of the rich, providing at the same time the mindless entertainment that distracts and the not-so-subtle message that only they, the rich, are worth anything - starting with attention.
That bears have made it to business news only proves one thing: that things are now so bad that it's no longer possible to paper over the cracks and hide the sheer hollowness, and the devastating price, of the Cult of the Market.