I highly recommend this long but excellent piece, “Wall Street Lays Another Egg,” by Niall Ferguson in Vanity Fair. You’ll be smarter if you read even half.
Hat Tip: Ralph Hancock on the Postmodern Conservative blog @ Culture11
It starts with this quote:
“The financial crisis is not the crisis of capitalism. It is the crisis of a system that has distanced itself from the most fundamental values of capitalism, which betrayed the spirit of capitalism.”
— Nicolas Sarkozy
and includes gems like:
The fundamental morality of capitalism lies in the voluntary nature of its trades, consented to by all parties, and therefore providing a gain to all.
Vigorous work is praiseworthy but should be accompanied by equally vigorous results.
No one has a right to their job. Not the janitor, not the CEO, no one. It would be like a rationalist having a right to their own opinion. At some point you’ve got to fire the saddle-makers and close down the industry.
No company has a right to its continued existence. Change happens.
A high standard of living is the just reward of hard work and intelligence. If other people or other places have lower standards of living, then the problem is the lower standard, not the higher one. Raise others up, don’t lower yourself. A high standard of living is a good thing, not a bad one – a universal moral generalization that includes you in particular. If you’ve earned your wealth honestly, enjoy it without regrets.
People safeguard, nourish, and improve that which they know will not be taken away from them. Tax a little if you must, but at some point you must let people own what they buy.
In countries that are lawful and just, the government is the referee, not a player. If the referee runs onto the field and kicks the football, things are starting to get scary.
Making money is a virtuous endeavor, despite all the lies that have been told about it, and should properly be found in the company of other virtues. Those who set out to make money should not think of themselves as fallen, but should rather conduct themselves with honor, pride, and self-respect, as part of the grand pageantry of human civilization rising up from the dirt, and continuing forward into the future.
Victor Davis Hanson is always worth the read. Today’s column is on the basic lessons we can learn from the financial mess.
The new national gospel became charge now/pay later and speculate, rather than put something away in case of a downturn. To provide more goodies that we hadn’t earned, politicians ignored soaring annual budget deficits and staggering national debt and kept spending.
First, cash really is king. For all the talk of a trillion here or billions there, when the crunch came, many of these investment houses and their once-strutting managers found themselves with a minus net worth. They were desperate to find liquidity — any money anywhere they could find it. Pedestrian passbook savings accounts proved wiser investments than all the clever hedge funds, derivatives, and sub-prime schemes put together.
Second, wisdom and blue-chip college educations are not quite the same thing. The fools in Washington and New York who blew up Wall Street had degrees from our finest professional schools.
Third, we as a nation need to relearn the old notion of shame — as in “shame on you!” Firms like Lehman Brothers and Bear Stearns were once responsible Wall Street institutions, built up over decades by sober men. But their far-lesser successors in just a few months have bankrupted these venerable brokerage houses — with seemingly no shame at what they have done to the image of Wall Street.
Americans used to pay their debts. Somewhere in all the blame-gaming about the crooks and liars in New York and Washington, we never hear that real people borrowed real money that they should not have. And they then defaulted on what they owed to others. Walking away from debts may have been understandable, but it was also a violation of trust — and wrong.
My Uncle David, who lives in the state with the best motto – Live Free or Die – just forwarded this to me; I assume it came to him the same way (not sure the source).
CEO –Chief Embezzlement Officer
CFO– Corporate Fraud Officer
BULL MARKET — A random market movement causing an investor to
mistake himself for a financial genius
BEAR MARKET — A 6 to 18 month period when the kids get no
allowance, the wife gets no jewelry, and the husband gets no sex
VALUE INVESTING — The art of buying low and selling lower
P/E RATIO — The percentage of investors wetting their pants
as the market keeps crashing
BROKER — What my broker has made me
STANDARD & POOR — Your life in a nutshell
STOCK ANALYST — Idiot who just downgraded your stock
STOCK SPLIT — When your ex-wife and her lawyer split your
assets equally between themselves
FINANCIAL PLANNER — A guy whose phone has been disconnected
MARKET CORRECTION — The day after you buy stocks
CASH FLOW– The movement your money makes as it disappears
down the toilet
YAHOO — What you yell after selling it to some poor sucker
for $240 per share
WINDOWS — What you jump out of when you’re the sucker who
bought Yahoo @ $240 per share
INSTITUTIONAL INVESTOR — Past year investor who’s now locked
up in a nuthouse
PROFIT — An archaic word no longer in use
From the CNN op-ed page (emphasis mine):
This bailout was a terrible idea. Here’s why.
The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.
Worse, beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie/Freddie to expand subprime lending. The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared.
This subprime lending was more than a minor relaxation of existing credit guidelines. This lending was a wholesale abandonment of reasonable lending practices in which borrowers with poor credit characteristics got mortgages they were ill-equipped to handle.
Once housing prices declined and economic conditions worsened, defaults and delinquencies soared, leaving the industry holding large amounts of severely depreciated mortgage assets.
The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.
Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.
In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This “moral hazard” generates enormous distortions in an economy’s allocation of its financial resources.
Thoughtful advocates of the bailout might concede this perspective, but they argue that a bailout is necessary to prevent economic collapse. According to this view, lenders are not making loans, even for worthy projects, because they cannot get capital. This view has a grain of truth; if the bailout does not occur, more bankruptcies are possible and credit conditions may worsen for a time.
Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.
Further, the current credit freeze is likely due to Wall Street’s hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.
The costs of the bailout, moreover, are almost certainly being understated. The administration’s claim is that many mortgage assets are merely illiquid, not truly worthless, implying taxpayers will recoup much of their $700 billion.
If these assets are worth something, however, private parties should want to buy them, and they would do so if the owners would accept fair market value. Far more likely is that current owners have brushed under the rug how little their assets are worth.
The bailout has more problems. The final legislation will probably include numerous side conditions and special dealings that reward Washington lobbyists and their clients.
Anticipation of the bailout will engender strategic behavior by Wall Street institutions as they shuffle their assets and position their balance sheets to maximize their take. The bailout will open the door to further federal meddling in financial markets.
So what should the government do? Eliminate those policies that generated the current mess. This means, at a general level, abandoning the goal of home ownership independent of ability to pay. This means, in particular, getting rid of Fannie Mae and Freddie Mac, along with policies like the Community Reinvestment Act that pressure banks into subprime lending.
The right view of the financial mess is that an enormous fraction of subprime lending should never have occurred in the first place. Someone has to pay for that. That someone should not be, and does not need to be, the U.S. taxpayer.
I’m borrowing my post header from P.J. O’Rourke. (VERY funny book if you have never enjoyed it.)
I do wish names would be Named, no matter the party affiliation: who started and voted for all of the federal legislation, who harassed the lenders to conform, which lenders not only conformed but went above and beyond the call, and who made big bucks.
It won’t happen, of course, because they are all in bed together to some degree.
As Anne of Idaho quipped, “Someone needs to go to Washington and Wall Street and close down the whorehouses.”
If no bailout bill is passed and no other/better solution can be agreed upon, I am just fine with having us (and the rest of the world) go into a recession where everyone becomes more financially conservative and/or moderate.
If I personally have to lose a little in the short term, so be it. It’s what is best and wisest in the big picture that matters. “Principle over pain.”
(Note to Chris Matthews on his statement that Dems “overwhelmingly” voted for the bailout bill: sixty percent is not overwhelming. In fact, I’d say it’s rather underwhelming.)