Wednesday, November 26, 2008

Your Worst Fears

You need to take about 30 minutes out of your holiday celebrations and read a most interesting article at Conde Nast Portfolio:

The End

It will take your breath away.

”To this day, the willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars to dispense investment advice to grownups remains a mystery to me. I was 24 years old, with no experience of, or particular interest in, guessing which stocks and bonds would rise and which would fall. The essential function of Wall Street is to allocate capital—to decide who should get it and who should not. Believe me when I tell you that I hadn’t the first clue. “

If this was the only article I had read about our current economic situation, I would have thought someone was pulling my leg. But as my readers know, I keep two blogs in the list to the left and I read them regularly -- Paul Krugman’s and Robert Reich’s.

Robert Reich had this to say back in September:

That's because, when the market was roaring a few years back, many financial players had no idea what they were buying or selling. Worse, they didn't care. Derivatives on derivatives, SIVs, credit default swaps (watch this one!), and of course securities backed by home loans. There seemed no limit to the leverage, the off-balance sheet liabilities, and what credit rating agencies would approve by issuers who paid them to.

Two years ago I asked a hedge fund manager to describe the assets in his fund. He laughed and said he had no idea.

Don’t worry if you don’t understand everything in Michael Lewis’ article The End. Trust me, you’ll understand enough. As a matter of fact, you’ll come to realize that nobody understands what was happening on Wall Street -- it was all part of the plan.

”Eisman had long subscribed to Grant’s Interest Rate Observer, a newsletter famous in Wall Street circles and obscure outside them. Jim Grant, its editor, had been prophesying doom ever since the great debt cycle began, in the mid-1980s. In late 2006, he decided to investigate these things called C.D.O.’s. Or rather, he had asked his young assistant, Dan Gertner, a chemical engineer with an M.B.A., to see if he could understand them. Gertner went off with the documents that purported to explain C.D.O.’s to potential investors and for several days sweated and groaned and heaved and suffered. “Then he came back,” says Grant, “and said, ‘I can’t figure this thing out.’ And I said, ‘I think we have our story.” “

For me, it all comes down to this: America bet big on deregulation. And we lost. We bet that the “free market” could harness and control old-fashioned greed. And it didn’t. We will now pay the price and there is no one -- absolutely no one -- on the planet that knows what that price will be. My guess is that it will be the Second Great Depression. But what do I know ? I’m just a retired government worker with too much time on my hands. I read too much. Things like:

Robert Reich -- “This is not the Great Depression of the 1930s, but nor is it turning out to be merely a bad recession of the kind we've experienced periodically over the last half century. Call it a Mini Depression.”

Thomas Friedman -- “So, I have a confession and a suggestion. The confession: I go into restaurants these days, look around at the tables often still crowded with young people, and I have this urge to go from table to table and say: “You don’t know me, but I have to tell you that you shouldn’t be here. You should be saving your money. You should be home eating tuna fish.”

Paul Krugman -- ”This is an economic emergency. “

Fareed Zakaria -- ”There is a consensus forming that Washington needs to spend its way out of this recession, to ensure that it doesn't turn into a depression. Economists of both the left and right agree that a massive fiscal stimulus is needed and that for now, we shouldn't be worrying about deficits. But in order to run up these deficits—which could total somewhere between $1 trillion and $1.5 trillion, or between 7 and 11 percent of GDP—someone has to buy American debt. And the only country that has the cash to do so is China. “

I’ve been watching for months as these very smart people and others have had to adjust and readjust again and again to the latest news. News that many of them were the first to warn us about. As more information came out, the fear has grown. Call me a pessimist, but I don’t think anyone is hiding the good news. We can only expect more of the same or -- more likely -- worse.

If you are fortunate enough to be with your family this Thanksgiving, take a good look around the table. They may be the only people you can count on in the near future. I hope you are blessed with a family as wonderful as mine. Count your blessings -- while you still have some.

Don Brown
November 26, 2008

P.S. In researching the above quotes, I noticed Thomas Friedman also steered his readers to Michael Lewis’ article The End in his column from today -- All Fall Down . You really should read it.

P.P.S Thanks to Earth-Bound Misfit for the original steer to The End.

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