The Financial Fire This Time
Reign of the Idiots
The Wall Street Journal on Saturday ran a captivating profile of Ted Forstmann, the billionaire financier who in 1988 contributed “a scathing – and prescient – op-ed to [the Journal] warning that the junk-bond craze was about to end badly: “Today’s financial age has become a period of unbridled excess with accepted risk soaring out of proportion to possible reward,” he wrote in October 1988. “Every week, with ever-increasing levels of irresponsibility, many billions of dollars in American assets are being saddled with debt that has virtually no chance of being repaid.” Within a year, the junk-bond market had collapsed, and within 18 months Drexel Burnham Lambert, the leading firm of the junk-bond world, was bankrupt. Mr. Forstmann sees even worse trouble coming today.”
The reason? The housing collapse is nowhere near finished, because its causes and consequences run much deeper than bad loans and foreclosed homes. The problem dates back to Alan Greenspan and the Federal Reserve, and their decision, in 2001, to flood the economy with cheap money: “I don’t know when money was ever this inexpensive in the history of this country,” Forstmann says. “But not in modern times, that’s for sure.”
So what’s wrong with cheap money? You’re seeing it all around. Cheap money is the modern term for what the Weimar Republic did with abandon. It printed money. Trundles and trundles of money. That’s what the Fed did in 2001, and kept doing after that, cheapening the value of money—and the dollar, and the American economy. As the Journal notes, “Combine this with loan syndication and securitization, and the result is a nasty brew. Securitization and syndication allow the banks to take the loans off their books and replenish their capital. They then use this capital to make new loans, which they securitize or syndicate and sell to the hedge funds, which buy them with the money they borrowed from the banks. For a time, everyone makes money. In fact, for six years, a lot of people made a lot of money in this environment.”
But cheap money is fake money. That’s what investors are discovering now, on the back of consumers who bought into the illusion and took the losses. And it’s all just beginning: “One reason is that the proliferation of new financial instruments has left the system more closely intertwined than ever, making a workout, or even a shakeout, much more difficult. […] This circular creation of new credit, used to buy more newly created debt, all financed by ultracheap money and all betting with each other, has left the major firms hopelessly intertwined. “It’s very interrelated,” he says, locking his fingers together. “There’s trillions and trillions of dollars that slosh around between all these places and if one fails . . .” He doesn’t finish the thought.”
| The reason we're in this mess was Alan Greenspan's doing, in 2001, when he flooded the financial markets with the cheapest money this country has ever known—by lowering interest rates effectively to zero and printing money like Weimar on the Potomac. On Tuesday, Ben Bernanke, Greenspan's replacement, predicted that the worst of the crisis will stretch to 2009. His solution? Amazingly, re-do what Greenspan did. Print more money, extend cheap loans to banks and corporations in trouble. And hope the illusion lasts a little bit longer. As for those 2.5 million homeowners about to discover the street: tough shit. This land is your land, if you can keep it.
But he does say this: “[ Warren] Buffett once told me there are three ‘I’s in every cycle. The ‘innovator,’ that’s the first ‘ I.’ After the innovator comes the ‘imitator.’ And after the imitator in the cycle comes the idiot. Which makes way for an innovator again.” So when Mr. Forstmann says we’re at the end of an era, it’s another way of saying that he’s afraid that the idiots have made their entrance.
Idiot Number 1? Ben Bernanke, the Federal Reserve chief, who thinks that fixing the disaster Alan Greenspan put in motion is replicating it exactly.
What Bernanke plans to do is extend low-interest loans to corporations and banks that screwed up—the kind of loans the Fed made available to J.P. Morgan when it bailed out Bear Stearns, the kind of loans that were supposed to end in September, the kind of loans that swell the market with more cheap money, and that Bernanke says will be extended indefinitely. In other words, print more money. Swell the money supply. Stretch the illusion, if not quite the eel-like dollar. Forstmann must have loved what he was hearing. His prediction coming true, dime for dime (if you're in the bottom 95 percent of out top-heavy society), billions for billions (if you're in the self-deluded top 5).
Bernanke was at the at the Federal Deposit Insurance Corporation's forum on mortgage lending for—of all ironies—low and moderate income households when he delivered a speech on Tuesday predicting that the economy’s troubles will carry over to 2009. He put it more cryptically: “We are currently monitoring developments in financial markets closely and considering several options, including extending the duration of our facilities for primary dealers beyond year-end, should the current unusual and exigent circumstances continue to prevail in dealer funding markets.”
The current unusual and exigent circumstances. Don’t you like how these guys translate their shit hitting our fans? Meanwhile, the Times reports, “Treasury Secretary Henry M. Paulson Jr., also speaking Tuesday, said that the Bush administration was working to prevent as many home foreclosures as possible, but that 'many of today’s unusually high number of foreclosures are not preventable.' Mr. Paulson said 1.5 million home foreclosures were started in 2007 and that an estimated 2.5 million more will take place this year.”
Did you get that? 2.5 million just this year. And the government can’t do anything about those. It can bail out Bear Stearns. It can make more cheap money available to corporations and banks. But it can’t bail out ordinary homeowners. That’s the America we’re in now. The America of the 1920s. The America of the idiots. Thank you, Alan Greenspan. Thank you, Ben Bernanke.
Now please sirs, may we have some more?