Bailout Nation (36 page)

There is no middle ground; it is an either-or choice. But for God's sake, we cannot suffer the worst of both worlds—we cannot allow banks the freedom to make horrific but preventable mistakes (i.e., lending money to those who can't possibly hope to pay it back), but then expect the taxpayers to foot a multitrillion-dollar bill when they fail. It is not the responsibility of the taxpayer to act as guarantor to every counterparty, warrant all hedge funds' trades, and insure every Wall Street transaction.

That's not capitalism, it's not socialism, it's not regulation, and it sure as hell isn't what free markets are. Our language is insufficient to describe this hodgepodge system, this random patchwork of casino capitalism, cronyism, and politics as usual.
Ideological idiocy
is the only phrase I can muster that has any resonance with the daily insanity.

We cannot have privatized profits and socialized risks.

We have entered into a fit of Orwellian madness: American capitalists, long the globe's leading advocates for free markets, have become socialists. Halfway around the world, Chinese Communists have picked up the baton and are moving rapidly toward a form of capitalism. Ironically, it is the once-Communist nations—China and Russia—that hold most of Fannie's and Freddie's damaged paper.

Perhaps the government's rescue of “Phony and Fraudy,” AIG, Bank of America, Citigroup, et al. is not so much a bailout of corporate America as it is a desperate attempt to stay in the good graces of our friendly global bankers. As the world's largest debtor nation, we have come to depend on the kindness of strangers—be they the Japanese, Europeans, oil-rich Gulf states, or even former Communists.

Back in the United States, something beyond cognitive dissonance is occurring—a full-blown case of dementia is unfolding in the public sphere. When this era of excess and absurdity is looked back upon in the future, the question I expect to be asked most is not why many of these people weren't jailed for their financial felonies. Rather, I expect future historians to wonder why so many of these folk weren't heavily medicated and placed in protective custody, for the only rational explanation for their statements and behaviors is that they have gone so far round the bend as to be completely and totally insane.

Massively overleveraged companies?
Blame short sellers.

Wildly undercapitalized financial firms?
Blame rumors.

Heinously poor corporate management?
Blame the messenger.

IndyMac goes belly-up, having lost $900 million in 2008 alone. Its shares fell 87 percent in 2007 and then its value dropped (on top of the prior year's utter collapse) another 95 percent in 2008. The stock was trading on the pink sheets for under a nickel as of mid-December.

Some estimates of the total bad loans made by IndyMac are in the neighborhood of $30 billion—and the head of the Office of Thrift Supervision (OTS) blames a senator who is investigating how much of the FDIC's $53 billion fund the rescue is going to eat up! The towering incompetence of OTS is incomprehensible, but it is its colossal gall that is truly stupefying.

Perhaps someone is running around Washington, D.C., with a ball-peen hammer, whacking senior government officials on their skulls. Blunt head trauma is a better explanation for the absurdities proffered than anything else we have heard. Books will be written about this period of time, and our descendants will wonder in awe as to how this was allowed to happen.
Tulip mania's got nothing on us!

It's not just the total dollar value of the losses that has exceeded all other global fits of financial madness combined; rather, it's how so many warning signs were so blithely ignored by so many and for so long. Future authors and historians will wonder:
What was wrong with these people?
Did the antibiotics in the food supply drive them mad? Did the high-fructose corn syrup compromise their ability to think? Was it some form of viral plague? 'Roid rage? What else could have created such mass delusion among not just the populace, but their leadership and institutions? Once-proud investment houses have been replaced with casinos. Concepts such as risk management and capital preservation have become passé. Myths pass for wisdom, heuristics for knowledge.

Adam Smith would not know whether to weep or retch were he alive to see this today.

Source
: By permission of John Sherffius and Creators Syndicate, Inc.

—Leo Tolstoy
War and Peace
Book IV, Part 2, Chapter 1, first paragraph

 

 

N
ow we come to what should be the most satisfying part of our exercise: assessing blame and assigning responsibility to all of the ne'er-do-wells who got us into this mess.

Fans of schadenfreude, brace yourselves: There are so many players responsible for the housing boom and bust, the credit crisis, and the financial collapse that it is difficult to blame any one person—it is a broadly shared culpability.

There are many who were rooting for the blame to be assessed to a given political party, a particular player, or a specific act of malfeasance. In reality, the situation is far more complex. The responsibility is widespread, and there is plenty of shared blame. Joseph Stiglitz, the Nobel Prize-winning professor of economics at Columbia University, called it a “system failure”—not merely one bad decision, but a cascade of many decisions that produced tragic results.
¹

The recklessness and incompetence seemed to be a team effort. With no single villain and so much blame to go around, I fear missing some person or event that significantly contributed to the mess now enveloping the global economy.

That does not mean we cannot attempt to highlight those whose contributions have disproportionately led to the final catastrophe. After exhaustively reviewing this debacle, I assess responsibility in order of culpability as follows:

Let's look at the most significant players.

M
any of the monetary and regulatory errors that directly led to the present crisis are attributable to the man they once called the Maestro. Under the guidance of Alan Greenspan, the Federal Reserve abused monetary policy, ignored critical lending issues, and failed to regulate new and irresponsible banking products.

Several of Greenspan's policies proved to be wildly misguided: the regular interventions to protect asset prices and bail out investors, the irresponsibly low rates after the post-2000 crash, and his nonfeasance in supervising lending. Most of all, it was his deeply held philosophical conviction that all regulations are bad, and are to be avoided at all cost.
We now know what that cost is, and it's astronomical.

Alan Greenspan had spent his years at the Fed operating under an enormous philosophical misconception, as the former Fed chairman admitted in testimony before Congress on October 22, 2008: “I made a mistake in presuming that the self-interest of organizations, specifically banks and others, was such as that they were capable of protecting their own shareholders.”
²

Based on Greenspan's worldview, the events of the present crisis and many others that occurred over the past decade were impossible, given that the so-called wisdom of the free markets would prevent them. Only they did occur. Greenspan's faith was wildly misplaced, and the taxpayers are that much poorer for it. If we have to put our finger on the single intellectual flaw that underlies the housing collapse, the credit crisis, the economic recession, and the problems with toxic paper, it would be a misplaced belief that markets could self-regulate. One is reminded of the Benjamin Disraeli quote: “He was distinguished for ignorance; for he had only one idea, and that was wrong.”
³

Given how enamored Greenspan was of free markets, it is increasingly difficult to reconcile many of the actions he undertook. The very concept of the champion of free markets repeatedly intervening in their inner workings is a contradiction of enormous proportions. It is a catch-22 worthy of Joseph Heller.

It is beyond my capacity to decipher how Greenspan justified his internal conflicts, but at least he later admitted that his primary philosophy “had a flaw.” Unfortunately, his flawed economic belief system colored nearly every policy he enacted as Federal Reserve chairman. Most of today's crises trace their roots in part to his policies.