by Simon
•Simon is a young Bahamian with things on his mind who wishes to remain anonymous. His column 'Front Porch' is published every Tuesday in the Nassau Guardian. He can be reached at frontporchguardian@gmail.com
As the financial crisis bleeds into an economic one, the market is increasingly relying on massive state aid to save it from its worst excesses. Government, which was once religiously described as the problem is now an essential part of the solution.
Life has unintended consequences. Thanks to those who demanded nominal government and a self-regulating market, the state is about to own an even larger and unhealthy share of national economies and the global economy.
The Federal Reserve continues its triage of the U.S. economy by taking the unprecedented step of offering short-term loans to struggling corporations beyond the banking sector.
Now the Treasury is floating the idea of taking an equity stake in various banks. In common lingo, the supposedly most capitalist country in the world is considering partial nationalization of its banking industry.
Governments are now becoming the bankers of last resort. Long-term this is a dangerous role for the state with potential repercussions that are frightening to imagine.
The Labour Government has proposed what may end up becoming a 500 million pound (or one trillion dollar) gambit to rescue Britain’s financial system. Even as he was proposing the rescue package the Chancellor of the Exchequer admitted it might not be enough.
Some market fundamentalists have suggested that we should simply allow market forces to clean up the mess from the housing and credit bubbles exploding. This didn’t work in the U.S. in the 1930s or Japan in the 1990s. Such crises have traditionally never been cleared up by market forces alone.
Meanwhile, many fundamentalists have become defensive regarding criticism of their excesses and quick to shift responsibility for and distract us from their misdeeds. In an unsettling misapplication of the intentions of Matthew 26:11, for some, “The poor you will always have with you” are to blame.
While all consumers must be accountable for their misjudgements in the U.S. subprime housing debacle, the scapegoating of poor people -- which often comes with a racial hue and tone -- is both unethical and factually incorrect.
Rep. Barney Frank, Chairman of the U.S. House Banking Committee, reports that a far greater number of foreclosures were caused by high-cost loans by unregulated entities as opposed to the lesser amount of loans granted to less affluent individuals.
GOOD ANTIDOTE
Some uber-capitalists have taken to describing their critics as anti-capitalist. To put a quick lie to such bait and switch perhaps the wisdom of a bona fide capitalist and one of the world’s richest men might be a good antidote to such intellectual chicanery.
Warren Buffet recalls the homespun advice of Abraham Lincoln: “How many legs does a dog have if you call his tail a leg? The answer: Four, because calling a tail a leg does not make it a leg.”
Except, of course, if you continue to prefer ideology over reality or if you have certain complex mortgage products you want to pawn off on people who are often desperate and vulnerable.
Oh no sir, this dog really does have five legs. But even before the ink was dry on the loans for these five-legged dogs, they were being sold and resold until the original purchasers and the last entities holding the loans were left one leg short.
This was a case of Alice in Wonderland meets the Wizard of Oz. Where’s up and where’s down? It’s wherever you decide. At least the Wizard of Oz had the humility and grace to admit his errors once unmasked. And he eventually helped Dorothy and her friends to realize their dreams.
Alas, many of the financial Wizards of Wall Street who got us to where we are today are even now calculating how to make money out of the mess they created. I guess this is what some would describe as the creativity or magic of the market.
Last week, as the British government was bailing out the banking system, a group of Barclay’s Wealth executives jetted of for a million dollar weekend to Italy to attend a seminar entitled: “End of the World Or Opportunity Of A Lifetime.” The seminar was designed to inform participants how to profit from the current mess. One of them admitted: “No expense has been spared. Does anyone feel guilty? Not at all. It’s business as usual.”
Not only are we far from home, Dorothy, the journey back from this crisis promises to be arduous, and upon your return to Kansas you and many of your neighbours may no longer own a home or may own one that is considerably devalued.
Still, to simply blame individual actors for this financial meltdown is, in the words of one observer, “to look for a sacrificial lamb” while “missing the plot.” Rather, there was a culture of gambling with other people’s money in a Wild West-like marketplace.
Back in 2003 Mr. Buffet warned that many of the complex securities in this high stakes game were “financial weapons of mass destruction” (FWMD). Funny, how many of the same people who spent considerable treasure attempting to locate phantom WMDs elsewhere, failed to act decisively to locate and destroy FWMDs at home.
Such is the nature of ideology. If you believe something erroneous hard enough and long enough it must be true. To wit, it’s amazing that legitimate criticism of the often inequitable distribution of wealth is cleverly spun as class warfare.
Mr. Buffet’s response: “There's class warfare, all right, but it's my class, the rich class, that's making war, and we're winning.” Here’s the sage of Omaha’s view on the “fundamental” that you should always keep taxes on the wealthy very low: “I’m paying the lowest tax rate that I’ve ever paid in my life. Now that’s crazy.”
PACK MINDSET
One of Mr. Buffet’s favourite stories, borrowed from Ben Graham, captures the pack mindset of those who even after being mugged by reality continued to put stockholders, taxpayers and even themselves at risk.
Upon meeting an oil prospector at the gates to Heaven, St. Peter advised him that while he met all the tests to gain entry there was a major problem. The saint pointed to a mansion filled with other prospectors and indicated that there wasn’t room for any more like him in the Kingdom.
But the clever businessman asked St. Peter if he could say just four words to those who once shared his profession. St. Peter agreed and the man yelled out to the former oil prospectors, “Oil discovered in hell!”
Immediately, the door to the mansion flung open and the other oil prospectors with wings flapping furiously descended to hell to search for the promise of oil even though they were already enjoying the bounty of Heaven.
St. Peter marvelled at the trick and told the man that the mansion was now all his. But the old man scratched his head and said, “No. If you don't mind, I think I'll go along with the rest of 'em. There may be some truth to that rumour after all."
Fundamentalism is ideological rigidity that won’t listen to the facts or see the reality on the ground. Any anomalies or counter-facts are either ignored or simply explained away. Intellectual ability is quite often not an antidote to such thinking.
Gideon Richman, writing in The Financial Times, referenced former U.S. Federal Reserve Chairman Alan Greenspan’s The Age of Turbulence which was published just last year with irrational exuberance.
Mr. Richman observes that Mr. Greenspan, “heaped praise on the magic of financial markets and decried the foolishness of those who called for more regulation.” Mr. Greenspan even asked: “Why do we wish to inhibit the pollinating bees of Wall Street?”
Those pollinating bees have now unleashed a contagion of monstrous debt and an even greater “age of turbulence”. Unfortunately the magic of the financial markets are unable to single-handedly correct such greed without the type of stronger regulation in which even Mr. Greenspan is now placing his newfound faith.
These are the times that try men's souls someone once said.
It is interesting that Barney Frank is not an ideologue in your opinion?
I for one believe the market needs to take its medicine and then rebound in due course. The "injection" by the governments seems to be delaying the crash.
Just last Monday, the bailout had worked, by Wednesday everyone was terrified by the losses yet again.
Is it because of lack of over sight?
Don't bet on it.
Have we seen the bottom yet?
I doubt it.
Posted by: Rick | October 19, 2008 at 06:37 PM
I agree with Rick, we ain't seen nothing yet.
What's more, our politicians haven't a clue, except to "blow" tax revenue on individual givaways. Of course, many of us have become dependent on government, so we have come to expect their "divine" intervention but at the end of the day, they will just raise taxes again, further "loading up" the productive (private)sector, which will further burden the public.
Who will they tax when the private sector has perished?
Who will have initiative when all is lost?
Ther are no easy answers to this one, so beware politicians bearing gifts.
Posted by: C.Lowe | October 21, 2008 at 07:56 PM