"The cynic knows the price of everything and the value of nothing", so spake Oscar Wilde.
Today, it seems, even the cynics appear challenged to put a price on, for example,....real estate, securities of financial institutions, depleting energy resources, food stocks, pro athletes and nursing home attendants, medical care and music, news and reality t.v. If price is the mechanism of rational allocation of resources in a competitive market economy, the collapse of various pricing mechanisms is yet another indicator of the cancer afflicting Capitalism.
Price is supposed to represent an agreement of value between buyer and seller, both of free will, and based on equal opportunity to ascertain the realizable benefit of the exchange. But too often in the current economy, price has become a weapon of deception. The mechanisms for setting price have been so tarnished by recent events that a fundamental tool of capitalism is rapidly being rendered impotent.
Let's consider real estate and other toxic assets in the current banking crisis. One of the many difficulties facing the resurrection of our financial institutions is isolating the toxic assets and exorcising them from the banks with an exchange of value that injects needed capital into the ailing institution and/or properly extracts from its balance sheet the loss reserves attached to these toxic tumors.
There are two problems here. One is the assumption of a static situation in which the tumors are knowable and are not metastasizing to currently healthy organs. The other is assigning a value that generates capital to the bank exclusive of the value of the asset, because the 'market-place' has so utterly mangled the assignment of value that price becomes nothing more than an arbitrary settlement.
We have lost a third of everything. Real estate value, portfolio value, earnings in many cases. Was that 'value lost', or 'value inflated'?
Even now, as employment crawls back, the stock market is attempting to will itself back to its pre-crash heights. Has our economic recovery to date justified the market breaking $10k? A market based on an economy which is 70% consumer based would seem to take its value from the state of employment, which by no means has bounced back to anywhere near the extent of the market. But our capitalist crack-heads will tell us that the market reflects future prospects. A future in which employment is not expected to return to pre-crash levels for four years. A future in which those who have jobs will feverishly de-leverage their personal balance sheets and make up for lost time saving for a retirement that is more distant. They are unlikely to support that 70% consumer economy, and the rest of the industrial economy that hangs off of it.
So fogetabout the US. We're investing overseas, where the real growth is. Yep. We're going to compete in parts of the world where Ch-India's cost structure and technology is a lot closer to their economic profile than ours. We're going into foreign markets with market intelligence equivalent to our intelligence in Iraq and Afghanistan. We'll sell them high tech gear their economy can't sustain, and fast food that's contributing to the growth of our health-care industry at home, which our economy can't sustain.
What can be said of an economic system that pays a pro-athlete $18 million to entertain our fantasies and indulge his own, and pays a nursing home aide $18,000 for work that is more socially meaningful, but not sufficiently valuable to provide a basic living for her family. Or $100 million to a financial crap-shooter who made billions for his organization at the expense of the world economy, and who can now afford to indulge his very own private art collection in his very own special castle. We have a corruption of values that should be criminal by any rational determination. But it's legal, at least for the moment.
As 'reality t.v.' grows in fulfilling our lust for voyeurism, and talk radio fuels our society's indulgence of ignorance and hatred, legitimate news media shrink or evaporate, lacking the necessary 'value proposition' to sustain themselves at an attainable price. Newspapers fold in competition with web based 'free' content, which isn't really free. It's paid for by advertising and loss of personal privacy. But even that business model is beginning to crack as advertisers discover that the Web is not a magic carpet to profitability. The infinite marketplace is littered with infinite distractions. Where will Google's price-multiple be in five years? What happens when people wake up to the fact that it's just another corporation?
Airlines have become subways with wings. Their 'competitive pricing' is little more than crude manipulation of the consumer with ever changing structures designed to confuse the unwitting rather than to compete on value.
Coal is 'cheap' because it is not required to pay for the responsible management of its own waste, and the consequences of its pollution. Its price does not cover its true economic costs. Oil is cheap because we price it to push it through the consumer distribution pipeline in three months, and not to conserve a depleting resource for the long term.
We are seduced to sign up for the cable t.v. package or cell phone service at the special price that lasts for three months; but try to find the website that will tell you the price in month four. Why is that? Does this oft repeated ploy demonstrate anything but overt contempt for the intelligence of the consumer? And yet, we consume, because in truth we have few real choices among the competing purveyors of anything, who seem to compete too frequently only in deception, and not in value.
Capitalism has become like an unruly teenager, discarding any sense of responsibility to anyone but itself, and indulging its excess with no sense of consequence. It has built itself an economic hot-rod, but not the good judgment to operate it responsibility. As too often happens with irresponsible teenagers and their over-powered vehicles, Capitalism could conceivably collide fatally with reality. And, as too often happens with irresponsible teenagers, it could take with it those who came along for the ride, with little thought of the possibility that their fate was at risk.
Concerted Procrastination is an accepted and well worn decision-making practice among senior executives in all venues -- government, business, NPOs. The theory is that, if you can wait long enough, difficult problems will resolve themselves when all options have been reduced to the worst one by default. Then the 'decision' is inevitable, and often unarguable.
I,too, though not a senior executive by any means, have practiced it on occasion, most recently in relation to forming my personal opinion on the efficacy of the Government assisting the US auto industry to a soft landing.
It seemed imprudent, if not irresponsible, to advocate pulling the plug on the US auto companies without having some credible sense of the collateral damage that might ensue, and a strategy to deal with it. Mind you, I am not so concerned about the auto companies themselves as the consequence of their failure to others dependent upon them but not responsible for their self-inflicted wounds.
But today my dilemma was resolved with news that GM has built into its taxpayer financed recovery plan the intent of importing cars to the US from its Chinese plants. Granted, the number of units are immaterial over the first three years. Just as the cost of corporate jets to fly its former CEO to Washington was immaterial to GM's financial situation when it begged Congress for deliverance. But to conceive this as an element of its recovery, while it triggers the demise of its own employee/taxpayers suggests such terminal institutional stupidity that it is clearly beyond rescue.
Pull the plug. Walk away. And be sure to turn out the lights on the way out the door.
R.I.P. G.M.
Onward
One of the myths of capitalism is the "Efficient Market" Hypothesis. It confers upon The Market an all-knowing wisdom of the herd that divines at any point in time the best valuation of a security based on two fallacious assumptions:
- that a broadly based market assumes a broadly based correct assessment of value, based on...
- ...reliable information that is broadly available to all at the same time.
The past eight years have steadily demonstrated the bankruptcy of this hypothesis, and yet its acolytes cling to it.
Alan Greenspan's observation about "irrational exuberance" at the front-end of the dot.com bubble was confirmed at the back-end, but not before the Market reprimanded him for deviating from the Capitalist catechism. He recently strayed again in testimony before congress, acknowledging that the premise of self-discipline in the Markets has been seriously eroded by recent events.
The dot.com bubble revealed the duplicity of market savants and demigods who serve as opinion shapers in the dissemination of so-called information. The revelation of broker and market analyst betrayals of client trust were to be repeated immediately in the current mortgage meltdown by packagers of sub-prime mortgages and by the bond rating agencies.
Beyond the quality of the information shaping market perceptions is the size of the "market" itself. We have come to learn that the market may be broad-based in terms of exposed participants (workers and citizens who participate indirectly through their pension plans, 401(k)s and IRAs), but it is narrowly defined in terms of the institutional investors who are the financial intermediaries and true decision-makers that drive the market. We have come to learn that the decision-making mandarins are no better informed, for the most part, or responsible for prudent conduct and due diligence than Joe and Jane Six Pack.
Enron, Worldcom, and a couple of other notables led to Sarbanes Oxley in order to clean up the accounting abuses that threatened to undermine Assumption 2 of the Hypothesis. Those who did not like the rigor and cost of Sarbanes Oxley and other regulatory aspects of "transparency", opted for private equity. Think of it as the capitalist equivalent of off-shoring interrogation to Guantanamo in order to avoid other US laws.
Finally, the hedge funds, largely unregulated, ascended; assuming an ever greater proportion of market volume and value, further consolidating the market that was already consolidating in the hands of institutional investors. So a relatively few major investors, investing in complex instruments and arcane methodologies that not even they understood (as we now know), came to dominate the market, and trigger its decline.
We could dismiss this as an aberration of the moment. But most aberrations aren't. They often have a long series of events preceding them, and predicting them to the few perceptive enough to notice; which gives unique opportunity to the few with the knowledge and insight to benefit.
Here we stand at a plateau of the information age where, in spite of all of our technology, and all of our information, the market is paralyzed by distrust, Sarbanes Oxley notwithstanding.
* * *
If the stock market is more passion than prescience, it is not the only market suffering in an informational gulag. We have now come to understand that there are three parallel markets that define our economic existence, and all three are suffering from toxic data:
- the stock market (and bonds and commodities and futures, etc.)
- the credit market; and
- the Main Street market.
The Main Street market is where the rubber meets the road; the ultimate bazaar of consumable goods and services. But in our complex economy it lives or dies on the actions of intermediaries and an extenuated supply chain, often distant and increasingly unresponsive or indifferent to local needs or knowledge.
The Main Street Market depends on the credit market for the life-blood of economic sustenance: working capital. The credit market, in turn depends on Information about the viability of the life-forms receiving its benefit before it gives an injection. The credit market depends on historical relationships with debtors, and corroborating methodologies provided by credit rating agencies and auditors as trusted third parties. In our present circumstance, it is noteworthy that the banks not only do not trust the financial viability of their customers; they no longer trust each other. This is testament to the failure of the regulatory processes and the information base on which they depend.
* * *
Much has been made recently of the apparent failure of the TARP, which injected $350 billion into the banking system, to induce banks to resume extending credit. Congress is demanding to know what the banks are doing with the funds. Congress and the public are outraged that the banks decline to discuss what they are doing with the funds, and why.
One commentator recently noted that banks are caught in a bind. On the one hand, the Feds are warning the banks to increase their capital cushion. On the other the Feds and Congress are urging them to lend, to stimulate the very consumer-oriented economy that seduced us and led us over the cliff in the first place.
I suspect that there is a very practical explanation for why the banks are not lending more, and why they are close-mouthed about their rationale:
1. They know they need to increase their reserves because...
2. ...they know how much garbage they still have or potentially have on their balance sheets from the sins of the past, or ...
3. ...even they do not know how much garbage remains in their portfolio from sins of the past because it has not fully unraveled, but...
4. ...beyond the sins of the past, they have every reason to fear that the whirlwind they have unleashed will bring much more wreckage to their books, as growing unemployment and business failures make new loans to formally solid customers as toxic as the ill-advised loans of the past, and demanding yet more cushion for the banks' solvency.
If indeed this explains the rationale of the banks, where do we begin to build confidence?
* * *
Perhaps the most notable observation of the current financial crisis is that it is the most recent of a string of systemic failures in the larger society.
- dot.com market implosion
- 9-ll
- Afghanistan / Iraq
- Katrina
- energy policy paralysis
- Sub-prime, et al
- collapse of the auto industry
- health-care comatose and on the verge of collapse
- dis-investment in infrastructure
- technological decline
Each of these instances demonstrated not merely failure of reliable information, but failure of multiple institutions which generate the information, opine on the information and act on the information. Our failures as a society have reached a point that demands a serious self-examination. We cannot afford to continue the status quo. Our national self-esteem must surrender to self-awareness, and long overdue self-remediation.
Onward.
W got it half right in his photo op with the finance chiefs of the G7 on 10/11 when he said: "That which affects Wall Street affects Main Street as well."
The other side of that coin is: "That which affects Main Street affects Wall Street as well." The Capitalist Catechism recognizes this in theory ("The customer comes first") but Capitalism's most ardent acolytes appear to have lost sight of this verity, ensconced in their gated communities or C-suites elevated above the street-level din.
The truth of these two statements can be found in the events leading up to the current crash in the price of oil. Let's review:
In the three years leading up to 2008, the price of oil escalated significantly. While the simplistic notion attributed this all to 'greedy oil barons', there were in fact a half a dozen factors which, in various combinations, gave credence to the escalation as an economic reality grounded in structural realities of the industry and the world economy at large. (See "The True Price of Energy" , 2007/12/01).
In 2008 the price of oil began to escalate well beyond the trajectory of reasonable intrinsic factors. Even to a lay person such as myself, it appeared driven by some externality apart from normal factors. At the same time, the Sub-prime whirlwind was emerging from the swamps of Florida and the deserts of the West and everywhere in between in varying degrees, and impacting Wall Street. I surmise that at this time, the hedge funds, which were seeing the bets on mortgage backed securities crumble with each passing day chose to escalate their offsetting bet in energy, thinking that the rational argument for higher prices was sufficient cover to take them to irrational heights, as had worked so beautifully for so long in real estate.
But, as with any form of economic kiting, no one is good enough to play the game forever. Wall Street's oil gambit came home to Main Street. The geometric escalation in oil prices in very short term led to commensurate 'demand destruction' on Main Street. As in any significant economic trend, the demand destruction from escalating oil prices had multiplier effects beyond the oil market itself, affecting tourism, retail, .... jobs. Whereas consumers in January worried how to balance fuel costs in their household budgets, by July the decelerating economy was blowing out more and more household budgets all together with unemployment. At this point the house of cards begins to collapse. Payback time. Main Street repays Wall Street in kind, and we all reap the whirlwind.
While this may not result in the second Great Depression as we knew it, it most certainly will result in The End of The World As We Know It now. This will not be decided on K Street or Wall Street; it will be decided on Main Street, where there is nowhere to run, nowhere to hide.
To be a Consumer. Over the years the term 'consumer' has become increasingly offensive to me. It is in Capitalist theology the equivalent of 'proletariat' in Communist theology. In both cases the terms dehumanize people into the lowest class of economic chattel. And there they remain.
The consumer economy is two thirds of the US economy. What we do in the economic dimension of our multi-dimensional lives is critical to the overall economy. Yet to a disturbing degree, the economic dimension of our lives has crowded out or compromised all other dimensions, leaving us unquestionably poorer in economic and most other terms. Still the people at the top of the economic food chain who have engineered this culture have the audacity to look out on the current wreckage, and blame it on the chattel.
Why did Detroit persist in building gas guzzlers when the end was obvious? Because WE wanted them; not because Detroit wanted the higher profit margins associated with this energy excess.
Why was the real estate bubble built on McMansions and Luxury Condos when affordable housing of all kinds was scarce to non-existent in many places? Because WE had a compulsion to spend beyond our means. WE refused to buy what was not being offered in the first place.
Why does Detroit not build more fuel efficient vehicles? Because we will only want to drive more, extending our commutes until they consume the rest of our waking hours. (Really... Supposedly educated people in industry and the current illusion of national government dare to argue that their opposition to higher fuel standards is in effect saving us from our squanderous inclinations.)
Why are health care costs moving beyond middle class reach? Could it be what we eat; the air we breathe; our culture of irresponsibility fashioned in the virtual conjunction of Hollywood and Madison Avenue, funded by Wall Street?
The absurdity of the consumer oriented existence was made starkly obvious in the dust of 9/11 when W urged the populace to 'go shopping' as our courageous response to terrorists, demonstrating in measurable terms that our resolve has not changed.
We can no longer afford to be Consumers. Ironically, that choice is no longer ours. We have tapped out our home equity; tapped out our credit lines; and the market has tap danced on our pensions. So where do we go?
Economics 101 teaches us that a dollar invested improves our productive capacity and thus our future prospects; a dollar consumed...is consumed. If we were to adopt this lesson and consume less, invest more, it would transform much of our economy and send much of what we now know into the economic dust bin. If we were to truly follow preventive health principles, half of the detritus that occupies our store shelves, and the companies that produce it, will be recycled to an alternate future. If we truly educated our young people to think critically and logically, and to adopt prudent values and long term thinking that is scarce in most corporate board rooms, much of our consumer economy would not find a receptive audience.
Gradually, necessity will transform our economy because we have squandered the privilege of waste. But to what? Will circumstance diminish the economy because the few with all the marbles will horde them? Ultimately, the few at the top of the pyramid must begin to realize that the peak rests on a much broader foundation; and that when the foundation crumbles, the peak cannot possibly survive.
Adapt, or die.
Onward.
Shock and Awe, Baby. Shock and Awe.
It looks and feels a lot different when you're near the blast zone: your home, your job, your family.
I've been anticipating this moment since 1995, and yet now that it's here, I'm somewhat surprised by its timing and ferocity. It's not like we couldn't see it coming. We've been warned for years.
I cite 1995 as a point in time when we were staggering out of the financial wreckage of the Reagan years, and surveying the future. My expectation was not of an immediate and universal implosion, but a long, steady slide into third world status, aided and abetted by serial failures in leadership.
Approximately one year ago, I attended a presentation of the Fiscal Wake-up Tour, conducted by David Walker, then Comptroller General of the Government Accountability Office (GAO), and a complement of economic policy wonks from institutions as diverse as The Heritage Foundation and the Brookings Institution. They came to the University of Hartford to present a consensus view of our economic future if current policies and leadership did not change. They painted a bleak picture, but one that was still some time in the future, though its seeds were already firmly planted and germinating.
When asked in the Q&A if this was a hypothesis or a destiny, Mr. Walker replied that he was confident that we could avoid their conservative projections if we act promptly to make fundamental changes in policy, but that it would probably take a crisis to focus our attention and stiffen our resolve. A crisis,... like now? Except I see neither focus nor resolve emerging from the current stew of personalities and policies churning in the Congress and on the campaign trail. The pieces do not fit together.
The Odd Couple
First, there's the odd couple, Bernanke and Paulson. They came to Congress with the same warning, but I suspect from different perspectives. Bernanke was concerned, I believe, with broad economic damage. Paulson was concerned with strategic institutional damage.
Paulson's institutional position in the Administration apparently gave him the initiative to craft a strategy that favored institutional rescue for Wall Street, and not the broader and deeper response that might have come from Bernanke. I suspect that the Paulson Plan was a consensus of the two only in the need to act quickly and decisively, and not necessarily an agreement in strategy.
Fool me once, shame on you; fool me twice,...
But beyond the focus or the imperative is the issue of intent. Mr. Paulson' three page proposal has the fit and feel of the same planning that got us into Iraq. This is perhaps unfair to Mr. Paulson, painting him with guilt by association with his administration; but the parallels to other administrative initiatives and behaviors is disturbing, particularly in the context of the magnitude of this initiative and its likely future impact on our lives. The safe harbor from oversight bespeaks Guantanamo, no bid contracts and other stratagems of prior Bush administration quagmires. The lack of understanding of causes while rushing to band-aid effects bespeaks the faulty intelligence of Iraq. The capacity to benefit his corporate alma mater echoes the Cheney / Halliburton relationship. The good news is that there will be fewer civilian fatalities. The bad news is there will be many more casualties. This comment will strike many people at first glance as dismissive of the horrors endured by the walking wounded of Iraq in all spheres of that conflict. But they too will suffer from this in ways direct and indirect.
Treating the Symptoms in Ignorance of the Cause
What seemed to concern many members of Congress who voted against the Paulson Proposal in its Plan B form last Monday was the acknowledged lack of certainty of the precise cause of the credit problem, and therefore the efficacy of the proposed cure. It appears that sub-prime mortgages are the likely foundation, but by no means the only cause. Therefore, how reliable can the proposed solution be? If no one can speak to the value of the assets at risk, how can anyone presume that the taxpayers will not be burned in the end? If we do not know the cause, how do we know that the solution hit its target, and that the cause will not metastasize into another crisis that will then be beyond our means to cure.
Hunting An Elephant With A Pea Shooter
For their part, the Democrats were in classic form. One of the first screams that was heard was for a lid on executive compensation, as if that was the cause of it all. The current status of executive compensation among American public corporations is clearly an abomination, but only one of many deserving attention beyond the immediate scope of this crisis. It is not the priority. The priority is oversight of the distribution of the $700 billion before it too resonates with echoes of Iraq mismanagement. At a minimum, auditors from the Government Accountability Office (GAO) should be immediately embedded with Treasury and any ancillary agencies created to administer the rescue to assure on-site contemporaneous monitoring from the top down.
The matter of executive compensation should be taken up after the immediate crisis has been stabilized, and should be handled through stock holder, bank and insurance regulation, and pension fund regulation that requires these entities to more closely evaluate compensation of executives of companies in which they invest for the benefit of pensioners, depositors, and other stakeholders. Bringing broad external pressure to bear on the issue of executive compensation will be more effective in evolving a social consensus of executive value than any bureaucratic rubric crafted by Congress.
A Cure As Bad As The Illness
Plan C, the 456 page opus that passed last Friday takes outrage to a new level. Picture this analogy. A victim calls 911 in the course of a mugging. The cop arrives, looks at the perp, looks at the victim, and shoots the victim.
How else to describe a bill that presumes to address what many regard as an outrageous request to bail out the perps, and then adds to it yet more outrageous requests in order to sweeten the offering, not to the taxpayers who are footing the bill, but to their very representatives who stood watch as this mess evolved. Back in the good old days, it was lobbyists who bought congressmen. Now it's congressmen, eliminating the middleman, buying off each other with our money.
Not to be outdone by the Democrats' obsession with people making more money than they, the Republicans seized the moment to engineer yet another tax reduction in order to dig our economic grave yet a little deeper while 'solidifying the base'. Granted, tax reform is desperately needed, and alternative energy credits are desirable in my opinion, but these and all the other 'Christmas Tree ornaments' attached to this package only serve to reinforce our awareness of the twisted process that got us here.
This does not argue that there was no need to act. Rather, the manner in which action was ultimately taken was so typical of the pervasive rot that got us here as to place the final seal on a conclusion that we are doomed as long as the status quo continues. And the status quo, if nothing else, has indeed survived in the final rescue legislation. When Congress was called upon to act in its highest capability, it degenerated into business as usual. But at least it was bipartisan.
It's Not Just Wall Street
Much as Wall Street richly deserves to get slammed for this mess, there is much more blame that deserves to be spread far and wide. Wall Street was the prime facilitator and enabler, but all those toxic mortgages didn't get written on Wall Street by investment bankers. There was a legion of intermediaries across the country who perpetrated, aided and abetted this crisis. There were a number of regulators and relevant professions that stood by in knowing silence as our economic well-being systematically devolved.
The Victim Too is a Perp
The consumer constitutes two thirds of the national economy by most estimates. Over the years, it has been the consumer who has been deemed the key to sustaining and growing the economy, at all cost. The Corpocracy has steadily and aggressively cultivated the consumer to serve as economic cattle in the Corpocracy's aggregation and concentration of wealth. The Corpocracy clearly has the strategic and tactical advantage in this relationship. But the consumer also has responsibility; act like mindless cattle, and you can reasonably be assured of being led to the slaughterhouse.
The bailout is not the beginning of the end. It is the end of the beginning. As has been said often in the past two weeks by a multitude of "experts" and commentators, we are now in uncharted waters. I would add that we lack a compass, and the batteries for the GPS are dead. We cannot remain where we are. But before we rush forward, perhaps we should look inward for a sense of values as the first step to finding a sense of direction.
Onward.