“How are you supposed to know? Fucking men like you built the hydrogen bomb. Men like you thought it up. You think you're so creative. You don't know what it's like to really create something; to create a life; to feel it growing inside you. All you know how to create is death...and destruction.”
These are the lines Linda Hamilton speaks in Terminator 2. Change a few words and she could be speaking of the current financial disaster. Now it's out of control. Make no mistake: the extraordinary steps by the Federal Reserve in the past few days, including a Sunday night fire sale of Bear Sterns and an interest rate cut, are being taken out of fear.
The geniuses on Wall Street have spent 25 years thinking up creative financial devices such as derivatives and swaps that are so complicated that now no one fully understands how deep the financial trouble extends. Many of these “innovations” are mere pieces of paper backed by nothing. Others represent the destruction, through mergers, job cuts and offshoring, of the wealth it took the nation a century to produce. Little of it represents real production of a real economy.
No wonder Warren Buffet called them “financial weapons of mass destruction.” They’ve been ticking for years. Now they’ve gone off. They are to the financial system what Skynet was to the calamity that led to the world of Terminator. Subprime, another “innovation” was only the trigger for an implosion that has reached every part of the capital markets.
As the Wall Street Journal reported in this arresting sentence, “With each firm intricately intertwined with others in a maze of loans, credit lines, derivatives and swaps, the Fed and Treasury agreed that letting Bear Stearns collapse quickly was a risk not worth taking, because the consequences were simply unknowable.”
Unknowable. Think about that. The smartest men and women in the room have done this. Thay thought not a whit about the consequences when it just meant millions of blue-collar workers lost good jobs, or even when millions more in commercial banking, telecommunications and other fields were thrown out by mergers they engineered, earning huge fees. Now they will be out of work, but, alas, many will leave with millions in severance.
Some things are known. As Gretchen Morgenson columnized in the New York Times, the bailout of Bear Sterns has once again saved the elite from moral hazard, from the consequences of their bad investment decisions. The message this sends is very dangerous. But it might have been more dangerous still to allow Bear to collapse. Yet until the rough justice of the market plays out in real bankruptcies and real knowledge of bad bets, the bottom won’t even be within sight.
We know now that the “reforms” of the past two decades are a disaster. Regulators allowed ever more exotic plays by investment and commercial banks. Consolidation of financial institutions did not spread and buffer risk, as promised, but made it more potent. Deregulation brought down the wall between the two kinds of banks. It was a wall erected during the New Deal after similar schemes helped bring on the Great Depression in 1929. Indeed, the only things now standing in the way of further disaster are the regulations left from Glass-Stegall and its successor legislation, and the Federal Reserve, a creation of the Progressive Era. We are also about to learn that, pace Dick Cheney, deficits do matter, including the billions we owe the world, as the dollar’s de-facto devaluation brings severe consequences. In other words: all the "free market" intellectual conceits of the past 25 years are dust, spread amid the stink of greed and venality.
Another thing we know that is millions of Americans are losing their nest eggs. They gave up job security, unions, health care, pensions, on and on. They were promised a piece of the action in the stock market. Once again, they’re screwed. Will enough of them wake up? Or will they just look for the next hooker scandal to distract themselves while decrying the high price of gas, driving to Wal Mart in order to stock up on more junk produced in China, paid by credit cards, as the suburban house faces foreclosure and the call-center job they had to take after losing a real job is outsourced to India? Oh, the president “is on top of it.” And those tax refunds will fix everything.
Jon, as one of the analysts said on a CNBC financial news show yesterday evening, "Cash is king as long it's not green".
And to think not long ago the dollar was "the almighty dollar".
Posted by: Don Gardner | March 17, 2008 at 02:53 PM
Awesome post title, Jon.
The sick part of all of this is that no one "on the street" is paying attention, let alone connecting the dots. I can count on one hand the number of people I know who are even vaguely aware of the calamity or its potential (inevitable?) consequences.
Like a ton of bricks, this collapse of Wall Street will hit...
Posted by: Petro | March 18, 2008 at 07:49 AM