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As Long as We Remember...

October 27, 2008

House of Cards Burning Down

Steven R. Berryman

What had been “supply side economics” and the economic school of “rational expectations” is now both an experiment gone bad and a “Ponzi Scheme” exposed.


The proverbial house of cards that had been our economy is not only collapsing, but is on fire.


When Alan Greenspan, former Federal Reserve Board chairman, testified before Congress last week as to the level of his shock, I had to fight away tears. Not.


Arguably a man in Mr. Greenspan’s position was fed a broad range of information – all from “experts” – on what was happening in the economy and why. His excuse for not taking action at that time was that about half of his information was conflicting.


What he failed to state was that it was his job to decipher that conflicting information and decide what was actually happening. He failed miserably, but not before publishing his memoirs, “The Age of Turbulence.” Unfortunately, it sold well.


I turned my copy around on the bookshelf, and will make efforts to unlearn.


Chairman Greenspan stated that he was “shocked” that the CEOs and the free market did not allow for the automatic care and protection of the shareholders’ equity. Quite the self-serving deflection of criticism, and transparently bogus.


The Alan Greenspan I remember, back in the day, was one who spent much time convincing us of his brilliance and status as resident oracle.


While his every word was subjected to analysis and scrutinized for hints of the upcoming, he ignored calls for regulation as unnecessary. I am in awe of his willful ignorance, as the operative joke now is: My 201k portfolio is now worth half as much!


A cost to the Greenspan testimony hits us now where we are most vulnerable as a country: our reputation within the global economy, and confidence in the American system, is now an open question.


Now they see that Grandpa Crackers himself was in charge, his genius strategy based upon hoping for the best, and believing in the expedient.


Leverage upon leverage upon leverage built upon a sea of quicksand is what we ended up with as a system, as expectations of performance were based on chains of “rational events,” each needing to occur in order to complete the chain.


What had been missing was the wary examination of the “what ifs?” One need not extrapolate all the way to the esoteric items like mortgage-backed securities (MBEs) and credit default swaps to interpret the threats to the chain needed to support the Ponzi model.


Certainly in anyone’s 20/20 hindsight they rationally deserved scrutiny and oversight, but too late now.


Much more simple questions were posed:


What if we developed a goal of 65% homeownership in America? “Is that not the American Dream?” But how to get there? Who was asking questions about the consequences of changing lending standards in order to “catch the dream?”


And when we repackage low-end loans to spread the risk, does that mitigate the risk? To whom?


What if we suffered undue influence to policy-by-do-gooder pressures to allow sub-standard customers to qualify for loans?


And if pro-immigrant groups applied political pressure? “Hey, what about us”…became their cry amounted to an emotional argument that was accepted as sufficient. Political Correctness had its’ day.


What if liberal social programs were used as political tools to loosen up credit for the underclasses and poor? If you had launched out against it, surely a brand of ethnic insensitivity – or even racism – would have been forthcoming.


The above is a hint at redistribution of wealth in an Obama administration.


Without courage of conviction, the Fed and our monetary policy were asleep at the switch at the crucial moment.


And how to compound the consequences of bad policy and mistakes?


Just pick up a paper and read.


To free up credit-frozen banks, we shall give those banks the citizen’s money. This is a plan akin to giving the habitual gambler more chips as a reward for taking risks with money he could not afford to lose, as he was unable to keep playing the game. His punishment shall be…more chips!


The results reported recently of the above have been:


*Credit markets are still frozen as banks are keeping the new funds and don’t have the trust to lend it back out, even to each other as cooperating banks.


*Banks are using the new infusion of funds to purchase lesser banks via acquisitions instead of lending the money back out. This is a selfish grab.


*Banks are using newly garnered windfall cash from this bailout to fund bonuses for CEOs and executives. The details of this, conveniently, will not be reported until after November 4, Election Day 2008.


Thanks to your Congress, you have been served up. “With complicity for all, and blame for none.


As the dominos continue to fall, and the stock market becomes the weekly roller coaster ride, we must reconcile ourselves to building a brave new world.


With the appropriate lessons learned and crooks punished, perhaps we can go at least another 79 years before another day of reckoning.


We shall see.


(Editor’s Note: A Ponzi scheme is defined as “a swindle in which a quick return on an initial investment, made up of money from new investors, lures the victim into much bigger risks.”)


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