Pregnant Thoughts

I've been traveling and too preoccupied with personal affairs to post, but arriving back at home I am pregnant with comments stemming from the sheer quantity of misinformed anger, vitriolic hyperbole, and near-lunacy from all corners of the polity regarding The Financial Crisis, The Credit Crunch, and The Bailout.

First the divide between the guilty and the honest. Indeed some are more directly responsible for neglect, fraud, incompetence. But Americans will remain in denial until they realize it is complex and that nearly ALL AMERICANS (except perhaps my late granny) and some Asians are culpable in one way or an another for how we arrived here. First Americans voted in this administration....TWICE! Not everyone. Maybe not even the majority. But those that apathetically didn't vote against them are guilty. They benefited directly and indirectly from the tax cuts, lack of energy policy, and the war expenditure by gaining employment and income they wouldn't otherwise have had. They benefited from low rates and easy money and lax regulation to buy homes and watched the value of those homes rise dramatically. They removed equity via refi and HELOCs at unprecedented rates, including my late mother who eschewed debt. It was too good a deal to pass up. Few invested it wisely or banked it. Most spent it. On new cars, or kitchen renovations, a Caribbean cruise or stainless-steel appliances. The consumption orgy was obvious to anyone who desired to look, and it touched everyone's lives - directly or indirectly. Few countenanced matching revenues with expendtitures, and most decried the idea by not electing fiscally sober souls to Congress or the Senate. America borrowed from the future to fund the present in all ways, whether via fiscal policy, monetary policy, people's pension funds, corporate balance sheets, or household asset values and expenditures. But now they [the American people] are incensed when the bill has arrived. They have no recollection, nor amazingly can they make the connection between the prior faux-prosperity and the current crisis. Perhaps this results from the fact that while real wages have been falling due to pressures from globalization, this plunge was ameliorated by the past decade. No they don't fly private, or dress their women in Armani garb, or drive leased Aston-Martins, but IMHO is undeniable that they were (until 2008) less-worse-off than they otherwise would have been had the Admin and Fed let things naturally recess in 2001, throttled subsequent credit and policed unbridled extension of credit by the shadow banking system. Someone, however, must explain this to them, so that capital can be extended to the financial system (in whatever the most appropriate, effective and just form) to restore confidence. Even a policy whereby authorities will in effect "insure" their jurisdictional terrain of the interbank market until deleveraging runs it course will in all likelihood be less expensive to the taxpayer than encouraging Mellon-like liquidation. But political and financial ignorance runs deep in this land and it would be ironic if it is precisely this populist ignorance that with hindsight will be viewed as the cause of a new depression, one that might have been ameliorated by wholesale intervention and recapitalisation.

Second. People should stop rueing the controls upon of short-selling. I realise that this is intensely unpopular view in my field, but with the likes of Mssr Hendry extolling the saintliness of his ilk, it needs some tempering. By way of disclosure, I have been an active (and at times aggressive) short-seller for more than seventeen years. There are disingenuous people who will have you believe it is both noble and right to sell short, maybe even god-given. Or that because its risky, or conveying information (however flawed it might be) it earns its rightful place. It has no such moral rectitude. At the best of times, it [short-sellers] may help ferret out fraud, or simply have no effect. But in the current environment, I believe the bans are correct for herd-like front-running of sales by eventual owners are in essence de facto collusion with the same as effect. Yes, it would have been better (as I've been a proponent) to have sustainable policies that would have avoided the asset price rises, over-leveraging, and subsequent revulsion. But we're here, not there, so get over it. Massive short-selling financials (whether deserved or undeserved) eats to the core of systemic confidence. It is of course not alone in compromising systemic integrity. Nor even primary. But these institutions are exceptional. And authorities are right and correct to do what they can do for the impact is the equivalent of whittling away at the systemic foundations and as a result accidentally having the building fall. The flip side is that because banks are exceptional, they should behave that way, not have been allowed to lever-up as they did. They should be repositories of sobriety, and prudent risk-management, NOT places for coin-flipping agents to shoot the moon in order to maximize short-term gain by gaming the Treasury put.

Third, the media has been pathetic and perhaps inflamed both the panic and sense of outrage at authorities acting as (IMHO sensible) liquidity provider of last resort. They have not tried to explain the truths of ultimate culpability to temper the misconstrued outrage. They can slay the easy targets, but educating people on the history of the credit bubble, and of course, their knowing or unknowing participation, would be a great public service. For Americans (and Brits too) never could something-for-nothing, the deal too good to be true, systemically flawed as it might be. Everyone want to eat their cake, and have it too.

Finally, the perils and absurdity of unbridled leveraged financial speculation (as widely practiced) has been demonstrated, with the fallout from hedge funds still to come. The result will be an eventual return to making things and stuff, both tangible and intangible, rather than mere money with money. American zaitech is dead. This will be wholly good thing in the longer run, though the shorter term pain it will inflict upon asset prices as leverage is further reduced will be significant, and will reveal - for those with capital, unleveraged and unencumbered - tremendous opportunity - particularly from the liquidation that will certainly ensue over the coming Q4.