Dow down 49 yesterday. Gold down $5.
Nothing proved one way or t’other. But the lack of follow through, after the Fed’s historic announcement last week, leaves us wondering:
Had stock investors already priced in quantitative easing (QE) forever? If so, is there nowhere left to go but down?
We will leave that thought on the table, get up and look out the window.
It’s been six years since Bear Stearns went broke and five years since Lehman Bros declared bankruptcy. What, exactly, has changed?
We wish we had been there. We would have loved to see the look on Jimmy Cayne’s face. He was once the richest player on Wall Street with a stake in Bear Stearns worth more than a billion dollars. But in July 2007, he was playing bridge in a championship match when executives of Bear Stearns came to the table.
“Uh, Jimmy… can we talk to you for a minute… ”
“Not now… can’t you see I’m in an important game…
“But Jimmy… there’s something you should know… something that can’t wait… ”
“Alright already… what is it… blurt it out.”
“Okay. We’re broke. Two of our hedge funds collapsed last night. We’ve got no choice. We’ve got to go chapter 11. ”
Poor Jimmy. That moment marked the end of his greatness and pre-figured the Great Deleveraging, which would begin a year later when Lehman bit the dust. Cayne later sold his billion dollar stake in Bear Stearns for $61m – and he was lucky to get that.
As every sentient biped knows, the developed world entered a financial crisis in 2008. Actually, the first cracks appeared a year earlier with Bear Stearns and distress in the most junky of all junk debt markets – subprime. By 2007, this stuff had fallen so far below prime that you couldn’t find it with a metal detector. Besides there was no metal – precious or base – in it. It was all paper. and the paper wasn’t worth a fraction of what people paid for it.
But the Lehman bankruptcy marked the beginning, and as it turned out, the end of the Great Deleveraging. Thereafter, the feds were on the case, sandbagging the levees, dusting the forests with fire-killing chemicals, drilling escape holes for those trapped below the surface, pushing the debris out of the way, and in general making sure that the disaster was held in check.
For this they were awarded hosannas and hoorays from the adoring press. Their photos appeared on popular magazines, describes as ‘heroes’ and ‘geniuses’ who had not merely pulled Goldman Sachs’ nuts out of the fire, but had saved civilisation itself. They were successful in preventing a Great Depression; everybody said so.
Was there ever a better time to be a central banker, when the press took your words, examined them carefully, but uttered not a critical word? No one mentioned that the words were hollow, meaningless or plain stupid. Instead, people thought they were being cagey, or intentionally opaque, as if the bankers were playing such as high-stakes game they were not under any obligation to let their employers know what the hell they were actually doing.
And now, we look around and wonder, what has improved? How have the problems, imbalances and excesses of 2007 been addressed?
The big thing is the real estate market in the US. It is no longer so bubbly. People no longer expect to get rich by buying residential property.
Bill Bonner on markets, economics & the madness of crowds
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Apart from that…
The big banks, have they been broken down and broken up? No, they’re bigger than ever.
Health, education, defence, finance – have the zombie sectors been brought under control? No, they are more out-of-control than ever, getting an ever-larger piece of GDP.
And excess debt, the real cause of the financial crisis of 2008, has that been eliminated or at least reduced? Don’t make us laugh, dear reader. In the US private sector, debt has been cut back, but only a little. Saving levels rose to 6% immediately following the crisis. Now, they’ve slipped back to around 4%. And total debt is higher than ever – thanks to ‘help’ from the feds. According to William White, formerly of the Bank of International Settlements, total debt in the advance countries, as a percentage of GDP, is 30% higher now than it was then.
The feds decided to fight fire with fire. So, to solve the debt problem, they added debt! The genius of this plan was, we admit, not immediately obvious to us. But over time, the elegant brilliance of it has practically blinded us.
The feds have always had one overriding and primordial goal – to transfer money and power to themselves. They create no wealth. They can only get it by taking from others. The crisis – which was nothing more than a natural market correction in an unnaturally extreme debt cycle (caused largely by the feds themselves) – gave them cover for larceny on an even grander scale.
TARP (troubled asset relief programme), QE, ZIRP (zero interest rate policy) – none has had positive effects for the economy. Debt is the problem. Each of these fixes has left us with more of it. Obviously, that’s not the way to really fix things. But from the feds’ point of view, the whole programme has worked beautifully. Had the correction been allowed to run its course, deleveraging would have wiped out many investors and many companies – especially in the finance sector. Instead, they are still in business, still profiting from the feds’ debt-friendly policies and still recycling much of the cash back to the feds themselves.
The feds’ easy money goes into the pockets of their friends, clients, supporters – and into their own pockets too.
Meanwhile, in the rest of the economy, Bloomberg is on the story. Here’s one tale, of a 77-year-old with two part-time jobs.
Even many affluent baby boomers who are approaching the end of their careers haven’t come close to saving the 10 to 20 times their annual working income that investment experts say they’ll need to maintain their standard of living in old age.
For middle class households, with incomes ranging from the mid five to low six figures, it’s especially grim. When the 2008 financial crisis hit, what little Palome had saved – $90,000 – took a beating and he suddenly found himself in need of cash to maintain his lifestyle. With years if not decades of life ahead of him, Palome took the jobs he could find.
Actually, this report has a positive message. It helps settle our nerves. Even at 77, if we make it that far, we may be able to find work flipping burgers. Heck, we might like flipping burgers.
But most people will take little comfort from this story. Most people would rather sit at home and collect their pensions. But the feds are ahead of them. Reducing the rate of return on ‘safe’ investments, the feds have taken trillions from the pockets of people such as Mr Palome. Their savings earn little income. And the pension funds into which they pay their money have a hard time keeping up with their commitments. Deficits grow. Defaults and cutbacks loom.
Household income is back to levels not seen since 1984. And the number of people with real jobs, as a percentage of the working age population, has never been lower.
If this is success, give us failure!
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