Quote of the Day - 10.23.08

How does inequality play into this mess?

Marriner S. Eccles, FED Chairman 1934-4?:

As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth?not of existing wealth, but of wealth as it is currently produced?to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery.

Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.

yeah, but credit default swaps is just meaningless jargon, right? Saying "CDS are clearly problematic" obscures things, rather than clarifies. The problem is that a firm was able to write a contract saying "if such and such happens, I'll give you a billion dollars", without actually having a billion dollars. So, in other words, the problem is just capital requirements, i.e. too much leverage, i.e. the same damn problem we're seeing again and again in this downturn.

"You know, that's precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well."

He doesn't seem to have noticed that between '33 and oh, '85 or so, the banking system was really quite heavily regulated.

max
['Stupid, stupid man.']

Here's an excerpt from a favorite website (sub required: http://www.contraryinvestor.com/subscriber/mo.htm)

"Derivatives "grew up" as an industry and specific contractual vehicles in terms of being insurance policies, per se. Insuring, if you will, buyers and sellers against directional interest rate risk, currency risk, commodity price risk, credit default risk, etc. In essence, the growth of derivatives themselves provided a key underpinning to the growth of the macro credit cycle. In concept, the more insurance that was available, the more credit risk could be assumed in the aggregate system. And as part of this growth in insurance/derivatives underpinning greater credit cycle acceleration, the increasing ability to enter into counter party or hedging transactions supported the very growth of the derivatives complex itself. So, as we step back and contemplate our issue of the moment that is now increasing concentration of derivatives risk in a shrinking/consolidating US and global financial sector, will a potential inability to find qualified/liquid/solvent counter parties hinder the further growth in the insurance product that is the derivatives complex? And if so, what does this mean for credit cycle reconciliation? We suggest that as qualified counter parties become more scarce, the ability of the derivatives complex to continue to expand will be constrained, ultimately resulting in a greater global financial sector constrained in its own ability to grow absent the growth in the credit market insurance underpinning that is the derivatives world. A big top down and longer term cycle view of life? Yeah, but something we believe needs to be factored into decision making as it applies to the fallout of greater credit cycle reconciliation. In short, this sure ain't gonna help the near term expansion of bank lending, bailout package or not."

"In other words, you found that your view of the world, your ideology, was not right, it was not working," Mr. Waxman said.

Gee, it turns out Ayn Rand is full of shit. Knock me over with a feather.

Greenspan presumed. We got screwed.

One of the questions the skeptics were asking a few years ago was: What happens if the Fed is not as clever as it thinks it is? Well, now we know. Greenspan played God and now he admits he should have known better.

A little more on the quoted passage. It seems to have been taken from an article by Brian Knowlton and Michael M. Grynbaum which, I assume, was at the site linked by Kevin (and others who quoted the same).

Now, that link brings up an article by Edmund L. Andrews that omits the quoted passage.

The original article (with the passge) can still be found at the International Herald Tribune website (here) but it may be on its way to being pulled from there as well (clicking "Printer Friendly" for that article now brings up the Andrews article instead).

Very curious.

[By the time a finished typing this, the article had been pulled at ITH as well, and replaced by the Andrews article].

Don't know why the NYTimes and the IHT replaced the article. Doing a Google text search still points to the links that no longer contain the text.

A version of the original article seems to still be accessible at IHT, which is a different link from the one where it first appeared. The whole thing was on CSPAN, the record cannot be altered.

"I have been going for 40 years or more with very considerable evidence that it was working exceptionally well."

Am I correct calculating that as being since 1968 that the free markets have performed exceptionally well, Mr. Greenspan?

Doesn't that include such exceptional performances as:

1) the S&L crisis
2) Ivan Boesky
3) Drexel Burnham Lambert / Michael Miliken
4) Enron
5) Energy market manipulation
6) Worldcom
7) Healthsouth
8) Tyco
9) LTCM
10) Assorted rogue traders: Nick Leeson's $1.7bn in losses wiped out Barings. Jerome Kerviel of Societe Generale $7bn in losses

And none of those were grounds to question your faith in the "self-interest of lending institutions to protect shareholders' equity"

LTCM of course was a dry run for the current crisis and Greenspan was in up to his eyeballs on the rescue package.

Still Ayn Rand rules his world.

What are they teaching in those Business Schools anyway?

The problems we are currently facing sound remarkably like the problems facing the country back in 1929. Wasn't the 29 crash connected to a lot of highly leveraged gamblers unable to pay stock bets gone bad?

WTF? Greenspan, who presumably studied economics, "for forty years" believed that captains of business were "protecting their own shareholders and their equity in the firms"?

Despite Enron? Despite the looting of the S&Ls? Despite the junk bond pirates? Despite the looting of the federal treasury by railroad barons and their congressional enablers in the mid-1800s? Despite the facts that human beings enslaved other humans for economic gain?

Unbelievable. What universe has this guy, whose every sigh moved the market, been living in?

This Greenspan admission should instruct us all that because someone ascends to the Chairmanship of the Fed doesn't mean that they know their ass from their elbow, let alone that they understand human nature.

Even shorter Greenspan: People are greedy? Who knew?

Ayn Rand was a communist operative sent here to destroy our economy by making the legal pursuit of greed an OK part of the American landscape. It just took longer to achieve her goal than was thought by the folks who sent her.

It's too bad Greenspan preferred Rand over Graham:

The point I want to make here is that there is a special paradox in the relationship between mathematics and investment attitudes on common stocks, which is this:

Mathematics is ordinarily considered as producing precise and dependable results; but in the stock market the more elaborate and abstruse the mathematics the more uncertain and speculative are the conclusions we draw there from.

In forty-four years of Wall Street experience and study I have never seen dependable calculations made about common stock values, or related investment policies that went beyond simple arithmetic or the most elementary algebra.

Whenever calculus is brought in, or higher algebra, you could take it as a warning that the operator was trying to substitute theory for experience, and usually also to give to speculation the deceptive guise of investment.
(The Intelligent Investor, Benjamin Graham, Second Revised Edition, 1959, Harpers & Brothers)

I don't you can really judge a system of 6 billion souls by its worst actors, you're not going to glean much insight from creating a list of the worst failures of its individuals.

This problem is the proper result of the systemic inadequacies of a system that creates individual wealth while protecting those individuals from personal liability. It began with the East India Tea company, not Enron. Trying to put the genie back in the bottle after 400 years is unlikely to succeed.

Alan Greenspan, despite being a disciple of Rand's Objectivism, became James Taggart and embraced cronyism, which Paulson has expanded into the Sovietization of the finance industry.

Greenspan is a Republican. Do we need to say anything more?

"The palest ink is better than the best memory." - Chinese Proverb
Posted by: daCascadian on 10/24/08

Yea, even Lao Tzu can barely be discerned as a real person.

"Anyone whose admiration for Ayn Rand survived adolescence should be presumed stupid and possibly dangerous."

Truer words have never been spoken.

Still, this admission from Greenspan is an example of a history of suprisingly greater-than-average intellectual honesty. I've watched him closely all of my adult life, like many others have, and he has always been far more reasonable and pragmatic than most others of the Randroid and free market fundamentalist stripe. Don't forget that his ideological cousins are the Austrian school fans who oppose most vehemently his life's work.

I, personally, was surprised that he tolerated and even encouraged the bubbles. But then, you know, so did so many other people who knew better. Eceryone likes it when the good times are rollin'. No one likes a party pooper.

Ayn Rand accurately described our current political economy. All of the players in the current economic crisis resemble characters from Rand's novels. Rand's ideology was wrong, as most recognize, but her observations were correct.

I just had one question regarding credit defaults swaps. They seem to sound an awful lot like insurance. (To oversimplify, Party A assumes the risk of a bond defaulting in return for a payment from Party B, the bondholder.) Is the only reason that such transactions are unregulated is because they are called credit default swaps instead of credit default insurance? Otherwise, a credit default insurer would be subject to state regulations such as proof that the insurer had sufficient capital reserves.