Think Twice Finance

The Credit Crisis, Expertise, Gut Instinct, and the Election.

Ronald Regan was the last President that realized how often the gut instinct of the average voter and the expertise of the educated few who openly share their reasoned beliefs spring from the same well. It gave him clarity and decisiveness we haven’t seen since. He had the rare courage to instill public confidence in public gut instinct.

Our current news opinion-leaders and politicians sail a vapid sea of indecisiveness, hiding behind the old excuses: “If I tell the truth they’ll fire me. We’ll lose readership. I will appear to be an extremist. I will not get a majority vote. I won’t get the financing to win an election.” These “leaders” hide their reasoned beliefs to protect themselves from an unwarranted fear of the consequences of telling the truth.

The climate of opinion as we near the election blows the musty smell of denial, mixed with the sweet-and-sour odor of hypocrisy over us. Nobody important explains that the public must make hard choices if we are going to make progress on the major issues of the day.

Take the Credit Crisis. In its naked form, the credit crisis is two bookends supporting a load of pulp fiction. The left bookend is a nation of homeowners that collectively own houses beyond the means of the economy. Don’t focus on the greedy or irresponsible. They will always be with us. Most homeowners have not been irresponsible, but all of them have bought properties that are now higher in value than our future power to generate wealth can reasonably sustain. This is the result of decades of spin provided by financial and political players who depended on the resulting feeling of wellbeing. Yet if I ask my classes, “Do you think the housing price crash was predictable?” the vast majority say “Yes.” Of course, most of them do not live in rented homes. Gut feeling is inconsistent with decision-making, a national case of denial.

The second bookend is the expectation that personal savings will produce steady sustained income in excess of the Treasury bill rate. The typical Finance textbook devotes Chapter One to the central proposition of Finance – that such a higher return cannot be indefinitely sustained. The textbook then spends the next 30 or so chapters planting the subliminal message that Chapter One should not be believed. If it should not be believed, why not make it chapter 30?

Together these bookends would fall off the shelf and shatter if it were not for the pulp fiction in between – our financial system fashioned to support the public’s dream of milk and honey. The symptoms of the system’s essentially duplicitous nature are obvious to all – festering in the gut of the public. Chief Executives who spend their time playing bridge and golf while making stratospheric salaries. Chief Executives with 100,000 employees who are fired when disaster strikes along with 10% of the workforce. The other 90% didn’t know what was going on, we are told. Banks who divest themselves of 30% of their “legacy” assets in order to “correct the mistakes of the past.” “What must those guys they fired have been thinking?” Now everything will be fine.

But our politicians are not going to junk the entire system and start over – the manifestly necessary reaction to this sorry situation. They are in the tight embrace of Wall Street campaign finance. This was underlined during three weeks of McCain’s campaign. After some months of silence following the onset of the credit crisis, Republican Candidate McCain delivered a reasoned description of the problem, focusing on the essential banking system risk-taking that led to the inevitable collapse of the system. I think he must have formed his position by asking his economists. That won’t do. During the following month he deftly backed away from this position, leaving him once again in line with his donors, and no different with Obama except for the usual Democrat/Republican variations on income tax distribution. We’ve been watching that debate go nowhere since WWII. Wall Street has found neither side creates a material change in how the game is played.

There are good bankers who make heaps of honest money. It’s just that they don’t depend for their survival on the immense system of regulatory flim-flam and subsidy that we call pubic regulatory policy. There is a simple question that politicians never ask. Why was it the regulated large banks, not the unregulated hedge funds and private equity firms, that lost the most money during the crisis?