Friday, October 10, 2008

Some People Never Learn

It's amazing, really, how some people never learn. Even despite the fact that the previous administration, and really every single administration before that one, had a firm handle on how dangerous it can be to spook investors in this country, somehow that message and the entire list of lessons learned on this point over the past century or so of history in this country got completely lost over the past eight years. For those of you who have been involved in the stock market at any level of detail over the past 10-20 years, you will be able to recall countless instances where the various market participants -- be it the Fed Governor, the President, OPEC oil ministers, key company CEOs, you name it -- always took extreme care to handle difficult situations in the market with excessive delicacy. You have to, for it has always been common knowledge -- before Y2K anyways -- that if you do anything to give off the appearance of being spooked, then investors will pick up on it and will run for the exits in a panic. It's just the way of the world on Wall Street, and everybody knows it, or used to know it.

Just to give a few examples of what I'm talking about, there have been numerous times over the past couple of decades (and more) when it was clear that interest rates needed to be cut. In many of those cases, people were clamoring all over the place on Wall Street for the Fed to cut rates in between their regularly-scheduled meetings, and on a great many occasions, for huge cuts of 75 basis points or more in one fell swoop from the Fed. But you could count on one hand the number of times in the past couple of decades when the Fed has stepped in with large intra-meeting cuts in the Fed Funds rate. Why? Because it sends the wrong message. It tells the market that the Fed is scared, that the Fed thinks the economy or the market is in need of "emergency" action, that the Fed believes that its normal policy of only cutting rates in quarter-point increments at its regularly-scheduled meetings will somehow expose investors and major players in the economy to extreme risks unless something more drastic is done.

Similarly, there have been a few occasions over the past 20-30 years where it was clear this country was heading into a recession. Despite what the current administration seems to think, recessions are an absolutely necessary and absolutely inevitable part of the economic cycle in this and in any free-market* economy, and they have happened with shocking regularity every 10-15 years or so over the entire course of United States history. And yet, when this has happened in the recent past, the President has either been quiet about it entirely -- which is a more or less fine reaction in my book, since these are as inevitable as the sun coming up tomorrow -- or has spoken to the public only sparingly on the issue, never emphasizing the bad too much and really just focusing on the fact that things in general are fine in the country, the whole system isn't tumbling down or anything, and that things will bounce back better than ever soon enough. Why? Because what do you think is going to happen if the President says the sky is falling? Are people going to remain calm, keep their money in the banks, in the markets, etc.? Or are they going to interpret the President's words as indicative of a real panic and something that they should really be freaking out about?

There are countless example of this phenomenon over just the recent past in the U.S. stock market and the American economy. As I said above, it has been frigging common knowledge for every administration since Adam and Eve that the executive, financial and economic leadership in this country needs to be extremely prudent in its words and actions to avoid giving off any show whatsoever of panic or fear. Everyone understood it, and somehow basically every Fed Chief since the 70s, every President since forever, and everyone else involved in the financial markets has managed to avoid giving off this extreme panic smell, much to the benefit of the overall U.S. economy and the stock market at large.

All until now, that is. To go over the list of actions the government has taken in this country during 2008 is like reading a red alert bulletin for national emergencies, and the results in the stock market are proving what everyone before this adminisration has known forever -- investors aren't stupid, and the market has an uncanny knack for reading between the lines and figuring things out. In March of this year, the Fed stepped in in an unprecedented move and backstopped $29 billion of losses on Bear Stearns's $30 billion of distressed loans in orchestratings its weekend firesale to JP Morgan Chase for what was then just $2 a share. This was the first sign from the government that things were amiss enough that it felt it could simply not allow the fifth-largest U.S. investment bank to fail or declare bankruptcy, and that they couldn't even expect JPM to pick up all the risk associated with taking on Bear's operations for a measly $2 a share, for a stock that was trading at $60 just two business days earlier, and over $100 a share a year previous to that.

But this proved to be just the beginning. Just days after the Bear collapse, the Fed opened up its discount lending window to the rest of the investment banks in the country, another unprecedented move to shore up liquidity at the rest of the banks. The government was very public about the reason why they were taking this never-before-done step for investment banks being to avoid any other liquidity crises like the one blamed for the demise of Bear. Here the Fed, with the explicit approval of the President, was telling us that extraordinary steps needed to be taken to avoid similar failures of other similarly-situated financial institutions in this country.

View in a vacuum, that response might not be so bad on its own, and under the right circumstances, I could even buy that reaction as being viewed in hindsight as borderline heroic, if it really saved anything. But instead, fast forward a few more months to this summer, and since then we have just seen a steady drip of the government trying anything and everything it could to save the system from collapsing. Redundant actions, contradicotry responses, ridiculous scary commentary coming from the highest reaches of the government, you name it and this administration has done it over the past few months. Late in the summer, the government stepped in over a weekend and seized control of Fannie Mae and Freddie Mac, the two largest holders of mortgages in the world. They just flat-out took these entities over, becoming overnight the owners of more than 75% of the mortgages in this country. Just like that. The market freaked out as a result. That same week the SEC, with full support of the executive branch, banned naked short selling entirely as a common practice in the U.S. stock market, and in fact banned all short-selling on a list of financial companies, a ban which was reinstated and expanded again later in the summer for the first times in history.

A month later, with Lehman Brothers on the brink of epic collapse, the Fed called an emergency meeting all weekend long in early September, ending by allowing Lehman to declare the largest bankruptcy in history -- some ten times bigger that the previous leader, MCI WorldCom -- and orchestrating the rushed acquisition of Merrill Lynch by Bank of America. A day later the government arranged for an $85 billion loan to the world's largest insurer AIG, in exchange for 80% ownership of the struggling company. From all this investors knew beyond a shadow of a doubt that without the government, the largest investment banks, mortgagors and insurers in the world were totally effed without emergency government intervention.

Not ten days later or so, Treasury Secretary Hank Paulson, Fed Governor Ben Bernanke and President George Bush unveiled this also unprecedented $700 billion bank bailout plan to the world. Paulson insisted that he needed to be given $700 billion of taxpayers' money, that there was a national emergency to avoid a complete collapse of the banking system in this country, and that he needed to be given sole control and absolutely zero oversight into what he did with these funds. Not to be outdone, our esteemed president went on televsion during prime time and scared the fuck out of everyone. On purpose. I mean (I wrote about this at the time) this guy said we are absolutely on the edge of the economic abyss, and that ourselves, our children and even our children's children would be screwed if this bailout was not passed right away. He essentially screamed into the tv that we are all in major trouble if this bailout does not work, and that the entire financial system in the country would crumble to the ground if they couldn't stop it immediately. This action was completely unprecedented by any leader of our nation, and with good reason. It was among the most idiotic actions taken by any President in history, and even in this past eight years of highly questionable decisions and extremely dubious tactics, it stands out as perhaps the low point of Bush's entire term in office.

Since then, the bailout did fail the House the first time around, and while waiting for it to pass, the government went ahead and seized control of WaMu, the largest savings bank in the entire country, as well as semi-seizing and orchestrating the immediate sale of Wachovia, another large national banking operations, to avoid its own full seizure by the FDIC later that day. And, as the markets have falled steadily since the moment this bailout plan was eventually passed through both houses of Congress, the government has come out with basically a new plan every fucking day in what has proven to be the ultimate show of total and complete desperation to our citizens, our investors and to the rest of the free world.

First it was Fed injection of hundreds of billions of dollars of liquidity (literally, $900 billion) about a week ago into the banks of the country via its Term Auction Facility. That was going to help alleviate the tightened credit markets and start the process of getting us out of this mess. Then, when that failed in one day to alleviate the crisis, just a day later the government was talking up the establishment of a special funding facility to purchase credit default swaps to try to kick start that flagging market. Fail. The next day the Fed established the Commercial Paper Funding Facility to buy up the short-term debt many companies use to fund their day-to-day operations, another market that had been drying up significantly as the crisis deepened. Fail. A day later the Fed coordinated with several central banks around the globe to cut interest rates by a half-point in a dramatic intra-meeting rate move. Fail. Then on Thursday of this week, just one day later still, then comes word that the government may consider taking stakes in U.S. banks instead of just buying their shit assets at inflated prices. As you know if you read here, I prefer that as a response to the foolish bailout plan originally championed by Bush/Paulson/Bernanke, but it's the way this has all been handled over the past several months, and then increasingly over the past several days, that has me completely baffled.

Anyone wondering why the U.S. stock market has shockingly lost 23% of its value over the past seven trading sessions needs to look no further than the actions publicly taken by our government over the past few weeks. If they do not realize what their desperate ploys, refreshed and changed, sometimes contradicted, sometimes expanded, day in and day out look like to the American public and to the global pool of investors in U.S. stocks, then they are blinder than blind. As I've said, every administration in the history of this country has understood the importance of not giving off signs of imminent danger and panic. Somehow this administration, from the President to the financial and economic leaders in other branches across the board, has completely missed the boat on this always-known-to-be-crucial point. In the past, the President was on mass media in times of crisis like this telling the people "The only thing we have to fear is fear itself" and the like. Now today instead we have the Prez on prime time tv telling us we are all screwed and the whole system is done. Instead of taking the time to consider the right approach and letting it work itself through the system as in the past, today we have the government flailing around, taking step after step after step, day after day after day, telegraphing its nervousness, desperation, and frankly, panic as clear as a bell to the entire free* world. And just look at the results.

I guess this is what we all get, the American people at large, for electing (and then re-electing!!) a President who was never more than a C-student, and who never showed any penchant in his entire life for doing anything even remotely intelligent. It's a scary reminder of just how important the person we elect as President can be to the quality of our lives in this country.

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Blogger 1Queens Up1 said...

Can someone tell these people (Bernake, Paulson, Bush) to stop addressing the nation?

Everytime they speak investors lose more confidence and the DOW plunges.

700 point drop then a rebound in the span of 1 hour... Hold on to your butts friends.

9:48 PM  
Blogger RaisingCayne said...

AMEN Hoy! Great, great post man. Your analysis of the recent economic happenings has been spot on man. Not to pad an ego, but I haven't commentated much on the recent ridiculousness myself, as my insight would only mirror your analysis and pale in comparison in depth of understanding.

I recall being taught in college that there was indeed an explicitly clear economic cycle, which was absolutely necessary to the basic fundamental operation of our free market economy, and this cycle included a recession! This knowledge has seemed wholly contradictory to every government economic communication witnessed over the last 8 years. Why an administration would not permit any use of "the 'R' word," all while taking multiple other actions that result in complete widespread panic is simply beyond me! (Of course, MUCH of the actions of this administration has been beyond me, but I digress.)

Have a great weekend!

11:22 PM  
Blogger Irongirl01 said...

How can it be a random walk if we are constantly manipulating the markets? Had we been allowed into a recession the bottom may have already occurred rather then being postponed into what is now truly cataclysmic.

Dow retreats to 7000

2:02 AM  
Blogger Blinders said...

So your point is that if everybody would just shut up, and the government did nothing the stock market would have been fine the past few weeks? You are right that we are heading into the negative part of the cycle. Stocks are discounting this fact. Trying to say that Bush talking about the economy is causing the market to do what it simply does is silly. It is going down no matter what the government says or does.

4:57 AM  
Blogger Chef said...

They are afraid of letting the 'invisible hand' of economics do what it need to do to balance out. Relinquishing control is what this clown and the rich fat cats are afraid of. It's the last, dying gasp of the old 19th and 20th century ways.

9:06 PM  
Blogger DeRustZelve said...

So I take it your poker results suck lately?

3:32 PM  
Blogger Hammer Player a.k.a Hoyazo said...

Poker's been awesome, actually. I've just been a lot more interested in writing about this stuff than the poker lately.

6:02 PM  

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