I'm standin' in the shadows with an aching heart
I'm lookin' at the world, tear itself apart
Here Dylan has given us a brilliant summation of the condition of the simple citizen in the face of the economic crisis that exploded in our faces in mid-September, and which may well prove more momentous than another calamity, another September, seven years earlier.
I can only speak as the simplest layman, and even that may be too bold. No doubt whatever I say about the crisis will include error, for the world of finance, despite by best efforts, remains to me mind-bogglingly opaque in many respects.
Nevertheless, I feel it is a perfectly defensible statement to say that we have beheld some astonishing sights in these last two months. At the height of the crisis in September, I asked a knowledgeable friend to try to explain what he was observing. He groped briefly for a way to convey it, then said, “Imagine you woke up and the sky was green instead of blue.” Another analogy he used was, “What if you looked, and found that the sun was rising in the west?”
We have witnessed Porsche take control of Volkswagen, not by purchasing shares (the old fashioned way), but by purchasing, outside from view, derivatives that force other people to sell VW stock. Disgruntled Europeans took to the papers to denounce the mercenary shrewdness of Porsche, accusing it of behaving like ruthless hedge fund. The charge is not far-fetched: Porsche made substantially more profit exercising options (another company’s options) than it did selling cars.
We saw the world’s biggest insurer, with an empire of sturdy assets, brought to its knees by the weight of some other, even more arcane derivatives. We saw the country of Mexico, a big oil-producer, hedge an entire year’s worth of oil exports against oil, again through the mechanism of financial derivatives. These derivatives, as I understand them, amount to a kind of unregulated market in abstracted risk. Companies and banks and hedge funds buy and sell, not products, not even futures on products, but packages of risk on the profitability (or lack thereof) of products. Mexico paid several investment banks a cool 1.2 billion dollars to assume the downside risk on oil. No product changed hands, only an abstraction of risk.
Everything is happening so fast. Recall that for a couple weeks in late September, the Europeans were enjoying a good laugh at our expense: there was giddy talk of the end of American economic hegemony, the resurgence of the European model, and so on — until the crisis vaulted the Atlantic. Now we read that the recession in Germany — a country which wisely avoided the both a housing bubble and an overextension of consumer credit — may well be deeper than the one in America.
The dread word DEFLATION has appeared in newspapers and on the business news channels, with appalling regularity of late. It is pretty clear that the bursting of the housing bubble provoked a hysterical flight to commodities, above all oil, which in turn experienced its own rapid and ruinous bubble. Perhaps the only pleasurable thing in this whole mess has been watching the spectacle of OPEC’s pathetic flailing against forces beyond its control.
Is it possible that we're in the midst of the death throes of the Globalization project of the last 60 years? The Financial Times reports on how manufacturers with huge globalized supply chains have taken the striking step of encouraging their suppliers to come to them for aid in lieu of the banks when things get tight. Now obviously these manufacturers are not doing this out of the kindness of their hearts. It’s a matter of interest and even necessity. If some link in those supply chains is irrecoverably broken, companies could be ruined in a matter of days.
But the undercurrent of the FT article, as I read it, is that globalization has made even solid, conservatively-financed companies extremely vulnerable, and that they are rethinking Globalization itself.
You really have the feeling that you’re watching the world tear itself apart. The Treasury Department, hoping to save the banking sector that is the lubricant of the whole economy, is shoveling money into the banks with abandon, but (a) the banks are so desperate to deleverage that the money is vanishing as fast as it arrives, and (b) it’s an open question whether anyone out there among consumers is even looking to borrow from them. Senators, in turn, threaten to “mandate” that the banks start loaning. But only a very strange mandate indeed would insist that they lend money they don’t have to people who don’t want to borrow it.
Here at What’s Wrong with the World, we had a somewhat rancorous debate over the merits of the Troubled Asset Relief Program proposed to Congress back in September by Treasury Secretary Paulson and finally passed with modification in October. Its purpose was ably analogized by Zippy. Well, forget about all that. The TARP money is doing different things now, mostly purchasing preferred shares and warrants in banks. In short it’s assisting in the deleveraging of the financial sector.
The picture of Wall Street, stock markets and investment that most of us have grown up with is shattered, probably irretrievably. Someone sent me an email yesterday which made mention of the fact that in the year 2000 the NASDAQ was above 5000. I laughed out loud at that.
It was hollow laughter.
You watch these developments and your first instinct (if you are, say, me) tends towards outrage. Where is all this flipping money coming from? And just what the hell happens when US sovereign debt is no longer seen as a secure investment by China, Japan, the Gulf states, etc.? Why won’t the bloody banks start lending? What about buying up bad mortgages, Mr. Secretary? — But after a bit of investigation, the enormity of the whole situation hits you, and outrage is replaced by resignation tinged with sympathy. The banks ain’t lending because no one wants to borrow money, and no one wants to lend it. The TARP transmogrified into a quasi-nationalization program because the opportunity to put a firewall around the bad mortgage-backed securities had passed, and maybe never really existed in the first place. The money is coming from the sale of US debt; and for the time being, everyone and their uncle is racing to protect what wealth they have left in US debt. So we got that going for us, which is nice.
How long that will last is a rather disconcerting question. No doubt the budget deficit will cross over into the trillions soon. Cities, states, companies, funds — they’re all lined up at the federal dole. Even more disconcerting is real possibility that all this debt-financed expenditure won’t do any good, because banks, countries and individuals, spooked and demoralized, are absorbing it as fast as it arrives and not even thinking of putting it to productive use. A steady contraction in demand is staring us in the face, and it is far from obvious that government spending can arrest it.
So you get to a place where criticism is just impotent. I am constitutionally hostile to bailouts. And yet here I sit thinking that maybe letting Lehman Brothers fail, instead of rescuing it, was the decisive mistake. Or not. My criticism is disarmed by circumstance. The best I can do is fumble for some kind of reactive understanding. I’m standing in the shadows with an aching heart.