In a letter to investors whose life savings they had frozen, Monticello’s Gaffken-Barriger Fund wrote last March: “While we do not make the following comparisons as an excuse, we point out that the fund shares the same problems as many on Wall Street have faced lately… ”
If it wasn’t meant as an excuse, we’re not quite sure what it was meant as. But one thing is clear: the fact that virtually everybody in the financial industry in recent years got caught up in doing a lot of irresponsible things, reinforced by the knowledge that everybody else was doing them, is a big part of how the country got into the current financial mess in the first place.
Whether it was mortgage originators making “NINJA” (no income, no job, no assets) loans, investment firms like Gaffken boosting their returns by leveraging their investments with borrowed money, ratings agencies giving risky instruments triple-A ratings or banks foisting that bogus-rated paper on the public, the players in the financial industry got themselves into a self-congratulatory echo chamber in which each affirmed the other’s belief that the profits they were raking in were the result of their transcendent collective cleverness.
They engaged in a race to the bottom to lend money to more and more ineligible parties because everybody was doing it. They leveraged their investments (magnifying returns by borrowing some of the money used to invest) because everybody was doing it. And when it all fell to the ground, they had to freeze assets because everybody was doing it. That Gaffken-Barriger was part of this phenomenon does not let them off the hook.
This is the second self-reinforcing spiral of this type that this nation has gotten into over the past two decades, the first being the dot-com stock market boom of the 1990s. Bubble economies get created when wealth is created, not by production of goods and services, but by the prices of some assets rising. Those assets can be stocks. They can be art and collectibles. They can be real estate. They can even be tulips, as famously occurred in the Netherlands in the 1630s, when speculators drove the prices of single bulbs to the equivalent of six figures in today’s U.S. dollars.
But what all such economies have in common is that the apparently growing prosperity happens in large part to numbers on paper, not in the creation of new things that can be used to make people’s lives better or can themselves be used to create new things.
Sooner or later—and we hope it’s sooner—the stock market will bottom, even the real estate market will bottom, and the economy will start growing again. How healthy and real that growth is will depend in large part on the policies adopted by the new administration. We would hope, to begin with, to see a rapid re-regulation of the financial industry, with ratings agencies held accountable for their judgments and the degree of risk allowed in the system strictly controlled. The adequacy of disclosure to investors should be monitored and ensured—something the U.S. Securities and Exchange Commission (SEC) should have been doing all along—and significant sanctions imposed upon firms that do not adhere to the regulations laid down. Such measures might be too late to help the victims of Gaffken, but they would help prevent similar suffering in the future.
Stimulus measures that create jobs and invest in leading-edge green industry and technology would be another step in the right direction. President-elect Obama has said that he intends to see to it that middle-class wages and earnings finally start rising again. If he succeeds, that will be a good sign that the economy is on a genuinely sound footing, because it will mean that rising income is directly related to work and production as opposed to a mere increase in the price tags stuck on existing goods.
But beware if you see things picking up because some group of people has discovered some new asset class, whether stock, real estate, commodities or other, on which everybody can get rich quick because “prices can only go up.” It will be tempting to jump on board. Everybody would be doing it. But we need to stop looking at what everybody is doing and start asking instead what kind of economic behavior we can engage in that will increase prosperity for the economy over the long haul.
Dr. Punnybone
It Doesn't Matterhorn
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The gas industry has been waging a highly effective PR campaign to sell gas drilling as a benign activity that is environmentally safe. Much of the media has picked up on their talking points. Government officials, even those responsible for regulating this industry, have become some of its biggest advocates (see the interview with Pennsylvania Department of Environmental Protection spokesman Tom Rathbun in the October 23 issue of The River Reporter.)
