How bad was it? Whatever jobs we thought had been created were wiped out by the market collapse that occurred between 2007 and 2009.
The primary reason for this development is that market analysts and media pundits drank the free market Kool-Aid that was being peddled at the time (incredibly, this same Kool-Aid talk is now making a comeback). In a few words the free market happy talk works like this: Trust market players, they will do the right thing.
Ooops.
What people missed was how all the free market happy talk was really the delusional babble of analysts and media pundits who ignored how a bubble economy had been built on growing consumer debt, favorable legislation, and deregulation. Worse, the bubble economy had been super-charged by market players who operated as if they were in a casino rather than as real investors in a capitalist economy.
Why did the market experts ignore this? Because they don't know how markets really work in today's casino economy. In a few words our casino economy works like this: You're on your own, market players can do what they can to take your money. They own the House.
A bit harsh? Perhaps. But I don't think so. Here's why.
In a wonderful (if somewhat overly technical) review of how some of America's biggest institutional players gamed the system, Yves Smith outlined how companies like Goldman Sachs and Morgan Stanley deceived market players into buying certain market products. The problem was that Goldman Sachs and Morgan Stanley were betting that these same products would fail.
The details of the deals are somewhat complex, but it would be akin to me selling you a car but then delivering you a lemon. Or, as I wrote about in October, it would be akin to me selling you a Classic '65 Mustang but sending you a piece of crap Pinto. Your argument would be "It's not the model I want." My argument (or Goldman Sachs' argument) would be "Hey, a Ford's a Ford." In the real world, unless you're seriously clueless - or just plain stupid - this wouldn't be tolerated. And if it were, the seller could still be charged with fraud.
But in today's Alice in Wonderland Economy companies like Goldman Sachs and Morgan Stanley think that they are not only entitled to sell you crap, but that if you lose money you should have known better because everyone can lose if they go through the wrong door.
As Yves Smith points out this kind of thinking is "irrelevant" when you consider many of the institutional investors who got taken for a ride (like union or state pension funds) were not equal partners in setting up the deals, nor were they given access to the same models that companies like Goldman and Morgan had for assessing deals. Worse, most of the deals were managed, "meaning they were effectively blind pools."
What does all of this mean in plain English? Goldman and Morgan were effectively selling crappy Pintos and getting Classic '65 Mustang prices. Their argument? Not that it was good business. Because it wasn't (collaborating with rating agencies is not good business). Instead, they're banking on the "it was legal" argument.
They knew they would get away with it because pension fund plans (for example) had neither the expertise, personnel, nor the models to assess the games firms like Goldman and Morgan were playing. Pension funds and the American taxpayer were effectively played as suckers.
As I point out in my book, what we have today is an economy based on wealth extraction, not it's creation. Worse, it's being extracted in a casino economy built on bubbles, industry lies (see esp. the rating agencies), favorable legislation, and debt.
In the next few months we're going to hear some good news on the economic front. Don't be misled by the Kool-Aid talk sure to follow. Think about it, $10-20 trillion in market bailouts and other guarantees should buy us some good news. But with consumer debt, favorable legislation, and deregulation continuing unabated what we're actually going to see is more smoke & mirrors.
Stay tuned.
- Mark
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