A MONKEY WITH DARTS, AND OUR ON-GOING MARKET "CRASHES"

So the market's tanking. Again. Yawn ...

Every time this happens I have fun watching the market analysts. Many like to pretend they know what they're doing when, in fact, they're little more than market cheerleaders, who live in a bubble that they help inflate.

What they ignore is that for the better part of 30 years what's been supercharging the markets - and subsidizing their profits - has been a combination of emergency bailouts, easy money policies (the Greenspan Put), plus favorable legislation and reckless deregulation (which has pretty much made gambling legal on Wall Street).

Then we have the backdoor bailouts, regulatory market props, and other government supported market schemes that pretty much insure that a monkey throwing darts could have made money in the market over the past 30 years. Seriously.

Don't believe me? Check out this story.

A Monkey Throwing Darts

In 1988 the Wall Street Journal began a contest inspired by Princeton Professor Burton Malkiel’s book A Random Walk Down Wall Street. In the book Malkiel suggested that "a blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts."

While the WSJ didn't ultimately use real monkeys (liability issues) they did use staff members to throw darts. The contest became such a popular feature in the WSJ that journalists and academics alike wrote about the implications (which you can find here). While rules were established and changed over time the basic guidelines included asking four professional market players to make market picks each month. They would then select one stock that would be followed over the next six months.

The "pro" stock picks competed against four stocks chosen by the Journal's "monkey" staffers, who tossed darts at financial pages pasted on a board. On October 7, 1998 the Journal presented the results of the 100th dartboard contest, with the pros winning 61 of the 100 contests.

There's no doubt that winning 61 out of 100 times is impressive. It would get you into the playoffs in most professional sports. But the fact that throwing darts randomly at financial pages could produce better results than the pros 39 percent of the time says much about market players. Think about it. A team of monkeys wouldn't beat a professional sports team 39 percent of the time, even if they were WSJ monkey staffers.

But wait, it gets better.

The performance of the market pros "sure winner" stocks was compared against simply leaving portfolios alone to ride out the fluctuations of the Dow Jones Industrial Average. It was even less impressive. The pros beat the DJIA only 51 out of 100 contests (though pro returns were slightly better). Put another way, if you simply invested and left your money alone in a portfolio (i.e. passive investing) you - the real investor - would've beaten the pros almost half of the time.

In 2002, the WSJ stopped the contest, but wouldn't say who won. Still, a point was made.

This isn't good, especially when you consider management fees, transaction costs, or taxes assessed on taxable investors.  And all for what? So you can be told the market equivalent of "don't put all your eggs in one basket"? (though, to be fair, there are smart market players who will tell do-it-yourselfers what to look for, or who will admit that they really can't beat the market over an extended period of time).

If you don't want to dump your market expert for monkey staffers with darts that's fine. I wouldn't either. Playing the percentages wins games in baseball too.

Still, confirming for us all that market analysts and market pros aren't always the best sources for understanding what's happening in the market is the following ...

Going Ape in 2008
We always want to keep in mind that a great deal of the market enthusiasm before the 2008 market crash came from market experts who were supposed to be objective analysts. None of them ever took a step back to explain that the market surge since the 1980s was a direct result of government bailouts, Fed money dumps, and reckless deregulation - or that it couldn't last.

In fact, none of the market experts who were cheer leading everything from deregulation-tinged CDOs and CDSs - or those who were coddling the financial titans that peddled financial crap - were made to pay for their boot licking incompetence after 2008.

Look at all the talking heads on the cable networks today. Who left? Who was forced to resign in disgrace from the networks?

Then we have all those bonuses that were paid out to Wall Street for doing such a bang up job before 2008 ... What made the "recovery" and record payouts possible? Taxpayer backed guarantees, or market acumen?

Which brings us back to what's happening in markets today. Let me make this real simple, again. The outlandish market successes we've been enjoying over the past 30 years have been the product of primarily three interrelated market subsidizing developments:

1. Bailout Nation 

2. Easy Money (the Greenspan Put + debt)

3. Favorable Legislation / Reckless Deregulation

At the end of the day, our market system is living on borrowed time, and borrowed money. And it's all government sponsored. When these three "magic of the free market" gifts end, or stop working - for whatever reason - the geniuses who have been managing your money, or talking up the markets, will no longer be geniuses.

And I should know. I've been a market guru for some time now ;-)

- Mark

UPDATE: From the Wall Street Journal, "Advisers' stock recommendations drag down clients' portfolio, study finds."

GET GOVERNMENT OFF MY BACK? HARDLY ...

We hear it all the time. Don't interfere with the marketplace. Deregulate. Get the government out of the market. Unfettered competition leads to the best possible outcome for everyone because people rationally pursuing profit will enhance both productivity and quality in the marketplace. Like an "invisible hand" the needs of society would be met. In the end consumers get better products. Producers get more money. Workers earn better wages. Everyone wins.

At least this was the message many believe that Adam Smith, the intellectual godfather of capitalism, told us in The Wealth of Nations (1776). It's this belief system that has fed the free market and deregulation push we've seen over the past 30 years. It's what's pushing us today. Unfortunately, much of what Adam Smith wrote was often misrepresented and taken out of context by many of his followers, including Milton Friedman. It's one of the reasons I wrote The Myth of the Free Market.

To be sure, Adam Smith argued that the state should stay out of the marketplace. But not because market players should be free to do what they wanted. Rather Smith believed that government should stay out of the market because it usually intervened on behalf of monopoly and privilege. Smith's message was that we shouldn't allow market players run herd over the rest of us.

Many of today's market players have no clue about any of this. And it shows. In fact, contrary to popular belief, market players today ignore - or don't recognize - how they have been pushing and benefiting from the very visible hand of government subsidies and supports, which Adam Smith feared would happen. Check it out:


A SERIES OF MARKET BAILOUTS: Talk about a lack of accountability. One of the cornerstones of a competitive market system is the idea that there would be retribution for stupid decision making. You would go bankrupt and/or lose your business. Guess what? Increasingly, for Wall Street's biggest players, it's simply not happening. Anyone who argues otherwise is either clueless or on crack.

Here's a short list of the bailouts Americans have yawned at or supported since Ronald Reagan's "free market" revolution began in 1980:

* Wall Street / Mexico in 1982.
* Continental Illinois in 1984.
* The Discount Window intervention to save floundering banks in the late 1980s.
* Market support after the October 1987 crash.
* The Savings & Loan debacle of 1989-1992.
* Intervention to save the Bank of New England and Citibank.
* The 1994-1995 Wall Street / Mexico rescue.
* The Asian Currency rescue in the late 1990s.
* The Fed-organized LTCM bailout.

Impressive, ain't it? But know one thing. This list is incomplete.

In virtually every case above we were told, in one way or another, by the Chicken Little's of the financial world (and Washington) that bailouts and subsidies were necessary or else "prosperity in our time" could end. Markets would collapse, and middle class Americans would be hurt. So we propped up the stupidity with bailouts, rather than "let the market work." We were saved.

Then 2008 came along. Oops.

THE GREENSPAN PUT:
Perhaps the greatest guaranteed money flood in human history. It all began when Alan Greenspan became chair of the Federal Reserve (1987-2006). Instead of letting market players pay for their market stupidity, Greenspan made the decision to push money into Wall Street - the Greenspan Put - every time they created a mess of things. And he did it by making money available at a cheap price (and he said he wasn't a Keynesian ...).

Coupled with deregulation, this fed market appetites for bigger and bigger market bets (it didn't matter to Greenspan that the vast majority of trading is not done by humans buying and selling a few hundred shares, but by computers and high frequency traders dealing in ever more complex instruments).

Accountability flies out the door when The House backs your bets in Vegas. So it is with Wall Street (though, to be fair, Vegas doesn't do what Washington does). The Greenspan Put has been continued under Ben Bernanke with QE I, QE II, and what we can expect to be QE III (yes, it's coming).

FAVORABLE LEGISLATION / MARKET INTERVENTIONS: If markets are logical, and market players are rational, why do free marketeers need the very visible hand of government for this ...

* You're not smart enough so ... The 401k was created in 1978 by Congress to encourage workers to invest in the market (by allowing employees to defer paying taxes on income they invest). The rules impose strict penalties for early withdrawal (why penalties if market players are rational?). The end result is that by enticing investors with tax breaks our financial markets have been given an artificial boost, which is good for portfolio and wealth managers who get paid based on fees and volume managed. Don't believe me? Check out what's happened to market activity and volume traded since the 401k and other "invisible hand" of the market tools were invented by Congress ...

- The Helmet Laws for brokers ... NYSE circuit breaks, which stop trading, are designed to maintain confidence when markets tank. Then we allow market players to suspend redemption's (not allowing clients to sell their investments) in order to stabilize markets in panic. Both make a travesty of market logic and the code of rationality that we're told dominates the market. It rewards gambling and stupidity by telling brokers "we'll control the panic, even if your incompetence starts it."

- The "socialize the losses" law (deduction) ... If you sell a stock at a loss you can deduct it (as a "capital loss") from your tax bill. Nice.

- The "carry it forward" tax law (deduction) ... Stock losses can be carried forward for tax purposes. Specifically, a banking stock that collapse can be used to offset gains from more successful ventures, or even a portion of your everyday income. So much for taking it on the chin when you make a stupid investment decision.

There are many more of these legislative and political gifts. The point is that it's hard to argue that the millionaire wunderkinds on Wall Street are rugged individualists going it alone in a jungle-like market environment when we look at all the government created, and taxpayer funded, market supports that are out there.

In fact, in many ways Wall Street has become a walled off, protected, ward of the state.

Still, today there are plenty of market players who are dumb and arrogant enough to believe they're actually market gurus, slaying market dragons. In reality, monkeys picking stocks randomly could have made money in this state subsidized market environment (and they have the tests to prove it).

At the end of the day, Wall Street and their financial mandarins are the beneficiaries of a massive legislative and regulatory group hug given by Washington over the past 25-30 years.

Get government off my back? What a joke. Worse, market players don't even know it.

- Mark

UPDATE: Here's an excellent article (9/26/11) explaining ETFs, or exchange-traded funds. It's written by Money Mornings Shah Gilani. ETFs are complex derivative products, which fit into the "complex instruments" noted above.

BEN'S SPEECH WON'T FIX ANYTHING ... OUR MARKETS JUST AIN'T RIGHT

Do you want proof that our markets are out of whack? Check out the following chart, which comes to us via Barry Ritholtz' The Big Picture.  Make of this what you will, then follow me below ... 

My thoughts? We just experienced a market collapse, and are poised to enter a second recession. Yet, the stock market is still above the point at which Alan Greenspan thought we might be entering a period of "irrational exuberance" in 1996.

As I've written about before, I think what you see in the chart above can be attributed to several factors.


1. The Fed's seemingly never ending money dumps (started after Reagan fired Paul Volcker), which are designed to boost markets when they stumble (a.k.a. the Greenspan Put).

2. Financialization run amok (due, in part, to the rise of the symbolic economy and deregulation).

3. The market's herd mentality (made possible, in part, by centralized modeling and market zombies).

4. Accounting gimmicks & fraud (a market staple that acts like Ritalin).

5. All of the above ...


Take your pick. You can make a case for any one of the choices here.

For my money - as those of you who read regularly have probably guessed by now - it's #5 ... "all of the above." This why I think Fed Chair, Ben Bernanke, will let the world know tomorrow, in Greenspan-like fashion, that the money's still going to be cheap, and/or that another money dump is on the way (though it will probably be clouded in murky Fed-Speak).

Whatever it is, our markets ain't right. And Bernanke's speech tomorrow won't do much to fix it either.

- Mark

UPDATE: It's déjà vu all over again. It was February 2007. Market were in a tizzy over stocks went crazy on February 27. Ben Bernanke came out and said that "markets were working well" and that he expected the U.S. economy to pick up. Then we have his other gaffes (including 5% unemployment through 2011). Fast forward 4 1/2 years to August 2011. Markets are worked up over recent roller coaster rides on Wall Street and what appears to be an imminent recession. Today Federal Reserve Chairman Ben Bernanke said the U.S. is on track for long-term economic growth and announced no new economic stimulus measures during his speech at a conference in Jackson Hole, Wyo. But he did leave open the possibility of more action by the Fed if another recession looks likely. If we look at Bernanke's track record, and translate from the Fed-speak, this is what we get: We're in trouble. Expect another money dump.

BLAME BUSH FOR OUR BUDGET MESS

Over time I've tried to explain in as simple terms as possible how we got into our current budget mess. In April I wrote how republicans refuse to go after one source of our budget bills - wasteful corporate subsidies, write-offs, tax deductions and other unnecessary giveaways - which add well over $1 trillion to our national tab.

Then, in another post, I pointed out how President Bush's policy choices effectively squandered budget surpluses, and discussed the same points in an op-ed I wrote for the Bakersfield Californian. All of this created a fiscal and economic mess that the GOP and their Tea Party sycophants have no problem blaming on President Obama.

I've also pointed to Alan Greenspan's ridiculous cage matches with himself, and the Ayn Rand inspired policies he supported, which helped drive our economy into a ditch (this takes us down another road, that we can avoid for now).

The point is very few people on the far right want to believe that President Bush and the Republican Party's tax cut jihad are to blame for our current budget problems. This is why these CBO projections from 2001 are so important to look at today. Every year the Congressional Budget Office makes 10-year budget projections, based on spending, revenue, and laws then in place. In 2001 the CBO projected a cumulative surplus of $5.6 trillion through 2011.

Let me repeat, in 2001 the CBO projected cumulative surpluses of $5.6 trillion through 2011.

What this means is that if we had continued with Clinton era tax rates, and avoided some of the reckless wars and other policies pursued by the Bush administration, we would be paying off our entire national debt at the end of this year (or at least seeing the fiscal light at the end of our economic tunnel). Instead, as a result of the Bush years, we've seen a collective swing of $11.8 trillion (from the January 2001 projections), and record budget deficits.

Check out the CBO projection numbers here, and what it looks like in graph form here ...

So, what happened? George Bush happened. I really can't make it any simpler than that.

- Mark

BEWARE OF DEBT COMMISSIONS BEARING FALSE PRESCRIPTIONS (and false promises)

I discussed this a few weeks back in class ...

The Greenspan Commission (yes, Reagan raised taxes)
It was early in the 1980s and Ronald Reagan was just elected president. He was staring record deficits in the face. Part of the problem was tied to his trickle-down, tax cuts for the rich, policies which were going to drain income from the national treasury. The other problem was tied to increased defense expenditures and anticipated hikes in social security costs down the road.

Because tax cuts and increasing defense spending were the heart of President Reagan's policy prescriptions, he focused on social security spending as a way to deal with looming budget shortfalls. So he appointed a blue ribbon panel to study the social security problem - which was Reagan's way of dealing with his budget deficit mess. The panel was chaired by future Federal Reserve chair, Alan Greenspan. Thus was born the Greenspan Commission (the National Commission on Social Security Reform).

The Greenspan Commission was driven by two realities. They had to buy into Reagan's assumption that trickle-down economic policies would reduce budget deficits (even after 1980 presidential candidate George H.W. Bush exposed it as "voodoo economics"). Then they had to accept that President Reagan was going to increase defense spending. As a result the Greenspan Commission was told to ignore any consideration of across the board tax increases, and to not consider touching defense expenditures, as a way of fixing the budget.

What emerged from the Greenspan Commission were a set of policy prescriptions that effectively doubled social security (FICA) taxes on America's middle-class and their employers.

In addition, retirees had to accept postponement of cost-of-living increases while some employees saw the date when they could begin receiving benefits deferred. President Reagan signed these recommendations, along with others, into law in 1983.

Left unsaid throughout the entire process was how social security, a pay-as-you-go program, had been generating program surpluses for years. Part of the reason for ignoring these program surpluses is because discussing how to protect those surpluses (in a "lockbox") would have drawn attention to the fact that the federal government had been using these surpluses to shore up budget expenditures and deficits over the previous decades.

Put another way, the federal government was sucking off of the social security program - and owed the social security program money (as it does now) - but didn't want to admit it.

The Greenspan Commission ignored this inconvenient reality, and decided to start the clock over on it's own terms. This meant that America's middle-class would pay for previous deficits, PLUS President Reagan's signature tax-cuts-for-the-rich program PLUS rising defense expenditures. America's wealthiest would get a pass.

The Boskin Commission (wishing inflation away to the cornfield)
Fast forward to 1995. With Reagan and Bush era policies raising our national debt Washington's elites were once again concerned about government expenditures. Specifically, they were concerned with a national debt that had quadrupled in 12 years. But instead of focusing on rising defense expenditures and foolish tax cuts for the rich policies, policy makers once again looked at anticpated social security costs (again ignoring present program surpluses), and focused on mandated cost-of-living-allowances (COLAs).

Since social security recipients receive annual increases in their benefits, which are tied to the official rate of inflation (COLAs), the U.S. Senate decided to put another commission together - the Boskin Commission. But this commission was tasked with looking at how inflation was measured. They wanted to see if they could slow down social security benefits by adjusting COLA increases downward.

If this sounds confusing your instincts are correct. Their real goal was to cut benefits, without nobody noticing. Guess what? The Boskin Commission found a problem.

Let's reemphasize this point. The Boskin Commission's real goal wasn't to find a new mouse trap for measuring inflation. It's goal was to find a way to reduce social security payments, and to do it in a way that would confuse everyone enough so the recipients wouldn't notice (or give up trying to figure it out). Here's how they did it.

 

All of us know that home prices doubled in a short period of time before the markets collapsed. We also know that crude oil prices doubled, tripled, and then quadrupled over the past 10 years. Anyone who goes food shopping know what's happened to food prices. Then we have insurance premiums, medical costs, co-pays, education and other service fees that we have to pay, especially as government budgets and services are cut back or privatized.

Yet, over the past 10 years, the consumer price index (CPI), which measures our nation's inflation rate, has barely budged. Here, check it out.

Now, do you believe that your household costs have actually increased by an average of 2-3% per year? Neither do I, and I have the bills to prove it. I'm sure you do too.

Here's what's been happening.

Because of the Boskin Commission's "hedonic" adjustments we don't count the $1,000 you paid for your new computer as part of our inflation numbers. Why? Because since it's twice as fast as your old one the government concludes that you really paid half as much for it. The same goes for figuring out how much your car and refrigerator cost.

Think of it this way. In the government's eyes your $1000 computer only cost $500. This is akin to saying, "Now that I'm buying $3.00 hamburgers, which give me twice the calories, I'm going to start calculating my food budget at half the price." Huh? Yeah, that's what I thought too.

Look, if you double up on the calories for the same amount of money you're not always doing yourself any favors. Oh, and you're still spending $3.00.

Then we have the substitutions.

Because of the Boskin Commission, when the government sees the price of steak go up it assumes that consumers replace steak with chicken, or some other meat-like substance (note: the "core CPI" actually excludes food & energy prices). Pesky prices according to the Boskin Commission don't count if you don't really want them to count.

But, in the real world, you and I know the price of steak went up.

In this way, with hedonics, substitutions, and many other accounting tricks, the Boskin Commission helped reduce inflation in America. Like the little boy on the Twilight Zone segment who wished things he didn't like into the cornfield, the Boskin Commission's recommendations allowed America's policymakers to wish inflation away.

And just like that, America's retirees and middle-class wage earners saw the size of their social security checks, and other raises, stagnate as real prices rose in America.

Oh, as an aside, with official (but artificial) low rates of inflation Alan Greenspan had his green light to keep on lowering interest rates. This, as we all know, contributed to the housing boom and the markets subsequent collapse. Thank you Boskin Commission.

President Obama's Deficit Commission (watching hope take a dive)
Now we have President Obama's Deficit Commission, and it's deficit reducing proposals. As should be expected, nothing is said about 60+ years of using social security surpluses for current expenditures ... nothing is said about three decades of unfunded trickle-down policies ... nothing is said about walking back Bush's tax cuts for the rich policies ... nothing is said about unfunded bailouts for Wall Street that now reach into the trillions of dollars ... nothing is said about unsustainable and reckless war projects.

So, guess who's going to pay through the nose on this one?

So much for keeping hope alive.

Whether it's tax increases on the middle-class (Greenspan), wiping out cost of living increases and ignoring the impact of inflation (Boskin), or turning our back on what's really driving national debt loads (Obama's Deficit Commission), America's middle-class is being made to pay for 30 years of unfunded tax cuts, corporate bailouts, and reckless wars.
 
All of this goes a long way in helping to explain the widening wealth and income gaps that exist in America. I think we need another commission to study the issue ...

- Mark

GREENSPAN vs. GREENSPAN CAGE MATCH ... WE LOSE

"... A New Paradigm
of Active Credit Management."

- ALAN GREENSPAN (October 5, 2004)

Translation: "I don't see no credit 
market Chernobyl-like meltdowns in America."

One of the things you get when you follow free market ideologues long enough is that their words come back to haunt them. In this case former Federal Reserve Chair (1987-2006), Alan Greenspan, claimed in 2004 that credit markets were just fine. Big private market players, rather than "over regulated" banks, were spreading money and credit around efficiently.

Private market players (our shadow banking system), Greenspan argued, know what they're doing. Even if they were funding the purchase of toxic assets, and providing easy money that helped create our housing bubble, they were the ones who were on the hook if they lost money -- so the argument went. The market not only knew best according to Greenspan but, in this case, had created a "new paradigm of active credit management."

No Chernobyl-like credit market meltdowns were on his horizon.

Then the September 2008 credit market meltdown happened. Ooops.

Mr. Greenspan spoke up again on Sunday (Aug. 1). He claimed that we should repeal President Bush's tax cuts for the rich because we can't afford them. Specifically, he said (in typical Greenspanspeak):

"We believe it is appropriate to let those tax cuts that go to the most fortunate expire,"

I have only one question. Where the hell was this Alan Greenspan when President Bush said we needed tax cuts for the rich in 2001?

If  you recall, when George W. Bush ran for president in 2000 he gained considerable support telling America that the surpluses generated during the Clinton administration was "your money." It didn't matter that we had a $5.6 trillion national debt to pay down. In his mind budget surpluses should be given back to the American taxpayer in the form of tax cuts. So, instead of paying down our national debt (where were the Tea Bag crazies then?), President Bush proposed tax cuts, most of which would go to the nation's wealthiest Americans.

As he pointed out in his book The Age of Turbulence, Greenspan supported tax cuts at the time because "chronic surpluses could be almost as destabilizing as chronic deficits." We have two problems here. First, while we had a budget surplus in 2001, we hadn't started to run "chronic" surpluses. Second, Greenspan ignored how previous Republican tax cut policies had effectively quadrupled our national debt between 1981 and 1993.

What's key here is that Alan Greenspan knew all of this. Yet he still supported tax cuts that would primarily benefit the wealthy (yes, he understood the Bush proposal) to deal with "chronic surpluses."

To be sure, Greenspan was careful to say at the time that he supported tax cuts in general, and not necessarily President Bush's tax cut proposal. But he was being politically naive, at best. More probably, as an Ayn Rand sycophant, Greenspan was using his position to help get more money into the hands of private market players. More bluntly, he was playing a parlor game and was deliberately disingenuous.

Whatever inspired him, with decades of experience in Washington, Greenspan had to know that his congressional testimony supporting tax cuts would give President Bush the political gravitas - or greenlight - he needed to ram his tax cut program through congress. Ten years later, and with an additional $5 trillion added to our national debt, Mr. Greenspan is now saying "Hey, I think we need to pay for these tax cuts."

Still, perhaps we shouldn't be so hard on Greenspan and his sudden fiscal two-step. As chair of President Reagan's National Commission on Social Security Reform (the "Greenspan Commission") Alan Greenspan supported raising social security (FICA) taxes on the middle class in 1983 to help pay for projected social security shortfalls.

Got that? To deal with looming deficits in 1983 a tax hike on middle-class America was fine. This helps explain why the payroll (FICA) tax was raised in the 1980s (yes, President Reagan raised taxes). But to deal with real deficits in 2001 ($5.6 trillion) Mr. Greenspan was fine with tax cuts, most of which would go to America's wealthiest class.

Are you kidding me? How do you go from, "Let's raise taxes on the middle class to pay for projected shortfalls" in 1983 to "In spite of an actual $5.6 trillion debt, let's take projected surpluses and use them for tax cuts, which will go primarily to the rich" in 2001?

Now, in 2010, we have Mr. Greenspan saying that we should allow tax cut legislation that benefitted primarily the richest Americans to "expire" because we can't afford them. I guess you're never wrong if you're an intellectual schizoid ...

So, which Mr. Greenspan should we go with? Mr. We-Should-Pay-Our-Bills-So-Let's-Tax-The-Middle-Class? (1983), or Mr. To-Hell-With-the-Deficits-Taxes-for-the-Rich-Are-OK-by-Me? (2001), or Mr. Ooops-Now-We-Should-Pay-Our-Bills? (2010). Will the real Mr. Greenspan please stand up. Cue the music...




For my money, we also run into problems when we sit down and do the math.

What we find is that the billion dollar surpluses, generated in part by the social security tax hike, were effectively handed over to America's wealthiest during the Bush years -- making it one of the greatest transfers of wealth in human history. No wonder the far right is afraid of discussing class warfare. They're winning, and they don't want America to find out how it happened.

Today America finds itself staring at bloated budget deficits (a product of Bush's failed policies), more than $12 trillion in debt (due to a failed trickle-down theory), and another social security hole that Republicans claim can only be fixed with more tax cuts and deregulation.

(To be sure, the vast majority of our projected social security short fall is attributed to slowing wage growth and increased inequality in America. These are two economic shifts that Greenspan's commission didn't anticipate. Then again, they probably didn't anticipate the Republican Party tearing up the post-war social contract, which helped slow wage growth and increased income gaps in America.)

In all cases, Mr. Greenspan now concedes there was a flaw in his model, and that he was shocked by the results of the casino mentality that he helped create.



Incredible. Still, the damage has been done. And Alan Greenspan was there egging it on, every step of the way.

While Greenspan 2010 seems to be channeling Greenspan 1983, the reality is Greenspan 2001-2006  -- and the policies he rubber stamped during his time at the Fed -- is emerging as the winner in this Greenspan vs. Greenspan Cage Match.

Unfortunately, that's bad news for the rest of us.

- Mark

UPDATE (12/17/12): I just found this Tom Tomorrow cartoon. It pretty much explains the post ...

AMERICA ... A NATION OF IGNORANT WRETCHES?

Want to know why public pension funds are sucking wind (California is going to be short at least $350 billion), and why your house and/or the commercial real estate market is either underwater or in deep trouble? It's not because of the actions of Freddie Mac and Fannie Mae, as moral coward and former Fed Chair, Alan Greenspan suggested during his testimony to the Financial Crisis Inquiry Commission. It goes much deeper, as this Dylan Ratigan clip outlines.

Visit msnbc.com for breaking news, world news, and news about the economy

I especially like the Hollywood movies Ratigan uses to explain what's happened. Former Federal Reserve Chair, Alan Greenspan, is The Godfather. He makes the banking sector an offer they can't refuse: Virtually free money with carte blanche to do what they want. The banks, and other market players (especially the "shadow banking" institutions), take the money and make unrealistically low interest rate loans across the economy.

And why not? The Godfather, Alan Greenspan, had their back. (Paradoxically, in spite of his hands off "free market" beliefs, Greenspan also believed it was his duty to write blank checks and ignore market corrupting practices to keep the market afloat.)

For their part, American consumers thought the money coming in was "all good" and would last forever. Like Doyle Lonnegan in the Robert Redford movie The Sting, American consumers didn't realize that they were getting their pockets picked, and that the ones doing the picking were the people America trusted to take care of their business - Alan Greenspan and Wall Street (a process I wrote about in early 2008).

Like Doyle Lonnegan, the American taxpayer was footing the bill for the con men (Alan Greenspan and Wall Street) to play and make their bets. When the time for making the real big con (bet) arrived, Lonnegan was again tricked out of his money by a first-class sting operation. In many ways, with the American taxpayer Federal Reserve footing the bill for the low interest rate loans to Wall Street, and with the American taxpayer covering the cost of the bailout for Wall Street, there's little doubt that the American taxpayer has been connned too.

Heads they win, tails we lose.

Still, there's little doubt that America was pleased with the immediate results, and did not worry too much about the future when the game was being played out. And why should they worry? Americans were told over and over again that market players are good, rational people. You can trust Wall Street. Government, on the other hand, was bad. Government regulations were worse. And besides, Wall Street historically returned about 7.5% per year, which would likely go on for eternity (so the argument went).

With this mind-set as America's backdrop, it should come as no surprise that Wall Street's sting operation wasn't such a hard sell. In many respects, we were asking to be fooled.

The end result? Bankers and investors went nuts borrowing and lending, borrowing and lending, borrowing and lending ... well, you get the drill. But it didn't stop there.

The good people on Wall Street took all the newly created debt contracts, repackaged them into high paying securities, and then sold them to pensions and other fund managers. Wall Street effectively marketed them as securities that were as safe as government bonds. With the ratings' agencies and Wall Street financiers working together to make sure the debt looked clean on their computer models, what could possibly go wrong?

Well, we know what went wrong. Because America is chock full of people who have a child-like understanding of how markets work, we got conned. And it's happening again.

Today, no one in Congress seems willing to stand up to get our money back. Part of the reason for this is that they don't understand what the hell is going on either (Republican Ron Paul and Democrat Alan Grayson excluded). Worse, those who helped pull off this scam are too gutless to accept blame because of what it would do to their egos, and their bank accounts. Recent regrets from CEOs, without assuming responsibility, are simply public grandstanding.

As a result, it should come as no surprise that the pieces of legislation making their way through Congress are left lacking (though Audit the Fed is promising).

At the end of the day I don't expect much out of the reform efforts (which can be tracked here). Americans are woefully ignorant about too much of this stuff to push for anything of substance. Our Congress is too dependent on Wall Street lobbyist campaign contributions to stand up for the American consumer. Worse, most Americans - especially the market sycophants in Congress - have bought into a free market mantra that is more fairytopian than grounded in reality. This explains why accountability is missing from our current debate.

Simply put, because the vast majority of Americans still believe in self-regulating markets they don't understand where to begin when it comes understanding the market failure we just experienced (hint, it's not just Fannie Mae or Freddie Mac).

When it comes to understanding how modern markets work we really need to ask whether America has become a nation of ignorant wretches. If we are honest with ourselves I have to believe that the solutions would have become obvious by now ... which, in my view, explains why we're going to do 2008 all over again.

Stay tuned.

- Mark

GREENSPAN WINS DYNAMITE PRIZE IN ECONOMICS

The on-line journal Real-World Economics Review Blog recently had a contest to see who their readers believed was the economist most responsible for blowing up the world economy.

Here are the top three vote getters for the Dynamite Prize in Economics, with a brief professional "bio" explaining their rank.

Alan Greenspan: As the former chair of the Federal Reserve (1987-2006), Alan Greenspan won because of how his fairytopian market views helped ruin our nation's economy. His economic dream world ran so deep that he believed markets didn't need regulation because they're so efficient that even corruption and stupidity are eventually weeded out. People, after all, can be expected to do the right thing when money and profits are staring them in the face. He was so convinced about his Ayn Rand drenched ideology that he consistently lowered interest rates, and expanded the money supply, foolishly believing that people who get money nearly for free will act rationally.

For believing that people are angels in a market setting, Greenspan's award is well deserved.

Milton Friedman: Encouraged by the brilliance of his own writings (he was a good writer), Friedman managed to convince himself that the Federal Reserve was to blame for the Great Depression. Friedman pushed his delusions about markets - and evil government - to such a degree that he wrote the policy paper that led the U.S. out of the draft and into an all volunteer military. To get the results he needed - which focused on market efficiency rather than national security - he deliberately ignored the research methods he was asked by Congress to use in the policy paper. Because of Milton Friedman we now have: (1) a Federal Reserve that believes it's so important that it can stonewall congress, and; (2) a military that allows U.S. presidents to ignore the will of the people (a draft to fight reckless wars would get our attention), and increasingly depends on private mercenary companies, like Blackwater.

After considering how his academic career influenced public policy, Friedman probably should have received a Life Time Achievement Award.

Larry Summers: Former Harvard economist Larry Summers was at the center of the good 'ol boy wolf pack that went after Brooksley Born. Who's Brooksley Born? In her post as director of the Commodity Futures Trading Commission (CFTC), Born warned Washington that if we did nothing to rein in derivative trading that we were looking at a market collapse ... in 1997! Summers - along with Robert Rubin (Treasury), Alan Greenspan (the Fed), and Arthur Levitt (SEC) - thought it was better to bury Born politically. Kudos.

Proving that his Born Stupidity was not a one time fluke, in 1999 Summers also gave intellectual weight to the idea of dispensing with the Glass-Steagall Act (1933). The Glass-Steagall Act separated commercial banks, investment banks, and insurance companies after it was discovered that the financial sector had worked collectively to speculate and defraud customers before 1929. For reasons not yet explained, Summers believed that ignoring history and bringing banks, brokers, and insurance companies together again was a good idea.

Don't feel bad for Larry Summers if you think he should have won this time around. He can still prevail. For my money, as a member of President Obama's "don't-push-Wall-Street-too-hard" economic team, Summers has a very good chance of winning the Dynamite Prize in Economics in the future.

While I would have liked to see Arthur Laffer, the economic genius behind supply-side economics, as one of the nominees, there's no doubt that the top vote getters deserve their place in Dynamite lore.

- Mark

IGNORE REGULATION NOW, PAY (again) LATER

Yves Smith at nakedcapitalism has an interesting post on the new regulations proposed by the Federal Deposit Insurance Corporation (FDIC), the federal institution that insures your bank deposits. The goal is to put some limits on the stupidity and greed that helped bring down our markets, and threaten to do so again (because we've done nothing to alter behavior, and have left the same guys playing the same games).

These three suggestions stand out:

1. SEASON THE LOANS: Make sure mortgages are "seasoned" - or maintained with the loan originator - for 12 months before they can be passed on to other market players (who either packaged or cut up mortgages to be sold elsewhere).

2. REAL BUY-IN: Loan originators must maintain a 5% stake in the mortgage contract after it's sold. The ideas is that if loan originators have a stake, they will write better loans.

3. NO CDOfication: Collateralized Debt Obligations (bundling up loans that are sold as a security) are not permitted.

If these proposals are real I like them, as a start.

Now, I'm sure there are some people out there - like the parasitic sociopaths on Wall Street who got us in this mess - who are probably going nuts over the idea of regulating the market. I say to hell with them.

They should have learned something from the market collapse, but didn't. One thing they haven't learned (nor appreciate) is that, were it not for the trillion dollar bailout, many of the those complaining about financial and security regulations would now be in court fending off lawsuits, or in jail (because the bailout helped fill financial gaps - especially by allowing collapsed securities to be used as collateral for government loans - securities related lawsuits declined dramatically in 2009).

What these parasitic sociopaths fail to understand is that markets don't self-regulate. Market players don't always do the right thing. Consider the following.

Part of what started our economic landslide were unregulated over the counter (OTC) markets. Market players bought and sold complex financial instruments (derivatives) in OTC transactions that few understood, and even fewer could justify as a meaningful contribution to society. These transactions did little more than inflate claims on money between Wall Street power brokers, and created a massive bubble economy. We're now paying for these acts of greed and stupidity in the form of collapsed home values, increased unemployment, rising credit card rates, reduced tax revenue and higher government debt, etc.

How much did they inflate market claims? Brooksley Born, former head of the Commodity Futures Trading Commission (CFTC), said that by June of 2008 trading on the OTC markets surpassed $680 trillion. How big is this amount? The total amount of goods and services the U.S. is expected to produce this year is worth around $14 trillion. Six hundred and eighty trillion dollars, according to Born, is more than 10 times the gross national product of all the countries in the world, combined.

The worst part of this is that market players (they're not investors) were gambling with borrowed money, and providing insurance on products that they could not pay claims on because they didn't have enough capital on the books. One of the few people who saw what was happening in the 1990s and tried to do something about it was Brooksley Born. For her efforts - to secure information (which started with a concept release) and regulate the OTC market - Born  was beat up politically, and effectively muzzled, by Alan Greenspan, Bob Rubin, and Arthur Levitt.

You can read about Born's warning here, or you can watch "The Warning" on Frontline here. It really does a great job of explaining what we're up against. What's clear is that we can ignore the calls for regulation now, or pay (again) in the future.

- Mark

THEY'VE LEARNED NOTHING ...

Back in March and July I wrote about how our non-regulatory and non-punitive responses to the 2008 market collapse effectively sets us up for an Extreme Do Over.

In a few words - and using ABC's Extreme Makeover Program as an example - I argued "that rather than demolish the commercial banking and investment infrastructure that got us into this mess - and then rebuilding everything with strong firewalls - the Obama administration has signed off on the old framework."

The point I made in both posts was that we've learned little to nothing from the market meltdown. The same people, the same thinking, and the same institutions that got us into this mess are still dominating our economy. In many respects, these developments create all the trappings for an Extreme Bailout Do Over.

This article from William Black offers additional insight into why we should not be surprised if we go through another 2008 market meltdown.

Black - who is a white-collar criminologist, a former senior financial regulator, and now an Associate Professor of Economics and Law - tells us that the epic regulatory failures at the Federal Reserve are the product of the continued intersection of a failed ideology with bad economics.

Specifically, Black points to five failures that are the stuff of legend:

1. Former Fed Chair Alan Greenspan believed that the Fed should not regulate fraud because the market would clean up fraud on it's own.

2. Current Chair Ben Bernanke also believed that the Fed should rely on self-regulation by “the market.”

3. Former Federal Reserve Bank of New York President Tim Geithner believed that he was never a regulator while he headed the NY Fed (a true statement as it applied to him, but not one he’s supposed to admit).

4. Bernanke gave key support to the Chamber of Commerce’s effort to gimmick bank accounting rules to cover up their massive losses — allowing them to report fictional profits and “earn” tens of billions of dollars in bonuses

5. Bernanke recently appointed anti-regulation crusader Dr. Patrick Parkinson as the Fed’s top supervisor.

Of these five developments, Dr. Parkinson's recent appointment is especially noteworthy because it shows that our regulatory mandarins have learned nothing from the past year.

Specifically, Dr. Parkinson was appointed largely because he shared Dr. Bernanke’s anti-regulatory ideology, a view that he hasn't changed even in the face of the Great Recession. Perhaps more importantly, as Black points out, Parkinson is an economist who has never examined or supervised. This is important because Parkinson is also known for naively claiming that credit default swaps (CDS, a.k.a the financial derivatives that destroyed AIG) should be unregulated because fraud was impossible among sophisticated parties! Huh?

Who believes crap like this? Oh, that's right. The same people who believe "invisible hand" pixie dust creates free markets where people magically become virtuous in the pursuit of profit.

And fairy tale market conditions exist too ... if you just close your eyes, click your heels together, and repeat the words, "There's no place like home ..."

Look, I'm all for creating useful myths and legends that help to build and unify a society (like George Washington never told a lie). But saying fraud is impossible among sophisticated parties in a market setting is like saying mingling among societies' power elites will turn ladies of the night into ladies of virtue. It doesn't happen.
 
At the end of the day, the anti-regulatory policies that Greenspan, Bernanke, Geithner, and now Parkinson champion are simply naive and reckless. Wishful thinking is no substitute for good policy.

- Mark

PAUL VOLCKER'S THE MAN (and Reagan Blew It)

In 1987 the Federal Reserve Board voted 3-2 to allow commercial banks to underwrite (invest in or accept some of the risk for) a limited amount of financial instruments like municipal bonds and mortgage backed securities. Underwriting bonds and securities had been a problem before the Great Depression because banks took depositor money and jumped into bigger and riskier investment schemes. As is the case today, bankers got greedy and stupid. Funny how some things never change.

Anyways, when bond markets and security investments tanked in 1929 banks who had taken bigger and bigger risks collapsed and took their depositor's money with them. There was no Federal Deposit Insurance Corporation (FDIC) back then so ordinary depositors lost their money to the stupid deals bankers made. You know the rest of the story.

Fast forward back to the Federal Reserve's 3-2 decision in 1987 ... By allowing our FDIC-insured banks to take on the risk of underwriting securities the Federal Reserve opened the door that would eventually enable our FDIC-insured commercial banks to get involved in the financial crap (CDOs, MBS, CDS, etc.) that brought down our economy last year. This is important to know because one of two board members who voted "no" on the 3-2 Fed decision was then Chair of the Federal Reserve, Paul Volcker.

I provide this background because Paul Volcker once again is doing us all a favor, which will probably go unnoticed (again). Via nakedcapitalism.com we learn that while in Sussex, England Mr. Volcker gave a speech and told some of the world’s most senior financiers that their industry’s “single most important” contribution in the last 25 years has been automatic telling machines, which he said had at least proved “useful”. Imagine, telling a group of financial executives with big wallets - and even bigger egos - that their greatest gift to humanity over the past generation was ATMs. Beautiful. But he didn't end there.

Mr. Volcker then went on to tell the group - after being asked about the importance of securities - that the commercial banks could innovate all they want "but do it within a structure that doesn’t put the whole economy at risk." The real surprise here is that many in the crowd were "stunned" by his common sense approach to banking.

Mr. Volcker finished by saying the industry needed to "wake up" and that investment banks and hedge funds should be the only financial groups taking on high risk investments. He added that our governments should also be telling them "If you fail, fail. I’m not going to help you. Your stock is gone, creditors are at risk, but no one else is affected."  That this even needed to be said - and that anyone would be offended or "stunned" by the suggestion - says much about where we're at today.

And, for those of you keeping score at home, Ronald Reagan effectively fired Paul Volcker and replaced him with Alan Greenspan. You do the math.

- Mark