The Greater Fool
Every recession or economic anomaly is caused by the lack of a greater fool. Hard to believe given that everyone and their brother was involved in this one. From politicians that wanted to keep the populace happy by giving everyone a shot at their own home, other politicians that were happy to let it happen and fuel economic growth, the bankers, mortgage brokers, real estate agents, builders, building material suppliers and everyone else with a finger in the pie, investment bankers, shareholders of every entity involved and finally back to the politicians and government agencies that were supposed to be providing oversight, they were the fools. That would include about every last one of us.
Unfortunately, one day, the greater fool didn’t show up. The narcotic of easy money had us all in a self-indulgent stupor. We were all rich by our 20th century standards, but this was the 21st century and life was good. The party was raging on Wall Street. The market was unstoppable, credit was there for the asking and home equity was growing faster than John Q. Public could refinance and buy more fun stuff.
The greater fool was expected to show up day in and day out. The greater fool came and bought up all the home loans nicely gift wrapped as collateralized debt obligations. We look back in hindsight and say they were very complicated financial instruments that only a few gifted people could understand. They were only hard to understand when intoxicated by endless creation of wealth without even trying.
This epic binge even had the Wall Street geniuses deserving of tens if not hundreds of millions of dollars a year drunk out of their minds with easy money. Then one day the greater fool didn’t show up. The nicely wrapped packages stopped moving and with age they began to smell like trouble and trouble they were. The whole thing fell apart, lock, stock and barrel.
A quick trillion dollars of government bailout money averted a total meltdown. We are now being entertained by many of the same fools trying to get the economy back on track. CEOs are pilloried for flying in corporate jets by the guy who flies around in a personal 747 and a Speaker of the House that complained that the Air Force wasn’t providing her with a big enough jet when she assumed the position just a short time ago. Both of which, by the way, are presiding over an entity taking in far less than it is spending.
The same people that crucified the Big Three CEOs for coming to Washington without a plan, don’t have one of their own. Secretary Geithner handily reduced the market capitalization of the U.S. economy by 4-5% by showing up to a press conference without anything to say other than whatever he was going to do could cost up to $3 trillion. Absolutely brilliant! What was even more spectacular was that the market expected anything more than it got.
History will look back at this period and describe the government, business and the public at large as the three blind mice. Hopefully we can get the constant recrimination, holier than thou self righteous rhetoric over with and get on with the economic cycle. Between the press thriving on bad news and politicians trying to lower expectations, some people think the recession will go on for another year or two. Unfortunately, we don’t have the luxury of time. Americans are not used to hardship. They will not tolerate unemployment for long, they will not stand peacefully in bread lines and they will not reelect the people that allow that to happen.
While I find the inclusion of so much pork and financing of political agendas versus job creation in a stimulus package nauseating, just like Geithner’s press conference, I don’t really expect anything better out of Washington.
The system works in mysterious ways. I do have faith that despite our best efforts to use and abuse the bailout and the stimulus package, enough good will come of it to get the system in gear. Faith and mysterious ways may seem sophomoric. I’ll live with that until I read something from somebody that really seems to have their arms around this situation. The fact of the matter is that rarely in the event of a shock to the world economy does anyone have it figured out until after the fact. Policy makers face a constant barrage of self fulfilling prophecies, medicine with side effects possibly worse the disease itself and the overwhelming temptation to take advantage of the situation. Yet it seems to work.
I do have some back of the napkin calculations of my own to reinforce my faith. Let’s say 300 million Americans equate to about 75 million families. Then let’s say 10% of those families bought homes with cheap and available credit they had no business buying. Then we’ll assume that those 7.5 million families bought $300,000 homes with 0% down. That’s $2.25 trillion in toxic loans that could potentially go bad. So $3 trillion should cover the mortgage backed securities problem with some left over for government and corporate malfeasance, an increase in the normal default rate due to the recession and million dollar bonuses for all the clever people that work out the details.
With the financial system now intact, the stimulus package will take care of pent up demand for free flowing money from Washington to fund political agendas. The powers that be can then stop talking down the economy and start helping to fix it. Most of that will be taken care of by the American people. We’ll put up with frugality for just so long, but we are the consummate consumers. Americans will ultimately mortgage their future to get out there and start spending again. The consumer will drive the recovery and they will drive it like a bat out of hell.
I’m not sure there will be many winners in this debacle, but the losers with be the usual suspects; the least fortunate of society and future generations.
Richard Gabel
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