There are those cheerleading type experts with the perpetual, frozen smiles who maintain that the necessary measures have been taken to deal with the financial crisis, the economy is now showing signs of recovery, all is under control and we're back on track with the market in rally mode since March leading the way. Then there are those labeled by the smiling ones as the Chicken Littles who are speaking up and saying, not so fast, it's not quite that simple.
Several posts back I provided a link to the PBS Frontline documentary,
"The Warning." The piece focuses on a woman named Brooksley Born who was the head of the Commodity Futures Trading Commission in the mid-90s. Ms. Born courageously raised major red flags to the Clinton administration and congress about the need to regulate financial instruments known as over the counter derivatives. As the documentary points out in detail, she was quickly labeled a Chicken Little and thrown under the bus by the big boys. This lack of regulation ultimately led to the crash of the derivatives market, and helped to trigger the financial crisis.
It's interesting to note, going back to 1987, that some of the same power players and their proteges who are the stars of "The Warning" have remained in key economic positions in both the Republican and Democratic administrations that have followed to this very day.
The financial crisis literally froze the engine of our economy. Once an engine freezes up, it's not as simple as adding oil (read government stimulus racking up more taxpayer debt) and you're on your merry way. It has to be taken apart and rebuilt, which in the case of our economy will take a lot more time and digging beneath the surface than the cheerleaders are willing to admit.
Part of the process of rebuilding the engine of our economy will be to seriously question certain metrics and long-standing fashion trends in thinking that may no longer apply. For example, we continue to hear from the cheerleading experts the same old mantras chanted over and over again like the following: "A Jobless Recovery." With unemployment on the rise as the stock market rallies, this is like Wall Street sticking its big thumb -- that it has on the scales of the economy -- in the eye of Mr. and Ms. America on Main Street saying, "We're ok, you're on your own." Also, I'm trying to reconcile in my own mind how this fits with an economy that the same experts have to admit is based 70% on the consumer. If people are losing their jobs or know those who are, where's the incentive to keep the consumer engine revving at high RPMs? "The stock market is a leading indicator of the economy." Is this metric still accurate or reliable in a market where the controlling mindset has clearly had a generational shift away from the stability of long-term investing based on real productivity to one that is predominated by short-term, grab-and-run speculation that drives cycles of over-inflated "paper asset appreciation" -- think bubbles -- creating a volatile and unstable economic environment?
My personal favorite from the cheerful ones was when the latest bubble was exploding, they were broadcasting to the masses, "When your statement arrives, don't open it -- don't even go near your mailbox until we tell you the coast is clear."
The economy remains on thin ice and our margin for error is as slim as it has ever been.
In "The Warning" there is an interview with Michael Greenberger. Mr. Greenberger served as director of the Division of Trading and Markets at the Commodity Futures Trading Commission from 1997 to 1999. He currently heads the University of Maryland's Center for Health and Homeland Security and teaches the class Futures, Options and Derivatives at the University of Maryland School of Law. Following are some excerpts of that interview that was conducted on July 14, 2009:
"When I first walk in the door, Brooksley said to me, 'This is a $13 trillion market.' ... By the time in May 1998 that we actually try to do something about it, it is a $27 trillion market. By the time Congress in December of 2000 deregulates it, it's an $80 trillion market. As we sit here today, the market has dropped from above $600 trillion to $592 trillion notional value. It's dropped because of the meltdown. ...
And obviously, it went from $13 to $27 to $80 to $600 trillion because nobody's watching the market.
Brooksley had the conception that she wasn't worried about the rest of the administration. She was worried about the financial services industry, that we were effectively now going to say swaps are futures, the dirty words, and that this would meet a lot of resistance.
Because it meant that this multitrillion-dollar market would now have to be traded transparently with capital reserves, with fraud and manipulation requirements, with the regulation of intermediaries, and on organized exchanges rather than this private little gamesmanship where it was. ...
We aren't going to take it over. It's not going to be government-run, but it's got to be done transparently. Everybody needs to know what's happening. It's got to be overseen by a regulator who ensures that fraud and manipulation are not conducted within those markets. We've got to make sure that when people make commitments, they have the capital to back those commitments up.
...and we see the template -- crisis, worry, threatened reform, pull back from the crisis, 24/7 lobbying, all is forgotten.
Right now, all I can tell you is that the battle is evenly matched. You would think after everything we've been through there shouldn't be a battle; it should be understood. No, no, the financial services industry has organized itself and will pitch very, very hard for continuing to have these markets be unobserved by anybody outside of the banking system or their customers. No capital requirements, no fraud controls, no manipulation controls and no regulation of the intermediaries. It's going to be a close-fought battle."
Consider also that competitive economies around the world have had decades to send their generations to American universities and they have closely studied our innovation and formulas for success -- and, more recently, our formulas for failure. These competitors are now in a far stronger position than ever before to beat us at our own game.
The tentacles of this predicament that were carefully hidden from the general public eye have been taking hold and spreading throughout the system for decades. Naturally, those who were the architects and engineers of this deeply implanted structural rigging of taking risks with no skin in the game, what has been referred to as the "socialization of risks and privatization of gains", and who have profited greatly from their handy work, would prefer -- and will fight tooth and nail -- to essentially maintain the status quo. And as public scrutiny bears down, we, of course, are having to sit patiently and watch as the Cheerleaders put on display their standard unctuously dismissive attitudes, denial of personal responsibility and prepared spin as to how forces beyond their control brought us to the edge of economic meltdown. Not a problem, we know this movie by heart, and it won't be the last time we see it.
However, this time around, things are different. The Chicken Littles aren't going away with their feathers tucked between their legs. Public awareness is on a steady drum beat and growing. People from all sides of the political and social spectrums, from low to high-profiles, are uniting in their understanding of what and how much is at stake here. It took time to get into this mess and it will take time to reestablish ourselves in a healthier direction.
As Michael Greenberger put it, the battle is on and the template of crisis that some are counting on --worry, threatened reform, pull back from the crisis, 24/7 lobbying, all is forgotten -- is now facing challenges that are as formidable as the crisis calls for.
In any event, one thing is for certain: we cannot expect political will to take the lead until our non-partisan cultural will has first been established. This is what is meant by the old saying, "Great leaders follow."