Victor Davis Hanson: Wall Street 101

National Review Online ^ | October 09, 2008 | Victor Davis Hanson

[neverdem]

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October 09, 2008, 0:00 a.m.

Wall Street 101
If a promised return on an investment seems too good to be true, it probably is.

By Victor Davis Hanson

Until the past few weeks, the financial panic was still mostly far away on Wall Street. But not now.

Car loans, mortgages, and college financing are suddenly harder to come by. Millions are stuck in houses not worth what is owed on them. Cash-strapped consumers are cutting back. The economy is slowing. Jobs are disappearing. Who wants to open quarterly 401(k) statements only to learn that everything they put away in retirement accounts the past two or three years is gone?

There is plenty of blame to go around. Greedy Wall Street speculators took mega-bonuses even when they knew their leveraged companies were tottering — and someone else would pick up the tab. Crooked or stupid politicians allowed Fannie Mae and Freddie Mac to squander billions, as they raked in campaign donations and crowed about their politically correct support for millions of shaky — and now mostly defaulting — buyers.

The new national gospel became charge now/pay later and speculate, rather than put something away in case of a downturn. To provide more goodies that we hadn’t earned, politicians ignored soaring annual budget deficits and staggering national debt and kept spending.

But amid the gloom, there are some valuable lessons that we can take away from the Wall-Street panic.

First, cash really is king. For all the talk of a trillion here or billions there, when the crunch came, many of these investment houses and their once-strutting managers found themselves with a minus net worth. They were desperate to find liquidity — any money anywhere they could find it. Pedestrian passbook savings accounts proved wiser investments than all the clever hedge funds, derivatives, and sub-prime schemes put together.

Second, wisdom and blue-chip college educations are not quite the same thing. The fools in Washington and New York who blew up Wall Street had degrees from our finest professional schools.

The most chilling example, at the very beginning of this ongoing mess, came in 2003 during the House Financial Services Committee’s hearing on Fannie and Freddie. At one point, Harvard Law School graduate Rep. Barney Frank, (D., Mass.), asked Fannie Mae CEO and fellow Harvard Law School graduate Franklin Raines — who took millions in bonuses even as he helped bankrupt the once-hallowed institution — whether he felt the mortgage giant had been “under-regulated.” Raines answered him under oath, “No, sir.” Then overseer Frank announced, “OK. Then I am not entirely sure why we are here.”

If these guys are our best and brightest, then it is about time we rethink what constitutes wisdom, since an Ivy League law degree certainly seemed no proof of either intelligence or ethics.

Third, we as a nation need to relearn the old notion of shame — as in “shame on you!” Firms like Lehman Brothers and Bear Stearns were once responsible Wall Street institutions, built up over decades by sober men. But their far-lesser successors in just a few months have bankrupted these venerable brokerage houses — with seemingly no shame at what they have done to the image of Wall Street.

Americans used to pay their debts. Somewhere in all the blame-gaming about the crooks and liars in New York and Washington, we never hear that real people borrowed real money that they should not have. And they then defaulted on what they owed to others. Walking away from debts may have been understandable, but it was also a violation of trust — and wrong.

Finally, what one makes is no proof of his worth. Almost every head of a Wall Street firm took tens of millions of dollars in bonuses these past few years, as they posted phony profits by borrowing ever more with ever fewer assets. But if financing facilitates the American economy, we should remember that less exotic and remunerative construction — such as farming, manufacturing, and mining — is what really powers America.

Recently, Americans built a new bridge across the Mississippi River in Minneapolis to replace the older one on I-35 that collapsed last year. It was finished three months ahead of schedule, and the industrious construction team that worked 24/7 to make thousands of commuters safer is now eligible for up to $27 million in well-earned incentives. Meanwhile, Franklin Raines at Fannie Mae made nearly twice that sum in bonuses — leaving behind nothing much at all other than billions in other peoples’ debts.

How odd that all those boring lessons from our grandparents turn out to be true in the globalized, hip 21st century: Save your money. Don’t borrow what you can’t pay back. Look first at a man’s character, not his degrees. And if a promised return on an investment seems too good to be true, it probably is.

— Victor Davis Hanson is a senior fellow at the Hoover Institution and a recipient of the 2007 National Humanities Medal and the 2008 Bradley Prize.

© 2008 TRIBUNE MEDIA SERVICES, INC.

[Travis McGee]

Yeah it’s different: worse.

[dsc]

“. . .have to say the economic crisis is working in favor of obama.
Yes, it is; understandable; and it is not surprising that Obama would capitalize here”

Is anybody ready yet to consider that this economic crisis may have been manufactured, and may have been in the works for years?

Or aren’t we there yet?

[cricket]

Is anybody ready yet to consider that this economic crisis may have been manufactured, and may have been in the works for years?

Oh yes...actually, have been saying for a long time; per 'what we all know' and that is this 'Democrat-now-radical-Left' Party will do whatEVER it takes, to assure their assumption of power in this next Election; including bringing our Country to it's knees - if that is what it takes. And according to any good Leftist bible - including Alynsky's/Rules for Radicals; that IS what it takes.

You can choose the 'guns'. . .or the 'power from within the system' MO (version of cooked frog - which counts on heavy use of politcal correctness) - but MO works on same principle. First DESTROY; big bang; or, 'silent', if practicalities matter. Destroy. . .then 'recreate'; recast a future.

Obama's friend - and neighbor - Weatherman, 'Bill Ayers' offered - long past Obama's eighth birthday - that his only regret is that he did NOT do more damage; more destruction. (contrast Ayers regrets, against McCain's apology/regret - albeit 'not guilty' - in Keating Five, media now uses for moral comparison). Now, as an aging terrorist; Bill allows that power from 'within' the best MO.).

Surely we can recognize the 'change we can believe' unfolding as we speak here. Whether by extreme calculations; 'happenstance'; or Alynsky 'wisdom'; or bumbling combinations; the Dems are now busy 'rewriting' a new creation myth.

Meantime, if there are still doubts. . .there is always COPUSA/communist part,usa/ website to check out and see how the 'Dem's' are doing.

Here is what their recommendations were for 'rescue' and for securing 'their securing' - America's future'.

A familiar 'hue and cry'. . .

SAVE MAIN STREET -NOTWALLSTREET / http://www.cpusa.org/article/articleview/985/1/123">copusamainst.link (read more here)

and the plan itself:

Any plan before Congress must:

1) Protect homeowners faced with foreclosure by restructuring mortgage rates to be in line with family income.

2) Create economic stimulus for working people and small business

3) Provide $100 billion in emergency relief to state and local governments wracked with budget cuts and diminished tax revenue

Bar CEO severance packages and cap the pay of executives receiving a bailout

5) Regulate banking and finance with transparent public oversight

6) Maintain public control over monopolies like Fannie Mae and Freddie Mac that have a decisive role in the economy

7) Control speculation and increase revenues by taxing large financial transactions

8) Ban predatory lending and cap interest rates on all types of debts

9) End the war in Iraq, which is draining $700 million a day from public coffers

Developments are moving quickly and their full impact has yet to be felt, but let's make sure that American workers—those who made this country rich—do not further suffer at the expense of the financial elites, those who have created this crisis.

Call Congress today! Tell them no blank check for Wall Street!

National Board Communist Party USA

What the media and others are saying about the Communist Party. Save Main Street Not Wall Street! by CPUSA, 09/22/2008 17:32 Statement of the Communist Party USA

[listenhillary]

1994 seems to be when the first seeds for the financial weapons of mass destruction were planted. There is no regulation to date of these “newer” financial instruments that were designed to get around sensible banking regulations of having capital reserves to back up your institution.

Snipped from http://www.newsweek.com/id/161199

Holed up for most of the weekend in a conference room at the pink, Spanish-style resort, the JPMorgan bankers were trying to get their heads around a question as old as banking itself: how do you mitigate your risk when you loan money to someone? By the mid-’90s, JPMorgan’s books were loaded with tens of billions of dollars in loans to corporations and foreign governments, and by federal law it had to keep huge amounts of capital in reserve in case any of them went bad. But what if JPMorgan could create a device that would protect it if those loans defaulted, and free up that capital?

What the bankers hit on was a sort of insurance policy: a third party would assume the risk of the debt going sour, and in exchange would receive regular payments from the bank, similar to insurance premiums. JPMorgan would then get to remove the risk from its books and free up the reserves. The scheme was called a “credit default swap,” and it was a twist on something bankers had been doing for a while to hedge against fluctuations in interest rates and commodity prices. While the concept had been floating around the markets for a couple of years, JPMorgan was the first bank to make a big bet on credit default swaps. It built up a “swaps” desk in the mid-’90s and hired young math and science grads from schools like MIT and Cambridge to create a market for the complex instruments. Within a few years, the credit default swap (CDS) became the hot financial instrument, the safest way to parse out risk while maintaining a steady return. “I’ve known people who worked on the Manhattan Project,” says Mark Brickell, who at the time was a 40-year-old managing director at JPMorgan. “And for those of us on that trip, there was the same kind of feeling of being present at the creation of something incredibly important.”

Like Robert Oppenheimer and his team of nuclear physicists in the 1940s, Brickell and his JPMorgan colleagues didn’t realize they were creating a monster. Today, the economy is teetering and Wall Street is in ruins, thanks in no small part to the beast they unleashed 14 years ago. The country’s biggest insurance company, AIG, had to be bailed out by American taxpayers after it defaulted on $14 billion worth of credit default swaps it had made to investment banks, insurance companies and scores of other entities. So much of what’s gone wrong with the financial system in the past year can be traced back to credit default swaps, which ballooned into a $62 trillion market before ratcheting down to $55 trillion last week—nearly four times the value of all stocks traded on the New York Stock Exchange. There’s a reason Warren Buffett called these instruments “financial weapons of mass destruction.” Since credit default swaps are privately negotiated contracts between two parties and aren’t regulated by the government, there’s no central reporting mechanism to determine their value. That has clouded up the markets with billions of dollars’ worth of opaque “dark matter,” as some economists like to say. Like rogue nukes, they’ve proliferated around the world and now lie hiding, waiting to blow up the balance sheets of countless other financial institutions.

[BroJoeK]

"the nation is plundered of two or three hundred millions of dollars, treble the amount of debt contracted in the Revolutionary war,"

It's worth remembering that in 1801, when Jefferson became president, the US national debt was around $100 million, about 10 times annual federal revenues. This was literally "the cost of freedom," and would correspond today to a national debt around $30 trillion.

Since our actual national debt is $13+ trillion, the government is in better financial shape today than it was in Jefferson's time.

And at the time, Jefferson's number one priority was paying down the national debt. So, how did he do it? How does ANY wise government ever increase its revenues? Yes, that's right!

JEFFERSON REDUCED GOVERNMENT SPENDING AND CUT TAXES.

Soon the national coffers were overflowing with revenues, paying down the debt, and the economy was booming.

And what was Jefferson's number two priority? Well, there was a small matter of Islamic terrorists in North Africa. Jefferson started a "war of choice" against them, to eliminate the annual tributes America was paying -- the First Barbary war.

But even with paying for the war, the US economy & federal revenues grew so fast, Jefferson had no problem coming up with (the unconstitutional) $15 million needed for the Louisiana purchase, and still paid down 30% of the national debt by the time he left office in 1809.

Do you suppose there's a lesson to be learned here?

[cricket]

More than one lesson, actually. . .

[SunkenCiv]

BroJoeK: It's worth remembering that in 1801, when Jefferson became president, the US national debt was around $100 million, about 10 times annual federal revenues. This was literally "the cost of freedom," and would correspond today to a national debt around $30 trillion. Since our actual national debt is $13+ trillion, the government is in better financial shape today than it was in Jefferson's time.

Excellent!

[durasell]

You mean someone or a lot of someones created a global crisis that vaporized trillions of dollars on purpose?

[durasell]

You mean someone or a lot of someones created a global crisis that vaporized trillions of dollars on purpose?

[dsc]

“You mean someone or a lot of someones created a global crisis that vaporized trillions of dollars on purpose?”

Do you think leftists wouldn’t do that?

[durasell]

it’s too big. i don’t think anyone could do it

[dsc]

“it’s too big. i don’t think anyone could do it”

They could start it, then it could get away from them.

[durasell]

it is what it is. large forces converging. history. and as complex as the weather

[dsc]

I remember back in the HillBillary misadministration when Janet the female rapist Reno was pressuring and intimidating financial institutions into making these unwise loans (I don’t think the term “sub-prime” had been coined yet), there was discussion of the ramifications of this policy.

There may have been discussion here; I don’t remember.

I don’t think we saw how big the problem was going to be, but one would have had to have been an idiot not to have seen that those particular chickens would eventually come home to roost.

Is it so inconceivable that the left knew this would damage the economy, and were in fact hoping for that?

[durasell]

as I understand it, on a very simple level it worked like this: the banks needed a way to mitigate risk, so they bundled the mortgages. Soon the bundles became a product and started pulling in more and more mortgages. The real estate industry became a giant factory for churning out these asset back securities. And for a brief time, they were “as good as money.”

[dsc]

However, they were never really as good as money, because the underlying asset was nothing more substantial than promises to pay made by people who couldn’t keep those promises.

[durasell]

the underlying asset was a house. and prices were going up for a long time.

[dsc]

Thing is, none of the banks or investors wanted to take possession of those houses, or could reasonably expect to profit if the loans weren’t paid.

[durasell]

And that’s the problem. Just who is going to roll up their sleeves and do the heavy lifting of refinancing millions of homes?

[dsc]

Right, and if nobody wants to, then the assets are worthless, and a worthless asset is no asset.