Friday, October 10, 2008
Only an Idiot
A question asked by a correspondent on my favorite discussion group this morning: "Who Are the Idiots Messing Up the Market?"
The "idiots messing up the market" did their work in 2002 -2006.
That's when the housing bubble waxed hot. People sold mortgages to everybody and anybody. "Everybody and anybody can own his or her own home," they said. They believed this could happen because they believed the prices of real estate would just keep going up forever, and only an idiot could believe such a thing.
Then those mortgages sold by companies like Ditech were "bundled" and cut into pieces, and the pieces were sold as "derivatives" (because they were derived from real estate mortgages). This was done in highly complex, secret ceremonies performed by the witch doctors who worked in the sanctuaries of the innermost heart of the finance "industry." They figured they could get away with these strange practices because the prices of real estate would keep going up forever. And only an idiot could believe such a thing.
These "derivatives" in turn were bought to the tune of billions and trillions by banks, by municipalities, by investment companies, by pension funds, all of whom believed they would be profitable because the price of real estate would keep going up forever. And only an idiot could believe such a thing.
There used to be a rule that banks had to have a real, cash dollar in reserve for every twelve dollars it invested (spent) on securities, etc. But in 2004, major banks wanted that rule lifted. In a secret meeting with the SEC commissioners, Goldman Sachs CEO Henry Paulson convinced them to waive that rule, and henceforth the reserve requirement could be as high as one dollar in reserves for every 40 dollars invested. Paulson said the banks needed to be free to "make more efficient use of capital."
In reality, after this waiver was put into effect, there was no reserve requirement at all. It was obvious the SEC would let the banks do whatever the hell they wanted. The banks could invest ALL their depositors' money in "derivatives" if they felt like it. Paulson believed they could get away with this because there was no risk, because the price of real estate would keep going up forever, and only an idiot could believe such a thing.
In 2007 the prices of real estate peaked, then began to decline rapidly.
All the institutions which had bought "derivatives" suddenly realized they had spent billions and trillions on pieces of paper which were now worthless.
This is an exact replica of the fever of speculation followed by a massive collapse that occurred in the 1920's. The only difference -- the ONLY difference -- is that back then, it was the prices on the stock market that were going to continue to go up forever. In the 2000's, it was real estate that was going to go up forever.
But only an idiot would believe such a thing, because what goes up must come down.
The capitalist cycle never changes. It starts with recovery from the last collapse. Then it progresses through recovery, to an economic boom. The boom becomes a mania and a frenzy. The frenzy ends in a price fall, a panic, and a collapse. Only idiots participate in the mania and frenzy, telling themselves it will be "different this time," but it never is.
There is currently deep resentment and anger about where we have been led by those who rule us, and a fundamental distrust of the ruling elites who brought us to this point. Many people would like to overthrow this ruling class. That was the sentiment in the 1930's too, but people lost their focus and failed to follow through.
This time we need to follow through. We can no longer live under the rule of these idiot bastards who ruin our lives because of their idiotic greed and hysteria, and "when, in the course of human events..."