Tuesday, April 2, 2013

Speaking Up for Deformity

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (Aucontrarian.com, 2009)

In a favorable review of David Stockman's The Great Deformation: The Corruption of Capitalism in America, a critic winds down with a sigh. Stockman's prescriptions are "blue sky" and will not be adopted by today's Washington.

            Of course they won't, but, since he generally agreed with Stockman's take, what does the commentator want? A friend opines the reviewer "is like a lot of people out there who understand economic orthodoxy and how far off course we are" and struggles to imagine "how we can maintain [our] collective standard of living."

            Such a course is impossible. Leaving aside how far living standards have already fallen, the economy and our process of thinking have become so deformed there is no way back without a shattering of such illusions and of living standards. The United States is one among most nations with accumulated imbalances of finance, trade, profits, jobs and non-jobs that have reached such distorted levels because of the post-1971, non-redeemable, paper-money, printing experiment. There is no precedent and there is no getting around the need for markets to clear.

            The insiders will pretend they are still in charge until the end. They started to lose control around 1985. It was still possible to redeem our foul misadventure at that juncture, painful as it would have been. Paul Volcker's unpopular medicine between 1979 and 1982 demoralized large sections of the United States, many pockets long since confused by the inflationary 1970s. The Reagan administration then started to appoint establishment economists to the Federal Reserve Board. At FOMC meetings, the votes of pliant economists made economics popular again. So doing, we are in the muck today.

            "A Quarrel in a Far-Away Country between People of Whom We Know Nothing," (March 21, 2013) was, of course, Prime Minster Joseph Chamberlain's comment surrounding Germany's invasion of Czechoslovakia in 1938. To expand: "How horrible, fantastic, incredible it is that we should be digging trenches and trying on gas-masks here because of a quarrel in a far-away country between people of whom we know nothing. It seems still more impossible that a quarrel that has already been settled in principle should be the subject of war."

            Taken alone, this statement rings true. (The "in principle" is quite a stretch.) The same could be said of Federal Reserve Chairman Ben S. Bernanke's many bizarre comments, which, on their own, are neither wrong nor interesting.

            In 1940, George Orwell wrote of World War II: "After 1936, of course, the thing was obvious to anyone except an idiot." In 1938, upon returning to England from continental Europe, Orwell had written about the "familiar streets, the posters telling of cricket matches and Royal weddings, the men in bowler hats, the pigeons in Trafalgar Square, the red busses, the blue policemen - all sleeping the deep, deep sleep of England, from which I sometimes fear that we shall never wake till we are jerked out of it by the roar of bombs." The bombs flattened London in 1940.

What Orwell wrote of the establishment figures in 1940 need not be changed to describe recent Presidents, Prime Ministers, Secretaries of the Treasury, Senate and Congressional Banking Committee members, unaccountable central bankers, other sordid, government bureaucrats, think tanks, professional-certification money-machines, tenured professors, and editorial boards: "They had to feel themselves true patriots, even while they plundered their countrymen. Clearly there was only one escape for them - into stupidity. They could keep society in its existing shape only by being unable to grasp that any improvement was necessary." (We might amend Orwell to account for the international loyalties of bean counters and bureaucrats rather than to their fellow countrymen.)

            Again, Orwell could have been writing about the litany of trusted leaders who have betrayed us: "What is to be expected of them is not treachery or physical cowardice, but stupidity, unconscious sabotage, an infalliable instinct for doing the wrong thing. They are not wicked, or not altogether wicked; they are merely unteachable. Only when their money and power are gone will the younger among them begin to grasp what century they are living in."

            The Great Deformation: The Corruption of Capitalism in America names names and describes the atrocious position the U.S. finds itself in today. It is pure Bernankeism to wish (or believe) we can maintain our standard of living without redemption many magnitudes beyond the severity of that which could have sufficed in 1985.

In 1933, Winston Churchill wrote to a colleague who accused him of being old fashioned: "I think we differ principally in that you assume the future is a mere extension of the past whereas I find history full of unexpected turns and retrogressions. The mild and vague liberalism of the early twentieth century, the surge of fantastic hopes and illusions that followed the armistice of the Great War have already been superceded by a violent reaction against Parliamentary and election procedure by the establishment of dictatorships real or veiled in almost every country. Moreover the loss of our external connections, the shrinkage of our foreign trade and shipping brings the surplus population of Britain within measurable distance of utter ruin. We are entering a period when the struggle for self-preservation is going to present itself with great intenseness to thickly populated industrial countries. In my view, England is now beginning the period of struggle and fighting for its life.... Your ideas are twenty years behind the times."

Martin Gilbert, author of the book in which this letter is published, then writes: "The times were indeed moving rapidly; on April 7, [1933],Hitler formally imposed Nazi rule on each of the German states, ending their century-old autonomy."

Churchill's influence was muffled through the decade. The Baldwin and Chamberlain governments held him at a distance, John Reith of the BBC kept him off the air, and Geoffrey Dawson, editor of the Times, suppressed his warnings. He was nearing 60 and who wanted to listen to this windbag anyway? It was easy to dismiss him as a has-been. In 1935, no doubt creating more distance between himself and the cabinet, Churchill warned the House of Commons: "[W]hen the situation was manageable it was neglected, and now that it is thoroughly out of hand we apply too late the remedies which then might have affected a cure. There is nothing new in this story. It is as old as the sibylline books. It falls into that long, dismal catalogue of the fruitlessness of experience and the confirmed unteachability of mankind. Want of foresight, unwillingness to act when action would be simple and effective, lack of clear thinking, confusion of counsel until the emergency comes, until self-preservation strikes its jarring gong - these are the features which constitute the endless repetition of history."

Kicking off National Poetry Month, this morning's Wall Street Journal (April 1, 2013), published excerpts from W.H. Auden's "September 1, 1939," the day Germany invaded Poland. It starts:

I sit in one of the dives
On Fifty-second Street
Uncertain and afraid
As the clever hopes expire
Of a low dishonest decade:
Waves of anger and fear
Circulate over the bright
And darkened lands of the earth,
Obsessing our private lives;
The unmentionable odour of death
Offends the September night.

Orwell and Churchill make for compelling reading today because they looked into the future, understood it, and warned the public despite indifference or hostility.

Among the investment managers who saw the mortgage meltdown well in advance was Paul Singer, general partner of the hedge fund, Elliot Associates. In 2006, Singer made a presentation at the fall Grant's Interest Rate Observer Conference. A majority of those present probably anticipated the housing crash, but Singer understood the form it would take. Having dug through tranches of highly sought CDOs, Singer showed that, in one example, and given certain assumptions, a 4% fall in housing prices would wipe out 84% of the principal. His presentation astonished some of the long-time, mortgage-bears present.

Singer spoke again at the April 2012 Grant's Interest Rate Observer Conference. His financial prognosis is consistent with Stockman's dim view of the economy in The Great Deformation. Singer told his audience there is one big difference between next time and the last time, the last time being that in which money-losing tranches in CDOs caught such worthies as Standard & Poor's and the banks sound asleep. This time, the "guarantors of last resort" in 2007-2009 - sovereign governments and their willing accomplices - are under suspicion: "So at some point in this process of impaired growth, restive underemployed populations being egged on by politicians who get points and votes by riling people up against others, and investors inability to earn a return on savings," said Singer - "at some point, investors, Arab revolt-style en masse, may say quietly to themselves, but perhaps at a crystallizing moment: 'Enough.'"