Sunday, December 29, 2013

Visions of Gallantry

In "The Stock Market" (December 22, 2013), there is a mathematical problem with the following: "Zero Hedge recently reported the days on which the New York Fed has engaged in POMOs (Permanent Open Market Operations) of $5 billion or greater, between April 2009 and April 2013, the S&P 500 rose 540%. On days when POMOs were less than $5 billion, the index rose 15%. On days without POMOs, returns were -2%." If true, and it is not, the market never goes down. Nevertheless, even a non-calculating observer knows of the strong relationship between POMO operations and the stock market over the past few years. Most important is the artificiality of pushing up the stock market and its inevitable deflation.

In what could have been a turning point of mass recognition, the S&P 500 fell 9 points (-0.5%) in the minute after the Fed announced it was tapering (December 18, 2013). An unseemly burst of buying pushed the Index up 35 points (1.8%) in the next six minutes. It added another 15 points by the close: up 2.8% from that moment of peril. The S&P 500 closed at a new, all-time high of 1810. The mafia is more subtle than our central planners. That is the point: whatever They do, is authorized. This plunge-and-protect operation received practically no attention. If the authorities are so frightened when the market is near its all-time high, how will they panic when the market falls 10%?

As Federal Reserve Chairman Ben S. Bernanke gets set to depart, his personal self-worth was set forth in a speech to commemorate the 100th anniversary of the Federal Reserve System. Bernanke buckled his panic attacks in 2007 and 2008 to Paul Volcker's money tightening belt in the early 1980s. Believing himself a combination of The Desert Fox and Joan of Arc, Simple Ben plastered his audience with this soggy discharge: "[O]ne value that strikes me as having been at least as important as any other has been the Federal Reserve's willingness, during its finest hours [Mon Dieu! - FJS], to stand up to political pressure and make tough but necessary decisions." Not content with this general (and ridiculous) claim, he followed with a vile and ignorant self-portrait: "I keep in my office one of the 2-by-4s mailed to the Fed during Paul [Volcker's] tenure, which communicates some distinctly unfavorable views of high interest rates and their effects. More recently, of course, the Federal Reserve took controversial but necessary measures to arrest what was arguably the worst financial crisis in American history."

It may be forgotten, but Simple Ben's initial rate cut that has led to our ruin was in response to Jim Cramer's CNBC attack on August 3, 2007. It should be noted that, on that date, the S&P 500 was down 7% from its all-time high. A sample of Cramer's bile: "[T]he Fed is asleep...My people [??? - FJS] have been in the game for 25 years...these firms are going out of the darn [discount] window." David Stockman writes in The Great Deformation: "[W]ithin days of the rant that shook the Eccles Building, the Fed slashed its discount rate, abruptly ending its tepid campaign to normalize the money markets."

We know the rest. The bravest act of Bernanke's life was telling some patrons at South of the Border the restaurant had run out of apple pie.

Ben Bernanke's personal myth is his own affair. Our affair is the cocoon in which Bernanke and the yes-men draped around him have secluded themselves. Bernanke was not overstating what he believes in this self-characterization. Nor, would economists under the age of 120 disagree. (A friend who raised the possibility that Ben Bernanke may not be on top of his game was upbraided after a meeting: "He graduated from MIT, you know.")

            It so happens that Joseph Epstein, graduate of the University of Chicago, teacher for three decades at Northwestern University, and past editor of the American Scholar, wrote Bernanke's biography in the December 21, 2013, edition of the Wall Street Journal. He does not mention the Fed chairman. He may not have the seventh-grade, spelling-bee champion in mind. Epstein's was an essay on the rise of the meritocracy, with the title: "The Late Great American Wasp:"

Here they are, our leaders:

Meritocracy in America starts (and often ends) in what are thought to be the best colleges and universities. On the meritocratic climb, one's mettle is first tested by getting into these institutions-no easy task in the contemporary overcrowded scramble for admission. Then, of course, one must do well within them. In England, it was once said that Waterloo and the empire were built on the playing fields of Eton. The current American imperium appears to have been built at the offices of the Educational Testing Service, which administers the SATs.

Whether Republican or Democrat, left or right, the leading figures in U.S. public life today were good at school. Bill Clinton had Georgetown, Oxford (as a Rhodes scholar) and Yale Law School on his résumé; Barack Obama had Columbia and Harvard Law School. Their wives, respectively, had Wellesley and Yale Law School and Princeton and Harvard Law School. [Senator] Cruz went to Princeton and thence to Harvard Law School. Players all-high rollers in the great American game of meritocracy. Their merit resides, presumably, in having been superior students.

But is the merit in our meritocracy genuine? Of the two strongest American presidents since 1950-Harry S. Truman and Ronald Reagan-the first didn't go to college at all, and the second went to Eureka College, a school affiliated with the Christian Church (Disciples of Christ) in Eureka, Ill. The notion of Harry Truman as a Princeton man or Ronald Reagan as a Yalie somehow diminishes them both.

Apart from mathematics,* which demands a high IQ, and science,* which requires a distinct aptitude, the only thing that normal undergraduate schooling prepares a person for is... more schooling. Having been a good student, in other words, means nothing more than that one was good at school: One had the discipline to do as one was told, learned the skill of quick response to oral and written questions, figured out what professors wanted and gave it to them.

Having been a good student, no matter how good the reputation of the school-and most of the good schools, we are coming to learn, are good chiefly in reputation-is no indication of one's quality or promise as a leader. A good student might even be more than a bit of a follower, a conformist, standing ready to give satisfaction to the powers that be so that one can proceed to the next good school, taking another step up the ladder of meritocracy.

What our new meritocrats have failed to evince-and what the older WASP generation prided itself on-is character and the ability to put the well-being of the nation before their own. Character embodied in honorable action is at the heart of the novels and stories of Louis Auchincloss, America's last unembarrassedly WASP writer. Doing the right thing, especially in the face of temptations to do otherwise, was the WASP test par excellence. Most of our meritocrats, by contrast, seem to be in business for themselves.

Trust, honor, character: The elements that have departed U.S. public life with the departure from prominence of WASP culture have not been taken up by the meritocrats. Many meritocrats who enter politics, when retired by the electorate from public life, proceed to careers in lobbying or other special-interest advocacy. University presidents no longer speak to the great issues in education but instead devote themselves to fundraising and public relations, and look to move on to the next, more prestigious university presidency.

A financier I know who grew up under the WASP standard not long ago told me that he thought that the subprime real estate collapse and the continuing hedge-fund scandals have been brought on directly by men and women who are little more than "greedy pigs" (his words) without a shred of character or concern for their clients or country. Naturally, he added, they all have master's degrees from the putatively best business schools in the nation.

Thus far in their history, meritocrats, those earnest good students, appear to be about little more than getting on, getting ahead and (above all) getting their own. The WASP leadership, for all that may be said in criticism of it, was better than that.

The WASPs' day is done. Such leadership as it provided isn't likely to be revived. Recalling it at its best is a reminder that the meritocracy that has followed it marks something less than clear progress. Rather the reverse."

*Lord [Nigel] Lawson, who served as Financial Secretary to the Treasury and as Chancellor of the Exchequer under Prime Minister Margaret Thatcher, at Davos in 2012: "There is a complete failure of modern economics to have any value at all. Economics has been supplanted by mathematicians who can't hack it as mathematicians and become economists. It has no connection to practical policy decisions whatever. It helps the investment banks to construct models which proved disastrous and were a contributory factor to the banking meltdown."

            This is the least reported proclamation in the history of Davos love-ins.