Car warmed up? Jitney ticket in pocket? Flip-flops extracted from the rear of the closet? Hey, hold on, before you escape the challenges of Memorial Day weekend. A quick reminder: It's been about a year now -- precision is hard in these matters -- since the world began to come unhinged. It was roughly a year ago since the Bear Stearns Cos. hedge funds began to totter and fall, bringing to public consciousness the reality that a golden age was ending. Since then, subprime has bubbled up and spread its poison across the markets; deals have collapsed; faux worthies (O'Neal, Cayne, Prince) have tumbled; an entire firm, Bear, has disappeared in a liquidity run unlike anything seen since the first Indiana Jones movie. We now have a de facto super regulator in the Federal Reserve. And, a year later, stunned and dazed but looking forward to a martini on the good ship Poopsnoop, there are still some large questions left unresolved.
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Was this the apocalypse or not? George Soros says yes, former FDIC Chairman William Issacs in this week's Wall Street Journal says (scoffingly) no. During the events of the past year, particularly in March, a lot of folks on Wall Street felt like Soros. Hell, it was scary. And, politically at least, the likes of Paul Krugman had every reason to see a Great Depression-type of cataclysm around every corner. Did the blogs, the cable talkers, the mainstream media hype the disaster, as Issacs argues? Who can tell? Most of the time they didn't really know what was going on, but then neither did the experts.
The fact is, the apocalypse issue is a very complicated question that may be unanswerable. Our financial world does not resemble that of the Depression or even the bank-dominated '80s when Issacs ran the FDIC and confronted a series of bank crises; and folks do forget how severe and systemic the S&L crisis was. Indeed that's what makes this so difficult. If this was a simple market dislocation, then Ben Bernanke needn't have moved to "rescue" Bear and thus inject a traditionally independent Fed into the political cockfighting arena. But even those who were eager to hammer the Fed for acting too late, acting too soon, overreaching, under reaching, bailing out Wall Street, not bailing out Wall Street -- would quickly add, sotte voce, that Ben had to do something to save the world from Bear. This is an understandable sentiment papering over two deeper issues: Why was the Fed alone in all this in the first place? And how did we get to the point where the Fed was confronted with this Hobson's choice?
We are nowhere on these questions. Both involve how we regulate our financial system, the relationship between our political system and the markets, between (that old chestnut) Main Street and Wall Street, between the U.S. and everywhere else. We are so confused, so dysfunctional, so self-delusional and provincial on these foundation elements of the political economy, that it's pathetic. And perhaps it's the scariest thing about this crisis.
Not that the crisis -- apocalypse or not -- is necessarily over yet. More shocks may occur -- the prudent observer will say, more are inevitable. For every positive, there's a negative. The markets have calmed a bit, the leveraged pipeline has cleared -- it'll really be clear if BCE Inc. collapses -- and faint suggestions of normalcy have emerged in the form of wolves, vultures and junkyard dogs. Somebody's got to clean this up. But there's this recession (or not). And what will replace these structured finance earnings that have evaporated?
Still, there are two big, inescapable positives, which are worth toasting: We've had a year to locate where all the toxic stuff is, and we know a lot more today than we did last Memorial Day. Two -- and this is worth noting -- for all the talk of credit crunches and liquidity runs, there's clearly a vast amount of liquidity still out there. That liquidity saved the day, whether in the form of sovereign wealth or private equity money, both of which helped to refloat the big banks; not to say all the money flowing into distressed investing funds, animal jokes aside. For all the jingoism about globalization, the fact that so much of that liquidity poured into the U.S. from overseas when we needed it the most has to be remembered. Not only did the rest of the world enable many of the excesses that led to the crisis, but it then eagerly stepped in to help out (and, of course, make a few bucks). If we were more mature as a society, we'd thank them. On the other hand, while they bailed us out, they're also allowing us to continue our incoherently profligate ways.
Maybe we should ban them because they're providing the biggest moral hazard of all. Just joking. - Robert Teitelman
