Transactions: Feb. 9, 2009

Then and now. Boom and bust. The inexorable rise, the free fall. What we know about the good times is that they resulted from a confluence of factors over many years (leverage, liquidity, deregulation, technology and yes, Virginia, a dollop of greed) that fed on one another and, in the heat of the reaction, melted finance into a hot burning mass that, alas, set fire to the building. In other words, we created a financial convergence, whose common denominator was a comprehensive exposure to the markets, to a sort of Metamarket. The fire spread swiftly from market to market, from firm to firm, from country to country. The question that emerges, now that we're actually confronted with this inferno, is, can it be reversed? Do we just let it burn itself out? Given the efficiency with which it spread, roaring down open pathways, can we simply reverse the process through massive liquidity injections or government stimulus? Or has the crisis shattered that convergence, sent structures crashing across open streets and left us to wander without points of reference as darkness falls?

Why not just let the market system self-correct? Belief in self-correction is, among experts, a beleaguered position these days. Markets that have broken down will not quickly self-correct. One reasonable argument against mark-to-market accounting is that if there are no buyers, if the market has technically ceased to exist, the resulting valuations are, well, suspect, even absurd. (Related to this, of course, is the belief that the "best" prices tend to emerge from the most liquid markets.) But markets are not really physical venues, like cities, forests or neo-Roman temples of commerce. They are assemblages of ideas and techniques, a kind of intellectual property that, in theory, will awaken, as if from a fairy-tale kiss, under the right conditions. You can't kill the damn things unless you forget how they work. And there is the matter of feedback loops. Markets feed off themselves, just as liquidity attracts liquidity and mobs tend to grow. John Maynard Keynes once diagnosed the Depression as having "magneto trouble," a phrase Paul Krugman retails regularly. A magneto requires an external power source to start, namely, a battery, then sustains itself. In our metaphorical promiscuity, the magneto is the banks, the battery the government. No spark, no drive. Nationalization!

For all of that, self-correcting pressures do exist, persist and grow over time, like hunger. For all the handwringing, greed is one form of pressure, perhaps the most fundamental. Yes, Virginia, we all carry greed in our knapsacks with fear, original sin and Tic Tacs. We want our money to perform. We demand that our portfolios grow. The atavistic urge toward bullishness is not just a corrupt fixation of Wall Street analysts; it's part of the human condition, along with a propensity for mobs. And then there is change, its good sibling, innovation, and its nasty cousin, uncertainty. We can't rid ourselves of these characters, no matter how bad things get. They exert their own pressure. A few weeks ago, everyone got jazzed when Pfizer spent $68 billion to buy Wyeth. A deal! A big deal! Pfizer had a problem. Its blockbuster, Lipitor, is sliding inexorably toward genericdom. Big, rich and hungry Pfizer needs new products, which Wyeth possessed. And so a deal was struck, which the banks stirred themselves to finance. Crisis over? In your dreams. What this shows is that a blue-chip, cash-flow-heavy behemoth can get money to buy a pretty big, blue-chip, etc., etc behemoth.

The Pfizer deal, for all its size, is about as low-risk as it gets. Even then, the banks hedged it in with covenants and protections. Pfizer and Wyeth, like many of the deals discussed in this issue's financing package, shows how close we remain to ground zero. The market system before the deluge was a paradox: Abiding complexity masked increasing convergence. Now we are left with scattered pieces of fractured financial technology that make '30s markets look as rudimentary as Tinkertoys. Certainly we can wait for the system to slowly respond to self-correcting pressures, knitting together pathways from the least risky to the more risky to the most risky, until once again, we have a whirring machine to feed our massively complex consumer economy. Of course, by then -- Keynes again -- we could be subsisting on acorns. But since there is no single pathway to health, the only realistic response may be one we're fumbling toward: an attempt to revive market by market, sector by sector, from lending, mortgages, commercial paper, IPOs to the real economy (stimulus and jobs) and the financial economy (TARP and capital). It was a marvelous system that evolved with our shortsighted help. Perhaps only now, as we try to reassemble it without directions, do we get a sense of just how miraculous it was.