Yes, you already know it. Lehman Brothers one and a half century of reign has ended ominously. As every corpse, it needs a hole in the ground to be buried. The problem here is that this hole is $600 billion big.
On my last post I was writing about the twins and their attempted rescue. Now we are seeing a glimpse of the real problem, that won’t stop here. AIG, brutally exposed to credit fault swaps, is going to be the next one. Who said this was going to be brief? One year of crisis, and we are still going down. The echos of ’29 are beginning to ring into the monetary authorities’ ears. But that’s another matter…
Remember when I wrote about the end of cheap money fifteen months ago? There was a graph there worth rescuing now.
Just a quick reference: M2 and M3 are common metrics or measures for money. M2 referred to domestic economies, M3 included the money that had been refuelling the economy, making stocks soar, gone into funds, hedge funds, private equity or debt. Money that, let’s say, was not 100% based on real needs of the economy but bets over bets over bets, all of them based in the perpetuation of the economy growth. Well, it didn’t.
Let’s say it another way: there was an excess of financial products relative to demand. Call it excess of offer, overcapacity, inflation, yet another bubble… Some of the products were simply traded between themselves, a huge casino where they grew interconnected, multiplied their correlated risk, while the real investors did not have a say, while the real investments were non-existent. The blue curve went too far from the red curve.
Now that the party is over agents will have to adjust accordingly. If they must be evaluated again based on the real price of their assets, things will get very ugly, very very ugly. Valuations might as well halve, employment in the financial sector will drastically be reduced as well.
What about the hero and saviour here? Well, it has been mangling with the system, saving the twins… sorry their creditors at the expense of their shareholders, never realising the road ahead was too bumpy. They have now… and it’s too late.
The great thing about capitalism is the freedom to do whatever you want with your money. When things are fine you deregulate, explore new skies, advocate for a minimum involvement from the state. I never saw any of them coming to society and saying… “wait, we want to contribute more, we want to raise that tax 20%, as our benefits have soared thrice, and give back some of our benefits to the society that has made it possible”. Nope at all. Instead it was all thanks to them. They gave us some lectures about corporate social responsibility, spent a lot of money in green branding, spent some more on carbon footprint rhetorical, and simply took the money away.
But when things get grim, the same capitalists and economic liberals are no liberals any more. The benefits were private, the losses socialised. Overnight, those same successful liberals become advocates of communism and claim that it’s not their fault: that the context is bad, the cojunture unmanageable, that volatility is impredictable, uncertainty more uncertain than ever and that the complexity that they proudly created should have been regulated from the first day. Sad, very sad.
Notwithstanding the evidence against them, we are out of options. It’s the taxpayers the ones that will have to pay the price of the party, and remember: the wealthy, those who have been irrationaly and exhuberantly gaining in this game, are the ones whose fiscal charges were reduced because they were creating growth, benefits and employment. How is that for assimetry and moral hazard?
After all this, and the suffering that will entail, there’s still hope: it’s called the survival of the fittest. But I’ll write about it another day…