Thursday, January 17, 2013

A Colossal Failure of Common Sense

I have been preparing a new course called Government and Business, and I wanted to include a few examples of the consequences of monetary expansion and ongoing Fed policy.  A good candidate is the case of Lehman Brothers.  I ordered Lawrence G. McDonald and Patrick Robinson's A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers from Amazon and read it over the past two days. It is a colorful, enjoyable book that I recommend.  It is mostly well written, but there are occasional sophomoric grammatical errors.  I wondered whether Three Rivers Press bothered to copy edit the work; at the same time,  McDonald's self-deprecating humor reminded me of Ragged Dick's from Horatio Alger's novel; moreover, the early part of the book is a  rags-to-riches tale.  McDonald pulls no punches in describing Richard Fuld and Joe Gregory's (the top management's) incompetence.

McDonald lacks a paradigm to accurately grasp the sources of Lehman's failure.  He sees Fuld's dominance of the firm as the cause--if only his friend Michael Gelband had gained control of the institution, things would not have gone wrong.  His philosophy is the result of his education at the University of Massachusetts Dartmouth and, more generally, of the one-dimensional coverage in the media and in universities, which serve as cheerleaders for America's value-destroying financial-and-banking system.  Things may have gone better if competent people were at the helm, but there are few competent people; they weren't at the helm at Goldman, AIG, Bear Stearns, GE Capital, or any of the other foolishly run outfits that were trading derivatives that they did not understand.

The cause was not bad leadership, but a bad system that permits the Fed to print money and hand it to people who lack the ability to use it wisely.  Investment in Wall Street's waste and the income tax crowd out innovative investment such as occurred in the late 19th century, when there was was no Fed, no central bank, no income tax, and Wall Street was in extremis. Historically, Wall Street's strength and growth rate are inversely related to the nation's innovation and the average American's financial well being.  Yet, Americans continue to vote into office politicians whose first priority is to subsidize Wall Street. 

Lehman had borrowed two thirds of a trillion dollars in printed money. The Federal Reserve Bank had stolen its value from the American people and handed it to half-witted crooks like Fuld and Gregory.  Lehman does not represent a deviant problem like bad leadership. It represents the core of the problem: malinvestment because of a financial system that has no incentive to invest optimally and that lives off the theft of wealth from the public; the stock market will not rise without such theft.

The entire money supply during the millennial years was close to $800 billion.  An amount equal to almost the entire US money supply was handed to half wits who proceeded to buy hundreds of billions of dollars in over-valued real estate and take financial gambles that they did not understand.

McDonald's message, which he does not grasp, is that the American systems of government and finance are  broken and cannot be fixed. An American people that continues to be satisfied with the stealing that underlies the profligacy McDonald describes (via the Federal Reserve Bank, which had printed the money Lehman badly invested ) is the underlying problem.  On this score, McDonald stands accused of apathy along with the rest of a nation that has allowed itself to be financially molested for the past century.

Perhaps a tragedy greater than the fall of Lehman is that smart guys like McDonald and his friends can think of no more imaginative career than living off printed money and playing financial markets. When America was a worthwhile place to live, people like McDonald, Gelband,  and McCarthy were inventors rather than stock jobbers. 

McDonald is a true insider, and he gives an insider's picture of the distressed asset trading desk at Lehman.  He is starry eyed, referring to his various colleagues as "the best in history" at various points, but the sophomoric grammar and starry-eyed reverence amount to a small price to pay for McDonald's wit, charm, idealism, and apparent workmanlike competence with respect to his craft.  At Enron there were two or three people, chiefly Vince Kaminski of Enron's risk management group, who saw that the firm was headed for disaster.  McDonald asserts that several of his trading colleagues, such as Michael Gelband and Larry McCarthy, had warned Fuld and Gregory of an impending crash in the real estate market nearly two years before Lehman's ultimate demise;  they and several others in McDonald's group had resigned months and weeks before the collapse. The remaining members of his group took over the firm when it was already too late; as will occur with the United States, things had to get close to the edge before Fuld and Gregory could be ousted; it seems to me that America may face a fate similar to Lehman's.  Hopefully, by then I will be resident elsewhere.

I think I will fit part of this book into my course, which also includes some material on Long Term Capital Management and Enron--all products of the American Whigs' and financial establishment's stealing from the Americn people via the value-destroying Federal Reserve Bank.  If you want to know why the average American's real hourly raise hasn't gone up since 1970, read this book.  The high salaries in exchange for the destruction of real wealth by Wall Street's bums is malinvestment on a scale that Ludwig von Mises could not have imagined.

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