Wall Street reaches its Wile E. Coyote moment

Responding to a recent post, Grandmaster Bud said:

I keep waiting for Brad to post something about the financial market meltdown….

Of course, bud wanted to the subject to come up so he could make some broad statement about the election, which he went ahead and made:

… Apparently the Phil Gramm approach to regulation isn’t so great after all. And to think, if Bush/McCain had their way our Social Security funds would be in grave jeopardy now.

My response was to say that I already tried to give y’all a place to talk about that — you know, the George Bailey thing — but as I’ve made abundantly clear in the past, I generally don’t comment on things having to do with Wall Street, because I don’t understand it. That is, I sort of understand it, and what I do understand makes such little sense that I prefer not to go out on a limb offering opinions on such things.

But here goes anyway: I think markets are all a bunch of smoke and mirrors. Value is totally relative, so to me Phil Gramm and John Maynard Keynes make equal amounts of sense in this context. The value of something like Lehman is to me based on B.S. So the assets were overvalued — big, freaking surprise. Samuel T. tried to explain it to me this morning this way: If your assets are valued at $40 million, but they’re only worth $20 million, you’re overvalued. I get it. And I also think it’s a bunch of hooey. To me, the only value of a place like Lehman, shuffling its ones and zeroes around, is the buildings and office furniture and carpets and such that it owns, plus B.S. If people will pay you $40 million for your stock, it’s "worth" $40 million. If they’ll only pay you $20 million, it’s "worth" $20 million. If they suddenly realize it’s based on nothing — like Wile E. Coyote suddenly looking down and realizing nothing’s holding him up — it’s over.

One can say this about anything — the monetary worth of anything is what people are willing to pay for it. It’s true of comic books. And although I believe (as I have said) that comic books have an absolute value, I realize value is relative.

But when you’ve paid too much for your comic book and you’re off the cliff and you look down, at least you’ve still got your comic book. With Lehman and Merrill and the rest, I’m not sure that you have anything at all.

By the way — you know that Krugman column I wanted to run on the subject, but it got outdated? Well, I’m happy to say that I have a very solid Robert Samuelson piece on the subject for Wednesday’s paper. In it, he explains why "Wall Street as we know it is kaput." My favorite part is when he says that after a crash like this, some good thing may happen in reaction. For instance, "Talented and ambitious people may move from finance, where they were attracted by exorbitant pay, into more productive industries."

That could only be good for the country.

11 thoughts on “Wall Street reaches its Wile E. Coyote moment

  1. bud

    This election is very much about who can do best for the economy. Iraq is yesterdays news for the most part. I don’t think either side will get much traction there. Most people want out quickly but given the decrease in violence this doesn’t have the same urgency that it did 2 years ago. As it relates to the campaign this seems like a stalement.
    Healthcare is important but the Dems are so careful on this issue, thanks to the Hillary care debacle in the 90s, they don’t really offer the necessary solution. The GOP basically offers pretty much the same. Again, seems like a stalement.
    Then we have taxes and the deficit. Even though the Obama plan is clearly better for most Americans the wealthy are able to mischaracterize it in such a way that many working class Americans are fooled into believing Obama will raise their taxes. Stalemate.
    As for the budget deficit, well, people just don’t care. No politician ever gets much mileage out of his claim to bringing down the deficit. So for all the ranting and raving from both sides the American public really doesn’t care.
    But what people DO care about is their own personal financial security. This is Obama’s best issue by far. McCain is coming across as the big money elitist. He doesn’t know how many houses he owns. His economic guy calls out-of-work folks “whinners”. McCain claims the fundamentals of the economy are in good shape. All people have to do is look at a couple of basic statistics to see just how poor the economy is. Unemployment is at a 10 year high. The DOW is trading at around 10,900 as I write this, little better than the 10,600 it was trading when Bush took office. The housing collapse, high gas prices and now the financial market turmoil all suggest our government has failed badly over the last 8 years. And who makes the more convincing case for change? That obviously would be the very intelligent, energetic senator from Illinois.

  2. Jimmy

    Fundamentals of the economy are strong but this is so far over most peoples head, you have to really dumb it down which McCain can’t do so he flubbed it.
    The GDP is the primary indicator of our economy. It is still growing.
    Inflation is a negative indicator. It is down last quarter.
    Consumer confidence, jobs, etc, play a role as well but the fact is, the economy is hanging on in spite of this atrocious financial sector (see, its not the economy) performance.
    Brad is right and that is why the economy is still hanging on. All of these companies are imploding because their balance sheets were crammed with paper assets (mortgage backed securities). As the housing market constricted, people defaulted and these mortgage backed securities became worthless or close to it. Thus, huge writedowns, capital calls, etc for the i banks. AIG is exposed becuase it insures these debts.
    The credit crisis is decades in the making and McCain was right that we need to modernize the requlatory oversight of the markets. Bush I, Clinton and Bush II were all asleep at the wheel here.
    My favorite part about all this: Fannie/Freddy bailout happens and McCain pens an op-ed in the NYT and lays out why it happened and how he would fix it (mandate equity in mortgages) and Obama says it was necessary and he will monitor.
    Fincancial sector goes to pot and McCain comes and says fundamentals are sound but we let a bunch of people build a house of cards without proper oversight and he will fix it. Obama, he will monitor it and it was really the GOP’s fault.
    Speaking of house of cards, Obama’s campaign is falling and his entourage is panicking. Its kinda funny to watch.

  3. Mike Cakora

    bud –
    Here’s hot news from the New York Times on September 11:

    The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.
    Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.
    The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.
    The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac — which together have issued more than $1.5 trillion in outstanding debt — is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.

    Did you notice the year? 2003… It didn’t pass; Democrats and some Republicans blocked it.
    Back in May McCain said this:

    For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac–known as Government-sponsored entities or GSEs–and the sheer magnitude of these companies and the role they play in the housing market. OFHEO’s report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO’s report solidifies my view that the GSEs need to be reformed without delay.

    Ooops! Pardon moi! That was 2006 when McCain co-sponsored the Federal Housing Enterprise Regulatory Reform Act of 2005. It didn’t pass; Democrats and some Republicans blocked it.
    Cui bono?

  4. Mike Cakora

    I think the McCain quote is really from 2005, but can’t find a citation for that year. The Freddie Mac false booking scandal broke in December 2004. The cited bill was introduced in January 2005. McCain’s remarks were therefore likely made in May, 2005.

  5. p.m.

    You see, bud, the failure of our financial sector can be laid squarely at the feet of Clinton-era Democrats, not Bush I and II.
    I’m so mad I hope Hillary never gives Bill enough space to have even one more excellent adventure.

  6. Steve Gordy

    Anybody here ever heard of the Gramm-Leach-Bliley Act (1999) which removed the separation of investment banking from commercial banking? Hint: It wasn’t sponsored by “Clinton-era Democrats.”

  7. Lee Muller

    The Gramm-Leach-Bliley Act did not cause the current banking problems.
    If the separation between investment banking and commercial banking had not been removed, some of the failing banks could not have been rescued by Wall Street, and some of the failing investment firms could not have been rescued by commercial banks.
    The current problems are the result of fraudulent mortgages being created by buyers without proper proof of assets or income. The Clinton administration did this to help developers sell more houses to blacks who could not afford them, and was sold to blacks as helping them get houses they deserved, when they didn’t. The government programs, Freddie Mac and Fannie Mae, were a big part of making those loans to unqualified buyers.
    What is not being discussed is that over 60% of the houses in foreclosure are speculative houses, owned by developers, builders and speculators trying to “flip” them in a market overheated by easy money.

  8. bud

    There are many players involved in the current crisis, but liberal democrats are not among them. Moderate democrats, including Bill Clinton, played a role, but the real villans are the “get the government off the backs of the American people” conservatives. That whole movement away from government regulation can be traced back to the Reagan years. The result has been the collapse of the energy sector – Enron, and now the financial sector. We liberals are in favor of strong government oversight. Conservatives, especially from the Phil Gramm/John McCain wing of the Republican party oppose regulation.

  9. bud

    The GDP is the primary indicator of our economy. It is still growing.
    Only to an elitist. If someone is out of work, as 6.1% of the American workforce is now, highest in 10 years, they don’t give a damn about GDP growth.

  10. Lee Muller

    Since Obama proposes to increase the deficits and national debt to finance huge welfare programs, the Democrats obviously don’t care about the debt left to our children.

  11. Jimmy

    “Only to an elitist.”
    – No. Only to economists. You are missing the point to the level that I don’t think there is any hope you will ever get it. But you are really starting to show your true colors.
    If someone is out of work, as 6.1% of the American workforce is now, highest in 10 years, they don’t give a damn about GDP growth.
    – You’re right. But this has nothing to do with the “fundamentals of the economy”. Job losses can occur due to corporate malfeasance or ignorance just as easily as inflation. Actually much easier. You are correct on one thing though. Only a severe revision to the regulatory framework that applies to the financials will this get better. Who was that has actually said on multiple occasions that this is what needs to be done? Oh yeah, McCain. Is McCain inherently in favor of deregulatoin, yes, in this case, no. So, your argument fails, bigtime.
    By the way, who was in office 10 years ago?

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