Tuesday, November 11, 2008

Go With Throttle Up

“We have always known that heedless self-interest was bad morals, now we know that it is bad economics.”
- Franklin D Roosevelt

The terms being tossed about in this global crisis are mind boggling – mark to market, credit default swaps, collateralized debt obligations, teaser rates, ARM’s, Fannie Mae, Freddie Mac, sub-prime, derivatives, Sarbanes-Oxley, Gramm-Leach-Biley, negative feedback loops, mortgage backed securities. With each passing day come new terms and increasingly frightening news about financial exposure. A month ago, the Fed began injecting billions of dollars into the “system.” A while after that regulators hoped that $85 billion to prop up A.I.G. might solve the problem. A few weeks ago public exposure was about $700 billion. Shortly after that, in testimony before the House, we learned that exposure in credit default swaps is somewhere in the neighborhood of $60 trillion, more than the entire world’s annual G.D.P!

While the exposure numbers reach into the stratosphere, the stock market is flirting with a crash. In the past month the Dow has lost between fifteen to twenty percent of its value. In some parts of California entire communities have been foreclosed on and abandoned. Here in Lyon County, Kansas, foreclosures for the first nine months of this year have increased by 57% from the previous year. Credit markets appear to be seizing up. Inventory needed for production hangs in the balance. The well of credit desperately needed to meet payroll is running dry. As business leaders meet in board rooms to slowly hammer out solutions and our Congress holds hearings, the crisis spirals downward, moving at the speed of the internet.

Is it any wonder, then, that we’re every bit as angry as we are confused? A Pew survey taken a few days ago revealed that 54% of us are paying a lot of attention to this crisis, yet 43% of us are confused by it. In fact, the more information we get, the more confusing and conflicting it seems to be.

The strange mixture of interest and confusion is becoming every bit as toxic as many of the sub-prime mortgages entwined in this crisis. The only avenue many of us feel we have left is to express our outrage. Democrats blame Republicans; Republicans blame Democrats. Proponents of regulation blame laissez-faire capitalists and vice versa. The cycle of blame seems to stretch to infinity, but it may only be the tip of the iceberg. As the anger mounts it’s becoming more personal, more visceral. As author/futurist Francis Fukuyama noted this past Sunday, “The quality of political debate has been coarsened by partisans who question not just the ideas but the motives of their opponents. All this makes it harder to adjust to the new and difficult reality we face.”

One of the constants in this crisis has been our uncanny ability to hold ourselves guiltless. We assume that we had nothing to do with this mess. Yet, many of us took second mortgages on our homes to fund that dream vacation we just couldn’t live without. We bought meals at Applebee’s and trendy bistros, Hummers and SUV’s, or designer clothes and shoes using plastic, to the collective tune of $2.4 trillion!

Warren Buffet, the sage of Omaha, once observed “it is only when the tide goes out that you find out who’s been swimming naked.” Well, the tide has gone out on the global economy and we’re finding out that there an awful lot of naked people flopping around in the driftwood and seaweed that’s been left behind.

There’s a sad truth at the heart of this mess - lies. In 2006, author/risk consultant Satyajit Das described it as a hierarchy:

“There are salespeople – they lie to clients. Traders lie to sales and risk managers. Risk managers? They lie to the people who run the place – correction, think they run the place. The people who run the place lie to shareholders and regulators. I remembered the quantitative colleagues. ‘I forgot the quants – our fabulous rocket scientists! When last heard from, they we trying to develop a model for lying.’”

While it would be easy to blame it all on a chain of skilled liars, the truth is we’ve also lied to ourselves. We’ve bought into the naïve notion that consumption built on a mountain of debt and bull markets were inalienable rights.

It all sounds eerily familiar in the light of history. Many in the 17th century mortgaged their homes so they could buy a single tulip bulb for $75,000, betting that their investment would reap huge rewards. During the “roaring twenties,” millions bought stock “on the cuff,” certain the only direction was up. On January 28, 1986, after days of delay, internal wrangling, and public impatience, NASA mission STS 51L lifted off from Cape Canaveral. About a minute into the flight mission control issued the command, “Challenger, go with throttle up.” At 73 seconds, Challenger disintegrated.

Since the early nineties it has been, economically speaking, “Go with throttle up.” In the wake the economic disintegration we’re confused, angry, trying to make sense of it all. We’re groping in the dark, hoping that there is a Churchill, an F.D.R., or a Reagan who will help us navigate the troubled waters. We hope, but no one seems big enough to answer the call. John McCain was clearly no match for the problem. And, I suspect time will tell that this crisis is well above Barack Obama’s pay grade.

In the face of crisis and recriminations I think back to stops made at mile marker 109 on the Kansas Turnpike a few years ago, gazing out along the tallgrass, keenly aware of my smallness and vulnerability, yearning for the consolation of the ages, realizing there are places where “moth and rust don’t corrupt.” In this age of Fukuyama’s “new reality” I find myself once more crying “Maranatha,” clinging to the age old hope of the eastern sky being split at dawn by the Parousia.

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