Are We Any Smarter?

What have we learned in the early days of the most recent economic melt-down?
Well, for starters, the old adage about draining swamps and alligators fits to some degree – but stops short of telling us what people do when they are up to their noses in swamp water and those alligators are snapping.

Confidence
Henry (Paulson, Secretary of the US Treasury) completely forgot that he was trying to restore confidence and liquidity. In the heat of the moment he decided instead to buy ownership in banks. We now know that doesn’t improve confidence, and as for liquidity…

Liquidity
We have learned that when you restore banker’s liquidity and ask them to lend to consumers they buy other banks.

Herds
Herds form, we have learned, in times of crisis. We’ve seen consumers bunch together as a “non-spending” Consumer Herd, bankers cluster as a “non-lending” Financial Herd, various governments mass as the “new owners of banks” Savior Herd, and businesses clumping up as the “cutting back and laying off” Business Herd.

What we do not know is what might happen if just one of those herds behaved differently in this crisis than they do in every crisis. If, for example, the Consumer Herd decided to forgo self-preservation and start spending, do you think some of the other herds in the equation would simply snap up and hoard the cash?

I do. The problem with an emotional self-serving model is that it is so … well, emotionally self-serving!

Capitalism
Just before they had to jump in and save their own banks, several European leaders pronounced the death of capitalism with real glee. They are not alone. It is no longer anathema in the U.S. to say that capitalism is a flawed system.

While our own leaders have done little if anything to restore confidence in our economic system, it was French President Nicolas Sarkozy who gave an insightful analysis in a speech in Toulon, saying, “The financial crisis is not the crisis of capitalism. It is a crisis of a system that has distanced itself from the most fundamental values of capitalism, which betrayed the spirit of capitalism.”

Exactly.

The Gordon Gekko, “Greed is Good,” or Ivan Boesky, “Greed is Right,” philosophy rose to its pinnacle in the 1980s.

Self-interest is a human trait. Better to deal with it that pretend it doesn't exist or can be wiped out. Greed, of course, is self-interest taken to the extreme, and is why free-markets do not remain free without regulation and regulators to police them.

Perhaps the “virtue” of unadulterated greed has been exposed for what it is, and perhaps we will no longer worship at its altar.

So, was it just plain old Greed?
No. But we all love a conspiracy. There is nothing like a conspiracy built on greed to bring out the theorist in all of us. But conspiracies are for simpletons who like uncomplicated answers to truly complex problems.

If you have to have a simple, one-line answer to the problem, the better answer is that we are where we are today because of mismanagement by the very people who should have known better.

There was no one element of the financial markets – including Congress, the Fed, and Treasury, that did not mismanage either the boom or the resulting bust to some degree or another. There is plenty of blame to go around. But no one is going to admit to their own culpability while they can point out the other players or take the easy one word answer.

Regulators
Speaking of Regulation and Regulators, we have learned that when Regulators disengage, and the markets run amok, said Regulators will rapidly and aggressively re-engage, take the regulatory balance from one extreme to the other, and kill any possibility of a quick-turn around.

So what does it mean for the near future?
It is easy to be doom and gloom at a time like this but we have not seen the worst of the downturn even if the banking crisis is over. Most non-food retailers make their year's much needed profit in that five-week period between Thanksgiving and Christmas in the U.S.

Here’s the rub. The Consumer Herd is scared to spend and the Holiday Retail Season is largely driven by consumer spending. This Holiday Retail Season could very well be the worst in more than 20-years.

Don’t bet on a bottom to this thing until sometime in the 3rd quarter of 2009.

And for those who remember the last real downturn in the economy...
Does it scare you at all that Paul Volker seems to be Mr. Obama’s number one financial advisor? Four years from now, Mr. Obama may look more like Former-President Jimmy Carter than any of us care to imagine.

Hillary may have dodged a bullet! Just like this year, the best contest in 2012 may well be the Dem Presidential Primary.