Vic Socotra

09 October 2008

Get Greenspan

Stephen Crowley/The New York Times

“The turmoil will not end quickly, nor will the measures taken by the government solve the underlying problems.” Somebody said that this morning, and it could have been Secretary Paulson, or it could have been oracle Alan Greenspan.

In terms of accountability for our ruin, the Times helpfully fingered him as the man who enabled the system of derivative financing that has brought us all low.

The 13th Chairman of the Federal Reserve was appointed by conservative icon Ronald Reagan, and supported by all the Bush Presidents and William Jefferson Clinton. His views had broad bi-partisan support. He retired in 2006, and that makes him directly responsible for the Fed’s easy acceptance of the growing market in derivatives and hedge funds.

The derivative market ballooned from just over a hundred trillion dollars to $531 trillion this year. That is more than half of a number for which I did not even have ready cognizance.

I had to look it up. It is a Quadrillion dollars.

It’s not a time for fear, says Senator Obama, and he is right. He was talking out on the stump, swelling with the certain knowledge that the unsettled times are going to propel him into the Oval Office, ready or not. The downside is that when he gets there, the best intentions of any man will buckle under the weight of a quadrillion problems. It happened to Mr. Clinton, who had to jettison a broad social agenda to deal with a significant budget imbalance. Even FDR needed a major world war to turn things around.

The Porters at Big Pink are the best barometers for all this. They ha ve withdrawn their money from the Old Age accounts established for them by the management company.

That contravenes the conventional wisdom. The smart guys would tell you to hold tight and ride this out. The market always comes back, even if it happens to be down thirty percent since last year. The Porters are men of courage.

They came to this country to get a slice of the American Dream, and appear fully prepared to take away with them if circumstances dictate. They are agile men, if laconic, and have a direct view of the bottom line. They will not be tethered to a sinking fund. They will, if necessary, take the penalty on early withdrawal and go home.

I mused about that. Had I taken the penalty and withdrawn all my money from the retirement account at the beginning of the year, I would still be ahead. Particularly if I was sitting on an ExPat barstool in Phuket, looking out at the turquoise sea.

It is not panic on my part, just a little buyers remorse for the disaster. We should have listened to our parents, and followed a more steady and traditional path.

Mr. Greenspan famously once told us to beware of irrational exuberance in the market, and the fundamental laws of economics had not been repealed. He believed that the those who managed the risk would be responsible about it. Unfortunately, Mr. Greenspan forgot about the overwhelming self-interest of the human animal.

Anecdotally, there are some troubling similarities to a market failure long ago. There have been reports of high-profile deaths in the financial community, former Masters of the Universe who suddenly saw that there was no way out. Back in the day, the executives tumbling from their office windows became a grim cliché adopted in a hundred New Yorker cartoons.

There is nothing amusing about this quotation of follies past. There is real human suffering that will come from this mess, based on collective trust misplaced.

We have found the place now. Remember the signs you used to see strategically placed off the interstate? “Shallow Valley Luxury Homes! If you lived here you’d be home now!”

The long joyride in the family sedan appears done. We can blame Mr. Greenspan all we want now, though I think we would agree it was a most excellent journey while it was in progress.

But now we are home.

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