Yes, We Have No Bananas
May 7, 2009 at 6:38 am 11 comments
Did you ever wonder if the game is rigged?
Sure, lots of recent sentiment seems to indicate that the worst is over. Banks are declaring profits , the market is up, there are “green shoots” poking up through the dead leaves of the economy. Real estate activity is picking up in moribund regions like Sacramento and Las Vegas. Maybe we’re nearing bottom.
On the other hand, pundits can’t agree on whether we’re headed for massive inflation, or slip-sliding away down the deflationary toilet bowl. Consensus seems to be that the bank “stress tests” are a sham, using unrealistically favorable assumptions.
Just yesterday we hear the government believes Bank of America (NYSE: BAC) will need to raise another $35B. Does anyone really believe that will be the end?
Finally, there’s Fed Chairman Bernanke’s repeated assertion that none of the banks undergoing stress tests will be allowed to fail. For all the talk about how we’re too smart to repeat the mistakes of either the Great Depression, or (more to the point) Japan’s “lost decade”, we seem well on the road to creating “zombie banks”. Colorful shells made up of window dressing and government infusions, surrounding a soft, chewy middle of bad assets.
How many licks does it take to get to the center of a bad bank, anyway?
The real problem, I believe, is a collusion of sorts between the government and an oligarchy of “too big to fail” banks. Both the government and Main Street are continually reminded of the dangers inherent in letting banks fail, in restricting pay, in interfering with the operations of the big banks–in fact, of any change at all to the status quo. And, for the most part, we’re buying it.
Monday’s Wall Street Journal spoke of how Stephen Friedman, the NY Fed Chairman, has benefited from his ties to Goldman Sachs (NYSE: GS)–yet another way investment bank elites have been influencing and then benefiting from policy. There remains a revolving door between Wall Street executive suites and the Treasury. And a recent Economist essay wonders why the Fed is perpetuating an oligarchy of “big three” ratings agencies, when they contributed to causing this mess in the first place.
This is not the behavior of the financial pillar of the world. It’s the behavior of a banana republic after a bubble pops.
I’ve been sharing an excellent article with friends recently, by Simon Johnson, former chief economist of the International Monetary Fund. Johnson makes an elegant and persuasive case that we are no different than emerging market economies such as Argentina, Malaysia, or Russia at key crisis points.
For me, the key takeaways from that article:
- What we’re going through now is not–in the final analysis–all that rare.
- Yes, it can happen to the U.S.
- It’s a little surprising (and perhaps encouraging) that it hasn’t happened here more often.
True, there are differences, such as the dollar’s prominence in world financial affairs, and the trust the world has in U.S. Treasuries. And there are encouraging signs in some of Obama’s and Geitner’s initiatives.
[As an aside, I'm still amazed at the schizophrenic approach the Treasury and Congress have taken to date. They keep pumping (our) money into banks, but then turn around and hamstring their ability to be successful by imposing compensation restrictions, demanding lower lending rates and fees, and restructuring mortgages--reducing the value of those "bad assets". Are we trying to buttress the banks or chop them off at the knees? Can't we just pick one?]
The conclusion, however, is inescapable.
The key roadblock to rescuing our financial system lies in breaking the oligarchy of large Wall Street banks and the influence they have over the Fed and Treasury.
When you ask him anything, he never answers “no”.
He just “yes”es you to death, and as he takes your dough
He tells you, “Yes, we have no bananas
We have-a no bananas today.”
Just because we’re not primarily a tropical fruit exporter doesn’t mean we’re acting any better than those corrupt banana republics we so disdain.
Disclosure: I hold no position, either long or short, in any stocks mentioned here.
Entry filed under: Market, Miscellaneous. Tags: Bank of America, Goldman Sachs.
by Michael Mauboussin
1.
Gryfino | May 15, 2009 at 5:23 am
Well in my opinion a huge part of the blame for recession should fall on media. They started panic and people stopped spending money and this only further crippled the economy. We need some positive opinions to get people spending again.
2.
Scott Berry | May 15, 2009 at 6:28 am
You raise a good point. On both sides. The media helped whip up an investing frenzy and then contributed to spreading panic when the bubble popped.
So much of our economy and markets are driven not by events but by the perception of events.
Inflation isn’t really inflation until people *expect* prices to go up. And the biggest fears about deflation is that pessimism will drive the behavior that makes it so.
Obama’s team is trying desperately to assuage the fears of the public, telling everyone that “things are getting better”, that the economy is turning around. And the media is cooperating. But it’s not at all clear from the evidence that this is so. One or two data points don’t indicate a trend, as much as we’d like them to.
Still, better to be an optimist.
3.
Pozycjonowanie | May 19, 2009 at 7:00 am
Yeah, the worst are the guys yelling that “Obama lies to us and is trying to make us think the recession is over to make his administration look better” while in reality this is one of those rare times where wishful thinking really works (everyone beliving economy is back up = everyone spending more = economy actualy getting back up)
4.
Scott Berry | May 19, 2009 at 8:14 am
One of Jon Stewart’s guys said exactly the same thing a week or two ago. “We have to believe the banks are OK, so people will put their money into banks, and then the banks will be OK.”
5.
Diety | May 20, 2009 at 7:45 am
Now I know I’m not exactly discovering America with this statement, but the media contributed in a huge way with the whole crisis. If they (and by they I mean both the corporations that own news stations and papers and the journalists) tried a less “let’s spread panic” approach, the impact could have been a lot softer. And yes, I do realize this is somewhat idealistic …
6.
Stancja | June 26, 2009 at 5:03 am
“It’s a little surprising (and perhaps encouraging) that it hasn’t happened here more often.”
Well if it did people wouldn’t be panicing that much – they’d be prepared for it. But then again the whole country would just be in worse state so I don’t know which one’s worse/
7.
Bajki | July 20, 2009 at 5:10 am
Well someone’s controling it in one way or another. But I don’t think it’s just one powerful man or corporation. It’s probably tons of people with contradicting interests trying to get the most out of the recession.
8.
livigno | July 23, 2009 at 3:12 am
But the crisis is a real threat to economy and that didn’t came from the press. Some mistakes has been made and some will become real in future. In free market there is a kind of sinusoid that makes it grow fast, and next fall down, to rise again in time. That is the natural process that takes dozens of years. It is impossible to fix it with government borrowin process. It can only help few billionaires earn few more millions. The real help would come from lowering taxes (even for few years).
9.
Scott Berry | July 23, 2009 at 7:33 am
Lowering taxes isn’t in the cards, I think, because of the looming deficit Obama and Congress have created.
I agree about the sinusoid, you should see my earlier post on bubbles: http://scottjberry.com/2008/12/31/tiny-bubbles/
10.
Yail Bloor | September 20, 2009 at 7:34 pm
Obama may be responsible for the “looming” deficit, but who exactly is responsible for our current deficit? Can we face facts and move on from that point?
11.
Scott Berry | September 21, 2009 at 7:47 am
Bush and Congress. But always Congress. I don’t really care about getting into political party blame games here. If the GOP creates a deficit and the Dems double it (or vice versa), both are responsible. Happy?