The Daily Reckoning
This week marks the one-year anniversary of the Lehman bankruptcy. The media struggles to say something meaningful about it. Here at The Daily Reckoning we will not even attempt meaningfulness. We’ll be satisfied with a few snide remarks.
What is most remarkable about the world a year after Lehman fell it is that so little seems to have changed. Even the papers have noticed.
“A year after Lehman, little change on Wall Street,” says the headline on today’s International Herald Tribune. “Backed by huge US government guarantees, the biggest banks have re-structured only around the edges. Employment [on Wall Street] has fallen just 8% since last September.”
“Obama to push banking overhaul,” says another headline at the Telegraph. Yes, the pols will try to convince the world that they have regulated risk out of the market. Perhaps they will limit salaries…or insist on more disclosure…or require that the capitalists hold onto more of their capital. Then, they will stand before voters and say they have made the world safe for democratic capitalism. Don’t believe it; their bailouts have made it more dangerous.
We don’t know whether this was what Nobel prize-winning economist Joseph Stiglitz had in mind. But he has come to the same conclusion:
“Stiglitz says banking problems are now bigger than pre-Lehman,” says the Bloomberg report.
Yes, Wall Street has a good gig going. The whole industry now benefits from the hedge fund formula – ‘heads I win, tails somebody else loses.’ When the hedge funds play the game, it’s their clients who lose money. But the way Wall Street banks play it, the big loser is the US government directly, and US taxpayers and bondholders indirectly.
When the going is good, the bankers make millions in profits – which they take home as salary and bonuses. An analyst at JPMorgan estimates that American and European banks will pay their 141,000 investment banking employees $77 billion in 2011…or about $543,000 per employee. Since they pay out so much of what they earn, they lack the capital to survive a crisis. But when they’re threatened with extinction, the feds step in to bail them out. No wonder they have no fear of a meltdown…
Wall Street was quiet on Friday. The Dow was down just 22 points.
The most exciting news was that gold closed at $1,006. But if gold buyers were afraid of inflation they neglected to mention it to the folks over in the bond market. The US 10-year Treasury note yielded all of 3.34% on Friday. Which is to say, fear of inflation is probably NOT what is driving up gold. But we’ll come back to that tomorrow. We’ve been doing a lot of thinking about gold…stay tuned.
Meanwhile, The Financial Times says world equity markets have rallied 65% since their lows in March. There is no longer any sign of panic. Or fear. People seem to think the crisis of over. This has reinforced their illusions. They desperately want to believe that their financial authorities have the matter under control. So long as things seem to be stabilizing – or actually getting better – they figure they can relax.
‘Nothing has really changed,’ they tell themselves. ‘It was just a hiccup…nothing serious,’ they say. They look out their windows and see the same trees, same buildings, same automobiles; it certainly seems as if nothing had changed.
Of course, when you set out on a drive from Manhattan, it takes a long time to get out of the city. For a long time, the buildings…the landscape…and the people still look the same. But you haven’t even crossed the Hudson yet! It is only later, after a lot of driving, that you realize…you are a long way from home. We suspect that there’s a long trip ahead of us too. We have begun the process of reversing a half-century of credit expansion. Since 1945, debt per person has increased. Now it is decreasing – with vast consequences. If we’re right, the financial sector will shrink for many years. Profits will be hard to come by. A job will be difficult to get too. And the part of the world dominated by Anglo-Saxons will diminish.
Fear will make a comeback…when people realize where they’re headed…
As you’ll recall from Friday, between the fall of the Berlin Wall and the fall of Lehman was perhaps the happiest, most worry-free period in American imperial history. The country had no military challengers. Finance was the world’s highest margin business…and New York’s hustlers were good at finance – rivaled only by those in London. And English was the world’s dominant language. With these advantages behind them, Americans (and Brits) saw nothing before them but growth and prosperity. They had gotten used to living off the kindness of strange lenders. They thought they could get away with it forever. But when Lehman went down, so did hopes for the eternal reign of the Anglo-American financial empire.
Now, savings rates are going up in America. Spending is down. So are salaries and prices. It’s a deflationary world…practically everything is deflating…
Consumer prices…inflation is negative in the United States and Europe…
Wages…household income is down in the United States.
Unemployment is up and the length of the average workweek is down. Result: lower wages.
Housing…“house price decline [in England] will continue after false dawn fades,” says a headline at today’s Telegraph. A study by Ernst and Young predict a 1.6% drop in British house prices in the first half of next year, after an 11.4% fall this year.
Net household wealth…down too, caused by falling house prices and falling incomes.
Oh…but here’s one thing that is up: government deficits. The United States posted a deficit of $111 billion in August. A few years ago, that would have been a frightening deficit for an entire year. Now, we have hundred-billion deficits every month…with no end in sight.
As we forecast, protectionism in on the rise. The Obama administration put a tariff on tires imported from China. It was done do to protect American tire manufacturers from competition. Free trade? Sure, when it suits us.
But China is getting huffy about it. In an “unusually strong riposte,” Beijing, using diplomatic language of course, said to the United States roughly what Serena Williams said to her net judge:
“If I could I would take this f***ing ball and shove it down your f***ing throat…”
Why’s China so upset? In an expanding world, everyone greedily grabs market share. Even if they’re not as fast as the next guy, they still feel they’re making progress. In a deflating world, on the other hand, if you give ground…you’re not just losing market share…you’re losing money!
This weekend we traveled back to Paris to take part in a panel discussion on freedom. Liberty is not a hot topic in Paris. In a metropolitan area of some 4 million people, only about 50 turned out to hear our talk – and half of them were American or English. Still, we were surprised there were so many. Liberty is a popular word. But freedom has never been much in demand. Millions of books are sold that promise to reduce your weight. How many are sold that promise to increase your freedom? We don’t know of any. Our guess is that the bookseller who makes freedom his market niche will soon have dust on his books and cobwebs in front of his door.
Still, the little group was enthusiastic. Assembled in a stuffy miniature theatre off the Rue Mouffetard, the freedom enthusiasts had a number of ideas for promoting their cause. One wanted to infiltrate the government with closet libertarians. Another suggested a takeover of academia. Still another suggested engaging taxi drivers in Socratic dialogues.
We looked for a fire alarm. Clearly, the heat was getting to them. They needed a good hosing down. We live in a world dominated by rules, laws, edicts, taxes and regulations. But it is not because the masses have never heard of liberty. They know what freedom is; they just don’t want it.
Instead, they want instead is an edge, an angle…a law that protects them from honest commerce…a special tariff that gives them an advantage…a monopoly…a privilege…
They want food stamps and unemployment compensation. They want free medical care for their parents and free schools for their children.
They want what we all want…growth and prosperity, without corrections. And they want to go to heaven without dying.
The Daily Reckoning
The Daily Reckoning
The World After the Fall of Lehman was originally published in the Daily Reckoning on 9/14/2009