Dow Jones Reprints: This copy is for your personal, non-commerical use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool on any article or visit www.djreprints.com
It's a new year, when the natural inclination is to start afresh and close the books on the past. Yet, after the disastrous "decade" just past, some perpetrators of the worst blunders of those 10 years seem intent upon insisting they really had the right idea all along.
I purposely (and purposefully) put decade in quotes because no matter how many people declare the end of a decade with the passing of 2009, the decade does not end until Dec. 31, 2010. And while we danced to "Party Like It's 1999," the twentieth century did not run out until the end of 2000. There was no zero AD; the Western calendar started with the year one; the first decade ran from one to 10, not nine; the first century ended with 100, not 99. But I digress.
In the new year, Jerry Levin, the former chief executive of Time Warner (ticker: TWX), contends that the basic idea of melding the media company with America Online (AOL) was a good one, even if the execution of the merger was a disaster.
And Federal Reserve Chairman Ben Bernanke argues that holding short-term interest rates at low levels earlier in the decade, well past the risk of phantom deflation had passed, did not cause the housing bubble and subsequent bust.
This just in: there really were weapons of mass destruction in Iraq. Not.
Levin was on CNBC Monday delivering mea culpas for the worst merger in history and excoriating other CEOs for not similarly prostrating themselves. At the same time, he contended that the melding of media with the Internet was more valid than ever.
That's an obvious observation, and not one to be contested by the editor-in-chief of Barrons.com. But given the state of the internet by 1999, there was no need to buy into AOL to get access to the internet. I suspect Steve Case, AOL's CEO at the time, realized as much. And with the advent of broadband, AOL's dial-up service became antiquated. But the merged company milked that cash cow as long as it could.
Indeed, the notion that AOL could be merged with Time Warner's operations was contradicted by anybody who saw that the media company hadn't melded with Turner Broadcasting, the owner of corporate crown jewels such as CNN, which had been acquired by Time Warner years before.
A media company no more had to buy AOL to get onto the internet than a newspaper company has to buy an ink producer. The medium is indeed the message, and that medium is the internet. AOL was redundant to that. Even so, Levin continues to defend the idea behind merging Time Warner with AOL, while admitting mistakes were made in its execution.
Similarly, Fed Chairman Bernanke continues to deny any role for the Fed in the housing bubble and subsequent bust. Had there been stricter regulation of feckless mortgage lenders, he contends, borrowers wouldn't have gone nuts, buying houses they couldn't afford or using their houses as automatic teller machines to pay for vacations or big-screen televisions or other frivolous items such as medical bills or tuition.
Bernanke appeared to be defending the policies of his predecessor, Alan Greenspan, but the present chairman was a member of the Fed's Board of Governors back in the early years of the decade. And he was the intellectual champion of ultra-easy policies, especially after his 2002 speech, "Deflation: Making Sure 'It' Doesn't Happen Here." That was the source of his moniker of "Helicopter Ben" for repeating Milton Friedman's suggestion that, if need be, the money supply could always be expanded by dropping dollar bills from a helicopter.
Instead, the low interest rates of the time -- with the federal funds target getting down to 1% and then being raised glacially in quarter-point increments -- resulted in a mad scramble among fixed-income managers to maintain yields.
As described by Barry Ritholtz of Fusion IQ, mortgage lenders originated carloads of loans, for a fee, which they off-loaded to Wall Street, which repackaged them, for a fee, into mortgage-backed securities. Ratings agencies gave a top triple-A rating to securities backed by junk mortgages, for a fee.
Moreover, in a world awash in dollars, the result of America's current-account deficit, surplus nations in Asia and OPEC needed a place to invest their surfeit of greenbacks. For them, triple-A collateralized debt backed by subprime mortgages were just the ticket.
And the rest is history.
Nearly a century ago, the economist Knut Wicksell described how holding interest rates below their natural level lifts the prices of commodities. The same principle applies to other asset prices. Cheap money gets pushed to work, not always wisely. The result is malinvestments, which eventually push down asset prices because of the excess capacity they produce.
The obvious inference is that with the federal funds rate near absolute zero, the Fed should avoid the mistake of raising rates too slowly this time around. Yet the obvious inference is not apt.
Ultra-low interest rates are hardly fueling a housing bubble now. Moreover, liquidity for the economy is rapidly tightening, risking a double-dip recession.
A fuller discussion of that will follow in a future column.
Comments: randall.forsyth@barrons.com
This copy is for your personal, non-commerical use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com
Yahoo! Buzz
MySpace
Digg
del.icio.us
NewsVine
StumbleUpon
Mixx
Credit Suisse upgraded Potash Corp. of Saskatchewan and Intrepid Potash.
Wedbush Securities raised estimates on the discount retailer.
Matthew Hougan of Index Universe's ETF Report says ETFs have gone mainstream.
Barrington noted 10 months of positive price performance in the sector.
Jesup & Lamont says Boeing is now its top pick in commercial aerospace.
Jonathan Tisch sold more than 455,000 shares of the conglomerate.
Chesapeake Energy and Total, the French oil giant, signed a $2.25 billion joint venture that should further energize the companies' stock prices.
Shares of the integrated-oil stock climbed after a laudatory story in the magazine.
Morgan Joseph says near-term indicators may show dollar appreciation.
Credit Suisse upgraded the financial giant to Outperform
Jefferies says the sector will continue to benefit from an ongoing recovery.
Caris raised revenue estimates but cut earnings views on the theater chain.
Baird is upbeat on both RightNow and Salesforce.com.
Wedbush upgraded the marketing firm to Outperform from Neutral.
Earnings estimates are rising quickly for these firms, a promising sign. (At SmartMoney.com)
Cloud computing, which shifts tech tasks into cyberspace, will be as revolutionary as the Internet itself. Why Salesforce, Apple, Google, Cisco and others could be winners.
How to ensure aircraft safety. A grim view of the new decade.
AN INTERVIEW WITH RICHARD KOO: America seems to be suffering from the same affliction that has hobbled Japan for so long -- a balance-sheet recession." And no matter how hard the Federal Reserve tries, it won't end until businesses shake their heavy loads.
Read Full Article »