Wall Street, Politicians Still Don't Get It

MSN Money January 11, 2010

The gamblers and the clueless are leading this nation into the abyss. If only we could throw out all of them.

There were many lists made of the "best" and "worst" of 2009. List-makers did themselves proud ticking off item after item.

But -- understandably, because it's a nonfinancial crowd -- one item got away from them: The 30-year Treasury bond turned in its worst performance in 40 years, as the yield rose from about 2.7% to about 4.6%. (For the layman, yields rise as bond prices fall.)

Given all the deflation fears and all the money that has poured into the Treasury market, that factoid may come as a surprise.

We're facing a protracted period when bonds deliver nothing but losses for folks -- just as the funding crisis I've written about before (read "The next crisis has already begun") is due to make itself visible this year. The only question is whether problems will erupt first in the bond market or the currency market. We'll probably learn a lot more on that score between now and March, when Federal Reserve chief Ben Bernanke is expected to end quantitative easing, by which the Fed has pumped money into the financial system.

Of course, the fact that we're going to have a funding crisis is a function of the Fed's activities. And, wouldn't you know it, the central bank's chief gave a speech last week that Bloomberg covered under the headline "Bernanke says low rates didn't cause housing bubble." The fact that Bernanke is so deeply in denial shows that he really doesn't understand the risks of printing money.

He is not alone on that score. It seems that all of those folks who inhabit Wall Street these days, as well as nearly all of our politicians, want to get back to business as it was and are trying to pretend 2008 never happened. If the Fed, in the form of Bernanke, cannot admit its mistakes, it is due to continue making them, exactly as his predecessor, Alan Greenspan, always did. More from MSN MoneyThe Men of the Broken DecadeThe rally may be running out of timeWhy the Fed loves inflation Dow 36,000? So much for predictions10 lessons from a dismal decadeWorthy of bookmarking Regarding the Fed, 2008 and the financial crisis, I've recently read almost all of the books released in the past year on that subject. I found Rep. Ron Paul's "End the Fed" terrific. I have always agreed with the Texas Republican's major points, except his tolerance for certain conspiracy theories, but before reading his book I had thought of him as a bit of a gadfly. I had not appreciated his true grasp of the underlying fundamentals of economics and money printing, and how "it all works."

Paul's book is mandatory reading for anyone wishing to understand how money printing makes the country worse off. (On the other hand, David Wessel's "In Fed We Trust" struck me as essentially a waste of time.)

Meantime, while my book "Greenspan's Bubbles: The Age of Recklessness at the Federal Reserve" and Barry Ritholtz's "Bailout Nation" were early explanations of the problems created by the Fed and what's evolved in the wake of its policies, most of the books written since then have focused on Wall Street. On that score, I enjoyed William Cohan's "House of Cards: A Tale of Hubris and Wretched Excess on Wall Street" and Patrick Robinson's "A Colossal Failure of Common Sense:The Inside Story of the Collapse of Lehman Brothers."'Sellout' is a strong 'buy' But the book I found most illuminating -- almost shocking -- and that made me quite angry was "The Sellout: How Three Decades of Wall Street Greed and Government Mismanagement Destroyed the Global Financial System" by Charles Gasparino.

This is another mandatory read. (Andrew Sorkin's "Too Big to Fail" runs along a similar line, but in my opinion is quite inferior.)

How bond investing works

Gamblers -- some call them bankers -- made leveraged bets on whatever interested them. For a few years, what interested them most was mortgage debt of all flavors and stripes, though they also got excited by leveraged-buyout debt and commercial-real-estate debt.

For them, it was a wonderful system, one in which gamblers collectively made hundreds of billions and individually made tens of millions. But when the system blew up, it cost the country trillions in obligations to be paid by the taxpayer or printed by the Fed.

What I find particularly outrageous is that even after the bailout of these entities, we aren't yet seriously forcing them to skinny down, and they're back to paying out bonuses of nearly the same magnitude as those in 2007.Heads they win, tails we lose I am a staunch advocate of capitalism, free enterprise and folks being able to make whatever they can by being honest and clever. But it seems to me that so much of the money the bankers "earned" was primarily a function of the massive leverage wielded by the institutions they worked for, rather than the result of any great decision making on their parts. (That's not to say there weren't certain guys and gals inside these institutions making brilliant decisions, but in the aggregate it was all about leverage.) And the money the institutions made last year was all about the government bailout. Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 304, 314, {"configCsid": "MSNmoney", "configName": "player-money-4x3-articles-inline", "player.vcq": "videoByUuids.aspx?uuids=93b54df8-31e1-4b14-bf50-82716148e59b,161243d8-3210-4506-a2f7-8b17fa710c34,2bd1f994-6aaa-4223-8b5b-6711297e948c,3e9114c9-24fb-439d-b958-9476ab0f53a8", "player.fr": "iv2_en-us_money_article_Investing-ContrarianChronicles-inline"}, 'PlayerAd1');

Thus they got paid for taking excessive risk and then paid again when that risk taking ended with the massive bailouts we've witnessed. I don't know what the solution is, but I know that what has occurred is outrageous and that there's going to be a huge backlash at some point. Most likely, that backlash will be unfairly delivered. I just don't know how it will be unfairly delivered.

Meanwhile, the optimist in me (even folks with a bearish outlook are optimists; it's just that we're in denial less often than those in the perma-bull camp) found some hope in a Dec. 30 New York Times editorial headlined "Failed state," which made the following case for throwing out the New York Legislature:

"New Yorkers should be appalled at their failed state government, particularly their corrupt and clueless Legislature. Scandal and irresponsibility have been Albany's creed for decades. This year, the gang added another outrage to the list: complete fiscal incompetence. The only solace is this: The entire Legislature is up for re-election in 2010. And unless there is a sudden turnaround -- and, so far, we see few signs of it -- New Yorkers have no choice but to vote out all the lawmakers and start over."

Now the only suggestion I would make to The Times is that they need to write that editorial about the U.S. government. We need to throw out all the bums. No exceptions, not even Ron Paul. I'm sure he wouldn't mind leaving, if it meant the 534 other career politicians in Congress have to leave as well. That would be a sacrifice I'm sure he would gladly make.

My hope is that as we continue on this path of irresponsibility and business as usual, perhaps we'll get to the point where people become angry enough to throw out all the bums and try to start over -- and clean up the mess so our kids and grandkids have half the chance that we did.

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Enter search terms:MSN Money Video Msn.Video.createWidget('Gallery2Container', 'Gallery', 120, 350, {"configCsid": "MSNmoney", "configName": "new-todays-investing"}, 'Gallery2');Video Hub: Prepare for the new year and review 2009, decadeAll videosSearch by tickermore ...Contrarian ChroniclesAbout Contrarian ChroniclesLearn the Contrarian Chronicles lingoSubscribe to Market Rap on Fleckenstein CapitalMSN Money InsightSuperModelsTop Stocks blogCompany FocusMutual FundsContrarian ChroniclesSmart Spending blogNew Investor CenterDecision CentersStart InvestingMutual FundsFind Hot StocksSimple StrategiesPower ToolsInvesting for IncomeReal Estate InvestingFund data provided by Morningstar, Inc. © 2009. All rights reserved.StockScouter data provided by Gradient Analytics, Inc.Quotes supplied by Interactive Data.MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.Msn.Video.createWidget('Gallery8Container', 'Gallery', 500, 230, {"configCsid": "MSNmoney", "configName": "gallery-money-article-site-wide"}, 'Gallery8');msft.msn._ic.cid='xvcbhti2ets55ek2c2gv9a58gv9ab5v9';msft.msn._ic.pst=false;msft.msn._ic.pgn=1; Join the discussion!Add a commentShow commentsSort by:Newest firstOldest first_uc2f12('iucGo');1 - 10 of 15PreviousNextNew Liberals of the purple sage #1Friday, January 08, 2010 11:50:41 PM

Fleck keeps it real, again.

I view Bernanke, a man obsessed with the great depression, as a scientist who wants to infect the world with a disease to prove he had the cure all along.

Prez and congress just wants a quick fix to save political face.

The "sheeple" just want to be able to buy a new car, use their credit cards and hit the casino now and then.

Its all good since we'll all be dead by the time the total bill comes due.

ReplyReport AbuseLynn X #2Saturday, January 09, 2010 12:54:56 AM

Bill Fleckenstein: I agree Allen Greenspan is larger to blame than any one other person, of many in government, for the creation and collapse of our great two economic bubbles. The thing I can't figure out is why organizations keep paying Allen Greenspan to speak at their gatherings and why they would want to listen.

We still await the reforms that are so desperately needed to prevent the recurrence of the speculative bubbles -- and their vicious unwinding -- that have become all too prevalent during the last 25 years of laissez-faire regulations and unalloyed hubris and greed among many finance professionals. ReplyReport AbuseHawkswick #3Saturday, January 09, 2010 10:21:22 AM

Good article.

There is direct complicity between Government, i.e. politicians - elected people with power - and the Banking establishment. It is wholesale corruption with each entity attending to the other's greed. All is paid for by the captive tax-payer (under sanction of fine, confiscation of assets, imprisonment and ruination of life); by the unemployed and under-employed on account of the vast misallocation of capital within the economy; and by everyone, especially the young, uneducated and unemployed, etc. who will feel the worst effects of the country's long-term indebtedness.

The U.S. has now degenerated, alas, into a third-world country - where the poor are robbed to provide for the wealth, perquisites and privilege of the fabulously rich. Shame on Uncle Sam!

Note 1: Despite my sweeping statements above, there are, of course, some fine individuals who are noteworthy exceptions.

Note 2: The economy can be better understood by reference to the underlying political philosophy. For people of strong constitution, I refer you to www.americanempireproject.com ( ... read Chomsky!); sensitive individuals should beware - "Where ignorance is bliss, 'Tis folly to be wise."

ReplyReport Abuseharshreality #4Saturday, January 09, 2010 12:17:20 PM

Great article. Add to the list of bums to be thrown out-- Bernanke. Geithner, Obama (who I regret voting for). I have spent much time in the last 5 years trying to educate myself as to how our government and economy works so I would be able to make better personal decisions. Before that, I was clueless, an ostrich wth my head in the sand, a choice I was aware I was making but not realizing I have a responsibility to myself, all others, and as a citizen to know what is going on. I am now wide awake and live in a shocked state all the time. Thank-you Bill for your help in educating me. What a total corrupt mess we are in. I have no children but I sure do care about all children and their future. I try to educate others if I can get them to listen. And boy, have I learned a lot about some human beings' natures and behavior. What are they thinking, how could they be so corrupt and so awful?

ReplyReport AbuseSiValleyEng #5Saturday, January 09, 2010 1:19:49 PMThis is a decent article, no special insight or recommendation. I feel that there is anger in the system but not no personal responsibility. The authos and Ron blames the political class. Gasparino blames the govt for bailing out people. Why are BillF and Gasparino not critical on themselves. They are financial experts and had no clue about the rampant greed on wall street. No they were happy because they were part of the system that maximized individual returns, hell to anything else. The government is a reflection of ourselves and we surely dont like what we see. I think that the educational institutions, specially the economics powerhouses harvard, stanford, dartmouth, wharton, columbia have been a bunch of irresponsible and idealistic ideologues. I think the issue started with milton friedman and his legion of virus spreaders, talking about the inefficiency of the govt and the efficiency of markets. We all know that neither is perfect but they act as checks and balances of each other. People are greedy and that is why the reporters did not bother reporting, legislators did not bother legislating, everyone was busy collecting their money spewing from the wall street spigot. pity that they were satisfied with the pittance being thrown at by the NY elite. How can gasparino and billf not ask why rubin, stephen friedman, paulson, greenspan are not going to jail for their conflict of interest and duplicitous role in industry/government. How can we have an unregulated financial industry such as the OTCD. Why are gasparino and billf not clamoring that the banks should be broken up. They conveniently focus on the government, no question of accountability for the bankers. There is no moral outrage at the greed of the NY elite. There are no stream of articles focusing on how much in bonus and compensation they are getting. If only the govt would not bail them out all would be well, if only. The NY scamsters need to be stopped and the only thing that they fear is Jail.Bill F, I would appreciate an article that focuses on these points.ReplyReport AbuseSiValleyEng #6Saturday, January 09, 2010 1:32:36 PMThe problem is not geithner, obama and bernanke. They are coming at the tail end of a massive ideological game that Milton F and his ilk have spread. This system got its greatest boost under reagan and then spread via corporate sponsored think tanks. The party of "less government" and idealists like ron paul who have unfaltering faith in the markets are the primary protagonists. Their thinking, that government is inefficient and the markets are efficient, robust and informed has created this problem. This philosophy has enabled corporations to become more powerful, CEOs to become unaccountable, the media to be "bought" and decimated the ability of the government to check the greed of individuals. If anything I think the three mentioned above are the least to blame, they have not been running around accumulating millions in their personal accounts. I would have been really depressed if someone else had become president. Bernanke for all his faults is a decent person.ReplyReport Abusebeobob #7Saturday, January 09, 2010 10:41:20 PM

Kicking the bums out (of legislatures) will probably only allow another set pre-paid (by corporation/pacs) bums in. We do not have a sufficiently informed and responsible population to do anything much about the wall of worry facing us.

What about figuring out a way to stop corporations from being treated as individuals in the judicial system?

Currently corps. have the possibility of existing forever, accumulating large amounts of capital to use to influence the economy towards maximizing profits for a small group of investors/managers who are always rotating in and out of the corporation. There is no real responsibility tied to the corporations activity, as there is for one who acts inside the arena of family/friends etc. who feel that affect them. That is to say that responsibility is so tenuous as not not exist. This leaves individuals to act through the corporation in ways the benefit them in the short term, then they can move on to the next "opportunity" and extract more capital for themselves. All this activity tends to lead the individual into identifying more with the mechanistic structure of corporation profit making through semi-anonymous transactions that insulate one from the reality of the outcomes down the road. In Mr. Bill terms, "delusional thinking". Banks are the poster girls for this activity now but it applies to most corporations. Exec. compensation is a classic example of individuals making massive profits from corporation activities regardless to the cost to the citizenry around them. And the the claim that these incredible individual fortunes are such a small piece of the pie, beggars the reality of the negative results to society from the activities undertaken to produce these crazed(imho) individual compensation schemes. If these people really are too smart to be "let go" we are in big trouble, as those smarts are destroying our potential to forward the society the founders of this and other "democratic" countries/regions envisioned.

So back to solutions. If corporations were acknowledged by legislatures and courts to have an ever-growing edge over individuals/families by the nature of their ability to acquire, control, and preserve resources over generations, then perhaps we could have feedback mechanisms through legislation and court systems. Currently the feedback comes from those who are in the electoral pay of the corporations themselves. We somehow need to get legislation that would allow a better way for large numbers of people affected by corporation behavior to have a way to affect the behavior of the corporations.

Maybe this idea is too vague but we need a way to rein in some of the delusion that is often lamented on sites like this one. We definitely need to be talking on a more thoughtful and wider scale about this. I am reading too many gun bullets and beans posts for my own comfort.

I don't know if this idea will work, More importantly I don't know how to implement the concept w/o drastic response from those who benefit the most from the current system. But the system we have now is not working, that seems pretty clear.

ReplyReport Abusetborow #8Sunday, January 10, 2010 7:48:03 AMThese politicians are plain and simply "out of control"...just look at all the revenue shortage of ALL these state budgets. We need to have ALL these state legislatures and staff take a few weeks off...WITHOUT PAY, to help cover these budget deficits....and maybe longer if needed, and of course this could also apply to the massive federal Government and all of it's politicians.....Wonder how many thought of this action...?????ReplyReport AbuseMiddleClassCitizen123 #9Sunday, January 10, 2010 9:09:14 AM

I have a guess as to what the backlash will be. Tax fraud will be on the rise, people will fight the IRS for every penny. The argument will be why pay taxes if they are used to enrich crooks.

There is another article on MSN about avoiding audits, indicating that the small business owners are now being targeted by the IRS. That will cause A LOT of social unrest. Instead of struggling small business owners, I think the target group this year should be anybody who received a bonus in 2009 and works for a company that was bailed out. But I guess that would be really hard to program into the IRS audit check computers. Maybe that way the social unrest can be avoided.

ReplyReport Abusezippy-the-pinhead #10Sunday, January 10, 2010 3:48:32 PMWhat are you talking about? If you have followed Ron Paul over the years you would understand a free market is devoid of a central bank or central planning and recessions/depressions occur only when govt inteferes. We've not had a free market for almost a hundred yrs as your dollar has been devalued 97% thanks to the Fed. Your comment on Bernanke as a decent individual is as confused as thinking currency is money. Milton Friedman is not the issue it's the money changers who issue the currency. Jesus tossed them out of the temple he understood who they were, I suggest you get a clue. Mises.orgReplyReport Abuse1 - 10 of 15PreviousNext_ucf13('0'); _iuc2Om1('MSNPortalInlineComments','Initial_Load_Comment_View','http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/wall-street-politicians-still-dont-get-it.aspx?','en-us');Are you sure you want to delete this comment?Report AbusePlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease notify us using the Report abuse form below. We will investigate your report and take appropriate action against offenders. We report all illegal activity to authorities.CategoriesSpam or advertisingChild pornography or exploitationProfanity, vulgarity or obscenityCopyright infringementHarassment or threatOtherAdditional comments(optional)100 character limit To add a comment, pleasesign in/*MSN PrivacyLegalAdvertiseRSSHelpFeedbackSite map© 2010 Microsoft/*