Ignoring the Alarm

With Wall Street in shambles and Main Street feeling wave after wave of aftershocks from the mortgage industry's self-induced earthquake, I've wondered why so few saw it coming. Turns out, a lot of people did or could have, but, in most cases, elected to ignore it. The few who didn't ignore it, but actually tried to raise the alarm were themselves ignored.

See this laudable Op/Ed piece by Michael Lewis and David Einhorn in the New York Times. It tells the story of one such alarmist, and in the process gives the best assessment I've seen yet of 2008's seismic activity on Wall Street. The authors also give relatively low grades to current Congressional and Federal Reserve efforts to correct the ills, and they propose, instead, some interesting alternatives for fixing what they identify as deep systemic flaws.

In short, they make a good case for what I've believed for years: that our financial system rewards short-term results (specifically, quarterly profits) and deeply, profoundly discourages long-term thinking of any kind. Further, they reveal that, in moral terms, the system is not just amoral, but expressly immoral because its workings, including those of its its regulatory bodies, encourage and reward greed and punish honesty.

One of the miserable effects of such immoral focus on short-term profit is the stultifying effect it has on manufacturing innovation. Here's just one of many examples: In the automotive world, we saw the Big Three desperately feeding their quarterly profits by building SUVs on truck frames that did not have to conform to passenger-car safety regulations. SUVs, as a result, could be more cheaply built but because they were in demand, could be sold at a greater profit than could less roomy passenger cars that cost more to build but sell for less. The result, of course, was that the Big Three — unlike Toyota, for instance, or upstart automakers like California-based Tesla Motors — spent precious little on developing cars powered by alternative energy systems. The Big Three were, thus, unprepared to launch hybrid electrics when fuel prices soared, and now they need bailouts. Toyota, which has never been guilty of short-term thinking, can get you a hybrid and isn't asking anyone for a bail out.

The result of all of that is that the incoming U.S. president has announced, and the taxpayers will pay for, a government program for development of alternative forms of energy that could have been developed (and much more efficiently, I'll wager) by private enterprise, if our system didn't discourage it.

One of the long-term effects of the financial collapse is that a number of key banking institutions have been nationalized (that's Lewis' and Einhorn's term, not mine). I think it's high time someone actually admitted that's what's happening. Those who fear various forms of socialism — a group that includes all those Wall Street investors and those who profited from Wall Street's recent drunken orgy — are now getting exactly what they hoped to avoid by deregulating markets. They had better hope nationalization is a temporary stop gap. But those who know their American History should know better. Temporary fixes in America have a terrible habit of becoming institutionalized. When a gambler puts the title to his car in the pot and loses, someone else is in the driver's seat.

There is a bittersweet irony in the fact that the "haves," in their clamber for instant wealth unfettered by market controls, have unwittingly surrendered the keys to an incoming President who I think it's fair to say genuinely represents the interests of the "have nots" and is quite willing tot see the government have a fairly large say in how the markets go in the future.

Lewis and Einhorn entitle their piece, "The End of the Financial World as We Know it," (almost certainly a bit of word play on the similarly titled youth anthem by rock group REM).

I think they're right. And I feel fine about that.