Sunday, October 18, 2009

One Year after Lehman....

It is about a month since the 1st anniversary of Lehman Bros' collapse. I wanted to see what everyone else has to say before I put in my 2-cents worth.

"Well, I think the heroes are-- are—(Federal Reserve Chairman) Bernanke. I think (former Treasury Secretary) Paulson's a hero. I think (current Treasury Secretary) Geithner’s a hero ..."
- Warren Buffett, 16 Sep 2009, CNBC Interview [Link]

"Not so fast Mr. Buffett...." - Lucky Tan

I remember how Greenspan was hailed a hero when he made 3 consecutive rate cuts that took the world out of recession after the Asian Crisis. 3 years later we had the bubble and later the US housing bubble. Is Greenspan still seen as a hero today? The consensus view today is allowing Lehman to collapse was a big mistake and the subsequent rescue effort i.e. banking system bailout has been a great success. Although it cost US tax payers about a trillion, it halted the freefall in the economy and saved the financial system.

"Letting Lehman fail was perhaps the only thing the govts have done right during this whole drama" - Jim Rogers, Financial Times

Jim Rogers has been badly criticised [Jim Rogers Is Wrong: The Feds Should Have Bailed Out Lehman] for his views. Jim Rogers' view is that there should be no bailouts and all the big but overleveraged banks should be allowed to collapse. It is easy to criticise Jim Rogers because allowing the banks to collapse would have definitely brought about more economic pain than what we are seeing today. If govts had listened to Jim Rogers, the economy today will be in far worse shape and unemployment would definitely be higher. It was also politically 'un-doable' to ask Americans to accept more pain. Jim Rogers cannot be so unintelligent to fail to understand the simplistic arguments against him. He is often misunderstood and there is validity in his ideas and he may be proven right in the long run. What good can be accomplished by allowing banks to collapse and making millions of Americans worse off? During the great depression, the US govt was able to carry out an extensive reform of the financial system - the FDIC, SEC, Glass-Steagall Act. There were also sweeping changes to the brought about by the NRA (National Recovery Administration) such as setting of minimum wages and encouraging the formation of unions. All these reforms led to a narrowing of income gap which was at a record high in 1929 and laid the foundation for the prosperity and large middle class in the 50s and 60s.

Before the current crisis, the income gap was at level not seen since the 1920s. There was plenty of excesses all over the place - the ridiculously high pay of executives ( and ministers in a small Asian island), the lack of regulation of the banking system and the household debt is at its highest level ever with the average American family owes U$120K (mortgage + credit cards). By rescuing the system from collapse, Bernanke is helping to preserve a system with numerous problems - chief of which is low wages which has resulted in high household debts all over the world. Wages are the main source of demand for goods and wages have been lagging productivity growth for the past 2-3 decades. What is preserved may be a system that is unsustainable in the long run anyway. By printing so much money, Bernanke preserved the debt of the working class and the wealth of the richest Americans and kept an unsustainable system going for just a bit long at a great cost to the taxpayer. In this 2006 (pre-crisis) prophetic video by Peter Schiff explains what is wrong and you can see that none of the problems he brought up in 2006 has been fixed.

Today I opened up the Straits Times and realised many things leading to this crisis are recurring:

Like many I was optimistic that following the moves to rescue the system, there will be a determined effort to fundamentally reform it so that the mistakes of the past 2 decades will not be repeated. Unfortunately, one the system is rescued, all the momentum for change disappeared. Once the pain is gone all the lessons are forgotten. This is like a man having a heart attack, his surgeons rescued him from the brink of death and when he out of the ICU all he thinks about is going back to eating the unhealthy foods that put him in hospital. The 2 measures to look at are the income inequality and household debt - these are the bloodpressure and cholesterol levels for the economy. Once they start building up again, the next heart attack is just around the corner. What the politicians and central bankers have accomplished might be to postpone the real crisis and if they don't use the extra time well, the past 9 months of so-called recovery is just an illusion driven by brute force massive govt stimulus. Jim Rogers might be proven right in the longer run - allowing more pain and letting the banks collapse so that the financial system can be rebuilt may lead to a more equitable and sustainable system for the coming decades.


Here's a Llama said...

Jim Rogers is right. Many know what he knows, but he's one of the few with the honesty to say it out.

Anonymous said...

So the so-called Heli Ben's solution is to flood the market with obscene liquity to HALT the slide, and the problem will go away!? Clearly it does not look like a solution but rather a postponement of pain.

It seems like the world is suffering for the crisis brought upon by Fed itself (2 bubbles happened during Greenspan's reign, dot-com and financial tsunami) and now the villians (Paulson, Geithner and Heli Ben are part of the party)are being called saviours!?

Ask yourself this question : if you have life-threatening illness, would like you to have a major surgery, though it is painful and costly at first, you can recover and go back to the normal self?

Or do you prefer to postpone surgery, rely on painkillers (which is more expensive based on daily dosage) and pretend nothing has happened and still wine and dine?

Be afraid, be very afraid, as we are venturing into the unknown effects of delaying surgery with consequences that nobody knows. Even a deflationary solution to ride out those excesses like Japan did looks like a better solution after all.

Anonymous said...

Whether in America or in Singapore, whatever happens on the economic front, the most important thing is political stability and social peace.

This has been achieved and sustained (proven already) even in the worst of economic times. And since the worst was presumed over, political stability and social peace can only get better.

Hence in the 21st century I don't think there will be any revolution or world wars, except for places in the Middle East, unlike earlier times.

If you ordinary folks suffer, better think of ways to get out of the suffering, to be part of the majority (about 66% in Singapore) who are not suffering even in the worst of economic times. They are the reasons why Singapore is so peaceful and stable.

DanielXX said...

Jim Rogers is insightful on commodities. He is a big picture thinker and his views on commodities have proven themselves right over the last 10 years and through this great recession where commodities have bounced back tremendously. I am willing to believe his timing on commodities but take his views on inflation with a pinch of salt because the policymakers all know this potential problem and once you have a problem in your crosshairs, it will be fixed or at least ameliorated. Human/policy feedback is often ignored in the way people make predictions ---- if enough people think it will be a problem, it will eventually not be because great efforts will be taken to prevent it. I don't regard it as inevitable.

LuckySingaporean said...


:::: the policymakers all know this potential problem and once you have a problem in your crosshairs, it will be fixed or at least ameliorated::::

I wouldn't count on that. That oil & commodities are back where they were when the economy is still not where it was says a lot about where we are in terms of inflation.

Specifically on inflation, I would think that the risk of Jim Rogers being right is very high. Like what Jubak said no govt has ever sanitised such a large amount of printed money without horrendous inflation. If inflation does not strike in a big way, it would be an exception....

DanielXX said...

Well from a point when deflation was imminent, it is possible to achieve a goldilocks scenario through money printing where it's not too hot and not too cold. But to paraphrase (ironically) the great communist Deng Xiaoping, it will be a process of crossing the river by feeling the stones in deciding when and how to withdraw the quantitative easing.

Japan has done easing for a decade and deflation is still a problem more than inflation. That's some evidence on the contrary for you.

LuckySingaporean said...


Thanks for the contrary logic. Perhaps the great fear at the beginning was a deflationary depression like the one in Bernanke being the great scholar of the 1929 depression open the monetary spigot. However, the initial conditions may be similar but not identical. The importance may come in the form of differences. The Japanese funded their debt with household savings which is non-existent in America. In 1929, the typical american household had no credit cards, zero debt. The problem with printing money now is not the money printed now but what is added to what is out there in the past 20 is the fiat currency system.

Lets see where the balance lies. Was Ben able to walk the tightrope and bring goldilocks back? ...I have real doubts.

DanielXX said...

Ah, but that's the beauty of a reserve currency! You don't need your citizens to have savings, you can borrow from suckers like China and Japan that have enormous savings in your currency! hehehe. That's why the G20 now realise they have been suckered into this 40-year master scheme (Jews are great at these sucker systems ... just look at Madoff) and are now clamouring for a new currency system.

I was watching Flags of our Fathers yesterday on TV, and thinking maybe since the Americans sacrificed their lives to save the world in two world wars, maybe we shouldn't be so calculating, and give them some slack lah. Give and take a bit.

xl said...

Regarding CPI mentioned by Peter Schiff being manipulated by US govt, i suspect same in sg. Number creatively adjusted to keep it low to make current govt good.

1 thing i don't quite understand is that with talk about devaluation of US dollar, how come Warren Buffett still making loads of investment into GE & Goldman Sach during crisis instead of diversifying away from US based investments?

Anonymous said...

Rogers will be proven right simply because human nature or greed knows no bound.

Anonymous said...

Every one can find fault, few can do betterpat

Anonymous said...

Dear Lucky

U should check out how many jobs the stimulus had created. Very few.

U should check out how much of Heli Ben's money actually went to the people & companies who need them. Again not very significant. Mortgage foreclosures are still ongoing. Credit for companies actually making stuff is tight.

All that has been saved is an artificially propped up stock market. And check out GS and JP's profits. The profit from fees is insignificant. They were mostly from trading.

Of course there would haven been a bit of short term pain had Paulson let the "too big to fail banks" die.
But certainly not the end of the world.
There certainly would have been healthier alternatives to fill their gap. Thats how true capitalism works.

Jim Rogers was correct. As for inflation .. check out gold prices.

And Mr DanielXX, it was the RUSSIANS who did most of the dying in WW2 and the AMERICANS who pulled the rug on the then recovering weimar republic and made Hitler possible.

Anonymous said...

Boom/bust cycle is part and parcel of capitalism. What the central banks and governments did over the last 2 yrs only postponed and worsened the problem and snowballed it into something that will eventually bankrupt the world. I am not an alarmist or a prophet of doom, I can't see how the US can extricate itself out of this mess without some big scarifice.

Anonymous said...

One thing I learnt about the crisis is that today’s star is tomorrow’s dog. We (and especially the mass media) always seek to explain success or failure with causality. We love to explain things in retrospect. With the help of hindsight, we can always explain why this person is destined for success or why “all the writing is on the wall” that person is heading for failure.

Case in point: Dick Fuld

All of us are familiar with how Dick Fuld screwed up Lehman brothers. We have read well-researched articles on international publications about this person is “a man who used to be known as “the Gorilla” because of his aggressive, hyper-macho behaviour….if he had listened to his generals……the catastrophe might have been avoided. But instead of this, he secluded himself in his palatial offices up there on the 31st floor, remote from the action, dreaming only of accelerating growth, nursing ambitions far removed from reality…”

However, I remembered vividly in the middle of 2008 how after Bear Stearn went down, people were trying to explain why Lehman brothers did not suffer the same fate. The economist magazine, a very well respected publication, came out with the following article on 24 Apr 2008 titled “Fuld of experience”.

In that article, Dick Fuld was credited with the following remarkable traits:

“………the work-obsessed Mr Fuld much (un)like the boss of Bear, Jimmy Cayne, who spent more time playing bridge than playing the markets……A former trading-desk star, once dubbed “The Digital Mind Trader” by awed colleagues, Mr Fuld thrives in choppy credit markets….. Direct knowledge of their dangers has equipped him with experience that some of his erstwhile peers—think of Citigroup’s Chuck Prince and Merrill Lynch’s Stan O’Neill—lacked……Stephen Schwarzman, the chief executive of Blackstone,has praised his “sixth sense” of when markets are turning……Unnervingly intense, he detests quitters…….. What is more, he fancies that Lehman’s tight culture and deep client relationships will propel it through rough seas. ….. It was once said that Lehman under Dick Fuld was a cat with 19 lives. They have not all been used up yet.”

Impressive right? Must be a genius right? Guess what? Six months later, after Lehman went down, we made a drastic 180 degree change in our portrayal of Dick Fuld. “The Digital Mind Trader” has suddenly turned into a "The Gorilla of Wall Street”.

Everything is obvious and can be explained in retrospect. When the result is good, this person must be endowed with special qualities that made success inevitable (read any memoir for many examples of such explanation). Once the result changes from good to bad (which it always does as everything moves in cycle), the same person must have some toxic defects in his genetic makeup that caused the downfall. But Dick Fuld did not change so drastically in six months time; only his results changed, and so did our explanation of his results.

Who knows, maybe ten years later when Dick Fuld is successful again, we may need to revise (or evolve) him from a gorilla back to a human computer. So, today’s star is tomorrow’s dog.