The "recession"
(warning: the following is a bit, err, populistic)
OK, folks, I'm gonna write something that's going to sound completely ridiculous for many of you, especially if you are following mainstream media, or worse, if you are like me a subscriber to Financial Times and Wall Street Journal.
Here it is.
The main and most interesting aspect of this so-called recession is that, for the first time that I can remember, the common man has won.
Whoa, I hear you say. What the hell is this lunatic talking about?
Consider. Where has most of the damage been done thus far? CDOs (those investment vehicles based on subprimes), and investment banks and hedge funds that engaged in loose risk management under the same sense of entitlement to money that pretty much all bankers, and particularly investment bankers, seem to possess in such high amounts.
But the damage is NOT to the folks getting the loans; most of them didn't deserve them in the first place (the $60K wage earner getting a $500K loan), yet quite a few are still managing to hold on to those properties that they would never have gotten otherwise. And the government is helping them, too. In an economic environment like this one, property IS a good investment, because rising inflation will eventually cheapen the loan principal quite significantly. It was the engine behind the rapid rise and level resetting (more than doubling) in property prices in the late 19th century, and it will be again. To put it in layman's terms, if everything becomes 50% more expensive in the next 6-7 years, as most predict, and wages more or less grow at the same pace, which also most predict (notice how in this whole discussion everybody repeatedly says they can't fathom why american corporations are doing so well; I'll tell you why down below), then your house will be easier to pay off. Even more so if the dollar continues to weaken, because you'll get more dollars (to make up for the fall in value) to pay off a fixed amount (your loan principle).
I see the difference already in my hourly-based business, where it is becoming a tad easier to charge what used to be considered top dollar only a year ago.
Most of the "credit crunch" damage is being done to very rich folks, make no mistake about it. When Carlyle Group folds, it doesn't hurt you and me in any noticeable way; yeah, sure, maybe your pension fund lost a bit of money, but it won't be much because pension funds are so highly restricted in their structure of exposure to any single risk, that their losses end up small. Who it does hurt are the uber-rich who were betting literally hundreds of millions or even billions each on the ability of hedgies to get them more, more, more. When Bear Stearns gets creamed, the main sufferers are not you and me; and if Jimmy Caine gets taken down to size because he loses a couple billion, oh well.
In fact, the main point of this "credit crunch" is not really noticed by the man on the street, except if they let themselves be scared by it. And you know something? while most of us have this unexplained sense of foreboding, because, well, they all tell us we're doomed, it just ain't happening. So we go about our lives worried about stuff we don't understand, but we go about our lives. Because in reality, we don't need to understand these things, they don't impact us much. Yes, interest rates may go up a bit on credit cards, but folks are still getting the money from the bank, who is even more eager to give it out because they have to make a profit somewhere. The truth is that the credit crunch squeezes tight on those high-risk, under-collateralized financial institutions who have thrown caution to the wind, their shareholders, and most importantly, their investors.
In other words, the main impact of the crunch is the narrowing - for the first time in a long, long time - of the gap between the poor and rich.
Interesting reversal of roles, don't you think?
That's why you hear them talking about systemic failure. Because when the system is working, no matter how poorly, Wall Street makes money. It's only when the system itself breaks down that they start losing it, and the more they rely on it working properly, the more exposed the end up being to it breaking. And let me tell you, they were, not to put too fine a point onto it, quite brutally exposed. The amount of hubris and self-importance engaged by many in the banking world in the past few years has been educational.
They couldn't imagine this happening, so why not "ride the gravy train"? That train, mind you, is that which is directly represented by that rich-poor gap, which has been growing, growing, growing...
Consumers have been doing OK - not stellar, obviously, because everyone gets affected, but from a man on the street standpoint, they have been mostly shielded (and likely will be more so by democrats coming to power), feeling more the impact of the rise of commodities than that of the credit crunch. Corporations have been doing quite well, so well in fact, that for many bankers it's become a sort of head-scratcher, along the lines of: "we're all in this terrible mess, I'm losing billions, how do all these companies keep making record profits? huh? HUH?!". The anger is palpable. But see, many - in fact most - corporations are not exposed as investment bankers to this stuff. Never have been. When you go beyond public companies, it gets even better, because while small and medium business are squeezed for credit (I should know, owning one), they are also not as dependent on those credit lines, and their sales and margins, for the most part, are growing. So as a business owner you trim some unnecessary costs, you grind down, and you make it through just fine. Except, of course, if you sold to a hedgie and are in debt to the hilt. Then bye bye Charlie.
Heck, even the worst predictions put unemployment at 5.5%, just about at the reasonable "maintenance" level for inflation. Did I say "oh well" already?
Guys, this is the other facet of "democratization of capital" (or money), that famous concept so lauded by Wall Street. Most of the time, it has the major impact of transferring wealth from the poor to the rich. That's how financiers set up the system. I don't begrudge them, I would do the same if I was in their shoes (which most of us secretly wish for, I think). But when the tables turn - and they have to turn suddenly and brutally or otherwise the more-or-less carefully designed system will take care of it - then the transfer changes direction, and it changes direction fast, and it changes in very large magnitudes. It won't last for too long; that won't be allowed. But for a while here we get to witness what happens when the gap narrows. I, for one, am propping my feet up on my very simple desk in my very simple home office and munching on some peanuts, because right now it's the best damn show in town.
OK, folks, I'm gonna write something that's going to sound completely ridiculous for many of you, especially if you are following mainstream media, or worse, if you are like me a subscriber to Financial Times and Wall Street Journal.
Here it is.
The main and most interesting aspect of this so-called recession is that, for the first time that I can remember, the common man has won.
Whoa, I hear you say. What the hell is this lunatic talking about?
Consider. Where has most of the damage been done thus far? CDOs (those investment vehicles based on subprimes), and investment banks and hedge funds that engaged in loose risk management under the same sense of entitlement to money that pretty much all bankers, and particularly investment bankers, seem to possess in such high amounts.
But the damage is NOT to the folks getting the loans; most of them didn't deserve them in the first place (the $60K wage earner getting a $500K loan), yet quite a few are still managing to hold on to those properties that they would never have gotten otherwise. And the government is helping them, too. In an economic environment like this one, property IS a good investment, because rising inflation will eventually cheapen the loan principal quite significantly. It was the engine behind the rapid rise and level resetting (more than doubling) in property prices in the late 19th century, and it will be again. To put it in layman's terms, if everything becomes 50% more expensive in the next 6-7 years, as most predict, and wages more or less grow at the same pace, which also most predict (notice how in this whole discussion everybody repeatedly says they can't fathom why american corporations are doing so well; I'll tell you why down below), then your house will be easier to pay off. Even more so if the dollar continues to weaken, because you'll get more dollars (to make up for the fall in value) to pay off a fixed amount (your loan principle).
I see the difference already in my hourly-based business, where it is becoming a tad easier to charge what used to be considered top dollar only a year ago.
Most of the "credit crunch" damage is being done to very rich folks, make no mistake about it. When Carlyle Group folds, it doesn't hurt you and me in any noticeable way; yeah, sure, maybe your pension fund lost a bit of money, but it won't be much because pension funds are so highly restricted in their structure of exposure to any single risk, that their losses end up small. Who it does hurt are the uber-rich who were betting literally hundreds of millions or even billions each on the ability of hedgies to get them more, more, more. When Bear Stearns gets creamed, the main sufferers are not you and me; and if Jimmy Caine gets taken down to size because he loses a couple billion, oh well.
In fact, the main point of this "credit crunch" is not really noticed by the man on the street, except if they let themselves be scared by it. And you know something? while most of us have this unexplained sense of foreboding, because, well, they all tell us we're doomed, it just ain't happening. So we go about our lives worried about stuff we don't understand, but we go about our lives. Because in reality, we don't need to understand these things, they don't impact us much. Yes, interest rates may go up a bit on credit cards, but folks are still getting the money from the bank, who is even more eager to give it out because they have to make a profit somewhere. The truth is that the credit crunch squeezes tight on those high-risk, under-collateralized financial institutions who have thrown caution to the wind, their shareholders, and most importantly, their investors.
In other words, the main impact of the crunch is the narrowing - for the first time in a long, long time - of the gap between the poor and rich.
Interesting reversal of roles, don't you think?
That's why you hear them talking about systemic failure. Because when the system is working, no matter how poorly, Wall Street makes money. It's only when the system itself breaks down that they start losing it, and the more they rely on it working properly, the more exposed the end up being to it breaking. And let me tell you, they were, not to put too fine a point onto it, quite brutally exposed. The amount of hubris and self-importance engaged by many in the banking world in the past few years has been educational.
They couldn't imagine this happening, so why not "ride the gravy train"? That train, mind you, is that which is directly represented by that rich-poor gap, which has been growing, growing, growing...
Consumers have been doing OK - not stellar, obviously, because everyone gets affected, but from a man on the street standpoint, they have been mostly shielded (and likely will be more so by democrats coming to power), feeling more the impact of the rise of commodities than that of the credit crunch. Corporations have been doing quite well, so well in fact, that for many bankers it's become a sort of head-scratcher, along the lines of: "we're all in this terrible mess, I'm losing billions, how do all these companies keep making record profits? huh? HUH?!". The anger is palpable. But see, many - in fact most - corporations are not exposed as investment bankers to this stuff. Never have been. When you go beyond public companies, it gets even better, because while small and medium business are squeezed for credit (I should know, owning one), they are also not as dependent on those credit lines, and their sales and margins, for the most part, are growing. So as a business owner you trim some unnecessary costs, you grind down, and you make it through just fine. Except, of course, if you sold to a hedgie and are in debt to the hilt. Then bye bye Charlie.
Heck, even the worst predictions put unemployment at 5.5%, just about at the reasonable "maintenance" level for inflation. Did I say "oh well" already?
Guys, this is the other facet of "democratization of capital" (or money), that famous concept so lauded by Wall Street. Most of the time, it has the major impact of transferring wealth from the poor to the rich. That's how financiers set up the system. I don't begrudge them, I would do the same if I was in their shoes (which most of us secretly wish for, I think). But when the tables turn - and they have to turn suddenly and brutally or otherwise the more-or-less carefully designed system will take care of it - then the transfer changes direction, and it changes direction fast, and it changes in very large magnitudes. It won't last for too long; that won't be allowed. But for a while here we get to witness what happens when the gap narrows. I, for one, am propping my feet up on my very simple desk in my very simple home office and munching on some peanuts, because right now it's the best damn show in town.
posted by Blinkered at 8:44 AM
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