You wouldn’t expect the world’s major economies to thrive against a background such as this and indeed, they are struggling. Jobs growth in the US is desperately weak at a time when the economy is, notionally, recovering. Britain is in a recession that seems to be deepening, not ending. Europe’s unique mixture of austerity and denial is driving even the best economies into the mire. The seas are rising—and the major dangers (fiscal mayhem in the US, currency collapse in Europe) still lie ahead.
And although consumer prices are not yet out of control, the danger signs are flashing red. Since March 2009, gold prices have doubled, other metals prices have risen some 76%. Food prices have surged, as have rents. The price of corn has roughly tripled over an only slightly longer period. Other commodity prices are rising too. These things shouldn’t surprise you. If central banks print money without restraint, the only possible consequence will be inflation. If it doesn’t get you now, it’ll get you tomorrow. There is no alternative outcome.
Indeed, that inflation is already visible in the world’s financial asset markets: stocks and bonds. It’s hard to exaggerate the degree to which the central banks’ wall of money has inflated these prices. Since the post-Lehman slump, US stocks are up over 100%; the NASDAQ is up over 130%. The bond markets are, if anything, even more dangerously inflated. As we’ve seen repeatedly through this book, such bubbles are unsustainable. A collapse will come and that collapse will, once again, wreak havoc on the plans and expectations of savers and pensioners. It’s a cruel and quite needless blow to inflict.
All these things cumulatively lead to a breakdown of credibility. You and I no longer believe in our banks. We no longer believe in our governments. We no longer believe the promises of a better future. We’re right to withhold our belief, because we’ve been deceived too often.
As a consequence of this loss of credibility, bailouts are barely working any more. In early 2012, the ECB plunged about €500 billion into the European banking system—a sum that bought peace for about six weeks. The €100 billion offered in the Spanish bailout bought peace for a matter of hours. Frankly, I’m surprised it lasted that long.
Loss of credibility, failure of bailouts: as the failure of trust becomes endemic, civil unrest is the inevitable conclusion. I don’t think people ought to burn cars or break windows, but I do understand why it happens. I’ve more sympathy, by far, with the indignados of Madrid than with the people who govern them. And I’ve infinitely more sympathy with those protesters than with the banks who precipitated the calamity.
Yet none of these things are my central concern in this afterword. You’ve heard enough already. There’s too much debt, too little action. Too much spin, too little truth.
The biggest point, really, is this. Democracy has taken a pasting. The Italian government contains not a single elected official. Berlusconi was a clown, but he was an elected clown. The government in place today has no discernible democratic mandate whatever.* A Greek prime minister was shunted out of power, following pressure from France and Germany, because he wanted to consult his people. On the board of the ECB, Jens Weidman, who represents the German Bundesbank, has to shout himself hoarse in an attempt to ensure that the ECB obeys the law and its founding charter.
Those things are wrong, and obviously wrong, yet the situation in the US is little better. We Americans pay our elected politicians to find solutions and yet a super-committee, charged with making modest progress on what is beyond question the most important issue of the day, has failed to make any progress at all. We face an election campaign in which we debate Mitt Romney’s tax bill and Obama’s views on gay marriage, while the greatest issue of our age receives barely any rational debate. The media, needless to say, are as culpable as the politicians, arguably more so.
I suppose the easy, cynical thing to say is that politicians only ever really care about re-election. As long as the dummies who voted them in the first time are prepared to do so a second time, why would they care that their bad or non-existent decision-making was imperiling the nation’s future? Yet in a way I’m worried that that conclusion isn’t nearly cynical enough. A shocking recent study found that Congressmen and women make huge insider trading profits—6% a year in the case of members of the House of Representatives, a stunning 10% a year in the case of Senators. I’m a pretty good investment manager myself. My investors have no cause to complain of the returns I’ve brought their way in recent years. But 10% a year? Every year? A portfolio that yields 5% a year for ten years will turn a hundred bucks into $163. A senatorial portfolio, boosted by that extra 10%, would deliver more than $400 over the same time period. If you’ve ever wondered why your elected representative is a heck of a lot richer than you are, there’s part of the reason, right there. And although a bill has recently cleared Congress that notionally puts an end to these matters, it’s notable that prosecutorial powers have been sharply reduced from an earlier draft bill. It’s a telling amendment. After all, rules only matter if they’re credibly enforced.
So let’s keep our conclusion simple. Democracy matters. Big issues need to be transparently explained, then put to a vote. No one has ever voted for Planet Ponzi; we were led into it blind. A failure of democracy got us into this mess. We need to trust democracy to get us out.
But democracy isn’t merely a question of voting. Democratic accountability means nothing unless you have transparency too. Transparency in government means honest figures. It means that governments need to present the kind of figures we’ve looked at in this book. Ones drawn almost entirely from official sources and yet which are routinely obscured and denied by people who should know better. If voters could see that a government’s financial promises had become worthless, that government would not be re-elected. If voters properly understood that corporate lobbying had purchased hundreds of billions of dollars in tax favors and other perks, the politicians involved would be driven from office in disgrace.
These same two themes—accountability and transparency—need to be our watchwords for the financial industry too.
Transparency first. Banks must be obliged to draw up honest balance sheets. No games of ‘extend and pretend’. No sovereign bonds held at face value, when the markets rate them as junk. No pretense that worthless collateral is anything other than worthless. A recognition that falling real estate markets will involve massive write-offs. Simply writing honest balance sheets would transform the banking industry.
We need transparency too when it comes to failures of other sorts. If a bank manipulates the LIBOR rate, the individuals involved—right up to the most senior level—must be publicly named. If a bank isn’t prepared to do so voluntarily, it must be compelled to do so. And so with everything else: financing drug traffickers, moving money for terrorists, giving succor to Iran and Syria.
With transparency comes accountability. In most walks of life, bad people go to jail. The same rule needs to apply in banking too. “Fix” interest rates: go to jail. Finance drug cartels: go to jail. Support international terrorism: go to jail. It’s so simple, so obvious, yet it almost never happens.
Accountability would also vastly benefit the financial markets. Insolvent firms need to be left to go bankrupt. Possibly the most astounding single fact about the global financial crisis has been that virtually no creditors have lost money. How can that possibly be? What’s so precious about these people that we defend them, at vast expense, from the consequences of their own dumb decisions? In what other industry, what other walk of life does this happen? Indeed, as with all things on Planet Ponzi, the truth always exceeds imagination. It’s not merely that creditors have been protected. They have very often been paid, as bankers pocket huge advisory fees for sorting through the mess that they themselves created.
Once again, the right answers are the simplest ones. Accountability in the financial markets has to mean, above all, that people start to lose money. It also means that regulations need to be enforced properly, so tha
t miscreants know they will be sent to jail if caught. The process of adjustment may be brutal, but it won’t last for long—and once it’s over, we’ll have a global economy ready to march forwards once again.
Part of that rebuilding effort will need to involve the dismantling of the over-large, ‘too big to fail’ institutions that dominate both investment and retail banking. As rumors spread earlier this year of huge losses emerging on its proprietary trading book, JP Morgan’s chief executive, Jamie Dimon, dismissed those concerns as a ‘tempest in a teapot’. That tempest was later estimated to have cost the bank some $2 billion…except that as the final numbers were crunched, it turned out that the actual cost was closer to $7 billion. What’s truly chilling about this incident isn’t the size of the numbers, it’s the fact that a well-regarded bank doesn’t even notice when $7 billion goes walkabout. If a bank can’t keep track of its assets to this extent, it has no right to exist. No right to demand the trust of creditors or the patience of regulators.
In fact, one of the bewildering things about our current mess is that the solutions are so simple. They’re obvious. If a government is in deficit, it needs to cut government spending and eliminate tax loopholes and exemptions. If a bank is insolvent, it needs to be left to go bust. If creditors have made bad loans, they need to bear the consequences. These things are so obvious that it’s bewildering there is any real debate about them. The fact is that there wouldn’t be any debate, except that politicians and bankers have been so close for so long, the former have lost all power of rational thought. So here’s one more thing for our wish list: walls of steel need to be erected between banks and politics. Erected, then electrified.
Above all, where excessive debt is the problem, there exists one and only one solution: less debt. If dumb creditors lose money, that’s good, a positively beneficial outcome. Simply put: too big to fail is too big to exist. The failure of some creditors will remind all the others that credit discipline matters, just as it always has done, just as it always will.
In particular, we need to relearn an old lesson: that you cannot solve a problem of excessive private-sector debt by getting the government to take it over. Or by extending government guarantees to soften the hit. Or by ratcheting up government debt in a vain effort to re-charge the engines of growth.
Those lessons could usefully be relearned by the central banks too. It’s not just a question of economics; it’s also a matter of political ethics. Central bankers aren’t elected, and have an appalling habit of concealing their actions, not merely from the public, but from legislators too. What right does the (Goldman-advised) Federal Reserve have to load its balance sheet with toxic assets generated by an irresponsible banking system? Why does the ECB feel it’s OK to make loans to insolvent banks against collateral it knows to be rotten? Why does Mervyn King at the Bank of England feel justified in pouring newly printed money into the banking system?
The truth is that, as Albert Einstein remarked, we can’t solve problems by using the same kind of thinking we used when we created them. Our political leaders and central bankers are precisely mired in the thinking that brought us to this point. It’s as though they’ve been poodles of the banking industry for so long, they’ve forgotten what it is to be a guard dog. As for the financiers themselves, they’ve profited so long from irresponsibility and a failure of integrity that it actually bewilders them to consider there might be (and once was) an alternative.
Simple lessons are good ones: we might actually end up remembering them. I said I’m an optimist and I mean it. Change is coming and crisis will only make it come sooner. This book is a part of that change. Your reading it is part of that change. So too is your anger, your passion, and your vote. The world needs those things. It needs them now.
M.F.
September 1, 2012
* Oh, and its prime minister is an alumnus of Goldman Sachs: yet another indicator of the malign interdependence of politics and Wall Street.
Notes
In keeping with my policy throughout this book, I’ve cited material that is as widely available as possible, and wherever possible from official or other highly trustworthy sources. In nearly all cases, you can use the notes below to retrieve the underlying data or information from freely available online sources. If you don’t believe something I’ve said, please feel free to check. The truth is out there.
One practical point: I haven’t given the full, long URLs in these notes for all web-sourced material because they tend to be very unstable. If you go to www.example.com and search for ‘Article title and date’ you’ll always find the item you’re looking for. And any good search engine will help you.
Footnotes
Chapter 1: The scheme
1 Mary Darby, ‘In Ponzi we trust,’ Smithsonian Magazine, Dec. 1998.
2 ‘The Madoff scam: meet the liquidator,’ CBS News, 60 Minutes, June 20, 2010. Note that there is still some uncertainty about the exact scale of the losses.
3 The Federal Bureau of Prisons is kind enough to make Madoff’s exact projected release date available online. Just go along to their website – www.bop.gov – and pop the name ‘Bernard L. Madoff’ into their Inmate Locator.
4 ‘Bernie Madoff baffled by SEC blunders,’ New York Daily News, Oct. 31, 2009.
5 I haven’t sought to update The Economist’s data. The relatively low number for Manhattan real estate is eye-catching, but you can verify this from the NYC FY12 Tentative Assessment Roll, published Jan. 14, 2011.
6 Graph available direct from the Federal Reserve, www.federalreserve.gov.
7 Data from Reuters, extracted Aug. 19, 2011.
8 All book value ratios extracted from Reuters, Aug. 16–19, 2011. For more on the possible further injection of state funds into RBS, see Robert Peston, ‘If RBS needs capital, taxpayers will suffer,’ BBC Business News, Oct. 7, 2011.
9 Laurence Kotlikoff, ‘US is bankrupt and we don’t even know it,’ Bloomberg, Aug.11, 2010 (www.bloomberg.com). The article is worth reading in full.
Chapter 2: The price of liberty
1 Alexander Hamilton, ‘The first report on public credit,’ 1789. The full text is available online in a number of locations.
2 You can piece this graph together for yourself from a number of public sources, but the relevant government standard data series runs only a century back, so you can’t get the graph itself direct from an official source. The best place to find it is Christopher Chantrill’s excellent website, www.usgovernmentspending.com. I’ve corresponded with Mr Chantrill on a number of points and have found his data to be carefully and intelligently constructed.
3 Joseph Stiglitz and Linda Bilmes, The Three Trillion Dollar War (Allen Lane, 2008).
4 Sen. Charles E. Schumer and Rep. Carolyn B. Maloney, War at Any Price? Joint Economic Committee of the US Congress, Nov. 2007. Household data sourced from the US Census Bureau.
5 Christopher Chantrill, www.usfederalbailout.com. Other ‘bailout counters’ are available online, including ones from more prestigious news organizations, but I like Chantrill’s monitor for its accuracy and up-to-date quality.
6 I need to confess: I’ve used an unofficial source (from Google Answers) for the thickness of a dollar bill, so my data might be a few feet out if you try to build that tower. You can get a lot of other data from the Bureau of Engraving and Printing, though, including the fact that dollar bills aren’t made of paper at all. They’re 75% cotton, 25% linen.
7 Dawn Kopecky and ‘U.S. rescue may reach $23.7 trillion, Barofsky says,’ Bloomberg, July 2009.
8 IMF, Global Financial Stability Report, April 2011, table 1.3: ‘Sovereign market and vulnerability indicators.’ Data are also available in a slightly more user-friendly format from www.EconomyWatch.com.
Chapter 3: Future-money in happy-land
1 Congressional Budget Office, Letter from the Director to the Hon. John Boehner and the Hon. Harry Reid, Aug. 2011.
2 See the Fiscal Year 2012 Budget of the US Gove
rnment (available from www.whitehouse.gov), but also ‘On the debt-ceiling deal,’ The Economist, ‘Democracy in America’ blog, Aug. 2011.
3 See Fiscal Year 2012 Budget of the US Government, p. 202.
4 ‘Service sector growth slows in July,’ Reuters, Aug. 3, 2011.
5 ‘US GDP disappoints with 1.3pc growth,’ Daily Telegraph, Oct. 29, 2011.
6 ‘Stopping a financial crisis, the Swedish way,’ New York Times, Sept. 22, 2008.
7 ‘Sweden’s experience on banking resolution and budget consolidation,’ IMF, ‘Public Financial Management’ blog, May 2009. See also the OECD’s useful paper on ‘Fiscal consolidation: lessons from past experience,’ available online but undated from www.oecd.org.
8 ‘There never was a surplus,’ The Economist, ‘Democracy in America’ blog, July 27, 2011.
9 Information on holders of US Treasury bonds is available from The Treasury Department (www.treasury.gov), ‘Major foreign holders of Treasury securities.’
10 Data available from the nonpartisan Tax Policy Center (www.taxpolicycenter.org), ‘Average and marginal federal income tax rates for four-person families at the same relative positions in the income distribution: 1955–2010,’ April 2011.
11 Tax data alone are available from the OECD (www.oecd.org). This graph uses a broader measure of government revenue and is most easily available from Christopher Chantrill’s website www.usgovernmentrevenue.com. He sources his underlying data from publicly available official sources – you just need to do a little hunting and crunching to obtain the overall data.
12 Data from the OECD, www.oecd.org.
13 Stephanie Kirchgaessner, ‘Brutal battle looms over tax loopholes,’ Financial Times, Jan. 26, 2011.
14 David Kocieniewski, ‘G.E.’s strategies let it avoid taxes altogether,’ New York Times, March 24, 2011.
15 ‘Analysis: 12 Corporations Pay Effective Tax Rate of Negative 1.4% on $175 Billion in Profits; Reap $63.7 Billion in Tax Subsidies,’ Citizens for Tax Justice, Oct. 21, 2011, www.ctj.org.
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