Comments

Thanks! I'm feeling better already. There remains, needless to say, the outcome to consider. But with such experience, competance, and management style, this is a welcoming sign indeed.

Posted by Judith Ellis at September 19, 2008 8:36 AM

No matter how nice these guys are and how well they communicate you're still talking about a controlled economy, not free-market capitalism. I prefer Adam Smith's "invisible hand" to their visible ones.

Posted by Tom E. Snyder at September 19, 2008 8:48 AM

Tom E. Snyder - The mere fact that you quote Smith's reliance on the "invisible hand" indicates the necessity of visbile ones. Hopefully, Paulson, Bernanke and Geithner are such leaders who will make a difference in restructuring the system, including the empirical ideas of another great Enligthenment figure, David Hume.

Posted by Judith Ellis at September 19, 2008 9:25 AM

Two thoughts: first, if the financial triumvirate were so astute and such good communicators, why are they trying to FIX the problem instead of having AVOIDED it in the first place? Second, for those who rail against the "death of the free market," don't blame the gov't for regulating it now. Rather blame those who took advantage of the lack of oversight and regulation to screw things up for everyone else--as always happens. Of course, there are many who theorize the gov't was responsible for this mess in the first place because they "forced" banks to make risky home loans by the million to open home ownership up to the "masses." I don't know if I believe that line of cause and effect, but it has the ring of truth.

Judith--Oh great, you wrote "David Hume" and that's all it takes to imprint Monty Python's Philosophers Song on my forebrain for the next twelve hours. Well, that's better than thinking about how much my 401K is losing!

Posted by Mike at September 19, 2008 1:44 PM

Another quote from Adam Smith's time... This from George Washington:

Government is not reason; it is not eloquence; it is force. Like fire, it is a dangerous servant and a fearful master.

I'd rather take the hit now than allow the government to sieze such control.

Make no mistake - this is a raw power grab. de Tocqueville warned us of the "benevolent dictator." The gloves are off.

Posted by Andrew Teasdale at September 19, 2008 1:53 PM

Mike - Sorry about your 401K. I'm not sitting terribly bad today.

The interjection of Hume was in appreciation of his ideas, sparked by the comment about Smith. That comment didn't peak your interest obviously in the way mine did. I wonder why? Both were Enlightenment figures. Was it the word empirical that gottcha...going? Anyway, progess begins with a thought, hopefully the right one that spurs other meaningful thoughts that lead to action. We're in this mess now and we need to figure out how we're gonna get out of it. Today's action, as I see it, is a start, a stabilizer.

Have you a direct question of me about Hume and the current crisis? I can give it a stab. If you'd like a lively indebt concversation, I'm down with that. And speaking of my writing Hume, I most certainly did not, as you well know--funny man, you are. But I have read a lot of Hume and written of him as well. Here...go for it...ask me anything...just anything about the empirical ideas of Hume and the current crisis and I'll do my very best. Are you up for the challenge?

Posted by Judith Ellis at September 19, 2008 2:38 PM

Andrew - From what I gather there are 6 million houses in foreclosure with a possible 6 million plus more coming. The hits seem to keep hitting! If the 6 million took out Bear Stearns and Indy Mac with the likes of AIG and others without the bailout, affecting the US AAA credit rating and those of cities, affecting municipal bonds, what can we really look forward to--a total wipe out of our financial system and neighborhoods to pay those responsible back? But then we all seem responsible on some level, complicitly or perhaps implicitly for our lack of involvement and knowledge.

Posted by Judith Ellis at September 19, 2008 2:54 PM

Judith--no, nothing so serious. Just that every time I come across the name David Hume, the lyrics to that song start going through my mind.

However, whenever the free market crowd starts crying about the gov't "interfering" in the markets or trying to take away our freedoms, etc. it strikes me the same as the misbehaving children who get disciplined by the parent before they set fire to the house complaining about being punished. If the market could actually regulate itself it would have done so. But, there were too many greedy kids--at all levels--who decided they could get away with theivery and murder. They ruined it for everyone and now that the big bad parent has to step in and try to set things to rights, they cry "foul!" Color me skeptical.

Posted by Mike at September 19, 2008 3:00 PM

Mike- Understood, completely. Skepticism is healthy, nothing wrong with that.

Posted by Judith Ellis at September 19, 2008 3:04 PM

Thank you for your bone chilling yet inspiring comments today at the Inc 500/5000 conference. In the words of Jim Collins, you have managed to :
Retain unwavering faith that you can and will prevail in the end,
regardless of the difficulties, AND AT THE SAME TIME have the discipline to confront the most brutal facts of your current
reality, whatever they might be.
I applaude you, yet again.
jrp

Posted by Jane Rodmyre Payfer at September 19, 2008 7:51 PM

Unfortunately, I can't share much optimism regarding the current market situation. I have little faith in Paulson and none in Bernanke.

In Bernanke's case, he's a lifelong academic who has completely missed the boat on the entire credit crisis. He has been on record time and again the last 3 years saying first that the housing market was healthy, then insisting that the problem was contained to subprime and then throwing the kitchen sink at it only to fail time and again. Unfortunately, Bernanke is a lifelong academic with little knowledge of how markets work in real life. He labors under the ridiculous belief that the Fed can somehow manage something as complex as an economy and seemingly has no understanding that it is such central planning that has got us here in the first place through selective and asymmetrical monetary policy.

Paulson likely has a much better understanding of the situation. Unfortunately, his old company, Goldman Sachs, helped to create it. Paulson stumbled through his congressional testimony during which he claimed he was not aware of the massive and, quite frankly, stupid leverage Goldman took in unbelievably risky mortgage bonds while he was CEO. Either he's dumb or he's lying. I'd say he was lying. If he really had no idea, we're all in a lot of trouble.

The bigger problem is that 25 years of continued government interventions to avoid a recession, the extension of easy and excessive credit and a complete abdication of government's regulatory responsibility have gotten us into this mess. We've spent 25 years building a Frankenstein that has now come back to eat us.

The premise that recessions can somehow be avoided through monetary policy is so absurd it defies words. Yes, it's worked for 25 years, but that has only given this country false confidence that it will always worked. Now we are so backed into a corner that the government must do something to avoid an all-out meltdown of the financial system, a meltdown that may occur regardless of what we do.

Unfortunately, I believe that we have now entered a new economic era. The party is over. And still these guys are talking about avoiding a recession. Their lack of knowledge of history is astounding. Circumvention of free markets never, ever works. Not once. And the more intervention there is, the worse the aftermath.

So now we're in a very tough spot. $700 billion will do little to solve the problem of a $160 trillion (yes, trillion) credit market that is built upon outrageous leverage taken by financial institutions that are now almost entirely insolvent.

The U.S. financial system is completely broke right now. $700 billion may hold back the floodwaters for now, but the flood is coming anyway. It's just a question of when and to what extreme.

Posted by Peter Davis at September 25, 2008 12:11 AM

Peter – thank you for such a coherent and well written summary of the situation in the US. Let me say at the outset I’m a non-economist but I have similar anxieties about Britain.

I thought with Christmas approaching it’s topical that I exclusively publish the plot for our British Economy Pantomime 2008 - from my very ‘amateur’ perspective – so here goes .….

THE WICKED PLOT:

Our leading man is Prime Minister Gordon Brown who was Chancellor of the Exchequer for 10 of the last 11 years. He is telling us that the problems we face in Britain are actually nothing to do with him - or indeed Britain - but they are due in fact to something called ‘problems in the world economy.’ It’s obviously all to do with those other nasty people known in pantomime land as – ‘the baddies’ – Boo!!! Hiss!!!

That nice man Gordon tells us that actually, everyone else in the world is to blame and not us folks in Britain …. And of course certainly not Gordon himself who is blameless. (This is the same Gordon who has been in charge of our economy since 1997 until 2007)

QUESTION TO AUDIENCE:

How come when things were (apparently) going well from 1997-2007 Gordon was happy to take the credit and now when things are going South in a big way it is the fault of ‘the world economy.’ And irony upon irony our Gordon is now in charge of the whole country as our PM!

ANSWER IN UNISON FROM AUDIENCE:

Politics stinks!

EPILOGUE:

They really couldn’t make this stuff up. It’s like appointing Richard Nixon as Chief Executive of ‘The Truth Commission.’

I am a life long Labour Party supporter so I really don’t have a downer on Gordon Brown. Actually he is a very experienced politician. There is probably no-one better to choose from in an era of dullness the like of which I have never known in my adult life as far as politics is concerned. All politicians in Britain - regardless of gender or age - suffer the very contagious disease of 'sameness' - they look the same, talk the same, wear the same type of clothes and frankly I cannot think of one of our 450 plus democratically elected Members of Parliament in Britain that inspires hope.

POSTSCRIPT AND FINAL WORD:

Quoting the words of Britain’s most popular Daily Newspaper ‘The Sun’ of many years ago …

‘Would the last person leaving Britain please turn the light off’

Posted by Trevor Gay at September 25, 2008 5:15 AM

Hey Trevor,

I agree completely that we are in an era of unprecedented political dullness. On the other hand, why the hell would anyone want the job these days?

In my opinion, government has been the root cause of the problem, so I really have no expectation that they'll be able to solve it without making it much, much worse. If there's one thing government is good for it is paving the road to hell with their reelection intentions. Democracy just makes you teary-eyed sometimes, doesn't it?

In the U.S., the government has enabled the use of excessive leverage by acting like a drug dealer, handing out credit to anyone with a pulse - although I think even having a pulse may have become optional at some point. Over the last 20 years, every time the market has hiccuped, Greenspan, and now Bernanke, have been there to pump it full of money. The result has been an economy fueled by moral hazard, in which the big boys just never expect to have to absorb the losses from their mistakes.

Combined with the flood of credit into the system, this has encouraged risky behavior of historical proportions. Add to that our third ingredient - incompetent regulators asleep at the switch - and we have brewed ourselves one hell of a potent cocktail.

The crux of the problem is that the U.S. government lives in a fantasy land in which it believes it can continually save the economy. Included in this fantasy is the idea that we (the government, banks, business and citizens) can continue to borrow and spend to oblivion without repercussion.

So now we are at the point of a massive, but necessary, deleveraging of our entire economy. Banks, citizens and even the government still do not understand that we cannot live beyond our means indefinitely. Apparently, most people still believe that being totally broke and in debt is a good thing. Apparently, few people have gotten the memo that our credit Hindenberg has gone down in flames. Oh, the humanity!

Unfortunately, with an election coming up, nobody wants to admit this, so we will continue trying to bandage the problem instead of actually acknowledging that the economy is very sick and like an alcholic, needs to detox if it is to have a chance at a healthy beginning. On the other hand, our election will bring no shortage of people to blame, so I'm personally gearing up for an all-out goon-fest on tv for the next six weeks.

The idea that we can sweep this all under the rug and start fresh is absurd, but that's what we have right now. I think the pain will need to get to a point where everyone gets so fed up and desperate that a massive change becomes the only logical choice.

Right now, the entire American citizenry is against this bailout. Why? Because they blame the banks. What they are ignoring, however, is that we are all complicit. It's not like banks brainwashed people into borrowing obscene amounts of money in order to buy a house they couldn't afford, with a mortgage rate that would reset to a percentage roughly equal to gross national product of Chile, then taking a home equity loan to furnish the house, buy a car, take a vacation, all while charging up their credit cards so they had enough frequent flier miles to take a few hundred trips to China and back.

Yes, I may seem a bit harsh, but I believe that the true root of our problems has been caused by lack of personal accountability on the part of each of us. Until Americans begin to take responsibility for their actions and stop looking for instant gratification and a free ride, I find it hard to believe we'll get out of this mess. I suspect Americans will end up having to be accountable whether they want to or not. We are going to be like a little kid whose mother forces us to take our medicine. Something tells me in might be in the form of a suppository.

Around the world, similar problems have occurred (not the personal accountability stuff - I can't speak to that outside the U.S.). Governments have fostered easy credit upon businesses and banks as the U.S. has done a bang-up job exporting its inflationary monetary policies to the rest of the world by racking up outrageous debts and selling it to everyone in the form of Treasurys. (And who said the U.S. didn't produce anything anymore?) As a result, the credit bubble is worldwide. It's no secret that U.S. banks aren't the only ones in trouble, and property bubbles in parts of Europe and Australia are said to be worse than in the U.S.

The end result, in my opinion, will not be pretty, but such is life in the big, wide world right now. I think a lot of people are going to be feeling a not inconsiderable amount of pain. Those who are mentally strong, confident, nimble and entrepreneurial will thrive, because they will see opportunities (even if there are fewer of them) and will possess the mentality to think positive and act, no matter what's going on around them.

Posted by Peter Davis at September 25, 2008 3:00 PM

Peter – terrific - thank you again.

Your last paragraph interests me about mindset and seeing opportunities through gloom. I’m sure you are right. I’ve always thought a lot of economic theory is actually about psychology.

As I see it we all have choices – we can sit back and let things ‘be done to us’ or we can try to make things happen. I like to believe I am in the latter camp. I left a secure 35 year healthcare management career 4 years ago to become independent. I had zero guarantee of ANY income but I love the freedom and liberation of self employment where accountability is first of all to the guy in the mirror. I tend to be a glass more than half full sort of person so I see the current financial crisis as an exciting challenge and not a threat.

You mention democracy and I think this was best described by Mahatma Ghandi when asked what he thought of democracy in the Western World. Mr Ghandi replied – ‘I think it would be a very good idea’ – Don’t you just love that?

When I got my first mortgage about 30 years ago I had (metaphorically) to sweat blood to get two and a half times my salary – now I understand some lenders allow six times the salary ... And we wonder why we end up where we are now.

A question from me to these top finance guys who are now allegedly going to rescue us ….. If you are so clever, and in a world full of accountants, how the hell do we get the basics of income and expenditure so wrong as a nation?

The world is full of accountants wherever I look. Don’t get me wrong - some of my best friends are accountants and my business accountant is my best advisor. The world of healthcare management that I left seems to have as many accountants as patients and yet we still overspend. We have to seriously ask ourselves about the word ‘expert’ methinks.

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I am not suggesting this stuff is easy but the word that keeps coming into my head is GREED.

I read an article over 18 months ago in the Daily Mail, here in the UK about how the wives and girlfriends of young City of London finance dealers have run out of ideas of how to spend the bonuses of their husband or partner – we are talking millions of pounds just in bonuses!

How can we co-exist on our one planet and allow such obscene payments to individuals whilst every day allow 30,000 people – mainly children - die because of extreme poverty. The only conclusion I can reach is greed. I always get fobbed off and dismissed by the ‘experts’ who tell me I don’t understand the complexity of it all. I plead guilty every time and will continue to say it.

Posted by Trevor Gay at September 25, 2008 7:37 PM

Trevor,

If only it were that easy. Booms and busts have been going on since the first days of speculation. As a trader, I'm all for speculation. I'm not so crazy, however, about speculation done by idiots. There is a difference.

Greed is certainly a big part of it. But it's really about crowd psychology. Booms and busts are crowd psychology events. During a mania (like the credit mania that is now unraveling), a few people start making money off something and, gradually, a bunch more start thinking what a great idea it is. Essentially, they see someone else making money doing something and figure that this person must be doing something right. So they copy them. Eventually, more and more people jump on until everyone becomes convinced that "this time it's different." Which it isn't. A very famous trader once said, "Markets change but people don't."

In other words, people will always acting greedily, jealously, fearfully, etc. It doesn't matter what the fad is; the psychology never changes.

Crowd psychology is, in my opinion, based on the insecurities of each person. The few people who roam this planet who are truly confident in their own ideas don't fall prey to the crowds. Whether they're traders, investors, business owners, athletes, whatever - they live their lives according to their own values. Unfortunately, most people aren't like that and instead seek validation outside themselves.

In crowd psychology, almost every participant really just lacks the confidence to go with their gut. As an example, if you go make a great business deal for millions of dollars and I envy you for it, I may try to strike a similar deal, simply to prove I'm better than you. And that's what happened in the financial markets. A bunch of people with low self esteem trying to one-up each other.

I know this sounds harsh but the truth is that most people are ruled by the fear of being inadequate, and this causes us to do all sorts of things that aren't in our best interests, much less our own. Greed is simply the fear of not having enough; jealously is the fear of not being enough; panic is the fear of losing what you have.

Think about what has occurred; a core set of incredibly stupid things that have been copied over and over again. Whether it's levering up to buy risky bonds, the ratings agencies rating junk as AAA, regulators all looking the other way, virutally every member of Congress doling out money and favors like the U.S. Capitol was their own personal whorehouse (which, in retrospect, it probably is) and citizens buying all sorts of things they couldn't possibly afford with borrowed money they couldn't possibly pay back.

Among my own friends, I have seen some buy houses way out of their price ranges simply because everyone else did.

And so when the dam truly breaks open, the same euphoric crowd behavior that ruled the mania will turn into fear and intermittent panic on the downside. I've been back and forth on the phone with my brother for several weeks, telling him what I think of all this. It finally occurred to me that he wanted one of two things from me: First, to agree with his financial advisors or second, to say something so dramatic as to turn him around to my opinion. He is understandably scared right now, and he is looking to others to make him feel better. And that's the whole problem. Taken on a mass scale, add a boatload of "free" money, don't regulate anyone and then regale this stupidity as the dawn of yet another golden age and presto - Instant Mania!

As for your personal situation, I think you did a great thing by going out on your own. As long as you continue to cultivate your independent mindset, you'll do fine no matter what. I've been reading a lot of Trump's books lately and love him or hate him, his stories of picking himself up off the carpet are very applicable right now.

Posted by Peter Davis at September 25, 2008 11:16 PM

Peter - I accept (reluctantly) it is maybe not as simple as I would like to believe but I live in hope :- )

I love the ‘crowd thinking’ and I’m with you 100% on that. We see it in all walks of life don’t we? As an Englishman you might guess I love football (soccer) and back in the 1980’s we used to see normal, healthy, stable, family men become wild animals at 3pm on Saturday afternoon when they were watching their favourite football team. The good news is football hooliganism is not as bad as it was in those days but if you watch the behaviour even now it is incredible how crowd psychology turns people completely. Part of that is the sense of needing to belong to the crowd.

One thing that fascinates me about this financial crisis is how highly intelligent, well trained professionals cannot see this coming or if they do see it coming they ignore it.

I recently wrote to a friend the following – your take on this would be great.

‘I am saying the responsibility ALWAYS rests with the Chief Executive and the corporate people - the leaders - and not with individual accountants.

My own accountant always reminds me that it is his responsibility to PREPARE my accounts but it will always be my responsibility to sign them off and so …. ‘MY ACCOUNTANT DIDN'T TELL ME' is not a valid defence from me if things go wrong. I realise my situation is far simpler as a one man business but the principle is surely the same.

Simply ‘employing’ someone does not take away personal responsibility of the Chief Executive or corporate responsibility of a Board of Directors.’

I note what you say about Mr Trump and I have not read much about him. I have read a lot about Sir Richard Branson who has thrived by hard worked, being different and picking himself up many times. Sir Richard dropped out of University, he is dyslexic and has never really had any training in management ... he just did things that made sense to him. He is one of my heroes. The other heroine for me in business is the late great Dame Anita Roddick founder of The Body Shop. She sadly died last year but again she was prepared to be different and, being a woman in a business world dominated by men, meant she was already 1-0 down before she started! She refused to compromise her principles and became the most successful business woman in the word and never had any formal management training.

I think you and I are agreeing psychology is at the root of all economic theory – its all about human behaviour methinks.

People always come before policies and procedures!

Posted by Trevor Gay at September 26, 2008 5:08 AM

Trevor,

I certainly agree with you that the "chief executive" holds the final responsibility for decisions - the chief executive being each one of us. For example, my brother has a couple of financial advisors and has been wavering as to what to do with his money. He's abdicating his own decision-making responsibility and giving it to someone else. What he's not getting is that it's his responsibility to decide what to do right now, and if he's confused, he must take it upon himself to learn enough so he's comfortable making a decision. viagra cheap overnight

I think a lot of people are in a similar boat right now. This situation is scary for a lot of people but because it's also overwhelming, many people are simply choosing to do nothing in lieu of making whatever effort they need to in order to make a decision.

As for Richard Branson, I love him - he's great! I've read both of his books and have tons of respect and admiration for him. A true pioneer, ballsy and a very, very passionate guy.

Posted by Peter Davis at September 27, 2008 10:55 AM

Peter – I’ve written elsewhere on many occasions we are all Chief Executive of our own career. I happen to believe that has always been the case. I think – it is even more relevant in the sort of circumstances we face now. People need to see this situation as one of opportunity not threat. It is largely about self belief and as you said earlier self-esteem may not always be high despite having the material trappings.

I use the analogy of pushing at doors – I did an interview recently about this that you can hear at this link if you get time.

http://begoodventures.com/joeandwanda/?cat=26

Sir Richard is brilliant and his latest book ‘Screw It Lets Do It’ is one of the top three management books I’ve read.

Posted by Trevor Gay at September 27, 2008 5:36 PM