“As recently as Spring 2007, Mr. Paulson, among others, was arguing that onerous regulations were crippling American finance in intensifying global competition. Those cries are silenced. ‘The last twenty years saw people actually mouthing the idea that government should keep hands off,’ says Richard Sylla, a financial historian at New York University. ‘We had this free market ethos: Reagan’s ‘government isn’t a solution, government is the problem.’ Now people are saying, ‘The market is the problem. The government is the solution.’” The Wall Street Journal September 29, 2008

Readings

“I have reluctantly concluded that substantial intervention was justified to avoid a major short-term collapse of the financial system that could push the world in a major depression”…Nobel Economist Gary Becker, Prominent Free Market Advocate, University of Chicago, Wall Street Journal, September 27th

“In Chain of Blame, authors Paul Muolo and Matthew Padilla, both seasoned financial journalists, skillfully lead readers through the quagmire of what went wrong inside the nation’s subprime-lending firms that led to the current mortgage and credit crisis. Their central thesis: ‘Wall Street’s thirst for profits and its near-total disregard for loan quality inflicted massive damage on the U.S. and world economies…Much of the story, rooted in Southern California, is built around two key players: Angelo Mozilo, founder and CEO of Countrywide Financial, America’s largest home mortgage lender, and the late Roland Arnall, founder of Ameriquest Mortgage and wholesale lender Argent Mortgage, former ambassador to the Netherlands and a President Bush political donor…Over the years, Ameriquest bought the naming rights to the Texas Rangers baseball stadium…Arnall’s lenders had a ‘do anything to get the deal done mentality,’ they write. After a while, consumer complaints began to pile up. Nonetheless, by 2002, Ameriquest and its affiliates were originating $40 billion a year in U.S. mortgages, 30% stated-income mortgages—sometimes called ‘liar loans’ by industry insiders”…USA Today, September 30th [My Republican friends ask me over and over why Senator McCain hasn’t capitalized on the donations made by Fannie and Freddie to Senator Obama. This paragraph and McCain’s inclusion in the infamous “Keating Five” during the S&L crisis, which also had roots in Southern California, suggest even politicians who live in glass houses can’t throw stones.]

“Republican doctrine adheres to an outdated view of society: Barry Goldwater’s vision was highly individualistic and celebrated a certain sort of person—the stout pioneer crossing the West, the risk-taking entrepreneur with a vision, the stalwart hero fighting the collectivist foe. The problem is, this description of human nature seems to be wrong. Over the past 30 years, there has been a tide of research in many fields, all underlining one old truth—that we are intensely social creatures, deeply interconnected with one another and the idea of the lone individual rationally and willfully steering his own course is often an illusion…The latest example of the mismatch between ideology and reality is the housing crisis. The party’s individualist model cannot explain the social contagion that caused hundreds of thousands of individuals to make bad decisions in the same direction at the same time. A Republican administration intervened gigantically in the market to handle the Bear Stearns, Freddie and Fannie debacles. But it has no conservative rationale to explain its action, no language about the importance of social equilibrium it might use to justify itself…If Republicans are going to fully modernize, they’re probably going to have to follow the route British conservatives have already trod and project a conservatism that emphasizes society as well the individual, security as well as freedom, a social revival and not just an economic one and the community as opposed to the state”…Syndicated columnist David Brooks, Sarasota Herald-Tribune, September 14th [Note: The big picture is that while a few rugged scouts led the way into the West, most people joined wagon trains.]

“In spite of the recent turmoil in the world’s capital markets, I’m a big fan of capitalism, which deserves much of the credit for the recent progress in reducing global poverty. Still, there is a bad apple in the barrel of its foundational concepts. It’s called ‘homo economicus,’ or ‘economic man.’ This 19th-century concept, embedded in classic economic theory and still embraced today, rests on two assumptions about human nature. The first is that individuals are only motivated by self-interest; the second is that we’re all rational decision-makers. Unfortunately, these assumptions are both inaccurate and incomplete. Yet they’re routinely taught in our business schools and embraced by Wall Street—and business suffers accordingly”…Fred Kiel, BusinessWeek, October 6th [The concept is linked to the Chicago School of Economics.]

“Early in every commercial career there is a moment of clarity as you learn about dishonest dealings in the business world. It is the realization that when it comes to large sums of money, even seemingly charming fellows are capable of telling serious lies…We are all transfixed by the unraveling of free market capitalism in fear and awe, while the clamour grows to find the guilty parties. Most commentators are blaming Wall Street. Yet the heart of this wealth destruction is a collapsing sub-prime property market. And in that dark and catastrophic place, I suspect there have been more lies told than by all the worlds bankers put together. It is inconceivable that the many thousands of realtors, mortgage brokers, valuers, developers, builders and other members of the great daisy chain were not in on the game. Moreover, the homeowners themselves were also willing participants. We may be witnessing the greatest financial fraud of all time—on many levels. Western societies have been guilty of living beyond their means, and the reckoning we face is a sobering jolt. As they say: I have seen the enemy and he is us”…Financial Times, October 1st

“Unhappy America: Nations, like people, occasionally get the blues; and right now the United States, normally the world’s most self-confident place, is glum…One source of angst is the sorry state of American capitalism. The ‘Washington consensus’ told the world that open markets and deregulation would solve its problems. Yet American house prices are falling faster than during the Depression, petrol is more expensive than in the 1970s, banks are collapsing, the euro is kicking sand in the dollar’s face, credit is scarce, recession and inflation both threaten the economy, consumer confidence is an oxymoron and Belgians have just bought Budweiser, ‘America’s beer’. And it’s not just the downturn that has caused this discontent. Many Americans feel as if they missed the boom. Between 2002 and 2006 the incomes of 99% rose by an average of 1% a year in real terms, while those in the top 1% rose by 11% a year; three-quarters of the economic gains during Mr. Bush’s presidency went to the top 1%. Economic envy, once seen as a European vice, is now rife”…The Economist, July 26th

“The Ranks of The Ultra-wealthy Grow: One of the most exclusive clubs in the U.S. has picked up more members. About 47,000 people had a net worth of $20 million or more in 2004, the latest available year, according to new estimates by the IRS. While that was up only slightly from 46,000 in 2001, it was up 62% from 29,000 in 1998”…Wall Street Journal, August 27th

“If you go to the Federal Reserve data at www.federalreserve.gov/releases/z1/Current/z1r-5.pdf), you find that US national net worth has dropped by over $2 trillion in the two quarters ended last March (that is the latest data). Given the continued drop in home prices and the stock market, it is likely those losses will mount. But we still have total assets of $70 trillion against liabilities of $14.5 trillion. However, much of that wealth is concentrated in the hands of the wealthy, and the real imbalance is in lower-income households”…Outside the Box, September 12th

“American households have $7.4 trillion in checking savings and other bank accounts and money market funds. They have another $4.1 trillion stashed in Treasury and other bonds. That $11.5 trillion, up from $8.9 trillion (in constant dollars) in 2000, is enough to buy every company in the Wilshire 5000. It’s more than enough to pay off every home mortgage. The distribution of the loot, though, is quite lopsided. The economy is weak because so little of this cash is in the hands of people with a propensity to spend it”…Forbes, October 13th

“Corporate cash pile hits peak despite the crunch…Corporate America waded into the darkest days of the credit crisis with more cash than ever…Excluding utilities and financial firms, members of the S&P 500 Index ended June with a record $648 billion in cash and short-term securities”…Financial Times, Sept 24th

“How Lifting a Bank Rule Set The Stage for A Crisis: Decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control. The SEC’s failure to follow through on those decisions also explains why Washington regulators did not see what was coming. On that bright spring afternoon, the five members of the SEC met in a basement hearing room to consider an urgent plea by the big investment banks. They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments…In loosening the capital rules, which are supposed to provide a buffer in turbulent times, the agency also decided to rely on the firms’ own computer risk models, essentially outsourcing the job of monitoring risk to the banks themselves”…New York Times, October 3rd

“People feel the need to place blame. They are blaming Wall Street and CEO’s… (But) the lack of economic literacy is also to blame. Our educational system has not done the job of teaching basic economics and personal finance to our youth. Churches are a part of the problem for not providing their members with the education, skills, and tools to become good stewards of their income and wealth. The same church that places resources into providing wonderful ESL programs has done little to provide programs to teach financial literacy. Those that have, relied on simple and poorly developed programs that did little to make a difference in the lives of members. One example is a church sponsored cookie cutter program that I once attended, taught by an art teacher who had little understanding of economics or personal finance.
The Christian Economist
October 1st

Reflections

One of my favorite clients is a left-wing libertarian, or a hippie from the sixties. Another is a conservative Christian businessman. Both despise government and the bailout plan. But both now insist all their investments be government guaranteed. Like our banks, investment firms and the rest of my clients, neither thinks about helping end this credit crisis by lending to risk-assuming endeavors that create wealth. While both are worried about the economy their children will inherit, they simply do not trust businesspeople with their money. I can’t say I blame them.

The very word credit is derived from the Latin word for trust. Bernanke can create all the money he wants and business will collapse if investors don’t have trust. So common sense tells us to look beyond our own financial interests to those of our neighbors and future generations. Yet during panics, emotion rules, rather than logic. Another challenge is that we live in a bi-polar political culture in which one side can always blame the other side for every problem. The more heated the blame, the more effective. So we rarely see we are part of the problem. And that’s particularly true during elections when political smoke is so very thick. So each day, I receive emails from Republican friends about how liberals and government have caused the credit crisis. Meanwhile, my local paper, which is affiliated with the liberal New York Times, explains how conservatives and markets caused the problems. Of course, both are correct.

There was a time when true religion transcended bi-polar politics to play a civilizing role in society. It graciously helped us remember “we have all fallen short.” It also explained the root of most mischief is the love of money on all our parts, whether a politician wanting to raise campaign funds from Fannie and Freddie or a Wall Street rocket-scientist wanting to earn a fee from a bond transformed from junk to AAA by a fee-seeking rating agency. So rather than casting more blame, I’d like to explore how the root of all evil grew so accepted on both Wall Street and Pennsylvania Avenue, and probably Main Street as well. I’ll confess to some self-interest in the approach as a headline in the October 4th edition of the Wall Street Journal began “Rich Investors Blame Advisors: Many Plan to Take Money and Run; Misplaced Anger for a Market Meltdown?” It says fully 81% of those with one million or more with an investment firm plan to leave their advisors and tell others to avoid those advisors as well.

After the New Deal and Great Society, Americans better understood why the Bible clearly says it was the well-intentioned Joseph who had teamed up with Pharaoh to provide economic security for his people but instead “made slaves of the people from one end of Egypt to the other” ( Genesis 47:21). The communists soon discovered the same truth about central planning and the Berlin Wall fell in 1989, a time when America was still smarting from the savings and loan crisis. Just as with the sub-prime mortgage crisis, its epicenter was also centered on Southern California, home to Charles Keating and Lincoln Savings and Loan, who not only contributed campaign funds to Senator McCain but employed a consultant named Alan Greenspan. Few have drawn the connections but two should be obvious: First, housing is a heavily subsidized industry in America. The savings and loans and taxpayers paid for that subsidy during the eighties while Fannie, Freddie, investment banks and taxpayers are now. Commercial banks will likely pay in the future, particularly if a high level of home ownership remains a priority of politicians, both Democratic and Republican, as it has been the past couple decades.

The second connection is Southern California, and Orange County in particular. How? Well, when one group of people--investors and taxpayers--unwittingly subsidize another group of people--homebuilders and homeowners--there is usually an “intermediary” like a savings and loan or investment firm between the two, otherwise the first group would not willingly provide the subsidy, losing an enormous amount of money in the process. Such intermediaries normally know a great deal more about what is going on than do the investors. And if they operated according to the old Golden Rule, they might have qualms about taking enormous salaries for bankrupting their institutions, losing money not only for investors but taxpayers as well. So they need a different morality, one Orange County provides at the Ayn Rand institute.

Since the early nineties, I have written about that morality every chance I get. It is called objectivism. Rand was the only woman included in a list of the world’s most influential economic philosophers published by The Economist in 1994. Interestingly, it completely ignored Hillary Clinton, on whom my conservative Christian friends were totally focused back then. It described the devout atheist Rand as “the heroine of America’s libertarian right” and added: “The Reagan presidency provided opportunities for a few objectivists to try their hand at their most hated institution: government. The most celebrated Randist even survived the passing of the Reagan years. Alan Greenspan was an acolyte of Rand’s during the 1960’s.” In short, Rand taught the moral purpose of our lives is to make money and we do not need to consider our neighbors when doing so. That was just the morality needed to broker suspect mortgages. And that morality became public policy in Washington and on Wall Street.

Worth once did a cover story on Greenspan entitled “Playing God at the Fed.” It described this scene before Congress: “Referring to the disastrous advice given by a Merrill Lynch broker who sucked nearly $100 million in commissions from Orange County, Greenspan declared that both brokers and their customers should be ‘unburdened by any perceived need to take into consideration the interest of their counterparties.’ It sounds dull enough—until you realize what he’s driving at. Greenspan expressed that same radical belief more clearly during the 1960’s in a book of essays assembled by his mentor, the novelist and free-market zealot, Ayn Rand.”

Michael Milken, who grew very rich brokering junk bonds to our savings and loans during the eighties, spent his time in prison re-reading Ayn Rand. Chris Cox, the embattled chairman of the SEC who is increasingly blamed for having let Wall Street firms run wild, was also a disciple of Rand’s before he became a congressman from Orange County. It has been reported one reason he and Greenspan let the large investment firms leverage themselves over thirty to one and regulate themselves was simply that they thought the firms’ leaders were capable. That hugely optimistic and costly belief probably came from Rand’s humanistic teaching that man is a “noble being” rather than a fallen being, as the old moral philosophy had taught.

Rand’s radical philosophy was also reflected in the teachings of the hugely influential Chicago School of Economics. Milton Friedman, its most influential philosopher, famously complemented Rand’s sermon by preaching: “The only social responsibility of a business is to make money. Period.” Of course, if that’s true, a bartender would gladly sell one for the road to a fellow who’s already highly inebriated. More importantly, a banker might load more debt than is prudent on a borrower as long as the banker can make a buck by quickly selling that debt to an unsuspecting

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soul. Which is why Nobel economist Daniel McFadden responded, “What’s been lost is the idea that a banker has some responsibility to protect the client’s interest” when asked by the Wall Street Journal (August 21st) what had caused the subprime crisis.

Today’s situation can be neatly summarized by two charts I’ve come across recently. The first shows that cash in circulation has increased from under $100 billion at Reagan’s inauguration to over $750 billion in 2007, enabling the monetized culture that Rand had envisioned. In the last sentence of her tome entitled Atlas Shrugged, Rand had her humanistic savior make a dollar sign over the world to replace the Cross, Star of David and so on. She also had a six-foot dollar sign at the head of her casket. Weird as that seems, Atlas Shrugged has been ranked second to the Bible in influence. It is particularly popular on Wall Street and with CEO’s. Broader measures of money which include bank deposits and so on indicate the same explosive growth. So naturally, debts have increased correspondingly. However, the growth of debt in the financial sector has dwarfed that in any other sector. The September 24th issue of the Financial Times shows that it was at 20% of national income in 1980 but was nearly 120% in 2008. Meanwhile, the debts of all governments increased from 40% to 50%. Naturally, Wall Street CEO’s loved that as it allowed them to leverage profits enormously, at least until the music stopped and the hangover began. That brings me to the second chart, in which the Financial Times ranked countries for anti-corruption in 2008. America ranked 18th. Denmark was first, followed by Sweden, New Zealand, Singapore, Finland, Iceland and the Netherlands, none religious but most socially conscious.

Now, if the roots of our current mess are in a new morality that encouraged the worship of money and no ethic towards neighbor, why have we not heard anything about it from Judeo-Christianity? Having been burned by playing the role of Joseph during the New Deal and Great Society, our liberal churches rarely bother with economic morality anymore. When they do, they usually still sound a lot like Joseph, advocating Pharaoh should care for our people. Meanwhile, conservative Christian leaders, who are probably the most economically liberal Christians in history, have usually reflected culture by echoing Rand. Only last week, I received my weekly blog from a friend who is a prominent conservative stewardship leader. He reminded us of the best-selling book in American Christianity during 1992. Basically, the book described how the federal debt was going to lead to another Great Depression. In an update of that book, the author himself claimed credit for ushering in Newt Gingrich’s revolution by convincing conservative Christians Reagan was right that government was the root of our fiscal problems. Yet while governmental debt has actually declined since 1992, the blog concluded the book was correct and only off in its timing. Like the book, the blog never mentioned the explosive growth of debt in the financial sector. Yet that debt, and not the government’s, is why a USA Today/Gallup survey just said 33% of us believe we are already in depression. Guess judgment still begins in the house of the Lord.

Readings & Reflections is an email publication of The Financial Seminary, a non-profit whose sole interest is to encourage the reintegration of spirit and ethics into political economy and personal finances. While R&R is written by an investment professional who gladly submits this newsletter to officials trained in the intricacies of securities regulations, nothing in it should be construed as counsel to consider any particular investment opportunity. R&R is also posted on www.financialseminary.org, along with other articles and speeches by Gary Moore, the Seminary’s founder, and other contributors .Gary Moore offers securities through NPC of America (NPCOA), Member FINRA/SIPC. Gary Moore & Company, The Financial Seminary and NPCOA are separate and unrelated companies. The political, religious and ethical opinions contained are not endorsed by NPCOA. Opinions are not intended to provide specific investment advice and should not be construed as recommendations for any individual. To determine which investments and investment strategies may be appropriate for you, consult your financial, tax or legal professional. Please remember that investment decisions should be based on an individual’s objectives, goals, time horizon, and tolerance for risk. Furthermore, any listing of a vendor or product does not constitute an endorsement or warranty of the vendor or product by NPCOA. NPCOA is not to be held responsible for, and not be held liable for, the adequacy of the information contained herein. International investing entails special risk considerations, including currency fluctuations, lower liquidity, economic and political risks, and differences in accounting methods. Past performance cannot guarantee future results.