William Manchester is my favorite historian. An unparalleled researcher and a lover of language; he wrote of the great men and wars of the Twentieth Century, and wrapped them in context and insights so illuminating as to make his work unique amongst all I have read. Such insight came at the price of personal experience - Manchester was a decorated U.S. Marine who was severely injured on Okinawa. In his stunning memoir of World War Two entitled Goodbye Darkness, Manchester wrote of he and his comrades on Okinawa that, "we were living very fast". He meant that they knew they were living in a pivot point of history.
Last week we saw the pivot point in a financial maelstrom of almost mythological proportion, and Secretary of the Treasury Hank Paulson and the world's financial markets have also been living very fast. The debate about whether or not the U.S. Government should have done what it did is now academic. What CAN and NEEDS to be debated are how it should best manage the bailout. In order to do this it is critical to understand the foundational causes of this crisis.
Our two Presidential candidates tried to respond to these very questions, and neither one acquited himself well. Barack Obama did what he does - smoothly and articulately dispense a bunch of high-sounding but empty words, continuing his pattern of spewing rhetorical Cheetos to a nation hooked on political junk food. John McCain looked frustrated and confused as he groped for a position. I longed for one of them to say something like, "this is an incredibly complex and important matter and I am simply not going to use it as a political whipcord until I have had a chance to think it through". How refreshingly courageous this would have been.
Because problems like this are so ENORMOUS we assume the causes and solutions must be of equal size and complexity. We view a dizzying menu of things like "sub-prime packages" and "securitizations" and "unwindings of debt", until the whole matter becomes an opaque bowl of data-laden goo. While all of these things have their place in the discussion, they are simply too large for us to assimilate, and worse, cause us to lose sight of the truly foundational issues. Our eyes move from headline to headline, and our ears absorb panel discussions until we contract intellectual lock-jaw. The lock jaw then turns into capitulation; an almost involuntary "shrugging of our intellectual shoulders". This is not a healthy development and we need to resist it.
Amongst many enablers of this crisis there was one primary primary factor - the years of ridiculously easy money proferred by the Fed, in spite of nearly two decades of unsustainably soaring real estate values. Alan Greenspan now postures that years of record low interest rates were not the cause. I agree, but more so than any one factor it enabled this crisis. And more than any other individual's, it was his hand that held the great National Needle of Morphine as it dripped the narcotic of rate reductions into our fiscal veins. This would not have happened had Paul Volcker been Fed Chairman.
But while easy money ENABLED the crisis, it did not CAUSE it. I believe there are two primary causes of this mess: human greed and something closely linked to it - a failure of CHARACTER on the part of the leaders of America's enormous financial institutions.
We all have it within us to be greedy; it is a propensity of our nature and one that can only be combatted with discipline and care. But for all the prattle about "change" on the campaign trail, I trust we all agree that neither candidate is able to change the condition of the human heart. Greed cannot be eradicated, and will always be an issue in our dealings. It was greed on the part of prospective home buyers that led them to "rent" three-hundred thousand dollar homes because they were not content to "buy" a two-hundred thousand dollar home. It was greed on the part of real estate speculators. And of course, it was greed on the part of banks and brokerage houses, now joined together in an incestuous relationship, who churned out these packages to millions of such people, consciously spurning the time-honored and proven traditions of their industry.
But we need to loook further and deeper. We need to acknowledge that it was a crisis of character on the part of the leaders of these institutions. Men and women who simply knew better but could not bring themselves to stand up in their board rooms and say, "ENOUGH - NO MORE. We will no longer engage in such risky and unsustainable conduct. It may be legal, but it isn't RIGHT". It tells us that managers who DID do this had the courage to say "NO" to the orgiastic joy ride of their industry. It reminds us that a senior manager's FIRST and SACRED responsibility is to act in the best interests of their SHAREHOLDERS - NOT to achieve a particular level of quarterly bonus for their staff.
Please remember this the next time you hear someone say, "I am more interested in a person's policies than I am in their personal character". There are pivotal times in history where character is inseparable from policy, and indeed, far more important.
So where do we go from here?
There is an interesting development ocurring which predictably, is going under reported by our fallow mainstream media. There are actually banks and financial firms that are still on their feet. And some of them are beginning to enter the picture and conduct negotiations to buy some of the failed banks. This tells us two things. First, that such institutions were led by people who decided they would NOT engage in such incendiary practices. And secondly, it tells us that the market can help the Government sort this mess out by purchasing the assets of now defunct organizations at a hugely discounted rate, and begin the process of building up their capital base and balance sheets into a stable condition. The single best thing the U.S. Government can do right now beyond what has already ocurred, is to create an environment where such transactions are transparent, encouraged, and applauded. It is also time to create an agency akin to the Resolution Trust Corporation and put the RIGHT PERSON in charge of it. I don't know who that might be, but amongst many who have the professional competence, I would look for a person of unquestioned and Olympian CHARACTER. I hope and pray that Paul Volcker, or someone of his caliber, is available to serve.
Lastly, I believe this crisis has taught us that economics is more important than finance. Economics is the foundational science of commerce, for it is the study of how human beings make decisions under the context of unlimited wants, finite resources, and the condition of the human character. Finance is the methodology through which economic decisions are enacted. It is finance that says, "Hey - I have figured out how to mass produce uncollateralized loans for people who cannot afford them". It is economics that says, "Well congratulations - but that is a BAD idea". Finally, it is people who understand economics and combine it with personal character who say, "I don't care how much pressure builds up - we are NOT going to do it".
The final and most important lesson of this crisis is to listen to the laws of economics, and to political and financial leaders who understand them.
And who have the courage to respect them.
