"Even among the circle of top executives who lived through that frantic week, no two people see the crisis at Bear the same way. Many, though, agree with some version of the scenario Alan Schwartz has come to believe. Yes, Schwartz tells friends, mistakes were made. Yes, the firm was financially weakened. But the more he learned about what had happened behind the scenes that week, the more Schwartz came to believe that Bear’s collapse was a pre-meditated attack orchestrated by market speculators who stood to profit from its demise. According to those Schwartz has briefed, these unnamed speculators—several now being investigated by the S.E.C.—employed a complex scheme to force a handful of major Wall Street firms to hold up trades with Bear, then leaked the news to the media, creating an artificial panic."I'm inclined to believe this story. But even if the short selling attack on Bear Stearns was premeditated - so what? Sure, things were "okay". The company said just days before it went nearly bankrupt that it had plenty of liquidity. And it did... except not in the face of an unexpected situation. These big firms were leveraged 30:1 and it wasn't a secret. It would be fairly simple to bring them down with that kind of exposure.
It's my hypothesis that we need to get rid of the blind trust that everyone has either in business or government. The Libertarian crowd somehow believe that businessmen are basically honest and the hidden hand of the market corrects all evils. (Well, it does, eventually - but there can be a lot of discomfort in the meantime.) And then there are those that think all businessmen are criminals and that the government, in spite of the continuing evidence of graft and incompetence, is somehow necessary to keep businessmen honest.
Given a choice I'll go with the Libertarians. But the Libertarians need to ask themselves the following question: if they are right, how come nobody believes them? Probably because everyday there are examples of crooked businessmen. People somehow believe that when a businessman gets bent that he hurts more people than when a government official gets bent.
I would suggest that the proper position is not whether you should trust the hidden hand of the market or trust government - you can't trust either. You can't trust anyone. Just like the internet, where every site is under constant attack, you must assume that every financial transaction might be a fraud. You have to assume that every transaction is a risk. You need to diversify. You need to make sure that you're really diversified - you might be in several mutual funds but they might all invest in the same thing. You need insurance. You need to make sure your insurance company has a lot of cash on hand. You need to assume any company you deal with might go bankrupt tomorrow. You want to look for firms that are fairly transparent.
Consider the case of Paul Bremer, who lost billions of dollars in Iraq. He lost it and he has no documentation as to where it went. Should we give him the benefit of the doubt? No! If I go on a business trip and spend $10,000 on my expense account, and don't have any receipts, or any explanation, what do you think my boss is going to think? He's going to think I'm a crook. Likewise, we should assume that Paul Bremer is a crook, and stole the money. What other point of view is rational? We're talking about billions of dollars! And the Congress does nothing? Nobody is investigating it? He hasn't denied losing the money.
Trust needs to be earned. Right now, there is very little trust to go around, but I would argue there is still too much. Dumping a few trillion dollars into the economy by giving it to banks who have no accountability for the money is not increasing trust. The rule change that allowed Bear Stearns to be leveraged 30:1 has not been reversed!
(I've heard the reason all of these banks are getting the piles of cash is so they can weather the next round of sub-prime loans ("Option ARMS") that will reset to new interest rates. Nobody will own up to this because they don't want to scare you shitless.)
It's hard to be concerned about liberty, freedom, sound economic policy, the future of the dollar, and so on, without sounding like a nutjob.
But seriously ... shouldn't Paul Bremer be in some kind of trouble? Since when is it okay to admit you misplaced a billion dollars?
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© 2005-2008 Stephen Clarke-Willson, Ph.D. - All Rights Reserved.
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