Trillion Dollar Meltdown

Yesterday I finished listening to the audio verson of a powerful book by Charles R. Morris explaining the recent collapse of the financial markets called Trillion Dollar Meltdown. Published in late 2007, the book predicted all of the disastrous events of the past eighteen months and how they came to be. The scope and clarity of its many insights and anecdotes are worth pondering more deeply. I will get to those shortly.

Morris begins by giving an overview of the past six decades from the perspective of wealth creation, business expanse and retraction, the market drivers during this period and the political context of it all. You really cannot understand particulars without an overall context and often Americans forget this simple fact. What is happening today is an outcome of decisions made over a period of decades, not days, weeks or months.

According to one review on Amazon the book is written toward university level students, and it may be heady for some but even if you have a marginal understanding of economics and markets, you will glean plenty in my opinion.

I remember in high school my father invited a representative from the Dreyfus Fund come to our Bridgewater home to help teach me how to invest my savings. The fellow had stock market charts with all kinds of data, along with prospectuses and documents designed to show me the power of investing my money in the market. Well, I took $500 out of the bank and opened an account. I never saw that money again.

This is not an argument against investing. It is simply a statement that there's no such thing as a sure thing. This period in which I salted a few hundred dollars away was, according to Morris, the tail end of the Liberal/Keynsian era in economics. The resulting collapse of the markets in the 70's, with a simultaneous inflation so that your real holdings in dollars was about 75% less than they had previously been worth, culminated in Carter's disastrous presidency. (This is not to say Carter was not or is not a good man.)

It could be argued that half the debacle of the Carter era (double digit inflation, double digit interest) was due to the circumstances he inherited. In the end, it is during desperate times that a sea change can be set in motion. Thus was Reaganomics born, a new period of deregulation as Chicago-school economics gave the boot to Keynes.

Milton Friedman's ideas carried the day and the market climbed higher (with a few hiccups along the way) than anyone could have even dreamed. But, and it is an important part of the equation, part of the reason markets climbed so far is that the enormous size of the Baby Boom generation was becoming older now and, staring at retirement with a little more earnestness, they began to save more. This resulted in increased stock valuations. It also gave unscrupulous money managers increasing quantities of cash to play with, which was leveraged in extremis.

Morris shared how computers helped companies create financial instruments (bonds, etc.) that were so complicated even the people who sold them did not understand them. It was an amazing run. And when variables shifted, some companies had no idea how to determine their own true valuations. Some of these disappeared completely.

Add to this the increased debt loads and the absurdly high real estate valuations and you have a witch's brew of disaster in the making.

Though Morris published the book before Obama was elected, he accurately predicted that the pendulum is about the swing the other way. It certainly wasn't good to see 401K retirement plans shrink in value by 40% while the men who managed them made quarter million dollar a year salaries on average.

There are ideologies at war in the economic realm of which the average person usually has the most simplistic understanding. And this particular author lays some heavy blame on the Alan Greenspan camp. Morris gives the impression that he is in love with Paul Volcker.

Funny thing how every time things are good, the reigning president takes credit, and when things are bad the reigning president says he inherited it. And how politicians are ever trying to re-assure us that things are not as bad as they seem.

Not everyone who reviewed this book on Amazon liked it. Some found it biased against free market economics. One called it "A Coherent Rant." But I still found it raising good questions. He compared the complexity of the markets to Yertle the Turtle, in which everything is so interdependent that when you modify one variable it can have a serious impact on the stability of the whole.

My great-grandfather was scammed late in life by a fellow who was going to invest great-grandpa's life savings. The man lost everything and had his heart torn out. It's a scary thing to work hard and save and do all the right things only to have it plucked away with no legal recourse. This tragic family event led to my mother being more careful with her retirement assets. I myself took a measure of comfort in knowing (or believing) that the U.S. investment markets were the most regulated and reliable in the world, unlike many nations where there are no disclosure requirements or where banks can close and without warning take all your money saved (Russia) or where the government can devalue their currency by 50% overnight (Mexico 1981).

So how is it that a man like Bernie Madoff, former head of the NASDAQ stock exchange can make off with 50 billion dollars of other peoples' money right there under the big spotlights of our regulators? How about all the funds that invested in Enron because of the high returns and the approving nods of auditor Arthur Anderson?

Morris predicted a financial mess and he predicted right. What many of us wish to know is what happens next? Yesterday's paper carries a feature story with newly elected Senator Al Franken claiming the economy will "come back strong." I want to know how that will happen and why? Unemployment keeps rising. Our investment in bailouts and overseas military enterprises continues unabated.

I am especially curious what book being published today will be the one that most accurately portrayed the next two years? Maybe we'll find out in five. If sooner, you can be sure I'll write about it here.

1964 ~ Welcome to New Jersey

I'd always told people that I moved to New Jersey when I was twelve. Technically, this was not true, however. My family moved to New Jersey in January, the 20th to be precise, and my birthday falls in September. So in actuality I moved to Jersey when I was eleven. That explains why I was able to play two years of Little League there.

Baseball was a big part of my life in those days. In Little League I was a pitcher/infielder, and above average with a bat. We played every day in Maple Heights, the suburb of Cleveland where I grew up. When spring rolls around the first thing you do is look for the pickup game in your neighborhood.

In Jersey, our temporary first home was a rental property on Highway 202-206 with no running hot water. We stayed there while the new split level suburban house was being built over the mountain, the first foothill of the Watchung range in Bridgewater. The kids in the neighborhood welcomed my brother and I to play ball with them, and we eagerly joined.

Something I did a lot was call out the score, announce the game as it was going along, how many outs there were, etc. It was a form of leadership, I'd like to believe, or maybe I was just a blabbermouth, always announcing what was going on as if it were a big deal. I think I just wanted everyone to be on the same page. But especially so when the inning ended and teams exchanged roles between being on and off the field.

On one occasion during one of those early games, the other team scored a run and I announced, "Five to two," to let everyone know that was their second run and we were no only ahead by three. Louis P, a tough kid who was a year older than I and captain of the other team, shouted back that the score was five to three, that they had three runs.

Naturally, being a little anal about accuracy in these matters, I objected and replied that the score was five to two. I proceeded to review in my mind the plays in which the two runs were knocked in, and began to lay this out before him as he was approaching. He walked up to me and grabbed my shoulders with rough hands. "It's five to three," he declared.

"No, it's only five to two," I said with conviction.

In a totally unexpected move, he kneed me in the groin. I was eleven and did what eleven year olds often do when a bully strikes them. I went crying home to my mother, hurting quite badly from the blow. I vividly remember sprinting across the field and up between the houses to my back door, serious tears streaming.

Running into the house, I told what happened. Mom came across very matter of fact in her response. In effect she said, "Do you like playing baseball? Well, those are the kids in the neighborhood that you have to get along with if you want to play ball."

And yes, I wanted to play ball. It was a little different kind of crowd from the kids in my old neighborhood in Maple Heights. But I found my place and learned a few lessons that would stand me well over the years. For example, if you are getting beat up, don't fall to the ground because they will also stomp on your head. And make sure you protect what your vulnerable spots.

In the bigger world there really are some different kinds of animals out there. Not everyone plays by the rules. You just have to be a little wary, and know what's important to you. Not everyone plays nice. On the other hand, that's no reason to quit.

Sports can bring all kinds of people together. And it can teach us many lessons. This week the Olympics have convened in Beijing. The opening ceremonies were a spectacle. There will be new records set, no doubt, and heartbreaking losses for many. Hopefully the scoring will be accurate and fair, and the world will be reminded of the important lesson these games are intended to teach: that as fellow creatures on a finite planet we must learn how to get along.