All right, so far I've kept pretty quiet on the whole bank meltdown. I've been mulling this post in my head since reading my old friend Deadspot's excellent post on what he wants out of the bailout.
See the book at the top of this post? It's Adam Smith's classic "The Wealth of Nations," which was first published in 1776. It's sort of an owner's manual for capitalism. Unlike most people, including, presumably, most people working in on Wall Street and the banking industry, I've actually read it. I read it for an assignment in an Economics class in college and wrote a paper on it.
Remember in the movie Bull Durham where Trey Wilson's character, manager Joe Riggins, throws a tirade at the slumping Durham Bulls? He tosses an armload of bats across the locker room and yells at the players:
"This is a simple game. You throw the ball, you hit the ball, you catch the ball. You got that?!"
Adam Smith lays it out just like Joe Riggins. You get the materials. You hire some workers. You produce something. You sell it for more than the cost of labor and materials that you paid for. Your reward for your trouble is the difference between the costs of production and what you sell it for. It's called "profit."
Yet, somehow capitalists can't seem to manage to get it right. It's a simple game. Produce something someone wants to buy and sell it for more than it cost you. Or loan out some money with the anticipation of being paid back with some interest. Or lease or rent something you own for more than it cost you. Simple, right?
But if you read the Wall Street Journal or the business pages of the New York Times, you enter an alternate universe of bizarre economics. Hedge funds. Futures. Derivatives. "Flipping" property.
Reading about these guys, 28-year-old hedge fund managers who live in mansions on Martha's Vineyard, you got the impression that actually producing something seemed to be looked on as a sucker's game. The really big money was in the high stakes gambling of buying and selling increasingly amounts of precarious debt, debt that in their perverse universe got more valuble the riskier it was.
These people apparently have the attention span of four-year-olds. Remember the internet bubble, less than ten years ago? Remember how internet stock values rose and rose, until they defied the ability of even the best-performing companies to deliver a profit even remotely commensurate with the inflated stock values?
And of course they brought the rest of the stock market down with them, especially after 9/11. My parents, who were getting ready to retire, watched in horror as their retirement portfolio lost over a third of its value.
We keep learning the same lessons-- or maybe not-- over and over again. Remember the collapse of the Savings and Loan industry in the eighties? That cost us $500 billion to bail out that one. They keep making the same mistake, for hundreds of years, it turns out. The first time this happened in Western society was the Tulip Bubble of the 1600's in the Netherlands.
The tulip was first imported to Europe from Turkey, then part of the Ottoman Empire, in the late 1500's. Since tulips were able to tolerate the rough weather of Northern Europe, they rapidly gained in popularity. They became sought-after status symbols. Rich people contracted out with growers, and the first futures contracts were born, for tulip bulbs.
Throughout 1636, the spectulative price of tulip bulbs skyrocketed. Then, in February of 1637, the prices collapsed, and tulip bulb speculators learned the hard way what so many businesses have had to learn as well-- that in the end, no matter what your computer program, derivative, "gut" or whatever other method you have of figuring, that in the end, someone has to buy a rail-car full of pork bellies, pay a mortgage, purchase electricity (hello Enron)-- or a tulip bulb-- for you to make some actual real money. It seems like every ten years or so, business people need to find that out the hard way. Too bad we taxpayers always seem to be the ones who end up footing the bill for their lack of understanding that it's a simple game.