The Viagra Economy

Heads, I win.
Tails, I win big.
This is how our economy has worked since around the time Greenspan took over from Paul Volcker.

An economy where one could buy a home with no down payment and no income.
It was a safe bet.
The value always went up.
But, If for some strange reason the buyer ran out of money, all he had to do is walk away and leave the keys to the banker.

The banker who made unsustainable loans to unworthy home owners did not worry either.
She cashed in her fee and passed on the loan to Wall Street.
If the borrower defaulted, the banker would not be affected.
It was Wall Street’s problem.
All gains, no risk.

Of course, Wall Street was even smarter.
Investment bankers made a fortune leveraging the whole mess and sold it back to the bankers.
Knowing full well what was going to happen, they then took a life insurance in Washington.
Hedging is after all their forte.
Heads, they made huge bonuses destroying the world financial system.
Tails, they got their bonuses paid by their victims.

The bankers, in the meantime, were declared too-big-to-fail.
Heads, they were fat cats.
Tails, the supply of mice was guaranteed.

Portfolio managers understood the new paradigm too.
Getting filthy rich with no personal risk was more appealing than being compensated for long term performance.
Smart hedge fund manager (an oxymoron) made huge leveraged short term bets.
If it worked, he (sometimes she) raked in tens of billions of dollars at a reduced tax rate.
As soon as he made the wrong hugely leveraged bet, all he had to do is close down the fund and apologize.
It was a slight variation on the prevailing game.
Heads. I win very big.
Tails, I do not lose.

All along, The Federal Reserve bank was touting this new era.
It was called the New Moderation.
The American economy – and, by extension – the world economy could no longer falter.
Greenspan’s Fed had outlawed economic down cycles.
Heads, the economy grew.
Tails, we’ll stimulate the economy to the wazoo with negative real interest rates.
When that was no longer doing the trick, Greenspan’s offspring started monetizing the ballooning public deficit.
This, in turn, made the politicians sure winners too.

Stock markets went along.
One could no longer lose money buying stocks.
Markets always bounced back.
10 bad economic figures in a row?
Eventually, one dismal number would be better-than-expected and the market would rally on the prospect of the new economic up cycle.
No matter the downward revision the following month.
As a case in point, how many times can the jobless claims number drop below 400,000 for the first time since April?
The answer depends on the number of revisions.

Unfortunately, as the economic Viagra started to wear out, larger doses were needed.
This resulted in bigger side effects.
Lower interest rates fueled a housing bubble.
Later on, lower interest rates also made it imperative to save more in order to generate sufficient income, for example.

The touted wealth effect built on the housing bubble was short lived.
So, the Fed doubled down and created a new wealth effect based on an inflated stock market.
That too will be proven to be a wealth trap.
Maybe this time people will wonder why the Fed keeps luring savers’ money in risky assets to then see their assets vanish.

All this could be in the past if we so choose.
We can still save our hijacked capitalist system.
Or, we can choose to go Japanese and put our head in the sand forever.
And then blame it on the Greeks.

In any event, one should not buy on dips.
This is not a correction.
This is a generational readjustment.
The sooner we face it, the less it will hurt.

I know, I sound like Cassandra again.
Believe me, it is not fun to be Cassandra, for nobody listened to her/me.
But modern day Cassandras in the stock market have one big advantage over the original witch.
We have access to reverse ETFs.

Post a comment or leave a trackback: Trackback URL.

Comments

  • vimax results  On September 14, 2011 at 7:52 am

    This was a genuinely extremely beneficial post. In theory I’d like to write like this also getting time and actual effort to make a good piece of writing but what can I say I procrastinate alot and by no means appear to obtain anything done.

  • Herve van Caloen  On September 16, 2011 at 11:19 am

    If you get over your procrastination, please send me your letter; I am always looking for new ideas. BTW just get started and you’ll see how much fun you’ll get out of writing!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: