The tiresome boast put forth by secretaries of the treasury, stock exchange executives, Wall Street C.E.O.s, their economists, their consultants, their think-tankers, their B-school professors and suck-up business journalists is that Wall Street is the “world’s most efficient capital market.”
Exactly what we are to take that to mean is rarely explained. We are to receive it and be bowled over in admiration. One thing is sure—the people in high finance are ever so efficient in rewarding themselves. Whether they are good at anything else is another matter. Judging from recent reviews the world’s most efficient capital market has come a cropper.
Fortune magazine recently scared the hell out of its readers by declaring that a “crisis of confidence that began with subprime mortgage defaults is sweeping the Street, and risk is invisible no more. Banks are wobbling, markets are quaking, and ordinary investors are wondering how badly they’ll be hurt.”
The Economist, a publication not given to extravagant language, declared, “The spreading panic has shown up weaknesses in some of the foundations of modern finance. … Because this crisis taps so deeply into the newly devised structures of finance, anyone who says the worst is definitely over is either a fool or someone with a position to protect.” So much for the happy talk.
The magazine goes on to say that conditions created by the subprime criminal lunacy are so vast and so complicated that it’s impossible to tell the shit from the Shinola. In its more elevated style, The Economist pronounces: “As risk has become bewilderingly dispersed, so too has information. Nobody yet knows who will bear what losses from mortgages—because nobody can be sure what these loans are really worth. … Nobody knows how messy the inevitable bankruptcies will turn out to be.”
Quite a statement about the men and a few women who, when they are not blowing off about the world’s most efficient capital market, are trumpeting the crystalline transparency of American capital markets. They tell us that their “mess” is so murky that they do not know the value of their own securities. With all the computer models and the academic slaves writing foolproof formulas against the vagaries of risk in daunting mathematical hieroglyphs, they are in a dark room groping.
Obviously, they are also rigid with fear. These geniuses of high finance are looking like people crawling over a frayed rope bridge spanning a gorge. For years these people did one foolish, greedy thing after another, heedless of the consequences. Now they are petrified because they have no idea what the consequences may be.
One of the many unknowns is whether the rest of us are crawling behind these leaders of high finance across the rope bridge. The question is, if they go, are we also flung down the recessionary abyss? Will their rashness and cupidity take us with them?
That in itself is a heck of a question. You shouldn’t have to be an investment banker to know whether or not you are on solid ground, but in these circumstances no one can be sure. Some people are worried that even their money market funds may be in danger, and next to government bonds, we have been taught, nothing is more secure than our money market accounts.
We are in the same position as the people who predict how hard the winter will be by studying the fur on woolly bear caterpillars. In finance, the woolly bear equivalent is the length of women’s hemlines. The folk wisdom has it that when hemlines are up, times are good and so is the chance of war. When hemlines fall, times will turn bad but the danger of war recedes. The not-so-great news is that the other day The Wall Street Journal had a headline reading “Extreme Lengths: Why Hemlines Are Plunging,” followed by a lede that read, “The fashion pendulum is swinging to extremes these days. Pants, which were super-skinny just this summer, are flaring out to sail-like widths this fall. Tent-like trapeze dresses are giving way to close-cut pencil skirts. And now—most dramatically—hemlines are dropping.” Take it for what it is worth.
If the claim to be operating the world’s most efficient capital markets is less than precise, it nevertheless presumes a place where deals are easily made. Yet since the subprime debacle began to play out, the investing and/or home-buying public has heard little else beside the term “credit crunch.” We hear that the architects and operators of the world’s most efficient capital market are too terrified of what may lie down the road to lend money or borrow it. It is said that there is such a money shortage they have to hoard what few billions they have.
In the past 25 years our capital markets have come close to laying us out dead three times. First there was the savings-and-loan disaster, next the dot-com debacle and now the subprime mortgage nightmare.
All three disasters were preceded by much talk about the infallibility of the Wall Street money maestros, not to mention their reassuring tut-tuts in response to any outsider suggesting that what they were conducting looked more like a madhouse than a rational business operation. The insiders knew the moneymaking and jolliness was going to go on, if not forever, at least until all bets paid off and everyone playing the game turned up a winner.
But only those who spin the wheel collect the jackpots. A whiff of how big the jackpots can be turned up in a small back-of-the-business-section story in The Times the other day, which noted that “the average pay in investment banking is 10 times that of all private sector jobs.” The paper noted that investment banking accounts for 0.1 percent of all private sector jobs, “but it accounts for 1.3 percent of all wages. …”
A very efficient capital market, indeed. Not for you and me, but for that 0.1 percent of the workforce.
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