Big is better; biggest is best. Suddenly, everything seems to have been ratcheted up in scale by a factor of two or three. Size is what matters. Citicorp-Travelers. Bertelsmann-Random House. Bill Gates’ fortune. Titanic . The Dow Jones industrial average seems almost certain to hit the millennial number (which is, after all, just 10 percent further along the yellow brick road) of 10,000, well ahead of schedule, with a minimum of 12,000 at the next century’s first dawn clearly on the minds of those who pumped close to $40 billion into mutual funds in March and whose stockbrokers (or whatever they call themselves these days) are ordering up tables at Patroon for New Year’s Eve, 1999.
Big is what is on everyone’s wish list. Raging superlativism is what sells, what claps the trap and brings home the bacon. Citius, altius, fortius -as is written on the Olympic crest. Swifter, higher, stronger-and the greatest of these is “higher.”
So what are we to make of all this? Is it Granada we see-or will we wake up from the dream to find ourselves in “merely” Asbury Park? Will Sandy Weill make us forget J.P. Morgan, James Hill, Edward Harriman and John D. Rockefeller the First, or will it merely amount, as I suspect, to one more proof of the enduring maxim “You can take the boy out of the Five Towns, but you can’t take the Five Towns out of the boy.”
We live in special-some might say weird-times. Inflation is dead, or so we’re told from the top-trickle-down wisdom, just as Plato prescribed, is sister to trickle-down wealth. Perhaps. However, a columnist in The East Hampton Star recently pointed out that, locally, base cable charges have just gone up 15 percent, Bell Atlantic’s flat rate is up by a third, America Online is taking its base rate up 10 percent, banks now charge $1 for A.T.M. transactions plus a kicker if the A.T.M. isn’t their own, health insurance is being bumped up 4.5 percent to 7.5 percent, regular gasoline still sells for $1.39 at the local pump and so on. But Mr. Greenspan says it is not so, and Mr. Greenspan is an honorable man.
Speculators can finance their derivative positions via Japan at 3 percent or less, and borrow against Treasuries at a lower cost than Uncle Sam, whose long bond still flirts with 6 percent; home mortgages cost 7.5 percent plus points; and consumer credit rates hold fast in the high teens. If you’re a player, you can margin your stock bets 110 percent and the Fed can’t touch you. Credit-card financing priced to the cardholder at 18 percent is securitized by the Wall Street sharks and resold in the bond market at closer to 8 percent.
Some would say this bleeding of the common folk is usury. Real interest rates-face rate less inflation-are the highest in history. Given the thriving state of the economy, this is beyond unacceptable, this is criminal! Unless, of course, inflation hasn’t gone away, after all, but has merely been diverted, but Mr. Greenspan says this is not the case, and Mr. Greenspan is an honorable man.
In other words, what Mr. Greenspan et al. have bestowed upon the speculator, they have taken from the consumer. Thus does the Fed do its double-entry-or should it be “double-dealing”?-bookkeeping. Meanwhile, the downsizing ax gleams as sharp as ever, and the far bank of the Rio Grande glows radiant with alternative possibility for manufactures, so wage rates in basic industry are rising imperceptibly, if at all.
When Henry Ford raised his assembly-line workers’ base pay to $5 a day, he figured they would use part of it to buy the very cars they were making in Dearborn, Mich. What the great man might have done had he known from maquiladora manufacturing, we shall never ken. To a manager, a stockholder, a security analyst, a dollar of profit is a dollar of profit, no matter where earned or, increasingly, how. Yes, jobs are being created, according to the statistics, many in places like Silicon Valley where venture-capitalists continue to throw cash at money-losing pie-in-the-cybersky schemes. Can this go on? How long? How many Cal Tech Ph.D.’s does it take to change a transistor? I find Michael Lewis’ brilliant Slate dispatches from Silicon Valley positively alarming.
There is sense to the argument, beautifully elaborated in the current number of Grant’s Interest Rate Observer , that inflation is in fact alive and thriving. We just happen to be lulled by Alan Greenspan and his colleagues-or should it be “fellow conspirators”?-into looking for it in the wrong places. My view is that inflation has simply moved up the block from the A.&P. and Safeway into the financial markets. From the market basket into the Market’s basket (the one the stock index bettors use). I could be wrong; Mr. Greenspan would say so, and Mr. Greenspan is an honorable man.
It can be argued that the policies pursued by the honorable men who rule our money have transferred its loss of value from the making, doing and subsisting sectors (which the Government’s inflation-monitoring statisticians measure and report on) to the finance sectors (on which they are mute). Can’t one construct an inflationary fission-reaction that goes something like this: Usurious interest spreads create multimillionaire partners of Goldman, Sachs & Company who drive up the cost of private schools, co-ops, second homes in the city and “duh Hamptons,” and drive the less favored off the land with financial pressures-rising costs for shelter, transportation, children’s education-that the powers that be don’t count as “inflation.”
But inflation, after all, is simply too much money chasing too little of whatever it is that money desires or aspires to, from frozen dinners to new friends to engraved certificates. Inflation is too much capital chasing a scarcity of opportunity. The opportunity will vary in type according to who has the money and how much. It is called Say’s Law: Supply creates demand. Demand for deals, leveraging opportunities, initial public offerings. For Gulfstream jets and executive golf outings run through the corporate balance sheet as “deferred business development.” More or less in keeping with Parkinson’s Law-“Work expands to fill the time available for its completion”-Wall Street expands the quantity, range and variety of its merchandise to harvest capital.
Big certainly applies to the nascent “Citigroup” with the cute red umbrella. As in “too big to fail”? One wonders. For those of short memory, this was the policy benchmark adumbrated in 1982-1983 by the Reagan Administration in making whole the Continental Illinois Bank’s investors. My guess is, Perhaps. More likely, in my opinion, what has been created will be “too big to succeed.” My reasoning: There will be an outflow of creative people, the nation-size monolith will be too large and complex to manage even intelligently, let alone innovatively, and surely not in a risk-aware fashion, given the market’s expectations for the giant. Huge organizations breed frustration and resentment in ambitious people, which has been known to breed in turn foolhardiness, even larceny.
I expect that internecine strife will flourish. Citigroup may well turn out to be the Arthur Andersen & Company of high finance: with bankers vs. traders (instead of accountants vs. consultants). It’s not inconceivable.
And if, in time, Citigroup requires Uncle Sam’s (we taxpayers’) backstopping in the wake of some foolishness, the Mexican bailout will look cheap-at least, as was also the case in Mexico, to those who endorse the Federal give-away checks, if not the rest of us who sign them. And, finally, there is always the “Five Towns factor.” Beware, John Reed, beware the Ides of Weill! A man once “Robinsoned” will not risk being “Reeded.” Watch your back. Check the jet for hidden cameras.
So where do we go from here, then? Well, let’s focus on inflation, which can be described as a rise in the general level of prices with no concomitant rise in productivity or intrinsic value or utility. It is usually corrected only by a general fall (“deflation”) or stasis (“disinflation”) in the aforesaid price level.
Now, what we had better understand in this country is that inflation is built into our present capitalism, which is centered on the dependable, rising profitability of enterprises translated into stock prices. We have been encouraged by the Fed and other honorable parties to define inflation pretty much solely in terms of rising costs, with energy, raw materials and labor being the principal scapegoats in the commonest inflationary scenarios. This bias is understandable, disseminated as it has been by people like the honorable chairman of the Federal Reserve, whose curriculum vitae displays no indication of his ever having had what most people in this country would consider a real job.
The indisputable fact is, however, that our economy is as dependent, from top to bottom, edge to edge, on credit as it is on raw materials, power generation and an ample, aspiring work force. In the past 30 years, as American business-and the American consumer (viz., the mortgage borrower)-has moved from long-term, fixed-rate bonded indebtedness to adjustable-rate borrowing, interest costs have become as potent a source of cost-push inflation as any other. The irony, sublime were it no so lethal, is that when the Fed moves to cut off inflation by raising rates, the effect is not exactly what we are told by these honorable men.
Volcker’s Killer Cure
Go back to Continental Illinois. The near-failure of Continental was traceable to bad loans and risks originated by Penn Square Bank, in Oklahoma City, which laid these off to the big Chicago bank.
Most of Penn Square’s big bad loans were in the oil patch. It was the oil patch that was perhaps hardest hit by the “policy” of hyper-tightening interest rates installed by that honorable man Paul Volcker to curb inflation. What no one said at the time, except yours truly, although mine was hardly a disinterested voice, was that the cure was also a killer. Mr. Volcker sought to drive prices down by driving money costs up and thereby discouraging foolish new borrowing, of which the corollary is foolish new lending. But every interest bill in the country went up, even on loans taken out years earlier, by enterprises too small to have recourse to what was left of the fixed-rate market. Businesses in place, perfectly soundly financed at, say, 12 percent, went down the tubes when the rate went to 21 percent. How many “bad loans” were created not by business iniquity or foolishness but by Paul Volcker’s policy? A great many, I wot. I owned one of them. Fifteen years later, I am still paying off the loan, which I guaranteed personally. I hope Paul Volcker rots in hell, and I hope it is soon.
But like Dr. Pangloss, our masters tell us it must be so, that the Fed is the light and the way, and who are we to doubt them, for they are honorable men. Some might call them dogsbodies for the rentiers , because the effect of Volckerism (the necessary parent of Milkenism) is to transfer the nation’s wealth from industry to the paperhanging classes. But before you quibble, recall your Martin Chuzzlewit and remind yourselves that in this country, honor is an affair of “dollars, sir!”
And then there is this to ponder. The only inflation that matters is that which impacts on the central, the key component of American economic activity, whatever that happens to be at a given time. Today it is the stock market that is the measure of all things. The stock market has displaced manufacturing and production as the lodestone of the American economy. But the market remains mainly a proxy for business results. Stock prices-and the value of chief executive options and pay packages-depend on the goods-and-services sector’s bottom lines. Is it not therefore likely that Prices (from whence flow Profits) will be raised by business to maintain whatever level of profits-or profit expectations-is required to support stock prices, irrespective of “real” costs like fuel and labor?
Finally, then, quo vadimus ?
The mutual fund numbers suggest that when it comes, the carnage will be the worst in history, absolutely and proportionately, as funds are forced to sell to meet redemptions. When mutual fund stockholders can get through to redeem, that is. If you thought AOL was a bitch when it went to $19.95 for unlimited usage, just try logging on to Fidelity Investments when the market goes into free fall!
I think it still has a way to run. Why do you think the Republicans have wishy-washed on Bill Clinton? Simply because Dow and Jones stand at the head and foot of his trundle bed like the angels in the old children’s prayer. History suggests that their place will one day be seized by horned demons named Graham and Dodd, but frankly, I am no longer so certain. Does George Santayana’s dictum about those who ignore history being doomed to repeat it also apply to those who have abolished history, for whom history not only has no meaning, but no existence? Konstantin Stanislavsky demands that the initiate stand in a corner and not think of a white bear; it’s an exercise that’s hard for most of us, but not for those who have no idea, presumably thanks to a good Brown education, of what a white bear might be. Or that there was ever another dimension to mortal time than today.
Anyway, I look forward to reading the bad news by the light of mansions burning up and down Lily Pond Lane. Or, better still, remember the movie Spartacus ? With the rebellious slaves crucified every 100 meters by the side of the road to Rome?
Will Sandy Weill play the Kirk Douglas part? Will the partners of Goldman, of Bear Stearns & Company, of DLJ Inc., be the ones dangling from lampposts? Even better: Will the gibbets sway with the wracks of honorable men?
It’s a mind’s-eye vision that does almost make one wish for a crash.
Almost-but not quite.