This seems like a good time to step back and see where we are and how we got that way.
In last Sunday’s Times, William Cohan and Sandy Lewis laid out a very convincing debunking of what many people with a grain of common sense and market experience believe to be a rosy propaganda barrage about the state of the economy and Wall Street, a barrage that is essentially delusional.
What Cohan and Lewis couldn’t do, whether from lack of space or inclination, was to dwell on what seems to be going on. How the sausage is actually made. Since the current mantra du jour in public affairs seems to be “Watch what I do, not what I say,” I have to think this applies as much to the finances of this Great Republic as to it does to foreign policy or environmental matters.
I think we have to come to terms with, and decide rationally how angry we want to get about, the fact that Wall Street—the World According to Goldman Sachs, if you will—has essentially given the finger to the rest of us. Faced with the dire prospect of really cleaning up its stockpile of toxic assets, and with the regulatory and stock equity penalties that would surely be associated with a proper cleanup, the Street went eyeball-to-eyeball with Washington. Predictably, Messrs. Bernanke and Geithner blinked first. Rather than administer really tough love and stand firm on behalf of their real clients, We the Taxpayers, the Fed and the Treasury, faced with (at least perceptually) a deteriorating financial outlook, elected to substitute a placebo compounded by phony accounting, looking the other way, and an outright giveaway of the Public Capital.
The latter is the most crucial ingredient of the snake oil. TARP, TALF and other injections of statutory capital weren’t getting the job done, so Fed and Treasury, in what this space has dubbed “The Great Geithner Giveaway,” decided that the best way to rebuild the Street’s balance sheets, at least notionally, was just to hand the Street all the free money it wanted and let Goldman et al. trade their way back up to solvency. Borrow from the Fed and F.D.I.C. at 0 percent plus a fraction and lend the money to Treasury at 3 percent or so, or do other trades, including what starts to look like a fair amount of program trading in the stock market. And blow a lot of “compensation” smoke to cover the looting.
After all, capital is fungible, and if you can borrow from Uncle Sam what you need to juice up your bond book, then your own money—as it were—can be profitably deployed by your computers to make those suspicious, hugely auspicious futures trades that, properly timed, can drive the Dow up a hundred points in a couple of minutes. This is why a lot of people don’t believe in this rally that has taken the averages up some 35 percent or more (and some stocks, like Goldman and GE, much, much more). What could be a better way to fast, sure profits than “momentum trading” in which you kick-start the momentum? All over town, and especially on the Net, informed opinion doesn’t hesitate to murmur the word “manipulation.” But since Washington can’t understand, or doesn’t want to understand, that this may be a real possibility—after all, the stock market rally is the greenest shoot of all—no serious looking-into is on the agenda.
One hard lesson we’ve all learned by now is that properly orchestrated trading in options, derivatives and indices can drive the market price of the underlying paper or commodities. What seems to be going on in equities may also be occurring in the commodity markets, most noticeably oil, which has the highest visibility. It’s all what in Shakespeare’s day was called “claptrap to lure the groundlings”: The ultimate point of the exercise is to grind away at the fraying patience of investors whose intelligence is saying that these stock prices, with rare exceptions, don’t make sense in terms of the fundamentals, but who can’t stand appearing to be wrong day after day. If we have a true national emotion, after all, I would say that it’s impatience. The men and women who jerk market prices around understand that. It’s a simple matter of pushing the sideline crowd to the jumping point. Such a strategy needs money, of course, lots of it: Since the lucre that’s needed by the big players, the ones who can place $10 billion index bets, can be had for free from Messrs. Bernanke and Geithner, why shouldn’t the game be afoot? Charlie Prince must be St. Vitus–dancing in his vocational grave.
All this has given rise to conjecture and debate about the inflation scenario, which has returned to haunt us like one of Scrooge’s ghosts. I have my own definition of inflation: an increase in price unaccompanied by an equivalent increase in output value, whether the unit of account is an hour of manual or skilled labor, or a commodity price. For example, last weekend I paid $2.99 for a gallon of regular gasoline that presumably delivers the same BTU count as the gallon for which I paid $2.19 not all that many months ago. I think that’s inflationary. If I then demand, and obtain, an increase in my income to compensate for that 80-cent pop, a downward spiral is born.
With stuff like this going on, questions like these to be asked, it’s tough to get decent sleep. I’m beginning to wonder whether the administration’s smoking those “green shoots” they keep boasting about.