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The public has been trained to believe that the people making the decisions at the top of the American financial system are masters of the universe. These were the best and the brightest. They had invested all of these wonderful contractual obligations that made billions of dollars of profits for their companies. It was going to go on forever.
Then, like toppling dominoes, the masters of the universe were exposed as bunglers of the universe. They took their severance pay of tens of millions of dollars each, and went off into the oblivion that is reserved for ex-masters of the universe.
These stories kept coming before the public, beginning with the forced sale of Bear Stearns in March. One by one, the organizations that supposedly are at the heart of American financial capitalism have been exposed as barely functional operations that have been run by men who did not have any understanding of the new finance.
All of these leveraged securities had been disguised by mathematical geniuses. So had Long-Term Capital Management, which went bust in 1998. The problem is, the heads of these organizations are not mathematicians. They took the word of a bunch of "quants," who had no experience making money, that these incredibly complex contractual agreements would make above-average profits, year after year, and not expose the issuing organizations to gigantic risk. In other words, they trusted mathematicians and computer geeks with the future of their companies.
Anyone who has dealt with computer geeks knows that some of these people have trouble balancing a checkbook.They are whizzes at constructing arcane codes that nobody understands. it is even worse with the mathematicians. They thought that you could evaluate risk in advance and shield yourself against risk by establishing co-party agreements. AIG wrote $447 billion of these agreements. No one knows how the Federal government will pay off any of them in a market collapse.
The entire system is unraveling. Nobody has a handle on it. Nobody knows how many agreements are out there, or how much money is at risk, or how many bankruptcies we can expect. All that the experts know is that this system has been designed by mathematicians and computer geeks.
The people in charge of sorting out this mess are tenured, salaried economists who work for the Federal Reserve System and the Department of the Treasury. These are the fellows who were not good enough at mathematics to become mathematicians. Yet these are the people who are expected to produce a cure for the developing catastrophe that is threatening the capital markets of the entire world.
No port in this storm
There is no national port in the storm that has now begun to hit us. This storm is like Hurricane Ike. Hurricane Ike was gigantic in terms of its diameter. It was as big as the state of Texas. Like Hurricane Ike, the financial storm we are in is not yet a Category 3 or higher. It is more like a Category 1. It will not stay a Category 1. It is going to go to Category 2 or 3. And, like Ike, it is going to cover a lot of territory.
Experts now say that this is going to be a mild recession. They have said that it will last six months. These are the same people who said there would be no recession. They did not tell you to short the stock market in 2007. These are the people who have been perma-bulls since 1982. They tell you to have a balanced portfolio of stocks and bonds.
The storm is coming. You have been warned that the storm is coming. Those of us who have been critical of Allan Greenspan since 1987, because we knew that he believed he could outsmart the capital markets of the world, were amused to hear him say on Sunday, September 14, that the capital markets are entering into a crisis that we see once in a century. Thanks, Alan, for you are the one who created it.
There comes a time to face reality. The realty is this: the best and the brightest in America's financial institutions were blind as bats. They thought that risk was minimal. They took gigantic risks with the capital of their return on investments that should never have made at all. They are matched in blindness by the economists at the Federal Reserve System and the United States Treasury.
We have a lame-duck President , a lame-duck Treasury Secretary, and an academic economist who is running the Federal Reserve System. The best and the brightest in the private sector have been dismissed. They took their tens of millions of dollars and wandered away. Now we are left with tenured government bureaucrats who are in charge of Fannie Mae, Freddie Mac, and the largest insurance company in the United States.
Conclusion
Investors last week began to figure it out. A lot more investors are going to figure it out. They are going to have two years to figure it out. This is if things go well. They MAY have three years to figure it out.
Whoever is elected President in November is going to preside over the worst financial disaster in American history in the postwar era. Some lucky soul is going to lose this election.
You had better batten down the hatches.
*Gary North, is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.