The Zong

Why was this man so damn pissed off last week?

It’s the credit market, stupid.

As I’m sure everyone out there with a no money down, variably funded, subprime mortgage now knows, the housing credit market shit the bed a few weeks ago, and the resulting effect it had on the credit market in general has Market Playas like “Iron” Jim Cramer here and his Captain of Industry ilk shaking in their very expensive shoes. It’s not that they’re paying for their Hampton estates on a wing and prayer, it’s that, to our great benefit and sometimes bane, our economy is linked in ways it never has in the past, not since the pre-1929 days. Cramer and his hedge fund buds make money off the intricate shuffling of liquidity from one source to another: I don’t pretend to really understand it, but I do know that rattling of the credit market gives the Wall Street glitterati a nasty case of the runs. There’s even some creditors that have taken to shutting off all lending all together until they see where everything shakes out.

In this week’s New Yorker, James Suroweiki has a great little blurb (8/27/07, ‘Beware Bailouts’) on the credit meltdown (hereafter known as The Great Meltdown, Seriously, This Time, Not Counting 1979, 1989, 1993, and 2001), and it’s effects, or rather possible non-effects on the economy as a whole. To wit:

“Wall Street so dominates our image of the U.S. economy these days that it’s easy to assume that what’s bad for the Street must be bad for everyone else. But, while it’s true that a complete market meltdown would have disastrous effects on the economy as a whole, market downturns like those of the past few weeks often have only a small effect on businesses and consumers. In part, that’s because much of what happens on Wall Street consists of the shuffling of assets among various well-heeled players, rather than anything that’s fundamental to the smooth functioning of the U.S. economy. (The economy did fine before the advent of hedge funds and private-equity funds, and would probably do fine in their absence.) Similarly, while stock-market tumbles are always painful, they have no concrete impact on most American consumers, who own little or no stock. (In any case, the S. & P. 500 is still up ten per cent over the past year, which hardly suggests imminent disaster.) And, in the short run, they’re irrelevant to most corporations, too, since few companies actually use the stock market to raise capital.”

So “Barbwire” Jim’s little rant has a bit of a whiff of the disingenuous to it. He’s freaked out, sure, and so are his buddies. But how much do the high-value movers and shakers have to do with what we, as normal working Americans, see as our daily living economy?

Surowiecki’s excellent article’s main point is that with every Fed bailout, the risk-takers that drive our Dow numbers higher and higher to such dizzying heights are less inclined to think sagely about where and what to put their (and our) money into, and he’s spot on. But he’s only got half the point, and maybe he doesn’t say it because he doesn’t want be Swift-Boated as an insane, anarchistic anti-capitalistic crackpot. Luckily, I don’t mind.

I’m a free-marketeer in the best beating-back-bloated-bureaucracy sense of the phrase, but it doesn’t take a lot of insight or financial acumen (of which I’m short on both) to start to get the sneaking suspicion that some of the highest rollers on Wall St. don’t exactly have Main St. best intentions at heart. I’m not really sure why it’s so dangerous to mention this in polite company, but when real money is made, it doesn’t trickle down too much: in the past 20 years, the separation between the rest of us and the super rich ( hedge fund managers, et all) has leaped frogged to unheard of heights. Additionally, we have ample evidence time and again that when the people at the top of market think they can get away with it, they will binge and purge, sneak around, make and bunch poor choices, and eventually vomit all over the US public and economy with their lousy bets. And guess who gets to clean it all up? I’ll give you a hint: Marc Rich doesn’t own a mop.

In the past 20 years, ever since the Reagan Revolution (*chortle*), the deregulation of Wall St. has continued apace, and I’m not sure how many times the US government has to come in and bail folks out before we start talking seriously about the pitfalls of completely unmonitored financial markets. I’m a believer in the human condition as much as the next guy, but I’m also not dumb enough to believe people won’t try to get away with something if they can. Countrywide and other lenders posed their subprime lending habits as “for the people” , and “enabling the American Dream”, but you and I know that’s a bunch of horseshit. The lenders saw a group of people they could lock in to very higher percentage loans, and they went for it, because they were easy marks. And I don’t even want to begin talking about credit cards marketed to college students.

Until “Nuclear” Jim and his high level pals are actually forced to conform to some type of standards, we’re going to be seeing this again and again. I’m tired of seeing the US Government, and by proxy normal Americans, having to continually step to the plate and bail out these idiots when one of their schemes to cut this country into smaller pieces for themselves goes belly up. Hopefully, we’ve been lucky this time, the Fed’s .25 percent slashing of the discount rate did the trick, and we’ll all get to keep buying cool stuff. But eventually, we’re gonna have to pay the piper for these bozo’s choices, and I don’t know about you, but I’m a little short on funds these days.

- J.A.