Well, it’s happened. The financial sky has fallen. The good news is that it hasn’t crashed into the earth yet . . . it’s just fallen. And the next big question after the one that asks, “How does this affect me?” is, “What does it mean to say “the sky has fallen?’”
First of all, the little noticed headline that I read on the financial pages today was that Citigroup was purchasing Wachovia Bank. Think about this for a moment: If the sky is falling, why would one bank buy a bank that would have likely collapsed and been taken over in a few days or weeks? Well the answer is a simple one: Citigroup believes that when the dust clears, there is serious money to be made. They are following John Templeton’s advice to buy the market at the height of the Depression.
But what does it mean that the sky has fallen? Well, first and foremost the sky is the credit markets. When General Motors has to pay their payroll at the end of the week, and they look to see if they have enough and don’t, they call up the man at the money market fund and ask, “Can I borrow $338,000,000 until the end of the month when the dealerships send in their payments for the cars they bought on the 90 day net plans?” And up until most recently, the money market guy would say, “That will cost you 2.57%; okay?” And the GM guy would say, “Great. Will that money be in my account tonight or should I count on it for the morning?” This was and is a conversation that took place thousands and thousands of times each and every day the commercial paper market was open (commercial paper is how these people talk about the bonds that make up money market funds).
Over the past couple of weeks and especially after the collapse of AIG, two critical things happened that made the Treasury executives go crazy. The first was that for the first time in my 28 years in the financial world, a money market fund “broke a buck.” This means that a money market fund said it would pay money market fund holders less than the $1 it had put in. This is something worse than mortal sin. Not only do you have to go to hell forever, you also undermine the commercial paper market. Now the possibility exists that you could put money into a money market fund and not get back your full principal. Under these circumstances, getting money for short term purposes now became anything but routine. Now the possibility existed that banks would refuse to loan money to other banks and commercial paper lenders wouldn't lend money either. Without this capacity to have short term money move, you had what is generally been referred to I the press as a “liquidity crisis.”
What makes this so perilous is that without liquidity, the economy stops. Your credit card doesn’t work when you go to buy makeup at Walgreens and car loans dry up and mortgage loans dry up and payrolls get missed and stores don’t restock shelves. You’re beginning to see the chaos beginning to appear when you start multiplying this across the society and then throughout the world!
The Treasury’s response was to cobble together a plan whose design was to restore trust in the marketplace by taking away all the bad loans on the balance sheets of banks and investment companies. That way, if I now make a loan to a troubled bank, I can know with assurance that that bank is not going to go bankrupt very soon, and so, there is a good chance that I wouldn’t have to stand in line to get paid back after the bad loans get covered. It would be safe to loan money again. Why $700 billion? Because it’s a very large number…enough to convince the markets that there is no bank and any number of banks or investment houses that it could not prop up. The world would be safe again to make loans.
Well it didn’t happen again today. The markets crashed . . . that’s a fair rendering. They crashed . . . 770 points on the Dow is a crash in my book. Now the question is, “Can the sky be raised again?”
I have found myself, more than one this week, thinking about my intellectual pal and mentor, the great Creel Froman. Most people I know never heard of Creel, but I’m on a first name basis with him. He has a 3 handicap on the golf course which is pretty darn good for a California professor. Creel started his career looking at all the rules Congress uses to game the system to their needs. He eventually found himself at the University of California Davis and with the support of his department, he took time to write a series of books—eight I think so far—titled Language and Power. The main thesis of this work—all 8 books—is to establish, without any doubt, that all of reality comes into being by the application of power. Whoever gets to say what is, is, is powerful. Following me so far? So the House Republicans, by not delivering the votes they promised at the start of the day got to say, “Today, we will not pass this bill. That’s "what is so" at the end of the day.” They got to say what the is is. Yes tehre were Democrats voting "no" as well. The difference is that the Dems delivered the promised votes.
Froman also has one other message that he argues, elaborates and illustrates way past the point where it becomes an irrefutable truth: Those in power (Creel refers to these individuals simply as “Power”) use their power to insure that the “distribution of that which is most desired” always favors them. In other words, in Creel’s shorthand way of saying it, “power will always take care of power.”
In a paper I delivered to the psychotherapy community last Friday, I spoke to them about how to bring sanity to their clients’ lives. I mention it here to help you look to see what you need to do to keep yourself sane. Once again, let me again drive home the primary message I keep telling my clients: stay on purpose with your asset allocation program; balance to keep on track for your percentage in interest earning and equity investments. Also, pay attention to the things you can do something about; the amount you save, the place you live, credit or cash.
The comfort I suggested to my psychotherapy colleagues was to really get the importance of the law that power will take care of power. The sky will get propped up one way or the other. You and I may and likely will see a variety of changes that we will not like. Who do you think is going to pay for this? Power? And how will we pay for it? Nether presidential candidate in their debate wanted to even get in the same universe with the word, but you know that you can either print money and drive inflation to the moon, or you can raise taxes and put that burden on the largest tax payer group: the middle class or, more personally, your back. Guess which one is likely to happen after the election no matter who gets elected? This may have some serious implications in terms of what we might want to do in taking out IRAs and converting them to Roth IRAs as much and as soon as possible. Just a tip.
I’m in the same boat with you. I wasn’t planning on retiring any time soon anyway so that’s not big issue for me. The crisis is really about time, more than money. It is going to take time, no matter what the bailout plan ends up looking like, to get back to a time of prosperity. It will. As Froman so perfectly understands these things, power is housed in institutions and the financial institutions will be shored up, propped up, held up and made to survive and as this aircraft carrier of a global economy gets turned around in that direction again, we simply have to allow that time to unfold, doing what we can to use everything available to cover our little worlds while the Titans throw billions and billions around like so many toy cars.
Every good wish,
Michael
