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Funny Money

The most incisive and provocative take I've read on the financial meltdown is Robert Samuelson's column today, in which he writes this stunning sentence: "What's really happened is that Wall Street's business model has collapsed." Whoa. That got my attention at the breakfast table.

Samuelson explains his thesis much better than I could, so I won't try to repeat it. But if he's right, I think we'll come to wonder how we ever convinced ourselves that the now-collapsing (or at least teetering) model ever made sense. Common sense should have told us that making risky bets with huge amounts of borrowed money was a dangerous game; if the bets pay off you make money beyond your wildest dreams, but if they go bad you face utter ruin. Common sense should have told us that betting fortunes on small and ultimately meaningless fluctuations in stock, bond or currency values -- as hedge funds often do, unfettered by any meaningful regulation -- was about as productive, in terms of the real economy, as a trip to Las Vegas. Common sense should have told us that buying and selling exotic securities based on other securities based on bundles of mortgages that were treated like mere numbers on a balance sheet -- with no recognition that the whole iffy construct was based on real people living in real houses that they might or might not be able to afford -- was not an endeavor to induce restful sleep.

Somehow, we all forgot that "highly leveraged" is just another way of saying "deeply indebted." Now we've had a wake-up call, and maybe the erstwhile Masters of the Universe will have to stop playing with imaginary money and go back to using the real stuff.

By Eugene Robinson  | September 17, 2008; 2:41 PM ET
Categories:  Robinson  | Tags:  Eugene Robinson  
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Comments

Samuelson had me nodding until he got to the part where 10 to 1 is what he calls good, acceptable leverage. Maybe it is, but then where is the paradigm shift?

Posted by: Howard K | September 17, 2008 3:21 PM | Report abuse

Why not go all the way and admit that currency is just a representation of value that has to be backed up. All the "real money" in the world won't help you if it's dollars and the dollar has no value. You could starve. People need to realize there is more value in self-sufficiency and knowledge.
Paper is only good if the government can back it up. Or something like that.

Posted by: Suzie Q. | September 17, 2008 3:33 PM | Report abuse

The best book describing the problem is, ironically, written by an erstwhile Republican. Kevin Philips, in American Theocracy describes the inevitable downfall of countries that stop being primarily concerned with real production (manufacturing, commerce), and become dominated by financiers who make money by trading symbols of real production. What I want to know is why the people who have been driving this economy into a ditch are the ones who "earned" millions of dollars because they were so smart.

Posted by: Joan C | September 17, 2008 3:52 PM | Report abuse

Joan C.: Bingo! Exactly what crossed my mind first. I have Philips' book (one of the dozens of gotta-read-that-soons), but the idea isn't foreign to me; it's akin to what those of us trying to keep Wal*Mart out of our community are thinking about: namely, that retail sales are not "production" in any sane meaning of the word. So also with financial speculation, times infinity.

Posted by: Linda Maloney | September 17, 2008 4:00 PM | Report abuse

Start talking about the financial markets, and suddenly, the election's not fun any more. There we were having the time of our lives praising or picking on Palin, and then we realized: the theater is on fire!

Posted by: Lulu | September 17, 2008 6:29 PM | Report abuse

Real Brother here.

Though I usually agree with Eugene on everything(except his take on Condi Rice)I have to disagree with him here.

The reason for the collaspe of the Insurance industry is due to people not able to afford car insurance because of high gas prices. People who can't afford to pay their home owners insurance because of the lost home values.

The War is killing us people don't have money to pay for insurance let along INVEST in pork belly's. In short its the economy stupid.

Everyone is talking about how Obama's a Socialist because he wants to regulate and tax these Countries that are causing our dollar to lose its value.

The War in Iraq and the attack on the middle class is simply killing our Country and McCain and Palin want it to continue and so does every other Racist, White Supremacist and Black man hating lesbians.

TKCAL

Posted by: Realbrother | September 17, 2008 7:46 PM | Report abuse

For the past five years, I’ve advised family and friends that there was going to be a fall in the mortgage market, which for all intents and purposes would eventually cause a collapse in financial markets. I am not happy I was right and I’m not gloating about my prediction. It saddens me that an amateur like me could see the signs that came from greed and slick mortgage companies. Mortgage companies that shelled out billions in loans not worth the paper they were written on. The signs of a failing economy were there with consumer and government debt so alarming, so shocking and so incredible that it’s akin to the lookout in the crows nest shouting "ice-berg ahead!?" But the band played on.

The total loss in the DOW this week is hovering around 950pts, the single biggest stock shake-out since 1929. What’s worse, the government bailout of AIG is like writing a check to pay for a bounced check. Floating checks is not only illegal, but catches up with the offender with devastating financial consequences. The US government has the highest debt in history and the average American hasn't a clue as to what's going on. Like the war in Iraq, the White House and the Republican campaign say “just go shopping” all is well.

Right now we need someone out there to shout that not only is there a huge ice-berg ahead, but to brace yourselves, get the life boats ready, put on your life vest, stop the dancing and partying on the lower decks and brace yourselves for a very, very hard collision.

Posted by: Ahsay | September 17, 2008 8:43 PM | Report abuse

When things are bad people never think they'll get worse; when things get worse, people never think they'll get better...

And then when things get better... The business cycle - exacerbated by greed and fear - has always been with us. Just as corruption has been, as well.

We can't get rid of the business cycle, fear, or greed. But corruption, believe it or not, has continued to decrease over the past 220 years or so.

And as for the deregulation-corruption-bailout schemes that McCain has been supporting for the past twenty years: it, like him, has to go.

The American people are too dumb and happy to figure that out. The question is: does the Washington Post still care enough about the truth - and the American people - to do it's job and let people know what is really going on...

Posted by: Deep Blue | September 17, 2008 9:21 PM | Report abuse

Our great grandchildren will hate us for letting the (R)'s loot our treasury.

Posted by: PreAmerikkkan | September 18, 2008 2:31 AM | Report abuse

Delusional idealism has propped Wallstreet up for too long now, this correction to a proper bear market has been overdue for about a year. Posponing the inevitable by bailing out the unwise will just put further downward pressure on the dollar while the delusional still refuse to eliminate needless volatility by Oil Speculatars. It ain't over yet.

Posted by: Mark W. | September 18, 2008 7:21 AM | Report abuse

I guess this is one time savers could be penalized big time. Who would have thought investing in the Dow would be considered a bad thing done by greedy people? I hope nobody is going to blame hard-working Americans for investing in the stock market.

Posted by: NoDebt | September 18, 2008 7:50 AM | Report abuse

I really wonder if this fall will affect people’s view of economics. Years ago the business report was a small add on to the news. Now it is a section on its own. Typically the "experts" brought on to these programs are from the money manipulation industry or right wing think tanks (eg propagndists). I have been high enough but not that high, in companies to know how little these people know about what is going on. Yet they are there on TV holding forth on everything from the health of companies to the health of people. What isn't said is that these people have a bias and have limited understanding of the economy. When Michael Moore was on CNN they fact checked every claim, when someone from a financial firm or the American Enterprise Institute goes on TV nothing is checked.

The real question is "is anything going to be learned from this?" After the Iraq war disaster you would think would it have sharply discredited the neocon so called experts like Pearle and Kristal, but they still show up as experts in the media despite the complete failure of their basic claims to expertise. Other than some lame attempts to explain away their failures usually based on minor differences in policy, the neocon so called experts have never been held to account.

Unfortunately I think that we will see the same failed economic beliefs to be propped back up with the argument that some minor tinkering will make everything ok again. Although Milton Freidman’s pop economics have been shown to be deeply flawed by following Nobel winning economists, will they continue to be the dominant economic theory followed by the US. Other countries have been burned by them and moved on or never followed them with such dedication as the US. Can the US get out of its mental straight jacket? When I was in the US a few months ago the term socialized medicine kept coming up. Sometimes to my American companions I would refer to their “system” as corporate medicine. Of course neither expression is correct, the US government spends the same percent of the GDP on medicine as we do although we do spend considerably less privately. The US needs new flexibility in economic thought not dominated by catch phrases and economic doctrine. Based on experience so far, I don’t see it happening.
.

Posted by: jonnm | September 18, 2008 7:53 AM | Report abuse

www.barackobamaslipstick.com is up!!!! It is Barack "Maybelline" Obama!!!!

Posted by: Baroprah Obafrey | September 18, 2008 9:41 AM | Report abuse

I think it was Sebastian Mallaby who made the point it was the regulated broker dealers (investment banks), not the unregulated hedge funds, that were blowing up. Over at Barry Ritholtz's Big Picture blog he has an SEC guy saying that in '04 investment bank capital ratios were lifted from 12:1 to the incredible ratios that sank them (30-40:1). This is the deregulation that left-wing pundits should scream about. Maybe the hedge fund boys, with their carried interest and being more like small businesses were smarter. Maybe they actually treat their carried interest like their money, causing better outcomes. We know how the investment banks treated their capital. So it seems one point for regulation (investment bank capital ratios raised and then they imploded) and one pending for deregulation (hegdge funds haven't killed the finanical system yet).

Posted by: Joe Nuffer | September 18, 2008 10:25 AM | Report abuse

I would agree with Samuelson's theory. It IS an elaborate shell game that in the end, there is nothing under any shells. You may have seen someone put money under a shell to start the game, but they palmed it and they are richer because of our ignorance.

I don't believe that Bailouts, loans or regulations are the answer. Just let them fail, the free market will let those companies with good, smart investments rise to the top. Laws like Sarbanes-oxley are a joke. So, the CEO has to certify the financial statement? If they're doing hinky things they'll end up with the short stick eventually with the law or with out it.

In my experience those who are trying to make a quick buck probably will...for a while. but those who have sound business practices and are honest will be secure in the long run.

I think we ARE seeing the collapse of the adjustment after deregulation. Now the good practices can rise to the top...if we don't keep having the government try to manage the problem. The free market will adjust itself. Yes, it is painful. Yes, people lose money. Yes, lives can be destroyed. But, we have to work as individuals to research and understand where our investments actually are.

Posted by: Dave, Minneapolis | September 18, 2008 10:36 AM | Report abuse

This housing bubble and the consequences we have been seeing on Wall Street are watershed events. They mark the end of the era from financial deregulation in the '80s to 2007 when the nation decided to stop thinking that ever increasing debt loads were bad and where the American economy stopped producing things and started to merely, market and finance shopping. Consumer spending makes up 70% of the American economy and trade and budget deficits (both personal and governmental) are ever growing.

An economy can't continue to be healthy unless it produces things. Simply marketing and financing other countries manufactures simply makes Americans debtors of the foreign producers.

The Executives that ran or run the investment banks and Fannie and Freddie need to not merely be fired but also indicted for the massive fraud they have perpetrated on the American economy and the American people. They should have all assets stripped so as to remove the fruits of their massive fraud and negligent mismanagement of the American economy that led to short term only focuses and off shoring of virtually all US manufacturing capacity in order to massively enrich America's senior management classes. This is why the only class within the economy to see steady and extraordinarily rapid income gains are the very top management of Americas corporations. It is amazing that for years we have seen executives massively compensated regardless of success or failure and no actual accountability at the top.

This needs to stop and we need to move back to fundamentals and hope it isn't too late. There is no reason that American standard of living should be higher then those of other people around the world. Ultimately it won't continue to be unless we move back to the fundamentals where riches are the result of making an economic contribution, ie if you made something of value then you profited from it.

Posted by: Mike | September 18, 2008 11:06 AM | Report abuse

Bush hard at work on financial turmoil (headline on today's web although it describes 7 years of hard work)
If we had a visitor from space review the US economic policy of the last 100 years and compare it to the last 7, the visitor would come to the conclusion that Bush/Cheney/McCain/Phil Graham/failed HP exec were TRYING to plunder and defeat the US from within for the benefit of their masters in Saudi Arabia.

Posted by: JJ | September 18, 2008 12:45 PM | Report abuse

www.barackobamaslipstick.com is up!!!! It is Barack "Maybelline" Obama!!!!

Posted by: Baroprah Obafrey | September 18, 2008 1:09 PM | Report abuse

It's disturbing to realize how much of a house-of-cards this whole financial system has been for the past near-30 years.
Tighter, harder regulation isn't a good idea now; it's a necessity. We can see the dangers of letting the free market run riot. Now the economy will take an even-steeper downturn, thanks to our rules-slashing Republican "friends"... all of whom either made their money and got out (if they were smart) or lost their shirts (if they weren't), and took the rest of the country down with them.
Another good reason not to reward this gang of incompetents with four more years.

Posted by: DB | September 18, 2008 1:17 PM | Report abuse

www.barackobamaslipstick.com is up!!!! It is Barack "Maybelline" Obama!!!!

Posted by: Baroprah Obafrey | September 18, 2008 1:09 PM
______________________

Who is this idiot and why is he wasting the board's time on this inane trivia?

Posted by: DB | September 18, 2008 1:19 PM | Report abuse

When did we let the finance gas bags replace the word "debt" with "leverage" without some kind of fight?
Were we distracted by paying off the monthly minimums on our credit cards?

Posted by: jr | September 18, 2008 1:23 PM | Report abuse

Yo, Mr. Robinson, do something an actual populist would do and hammer down that the people who made these bad deals that resulted in the U.S. Govt bailout need to go broke with their companies. The U.S. Govt should sue to get back the phony dividend checks these guys wrote to themselves with what is now the people's money.

If the current laws do not allow for that, well write new ones.

Posted by: DCDave | September 18, 2008 5:00 PM | Report abuse

Those who play by the rules, well, end up with more rules. Those that don't, well, they end up being saved by taxpayers.

What a tragedy!

Posted by: Hari | September 19, 2008 1:21 AM | Report abuse

It would be nice if we could go back to being "citizens" instead of "consumers." Citizens care about their society and the future. Consumers consume. 70% of our economy depends on "consumption." We used to call that "eating our young."

Posted by: RMarigny | September 19, 2008 11:44 AM | Report abuse

Like I said, a year ago: it ain't over yet.

Get ready to duck further and keep your head waaaaay down.

Posted by: Mayapan1942 | September 19, 2008 8:00 PM | Report abuse

Little makes me grimace more than when people like you -- so, that is, most of your journalist colleagues -- discuss, diagnose, and "analyze" economic conditions and changes without any actual substantive understanding of the issues, rather with merely a capacity to sensationalize them.

Please, trivialize politics, but keep economics out of the repertoire.

Posted by: An Economist | September 20, 2008 12:44 AM | Report abuse

All pyramid scams eventually implode. But who would ever have thought that giving mortgages to people with no jobs nor income was not safe. :) :)

Posted by: JOHN KLINE | September 20, 2008 12:55 AM | Report abuse

The past does repeat itself endlessly for those who don't pay attention. Today we don't pay attention because we're too busy watching TV.

Posted by: JustSayNoWay.com | September 21, 2008 9:58 PM | Report abuse

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