The Wall Street Journal published an article today about the pioneering work of Yale University economist John Geanakoplos. Working in the academic version of a rat-infested basement with sooty windows letting in streaks of dim light, he has toiled for years trying to redefine the nature of collateral in our modern economy. His ground-breaking work? That when investments contain overleveraged or synthetic collateral as backing, the efficient market hypothesis is no longer valid, i.e. investors no longer have access to all pertinent information, and the price will no longer reflect an accurate market assessment of value. Financial derivatives, collateralized debt obligations, and a whole odd-lot assortment of "casino" investments qualify, explaining in part the economic collapse. Wow, on the surface, this seems like big news.
According to Geanakoplos, when there is a margin call because of concern over future expectations and collateral is short, prices drop, which further exacerbate the situation. Mmmm, this sounds very familiar. In fact, this "new paradigm" seems to have its roots in the 1929 stock market collapse, which was triggered by margin calls because the collateral to cover didn't exist.
There's no "new thinking" here. Investments, whether in a Wall Street casino or a Main Street home, had no down payment, no collateral. This is nothing short of fraud. What he's really saying is that when you defraud investors, they get burned. And when you defraud an entire industry, the global economy gets burned. Yet, no one has been charged with this crime, a transgression that makes Bernie Madoff seem like he stole penny candy. Why?
Let's not forget the words of Jean Rostand, French experimental biologist and philosopher: "Kill a man and you're a murderer, kill many and you're a conqueror, kill them all and you're a god."
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