Meet the New Boss, Same as the Old Boss

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 That when investments contain overleveraged or synthetic collateral as backing, the efficient market hypothesis is no longer valid, i.e. investors no longer have access to all pertinent information, and the price will no longer reflect an accurate market assessment of value.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."

The Beauty of Finance

Sarah Palin, once mocked in the press and on television for her vacuum of foreign policy skills, her implosive domestic agenda, and her slippery-fingertip grasp of economics, has finally shown her true colors. She is a financial genius, on the same level as Jim Cramer, Richard Nixon, and Herbert Hoover.

Speaking in Hong Kong at an annual conference of investors, Palin has finally cracked the code that led to our current global economic malaise, an issue that has already been explored by dozens of books, magazine articles, and television documentaries, all helmed by leading pundits, regulators, economists, traders, banking experts, and financiers. Contrary to this treasure trove of insight, in her opinion the fault line lay in too much government regulation.

Alan Greenspan, the legendary head of the Federal Reserve, has said, "I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms." He went on to admit, "“I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.” Under questioning by Rep. Henry Waxman at a congressional hearing, Greenspan even went to far as to agree that his world view, his entire ideology of deregulation was wrong. According to man who headed the most powerful financial institution in the world for 19 years, it was a lack of regulation that fomented the collapse. But from Palin's perspective, Greenspan is old and not very pretty, so he is not to be believed. Did Greenspan ever kill a wolf from a helicopter or put on hip waders for a news conference? I think I've made my point.

Numerous experts have pointed to the repeal of the Glass-Steagall Act with the Gramm-Leach-Bliley Act, a bill that removed the separation between commercial and investment banks, and the Commodities Futures Modernization Act, which eliminated penalties for outright gambling by investment houses, as key components of the meltdown. Further, a multitude of insiders point to a dysfunctional SEC as a contributing factor; this was an agency that for 16 years didn't notice the largest swindle in history, the Madoff scandal. Madoff's hedge fund was a Ponzi scheme, the oldest trick in the book and one that an MBA student could have uncovered, let alone the chief securities regulator.

Several investors walked out on her speech, but that only showed how their "reality-based" worldview will limit the possibilities for the future. Palin lives in a universe where Ayn Rand is the Supreme Creator, an alternate existence where the removal of all restraint will inspire trust and confidence in the markets. The French, the Russians, and the Iranians have already experienced this happy place of social Darwinism presided over by a discompassionate oligarchy, and as a result, the world received the benefits of the guillotine, Stalin's communism, and Islamic fundamentalism.

Perhaps this is Palin's strategy - we'll all have to buy lots of guns and move to Alaska while we await the apocalypse. Oh, joy!