Marking to madness
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A foreclosure hotline has been “overwhelmed” with pleas for help, moans a report from the US.
One of America’s largest builders reports a record loss – and, in the last quarter, US house prices took their biggest fall in 21 years.
US Treasury Secretary Paulson says he’s run out of “easy answers” for the credit-crunch problem. And the US stockmarket registered its worst first five days in history.
The BBC passes along a Merrill Lynch report, warning a recession “has arrived” already in the United States of America. And John Stepek, deputy editor of this august journal, says that “Britain will not be far behind”.
The news headlines whine and squeal. But here at MoneyWeek, we are as happy as a loafer and tranquil as a corpse. We neither add to your worries nor take away from them. Instead, we count our blessings: we have the devil’s own sub-prime debt and a credit crunch from Hell; we have dollars, pounds and euros – none of them worth much of anything in particular; we have Ben Bernanke, Mervyn King, and a whole cast of characters who seem to have escaped from a circus; we have economic theories that would make an alchemist blush, and financial opinions that would embarrass a TV presenter; and we have a bull market in our favourite metal, gold.
The Canutes at central banks in all time zones are determined to put the market out of business. If they put enough new money into circulation, they believe the mistakes of the past will disappear and the markets will behave. They seem not to notice that the mistakes were caused by too much money and credit in the first place!
Prices of real things – oil, gold, food and farmland – are soaring. Oil rose above $100 a barrel last week – for the first time ever. And gold punched into entirely new territory, hitting $880 an ounce. The Financial Times says that gold is the “new global currency”, hinting that the old currencies – notably the dollar – are yesterday’s news.
But who has gold? Only a few speculators and grumpy old-timers. If it really were the world’s new currency, most of the world’s people would be flat broke. Most people have paper money. And most people don’t know whether it is coming or going.
It was only a few years ago that low-cost communications and computer technology seemed so promising. Access to the internet was said to have changed everything. Former Fed Chairman Alan Greenspan said ten years ago that a new era of faster productivity growth had arrived. But we can now pronounce judgment on it: with infinite knowledge at our fingertips we have turned into a race of morons. Ten years after the dawn of the Information Age, nobody knows anything. Is it inflation or deflation? Are we getting richer or poorer? Nobody can tell you.
What is a derivative contract really worth? Who knows? Not the people who put it together, the people who sold it, the people who gave it a Triple-AAA rating, or the people who own it. The alarms sounded back in the summer; it was clear then that the ‘mark to model’ valuations of these investments were as flawed as a TV preacher.
Months went by without anyone really knowing anything more – except that many people were losing money, including some of the smartest financial institutions in the world. Buying, selling, trading, investing – the transactions kept happening; trillions of dollars changed hands. And financial firms tot up many of their positions based on Enron-style “mark to market” calculations. They bet on the value of the trades six months, one year, five years into the future – and on what the dollar will be worth too. But who even knows what a buck is worth today? Circa 2008, the whole world’s financial structure is built of sugar bricks. It is all so sweet, until it starts raining.
And the builders – they seemed to know not nothing, but less than nothing. How complicated was it to build a house at a profit? Levitt and Sons – inventors of modern American suburban development – had been doing it for more than 50 years. And yet, with computers on every desk; with access to the Black Scholes Option Pricing Model; with a staff of trained economists and mathematicians; and internet connections drawing forth every possible bit of information at the speed of light; they couldn’t tell if they were making money or losing it. With all the wonders of the new communications era at their disposal, Levitt and his sons still went bust.
The financial world is essentially a war of wits. But in the 21st century the combatants laid down their arms. We recall the people who made “mark to market” accounting notorious – the Enron desperados. Ken Lay’s defense was a jewel; he argued that he had so much information he didn’t know what to do with it. He couldn’t be guilty of intentionally misleading investors, he told the court, because he didn’t know what was going on himself. The same line of talk had been used on reluctant investors: Enron’s business model was too sophisticated for ordinary investors to understand.
Like the New Era of dotcoms, subprime mortgage debt and derivatives, the current-account deficit, the dollar – and all the other financial subterfuges that are so clever we will never understand them – you just ‘got it’ or you didn’t. But finally, investors are getting it – good and hard. Who could ask for more?
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