This has been a very good week for us. We can’t remember when we’ve laughed so hard.
“We’re not going to Christmas tree this bill,” was how one senator – we think it was Chris Dodd – described how Congress would deal with the bailout plan.
We had never heard “Christmas tree” used as a verb. But leave it to a Washington hack to turn Christendom’s sentimental icon into a lobbyists’ grabfest. The boys on the hill began decorating the tree on Monday…they’ve been hanging baubles ever since. And according to today’s paper, they’ve agreed on the major issues; but they’re still going to take a few days to get the thing all trimmed out before it becomes law.
The Dow shot up 196 points Thursday as investors waited for the lighting ceremony. Oil rose $2.26. Gold dropped $13 to $882. The dollar held steady – in the Gare Montparnasse we paid the same $7 for our cup of coffee and pain aux raisins as we paid a week ago. And the yield on short-term government paper – 91-day T-bills – fell to exactly 0.27%, which is to say, nothing at all.
But getting back to the entertainment – everyone is getting in the act. Politicians, investors, comics…even the clergy. Yes, the archbishop of Canterbury said that men had put too much faith in the market…and that this faith had become a sort of “idolatry.”
He thinks government should be held in higher esteem…while the decisions and plans of free men should be curbed. More regulation is needed, said he, praising Britain’s ban on selling financial firms short.
Yes, dear reader, the poor Church of England has a fool as its top man.
But you can hardly blame a man of the cloth for believing that markets have failed and that government must fix them; the idea is so widespread, he probably got it like one catches a cold or picks up a popular tune – that is, without having to think about it himself.
When everybody thinks the same thing, no one is thinking. And now, everyone thinks the market screwed up…and the bureaucrats rush in to unscrew things.
Typical is this from Garrison Keillor:
“[T]hat’s why we need government regulators. Gimlet-eyed men with steel-rim glasses and crepe-soled shoes who check the numbers and have the power to say, ‘This is a scam and a hustle and you either cease and desist or you spend a few years in a minimum-security federal facility playing backgammon.'”
Out on the prairie, one can imagine all sorts of things. But it’s not as if there were no bureaucrats on the job between 2000 and 2007. How does one imagine that these same regulators, who missed the biggest bamboozle in market history, are now going to be able to clean it up?
How does a bureaucrat – charged with protecting the public’s money – recognize a scam more readily than an investor whose own money is on the line? What information does he have that is not available to the public? What theory does he follow that is unknown to investors? What meat does he eat…what wine does he drink…that prevents him from falling prey to from the delusions and temptations to which all flesh is heir?
This is what Hayek termed the “fatal conceit,” that public officials – armed with the power to force people do to what they say – will do a better job of running things than people can do for themselves.
Apparently, neither the masters of the universe on Wall Street, nor the geniuses at the rating agencies, nor the saints at the SEC…and certainly not the poor lumpeninvestor… understood what was going on. None had gimlet eyes. Instead, all their eyes bulged with admiration at the financial engineers’ handiwork…and with greed at how much money they could make.
And now we find, on page one of today’s International Herald Tribune, the bureaucrats’ practical challenge. “What’s this stuff worth?” The Paulson plan puts $700 billion in the hand of GS14s, clerks, hacks and appointees. What are they supposed to do with it? Buy “assets” that Wall Street wants to dump.
How are they supposed to know what it is worth? If they pay too much, the government takes a big loss. If they pay too little, at least according to the dim light coming from the Christmas treers, it won’t bail out Wall Street enough and the economy is likely to sink into recession.
“The reality is that we are not going to know what the right price is for years,” the IHT quotes a portfolio manager.
Isn’t it amazing how fast things change, dear reader? Only a few months ago every portfolio manager in the world would have deferred to the market. What’s something worth? Exactly what willing buyers will pay for it! Not a penny more. Not a penny less.
But now we have a whole new theory…that the value of a financial asset is somehow unknowable…it is like the face of God…or the meaning of “is” – it floats in the ether; it plays cards with Jimmy Hoffa. According to this theory, the value of an asset is determined not by what willing buyers will pay for it…there is no such thing as a ‘market price.’ Instead, values are metaphysical…determined by what willing buyers MIGHT pay for years from now…if everything goes to plan.
Henry Paulson says that the government might even make a profit. How might this occur? Well, the bureaucrats might turn out to be shrewder than the Wall Street pros. Prices set by bureaucrats (with money that doesn’t belong to them) will be better than those set by willing buyers and sellers!
According to this new theory, the sellers don’t know what gems they are tossing out. You’ve heard of casting pearls before swine. According to the new theory, the pigs on Wall Street are casting out the pearls! And those canny bureaucrats are grabbing them up!
Now, get this… “the recent turmoil on Wall Street may be followed by a $900 billion aftershock as bank debt comes due next year…”
Oh happy day for the public sector…that great untapped reserve of investment wisdom…. Here comes more opportunity to buy up those pearls that the swine on Wall Street don’t want.
Now things are going to get interesting. Add another trillion-dollar bill to Christmas tree…only months after they Christmas treed the last one. Turn on lights! We can hardly wait to see what this new Christmas treed-up world looks like.
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