Bankers and Investors

Bill Clinton should have gone to the Alps. Instead, the poor man went to the piedmont...to the aid of his wife in South Carolina.

At the annual Davos, Switzerland conference of celebs, power-brokers and do-gooders, Clinton was always a hit. In Carolina, he was a flop.

If he'd been in Davos, he might have given the meeting some of the magic of the old days. Every year, the movers and shakers gather to tell each other how to make a better world. Most just blather in a way that began naively, early in their careers, soured into cynicism in middle age, and finally becomes merely stupid. Some probably still think they can improve things. A few probably succeed.

But this year's meeting seems to have had a defeatist tone to it. Probably because the news was bad.

Last Sunday, it was discovered that a young man at an old bank had managed to get himself into $50 billion worth of positions – most of them losing positions. This was more than half of the value of all of France's gold and currency reserves. It was more than the entire value that had been built up by the bank over decades. How could it happen? What was wrong? How could banks be so fragile...and what could you think of the whole world's financial system when it was built with bricks that cracked up so readily?

When his bosses at Societe Generale found out what he was up to, they quickly tried to close his trades – on the worst trading day in recent memory. And when it was over, he had set a new record for this kind of thing, at more than two times the losses of Nick Leeson, who brought down the 200-year-old Barings Bank.

Asked his opinion, Leeson responded: "Haven't they learned anything?"

Learning comes at a price. When markets are rising, nobody learns anything. It's when they go wrong that people put on their thinking caps and take instruction.

And then, at Davos this weekend, up to the podium stepped Stephen Roach, acting like an old professor with an "I told you so" tone in his voice.

"If we had been running our economies the old-fashioned way, for example, where saving and consumption were funded by income, maybe we wouldn't be in this mess we are in now."

Roach went on to say that this mess "will dwarf the dotcom slump."

As we've hinted, too, it is one thing to punish a few speculators with skin in the dotcom game. It is quite another to deliver a stern lesson to America's entire middle class. The latter never liked school.

Spending on information technology was barely one sixth the spending on house building. But that's only the beginning – because the dotcom bubble didn't cause millions of householders to think they were a lot richer than they really were. It didn't lead millions of families to borrow and spend far more than they could afford. And it didn't entice bankers and investors into billions of dollars worth of losing positions.

Naturally, Mr. Roach's words didn't seem to lift the mood at Davos. And the news coming out of the U.S. economy does little to lift American consumers' moods either.

On Friday, the Dow sank back 171 points. What happened to the rally, investors asked themselves? Hadn't the Bernanke helicopter squadron just dropped rates 75 basis points? Aren't they warming up the engines for another run this week?

Ah...yes. But only gold investors seemed to know what it meant. Dropping money from helicopters is unlikely to make an economy prosper. But it is very likely to make gold investors prosperous. Gold rose another $4.90 on Friday – to over $910 – a new record high. Commodities, generally, rose too, with the CRB index reaching 492...and oil once again over $90.

A word to the wise: you can't really make people wealthy by resorting to "Zimbabwe economics." A society grows rich by producing things...and saving money. There is no other way. Cheaper credit won't do it. More consumption won't help. Printing money – and dumping it from helicopters – is a losing proposition.

But we hope our financial authorities continue. At least it's fun to watch.

Bill Bonner
The Daily Reckoning Australia

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