“They are in trouble in New York,” said J.P. Morgan to Bishop Lawrence.
In October, 1907, J.P. Morgan was 70 years old…and attending a church meeting in Richmond when the importance of the sacred was disturbed by the urgency of the profane. Telegraphs kept arriving from New York; they warned of a disaster. According to Dun’s Review, 8,090 companies had failed in the first 9 months of 1907. Then, a failed takeover of the United Copper Company caused a panic.
“A correction is equal and opposite to the deception that preceded it,” Morgan would have said, if he’d thought of it. Since he didn’t, it falls to us.
Morgan had been around the block when it came to money. He had taken over his father’s banking business decades ago. He’d seen panics, crashes, bankruptcies. And, now, it must have seemed that his whole life had been spent training for this one test. He returned to New York; crowds of investors looked to him to save the day. And he did. He put his own money on the line to help shore up troubled companies. He rallied friends, colleagues and competitors to do likewise. A trust was in trouble…then the New York Stock Exchange itself…then the City of New York…one after another, Morgan brought in the financiers…came up with the money…bullied and cajoled…until the storm had passed and they could all enjoy a good drink.
And when it was over, Senator Nelson W. Aldrich, realizing what Morgan had done said: “Something has got to be done. We may not always have Pierpont Morgan with us to meet a banking crisis.”
As it turned out, Pierpont Morgan was a ghost four years later. But in that same year – 1913 – the US Federal Reserve was set up to fill his big shoes. This year, it’s the Fed that is being tested.
Armageddon seemed to arrive in Manhattan on Monday. And not just in New York, but in Moscow, Hong Kong, London and Frankfurt too. Germany hastened to succor bank account holders. In Rejkavik the pandemonium was so hot it seemed to melt the ice. Then, on Tuesday, all the plagues and locusts we’ve been warning about here in the Daily Reckoning were loosed on the world: The US stock market fell hard again. Japan was sinking into the sea. Brazil’s market was down 51%, year to date. Central banks were cutting rates like pulpwood. Even so, unemployment was on still the rise. Consumer spending was falling. House prices were going down.
Of course, the world improvers were intervening in the usual clownish ways. Short selling was blamed for more accidents than alcohol. And everywhere, the authorities were getting ready for show trials…perp walks…and public hangings. Over on the Guardian’s front page, for example, was an extended whine about how much Richard Fuld earned at Lehman Bros. before he bankrupted the 158-year institution. $480 million was the number given for the 8 years of disservice. “Is that fair?” asked Congressman Henry Waxman.
Congressman Waxman seemed to think that something needed fixing. But that just goes to show how little he appreciates the free market. Investors handed Fuld that money of their own free will; they got exactly what they deserved. The system was fixing itself.
Politics always lists to the port side. But markets are more exquisitely balanced, between fear and greed. When investors had the wind at the backs, they were ready to believe the most outrageous things – that the financial sector could get rich by lending money to people who couldn’t pay it back…and that a whole economy could flourish by luring consumers to spend more than they could afford. These hallucinations created an immense worldwide bubble of debt and dollars. But now, the wind has swung around. A huge anti-bubble is forming – equal and opposite, in true Newtonian form – a financial whirlpool marked by exaggerated thrift, debt destruction and sweaty- palmed investors.
And where is Morgan when we need him? Where is the Fed? Ten years ago, the giant hedge fund – LTCM – had overdone it. As in 1907, according to Roger Lowenstein’s account, “Rushing for the exits…[traders] posed a danger not only to themselves, but to the entire world financial system.” So, the Federal Reserve Bank of New York called in the big financial houses to help with the rescue. It worked. The crisis was averted. LTCM’s positions were liquidated in an orderly way, just the way Morgan would have wanted.
But this time, the fix doesn’t seem to stay fixed. Bad positions can’t be unwound in an orderly manner; there are too many of them. And it’s not just a handful of speculators who are getting whacked – it’s half the population of the United States of America and Great Britain. Trillions of new cash and credit are being pumped in. The Fed is buying ‘assets’ you would throw out of your refrigerator. Her majesty’s government is now proprietor of 50 billion pounds worth of banking shares; the government of George W. Bush is preparing to enter the banking business too. But as trillions go in, trillions more leak out. So far this year, world equity markets have lost $20 trillion. U.S. property markets alone have lost $6 trillion over the last two years. It is not just a few investment decisions that are being corrected, in other words, it’s the delusions of an entire generation.
“These prices make no logical sense,” said a Wall Street trader, referring to mortgage backed derivatives at Wal-Mart-style discounts, and missing the point. Markets are not scientific. They are poetic. After the liquidity comes the liquidation. After the outsized recklessness comes the appropriate regret.
for The Daily Reckoning Australia