April 04, 2010

Der Brotteig ist auferstanden

The advantage of some foreign languages is that the nouns have gender; therefore, if I substitute the pronoun "he" in the above German phrase, I have "He is risen," thus giving me a holiday-appropriate title.

The problem is I have no real subject. I do know something about bread dough, as it happens, and even a little about the basic process involved in dough rising. I mean, I've done it, kneaded flour mixed with molasses-infused water and waited for the yeast to work its peculiar magic. By analogy, the American economy is looking for its own type of yeast to cause various asset classes to inflate, particularly housing (transition: off and running!).

I saw Alan Greenspan on "This Week" this Easter morning, and he was "confronted" (in the usual obsequious way) with the Op-Ed by Michael Burry, of The Big Short fItalicame, who wrote a scathing piece in the the New York Times about the failure of Greenspan and the Federal Reserve to detect the housing bubble before it became obvious to everyone, in 2007, that it was going to pop. In essence, Sir Alan said that there were three groups of people in Washington circles during that run-up period between 2001 and 2007. Those who did not see the bubble forming, those who guessed right based on "luck," and those (very few) who had been "right." Greenspan put himself in the first category, and insinuated earlier (though not today) that Burry had benefited from statistical "illusions" (thus making him "lucky," I guess).

One idea that immediately occurs to me is that Greenspan should simply stop appearing on TV shows. He doesn't look at all well (a little bit too much like a George Lucas character who speaks in phrases that sound inverted, sort of like German), and he doesn't make any sense whatsoever. How would you see the housing bubble based on "luck?" That doesn't even compute. Burry saw it because he did tons of grunt-level research, reading through prospectuses for mortgage-backed bonds (which must have been unbelievably dull work) and finding the bonds that were backed by the lousiest mortgages (interest only, negative amortization, subject to big re-set in interest rate, borrowers with the worst FICO scores). There was no luck at all. He knew he was right and bet millions, putting his investors' money (and his own) where his mouth was. His only concern was whether the crooks on Wall Street would be good for the resulting pay-offs, and his suspicions were justified. They tried to weasel out, hating the idea (as Greenspan does) of being shown up by one very diligent researcher in a small office in Cupertino who proved more accurate and savvy than all of them put together, and who did not succumb to the mindless groupthink that is so completely characteristic of official policy makers these days. Burry diversified his marks (counter-parties on the other side of his credit default swaps) so he was not dependent just on bankrupt outfits like Bear Stearns and Lehman Brothers (which he avoided like the plague they were). He was also aware that some of his bets would be helped along because the Treasury Department and the Fed would bail out their close friends in some big investment banks who were carrying all that shitty paper, and he was prescient in that as well. But his main concern was that the feds would bail out the distressed homeowners themselves, thus "curing" all those bad subprime loans and spoiling his big play, but there he just wasn't cynical enough. Help the little guy? Hah!! All in all, Burry saw it all, and his only missed call was in thinking that friends of Wall Street like Sir Alan would ever give a shit about the actual struggling homeowners going under.

Don't ask me why Greenspan "missed it," but it is amazing how often the excuse that "no one else saw it" is used to justify every monumental failure of management and oversight in Washington, D.C. The same exact rationale was used to excuse the failure to understand that Saddam Hussein did not have weapons of mass destruction, and it was equally false. Lots of people said, before March, 2003, that Hussein did not have any weapons of mass destruction (including Saddam, of course, but also Hans Blix, who was there looking for them on a full-time basis). Anyway, since when do you evaluate the opinions of people whose sole occupation is to manage such matters (the housing bubble, finding weapons of mass destruction) on the basis of what "everybody else" thinks? Isn't that why we have highly-paid experts in the government whose job is to do nothing else but focus their attentions on these issues? Why can they resort to the opinions of the guy sitting on the next bar stool to justify their profound ignorance and incompetence?

So shut up, please, Mr. Greenspan. It's obvious your enormous ego took a pounding once you realized that deriving your economic philosophy from a third-rate, addle-brained novelist was not a good idea when managing the largest economy on Planet Earth. When Atlas Shrugged, he threw the whole country into a ditch.

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