Big numbers confuse the basic issues
The financial crisis is very bad for markets. It is however very good for newspapers. It makes our work easy. It creates an endless stream of quality copy, vying for a spot on pages that are already crammed with financial crisis opinions.
The world certainly sighed with relief on Wednesday when it was announced the rescue package is now reality. Immediately various American politicians, not least the two presidential candidates, jumped on a bandwagon that everything was but under control. The remark that stuck in my mind was one by the Rev. Jesse Jackson pointing to the need to ensure that ordinary, low-income home owners do not get hurt further, and that they will enjoy some form of protection from future antics by Wall Street and other investment bank fat cats.
Another note that found a ready ear was the insistence by several American leaders that those responsible for the mess, the banking fraternity's chiefs, must not be allowed to go scot free. They must also not be allowed to continue earning their astronomical incomes hidden behind the guise of trying to unscramble scrambled eggs.
But I think some of the soberest words came from Investec's Jeremy Gardiner. Using everyday symbology, he alerted us to the fact that the party was not only enjoyed by those selling the drinks, the bank managers, but also by the party-goers, the home owners. And this is very true.
Nobody stood with a gun against the heads of the homeowners when they opted to refinance to access more cash, and nobody threatened them in any way when they registered second and third mortgages. And don't forget that despite my criticism of Mr Greenspan's highly inflationary policies, I believe he was trying to get a steam engine that just would not go, to build up some steam.
When the attack on the World Trade Centre occurred in 2001, the American economy was already in distress for exactly the same reasons it has almost floundered this week. The magnitude was not of the same scale though, but the entire world, already then, was the victim of the exuberance and recklessness of the American consumer. I stated it often in no uncertain terms citing all the statistics, which then, to me, were the writing on the wall. And I was not alone in being a clever dumb ass, dozens of reputable analysts all said the same thing, yet Wall Street was making money and the average American's indebtedness was not seen as a major issue.
But economies, regardless how much they are interlinked, hedged or inter-dependent, still basically form a close system. What is scored in one market, or by one asset class must reciprocally be lost by another market or asset class. The only real growth in wealth is that backed by higher production, higher productivity, and eventually higher consumption, not because easy cash is available, but because you have worked more than the guy next door.
So, America's debt would not disappear, did not disappear, and revisited us continually for the past year in increments of growing intensity. Which brings me to believe that the 700 billion dollars earmarked for banks, are not going to have the desired effect. It is only delaying the inevitable, which as I said last week, will not go away, until people in the so-called developed (first) world learn to work again, and to save.
To me it was just as big a shock as to any other person who watches markets, to learn that the world's biggest market, the anchor of the world economy, can shed one trillion dollars in one day.
Better to hold your tongue and appear a fool than speak up and remove all doubt.