Tag Archives: wall street

This is the Way US Manufacturing Ends…Not with a Bang but a Whimper

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If President Obama were anything like FDR, he would have urgently taken to the airwaves today with his address to America sounding something like this:

“June 1, 2009 – A date which will live in infamy- Yesterday, the Nation buried an American Giant which alone is responsible for pioneering the modern industrial era…. But in the day where financial engineering has long taken over from industrial engineering, there will be little lamenting on the streets of America. Instead, there’s an eerily devilish dance taking place upon the grave of General Motors by its bondholders, for their derivative bets have paid off by sending this giant to its grave. These  out of control charlatans will soon announce record profits for themselves with the blood of tens of thousands of families on their hands…”

If you would indulge me a bit further, an FDR-like Obama would conclude….

“Today, America has lost its moral compass. On Wall Street, the rich hires the intelligent to export the job of the poor.  Then turns these same toxic tools against that very ladder that got us here. Today, I’m announcing the end of Wall Street as we know it. There will be no more flooding of America with cheap money and watching it become complaisant and bet on its failure. Today, I’m outlawing the entire practice of option trading from all stock exchanges and placing hedge funds under heavy regulation. The creation of financial derivatives of all kinds will be outlawed as well. There will be no more betting that urges us to fail so the few can collect Trillions from the hard earned wages of the many.  How many more American Icons would have to fall before Wall Street wakes up to its evil ways…..”

Much more would have been said, but this is 2009, and leaders fear the consequences of straight talk and the media that would have covered the event suffers from 2 things: 1. It is owned by Wall Street, and 2. It suffers from the worst case of Attention Deficit Disorder.

The legacy of GM is so intertwined with that of its founder Alfred P. Sloan, a genius MIT engineer and one of the pioneers of the American Industrial business model. So much so that MIT, Stanford and The London School of Business created their business programs based on his teachings. He is also known for having pioneered modern corporate finance. Things like rate of return (ROR) and return on investment (ROI)  are  standard parts of Finance 101 in every business school in the world today. But,what made Mr. Sloan unique, in my opinion, was that he never boasted about any of his accomplishments. For years he lived in the same apartment in NYC just a few blocks away from his office. When he’d visit Detroit, he would stay in a “sleeping room” upstairs at GM’s corporate offices. This is how good leaders are made to be great.  When GM filed for bankruptcy yesterday, the legend of Alfred P. Sloan and the story of American industrial innovation came to an end.

Yes, on this day after we buried what once was the biggest industrial giant in the world, the streets were eerily quiet. America has slowly been lulled to its own industrial death, and we’re too numb or too dumb to do anything about it.

Yes, on the day we buried GM, The Dow Jones went up 221 points and two Giants who shaped America’s twentieth century; Franklin Delano Roosevelt, and Alfred P. Sloan were turning in their graves. This is the way America’s manufacturing world ends. Not with bang but a whimper.

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The Memetics that Ruined Main Street; a Value Systems Analysis of the Housing Crisis

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In a continuing effort to bring understanding to where Economics meet Memetics, in this post I will offer an expanded view on the value systems that created the housing crisis. Suffice it to say that many will disagree with my viewpoint. It has been my experience over the last 2 years that every time any analysis on the causes of failure in any industry that point to Wall Street, these self-proclaimed “Masters of the Universe” vehemently deny any and all responsibility. (More on how Wall Street downshifted to an unhealthy ego-centric value system in an upcoming post).

One of the most requested slides from my presentations is entitled The Housing Bubble; How Wall Street Destroyed Main Street. Although I have posted it below, it’s important for the reader to understand that greater forces were at play for many years that created the perfect storm that got us here. It wasn’t just Barney Frank lowering the underwriting standards at FREDDIE and FANNIE. It wasn’t gang member Darnell Bell who just got busted here in San Diego for running a $100 Million mortgage scheme with 22 others who were accountants, brokers, appraisers, and professional tax preparers. Mr. Bell, a known gang member who was already in jail on drug charges at the time of his indictment, didn’t wake up one day and decide that drug dealing is no longer hip and wanted to get into banking; instead, banking came to him. The focus of the rest of this post and the Memetics in the slide discuss how the removal of barriers to entry into the housing market created the mess we’re in and how there won’t be a return to prosperity in housing any time soon.

Corrupting the Oldest Form of Order

In the research I’ve done to pinpoint the causes of the housing crisis a common theme kept emerging over and over again. This phenomenon wasn’t just a threat to the housing market, but to every institution that capitalism had so fondly upheld for hundreds of years. I have since concluded that cheap and unregulated supply of money has forever perverted capitalism as we know it. From a cultural value-systems perspective it is paramount to understand the historic role that money played in human evolution. Before any of the Abrahamic religions offered humanity the notion of “Sacrifice Now for future gains”, humans had to control their impulses for immediate gratification to “save” for future rewards and in doing so, evolved into a higher level of bio-psycho-social complexity. This sense of postponing gratification allowed for a barter trade system that gave birth to money and eventually to the complex global financial system we have today.

Over the centuries money became a very important cornerstone that built the cultural codes that in part define who we are.  The simple discipline that required the accumulation of savings became itself the barrier that separated compulsive acts from long-term behavioral patterns that lead to human progress. Simple things like payment of wages in return for hard work became the model that defined human interaction and the driving force for seeking better and more enlightened lives. So, how did we go from that level of social complexity that was thousands of years in the making, to giving a farm hand in Bakersfield a $700,000 loan on an income of less than $15,000 a year?

Two major dynamics were responsible for perverting money. The first was the flood of liquidity from the OPEC countries, and other countries representing the   Emerging Economies which had no stable investment infrastructure in their own countries. These investors primarily from a tribal-to-egocentric cultural value system with Trillions came knocking on Western doors seeking the illusion of stability and high returns. (See previous post for an explanation of what investment means to the different value systems). Since these investment giants couldn’t bother  investing in individual mortgages at the retail level, Western investment bankers gladly took their money and invested it for them. It didn’t matter that the farm hand couldn’t pay his mortgage, wall street had cleverly packaged it with a million other mortgages just like it, sprinkled a bunch of sophisticated-looking derivatives on the top and sold it as securities to these countries’ sovereign wealth funds and brokerage houses; All the while, collecting their 12.5%-20% fees in advance. Not a bad way to rip off unsophisticated investors, and blame the little guy for not making his payments on time.

The other dynamic that perverted money was the Bush Administration’s reaction to the 9/11 attacks. Not the military one, but the far more dangerous reaction that used the same value system that brought down Saddam Hussein in fighting off the possibility of recession. Bush along with Greenspan liberated the American consumer from any sense of accountability by redefining patriotism as “spend, spend, spend, or the terrorists win”. Interest rates were lowered to historic levels, and Wall Street anxiously accommodated this call by creating more securities that just kept giving the consumer more and bigger credit cards where the balances became perpetually bigger but never became due. This phantom growth in mortgage loan sizes came on the hands of greedy investors who pushed appraisers for higher valuations which fueled a bigger and bigger housing bubble with a huge array of supporting actors like the ones recruited by Mr. Bell in San Diego.

The fact that real estate was historically looked upon as a “real” asset allowed for a shared hysteria that dismissed  the notion that value will disappear as a soap bubble would disappear when it bursts. Wall Street thought it had finally found the goose that laid the golden egg  and they fianlly turned the “real” into their realm of “unreal”. By the time enough steam gathered to call Wall Street’s bluff, Trillions were lost, and millions of lives ruined. The likes of Mr. Bell, and there are thousands like him, wouldn’t have had the sophistication to pull off what he did without incompetent regulators who were asleep at the wheel and a predatory Wall Street that spent years laying down the infrastructure for predatory lending and investment practices.

anatomy-of-a-fraud

The perversion of the role of money on Wall Street, will take a while to manifest on Main Street and a while longer for it to heal the things it destroyed. By nature, Americans don’t hold long grudges, but by targeting the most unique aspect of the American Dream, Wall Street has cheapened housing in ways unimaginable. The phantom rise in values created unsustainable levels in housing production that will take many years for the market to absorb. The disappearance of Trillions of dollars in home  equity and the continued decline in values make the horizon for recovery that much further away. So, when will the average American start thinking again of a home as a vehicle for building wealth? That crystal ball won’t be invented till after a New Economy takes a firm hold.

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