Congress needs a little bit of Winston

Paris, France

In the crash of ’29 Winston Churchill, who just happened to be in New York at the time, reported:

“A gentleman cast himself down 15 storeys and was dashed to pieces.”

This past weekend a London banker “haunted by the pressures of dealing with the credit crunch,” according to the Daily Mail, was the first reported victim of the credit crisis. He “died in the path of a 100mph express train at the Taplow railway station,” said the paper.

Churchill had a way with words:

“The United States invariably does the right thing, after having exhausted every other alternative,” he said.

And yesterday, the stock market thought Churchill was right. Congress was running out of time...and alternatives. Investors figured the fix would be in soon.

The party line is that the world needs a bailout. Everyone says so. And now the Senate, in its magisterial wisdom, has vowed to get back on the case until it comes up with something. That’s probably why stocks shot up yesterday. Investors know the money’s on its way. So, the Dow went up more than 400 points. Oil went back to $100. The dollar rose against the euro. And gold fell $11.

Churchill was not a great military strategist, but when the chips were down, he had the words that Britain needed. At Britain’s finest hour, Winston Churchill led the nation. At least, that is the party line...

And now the chips are down in the world’s financial markets. And now the party line is that Congress has made a big mistake...

“The House failed to lead and the market plunged,” says the lead editorial in today’s International Herald Tribune.

We looked on the facing page for our favorite columnist, Thomas L. Friedman. Amid all this doom and gloom talk, we thought Friedman’s views might give us some comic relief. Instead, we found David Brooks. Like Friedman, Brooks is a world-improver. And like Friedman, he has little curiosity about the way homo sapiens economensis actually functions. Instead, the two of them always have some gimcrack plan for solving the world’s problems – ignoring the fact that the problems were generally caused by their last gimcrack plan.

Naturally, Brooks is for a bailout. Predictably, he cites Franklin Roosevelt as a role model. “He understood that his first job was to restore confidence...” he writes. He is surely unaware that it was too much confidence that got the US into its present jamb. And it has probably never occurred to him that the kind of ersatz swagger you get from a scalawag politician is not exactly bankable. Nor does he seem to recognize Roosevelt’s confidence-building programs were such feebleminded claptrap that they actually retarded a recovery. What got the US economy going at full speed again was the biggest public works program of all time – WWII.

Brooks calls Congressmen who voted against the bailout ‘nihilists.’ What is it with these neo-cons? Friedman calls people who object to the reckless use of US military power in the Mideast “nihilists.” What’s nihilistic about either group? We have no idea. We assume they mean “stupid.” But can’t they think of any other pejoratives? How about meatheads...or dimwits...or goofballs? These fellows need a little of Churchill’s magic!

Brooks has no clue about the world’s financial system or how it should be managed. But he knows what he likes. And what he likes is what all political scoundrels like – authority.

“...now we have a crisis of political authority on top of the crisis of financial authority....”

We understand the words. We understand the practice. What eludes us is the theory.

Political authorities boss other people around. What do financial authorities do? Isn’t an economy a different thing...isn’t it based on persuasion rather than force...on markets rather than politics? If we think a potato is worth 50 cents. And the farmer agrees to sell it to us for 50 cents, what business does a financial authority have telling us both that the price is a dollar? The world has been down that road. The Soviets tried financial authority for 70 years – look where it got them.

At least Brooks is hip to the danger.

“What we need in this situation is authority. Not heavy-handed government regulation, but the steady and powerful hand of some public institutions that can guard against the corrupting influences of sloppy money and then prevent destructive contagions when the credit dries up.”

Thus does he line up the words. One after another...leading nowhere. Again, we want to know more about the theory. What does this powerful hand do? What does it look like? And how is the fat mitt of a political appointee less susceptible to the corrupting influences than the jittery hands of a man whose own money is on the line? And where is money ever sloppier than in the public till?

But there is no point in fighting against it. The battle against a bailout is a lost cause. Yesterday’s report from Shiller/Case showed house prices are falling faster than ever – down 16.3% from a year ago. George W. Bush approved a loan to the auto industry – it too is in trouble.

Need money? Here’s a bank that can’t say no....

From a blog... “If we can socialize the banking industry, why can’t we socialize the health insurance industry? Big government is back...”

More thoughts...

*** “Your words are too hard,” said a Frenchwoman at last night’s soirée. We were celebrating the launch of our new financial magazine in France. The country is famously a graveyard for Anglo-Saxon capital. Businessmen from the US or Britain invest millions...and usually lose it. And so the well-wishers and grave diggers were out last night, drinking champagne, and talking about the news:

“Wow...I can’t believe what is happening in world markets. And I can’t believe what is happening in the US. To think that Congress wouldn’t pass the rescue bill! We’re on our way to a worldwide depression, for sure.

“You know...this must be the worst week in 50 years to launch a new financial magazine. Are you sure you know what you are doing...?”

Know what we are doing? Never. As near as we can tell – after 30 years of close study – the business world is a constant improvisation based on little more than guesswork, pluck and instinct. If something works, a good businessman keeps doing it – until it stops working.

How else to explain the disappearance of the whole investment banking industry – practically overnight? Ask any mother in the ‘90s what she wished for her son and she’d say she wanted him to go into investment banking. That trade was a ticket to wealth and everybody knew it. During the ‘90s...up until 2007... investment banking was probably the best paid profession in the world. Whatever they were doing was working like gangbusters. So, they kept doing it...until they went broke.

As long-time Daily Reckoning sufferers already know, we are not really very interested in money or investing. What draws our attention is not the beastly subject but the strange beast himself – homo sapiens economensis. So...we wonder what they were thinking...all those super-well educated, super-paid geniuses.

For example, Wachovia’s CEO appeared on Jim Cramer’s “Mad Money” show and whooped it up:

“We have a great future as an independent company,” said Robert Steel. “We’re also focused on very exciting prospects when we get things right going forward...” Two weeks later, the firm had lost 90% of its capital value and was hastily sold to Citigroup for $1 a share.

Now, the lawyers are circling...arguing that he intentionally misled investors. Maybe he did. Or maybe he just didn’t know what was going on. The investment banking industry drew in some of the world’s smartest people. But few of them seemed to have any idea what business they were really in – loading the world down with debt that couldn’t be repaid. Nor did they understand that they couldn’t continue to do for very much longer. Jimmy Cayne was playing bridge when Bear Stearns went down. When Lehman went bust, Dick Fuld, who was supposed to be so shrewd, was holding $1.2 billion worth of options on the shares.

The chat forums are exploding with angry comments: “These guys should go to jail,” they say. Probably some will. It is a virtue to help people make bad investments in a rising market. When the credit cycle turns, it is a crime.

P.S. If you enjoyed this article then we encourage you to sign up for the free Fleet Street Daily eletter. Learn what you can expect from today's markets -- and how to prosper in the face of uncertainty. You won't find more thought provoking writing anywhere on the Internet.

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Congress needs a little bit of Winston

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Congress needs a little bit of Winston