Thursday, November 20, 2008

It’s Different This Time

Those are the famous words that have been used to explain any stock market anomaly. They were used in the era as the NASDAQ approached 5,000 to justify the heady prices at the time, or when oil was leaping towards $150 per barrel. But any parabolic rise or fall must regress to the mean. Or so it’s been in my lifetime

I need not go into detail here concerning all the dominant economic undercurrents of today, the toxic assets the TARP program was thought to be resolving, the government’s support of the Bear Stearns takeover, the collapse of Lehman Brothers, the bailouts of AIG, Freddie and Fannie, the discussions of bailing out Detroit’s automakers, the reverberations in the financial markets throughout the globe. However, as a child of depression era parents, I guess subliminally I’ve always feared the unspeakable: a deflationary spiral with no bottom in sight. And somehow if does FEEL different this time.

Having lived through several economic cycles and piloting a business through them, the implosion of equity values in the 70’s, the subsequent threat of hyperinflation, the high interest rates of the early 80’s, the collapse of real estate in the 90’s, the run-up on the heals of dire Y2K warnings, and finally the easy money that led to this decade’s real estate run up and the interconnected toxic financial instruments engineered by financial institutions and hedge funds to make them rich, leaving someone else (us) to hold the proverbial bag. But as a society we were willing participants, eagerly spending what we didn’t have; let future generations do the worrying! Our entire culture cried out buy, why postpone what you can have today, so we bought McMansions, Hummers, luxury goods, vacations, whatever our consumptive libidos desired, using our homes and credit cards as piggy banks.

And that is why this economic era does feel different than prior ones, at least to me, someone who has lived through these various cycles but only in the shadow of the Great Depression. We are just beginning to embark on the convulsive purging of these excesses. How it will end is anyone’s guess. Even Secretary of the Treasury, Hank Paulson, looks like a deer in the headlights, changing his mind about using the $700 billion to buy bad mortgage debt securities (the very $$ Congress had to immediately authorize as financial Armageddon was imminent), probably because he knows it’s not enough. And humbled Alan Greenspan, looking completely bewildered in his testimony to Congress in late October: “I made a mistake in presuming that the self-interests of organizations, specifically banks, were such as that they were best capable of protecting their own shareholders and their equity in the firms. Free markets did break down, and I think that, as I said, that shocked me. I still don't fully understand how it happened or why it happened.”

We had long placed Mr. Greenspan on a pedestal, trying to decipher “Greenspeak,” looking for little nuggets of wisdom to reassure ourselves that this time it was different as he ratcheted down interest rates for our borrowing pleasure. Now he is clearly admitting he has no clue why the present economic catastrophe has devolved. At least he can afford to admit his misjudgments, as he is no longer the Chairman of the Federal Reserve. But we now listen to Mr. Bernanke and Mr. Paulson, desperately clinging to the hope THEY know what they’re talking about. The only certainty now is nothing is predictable. It’s different this time.