Money for Nothing
CONTINETTI, MATTHEW
Money for Nothing A bird’s-eye view of Wall Street’s nervous breakdown. BY MATTHEW CONTINETTI Feel free to disagree, but for my money the best anecdote in this entertaining and informative...
...The attentive reader will quickly grasp two key themes...
...To Maria,’ (she beamed some more), the host said again as everyone raised his glass, ‘my wife, my rare gem...
...Smick probably knew that already...
...The fundamental problem is simple...
...Late in the evening, after many glasses of wine, the ISIFA rose to deliver a toast...
...The United States, as they say, has “issues...
...Nationalize AIG...
...Congress passed no legislation on these matters...
...Matthew Continetti is associate editor at THE WEEKLY STANDARD...
...Let me explain...
...Turn Fannie and Freddie into conservatorships...
...Maria, gazing upon her successful husband from the far end of the table, beamed with pride...
...So the problem now is that the masters of the universe are stumped: Exactly how much bad debt is there...
...rising protectionist sentiments— the list goes on...
...The topic of the conversation—what’s going on outside the party—is not so pleasant, however...
...Also—and this is important—she didn’t speak English...
...And it was done...
...But he took from it a lesson...
...Jobs appear and vanish with astonishing speed...
...Nor do the individuals empowered by the market or by governments who increasingly make decisions affecting the livelihoods of hundreds of millions of people...
...The author, David Smick, is a well-traveled, well-connected fi nancial consultant who has journeyed to Rome, among other places...
...David Smick is right to point out globalization’s signifi cant achievements, the value of entrepreneurial risk-taking, and the risk that “classwarfare” and protectionism pose to global prosperity...
...The governments themselves cannot by edict restore order...
...What you don’t know really can hurt you...
...The “Great Credit Crisis of 20072008” is a case in point...
...As the government’s power recedes, new forces emerge...
...Oops...
...But the invisible right hand didn’t know what the invisible left hand was doing...
...Wall Street doesn’t have a clue...
...Not pleasant at all...
...To Maria … THE PIG!’ Smick was aghast...
...These new actors do not necessarily have the interests of the American citizen in mind...
...This is Smick’s second theme...
...Look how that turned out...
...Today’s world economy,” Smick writes, “bears a striking resemblance to the integrated markets and overwhelming prosperity of the period from 1870 to 1914...
...Where is it...
...The very hint that authorities lack confidence in the system can cause a panic...
...His timely book risks being overtaken by events, however...
...the rising price of oil...
...The World Is Curved is a discursive book, ranging from Tokyo to Martha’s Vineyard, from European Central banker Jean-Claude Trichet to the decidedly non-European New York senator Charles Schumer...
...the weakening dollar...
...If everyone is less knowledgeable than was previously thought, they are also less powerful...
...And it gets worse...
...Maria was a homely bambina...
...It was not that rich guys can be—and I mean this in the nicest possible way—insufferable little jerks...
...The fi rst is that the so-called information economy is imbued with ignorance...
...A lack of transparency rules...
...Paulson decided...
...It was in the Eternal City in 1989, Smick writes, that he dined with “an important strategic Italian fi nancial adviser”—or ISIFA for short—and “at least two dozen” other people, including the ISIFA’s wife, Maria...
...Eventually, Smick continues, the “bizarre, perhaps even offensive,” episode concluded...
...And what issues...
...Treasury Secretary Henry Paulson has wielded considerable power during the crisis: arranging for the sale of one investment bank, allowing another to collapse, nationalizing a major insurer, taking over Fannie Mae and Freddie Mac, preparing a massive bailout plan that would give him ever more discretion than he already possesses...
...the mortgage and credit crises...
...Smick tells us that she “was carrying at least an extra eighty or ninety pounds...
...Actually, it’s frightening...
...That is what Paulson is trying to accomplish...
...America’s twin budget and current account defi cits (the government spends more than it takes in, and the value of the goods coming in to the country is more than the value of the goods going out...
...His is a friendly authorial presence...
...Smick writes that the “industrialized world has surrendered control of its fi nancial system to a tiny group of fi ve thousand or so technical market specialists spread throughout investment banks, hedge funds, and other fi nancial institutions...
...But the engine of globalization is an international banking and financial system that is subject to frequent turbulence...
...When real estate prices tanked in 2006, the world’s most prestigious investment banks became saddled with bad debt from the subprime mortgages which lenders had issued in the belief that anyone—anyone—could own a home, and that home values would never fall...
...I]n the new global economy,” Smick writes, “this crazy ocean of global liquidity has not only increased the number of unknowns but also re-arranged their relationships and relative importance...
...And that means no one is entirely accountable...
...Fortunes rise and fall overnight...
...BY MATTHEW CONTINETTI Feel free to disagree, but for my money the best anecdote in this entertaining and informative guide to the international economy comes near the end, when the author likens the United States of America to an obese Italian woman named Maria...
...They can only project to the markets a sense that they know what they’re doing...
...During the boom years, pools of subprime mortgages had been “securitized” or auctioned off, contaminating the financial system...
...The lesson he drew was that “Maria is America—overloaded with debt, self-doubt, and self-absorption— and, more important, unable to communicate its message to the world...
...Smick has a knack for explaining these economic problems in everyday language...
...No one is entirely in control...
...Yet Smick warns us that even Paulson can only do so much: The size of the fi nancial markets, relative to the governments, has become so monstrously huge, there is no other means of maintaining stability than to establish a psychology of confi dence...
...What does it cost...
...The book reads like a pleasant conversation at a cocktail party...
...Events which suggest that our free-market system is not as free, and our democracy not as democratic, as we like to think...
...Global hedge funds, oil-producing nations, and sovereign wealth funds (pools of capital associated with and often controlled by foreign governments) wield considerable leverage over the international markets...
...What happened next was, well, horrible: Our host, her husband, continued [in English]: ‘And now we must toast Maria, the most beautiful fl ower in the desert.’ Maria beamed more upon hearing her name, but the guest sitting next to me, an Italian investment banker, whispered, ‘Oh boy, here it comes,’ as if he had witnessed on other occasions what was about to take place...
...What we call globalization—free trade, international capital flows, relatively pro-market public policies worldwide—has led to unprecedented prosperity...
...And when that tiny group of specialists truly messed things up, the future of the global economy was placed in the hands of two individuals—Paulson and Fed Chairman Ben Bernanke—whom no one had elected and whose decisions often were made outside any democratic mechanism...
...And yet the ISIFA kept calling Maria a pig, and Maria kept smiling, as she had absolutely no idea what her cruel husband was saying...
Vol. 14 • October 2008 • No. 4
